CVD Equipment Corporation (CVV) Q3 2022 Earnings Call Transcript

CVD Equipment Corporation (NASDAQ:CVV) Q3 2022 Earnings Conference Call November 14, 2022 5:00 PM ET

Company Participants

Emmanuel Lakios – President & Chief Executive Officer

Richard Catalano – Vice President, Chief Financial Officer

Conference Call Participants

Brett Reiss – Janney Montgomery

Operator

Greetings, and welcome to the CVD Equipment Corporation 2022 Third Quarter Results Conference Call. As a reminder, this conference is being recorded.

We will begin with some prepared remarks followed by a question-and-answer session. Presenting on the call today will be Emmanuel Lakios, President and CEO and Member of the CVD Board of Directors; and Richard Catalano, Vice President and Chief Financial Officer. We have posted our earnings press release and call replay information to the Investor Relations section of our website at www.cvdequipment.com.

Before I begin, I’d like to remind you that many of the comments made on today’s call contain forward-looking statements including those related to future financial performance, market growth, total available market, demand for our products and general business conditions and outlook. These forward-looking statements are based on certain assumptions, expectations, and projections and are subject to a number of risks and uncertainties described in our press release and in our filings with the SEC, including but not limited to the Risk Factors section of our 10-K for the year ended December 31, 2021. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made as of today, and we undertake no obligation to update any forward-looking statements based on the new circumstances or revised expectations.

Now I would like to turn the call over to Emmanuel Lakios.

Emmanuel Lakios

Thank you. Welcome to our CVD Equipment Corporation’s quarterly conference call. My name is Emmanuel Lakios, CEO and President, and I am pleased to be presenting to you today regarding our third quarter 2022 performance and important company developments and pertinent information related to our business. Your thoughts are important to us, and we look forward to your questions in our Q&A session.

Before discussing the results of the third quarter, I would like to first provide you with an update on our sale and leaseback transaction. In September, we announced that we had entered into an agreement to sell our main facility in Central Islip and lease it back for a period of 10 years with two five year renewal options. The potential purchaser had 30 days to complete their due diligence, during which time they retain the ability to cancel the agreement. On November 3 and 4, we amended the agreement with the potential purchaser to extend the due diligence period to last Friday, November 11.

On November 11, 2022, the potential purchaser notified the company that it was terminating the purchase agreement in its entirety. Each party will bear its own costs and expenses in connection with the foregoing. Either party will pay a termination fee with respect to the termination of the purchase agreement. While we are disappointed, we are — that we are not able to complete the sale and leaseback transaction, we may explore a sale and leaseback or other transaction in the future.

Now back to our third quarter and year-to-date results. First, I’m pleased to report that we achieved an operating profit of $122,275 for the third quarter and net income of $63,538. While our revenue and profitability will continue to fluctuate due to the timing of orders and shipments, we believe that we are on the right track to achieve consistent long-term profitability over the years ahead.

First nine months of 2022 have been an exciting period for all the stakeholders of CVD Equipment. The year-to-date order rate for 2022 lends further support that our belief that we are on the right path. Our core strategy, which includes focusing on markets that support the electrification of everything is fueling our present growth. This market segment continues — includes electric vehicle battery technology as well as high-power electronics for power charging and transmission.

Our Q3 2022 orders were $7.3 million compared to $6.1 million in Q3 of the prior year. Through the first nine months of 2022, we have received orders exceeding $15.5 million for our CVD systems and services segment as compared to approximately $8.3 million for the same period 2021. This is an 86% year-over-year increase in orders for the equipment group.

These orders primarily consisted of 22 FirstNano/CVD systems compared to 23 orders for the entire 2021 year. Of the 2020 — of the 22 system orders, 14 of our — were for our newly launched PVT-150 system that addresses silicon carbide growth and processing, two were for superconducting tape applications, and the remainder of the system orders are for battery nanomaterials, both R&D and production, as well as advanced carbon-based capacitors, and of course, for our legacy advanced R&D FirstNano system.

