CVD Equipment Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited and consolidated.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $10.43 million | $6.11 million | $20.13 million | $10.49 million |
| Gross profit / margin | $4.16 million / 39.8% | $2.46 million / 40.2% | $7.92 million / 39.3% | $4.44 million / 42.3% |
| Operating income | $1.52 million | $0.16 million | $2.72 million | $0.11 million |
| Net income (loss) | $1.33 million | $0.20 million | $2.00 million | $(0.07) million |
| Diluted EPS | $0.21 | $0.03 | $0.32 | $(0.01) |
- Orders were $13.1 million in Q2, up 145% year over year; first-half orders were $18.3 million, down 13.1%. Backlog at June 30 was $19.3 million, up 32.8% from a year earlier. Management expected a significant portion to be completed within 12 months, while noting timing can extend to two years and orders may be delayed or canceled.
- Q2 revenue increased 70.9% and first-half revenue increased 91.8%. CVD division growth drove the increase; SDC’s external revenue declined as it supported CVD aerospace orders. Management attributed first-half gross-margin compression to a large, lower-margin order; Q2 margin was nearly flat year over year.
- Operating expenses rose 14.8% in Q2 and 20.0% in the first half, with higher general and administrative costs, including legal, personnel, and occupancy costs.
Cash flow, liquidity and debt
- First-half operating cash flow was negative $1.28 million, compared with negative $1.43 million in 2014. Investing cash outflow was $0.17 million and financing cash outflow was $0.36 million, including scheduled debt payments. Cash and equivalents fell $1.80 million to $10.16 million.
- Management attributed the cash decline principally to the $4.925 million payment settling Taiwan glass litigation and the timing of shipments and customer collections. Working capital was $18.4 million, versus $16.4 million at year-end 2014.
- Total debt was approximately $4.21 million at June 30, comprising $0.49 million on a term loan and approximately $3.72 million on a mortgage. The $7 million revolving credit facility was unused; the company was seeking an extension to September 1, 2018, under the same terms. Management reported compliance with its financial covenants.
- Management said cash and operating cash flow should be sufficient for working capital and capital expenditures for the next 12 months. No off-balance-sheet arrangements were reported.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Forward-looking statements identify competition, access to financing, and uncertainty about future or acquired-business profitability and expansion as risks.
- Customer concentration is significant: one customer accounted for 76.7% of Q2 revenue and 66.2% of first-half revenue. It represented 43.7% of backlog at June 30. One customer also represented 60% of receivables, versus 38% at year-end 2014.
- The DSI arbitration continued after the company’s bid to stop it was denied by Delaware Chancery Court on July 23, 2015; the company filed for reargument, then pending. The arbitration hearing was scheduled for the week of October 12, 2015. The company disputes the claims and says it is vigorously defending itself; the filing gives no clear amount for potential exposure. Management expected significant legal expenses until the matter concluded.
- The company’s cash deposits exceeded FDIC insurance limits by approximately $9.84 million. Revenue on fixed-price contracts uses percentage-of-completion estimates, and changes in costs or estimated profitability can affect reported results. Management was evaluating the impact of newly issued accounting standards, including the new revenue-recognition standard.
- New York State’s manufacturing tax change eliminated state income tax for qualifying manufacturers; the company said this would reduce future tax expense but required writing off certain state deferred tax assets. First-half tax expense was $0.68 million.
Important facts for investors to verify
- Whether the large customer continues ordering, pays receivables on time, and supports the reported backlog conversion.
- The margin and completion outlook for the large lower-margin order and other percentage-of-completion contracts.
- Progress and any financial consequences of the DSI arbitration, including legal costs and developments in the pending reargument motion.
- Completion of the proposed revolving-credit-facility extension and continued covenant compliance.
- Cash conversion and liquidity after the Taiwan settlement payment, including collection of concentrated receivables.