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CVV > SEC Filings for CVV > Form 10-Q on 21-Nov-2012All Recent SEC Filings

Show all filings for CVD EQUIPMENT CORP

Form 10-Q for CVD EQUIPMENT CORP


21-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Except for historical information contained herein, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements, include but are not limited to: competition in the Company's existing and potential future product lines of business; the Company's ability to obtain financing on acceptable terms if and when needed; uncertainty as to the Company's future profitability, uncertainty as to the future profitability of acquired businesses or product lines, uncertainty as to any future expansion of the Company. Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements and the failure of such assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Past performance is no guaranty of future results.

Results of Operations

Three and Nine Months Ended September 30, 2012 vs. Three and Nine Months Ended September 30, 2011

Revenue

Revenue for the three months ended September 30, 2012 was approximately $4,696,000 compared to approximately $8,844,000 for the three months ended September 30, 2011, a decrease of 46.9%. Revenue for the nine months ended September 30, 2012 was approximately $18,945,000 compared to approximately $22,558,000 for the nine months ended September 30, 2011, a decrease of 16.0%. We attribute this decrease in revenue to management's focus on our efforts to complete the relocation to our new facility in Central Islip, New York.

Gross Profit

During the three and nine months ended September 30, 2012, we generated gross profits of approximately $1,746,000 and $7,391,000, respectively, resulting in gross profit margins of 37.2% and 39.0%, respectively. This is compared to the three and nine months ended September 30, 2011, where we generated gross profits of approximately $3,174,000 and $8,331,000, respectively, resulting in gross profit margins of 35.9% and 36.9%, respectively. The increase in gross profit margin is primarily attributable to our continuing successful efforts in engineering and production to achieve greater efficiencies in the use of our labor costs and the utilization of volume purchase discounts on materials ordered.


Selling, General and Administrative Expenses

Selling and shipping expenses for the three and nine months ended September 30, 2012 were approximately $226,000 and $937,000, respectively, or 4.8% and 4.9% of our revenue as compared to $363,000 and $885,000, respectively, or 4.1% and 3.9% of our revenue for the three and nine months ended September 30, 2011. The decrease in costs for the three months ended September 30, 2012 can be attributed to certain selling and shipping expenses such as commissions and freight which vary from period to period due to the timing of the shipments of systems. The increase in costs during the nine months ending September 30, 2012 is a result of the aforementioned factors as well as the hiring of additional personnel and attending more trade shows during the current nine month period compared to the prior nine month period.

We incurred approximately $1,172,000 and $3,829,000 of general and administrative expenses for the three and nine months ended September 30, 2012 compared to approximately $1,423,000 and $3,979,000 for the three and nine months ended September 30, 2011, a decrease of 17.6% and 3.8% respectively. This decrease is primarily a result of reduced legal fees during the current periods.

During the nine months ended September 30, 2012, we completed the sale of our facility located at 979 Marconi Avenue, Ronkonkoma, New York, where our Application Laboratory was located. The selling price for the facility was approximately $1,659,000 and as a result, we incurred a long-term capital loss on the sale of approximately $694,000. This capital loss had an adverse effect of $.12 per share on our pre-tax earnings for the nine months ended September 30, 2012.

On May 31, 2012, we entered into a Contract of Sale to sell our headquarters located at 1860 Smithtown Avenue, Ronkonkoma, New York, and began the final phase in completing the relocation process. The sale price for the Smithtown Avenue facility is $3,875,000 (exclusive of closing costs) and as of September 30, 2012, the book value (net of depreciation) on this facility is approximately $2,800,000. The closing on the sale of the Smithtown Avenue facility is expected to occur on or about December 31, 2012.

Operating Income

As a result of the foregoing factors, operating income was approximately $348,000 for the three months ended September 30, 2012 compared to operating income of $1,388,000 for the three months ended September 30, 2011, a decrease of 74.9%. Operating income for the nine months ended September 30, 2012 was $1,932,000 compared to operating income of approximately $3,467,000 for the nine months ended September 30, 2011, a decrease of 44.3%. If the loss on the sale of the Marconi Avenue facility had been excluded from the nine months ended September 30, 2012, the operating income would have been $2,626,000, resulting in a decrease of 24.3%.


Interest Expense, Net

Interest income for the three and nine months ended September 30, 2012 was approximately $9,000 and $24,000, respectively, compared to approximately $5,000 and $11,000 for the three and nine months ended September 30, 2011. Interest expense for the three and nine months ended September 30, 2012 was approximately $60,000 and $148,000 compared to approximately $47,000 and $149,000 for the three and nine months ended September 30, 2011. The primary source of this interest expense is on debt associated with the buildings owned by our Company.

Income Taxes

For the nine months ended September 30, 2012, we recorded approximately $443,000 of current income tax expense and $161,000 of deferred tax expense. For the nine months ended September 30, 2011, we recorded a current income tax expense of approximately $696,000 and $108,000 of deferred tax expense.

Net Income

For the foregoing reasons, we reported net income of approximately $180,000 and $1,229,000 for the three and nine months ended September 30, 2012 compared to net income of approximately $1,239,000 and $2,704,000 for the three and nine month periods ended September 30, 2011. Inflation has not materially impacted the operations of our Company.