We announced recently that we are selected and received an order in the fourth quarter from a major aircraft engine manufacturer. Specifically, the orders for production chemical vapor and filtration system valued at approximately $3.7 million. As I stated earlier, the system will be used to manufacture ceramic matrix composite materials for our aerospace gas turbine engines. We believe that this order is a tangible sign of the beginning of the aerospace market recovery, which traditionally has been a significant part of the CVD Equipment Corporation business.

We are also continuing to engage and market our CVI systems to other gas turbine engine manufacturers. We continue to receive orders for consumables and spare parts that serve our installed base in the aerospace market, while we believe that this new order rate is a sign that the aerospace market is beginning to recover. We do not expect it to fully recover for at least until the latter part of 2023.

Our SDC segment had increased sales over prior year of 23.1%, and increased orders in the third quarter that reflects a higher demand for our gas and liquid control system products. Our Tantaline and MesoScribe product lines continue to be profitable. Supply chain issues, though, continued to negatively impact our revenue timing and profitability for all the segments of the company. The lingering pandemic and geopolitical instability has impacted most global supply chains. The negative effect has been felt by all companies with increases in commodity and product material cost as well as in delayed product deliveries.

We continue our drive towards increased operational self-reliance. We’ve received and installed additional machine centers in our Central Islip facility to offset the supply chain issues related to machine parts. In addition, we are working closely with our OEM suppliers to mitigate as much as possible the delivery delays and increases in prices and components of the materials.

I would like to turn our call over to our CFO, Rich Catalano, who will provide our third quarter and year-to-date 2022 financial summary. Rich?

Richard Catalano

Thank you, Manny, and good afternoon. Our revenue for the third quarter of 2022 was $8.1 million this compares to $4.3 million for the third quarter of 2021. That represents an increase of $3.8 million or 88.4%. Net income for the third quarter was $63,538 or $0.01 per basic and diluted share, this compares to net income of $6 million for year or $0.89 per basic and diluted share in the third quarter of 2021. However, keep in mind that the 2021 quarter included a $6.9 million nonoperating gain on the sale of one of our buildings.

Operating income for the third quarter of 2022 was $122,275. This represents an improvement of $1 million from both the operating losses of $9 million that we reported in both the second quarter of this year 2022 and also the third quarter of 2021. This improvement in operating results from the prior year quarter was an increase related — increased revenue of $3.8 million, and this resulted in increased gross profit of $1.6 million. This was offset by an increased operating expense of about $0.5 million, $500,000. The increase in gross profit was primarily the result of leveraging our fixed cost on higher sales levels as well as an improved product mix. This offset increases that we had in certain material components and compensation costs.

The increase in our operating expenses is due to higher employee-related costs to support the growth of our business, including additional marketing and engineering efforts as well as we incurred an employee severance charge during the quarter.

For the nine months ended September 30, 2022, our revenue was $18.6 million as compared to $11.7 million for the same period in 2021. This is an increase of $6.9 million or 58.4%. The net loss for the nine months ended September 30, 2022, was $1.8 million or $0.26 per basic and diluted share. This compares to net income of $5.9 million or $0.89 per basic and diluted share in the same period of 2021. However, you should note that in the nine months ended September 30, 2021, it included two nonoperating gains that totaled $9.3 million. We had a $6.9 million gain on the sale of the building and a $2.4 million gain on debt extinguishment from the forgiveness of the company’s PPP loan.

For the nine months ended September 30, 2022, our operating loss decreased by $2 million to $1.6 million as compared to the operating loss that we had in the same period in 2021. This improvement was the result of the increased revenue of $6.9 million that resulted in an additional gross profit of $2.3 million this was offset by increased operating expenses of $0.3 million.

Similar to the results for the quarter of quarter three, the increase in gross profit was primarily the result of our leveraging our fixed costs, again, on our higher sales levels as well as an improved mix. This has been offset by higher material component cost and higher compensation costs.

Our operating expenses did increased over the prior year due to higher employee-related costs as we were focused on growing our business. So we had additional marketing and engineering costs for R&D. This increase was offset by lower building costs, however, we did consolidate our Central Islip operations in 2021, and we also benefited from lower professional fees as compared to the prior year.

