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CVV > SEC Filings for CVV > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for CVD EQUIPMENT CORP

Form 10-K for CVD EQUIPMENT CORP


31-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guaranty future results.

We design, develop and manufacture standard and custom state-of-the-art equipment and process solutions used to develop and manufacture solar, nano, advanced electronic components, materials and coatings for research and industrial applications with the focus on enabling tomorrow's technologiesTM. We offer a broad range of chemical vapor deposition, gas control and other equipment that is used by our customers to research, design and manufacture semi-conductors, solar cells, smart glass, carbon nanotubes, nanowires, LEDs, MEMS, and industrial coatings used for medical, aerospace and other applications, as well as equipment for surface mounting of components onto printed circuit boards. Our Application Laboratory focuses on higher efficiency material manufacturing for a wide variety of growth markets, as well as accelerating the introduction of nano materials into a range of products and applications, which are marketed through our wholly owned subsidiary, CVD Materials Corporation. In addition, we can provide process development support and process startup assistance. Our proprietary products are generally customized to meet the particular specifications of individual customers and to accelerate the commercialization of their proprietary intellectual property.

Based on more than 30 years of experience, we use our engineering, manufacturing and process development to transform new applications into leading-edge manufacturing solutions. This enables university, research and industrial scientists at the cutting edge of technology to develop next generation solar, nano materials, LEDs, semiconductors and other chemical vapor deposited products. We also develop and manufacture research and production equipment based on our proprietary designs. We have built a significant library of design expertise, know-how and innovative solutions to assist our customers in developing these intricate processes and to accelerate their commercialization of chemically deposited materials. This library of solutions, along with our vertically integrated manufacturing facilities, allows us to provide superior design, process and manufacturing solutions to our customers on a cost effective basis.

Results of Operations

In 2012, we purchased 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") and subsequently added another 10,000 square feet. This building replaced our two Ronkonkoma facilities which totaled 63,275 square feet.


Our 2012 and 2013 results of operations were significantly impacted by this transaction. A substantial amount of time and effort was dedicated to purchasing, renovating and moving into the new facility that proved to be disruptive to our continuing operations.

Revenue

Revenue for the year ended December 31, 2013 was approximately $17,884,000 compared to approximately $22,158,000 for the year ended December 31, 2012, a decrease of $4,274,000 or 19.3%. Annual revenue from the CVD/First Nano division decreased by approximately $5,943,000 or 31.3% to $13,014,000 which represented 72.8% of our total revenue during the year ended December 31, 2013 compared to $18,996,000 or 85.7% of our total revenue for the prior fiscal year. This decrease is directly attributable to the reduction in the amount of new orders accepted during this transition phase as well as the disruption and inefficiencies in production from dismantling and reconstructing equipment during the year. Overall revenue for the three months ended December 31, 2013 was approximately $4,880,000 compared to revenue of approximately $3,213,000 for the three months ended December 31, 2012, an increase of 51.9%, and a further indication that the distractions associated with the transition of moving into the new facility are behind us.

Revenue from outside customers for the SDC division increased by approximately 54.0% or $1,708,000 to $4,870,000 compared to $3,162,000 in the prior fiscal year. The SDC division represented 27.2% and 14.3% of our total revenue during the years ended December 31, 2013 and December 31, 2012 respectively.

Gross Profit

Overall gross profit in the current year amounted to approximately $6,710,000 with a gross profit margin of 37.5% compared to the gross profit of $7,989,000 with a gross profit margin of 36.1% for the year ended December 31, 2012. The CVD/First Nano division generated a gross profit margin including intercompany transactions of 37.8% for the year ended December 31, 2013, compared to a gross profit margin of 34.1% for the year ended December 31, 2012. We have begun to realize some of the efficiencies of hiring additional engineering and production personnel during the transition to our new Central Islip, New York facility so that they are now trained and productive. The SDC division's gross profit margin including intercompany transactions increased to 33.8% for the year ended December 31, 2013 compared to 33.4% for the year ended December 31, 2012.

Selling, General and Administrative Expenses

Selling and shipping expenses were approximately $1,027,000 for the year ended December 31, 2013 compared to $1,237,000 for the year ended December 31, 2012, resulting in a decrease of 16.9% or $209,000. This decrease was primarily attributable to the decrease in commissions earned during 2013.

