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CVV > SEC Filings for CVV > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for CVD EQUIPMENT CORP


14-Nov-2013

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 guarantee of future results.

Results of Operations

Three and Nine Months Ended September 30, 2013 vs. Three and Nine Months Ended September 30, 2012

Revenue

In March 2012, we purchased a 120,000 square foot facility located in Central Islip, New York (the "Property") through the Town of Islip Industrial Development Agency, (the "Islip IDA") and subsequently added another 10,000 square feet to the facility. The building replaced our two Ronkonkoma facilities which totaled 63,275 square feet and were not adequate to meet our anticipated future production requirements.

During the nine months ended September 30, 2013, and to a lesser extent in the three months ended September 30, 2013, the results of operations were impacted by this transaction due to the substantial amount of time and effort dedicated to renovating and moving into our new facility which proved to be disruptive to our continuing operations. We completed the relocation to our substantially larger facility in the closing days of March 2013.

Revenue for the three months ended September 30, 2013 was approximately $4,707,000 compared to approximately $4,696,000 for the three months ended September 30, 2012. Revenue for the nine months ended September 30, 2013 was approximately $13,004,000 compared to approximately $18,945,000 for the nine months ended September 30, 2012, a decrease of 31.4%. This decrease is attributable to both the reduction in the amount of new orders accepted while we were transitioning into our new facility and the reconstructing of our equipment during the period.


Gross Profit

During the three and nine months ended September 30, 2013, we generated gross profits of approximately $1,749,000 and $4,321,000, respectively, resulting in gross profit margins of 37.2% and 33.2% as compared to the three and nine months ended September 30, 2012, where we generated gross profits of approximately $1,746,000 and $7,391,000, respectively, resulting in gross profit margins of 37.2% and 36.9%. The primary reason for the reduced gross profit margins during the current nine month period was the hiring of additional engineering and production personnel so that they could be trained and more productive after the move was completed.

Selling, General and Administrative Expenses

Selling and shipping expenses for the three and nine months ended September 30, 2013 were approximately $252,000 and $741,000, respectively, or 5.4% and 5.7% of our revenue compared to $226,000 and $937,000, respectively, or 4.8% and 4.9% of our revenue for the three and nine months ended September 30, 2012. The increases can be attributed to certain selling and shipping expenses such as commissions which vary from period to period due to the timing of the shipments of systems while the increase in percentage is directly related to the reduced revenue.

We incurred approximately $1,462,000 and $4,272,000 of general and administrative expenses or 31.1% and 32.9% of our revenue for the three and nine months ended September 30, 2013, compared to approximately $1,165,000 and $3,822,000 or 24.8% and 20.2% of our revenue during the three and nine months ended September 30, 2012. The increases can be associated with the costs of personnel hired during the three and nine month periods ended September 30, 2013.

During the three and nine months ended September 30, 2013 we incurred approximately $623,000 and $610,000 respectively, of bad debt expense as a result of increasing our allowance for doubtful accounts due to the decline in the credit quality of a major customer, in the solar industry.

During the nine months ended September 30, 2013, we completed the sale of our facility located at 1860 Smithtown Avenue, Ronkonkoma, New York, where our former corporate headquarters was located. The selling price for the facility was approximately $3,875,000 and as a result, we incurred a long-term capital gain on the sale of approximately $887,000.

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 loss on the sale of approximately $694,000.


Operating Income

As a result of the foregoing factors, we incurred an operating loss of approximately ($588,000) for the three months ended September 30, 2013 compared to operating income of $348,000 for the three months ended September 30, 2012. We incurred an operating loss for the nine months ended September 30, 2013 of ($415,000) compared to operating income of approximately $1,932,000 for the nine months ended September 30, 2012.