Now turning to our backlog. Our backlog at September 30, 2022, was $15.7 million as compared to $10.4 million at the beginning of the year as of December 31, 2021. This represents an increase of $5.3 million or 50.9%. Our cash and cash equivalents at September 30th was $11.9 million this compares to $16.7 million at December 31, 2021. This is a decrease of $4.8 million, and this is primarily the result of the satisfaction of our mortgage debt on our Central Islip facility earlier in the year that was for $1.8 million. We have our net loss as adjusted for noncash items of $2.3 million, and we also invested in our capital, and our PPE of approximately $0.6 million.

Our working capital at September 30th was $15 million, and this compares to $16.7 million at December 31, 2021. We continue to be unable to predict the extent of the lingering impact of the pandemic and the current geopolitical uncertainties we’ll have on our financial position and results of operations for the balance of 2022 and, of course, going forward into 2023 and beyond. Due to various uncertainties regarding our supply chain disruptions, rising cost, the impact on the aerospace sector that impacted the company over the past couple of years. And — but the impact can be material in the future periods, whether indirectly or directly.

Again, the longer-term impacts on the pandemic and the geopolitical uncertainties are still uncertain and cannot ultimately be predictive. Our return to consistent profitability is dependent among other things on the receipt of new equipment orders, our ability to mitigate the impact of supply chain disruptions and the inflationary pressures as well as managing planned capital expenditures and operating expenses.

In addition, our revenues and orders have historically fluctuated based on changes in order rate as well as other factors in our manufacturing process that impacts the timing of our revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter-to-quarter.

After considering all these factors, we believe our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 to 18 months. Should the current economic environment continue longer or even worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support our working capital needs.

I’ll now turn the call back over to Manny.

Emmanuel Lakios

Rich, thank you for your presentation. In summary, the third quarter and year-to-date results of 2022 reflect the actions we took since 2021 to reorganize, focus on everything we do and those who we actually serve. Our focus remains on our customer markets, our employees, our shareholders and the pursuit of growth and return to consistent profitability. We look forward to continuing to build on our success in the year ahead and continue to be cautiously optimistic. Your comments and questions are important to us.

With the close of our presentation, I would like to open the floor to your questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Brett Reiss with Janney Montgomery. Please state your question.

Brett Reiss

Thank you, operator. Hi, Manny, hi Rich.

Emmanuel Lakios

Brett, how are you?

Brett Reiss

Good, good, good. First, congrats on a profitable quarter. It’s nice to see. And welcome aboard to Rich.

Richard Catalano

Thank you, Brett.

Brett Reiss

First question, the battery type orders, if we go into a recession, do you think that part of the business will be somewhat recession resistant?

Emmanuel Lakios

So when you speak about the batteries, if it’s the batteries exclusively or if it’s charging of the batteries and the battery, the nano material used in the battery because they do go hand in hand. As far as being recession proof to the extent that on a macro scale, it’s possible. I can’t really comment on that. I can comment that there is a lot of funding going into silicon carbide for power electronics used for converters and also in the automobile and also in the charging station and transmission as well as new battery material. We’ve seen an increase more so in the demand for silicon carbide growth systems to date, then the evolutionary new nano materials for battery.

So is it a recession proof? I really can’t — I can’t say. But I can say, though, that there are plans to continue to expand it. And our market research says that over the next — and it’s available to the public, of course, is that the silicon carbide market over the next several years will continue to expand. So and we hope to partake in that.

Brett Reiss

Okay. The — did the seller — the potential purchaser of the property sale that fell through, did they share with you why they took a pass on purchasing it? Was it because interest rates moved up and the…

Emmanuel Lakios

Clearly, from the time we started the discussion and we received the initial offer. And more recently, this past Friday, the interest rates have gone up by several points. And as you can imagine, that has — that’s affected most real estate and most real estate transactions. I’m confident that, that played a role in their decision as well.

Brett Reiss

If rates move back down, could the buyer come back or he’s gone?

