CVD Equipment Corporation
Q4 2015 Earnings Call Transcript

Published: 31 Mar 2016

[Operator:]

Greetings, and welcome to the CVD Equipment Corp Full Year 2015 Earnings Conference Call. My name is Darren and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. There will a question-and-answer session after the company has presented its results. Please note that this conference is being recorded. I would now like to turn the call over to the management team. Thank you. You may now begin.

[Glen Charles:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for our first earnings conference call. We will begin with some prepared remarks followed by a brief question-and-answer session. Presenting on the call today will be Len Rosenbaum, President and CEO; and me 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 event section of our website at www.cvdequipment.com. Before we begin, I would like to remind you many of the comments made on today’s call are forward-looking statements included those related to future financial performance, market growth, total available market, demand for our products and general business conditions and outlook. These are forward-looking statements 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 factor section of our 10-K for the year ended December 31st, 2015 filed today and our other reports filed with the SEC. 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 us on our first earnings conference call. Because this is our inaugural call, I would like to spend a few moments outlining CVD’s position in our target markets and summarizing our growth strategy. Glen will then walk you through a summary of our 2015 financial results. After which we plan to take some questions. CVD is an industry architect and a leading provider of chemical vapor deposition technology and equipment through a verity of end markets. Recently we have concentrated on the aerospace, medical and research markets. Chemical vapor deposition is the controlled decomposition of gases used to deposit a material on to a surface. We report in two segments for financial purposes. The CVD segment designs and develops equipment that commercializes process equipment solutions for pilot and volume production applications. Our First Nano group is focused on product development in areas such as graphene, carbon nanotubes, semiconductor nanowires, 2D materials and other thin films. The second segment is our SDC division that provides ultrahigh purity or UHP gas and chemical delivery systems for high-tech fabrication processes. SDC is instrumental in our vertical integration strategy as they build the gas subsystems using all of our equipment. Our primary mission is to develop and enable the commercialization of next generation technologies by incorporating our technology into equipment build for customers, manufacture and processes. Our customer base is broad and is comprised of industrial companies, universities and research laboratories. They use our chemical vapor deposition, gas control and other equipment through research, design and manufacture state-of-the-art leading edge materials or coding where applications such as turbine blades, implants, semiconductors, LEDs and MEMS. Much of the equipment and process technology that we sell is talent to its specific customers need or application. By designing and developing custom products, we have built a significant library of design expertise, knowhow and innovative solutions. These assist our customers in developing intricate processes. This library together with our vertically integrated manufacturing facilities allows us to provide superior design, process and manufacturing solutions on a cost effective basis. Additionally, through our application lab, we provide process development support and process product startup assistance. Our vertically integrated structure gives us control of the manufacturing process all the way to the finish product. This allows us to reduce cost, control schedules and prove quality and excellent height system development. Our proprietary real time software allows for rapid configuration and provides our customers with a powerful tool to understand, optimize and repeatedly control their processes. Our application laboratory also allows select customers to prove their processes and work together with our scientists and engineers to optimize performance. Our growth strategy is to nudge new technologies in various lab environments and follow those developments through production by building equipment technology needed at each step of the process. We plan to expand our capabilities in equipment design, process development, materials applications, IT and manufacturing as we work with new and existing customers which include Fortune 500 companies. One customer in particular that we have been engaged with is a larger U.S. supplier of next generation technology for aircraft engines. For the last several years, we have being working with this customer on different aspects of developing the technology and manufacturing processes needed. Initial machines have been delivered to their factory and depending on the machine type, we are either in production, being qualified for production and initial startup or soon to be started. We are cautiously optimistic that this customer will select CVD for additional orders to further scale their capacity. Obviously these are significant multi-million dollar decisions that take time as the customer plans that scale up. At this time, we’re unable to disclose the status of our discussions with this customer, but if ordered to CVD, follow-on orders for these machines could be significant. Focus, dedication and commitment of our entire team to these projects over the past few years has allowed us to significantly increase our business. The challenges that with so much of our technical and manufacturing resources dedicated to the success of these large programs and given the potentially significant follow-on business, our ability to target and secure other new business was limited. As a result, our backlog has dropped significantly. We have turned our focus to opportunities with other customers and new applications. We will keep you posted as we go forward on both existing and future opportunities. By staying at the forefront of next generation technologies, we plan to leverage our recent learnings from aerospace and medical projects as well as our long history of serving many markets and apply our capabilities to additional customers and industries. Finally, I would like to thank our employees, customers and shareholders for their continued support. Now let me turn it over to Glen.

