CVD Equipment Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. The company designs and manufactures equipment through its CVD and SDC divisions.
Financial performance
- Q3 revenue: $8.87 million, up 88.4% year over year. Gross profit was $3.31 million, with a 37.3% gross margin versus 37.2%. Operating income was $1.21 million, compared with an operating loss of $0.59 million; net income was $0.86 million, or $0.14 per diluted share, versus a net loss of $0.44 million, or $0.07 per share.
- Nine-month revenue: $19.36 million, up 48.9%. Gross profit was $7.33 million; gross margin improved to 37.9% from 33.2%. Operating income was $1.32 million versus an operating loss of $0.41 million. Net income was $0.79 million, or $0.13 per diluted share, versus a net loss of $4,809.
- Cash flow: Nine-month operating cash flow was $0.58 million, compared with cash used of $1.98 million in 2013. Investing activities provided $0.01 million and financing activities used $0.44 million. Cash increased $0.15 million to $11.40 million.
- Liquidity and debt: Working capital was approximately $19.75 million. Current assets were $25.28 million and current liabilities $5.53 million. Total debt was approximately $4.75 million, including a $3.94 million mortgage and $0.81 million term loan; no borrowings were outstanding on the $7 million revolver. The company reported compliance with debt covenants. Cash includes $0.40 million of restricted cash reported separately.
- Other balance-sheet items: Accounts receivable increased to $4.63 million from $2.88 million at year-end 2013; contract costs and earnings in excess of billings rose to $2.58 million from $1.58 million. Inventory was $5.21 million, up from $4.50 million.
Changes, operating drivers, and outlook
- Bookings were $6.4 million in Q3 and $27.5 million for the first nine months, compared with $5.3 million and $11.5 million, respectively, in 2013. September 30 backlog was $12.06 million, versus $3.99 million a year earlier. Management said a significant portion was expected to be completed within 12 months, but noted that cancellations and delays could affect conversion.
- Growth was primarily in the CVD division. Management attributed higher nine-month gross margin to production efficiencies from increased volume. Staffing and general and administrative expenses increased; legal fees were $0.47 million for the nine months, and management expected significant further litigation costs.
- Customer concentration is material: one customer generated approximately $4.8 million of Q3 revenue and $10 million of CVD revenue for the nine months; approximately $8.1 million of backlog was tied to one customer.
- Management said cash and available credit were sufficient for working capital and investment needs over the next 12 months. No specific revenue or earnings guidance was provided. The company noted it may seek financing for acquisitions and that equity financing could dilute shareholders.
- Income tax expense was $0.50 million for the first nine months. A New York State tax-law change eliminated state income tax for qualifying manufacturers; the company recorded a $0.38 million deferred tax charge from writing off state deferred tax assets, while expecting lower tax expense in future periods.
Material litigation and risks
- Taiwan Glass litigation: On November 13, 2014, after the September 30 reporting date, the court granted Taiwan Glass partial summary judgment and ordered the company to pay $3.564 million plus interest, while dismissing the company’s breach-of-contract claim. The company was considering options, including appeal. The September 30 financial statements do not reflect the judgment, and no amount was accrued for it. This is a significant potential cash and earnings exposure.
- Other risks identified include competition, financing availability, future profitability, and potential order cancellations or delays. The company reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material quarterly change in internal controls.
Facts investors should verify
- Current status, appeal prospects, interest amount, and financial-statement treatment of the Taiwan Glass judgment.
- Whether concentrated customer orders and backlog convert to shipments, revenue, and cash on the expected schedule.
- Collections on rising receivables and contract assets, and the credit quality of major customers.
- Availability and renewal terms of the $7 million revolver, which was due to expire August 5, 2015, and compliance with its covenants.
- Segment revenue commentary contains apparent inconsistencies with the segment tables, particularly for SDC; the filing text does not provide a clear reconciliation.