CVD Equipment Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. CVD Equipment Corporation operates through its CVD and SDC divisions, serving semiconductor/process applications and ultra-high-purity manufacturing. Financial statements are unaudited.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $10.83 million | $3.74 million | $20.48 million | $8.75 million |
| Gross profit / margin | $4.41 million / 40.7% | $0.49 million / 13.2% | $8.58 million / 41.9% | $2.03 million / 23.2% |
| Operating income (loss) | $1.83 million | ($0.98 million) | $3.55 million | ($1.51 million) |
| Net income (loss) | $1.26 million | ($0.50 million) | $2.28 million | ($0.83 million) |
| Diluted EPS | $0.20 | ($0.08) | $0.36 | ($0.13) |
- Revenue rose 189% in Q2 and 134% year to date, attributed primarily to work on orders received over the prior 12 months, including large orders previously delayed by customers.
- Management attributed the improved gross margins to higher revenue and product mix. Operating expenses increased, including costs related to CVD Materials and its Tantaline subsidiary.
- Six-month operating cash flow was $376,000, versus $694,000 in the prior-year period. Investing activities used $448,000, including $451,000 in capital expenditures; financing activities used $128,000. Cash decreased $200,000 to $21.48 million.
- At June 30, cash was $21.48 million and working capital was $23.1 million. Total debt was approximately $3.12 million, including $300,000 current maturities. The company also had an unused $7 million revolving facility available through September 1, 2018; it reported compliance with its covenants.
- Accounts receivable was $1.85 million, up from $608,000 at year-end, which management attributed to higher revenue and timing of invoicing, shipments, and collections. Current assets were $29.80 million and current liabilities $6.68 million.
Changes, outlook, and risks
- Both segments increased revenue year over year. For the six-month period, the CVD segment reported $17.99 million of revenue before eliminations and SDC $3.81 million; both segments reported pretax income.
- One aerospace customer accounted for approximately 66% of Q2 revenue and 68% of six-month revenue, compared with 53% and 38% in the comparable 2016 periods. Management cautioned that significant customers may reduce, delay, or cancel orders, and replacement business may not be available promptly.
- Management believes cash and operating cash flow will meet working-capital and capital-expenditure needs for the next 12 months. No specific revenue or earnings guidance was provided. The company may seek financing for acquisitions; equity or equity-linked financing could dilute shareholders.
- Cash balances exceeded FDIC insurance limits by approximately $19.85 million. The company noted risks involving competition, access to financing, profitability, and expansion. It reported no off-balance-sheet arrangements and no legal proceedings in Part II.
- A $629,000 gain from a negotiated reduction in legal fees related to the Taiwan Glass litigation was recorded in the 2016 comparative period, not in 2017. The company stated that adoption of the new revenue-recognition standard was under evaluation and was not expected to have a material effect.
Important facts for investors to verify
- Whether the unusually high customer concentration persists and how much of the reported revenue depends on follow-on orders.
- Whether receivables and contract balances convert to cash as revenue expands; operating cash flow was modest relative to net income.
- The sustainability of gross margins, which management linked to order mix and revenue levels.
- The exact six-month net income and EPS: the financial statements report $2.281 million and $0.36 per share, while MD&A gives rounded figures of $2.4 million and $0.37.
- Progress and financial impact of the new revenue-recognition standard, and future financing or dilution if acquisitions are pursued.