CVD Equipment Corporation
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to CVD's First Quarter 2017 Earnings 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] Please note, this conference is being recorded. I will now turn the conference over to your host, . Annie Leschin, Investor Relations. Thank you. You may begin.

[Annie Leschin:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for our first quarter 2017 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’d 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-Q. 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?

[Leonard Rosenbaum:]

Good afternoon, everyone, and thank you for joining our first quarter earnings call. Today, I will update you on the progress we are making towards achieving our strategic goals, and then Glen will walk you through a summary of our quarterly financial results. After that, we will be happy to answer questions. The momentum we saw at the year-end carried through into the first quarter leading to a healthy start to the year. Both revenues and bookings increased during the quarter. We received additional orders from our aviation customer as we continue to build the pipeline in our core business and prepared for future growth in our newly acquired Tantaline materials coating business. Repeat orders from our core business and orders from our aviation component supplier in the first quarter contributed to 31.8% increase in revenue and 353% increase in bookings over the fourth quarter. The follow on order received from our aviation customer for fiber coating equipment, will join the other CVD systems currently in operation in the first half of 2018. As we continued to solidify our position as a leading supplier of next generation technology, we are cautiously optimistic about additional equipment orders from our aviation customer to bring their facilities to full capacity over the next few years. Through our acquisition of Tantaline in December 2017, we are supplementing our traditional products, expanding our customer base and geographic presence by entering the corrosion resistance and materials coating market. We believe that this will add to our growth and profitability over the long term. The additional of Tantaline's innovative chemical vapor technology is a natural extension of our core CVD process. The coating creates a tantalum surface on parts that are prone to corrosion in harsh environments. Tantaline's unique coating technology can be applied to a wide array of end markets which include, oil and gas for value and fittings, [pharma] [ph] with a use of corrosive chemicals, and medical as research demonstrates tantalum coatings extend implant acceptance. The extensive opportunities we see to expand our current markets and enter new and adjacent markets over the long-term, should diversify and help smooth out our revenue. Only a few short months into the Tantaline integration process, things are progressing on schedule as we apply and leverage our equipment knowhow and proven ability to scale up deposition processes to offer high quality, value added materials, products and services. Through conversations with customers, we have identified important investment areas required to meet future demand. Both for existing and for new applications. To that end, we plan to increase our investment in sales and marketing as well as research and development in the coming months. Already we have begun to design and build new equipment that will be transferred to a new U.S. location dedicated to Tantaline and other material coatings. As the Tantaline process becomes more widely available and customers realize the value that our solutions provide, we expect to see an increase in orders. We expect Tantaline to be profitable by year-end. Overall, we are excited about the opportunities that we see ahead build our pipeline and expand our presence in material coatings. Market areas we are entering should also provide some new outlets for additional material coatings and equipment requirements. In summary, our customer relationships are strong, sentiment across our end markets is positive and we continue to evolve our manufacturing processes to provide customers with innovative, next-generation products and solutions. We remain focused on successfully meeting the technological and operational requirements of our customers to deliver on time. As we look to the second half of this year and beyond, we expect continued growth and long-term value for our customers and shareholders. We look forward to updating you on progress throughout the year. With that, I will turn the call over to Glen. Glen?

[Glen Charles:]

Thank you, Len. With first quarter revenues up almost 93% over the same period last year, we demonstrated the leverage and flexibility of our business model to quickly scale to meet the growing demands of our customer base. Sequentially, quarterly revenue grew 31.8% to $9.7 million as we delivered our on backlog of orders. Gross margins reached 43.2% in the first quarter, a significant improvement from the 30.6% during the first quarter of 2016, but down from last quarter's 46.2% Gross margins tend to vary from quarter-to-quarter dependent on the mix of business. Operating expenses for the first quarter decreased sequentially as percentage of revenue from 30.1% to 25.4%, while increasing in absolute dollars by 11.3%. Selling and shipping for the quarter was 2.2% lower sequentially at $285,000 compared with $292,000. R&D declined to $70,000 from $129,000 in the fourth quarter of 2016, as our focus turned towards order execution versus development. Going forward, as Len mentioned, we plan to increase our investment in R&D as we develop new applications and expand our Tantaline business. General and administrative expenses for the quarter increased 17.7% to $2.1 million from the prior quarter as we began the installation and implementation of a new ERP system in order to more efficiently handle our growth. We are also in the process of scaling our workforce to support new and existing customers and applications that will be necessary to grow our Tantaline business as well as our core business. Overall, we saw an increase in personnel during the quarter as total employees reached 201 compared to 173 at the end of the fourth quarter. First quarter net income was $1 million compared to $770,000 in the fourth quarter and a loss of $338,000 a year ago. This resulted in earnings per diluted share of $0.16 compared with $0.12 in the fourth quarter and a loss of $0.05 in the first quarter of 2016. We expect this trend to continue as we deliver on our backlog of orders and continue to grow our business. During the quarter net accounts receivable increased to $8 million from $600,000 at the end of last quarter due to the timing of shipments and customer payments. As a result, we ended the quarter with $18.4 million in cash and cash equivalents, compared to $21.7 million at the end of last year. Working capital increased by $1 million to $21.5 million from $20.5 million at December 31, 2016. Backlog at the end of the quarter was $30.1 million, an increase of 8.3% from the end of last quarter. In closing, our first quarter financial performance showed substantial improvement both sequential and year-over-year, continuing the trend of the second half of last year. Looking at the rest of 2017, we expect this financial performance to continue as we fulfill orders, increase our core business and begin to add Tantaline to the mix. With that, I will turn the call over to the operator for questions. Thank you.

