CVD Equipment Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results; comparisons are with the corresponding 2010 periods. The company operates CVD, SDC, and Conceptronic equipment businesses.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $7.51 million | $3.38 million | $13.71 million | $7.10 million |
| Gross profit | $2.87 million | $1.22 million | $5.16 million | $2.33 million |
| Gross margin | 38.3% | 36.2% | 37.6% | 32.8% |
| Operating income | $1.20 million | $0.13 million | $2.08 million | $0.07 million |
| Net income | $0.78 million | $0.10 million | $1.47 million | $0.01 million |
| Diluted EPS | $0.14 | $0.02 | $0.28 | $(0.00) |
Management attributed revenue growth to higher order levels beginning in the second half of 2010. It cited improved labor efficiency and volume purchase discounts for the gross-margin expansion. Operating expenses increased in dollars, including from additional personnel and legal fees, but declined as a share of revenue.
Cash, liquidity, and debt
- Six-month operating cash flow was $6.54 million, compared with $2.06 million in 2010. Cash at June 30 was $21.71 million, up from $6.25 million at year-end 2010. Cash generation included increased customer advance billings on uncompleted contracts.
- Working capital was approximately $22.08 million, versus $11.11 million at December 31, 2010. Accounts receivable rose to $3.82 million from $2.91 million.
- Total debt was approximately $3.40 million, including $0.28 million current maturities; total debt at year-end 2010 was approximately $3.77 million. The company reported no borrowings under its $5 million Capital One revolver, which expired August 1, 2011.
- On August 5, 2011, after quarter-end, the company entered a $9.1 million HSBC credit agreement: a $7 million revolver available through August 5, 2014, and a $2.1 million five-year term loan at a fixed 3.045% rate. The term loan is to repay existing Capital One mortgages; the facilities have collateral and financial-covenant provisions.
Material changes and operating developments
- Revenue increased 122.1% in Q2 and 93.1% for the six-month period year over year. Six-month backlog rose to approximately $22.21 million from $9.94 million at year-end; the company reported approximately $24.6 million in new orders during the half. Backlog completion can take up to two years and cancellations or delays are possible.
- A May 2011 public offering of 967,950 shares at $10.50 per share generated net proceeds of approximately $9.39 million for general corporate purposes, including working capital. Shares outstanding were 5,829,225 at June 30, compared with 4,819,325 at December 31.
- Segment results show CVD as the main source of growth. For the six months, CVD recorded $1.95 million in pretax income, SDC $0.36 million, and Conceptronic a $0.24 million pretax loss.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management said cash, positive operating cash flow, and available credit facilities were sufficient for working capital and investment needs over the next twelve months. It cautioned that backlog is not assurance of future revenue or profits. Forward-looking results are subject to competition, financing availability, profitability, and expansion uncertainties.
- The company is pursuing Taiwan Glass for $5.816 million over alleged breach of contract involving specially manufactured equipment; Taiwan Glass disputes the claims and seeks unspecified damages. The claim against Mizuho was dismissed. Most returned equipment, carried as $1.15 million of idle inventory, remained unavailable for use or sale pending the litigation.
- The company recorded $560,000 of inventory write-downs in the first half of 2011, versus none in the comparable 2010 period. The inventory-obsolescence reserve was $200,000 at June 30, up from $100,000 at year-end.
- Cash and cash equivalents held at financial institutions exceeded FDIC insurance limits by approximately $2.06 million at June 30. The company reported no off-balance-sheet arrangements and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the elevated order backlog converts to shipments, revenue, and cash on the expected schedule, and whether cancellations or customer delays emerge.
- Whether gross-margin gains persist and Conceptronic returns to profitability.
- Outcome and timing of the Taiwan Glass litigation, and recoverability or permitted disposition of the $1.15 million idle inventory.
- Terms, borrowing availability, collateral, covenant compliance, and mortgage-refinancing effects under the post-quarter HSBC facilities.
- Cash-flow sustainability apart from customer advances and the one-time equity offering proceeds.