CVD Equipment Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. CVD manufactures specialized equipment and reports two segments, CVD and SDC. The company said its focus on relocating Long Island operations to a larger Central Islip facility contributed to lower revenue. The filing was submitted under SEC Hurricane Sandy relief after disruptions affected the company and its independent accountants.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $4.696 million | $8.844 million | $18.945 million | $22.558 million |
| Gross profit | $1.746 million | $3.174 million | $7.391 million | $8.331 million |
| Gross margin | 37.2% | 35.9% | 39.0% | 36.9% |
| Operating income | $348,000 | $1.388 million | $1.932 million | $3.467 million |
| Net income | $180,000 | $1.239 million | $1.229 million | $2.704 million |
| Diluted EPS | $0.03 | $0.20 | $0.20 | $0.49 |
- Revenue fell 46.9% for the quarter and 16.0% year to date. Management attributed the decline to attention devoted to completing the facility relocation.
- Gross margin improved year over year; management cited production and engineering efficiencies and volume discounts on materials.
- Nine-month operating income included a $694,000 loss on the sale of the Marconi Avenue property. Excluding that loss, management reported operating income of $2.626 million, down 24.3% from the prior-year period.
- Nine-month operating cash flow was $273,000, compared with $4.884 million in 2011. Capital expenditures were $10.124 million, primarily associated with the new facility; investing cash outflow was $7.989 million.
Financial position and liquidity
- At September 30, cash and cash equivalents were $16.090 million, down $2.047 million from year-end 2011; restricted cash was $800,000. Working capital was $22.968 million, approximately unchanged from December 31, 2011.
- Total debt was approximately $8.555 million, comprising $933,000 current and $7.622 million long-term, versus approximately $3.172 million at year-end 2011. The increase principally reflects a $6.0 million mortgage loan used to finance the new facility.
- The company purchased a 120,000-square-foot Central Islip facility for $7.2 million, financed in part with the $6.0 million HSBC loan. The loan matures in 2022 and bears interest at a variable rate; the reported rate was 1.97375% at September 30, 2012.
- The separate HSBC credit agreement includes a $7 million revolving facility available through August 2014 and a $2.1 million term loan. The company reported compliance with its financial covenants at September 30.
- Management stated that cash, positive operating cash flow, and available credit were sufficient for working-capital and investment needs over the next 12 months. The filing reports no off-balance-sheet arrangements.
Material changes, outlook, and risks
- Backlog declined 46.3% to approximately $8.692 million from $16.198 million at December 31, 2011. The company received approximately $11.439 million of new orders in the first nine months. Management cautioned that backlog can be delayed or canceled and does not assure future revenue or profit.
- The company sold the Marconi Avenue facility for approximately $1.659 million, recording a $694,000 loss. It also had a contract to sell its Smithtown Avenue headquarters for $3.875 million, with closing expected around December 31, 2012; its September 30 net book value was approximately $2.8 million.
- No numerical earnings or revenue guidance was provided. Management’s outlook statements are forward-looking and subject to risks including competition, access to financing, future profitability, and expansion plans. Management disclaimed an obligation to update forward-looking statements.
- In ongoing litigation, CVD seeks $5.816 million from Taiwan Glass for alleged breach of contract; Taiwan Glass has asserted counterclaims seeking unspecified damages. On November 7, 2012, the court denied Taiwan Glass’s motion for partial summary judgment seeking $3.564 million. The case remained unresolved.
- The company disclosed that cash investments exceeding FDIC limits totaled approximately $4.387 million at September 30, 2012. This presents potential bank-deposit concentration exposure.
- Management assessed disclosure controls as effective and reported no material change in internal controls during the quarter. The filing lists risk factors as “Not Applicable,” while its forward-looking-statement discussion identifies the risks noted above.
Important facts for investors to verify
- Whether post-quarter orders, shipments, and backlog trends indicate a recovery from the year-over-year revenue decline.
- Whether the Central Islip relocation produces the expected operating efficiencies and whether remaining facility-sale proceeds and timing meet expectations.
- Cash generation, capital spending, debt service, revolving-credit availability, and continued compliance with HSBC covenants.
- The outcome and financial consequences of the Taiwan Glass litigation and the collectability of amounts tied to the disputed equipment.
- The status and expected disposition of the finished-goods inventory that had previously been restricted as idle inventory.