CVD Equipment Corporation
Q1 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Greeting and welcome to the CVD Equipment’s First Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Rhonda Bennetto [ph]. Thank you. You may begin.

[Unidentified Company Representative:]

Thank you, operator. Good afternoon, everyone and thank you for joining us today for our first quarter 2018 earnings conference call. We will begin with some prepared remarks followed by a question-and-answer session. Presenting on the call today will be Len Rosenbaum, President and CEO; and Glen Charles, CFO. As a reminder, today’s call is being recorded. Additionally, we have posted our earnings release and call replay information to the Investor Relations section of our Web site at www.cvdequipment.com. Before we begin, I would like to remind you that many of the comments made on today’s call are 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, 2017. 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 new circumstances or revised expectations. Now, I would like to turn the call over to Len. Len?

[Len Rosenbaum:]

Good afternoon, everyone, and thank you for joining our first quarter 2018 earnings call. Today I would like to update you on the progress we are making towards achieving our strategic goals to take CVD to the next level. Following that, Glen will walk you through a summary of our financial results, and then we will take questions. In the first quarter, we strengthened our senior management team and significantly invested in the development of our new CVD Materials facility. These critical investments support our strategic initiative to accelerate growth which are more diversified by providing advanced materials that enable new and unique applications and demonstrate our commitment to the growth and success of CVD. We are deeply committed to bring in our new Materials facility online as quickly as possible, and we are well-capitalized to make the overhead and capital commitments necessary to meet our future growth objectives. We’ve also shifted some internal personnel to focus on planning, building renovation and equipment design and fabrication for the new facility. Accelerating the capabilities required to provide materials, coatings and surface treatments, our essential investments, we are making now to transform the company with a long-term. Execution of our growth strategy will provide additional diverse and stable revenue streams that should significantly improve revenue growth and profitability over the long-term. Not only that CVD have the experience and equipment know-how necessary to build the production systems required, but we also have the expertise to operate the systems in a cost-effective manner should the customer choose. Either way, CVD will manufacture the chemical vapor deposition equipment and if operated by CVD will result in a significant operational and financial competitive advantage for us in the materials operations. In the first quarter, more than half of our revenue came from customers other than our large aviation component supplier, as we continue to meet demand and broaden our customer base. We anticipate that the large aviation project will complete -- will be completed later this summer and we are cautiously optimistic of future orders as our facilities ramp to full capacity. We continue to deliver on equipment for new applications and to leverage our equipment know-how to expand CVD into advanced material solutions, all offering high value added materials products and services. In summary, while the process in investing to accommodate expansion [indiscernible] lengthy and result of lumpy financial performance, it is an essential component of our strategic growth strategy and we remain very excited about the future for CVD. To recap, we are making significant investments now to position CVD for future growth. We’ve begun to build equipment necessary for the new facility. We can either provide the equipment to a customer or we can operate it for them. Either way we have strengthened our competitive position, and finally we’re well-capitalized to continue to accelerate innovation companywide to drive increased revenue productivity and profitability over the long-term. We are confident that our expanded range of leading edge products in conjunction with our equipment and new materials facility, we will open up a wide range of growth opportunities. And with that, I will turn the call over to Glen. Glen?

[Glen Charles:]

