CVD Equipment Corporation — Q2 2013 Form 10-Q
Business context and period. Unaudited consolidated results for the three and six months ended June 30, 2013, compared with the same 2012 periods. The company operates CVD equipment and SDC ultra-high-purity manufacturing businesses. Management said the move to its new, larger Central Islip facility was completed in late March and disrupted operations during the first half.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.85 million | $7.09 million | $8.30 million | $14.25 million |
| Gross profit | $1.78 million | $2.91 million | $2.57 million | $5.65 million |
| Gross margin | 36.8% | 41.0% | 31.0% | 39.6% |
| Operating income | $1.04 million | $0.51 million | $0.17 million | $1.58 million |
| Net income | $0.87 million | $0.32 million | $0.43 million | $1.05 million |
| Diluted EPS | $0.14 | $0.05 | $0.07 | $0.17 |
- First-half revenue fell 41.8%; management attributed the decline to fewer new orders during the facility transition and equipment reconstruction. It also cited hiring and training additional engineering and production personnel as a factor in lower gross margins.
- Q2 operating income included an $887,000 gain on the sale of the former headquarters. The prior-year periods included a $694,000 loss on sale of another facility. The gain materially affects period comparisons.
- Six-month operating cash flow was negative $2.05 million, versus negative $1.23 million in 2012. Investing activities provided $2.15 million, including $3.62 million in facility-sale proceeds; financing activities used $2.66 million, primarily for debt repayment. Cash declined $2.56 million to $11.16 million.
- At June 30, working capital was approximately $20.01 million; total current assets were $23.20 million and current liabilities $3.20 million. Total debt was approximately $5.65 million. The $7 million revolving facility was unused; $800,000 of cash was restricted as loan collateral.
Changes, outlook and risks
- Backlog was approximately $5.52 million at June 30, down 31.6% from $8.07 million at year-end 2012. The company reported approximately $5.75 million of new orders in the first half. Management cautioned that backlog may be delayed or canceled and completion timing can extend to two years.
- The company reported a covenant noncompliance at June 30 and said HSBC provided a written waiver. Management stated that cash and available credit were sufficient for working-capital and investment needs over the next 12 months. No quantified revenue or earnings guidance was provided.
- The facility sale generated an $887,000 book gain; management said the gain and related taxes were deferred for tax purposes through a Section 1031 reverse tax-deferred exchange.
- In litigation with Taiwan Glass, the company seeks $5.816 million for alleged breach of contract; Taiwan Glass denies the claims and seeks unspecified damages. The court denied Taiwan Glass’s motion for partial summary judgment seeking $3.564 million.
- Other disclosed risks include competition, access to financing, uncertain future profitability and expansion. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether facility-transition disruption has ended and revenue, orders, gross margins and backlog recover.
- The covenant waiver’s terms, duration and any ongoing compliance requirements.
- Cash generation and debt-service needs, including the availability and maturity of the revolving credit facility.
- Potential outcomes and financial effects of the Taiwan Glass litigation and the tax treatment of the facility-sale gain.