Form 10KSB for CVD EQUIPMENT CORP
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26-Mar-2007
Annual Report
Item 6. 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 and uncertainties that may cause our actual results or outcomes 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 our existing and potential future product lines of business; our ability to obtain financing on acceptable terms if and when needed; uncertainty as to our 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. We assume 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.
CVD Equipment Corporation designs, develops, manufactures, markets, installs and services Chemical Vapor Deposition and gas control equipment for use in manufacturing semiconductors, solar cells, carbon nanotubes, nanowires and equipment for surface mounting of components onto printed circuit boards. Our products include (1) both batch and single wafer systems used for depositing, rapid thermal processing, annealing, diffusion and etching of semiconductor films, (2) gas and liquid flow control systems (3) ultra high purity gas and chemical piping delivery systems; (4) standard and custom quartzware, (5) reflow furnaces and rework stations and (6) carbon nanotube and nanowire deposition systems. We also provide equipment consulting, and refurbishing of semiconductor processing equipment. Our products are generally manufactured as standard products, or customized to the particular specifications of each of its customers.
Results of Operations
Revenue for the year ended December 31, 2006 was approximately $13,356,000 compared to approximately $11,225,000 for the year ended December 31, 2005, representing an increase of $2,131,000 or 19.0%. Revenue from the CVD division increased by approximately $2,297,000 to $6,863,000 which represents 51.4% of our total revenues during the current fiscal year, compared to $4,566,000, or 40.7% of our total revenues, for the prior fiscal year. The increase in demand for customized CVD equipment and gas and chemical delivery systems coupled with requests for equipment provided by the First Nano product line, which we acquired in May, 2005, has fueled this increase. The annual revenue for the year ended December 31, 2006, from our SDC division, increased by approximately $935,000 or 42.6% to $3,129,000. This represents approximately 23.4% of our overall revenue for the current fiscal year, compared to the 19.5% SDC contributed in the last fiscal year. SDC's growing reputation in the industry for quality products is the primary stimulus for this increase. Revenue from the Conceptronic division was approximately $3,364,000 for the current fiscal year a decrease of approximately $1,101,000 or 24.7% compared to $4,465,000 for the year ended December 31, 2005. The Conceptronic division is continuing to improve their product offering at the same time it is focusing its efforts towards a more solutions oriented approach with what we believe is the best heat transfer in the industry and customized products. This is being accomplished by taking advantage of the engineering expertise in the Company as a whole rather than following much of the competition which has moved manufacturing facilities to the Far East to reduce costs and thus reduce selling prices. Conceptronic has already completed its first customized product sale.
As a result of the increased revenues for the current year, cost of revenues increased to approximately $8,672,000 from approximately $7,356,000 for the last fiscal year, an increase of approximately $1,316,000. The gross profit for the current fiscal year increased to approximately $4,684,000 from last year's $3,870,000, an increase of approximately $814,000 with an increase in gross profit margin to 35.1% from the 34.5% experienced during the prior year. We continue to achieve greater gross profit margins year after year as a result of our ability to absorb those fixed costs through greater revenues and continuously monitoring costs. The gross profit margin of the CVD division increased to 42.9% for the current fiscal year compared to 42.2% for the last fiscal year. The SDC division's gross profit margin increased to 25.6% for the year ended December 31, 2006 from 19.0% for the year ended December 31, 2005. The gross profit margin of the Conceptronic division decreased during the current fiscal year to 23.3% compared to 29.4% in fiscal 2005. This primarily is a result of the division's fixed costs having a greater impact on the reduced revenues.
Selling and shipping expenses were approximately $756,000 in the year ended December 31, 2006 compared to $716,000 in the year ended December 31, 2005 representing an increase of 5.6%. This increase can be attributed to primarily to increased sales commissions and travel costs.
General and administrative expenses were approximately $2,925,000 during the year ended December 31, 2006. This was an increase of approximately $394,000 or 15.6% compared to approximately $2,531,000 during the year ended December 31, 2005. This increase can be attributed to a combination of increased payroll and benefit costs, in addition to increased general insurance and utility costs.
Other income for the current year increased to approximately $116,000, an increase of $65,000 or 127% compared to $51,000 of other income generated during the year end December 31, 2005. In 2004, we wrote off a sale to a customer that filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware. In 2006, the liquidating trust distributed $92,400 to us, which represented 33% of the claim.
We earned minimal interest income for both 2006 and 2005 as a result of the utilization of all of our available funds for operations.
We incurred approximately $224,000 of interest expense in the year ended December 31, 2006, which was approximately $5,000 or 2.3% greater than the $219,000 incurred in the year ended December 31, 2005. The primary source of this interest expense, approximately $179,000 in the current year and approximately $188,000 in the year ended December 31, 2005, was the interest expense on the mortgages for the two buildings we own. The increase in the balance of interest expense is due to both the higher average outstanding debt as well as the higher interest rates on our revolving line of credit in the year ended December 31, 2006 than in the year ended December 31, 2005.
At December 31, 2006, we had approximately $40,000 and $277,000 remaining of our federal and state net operating loss carryforwards respectively. For the twelve months ended December 31, 2006, we recorded income tax expense of approximately $293,000 which related to various federal, state and local taxes. The current income tax provision was reduced by approximately $49,000 as a result of the use of available net operating losses.