Thank you, Len. First quarter was an important one for CVD, as we strategically invested in CVD Materials Corporation, which included the new Materials facility in support of our long-term growth plans. The new cost-effective infrastructure will produce high-quality materials for aerospace, medical and electronic applications, utilizing the latest technology and provide additional revenue streams over the long-term. Revenue for the current quarter was $9.2 million, down 5.1% year-over-year and 6.8% quarter-over-quarter. Gross margin for the quarter was 41.1% above our targeted range of 38% to 40%. However, below the 43.2% for the same period a year ago and 45% over last quarter. The difference was due primarily to the added cost incurred by CVD Materials. While these margins can vary quarter-to-quarter, we continue to be comfortable with our range of 38% to 40% going forward. Overall, operating expenses increased sequentially to $2.9 million from $2.6 million. Research and development felt flat with last quarter increased 37.6% from last year, as we continue to invest in and develop new processes to lead future customer demand. Both selling and shipping and general administrative expenses increased as a result of the costs incurred by CVD Materials. First quarter net income was $600,000 compared with $1 million in the same period last year and $1.6 million last quarter. The decline resulted from a loss incurred by CVD Materials of $635,000. We’ve also shifted some engineering and production personnel to the planning, outfitting and building of equipment for the new facility, of which most of these costs were capitalized. All of these initiatives have an impact on the bottom line. Earnings per share was $0.09 compared to $0.16 last year and $0.24 last quarter. Working capital increased slightly to $22.6 million and we ended the quarter with $13.1 million in cash and cash equivalents compared to $14.2 million at the beginning of the year. During the quarter, net accounts receivable increased to $9 million from $2.1 million at the beginning of the year. A very substantial amount of this accounts receivable was collected subsequent to the end of the quarter. Just about all of our orders this quarter were received from customers other than the large aerospace component supplier. Backlog at the end of the first quarter was $9.8 million. As Len mentioned, the investments we are making now to support future demand are an essential part of our growth strategy. As an organization, we're moving in the right direction and are very excited about the opportunities we see ahead. With that, I will turn the call over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Nathaniel August with Mangrove Partners. Please go ahead.

[Nathaniel August:]

Hi. Thank you very much for taking my question. I actually had two questions. The first is that I saw some unusual movements in your current asset accounts between accounts receivable growing and contract assets declining, and I was hoping that you could expand on that for me a little bit, please?

[Glen Charles:]

Okay, Nathaniel. But first of all the as we build out to the customer and our accounts receivable grows, our contract assets are going to decrease because they are sort of -- they work against each other, okay? Basically when we build out, that means our cost in excess which is what the contract as is are reduced as the receivables growth.

[Nathaniel August:]

Okay. And then my second question is, you mentioned that you were -- I think it was the word you used is cautiously optimistic regarding large new orders. To be specific, is that -- would that be large new orders from the large aerospace customer or large new orders from other new customers?

[Len Rosenbaum:]

We are cautiously optimistic about continued orders from our large aerospace customer.

[Nathaniel August:]

Terrific. Thank you very much.

[Operator:]

The next question is from Brett Reiss with Janney Montgomery Scott. Please go ahead.

[Brett Reiss:]

Hi, Len. Hi, Charles.

[Glen Charles:]

Hi, Brett.

[Len Rosenbaum:]

Good afternoon.

[Brett Reiss:]

Hi. The sequential quarter-to-quarter growth of the non-aerospace orders, you’ve said that more than 50% of the sales was from non -- the non-aerospace order, but what is that number look like quarter-to-quarter?

[Glen Charles:]

Well, the revenue that was generated by our large customer in this quarter was about $4.3 million.

[Brett Reiss:]

Okay. So …

[Glen Charles:]

In the last quarter it was -- I don’t know exactly, it was -- I believe it was probably closer to $6 million to $7 million.

[Brett Reiss:]

Okay. So you did $4.9 million in -- the other legacy type …

[Glen Charles:]

Yes, other than the large customer.

[Brett Reiss:]

Right. Now was that the 10% to 15% growth from the prior quarter that you thought you would be able to generate -- I think you’ve mentioned that on prior call?

[Len Rosenbaum:]

Brett, I think what we mentioned in prior calls was that we expected our core business, which is other than the large aerospace customer to be in the $4 million to $6 million range.

[Brett Reiss:]

Okay. All right. So you’re heading expectations, okay. What happens if you don't get the added order from the large aerospace customer? What happened? Are they write off, do you have to pullback equipment that’s at their plant. What's the worst-case scenario?

[Len Rosenbaum:]

There are no write offs. There is no equipment that’s returnable. Basically, we just move ahead with other customers.

[Brett Reiss:]

Right.

[Len Rosenbaum:]

Which we’re doing [indiscernible].

[Brett Reiss:]

Yes. Now by them waiting until the -- the 11th hour to award do the extra business. Does that hurt you in any way or you’re able to plan around whatever poker game they're playing.

[Len Rosenbaum:]

We try playing around whatever we need to do to make the business keep moving forward. It's always nice to have anticipated information, or we could plan all a bit better, but we will manage without it.