[Operator:]

[Operator Instructions] Our first question is from Will Hamilton with Manatuck Hill.

[Will Hamilton:]

Couple of questions on Tantaline. Any revenue or orders in the quarter from the business at this point.

[Leonard Rosenbaum:]

They weren't material but there was some revenue in the first quarter. Pretty much first month or two, it took just to get them back up and running and there was some additional time spend that generated revenue given the third month of the year.

[Will Hamilton:]

So outside of the $10 million order from the aviation, the $2 million, where is that coming from? Any color you can provide just on that.

[Leonard Rosenbaum:]

It's coming mainly from our core business.

[Will Hamilton:]

Okay.. and then the additional employees in the quarter at 25 or a little bit more than that. Are many in there at Tantaline or is it across the board?

[Leonard Rosenbaum:]

Most are across the board. There are some additions in Tantaline. We picked up approximately 8 people in Tantaline since the beginning of the year, total.

[Will Hamilton:]

They are eight in total, you are saying?

[Leonard Rosenbaum:]

Yes.

[Will Hamilton:]

Okay. And then last question from me, Len, you mentioned the idea of additional orders from aviation customer in time. Based on what you have received in orders to date, I mean can you guys just give very rough sense as to how much more they might need to fill their current factory.

[Leonard Rosenbaum:]

We are just cautiously optimistic. We don’t really have an insight totally into what they are doing. So I would rather not comment.

[Will Hamilton:]

Okay. Could it be 2x, what you have done?

[Leonard Rosenbaum:]

I am not going to answer that. I have no idea.

[Operator:]

Our next question is from Brett Reiss with Janney Montgomery Scott.

[Brett Reiss:]

I think you said you in fact received additional orders from the aviation customer. So just going forward, what the company policy on releases on these type of orders might be? What you got the original big order of almost $30 million you announced, what you got the follow-on order of $10 million a few months ago you announced. So this additional order, I mean because it's not a material amount anywhere near these other two, that’s why you chose not to come out with a press release on that. Just can you help me, what the bells and whistles on this will be going forward.

[Leonard Rosenbaum:]

Brett, I think you are confusing the $10 million order twice. It was received during the first quarter and it was announced.

[Brett Reiss:]

Okay. So that’s what you were referring to?

[Leonard Rosenbaum:]

Yes.

[Brett Reiss:]

In your opening remarks? Okay.

[Leonard Rosenbaum:]

Correct.

[Brett Reiss:]

Okay. Sorry, I put everybody on the call through that.

[Operator:]

[Operator Instructions] Our next question is from Gordon Howard with Bryn Mawr Trust.

[Gordon Howard:]

My question is this. You talked about getting a spot for headquarters for Tantaline in this country. If it's going to be big, potentially $10 million-$20 million, you have to have some facilities I presume, not just over in Denmark. Any progress on that?

[Leonard Rosenbaum:]

Well, we did announce earlier this year that we were going to be opening another facility for that specifically. We have been in discussions with a couple of states and a couple of areas within the states. We haven't made a firm decision yet. But in the meantime we are starting to build the equipment.

[Gordon Howard:]

Okay. So you can do it out of your current factory rather than having to have separate facility?

[Leonard Rosenbaum:]

Not really.

[Gordon Howard:]

Not really, okay.

[Leonard Rosenbaum:]

We are going to have to put the equipment somewhere but it will go through a lot more testing here prior to it going in to new facility where it will be operational.

[Gordon Howard:]

Okay. Got you. Do you see any area other that Tantaline -- I assume the aviation is wonderful customer but is there anything else even close to that on the horizon in terms of possibilities?

[Leonard Rosenbaum:]

Obviously, I am not going to discuss that, but we are working on things constantly and in the past medical turned out to be fairly good to us over the last two years.

[Operator:]

We have a follow up question from Brett Reiss from Janney Montgomery Scott.

[Brett Reiss:]

With all of the uncertainty over healthcare reform, have your sales people noticed any hesitation for order flow in the medical and life science part of the business?

[Leonard Rosenbaum:]

No.

[Brett Reiss:]

Okay.

[Leonard Rosenbaum:]

Nothing we can relate to.

[Brett Reiss:]

Okay. Good to hear. Thank you.

[Operator:]

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

[Leonard Rosenbaum:]

Thank you, everyone, for joining the conference call and I look forward to updating you on the next one. Have a good day.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.