[Glen Charles:]

Thank you, Len. 2015 was a record year for CVD. Revenue grew 39% to $39 million for the year, due primarily to orders from aerospace and medical customers. There in 2015, we saw substantial revenue from two customers which accounted for 63% of our net sales. Gross margin for the year was 38.9% compared to 41.2% for 2014. The decrease was primarily the result of lower than normal margins associated with orders from our largest customer. Although revenue increased substantially, we’ve reduced our operating expenses by nearly 8% excluding the litigation settlement. R&D expenses decreased 31% due to direct billing of time and materials to customer paid R&D projects. Selling and shipping expenses declined nearly 6% for the year as a result of reduced commissions and G&A expenses decreased nearly 6% primarily due to a reduction and legal fees. Operating income for the year was $4.6 million compared to operating loss of $3.8 million for the prior year. Excluding litigation settlements, operating income for 2015 was $5.6 million compared with $1.2 million for 2014. We had record net income of $3.2 million or $0.51 per diluted share compared to a net loss of $2.5 million or $0.40 per diluted share for 2014. The loss for 2014 was due to a litigation settlement and currently no litigation is pending. We ended the year with $13.1 million in cash and cash equivalents, up from $12 million at the end of 2014. We also ended the year with healthy working capital of $19.9, a $3.3 million increase from last year. We believe our cash is more than sufficient to meet our working capital and CapEx requirements for the next year. As a result of the execution, expectations and resource capacity in managing our largest customer, our order levels declined to $24 million for 2015 from $45 million a year earlier. This led to a decline in backlog to $6.1 million at year end compared to $21.1 million last year. As Len mentioned, while we await the decision our next steps from that customer, we are focused on building new opportunities. With that I’ll turn it over to the operator for questions.

[Operator:]

[Operator Instructions] Our first question comes from Gordon Howard with Bryn Mawr Trust. Please state your question.

[Gordon Howard:]

My question is this, in the past Mr. Rosenbaum, you implied that maybe the current large lot will not big enough for business and you might have to expand in the neighboring lot, is that dream sort of down the tubes at the moment?

[Leonard Rosenbaum:]

Not at all. Okay, assuming we do go ahead with our aerospace customer, I think that will help tax our current facility requirement.

[Gordon Howard:]

Thank you.

[Operator:]

Our next question comes from Brett Reiss with Janney Montgomery Scott. Please state your question.

[Brett Reiss:]

Yeah, hi, Len, hi Glen. And thank you very much for having this call. It’s greatly appreciated. I know you can’t say anything about this big customer but can you at least on a probability scale, you know on a scale of one to ten, ten being we’re going to get the business and one, we are not going to get the business. How would you rate that if you can share that with us?

[Leonard Rosenbaum:]

We are cautiously optimistic, okay, that’s the best I’ll be able to do for you Brett. And please bear with me today because I do have a lousy head cold, okay.

[Brett Reiss:]

Okay, fair enough. Could you give us just a status report on the engineering headcount present such an important metric for us, you know where was it last quarter, where is it - you know what you plan to have it be a quarter or so from now?

[Glen Charles:]

Brett, this is Glen Charles. Just want to answer your question that our engineering staff is the same as it was at the end of the year, okay, it’s approximately 25% of our total staff. We intend to continue to have the collecting sole of our company. The engineers are remaining with us and will continue as we go forward.

[Leonard Rosenbaum:]

One thing I add to that a minute. We hire engineers and scientists as we find them, okay. We don’t necessarily wait for business. You cannot just get an order one day and perform the next day. So whenever we find good people, we not only keep him but we really want to keep adding them as we find them.

[Brett Reiss:]

Okay, I’ll drop back into queue. Thank you and thanks for the call.

[Leonard Rosenbaum:]

You’re welcome.

[Operator:]

Our next question comes from Richard Dearnley with Longport Partners. Please state your question.

[Richard Dearnley:]

Good afternoon. Is the aerospace customer trialing your equipment or - and is it - if so, is it trialing other manufacturers equipment?

[Leonard Rosenbaum:]

This multiple projects that we have been involved with and as I said earlier, I believe some are in production, some are in let’s say the pilot phase of production, some are in startup and some are in actually being delivered. So they are in various stages. And as for whether they are trying anyone else’s products, not to my knowledge.

[Richard Dearnley:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next is a follow-up from Richard Dearnley with Longport Partners. Please state your question.

[Richard Dearnley:]

Thank you. I am new to your company, the presentation in the third quarter looks, is inconsistent with your year-end results then just the presentation the numbers, why the change?

[Leonard Rosenbaum:]

Can you give us more inside into what you are talking about?

[Richard Dearnley:]

Well, in the third quarter, you had a diversity of non-GAAP OpEx broken out for the third quarter and the full year, you included a balance sheet which you didn’t do for the full year, you don’t show operating income as a separate line item and so I mean the numbers, I suppose all add up but the presentation and the format is quite different?

