CVD Equipment Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparative periods ended September 30, 2010. The unaudited consolidated company operates the CVD, SDC and Conceptronic divisions, making specialized processing and surface-mount technology equipment.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $8.84 million | $4.03 million | $22.56 million | $11.14 million |
| Gross profit / margin | $3.17 million / 35.9% | $1.42 million / 35.2% | $8.33 million / 36.9% | $3.75 million / 33.7% |
| Operating income | $1.39 million | $0.15 million | $3.47 million | $0.22 million |
| Net income | $1.24 million | $0.14 million | $2.70 million | $0.16 million |
| Diluted earnings per share | $0.20 | $0.03 | $0.49 | $0.03 |
- Management attributed revenue growth—119.3% for the quarter and 102.6% year to date—to conversion of higher order levels received beginning in the second half of 2010. Higher sales drove operating income growth; gross margin also improved year to date.
- For the nine months, operating cash flow was $4.88 million, versus $1.83 million in 2010. Cash and cash equivalents were $18.62 million at September 30, up from $6.25 million at December 31, 2010. Working capital was approximately $21.81 million, versus $11.11 million.
- Cash growth primarily reflected $9.39 million net proceeds from a May public offering of 967,950 shares at $10.50 per share. The company also received $2.10 million of term-loan proceeds and repaid $2.54 million of long-term debt during the nine months.
- At September 30, total debt was approximately $3.33 million, including current maturities. A new HSBC agreement comprises a $7 million revolving facility, available through August 5, 2014, and a $2.1 million five-year term loan at a fixed 3.045%. The revolver rate is LIBOR plus 1.75% or prime less 0.50%. The term loan is additionally secured by $1 million of restricted cash. The company reported compliance with the facility’s financial covenants.
Business trends, outlook and risks
- Backlog was approximately $18.41 million at September 30, up 85.1% from $9.94 million at year-end 2010. New orders during the nine months were approximately $31.02 million. Management cautioned that backlog timing can extend to two years and orders may be delayed or canceled; backlog does not assure future revenue or profit.
- Management stated cash, positive operating cash flow and available credit facilities were ample for working capital and investment requirements over the next 12 months. No specific earnings or revenue guidance was provided.
- The company recorded $660,000 of inventory write-downs in the first nine months, compared with none in the prior-year period. A $300,000 obsolescence reserve was reflected at September 30, versus $100,000 at year-end 2010.
- Litigation with Taiwan Glass remains unresolved. The company seeks $5.816 million for alleged breach of contract; Taiwan Glass denies the claims and seeks unspecified damages. A separate claim against Mizuho was dismissed. Most returned equipment, carried as $1.15 million of idle inventory, cannot yet be used or sold because of the litigation.
- Third-quarter other income included approximately $61,000 of net tax-return adjustments, primarily related to depreciation, inventory and domestic production activities deductions. Management identified competition, financing availability, future profitability and expansion as risks to forward-looking results.
- Management reported disclosure controls were effective and no material changes to internal controls occurred during the quarter. The filing reports no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether the elevated order backlog converts to shipments and cash on the expected schedule, and whether cancellations or delays emerge.
- The status, potential recovery and carrying value of the Taiwan Glass-related equipment and the outcome of both parties’ claims.
- Future inventory reserves and write-downs, given the $660,000 current-period write-down and higher obsolescence reserve.
- Revolver utilization, covenant compliance and liquidity needs after the public offering and refinancing; the filing does not clearly state the revolving facility’s outstanding balance.
- Share dilution from the offering and stock options, and the sustainability of reported earnings growth as costs and taxes change.