Emmanuel Lakios

Would they come back? I think about the — I can’t speculate on whether or not they particularly would come back or not. I do think that the building was fairly priced initially. And I think that the real estate market is cyclical. So probably all I can really say on that.

Brett Reiss

Okay. And one last one. The margins you’re enjoying on the $3.7 million aerospace order, you’re happy with the margins?

Emmanuel Lakios

Yes, yes.

Brett Reiss

Okay. Once again, fantastic on the profitable quarter, and I will drop back in queue.

Emmanuel Lakios

Thanks, Brett.

Operator

[Operator Instructions] And it doesn’t look like we have any questions coming in. Well, one just came in. We have one that just came in from George [indiscernible]. Please state your question.

Unidentified Analyst

Hi, thanks for taking my question. I want to go back to silicon carbide. The other gentleman had asked about that. I’m an investor in many companies that are really taking advantage of the boom in silicon carbide. I listened and read many references that talk about for quite many years to come, demand is exceeding supply. So — well that’s one of your markets, correct?

Emmanuel Lakios

It is one of our markets, yes, correct.

Unidentified Analyst

So can you talk about your customers? Shall I refer to your annual reports — are any of these customers more than 10% of your revenue at this point?

Emmanuel Lakios

Customers — under NDA, we don’t list our customers specifically. We launched our PVT-150 system, which is a silicon carbide boule growth system. We’ve launched it, received orders in December of 2021. We shipped the first ones in early Q3. We’ve reported and mentioned in this report that we received 14 this year. And we announced in — for our Q4 results that we received six. So that’s a total of 20 systems on the launch of that product. So we see this electrification of everything, which is we play both into the silicon carbide boule growth as well as in the additive — the silicon additive to carbon anode nanomaterials.

Unidentified Analyst

Okay. I mean, I’m focused on the boule growth. So the systems that you talked about, the 14…

Emmanuel Lakios

20 total.

Unidentified Analyst

20 total, I’ll throw some company names out there. You’ve got — it used to be II-VI, now it’s Coherent; you’ve got Onsemi, who bought GT Advanced; you’ve got Wolfspeed, Wolfspeed announced they’re going to be opening up another facility in North Carolina, I think it was — I mean it’s just booming. So it seems like there’s a huge opportunity for you guys if you can execute.

It’s — Wolfspeed has said many times that it’s very, very difficult. I mean, you guys have expertise. I’m a relatively new investor to your company. It just seems like from everything I’ve read and the companies I’m invested in and watching closely that there’s a huge opportunity here. It’s just a huge demand for this. If the forecast for electric vehicles are right, I mean — you can argue five, 10 years down the road, what’s going to happen, whether the grid is going to keep up and all that government policy and how all that’s going to factor in. But right now, in the near future, the demand is just out there. It’s just booming and everyone from Onsemi to Wolfspeed to Infineon and every major player in silicon carbide saying that they just can’t keep up.

Emmanuel Lakios

And you can imagine, George, what I can tell you, you can imagine that there are new players also that are more on the merchant side of the silicon carbide wafer. You listed Wolfspeed and Onsemi, which are both captive houses for the most part. They grow the silicon carbide for their own consumption and devices. So we would conservatively agree with you. And again, we just recently within the last nine months to 10 months, launch the product, delivering the first ones in the beginning of Q3. So on this side of the table. But again, that’s probably I can’t mention who are our customers because we are under NDA. But you listed a large number of the very big houses for silicon carbide.

Unidentified Analyst

Yes, I did. And I know that there are many others. All right. Well, I wish you guys well, and hopefully, all your shareholders, including myself, can benefit. Thank you.

Emmanuel Lakios

Thank you sir.

Operator

[Operator Instructions] And it doesn’t look like we have any questions coming in.

Emmanuel Lakios

So with that close of the question-and-answer session, I want to thank everybody for their participation and also for the loyalty expressed by our shareholders, customers and, of course, our employees. We have a long way over the last 1.5 years to two years. But we still have a way to go, and we look forward to speaking to you again in the quarter. Thank you.

Operator

Thank you. This concludes today’s conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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