CVD Equipment Corporation — Q2 2012 Form 10-Q
Business context and period: Unaudited consolidated results for the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company operates through its CVD and SDC divisions and manufactures specialized equipment. It was relocating Long Island operations to a new, larger facility in Central Islip.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $7.09m | $7.51m | $14.25m | $13.71m |
| Gross profit / margin | $2.91m / 41.0% | $2.87m / 38.3% | $5.65m / 39.6% | $5.16m / 37.6% |
| Operating income | $0.51m | $1.20m | $1.58m | $2.08m |
| Net income | $0.32m | $0.78m | $1.05m | $1.47m |
| Diluted EPS | $0.05 | $0.14 | $0.17 | $0.28 |
Management attributed improved gross margins to labor efficiencies and volume discounts on materials. Revenue declined 5.5% in Q2, which management attributed partly to efforts diverted to the relocation; first-half revenue increased 3.9%. Selling and shipping costs rose, while general and administrative expense was broadly similar year over year.
Cash flow, liquidity and debt
- First-half operating cash flow was negative $1.23m, versus positive $6.54m in 2011. Investing cash outflow was $5.98m, including $7.72m of capital expenditures, primarily associated with the new facility. Financing provided $5.67m, including $6.00m of new mortgage borrowing.
- Cash and equivalents were $16.60m at June 30, down $1.54m from year-end; restricted cash was $1.00m. Working capital was approximately $24.55m, up from $22.95m.
- Total debt was approximately $8.79m, including $0.93m current maturities, compared with approximately $3.17m at December 31, 2011. The company reported compliance with its HSBC financial covenants.
- The company said cash, operating cash flow and available credit were sufficient for working capital and investment needs over the next 12 months. It reported no off-balance-sheet arrangements.
Material changes, outlook and risks
- Facility transition: The company bought a 120,000-square-foot Central Islip facility for $7.2m, partly financed by a new $6.0m mortgage maturing in 2022. It sold its Marconi Avenue facility for approximately $1.66m and recorded a $694,000 loss, reducing Q2 and first-half operating income. Excluding that loss, management said operating income would have been $1.21m for Q2 and $2.28m for the first half.
- The company agreed to sell its Smithtown Avenue headquarters for $3.875m, against a June 30 book value of approximately $2.8m; closing was expected by October 15, 2012.
- Backlog was approximately $10.06m at June 30, down 37.9% from $16.20m at year-end. New orders in the first half were approximately $8.11m. Management cautioned that backlog is not assurance of future revenue or profit because orders may be delayed or cancelled. No specific earnings or revenue guidance was provided.
- Contingency: The company is pursuing a $5.816m breach-of-contract claim against Taiwan Glass. Taiwan Glass has counterclaimed for unspecified damages and sought partial summary judgment for $3.564m previously paid. The filing does not state an outcome or quantify the company’s potential exposure.
- Management cited competition, access to financing, future profitability and expansion as risks to forward-looking expectations. It reported disclosure controls were effective and no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Progress and final costs of the relocation, and completion and proceeds of the planned headquarters sale.
- Whether the reduced backlog converts to orders, revenue and profits, and whether order cancellations or delays occur.
- Operating cash generation after substantial facility-related spending and the company’s debt, covenant and liquidity position.
- Developments in the Taiwan Glass litigation, including the counterclaim and motion for partial summary judgment.