Liquidity and Capital Resources

As of September 30, 2012, we had aggregate working capital of approximately $22,968,000 compared to $22,948,000 of working capital at December 31, 2011, an increase of $20,000 and cash and cash equivalents of $16,090,000, compared to $18,137,000 at December 31, 2011, a decrease of $2,047,000. Working capital remained approximately the same. The decrease in cash and cash equivalents can be primarily attributable to the costs associated with the acquisition and renovations of our new facility in Central Islip, New York.

Accounts receivable, net, as of September 30, 2012 was $4,134,000 compared to $3,664,000 as of December 31, 2011. This increase is primarily attributable to the timing of shipments and customer payments.

As of September 30, 2012, our backlog was approximately $8,692,000, a decrease of $7,506,000, or 46.3%, compared to $16,198,000 at December 31, 2011. During the nine months ended September 30, 2012, we received approximately $11,439,000 in new orders. Timing for completion of the backlog varies depending on the product mix and can be as long as two years. Included in the backlog are all accepted purchase orders with the exception of those that are included in percentage-of-completion. Order backlog is usually a reasonable management tool to indicate expected revenues and projected profits; however, it does not provide an assurance of future achievement of revenues or profits as order cancellations or delays are possible.


On August 5, 2011, the Company entered into a $9.1 million credit agreement with HSBC Bank, USA, N.A. secured by substantially all of the Company's personal property. The agreement consists of a $7 million revolving credit loan and a $2.1 million five (5) year term loan. The revolving credit facility permits the Company to borrow on a revolving basis until August 5, 2014. Interest on the unpaid principal balance on this facility accrues at either (i) the LIBOR Rate plus 1.75% or (ii) the bank's prime rate minus 0.50%. The term loan was used to pay off the mortgages previously held by Capital One Bank, NA. Interest on the unpaid principal balance accrues at a fixed rate of 3.045%. Borrowings under this term loan were collateralized by $1 million, provided that, so long as no event of default has occurred and is then continuing, the bank will release $200,000 of the collateral on each anniversary of the closing date. On August 5, 2012, HSBC released $200,000 of the collateral, thereby reducing the restricted cash to $800,000. The credit agreement also contains certain financial covenants. As of September 30, 2012, the Company was in compliance with the agreement.

So that we may expand our engineering, manufacturing, administration and Application Laboratory to further support the increase in our existing product sales and the development and sales of new products, on March 16, 2012, effective as of March 15, 2012, we closed on the purchase of a 120,000 square foot facility located in Central Islip, New York 11722 (the "Property") through the Town of Islip Industrial Development Agency, (the "Islip IDA"). This building will replace our two Ronkonkoma facilities which total 63,275 square feet. The transaction was structured pursuant to Section 1031 of the Internal Revenue Code, as amended, as a reverse tax deferred exchange. In order to avail ourselves of certain real estate and sales tax abatements, the purchase took the form of an assignment and lease purchase agreement with fee title continuing to be vested in the Islip IDA. The property was purchased from SJA Industries, LLC. The purchase price for the Property was $7,200,000, exclusive of closing costs.

Pursuant to the terms of an Accommodation Agreement, we entered into a loan agreement with HSBC Bank, USA, N.A. in the amount of $6,000,000, (the "Loan"), the proceeds of which were used to finance a portion of the purchase price of the Central Islip facility. The Loan is secured by the mortgage against that facility. Interest accrues on the Loan, at our option, at the variable rate of LIBOR plus 1.75% or HSBC's prime rate minus 0.50%. The Loan matures on March 15, 2022.

On April 26, 2012, we closed on the sale of our facility located at 979 Marconi Avenue, Ronkonkoma, New York 11779 which housed our Application Laboratory to K.A.V. Realty Associates, LLC. The selling price for the Premises was $1,659,375, exclusive of closing costs.

On May 31, 2012, we entered into a Contract of Sale to sell our headquarters located at 1860 Smithtown Avenue, Ronkonkoma, New York, and began the final phase in completing the relocation process. The sale price for the Smithtown Avenue facility is $3,875,000 (exclusive of closing costs) and as of June 30, 2012, the book value (net of depreciation) on this facility is approximately $2,800,000. The closing on the sale of the Smithtown Avenue facility is expected to occur on or about December 31, 2012.


We may also raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. In addition, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. On February 14, 2011, we filed a shelf registration statement on Form S-3 with the United States Securities and Exchange Commission ("SEC") to register shares of our common stock and other securities for sale, giving us the opportunity to pursue possible future fundraising of up to $20 million (the "Registration Amount") when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings. This shelf registration was declared effective by the SEC on February 28, 2011. In May 2011, we sold securities under the shelf registration statement having an aggregate value of $10,163,475.

We believe we have a sufficient amount of cash, positive operating cash-flow and available credit facilities at September 30, 2012, to meet our working capital and investment requirements for the next twelve months.

Off-Balance Sheet Arrangements.

We have no off-balance sheet arrangements at this time.

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