CVD Equipment Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. CVD designs, manufactures, and sells custom chemical vapor deposition equipment, with additional segments in ultra-high-purity gas control systems (SDC) and materials products. Results are unaudited.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $3.47 million | $9.15 million |
| Gross profit (loss) / margin | $(0.39) million / (11.2%) | $3.76 million / 41.1% |
| Operating income (loss) | $(2.57) million | $0.91 million |
| Net income (loss) | $(2.18) million | $0.56 million |
| Basic and diluted EPS | $(0.33) | $0.09 |
| Cash from operations | $0.39 million | $0.03 million |
| Capital expenditures | $0.44 million | $0.81 million |
Revenue declined 62.1%, primarily due to lower sales following completion of orders from a major aerospace customer and delays in receiving new orders. Management said payroll and other costs remained at levels intended to support anticipated Materials-segment expansion and future growth. Gross-margin deterioration drove the operating loss despite lower operating expenses. A $456,000 income tax benefit partially offset the pretax loss.
Revenue by segment was approximately $2.0 million for CVD, $1.1 million for SDC, and $0.4 million for Materials. CVD and Materials reported operating losses of approximately $1.54 million and $0.20 million, respectively; SDC reported operating income of approximately $0.17 million. Corporate eliminations and unallocated items contributed an additional operating loss of approximately $1.00 million.
Liquidity, cash flow, and debt
At March 31, 2019, cash and cash equivalents were $11.25 million, versus $11.44 million at December 31, 2018. Working capital was $12.6 million, down from $15.4 million. Current assets were $16.96 million and current liabilities $4.33 million. Operating cash flow was positive despite the quarterly net loss, supported principally by collections that reduced accounts receivable by $1.96 million and contract assets by $0.27 million. Cash declined by $0.19 million after investing outflows of $0.42 million and debt repayments of $0.16 million.
Total debt was approximately $12.74 million, including $0.86 million current and $11.88 million long term. Debt primarily relates to mortgages on the company’s headquarters and the building intended for Materials operations. The $10.39 million property loan bears fixed interest of 3.9148% and matures in December 2022; the headquarters loan has a balloon maturity in March 2022 and a variable-rate option. The previously available $7 million revolving facility expired September 1, 2018 and was not renewed. Management said cash and expected operating cash flow should cover working-capital and capital-expenditure needs for the next 12 months.
Changes, outlook, and risks
- The major aerospace customer represented approximately 22.2% of Q1 2019 revenue, compared with 47.5% in Q1 2018; no customer exceeded 10% of total Q1 2019 revenue. One customer represented 22% of accounts receivable at quarter-end.
- Management attributed lower revenue and margin to completion of large customer orders and delays in new orders. The Materials facility was being prepared for operations, which management anticipated would commence by the third quarter of 2019. The company invested approximately $0.4 million in the quarter, primarily in building improvements and machinery, and incurred about $84,000 of Materials operating costs, excluding interest.
- No quantified revenue or earnings guidance was provided. Management stated that staffing levels would continue to be evaluated against anticipated Materials operations and current and expected orders. Its forward-looking statements cite competition, access to financing, and uncertainty regarding future profitability and expansion.
- Changes in contract cost and transaction-price estimates reduced Q1 2019 revenue by a net $172,000 across 21 projects; the comparable Q1 2018 change increased revenue by $909,000 across 10 projects. Revenue recognition on custom systems depends on estimated costs to complete, and management noted that estimate changes can materially affect results.
- The company was out of compliance at December 31, 2018 with the fixed-charge-coverage covenant on the property mortgage. HSBC granted a waiver through April 1, 2020. The filing reports no legal proceedings and no off-balance-sheet arrangements.
- Management concluded disclosure controls and procedures were not effective at quarter-end. Identified deficiencies involve oversight and consolidation of a foreign subsidiary, incomplete integration of project-accounting software with the general ledger and continued spreadsheet reconciliations, and estimating costs on contracts in progress. Remediation efforts were ongoing.
Most important facts for investors to verify
- Whether new orders and customer shipments recover sufficiently to restore positive gross margins after the sharp Q1 revenue decline.
- Whether the Materials facility began operations as anticipated by Q3 2019, and whether associated spending and operating costs generate expected activity.
- Compliance with the fixed-charge-coverage covenant after the waiver expires, and the company’s ability to service mortgage debt without a revolving credit facility.
- Progress in remediating the disclosed financial-reporting control deficiencies, particularly contract-cost estimates and accounting-system integration.
- Customer and receivables concentration, including collection of the balance owed by the customer representing 22% of quarter-end accounts receivable.