[Brett Reiss:]

Great. I’m going to drop back in queue. Thanks for taking my question.

[Operator:]

Our next question is from Morton Howard with Bryn Mawr Trust. Please go ahead.

[Morton Howard:]

Hi. My question is this, you’ve all the sexy stuff, its 2D material. All these wonderful things, I know it's like to have a big aerospace customer, but why actually more -- why isn't there more demand for this other stuff. I mean, I know you’re growing some, but [indiscernible] isn't exciting if these other products and -- what can I say, the ideas are so exciting, why isn't that more of a commercial market for them.

[Len Rosenbaum:]

All new technology usually takes 10 to 15 years to given to the mainstream, okay? And you’re seeing the same thing occur right now with a lot of these new materials.

[Glen Charles:]

Let's hope we live that long. Okay, thank you.

[Operator:]

Our next question is from Paul Trica, a Private Investor. Please go ahead.

[Paul Trica:]

Hello. Thank you. I look forward to these events, please bear with us introduction to my question. Long time individual investor, but I also have a carrier in materials than CVD processes. So I have a great appreciation for what you’ve done with the equipment and services over the years. I actually feel that potential equal to that will come from your CVD Materials and the apps lab. So I’m excited about the new building investment and I also respect the internal investment you’ve done in the past. The new text about your PR, your press release, mentions, your ability to produce, operate materials fabrication processes and fund all of operations. But so it's nothing about directions in material compositions for applications or the IT that appears promising. I was wondering can you shed any light on that at all. Materials -- classes of materials or general types of applications.

[Glen Charles:]

The applications I’ve mentioned and asked and they continue to be the same. And I believe it was even less business in the couple of the earlier press releases, Arrow space, medical and electronics are the three main that we are focusing in on. Sure. As General fields of application, I was hoping for a little more detail on more specific applications or materials class.

[Glen Charles:]

Well, in the electronics we’ve been looking at LED substrates, okay? In the Arrow space, we're continuing to look at areas associated with the engine, and medical where associating more within plants and external devices.

[Paul Trica:]

Right, go. All right. Thank you very much.

[Operator:]

Our next question is a follow-up from Brett Reiss with Janney Montgomery Scott. Please go ahead.

[Brett Reiss:]

Yes, thanks for taking another one or two. Could you just update the last time the new plant was either, there were Some delays with permits that you needed from the municipality. Can you give us just an updated report on occupying the plant and doing business there?

[Len Rosenbaum:]

Well, we are sort of doing a plant in number of stages. The first stage was still waiting for the permits on or expecting those, hopefully before we speak again, Brett, and once I’ve started we will able to stock occupying the fund. In the mean time, what we’re doing with the plant is with the things that do not require permits such as complete painting, flooring, electric upgrades, some lighting upgrades, things that we can get [indiscernible] without requiring the permit.

[Brett Reiss:]

Right. Are you generating without even being in the new facility tantalum sales, from the business you purchased there in Denmark?

[Len Rosenbaum:]

Yes, about 10th of our annual -- in dead mark actually. We’ve been able to [indiscernible] a loss for first quarter. actually booked it, biggest sort of last month in history and for proceeding through our own application lab here to improve a lot of the science that has -- was never done as well as it should have been in the past and we’re making a lot of progress with that. We expect we will probably be filing some IT on that very shortly. MesoScribe actually is doing quite well. They basically breakeven for the year first quarter.

[Brett Reiss:]

That’s nice. Very good. Over the next six months or so, what keeps you up at night? What are your most challenged and consumed about that you have to get done to get this thing going even better.

[Len Rosenbaum:]

Nothing really keeps me up at night. I think we have a great team of people here at the company to solve, I mean, [indiscernible] problems and really returning more and more of our focus now towards increased sales both at MesoScribe, Tantaline and CVD and CVD.

[Brett Reiss:]

All right. Thank you and good luck.

[Len Rosenbaum:]

Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the conference back over to the management for any closing remarks.

[Glen Charles:]

Thank you everyone for attending and I look forward to speaking to everyone with the second quarter results. Have a good dya. Thank you will be the progress quarter results. Have a good day. Thank you.

[Operator:]

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