Interest Expense, Net

Interest income for the three and nine months ended September 30, 2013 was approximately $8,000 and $23,000, respectively, compared to approximately $9,000 and $24,000 for the three and nine months ended September 30, 2012. Interest expense for the three and nine months ended September 30, 2013 was approximately $33,000 and $133,000 compared to approximately $60,000 and $148,000 for the three and nine months ended September 30, 2012. The primary source of this interest expense is debt associated with the Company owned facilities.

Income Taxes

For the nine months ended September 30, 2013, there was no current income tax expense and we recorded approximately $507,000 of deferred tax benefits. For the nine months ended September 30, 2012, we recorded a current income tax expense of approximately $443,000 and $161,000 of deferred tax expense.

As a result of the sale of our headquarters in April 2013, for financial statement purposes, we incurred a long-term capital gain of approximately $887,000. However, as a result of structuring the transaction pursuant to
Section 1031 of the Internal Revenue Code, as amended, as a reverse tax deferred exchange, we were able to defer this gain and the related taxes to a future period.

Net Income

For the foregoing reasons, we reported a net loss of approximately ($438,000) and ($5,000) for the three and nine months ended September 30, 2013 compared to net income of approximately $180,000 and $1,229,000 for the three and nine month periods ended September 30, 2012.

Inflation has not materially impacted the operations of our Company.

Liquidity and Capital Resources

As of September 30, 2013, we had aggregate working capital of approximately $19,249,000 compared to $20,100,000 of working capital at December 31, 2012, a decrease of $851,000, and cash and cash equivalents of $10,715,000, compared to $13,721,000 at December 31, 2012, a decrease of $3,006,000. The decrease in working capital and cash and cash equivalents was primarily the result of the cash used to pay for the renovations of our new facility in Central Islip, New York which was partially offset by the cash received on the sale of our facility located at 1860 Smithtown Avenue, Ronkonkoma, New York.


Accounts receivable, net, as of September 30, 2013 was $5,388,000 compared to $4,515,000 as of December 31, 2012. This increase is primarily attributable to the timing of shipments and customer payments, and includes the adjustment of approximately $622,000 made to increase the allowance for doubtful accounts as a result of the decline in credit quality of a major customer.

As of September 30, 2013, our backlog was approximately $3,990,000, a decrease of $4,076,000, or 50.5%, compared to $8,066,000 at December 31, 2012. As a result of a decline in credit quality of a major customer we have chosen to omit from our backlog the remaining orders from this customer which totaled $2,598,000. We have received an additional $4,219,000 of orders in the 6 week period October 1, 2013 through November 13, 2013. 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, we entered into a $9.1 million credit agreement with HSBC Bank, USA, N.A. ("HSBC"), secured by substantially all of our personal property. The credit agreement consists of a $7 million revolving credit loan and a $2.1 million five (5) year term loan. The revolving credit facility permits us 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 pre-existing mortgage indebtedness of the Company. Interest on the unpaid principal balance accrues at a fixed rate of 3.045%. Borrowings under this term loan were initially collateralized by $1 million in restricted cash, 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. The credit agreement also contains certain financial covenants, one of which we were not in compliance with on September 30, 2013. We secured a waiver from HSBC regarding that covenant.

We decided in late 2011 to expand our engineering, manufacturing, administration and Application Laboratory to further support and grow 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, on March 15, 2012, 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.


As a result of the tax structure of the transaction for the sale of the facility at 1860 Smithtown Avenue, Ronkonkoma, New York, it was required that we use a portion of the proceeds received, approximately $1,309,000, towards reducing the mortgage on the property in Central Islip. The mortgage balance at September 30, 2013 was approximately $4,241,000.

On April 5, 2013, we closed on the sale of our former headquarters located at 1860 Smithtown Avenue, Ronkonkoma, New York 11779 to MelGlo LLC. The selling price was $3,875,000 exclusive of closing costs. As a result, we incurred a long-term capital gain of $887,000.

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. As a result, we incurred a long-term capital loss of $694,000.

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 an ample amount of cash, and available credit facilities at September 30, 2013, 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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