CVD Equipment Corporation
Q2 2017 Earnings Call Transcript

Published: 14 Aug 2017

[Operator:]

Greeting and welcome to the CVD Equipment’s Second 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Annie Leschin, Investor Relations for CVD Equipment. Thank you Ms. Leschin. You may now begin.

[Annie Leschin:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for our second 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 on the Investor Relations section of our website 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 of them, 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 second 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. Over the last year, we have achieved a number of the goals we set, and in the coming quarters our progress will become even more apparent. We achieved the milestone this quarter as we executed against our backlog of orders, our top line recorded in the historical high of $10.8 million while our bottom line increased to $0.20 per share. We’re confident that our broad range of innovative products and key high-value technologies supported by an increased sales and marketing presence will provide more-diversified growth opportunities over the near and long-term. Our sales focus has led to significant new order growth in our core business, and we anticipate further increases in the months ahead. More importantly, we are generating new IP in our application lab, expanding our customer base, and adding staff to our organization for future growth. By enabling tomorrow’s technologies, we’re staying at the forefront of important trends in research and industrial applications. As an organization, we believe we’re moving in the right direction, and we’re very excited about the opportunities we see ahead. With our Tantaline acquisition at the end of 2016, we began to diversify our business. As we continue to integrate this business, we’re working on a variety of applications to expand our corrosion resistant coatings. Some of these will combine Tantaline with other CVV coatings or surface modifications to provide additional capabilities to new and existing customers. Earlier this year, we announced our intention to add a new materials facility to expand Tantaline’s capabilities here in the U.S. I am pleased to report that we’re getting close to announcing the new plant location and the added capabilities that new facility will be offering. Our strong cash position is enabling us to invest in new facilities, IP and equipment and to acquire innovative technologies that can drive our future growth. We see significant applications for our capabilities across wide variety of markets including aerospace, medical, semiconductor, solar and nanotechnology. In summary, as noted by our record revenues, our customer relationships are strong and growing, and we’re accelerating innovation across the company to drive increased revenue, productivity and profitability. As we look to the second half of this year and beyond, we expect the upper trend to continue as we access new opportunities, successfully execute on our backlog and build our core business. With that, I’ll turn the call over to Glen. Glen?

[Glen Charles:]

Thank you, Len. Strong execution and delivery of our ongoing orders resulted in record revenue for the current quarter. Revenue of $10.8 million reached a new high, growing 189.3% year-over-year and 12.2% sequentially. These levels clearly demonstrate that we’re successfully meeting customer demand while focusing on core business drivers. Of the $6 million in new orders received this quarter, over 90% were received from our core business of customers, other than the large aerospace component supplier. Second quarter gross margin of 40.7% were significantly higher than last year and within our targeted range of 38% to 42%. This was lower than last quarter’s 43.2% due to the mix of projects being worked on and the stage of completion. Total operating expenses increased in absolute dollars this quarter and decreased as a percent of sales to 23.8% from 25.4% last quarter. Operating expenses grew 5.1% to $2.6 million from $2.5 million in the prior quarter and $1.5 million last year. During the quarter, we strategically added key sales and research personnel with critical skills required to meet future demand from our Tantaline business and accelerated development of new technologies in our CVD business. Selling and shipping rose 23.6% from the prior quarter from $285,000 to $353,000 and R&D grew 57.8% quarter-over-quarter from $70,000 to $111,000. General and administrative expenses for the quarter stayed relatively flat at $2.1 million sequentially. By the end of the second quarter, total full time personnel reached 203. Second quarter net income grew 28.2% to $1.3 million from $1 million in the first quarter and a loss of $496,000 a year ago. As a result, earnings per diluted share climbed 25% to $0.20 this quarter, this compares to $0.16 in the first quarter and a loss of $0.08 a year ago. With the healthy backlog of $24.8 million in orders at the end of the quarter, we believe we’re well-positioned to continue our track record of growth. During the quarter, net accounts receivable decreased to $1.9 million from $8 million at the end of last quarter due to the timing of customer payments. As a result, we ended the quarter with $21.5 million cash and cash equivalents, compared to $18.4 million at the end of last year. Working capital increased to $23.1 million from $21.5 million at March 31, 2017. After closing out a strong first half, we expect to follow with continue solid performance in the second half of the year. 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. Please go ahead.

[Will Hamilton:]

First question, sorry, I missed it, but what was the revenue from the aviation customer or the non-aviation revenue?

[Glen Charles:]

Basically in the second quarter, a third of the revenue was from our core and two-thirds from aviation customer.

[Will Hamilton:]

And is that sort of so much similar to the last quarter, so are we sort of on a run rate right now, based on what you have in the backlog from them?

[Glen Charles:]

So far, yes.

[Will Hamilton:]

And then, could you provide a little bit more color on the 6 million of orders from -- during the quarter, I mean, roughly speaking, how much might have been from the Tantaline or the new businesses, how much from sort of the core legacy research and diversity work and, any color on that would be helpful.

[Len Rosenbaum:]

Most of the new orders for the last quarter were not associated with Tantaline. Tantaline was a very small amount compared to what was book. Probably about little over 50% was industrial and mostly the rest is R&D.