General and administrative expenses for the year ended December 31, 2013 were approximately $6,082,000 compared to $5,123,000 during the year ended December 31, 2012, an increase of $959,000 or 18.7%. This was primarily a result of legal fees related to the Taiwan Glass litigation, and increases in both personnel and occupancy costs.


Prior to 2012 all research and development expenses were incurred on customer orders and were classified as part of costs of goods sold. In 2012 we expanded our laboratory staff and began independently conducting cutting-edge research and product development for CVD Graphene. On January 9, 2014 we filed provisional patents covering the promising results we had achieved. In 2012 we incurred approximately $389,000 of costs not classified as part of costs of goods sold. We further expanded those efforts in 2013 and incurred approximately $1,013,000 of independent research and product development expenses.

In 2013, we incurred bad debt expense of $1,281,000 primarily, due to a major customer (in the solar industry) executing a General Assignment For the Benefit Of Creditors. As a result of that action, we wrote off all existing accounts receivables from that customer and some of the revenue previously recognized using percentage of completion accounting. Remaining equipment that had not been delivered to the customer, which was significant, was placed back in inventory.

During the twelve months ended December 31, 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 twelve months ended December 31, 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 Loss/Income

As a result of the foregoing factors, we incurred an operating loss for the year ended December 31, 2013 of approximately ($1,806,000) compared to approximately $545,000 of operating income for the year ended December 31, 2012.

Interest Income

Interest income for the year ended December 31, 2013 was approximately $30,000 compared to approximately $32,000 for the year ended December 31, 2012. This decrease is primarily attributable to the decreased cash available as a result of the cash used for the renovations of the new headquarters at 355 South Technology Drive, Central Islip, New York. Our primary investing philosophy for the investment of our cash remains that of minimizing risk.

Interest Expense

We incurred approximately $164,000 of interest expense in the year ended December 31, 2013, which was approximately $41,000, or 20% less than the $205,000 incurred in the year ended December 31, 2012. This is primarily a result of paying off the mortgage associated with the sale of the former corporate headquarters in April, 2013 and in addition to the utilization of the proceeds received from that sale to reduce the outstanding mortgage on our current headquarters.


Other Expense/Iincome

We incurred approximately $17,000 of other expenses in 2013 compared to other income of approximately $28,000 in 2012. This was primarily attributable to the loss of certain rental income received at the former headquarters as well as income tax refunds received from prior year's overpayments.

Income Tax Provision

For the twelve months ended December 31, 2013, we recorded an income tax benefit of approximately $1,396,000. This is primarily the result of applying federal, state and local income tax rates less research and development and other tax credits that we have availed ourselves of on a pre-tax loss of $1,957,000 as compared to an income tax benefit of approximately $35,000 for the twelve months ended December 31, 2012.

Net Income

As a result of the foregoing factors, for the year ended December 31, 2013, we incurred a net loss of approximately ($560,000) as compared to net income of $436,000 for the same period in 2012.

Inflation

Inflation has not materially impacted our operations.

Liquidity and Capital Resources

As of December 31, 2013, we had aggregate working capital of approximately $18,444,000 compared to aggregate working capital of $20,100,000 at December 31, 2012 and had available cash and cash equivalents of approximately $11,248,000 compared to approximately $13,721,000 in cash and cash equivalents at December 31, 2012. The decrease in working capital and cash and cash equivalents of $1,656,000 or 8.2% and $2,473,000 or 18.0%, respectively, is primarily attributable to the costs associated with the renovations of our new Central Islip, New York facility.

Accounts receivable, net of allowance for doubtful accounts, decreased by approximately $1,632,000 or 56.6% at December 31, 2013 to $2,883,000 compared to $4,515,000 at December 31, 2012. This decrease is due to reduction in sales and our decision to write off $1,328,000 in accounts receivable as a result of a major customer, in the solar industry, executing a General Assignment For The Benefit Of Creditors as well as the timing of shipments and customer payments.

Inventories as of December 31, 2013 were approximately $4,497,000 representing an increase of approximately $1,754,000 or 63.9% compared to the balance of $2,743,000 as of December 31, 2012. This increase in inventory is primarily due to the inclusion of equipment and materials not yet delivered to the solar customer that filed for reorganization.


