CVD Equipment Corporation — Q2 2014 Form 10-Q
Business context and period: Unaudited consolidated results for the three and six months ended June 30, 2014, compared with the same 2013 periods. The company operates CVD and SDC equipment-manufacturing segments.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.107 million | $4.848 million | $10.492 million | $8.298 million |
| Gross profit / margin | $2.235 million / 36.6% | $1.785 million / 36.8% | $4.019 million / 38.3% | $2.572 million / 31.0% |
| Operating income | $158,000 | $1.043 million | $108,000 | $173,000 |
| Net income (loss) | $202,000 | $874,000 | ($66,000) | $434,000 |
| EPS, basic and diluted | $0.03 | $0.14 | ($0.01) | $0.07 |
- Revenue increased 26.0% for Q2 and 26.4% for the first half year over year, primarily attributed to higher orders. Six-month new orders were $21.089 million versus $5.748 million in 2013.
- Six-month gross margin improved to 38.3% from 31.0%, which management attributed mainly to efficiencies at the new facility. Q2 margin edged down to 36.6% from 36.8%, partly due to a large, lower-margin order.
- Q2 2013 operating income included an $887,000 gain on the sale of the former facility; this makes comparisons with 2014 less favorable. The gain also contributed to 2013 first-half results.
- Management reported higher personnel and legal costs. Legal fees were approximately $230,000 for Q2 and $268,000 for the first half, versus $48,000 and $123,000, respectively, in 2013.
- First-half operating cash flow was negative $1.430 million, compared with negative $2.046 million in 2013. Investing cash flow was negative $107,000; financing cash flow was negative $309,000. Cash declined $1.846 million to $9.401 million.
- At June 30, cash and cash equivalents were $9.401 million; working capital was approximately $18.523 million. Current assets were $22.650 million and current liabilities $4.127 million. Restricted cash was $600,000.
- Total debt was approximately $4.926 million: $720,000 current and $4.206 million long-term. No borrowings were outstanding on the $7 million revolving facility. The company extended its HSBC credit agreement through August 5, 2015, on the same terms; it reported compliance with financial covenants at June 30. The term loan matures in August 2016 and the mortgage in March 2022.
Outlook, risks and notable items
- Backlog was $14.514 million at June 30, up from $3.917 million at December 31, 2013; the filing also gives $5.516 million as the June 30, 2013 comparison. Approximately $8.944 million of current backlog is from one customer. Management expects a significant portion to be completed within 12 months, but notes timing may extend to two years and orders may be delayed or canceled. Backlog is not assurance of future revenue or profit.
- Management stated it believes cash and available credit are sufficient for working capital and investment requirements for the next 12 months. No formal earnings or revenue guidance is provided.
- New York eliminated state income tax for qualifying manufacturers in March 2014. The company wrote off $381,000 of state deferred tax assets; despite deferred tax benefits, first-half income tax expense was $158,000. Management said the change should reduce future tax expense.
- The company is pursuing a $5.816 million breach-of-contract claim against Taiwan Glass. Taiwan Glass has counterclaimed for unspecified damages and renewed a motion seeking $3.564 million; the motion was scheduled for submission by August 28, 2014, with trial scheduled for December 2014. The company expects significant legal expenses until the matter concludes. Outcomes and potential financial effects are uncertain.
- Management identified competition, access to financing, profitability and expansion as risks that could cause results to differ from forward-looking statements. It reported no off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- Whether the elevated backlog converts to revenue on expected timing, and the concentration represented by the $8.944 million customer exposure.
- Progress and financial consequences of the Taiwan Glass litigation, including the renewed summary-judgment motion and potential legal costs.
- Cash conversion and working-capital trends, particularly receivables, contract assets and inventory, which increased during the first half.
- Segment performance: CVD reported a first-half pretax loss of $397,000, while SDC reported pretax income of $489,000.
- The filing contains inconsistent backlog comparisons ($5.516 million at June 30, 2013 in one passage and $3.917 million at December 31, 2013 elsewhere); confirm the intended comparison. The interim results are not necessarily indicative of full-year results.