CVD Equipment Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. CVD Equipment designs and manufactures process equipment and operates its CVD and SDC divisions. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $10.83 million | $4.88 million | $31.31 million | $13.63 million |
| Gross profit / margin | $4.60 million / 42.5% | $1.69 million / 34.6% | $13.18 million / 42.1% | $3.72 million / 27.3% |
| Operating income (loss) | $1.89 million | $(0.40) million | $5.44 million | $(1.91) million |
| Net income (loss) | $1.40 million | $(0.09) million | $3.68 million | $(0.92) million |
| Diluted earnings (loss) per share | $0.22 | $(0.01) | $0.58 | $(0.15) |
- For the nine months, operating cash flow was negative $3.67 million, compared with positive $3.17 million a year earlier. Cash and cash equivalents fell $4.50 million to $17.18 million; capital expenditures were $0.62 million.
- Working capital was $24.8 million at September 30, versus $19.9 million at December 31, 2016. Accounts receivable increased to $4.06 million from $0.61 million, while costs and estimated earnings in excess of billings rose to $4.46 million.
- Total debt was approximately $3.04 million, including $0.30 million current. The company had an unused $7 million revolving credit facility available through September 1, 2018, subject to covenants, which it was meeting. The mortgage loan is due in 2022.
- At September 30, total assets were $45.80 million and stockholders’ equity was $38.69 million.
Changes versus prior comparable periods
- Revenue rose 121.8% in Q3 and 129.7% for the nine months, primarily reflecting work on orders received over the preceding 15 months. Both divisions grew; CVD generated most revenue.
- Gross margins improved substantially, which management attributed to higher revenue and product mix. Results moved from operating and net losses to profits in both comparison periods.
- Operating expenses increased, including general and administrative costs, partly due to personnel and occupancy costs related to CVD Materials and its CVD Tantaline ApS subsidiary.
- The 2016 nine-month comparison included a $629,000 gain from a negotiated reduction in legal fees related to the Taiwan Glass litigation. The 2016 quarter also included approximately $119,000 of insurance proceeds in excess of property repair costs.
Outlook, risks and notable items
- Management said cash and expected operating cash flow should meet working-capital and capital-expenditure needs for the next 12 months. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: one customer accounted for approximately 59% of Q3 revenue and 65% of nine-month revenue. Three customers represented 23.2%, 14.2% and 10.0% of period-end receivables. Management cautioned that reductions, delays or cancellations by major customers could materially affect results.
- Cash and investments exceeded FDIC insurance limits by $15.6 million at September 30. Contract revenue is recognized in part using percentage-of-completion estimates; changes in costs, requirements or estimated profitability may affect reported results.
- Subsequent event: on October 24, the company agreed to buy Central Islip property for $13.85 million, with closing anticipated around January 22, 2018. The purchase is contingent, among other conditions, on a $10.3875 million first-mortgage commitment. The $500,000 escrow deposit had been paid by the filing date.
- On October 31, a wholly owned indirect subsidiary acquired substantially all operating assets and the business of MesoScribe Technologies for $800,000: $500,000 paid at closing and up to $300,000 in contingent consideration based on specified revenue and other criteria.
- The company was still evaluating the operational and accounting effects of the new revenue-recognition standard, ASC 606. Management identified competition, access to acceptable financing, and uncertainty about future profitability and expansion among forward-looking risks.
Investor verification points
- Assess whether the sharp revenue growth and improved margins can continue, particularly given reliance on one customer and changing order mix.
- Review receivable collection, contract asset movements and operating cash conversion, which was negative despite reported nine-month earnings.
- Verify financing, closing conditions and funding impact of the $13.85 million property purchase, alongside the MesoScribe acquisition and contingent payments.
- Check the company’s progress and disclosed effects from adopting ASC 606, and monitor mortgage and revolving-facility terms and covenant compliance.