CVD Equipment Corporation — FY2018 Form 10-K
Business context and reporting period: The filing covers the fiscal year ended December 31, 2018. CVD designs and manufactures chemical vapor deposition and gas-control equipment, and provides materials coatings and process services. Its three reporting segments are CVD, SDC, and CVD Materials. Comparisons below are with FY2017.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $24.33 million | $41.13 million |
| Gross profit / margin | $5.18 million / 21.3% | $17.60 million / 42.8% |
| Operating income (loss) | ($5.25 million) | $7.22 million |
| Net income (loss) | ($5.20 million); ($0.80) diluted EPS | $5.26 million; $0.82 diluted EPS |
| Cash flow from operations | $0.51 million provided | $2.38 million used |
| Capital expenditures | $2.54 million | $0.89 million |
| Cash and cash equivalents | $11.44 million | $14.21 million |
| Working capital | $15.4 million | $22.4 million |
| Total debt | $12.91 million | $13.65 million |
- Revenue fell 40.8%, primarily because deliveries to the largest aerospace customer declined. That customer accounted for 38.2% of FY2018 sales ($9.3 million), down from 66.1% in FY2017 ($27.2 million). Excluding that customer, sales increased from $7.8 million to $8.6 million.
- CVD Equipment segment revenue declined 48.9% to $17.86 million; SDC revenue declined 15.9% to $4.73 million; and CVD Materials revenue increased to $1.74 million, principally reflecting a full year of MesoScribe activity and higher Tantaline sales.
- Gross margin contracted as sales fell and costs remained elevated to support planned CVD Materials expansion. Operating expenses were $10.43 million, broadly flat year over year.
- Year-end contract assets were $1.36 million versus $8.40 million in 2017, principally due to billing after project milestones. Accounts receivable increased to $4.07 million from $2.06 million; net inventory declined to $1.86 million from $2.97 million.
- Cash declined by $2.77 million during the year. Management attributed lower working capital mainly to the operating loss and debt service, alongside continued investment in the new materials facility.
Liquidity, debt, and outlook
- The company reported $11.44 million of cash at year-end and approximately $11.2 million on March 22, 2019. Management stated that cash and expected operating cash flows would cover working capital and capital expenditures for the next 12 months.
- The previously available $7 million revolving credit facility expired in September 2018 and was not renewed; the company said it had not borrowed under it in the prior 10 years.
- Debt included approximately $10.04 million on the 555 North Research Place mortgage and $2.67 million on the headquarters mortgage. The new-facility loan carries a 3.9148% fixed rate and matures December 2022; the headquarters loan has variable-rate terms and a March 2022 maturity. A $10.69 million debt maturity amount is scheduled for 2022.
- CVD was not in compliance at December 31, 2018 with the fixed-charge-coverage covenant on the new-facility mortgage. HSBC waived the breach through April 1, 2020 on March 26, 2019.
- The company invested $2.5 million in 2018, principally in improvements and equipment for its 179,000-square-foot CVD Materials facility, and anticipated another $1.5–$2 million of improvements and machinery. Operations were expected to start in the second or third quarter of 2019, following permitting delays; management expected the California MesoScribe operations to relocate by mid-2019.
- Management said fourth-quarter revenue was below expectations and new orders had not arrived as anticipated. It expected revenue in each of the first two quarters of 2019 could approximate the level of the last two quarters of 2018, and anticipated operating losses in both quarters. The timing of a return to profitability depended on orders, the materials-business ramp, and cost reductions.
- Year-end backlog was approximately $3 million; the company reported receiving more than $6 million in additional orders afterward. Backlog can take up to two years to complete and may be delayed or cancelled.
Developments, risks, and controls
- CVD Materials includes Tantaline corrosion-resistant coatings and MesoScribe direct-write deposition products. The company also announced a patent-pending Fluid Reactor technology; it remained in evaluation and was not expected to generate near-term revenue. MesoScribe was selected for three government-sponsored awards, two received in Q1 2019 and one anticipated in Q2.
- Key risks include concentrated customer exposure, long and variable sales cycles, order cancellations, cyclical demand, competition, execution and profitability of CVD Materials, and the ability to fund further expansion. Management identified anticipated losses and the risk of failing to recover facility and segment investments.
- Other disclosed risks include contract cost-estimation uncertainty, supplier and delivery interruptions, hiring and retention of technical staff, intellectual-property protection, product liability, environmental and export regulation, cyber incidents, and possible asset impairment.
- Disclosure controls and procedures were deemed ineffective at year-end. The company disclosed material weaknesses involving oversight and consolidation of a foreign subsidiary, incomplete integration of project accounting software with the general ledger and reliance on manual reconciliations, and controls over estimating costs on contracts in progress. Management described remediation efforts. Separately, management concluded internal control over financial reporting was effective under the COSO framework; the auditor did not provide an ICFR attestation.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. The company reported no legal proceedings and no off-balance-sheet arrangements.
Investor verification points
- Check subsequent filings for actual 2019 orders, revenue, losses, and the timing and economics of the CVD Materials facility ramp and MesoScribe relocation.
- Assess whether the customer concentration has continued to decline and whether backlog converts to shipments, cash collection, and profitable revenue.
- Monitor liquidity and capital spending against the stated $11.2 million March 2019 cash balance, and confirm debt service and the large 2022 maturity plan.
- Review compliance with the HSBC covenant after the waiver expires and any revised financing terms.
- Track remediation and auditor or management updates on the disclosed control weaknesses, particularly contract cost estimates and project-accounting integration.
- Evaluate whether Fluid Reactor, Tantaline, and MesoScribe developments achieve commercial adoption; the filing does not establish material future revenue from these initiatives.