CVD Equipment Corporation — Q1 2012 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2012, compared with the same quarter of 2011. The company operates through its CVD and SDC segments; Conceptronic is included in CVD. CVD Equipment makes specialized equipment and recognizes revenue on custom contracts using percentage of completion, and on other products when accepted and shipped.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $7.155 million | $6.206 million; up 15.3% |
| Gross profit and margin | $2.735 million; 38.2% | $2.284 million; 36.8% |
| Operating income | $1.073 million | $0.877 million |
| Income before taxes | $1.060 million | $0.911 million; up 16.4% |
| Net income | $0.728 million | $0.687 million; up 6.0% |
| Basic and diluted EPS | $0.12 | $0.14 |
| Operating cash flow | $2.273 million | $4.785 million |
| Capital expenditures | $7.602 million | $0.058 million |
Gross margin improved partly because Q1 2011 included $560,000 of inventory write-downs. Higher revenue and margin more than offset increased selling, shipping, and general and administrative costs. Net income grew more slowly than pretax income because the reported tax expense increased to $332,000 from $224,000; management attributed the higher tax rate to continued use of previously earned R&D and other tax credits. Weighted-average basic shares increased to 5.977 million from 4.821 million, while EPS fell to $0.12 from $0.14.
Cash and cash equivalents were $19.018 million at March 31, up $0.882 million from year-end; restricted cash was $1.0 million. Working capital was approximately $22.312 million, down $0.636 million from December 31, 2011. Total debt was approximately $9.017 million, including $0.927 million current and $8.090 million long-term, compared with $3.172 million at year-end. The company reported $13.194 million in total liabilities and $31.050 million in stockholders’ equity.
Material changes and operating developments
- Revenue growth reflected conversion of higher orders received beginning in the second half of 2011. Q1 orders were approximately $5.503 million; backlog declined 22.8% from $16.198 million at year-end to $12.506 million. Backlog timing varies, may extend to two years, and can be delayed or cancelled.
- Operating cash flow was lower year over year, while capital spending rose substantially. Cash provided by operating activities and $6.0 million of new borrowing supported the quarter’s investing outlays.
- On March 15, the company acquired a 120,000-square-foot Central Islip facility for $7.2 million, exclusive of closing costs, financed in part with a new $6.0 million HSBC mortgage loan. The loan bears interest at LIBOR plus 1.75% and matures March 15, 2022. The facility is intended to replace two Ronkonkoma facilities totaling 63,275 square feet and support expansion.
- On April 26, 2012, the company sold its Ronkonkoma application-laboratory facility for $1.659 million, exclusive of closing costs. The proceeds were subsequent to quarter-end.
- On March 16, equipment valued at $975,000 that had been classified as idle inventory became available for sale or disposal under a prior stipulation and was included in finished goods at quarter-end.
Outlook, risks, and contingencies
Management stated it believed cash, positive operating cash flow, and available credit facilities were sufficient for working-capital and investment needs over the next 12 months. The filing provides no quantified revenue or earnings guidance. Management cautioned that backlog is not assurance of future revenue or profit. Forward-looking results are subject to competition, access to financing, uncertainty about profitability, and the outcome of potential expansion.
The company is pursuing a $5.816 million breach-of-contract claim against Taiwan Glass. Taiwan Glass denies the allegations, has asserted counterclaims seeking unspecified damages, and on April 12, 2012 sought partial summary judgment for $3.564 million previously paid. The filing does not state a clear estimate of the possible financial impact or outcome. The company reported compliance with its HSBC financial covenants at March 31 and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material quarterly change in internal controls was reported.
Key facts for investors to verify
- Whether backlog converts to revenue and profit, and whether new orders replenish the decline in backlog.
- Actual occupancy, transition, and operating costs for the new facility, and the use of proceeds from the subsequent property sale.
- Debt terms, covenant headroom, and the effect of variable LIBOR-based borrowing costs on liquidity and earnings.
- Developments in the Taiwan Glass litigation, including potential exposure from its $3.564 million motion and the company’s $5.816 million claim.
- Whether improved gross margin persists without the prior-year inventory write-down comparison, and how taxes and diluted share count affect per-share results.