[Will Hamilton:]

Okay, thanks. And one last question just on Tantaline. So, with the new factory, once you have it picked, roughly speaking, how long will it take to construct it, and could you give us any color as to what would be the CapEx outlay for it?

[Len Rosenbaum:]

Well, we’re expecting the plant to be operational during 2018; the CapEx will probably be in the neighborhood of anywhere from $2 million to $4 million.

[Operator:]

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

[Brett Reiss:]

Hi, gentlemen, good quarter. The new Tantaline plant facility that you just said would be $2 million to $4 million, what -- how much business do you anticipate doing to justify that outlay?

[Len Rosenbaum:]

It’s not -- Brett, it’s not just for Tantaline, it’s for Tantaline and other CVD coatings that we’re going to be putting in there. It’s more of a materials facility. And both organically and inorganically we expect there will be additions to Tantaline itself.

[Brett Reiss:]

Okay. And the need for the second facility is to be closer to the customers that would be utilizing these products or you just don’t have space at your existing facility?

[Len Rosenbaum:]

It’s mainly because it’s going to be a materials facility, other than -- which is different than an equipment facility. And going forward, the facility in Denmark will not really be able to take care of the U.S. customers or the North American customers. With shipping of parts back and forth, it just doesn’t make sense to try to do it that way.

[Brett Reiss:]

Right, right. Now, with the large aerospace customer, are all the plants that are dedicated to the composite material engines, are they up and running at this point in time?

[Len Rosenbaum:]

No, I think they’re still in the construction stage; not all of them but some of them.

[Brett Reiss:]

The ones that are not up and running, when they become up and running, can we hope for additional orders when those plants come on stream?

[Len Rosenbaum:]

As I say every quarter, we’re optimistic about it but very cautious.

[Brett Reiss:]

Right, right. Now, the core business that’s dedicated to the coatings for the medical implant type products, is that where the core business is coming from or…?

[Len Rosenbaum:]

I am not sure I am following that question, Brett. Are you talking about materials or equipment?

[Brett Reiss:]

The coatings for the hip implants that you’ve mentioned in slide presentations.

[Len Rosenbaum:]

We build equipment for doing that; we don’t do that ourselves.

[Brett Reiss:]

Okay. And how does the order flow look going forward in that part of the business?

[Len Rosenbaum:]

We’ve completed all the orders to-date at this point, and again, going forward, we expect these additional equipment down the road.

[Brett Reiss:]

Right. I am going drop back in queue. Thank you for answering my questions and good show.

[Len Rosenbaum:]

You’re welcome. Thank you.

[Operator:]

Thank you. The next question is from Morton Howard [ph] from Bryn Mawr Trust. Please go ahead.

[Unidentified Analyst:]

I know -- I got that you’re very optimistic about the longer term future of Tantaline, so we can hardly wait to get that plant going. I see -- for your company, are you doing more business now in Europe than they were when you bought the company?

[Len Rosenbaum:]

I wouldn’t say that yet. I would think that they’re probably doing as much. And you said you saw an ad?

[Unidentified Analyst:]

No, somebody said me something that -- talked about the wonderfulness of Tantaline.

[Len Rosenbaum:]

While we may have read a press release about Tantaline and what its capabilities are.

[Unidentified Analyst:]

But you’re optimistic about this. So, I can see what you’re doing sort of big stuff to expose to the elements, I presume. So, I would think just what you’re saying, that’s not easy to ship across the ocean; in fact, that must add a lot to the cost?

[Len Rosenbaum:]

It did a lot to the cost, it has import and export issues, it has timing issues for transportation, and the customers prefer that whatever facility, they are going to have their parts coated that are closer to them.

[Unidentified Analyst:]

Well that makes sense but what about European customers? Are you regenerating some interest over there or do you sales people working in an area where you do have a plant going?

[Len Rosenbaum:]

We still have the plant in Denmark, we intend to keep that plant and probably expand the plant, over the long term.

[Unidentified Analyst:]

Do you have sales people working to bring business to that plant?

[Len Rosenbaum:]

We have all the sales people out of the -- in the U.S. but they are also concentrating on Europe and the rest of the world at the same time.

[Unidentified Analyst:]

Okay. Well, down the road, I mean years ago, you were talking about the Company getting up to a $100 million, do you still see that within the next couple of years?

[Len Rosenbaum:]

We’re still anticipating that. And with Tantaline, we’re also putting on a number of representatives and distributors throughout the world to help market product for us.

[Operator:]

The next question is from Robert Littlehale of J.P. Morgan.

[Robert Littlehale:]

If you could just may be further elaborate on what you’ve done as far as the outreach and the sales process, have you hired more direct sales people? Any color or any granularity to that would be helpful.

[Len Rosenbaum:]

We have added more sales people, both directly involved with Tantaline and also to help with some of the sales and backlog of quotations on CVD side. We will continue to add sales people as we see the need going forward, but you have to build a complete organization such as selling it and shipping, you also to have engineer and manufacture it.

[Operator:]

Thank you. There are no further questions at this time. I would turn the call back to management for closing remarks.

[Len Rosenbaum:]

Thank you very much for joining our second quarter results, call and we look forward to providing lot more information going forward in the next quarter. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.