CVD Equipment Corporation — Q3 2015 Form 10-Q
Business context and period. The unaudited filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. CVD Equipment operates the CVD and SDC manufacturing divisions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $10.65 million | $8.87 million | $30.77 million | $19.36 million |
| Gross profit / margin | $4.13 million / 38.8% | $3.31 million / 37.3% | $12.04 million / 39.1% | $7.33 million / 42.3% |
| Operating income | $0.87 million | $1.21 million | $3.59 million | $1.32 million |
| Net income | $0.81 million | $0.86 million | $2.81 million | $0.79 million |
| Diluted EPS | $0.13 | $0.14 | $0.45 | $0.13 |
- Nine-month operating cash flow was $1.82 million, versus $0.58 million in 2014. Investing cash use was $0.01 million and debt repayments were $0.51 million. Cash increased $1.30 million to $13.27 million.
- At September 30, cash and cash equivalents were $13.27 million; working capital was $19.5 million. Total debt was approximately $4.03 million. The $7 million revolving facility was unused and extended to September 1, 2018; the company reported compliance with its covenants.
Changes and drivers
- Revenue increased 20.1% in Q3 and 58.9% year to date. Management attributed growth primarily to ongoing aerospace and medical-industry orders and higher production utilization.
- Nine-month net income rose substantially, while gross margin fell from 42.3% to 39.1%, which management attributed to a large order with a lower margin. Q3 margin improved year over year.
- Q3 operating income and net income declined despite higher revenue, primarily because of a $995,000 litigation-settlement expense. General and administrative costs also increased year over year.
- New orders declined 55.3% in Q3 and 23.0% year to date. September 30 backlog was $11.49 million, down from $12.06 million a year earlier.
Outlook, risks and unusual items
- Management said cash and operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months. No specific revenue or earnings guidance was provided.
- Orders are uneven; backlog may be delayed or canceled and is not assurance of future revenue or profit. Management expected a significant portion of backlog to be completed within 12 months.
- Customer concentration is material: one customer represented 50.0% of Q3 revenue, 60.4% of nine-month revenue, 53.0% of backlog, and 40% of receivables at September 30.
- The company paid $995,000 in September to settle claims with Development Specialists, Inc.; both related proceedings were dismissed with prejudice. Management also reported two settlement payments totaling $5.9 million during the nine-month period.
- Management identified competition, access to financing, future profitability, and expansion as risks to forward-looking results. Cash balances exceeded FDIC insurance limits by $12.4 million. No off-balance-sheet arrangements were reported.
Investor verification points
- Assess the sustainability and margins of the large, customer-concentrated aerospace-related orders, and monitor order intake and backlog conversion.
- Verify customer concentration in revenue, backlog, and receivables, including any changes after quarter-end.
- Review the settlement’s total cash impact and confirm whether other litigation-related payments or costs remain.
- Track gross-margin trends, elevated general and administrative expenses, and the use of research and development tax credits.
- Reconcile the MD&A’s rounded revenue descriptions with the financial statements, which report nine-month revenue of $30.77 million.