As of December 31, 2013, our backlog was approximately $3,917,000, a decrease of $4,425,000 or 53.0% compared to $8,342,000 at December 31, 2012. The decrease is directly attributable to the purposeful reduction in the amount of new orders accepted during this transition phase of moving to the new building. The 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 our 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 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") to replace our $5 million revolving credit agreement and $2.1 million of existing mortgages previously held by Capital One Bank, N.A. This agreement consists of a $7 million revolving credit facility 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 of the term loan accrues at a fixed rate of 3.045%. Borrowings under the term loan are collateralized by certain assets as defined under the agreement. The balance outstanding as of December 31, 2013 is $1,120,000. We have not utilized this revolving credit facility. The credit agreement also contains certain financial covenants, one of which we were not in compliance with at December 31, 2013. We have secured a waiver by HSBC on that covenant.

In March 2002, we received from General Electric Capital Corporation a $2,700,000 mortgage loan, secured by the real property and building and improvements to finance and improve our facility in Ronkonkoma, New York. The mortgage loan, which had an outstanding balance as of December 31, 2012 of $1,007,842, was payable in equal monthly installments of $22,285 including interest at 5.67% per annum; pursuant to an industrial development bond purchase agreement with the town of Islip Industrial Development Agency. We sold the property and building in April, 2013 and paid the remaining balance on the mortgage loan.

In April, 2013 we completed the sale of our corporate headquarters located at 1860 Smithtown Avenue, Ronkonkoma, New York. 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. The transaction was structured pursuant to Section 1031 of the Internal Revenue Code, as amended, as a reverse tax deferred exchange.

On March 16, 2012, effective as of March 15, 2012, we closed on the purchase of the premises located at 355 South Technology Drive, Central Islip, New York. The purchase price of the building was $7,200,000 exclusive of closing costs. 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 Town of Islip Industrial Development Agency.


Pursuant to the terms of an Accommodation Agreement, we entered a loan agreement (the "Loan") with HSBC Bank USA, N.A. in the amount of $6,000,000, the proceeds of which were used to finance a portion of the purchase price. The Loan is secured by a mortgage against the Central Islip Facility. The loan is payable in 120 consecutive equal monthly installments of principal of $25,000 plus interest thereon and a final balloon payment of $3,000,000. As a result of the Section 1031 transaction a portion of the cash proceeds received from the sale of our previously owned building were used to reduce this loan by $1,309,000. This reduced the final balloon payment scheduled to come due when the Loan matures, to $1,691,000. Interest accrues on the Loan, at our option, at the variable rate of (a) 1.75% above LIBOR, which we chose or (b) a rate equal to 0.5% below HSBC's prime rate. The Loan matures on March 15, 2022.

The large demand for energy savings, energy generation materials and products needed to address rising energy costs creates a growing demand for manufacturing solutions using thin film coatings on glass, wafers and other substrates. Our Application Laboratory will help perfect and expand the multiple areas where low cost thin film manufacturing solutions can be applied and further optimize our technologies for cost and performance. We believe the solar, energy, electronic, aerospace, medical, LED's, graphene, nanowires and nanotubes markets we are addressing with multiple products have significant growth opportunities for technologies that deliver favorable cost benefits.

We believe that our cash and cash equivalent positions, cash flow from operations and our credit facilities will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.

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. Any equity or equity-linked financing could be dilutive to existing shareholders.

Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our significant estimates include accounting for certain items such as revenues on long-term contracts recognized on the percentage-of-completion method, recognition of stock-based compensation, assessment for impairment of our long-lived assets, and the valuation allowances for our income tax provisions.

Revenue Recognition

We continue to recognize revenues and income using the percentage-of-completion method for custom production-type contracts while revenues from other products are recorded when such products are accepted and shipped. Profits on custom production-type contracts are recorded on the basis of our total estimated costs over the percentage of total costs incurred on individual contracts commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. Under this method, revenues are recognized based on costs incurred to date compared with total estimated costs.


Stock-Based Compensation

We record stock-based compensation in accordance with the provisions set forth in ASC 718, "Stock Compensation," using the modified prospective method. ASC 718 requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards.

Long-Lived Assets

Long-lived assets consist primarily of property, plant and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine if impairment exists pursuant to the requirements of ASC 360-10-35, "Impairment or Disposal of Long-Lived Assets." If the asset is determined to be impaired, the impairment loss is measured on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value. We had no recorded long-lived asset impairment charges in the statement of operations during each of the years ended December 31, 2012 and 2011.

Off-Balance Sheet Arrangements

None.

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