As a result of the foregoing factors, for the twelve months ended December 31, 2006, we earned approximately $897,000 before taxes as compared to $455,000 for the twelve months ended December 31, 2005. After tax earnings for the twelve months ended December 31, 2006 were approximately $604,000 as compared to $391,000 after tax for the twelve months ended December 31, 2005 or $.19 per basic and diluted as share compared to $.13 per basic and $.12 per diluted share for the twelve months ended December 31, 2005. We earned approximately $239,000 or $.07 per basic and diluted share for the three months ended December 31, 2006 compared to net income of approximately $62,000 or $.02 per share basic and diluted for the three months ended December 31, 2005.
Liquidity and Capital Resources
As of December 31, 2006, we had aggregate working capital of approximately $4,151,000 compared to aggregate working capital of $3,123,000 at December 31, 2005 and had available cash and cash equivalents of approximately $257,000 compared to approximately $265,000 in cash and cash equivalents at December 31, 2005.
Accounts receivable, net of allowance for doubtful accounts increased by approximately $483,000 or 25.5% at December 31, 2006 to $2,377,000 compared to $1,894,000 at December 31, 2005. This increase is attributable to timing of shipments and customer payments.
The Company sold equipment to a Customer for a purchase price of one hundred four thousand, four hundred eighty two (104,482) shares of common stock, par value $.001 per share. Between July 19, 2007 and July 31, 2007, the Company has the option to demand that the Customer make cash payment i.e.: two hundred fifty-one thousand, one hundred thirty 00/100 U.S. dollars ($251,130) for the equipment, the amount that would have been required had the Customer made cash payment for the equipment on July 19, 2006 in exchange for the return of said stock.The Customer's obligation to make such payment pursuant to the terms of the option is secured by a perfected lien upon the subject equipment and the Company's right to execute upon the aforesaid common stock. In the event the Customer does not make full payment, the Company has also reserved the right to maintain plenary proceedings against the Customer for the purpose of recovering such sums as may be due as well as the right to obtain a deficiency judgment in the event that the collateral in the equipment and stock is insufficient to discharge said obligation.
Inventory as of December 31, 2006 was approximately $2,705,000 representing an increase of approximately $637,000 or 30.8% over the inventory balance as of December 31, 2005. The increase in inventory was comprised of a slight increase in raw materials of approximately $11,000, an increase in work in process of approximately $662,000 and a decrease in finished goods of approximately $35,000. The build-up in work in process is indicative of an increase in orders that we are experiencing in addition to our transition to building a more standardized product line in order to reduce the time needed to fill a customer's order. Custom orders still comprise a significant part of our revenues. Accounts payable at December 31, 2006 was approximately $651,000 or 1.7% higher than it was at December 31, 2005.
In 2006 our credit line with a bank which permits us to borrow on a revolving basis was revised to reflect an increase in the amount we are permitted to borrow from $1,000,000 to $1,250,000. 13 All financial covenants previously limiting the amounts borrowed were eliminated. The line of credit is subject to renewal on June 1, 2007. As of December 31, 2006, the outstanding balance on this facility was $210,000 as compared to $100,000 at December 31, 2005.
We also have an available $250,000 line of credit for equipment purchases from the same bank permitting us to borrow up to 100% of the purchase price of equipment. The amount borrowed is immediately converted into a five year term loan at the bank's prime rate plus 1 1/4%. As of December 31, 2006, there was approximately $77,000 outstanding on this facility. Borrowings under this facility are collateralized by the equipment purchased.
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 has an outstanding balance as of December 31, 2006 of $2,075,148, is 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. The final payment is due March 2017.
In April, 1999 we received from Kidco Realty Corporation a $900,000 purchase money mortgage loan, secured by the real property, building and improvements in Saugerties, New York. The mortgage loan has an outstanding balance at December 31, 2006 of $810,508 and is payable in equal monthly installments of $5,988 including interest at 7% per annum. The entire principal balance is due May 2009.
In the fourth quarter of 2006, an internal decision was made to significantly broaden the First Nano product line and pursue a significantly larger share of the R & D market with additional equipment platforms under the First Nano brand name. We have begun to market, quote and manufacture these products. In the second quarter of 2007, we plan to ship the first model of a new series of products intended for the R & D market. We feel comfortable we will be successful with the multiple new products to be offered as their design is based on building blocks we have used in previous systems over the years.
To support the increase in our existing product sales and the development and sales of the new First Nano products, we will need to increase our manufacturing capacity, hire additional personnel and expand our advertising, trade shows and marketing capabilities. Additionally, our First Nano laboratory is being expanded with additional laboratory test equipment and the new First Nano products for demonstration to help us stay in the forefront of carbon nanotube and nanowire production.
We believe that our cash and cash equivalent positions, cash flow from operations and ability to expand our credit facilities will be sufficient to meet our working capital and investment requirements for the next twelve months, including modest growth, without shareholder dilution.
Should we determine to grow our business more aggressively, which may include making acquisitions, we may need to raise additional funding. For this reason, as well as other reasons that arise from time to time, we may consider raising capital through equity or debt financings. Any decision to raise additional capital, as well as the determination of the appropriate vehicle for doing so, will depend on market conditions, order levels, opportunities presented to us and other factors.
Significant Accounting Policies
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.
The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed.
The liability, "Billings in excess of costs on uncompleted contracts," represents billing in excess of revenues recognized.
Off-Balance Sheet Arrangements
None
