CVD Equipment Corporation — Q1 2014 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2014, compared with Q1 2013. The company operates CVD and SDC divisions and recognizes fixed-price contract revenue using percentage of completion.
Financial results and position
- Revenue: $4.39 million, up 27.1% from $3.45 million.
- Gross profit and margin: $1.78 million and 40.7%, versus $0.79 million and 22.8%. Management attributed the margin improvement to efficiencies at its new facility.
- Operating result: Operating loss narrowed to $49,915 from $869,811.
- Net result: Net loss was $268,147, or $0.04 per diluted share, compared with a $440,006 loss, or $0.07 per share. The 2014 result included a $219,380 income tax expense; the prior-year quarter included a $462,380 tax benefit.
- Cash flow: Operating activities provided $791,196, versus $768,440 used in Q1 2013. Investing activities provided $58,675, including release of $200,000 of restricted cash; capital expenditures were $141,325. Financing activities used $128,900, including $180,000 of debt payments.
- Cash and liquidity: Cash and cash equivalents were $11.97 million at March 31, up $721,000 from year-end. Working capital was approximately $18.46 million. Restricted cash was $600,000.
- Debt: Total reported debt was approximately $5.11 million, including $720,000 current maturities. The $7 million revolving credit facility was unused; it was available until August 5, 2014. The company reported compliance with its financial covenants.
- Other balance-sheet metrics: Total assets were $39.18 million and stockholders’ equity was $31.05 million. Accounts receivable declined to $1.96 million from $2.88 million; inventory increased to $4.96 million from $4.50 million.
Changes versus Q1 2013
- New orders rose to approximately $15.73 million from $3.17 million. Backlog was approximately $15.26 million at quarter-end; management said completion can take up to two years and cancellations or delays are possible.
- Revenue growth and higher gross margin substantially reduced the operating loss. Selling and shipping expense increased 46.7% to approximately $358,000, primarily due to additional personnel; general and administrative expense rose 4.4% to approximately $1.48 million.
- Interest expense decreased to approximately $29,000 from $53,000, which management attributed to repayment of the mortgage on the former headquarters after its 2013 sale.
Outlook, risks, contingencies, and unusual items
- Management believed cash on hand and operating cash flows would be sufficient for working-capital and investment needs over the next 12 months. It also said it might seek financing for acquisitions or while market conditions are favorable; equity-linked financing could dilute shareholders. No specific earnings or revenue guidance was provided.
- A New York tax-law change for qualified manufacturers required the company to write off $381,345 of state deferred tax assets, contributing to Q1 tax expense despite a pretax loss. The filing’s notes describe the change as occurring in April 2014, while MD&A says March 2014.
- The company seeks $5.816 million in damages from Taiwan Glass in a contract dispute; Taiwan Glass has counterclaimed for unspecified damages. Discovery was complete and trial was scheduled for December 2014. The outcome is uncertain.
- Management identified competition, access to financing, future profitability, and possible business expansion as factors that could cause actual results to differ from forward-looking statements. Backlog timing and customer cancellations or delays are also risks.
- Management reported effective disclosure controls and no material changes in internal controls over financial reporting during the quarter. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the sharply higher new-order intake converts to completed shipments, revenue, and profits, and whether backlog is retained without significant delays or cancellations.
- Whether improved gross margins persist as volume and product mix change, and how the company manages rising personnel-related expenses.
- The effect of the New York tax-law change on deferred tax assets and future tax expense; confirm the filing’s conflicting March/April timing description.
- The status, potential financial exposure, and eventual resolution of the Taiwan Glass litigation and counterclaims.
- Renewal or replacement of the revolving credit facility, which was scheduled to expire August 5, 2014, and compliance with debt covenants.