CVD Equipment Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are against December 31, 2012. CVD designs and manufactures specialized equipment, reporting through its CVD and SDC divisions. The filing was signed November 14, 2013.
Financial performance
- Revenue: Q3 revenue was $4.71 million, essentially unchanged from $4.70 million a year earlier. Nine-month revenue fell 31.4% to $13.00 million from $18.95 million.
- Profitability: Q3 gross profit was $1.75 million, with a 37.2% gross margin, unchanged year over year. Nine-month gross profit declined to $4.32 million from $7.39 million; gross margin fell to 33.2% from 36.9%. The company reported a Q3 net loss of $438,494 versus net income of $179,964, and a nine-month net loss of $4,809 versus net income of $1.23 million. Nine-month basic and diluted EPS were each reported as $0.0; the filing does not provide a more precise displayed value.
- Operating costs and items: Q3 operating loss was $588,203 versus operating income of $347,830 in Q3 2012. Nine-month operating loss was $414,847 versus operating income of $1.93 million. Higher G&A, staffing costs and a roughly $622,000 increase in the doubtful-account allowance weighed on results. The 2013 nine-month period also included an $887,477 gain on sale of the former headquarters; 2012 included a $693,818 loss on sale of another facility.
- Cash flow: Operating activities used $1.98 million in the first nine months, compared with $273,000 provided in 2012. Investing activities provided $1.80 million, including $3.62 million of property-sale proceeds, while financing activities used $2.83 million, principally for debt payments. Cash declined $3.01 million to $10.72 million.
- Liquidity and debt: Working capital was approximately $19.25 million, down from $20.10 million at year-end 2012. Long-term debt, including current maturities, totaled about $5.47 million, down from $8.32 million. The $7 million revolving facility was unused; $800,000 remained in restricted cash. Management said cash and available credit were adequate for working capital and investment needs over the next 12 months.
Changes, outlook and risks
- Management attributed the nine-month revenue decline primarily to accepting fewer new orders during the move to the larger Central Islip facility and disruption from renovation, relocation and equipment reconstruction. The move was completed in late March 2013. Management also cited hiring and training additional engineering and production personnel as a cause of lower year-to-date gross margin.
- Backlog was approximately $3.99 million at September 30, down 50.5% from $8.07 million at December 31, 2012. The company excluded $2.60 million of remaining orders from a major solar-industry customer because of deteriorating credit quality. It reported $4.22 million in additional orders received from October 1 through November 13; backlog may be delayed or canceled and is not assurance of future revenue or profit.
- Accounts receivable, net, rose to $5.39 million from $4.52 million. The allowance for doubtful accounts increased to $642,122 from $32,425, largely due to the major customer’s weaker credit quality. Management considers the allowance adequate but notes estimates may change.
- The company was out of compliance with one financial covenant under its HSBC credit agreement at September 30 and received a written waiver. The $7 million revolving facility was scheduled to remain available until August 5, 2014.
- The headquarters sale generated a reported $887,477 accounting gain; under a reverse tax-deferred exchange structure, the gain and related taxes were deferred for tax purposes. The filing gives no specific earnings or revenue guidance. Management’s forward-looking risk factors include competition, access to financing, profitability and expansion uncertainty.
- The company is pursuing a $5.816 million breach-of-contract claim against Taiwan Glass. Taiwan Glass denies the allegations and has counterclaimed for unspecified damages; its motion for partial summary judgment seeking $3.564 million was denied, and discovery was complete.
Most important facts for investors to verify
- Whether new orders and revenue recover following completion of the facility move, and whether the reported post-quarter orders convert to shipments and cash.
- The major solar customer’s ability to pay, the adequacy of the $642,122 receivables allowance, and the excluded $2.60 million of customer orders.
- The terms and duration of the HSBC covenant waiver, future covenant compliance, and availability of the revolving credit facility.
- Cash conversion and working-capital trends, including receivables, contract assets and inventory, alongside continuing facility-related spending and debt repayment.
- The timing and outcome of the Taiwan Glass litigation and any potential impact from its counterclaims.