[Glen Charles:]

Well, we had the same format as we did at the end of 2014, okay, which is as you said it’s somewhat different than form the Qs. All the information that you need is in the 10-K report that was filed earlier this - few minutes ago.

[Richard Dearnley:]

Few minutes ago, I see. And what is the gating factor that the complexity and the accounting in your company that takes three months to report?

[Glen Charles:]

That’s - well you can say the complexity in the accounting has to do with the recognition of the revenue, okay. We use percentage of completion method in recognizing the revenue not to say that that necessarily takes three months, but I don’t have the staff that saying, Alco has that announces in five days, we are a smaller reporting company, 90 days is the timeframe that SEC allows us and we use every bit of that time.

[Richard Dearnley:]

Okay, I see that. Thank you.

[Operator:]

Our next question comes from Fred Meligan, a Private Investor. Please state your question.

[Fred Meligan:]

Hello, hi.

[Leonard Rosenbaum:]

Hi. How are you?

[Fred Meligan:]

Hi. I hope this is a first of many quarterly calls, so far so good. The large company that you might be getting the - more orders from basically, is there any particular reason why they give our orders this way that you are aware?

[Leonard Rosenbaum:]

I am not sure I understand the question Fred.

[Fred Meligan:]

Well, is it - they apparently have a large need for what they are involving with, so why then this given our order ones rather than in chunks?

[Leonard Rosenbaum:]

You know it’s a big decision on their part. They are obviously looking for the best price, best delivery and best quality. And you know we’re looking to deliver those three. We have to basically resolve that. You know they are multi-million dollar orders and you know they have to move it the timeframe that suites them.

[Fred Meligan:]

Is the pricing invariable, so that from one segment to another, the price might change?

[Leonard Rosenbaum:]

Well for the different projects, the price changes definitely. Of course each system is quite different.

[Fred Meligan:]

Okay. Alright, thank you very much and look forward to something in the few more weeks.

[Leonard Rosenbaum:]

You’re welcome.

[Operator:]

Our next question comes from Will Hamilton with Manatuck Hill. Please state your question.

[Will Hamilton:]

Hey, good afternoon, guys. You mentioned two customers that represented 63%, can you breakdown between those two how much each was?

[Glen Charles:]

Sure. The aircraft engine supplier right now 50% of the revenue and the medical supply company supplied 13%.

[Will Hamilton:]

Okay. How was it for the fourth quarter, do you have that figure?

[Glen Charles:]

For the fourth quarter, the aircraft supplier was about 61% and 30% of our revenue was from the medical supply company in the fourth quarter.

[Will Hamilton:]

Okay. So pretty much all your revenues during the fourth quarter came from these two?

[Glen Charles:]

Pretty much.

[Will Hamilton:]

Yeah. We are as noted pretty much through the Q1, obviously we went into the quarter with 6 million in backlog, but can you give us any color on Q1?

[Leonard Rosenbaum:]

Typically you know we don’t give guidance for Q1 that we have delivered in the past, we haven’t done for the year and we’re not going to start at this point.

[Will Hamilton:]

Okay. What might - there’s been some discussions about the engineers, but just overall, what your plans maybe for hiring this year and where did you find the total employees at the end of ‘15?

[Leonard Rosenbaum:]

Well that will depend on hiring the right people. As I said earlier, we hire them regardless in the workload because you just cannot get them at that time. Secondly, the level of RFQs, the level of interest has really picked up since we’ve focused starting later part of last year and we’ve started to see a lot of improvement going forward in changing the percentages.

[Will Hamilton:]

Okay. And in terms of the plan to diversify revenue away from or to add additional revenue outside of aerospace and medical, how soon should we possibly expect revenues because it could be in the first half or second half or are we talking more 2017?

[Leonard Rosenbaum:]

Okay, I missed part of that question, well, can you repeat it please?

[Will Hamilton:]

Sure. You talked about plans diversified revenues you know outside the commercial aerospace and medical, so I was wondering in terms of what you expect to be the timing of some of the revenues from those efforts? Are we see something in the first half or are we thinking more in the second half ‘16 and ‘17?

[Leonard Rosenbaum:]

Some of it will be in the first half. I expect the lost more in the second half, okay. And we go on to the next person. Will, I hate to cut you off, but there are other that want to speak.

[Operator:]

Our next question comes from Robert Littlehale with J.P. Morgan. Please state your question.

[Robert Littlehale:]

Good afternoon. If you could just elaborate a little bit more in terms of the rebuilding in the backlog, is that kind of necessitated in new initiatives or is it business as usual, if you could just put a little bit of color on that process in terms of what you are planning on doing?

[Leonard Rosenbaum:]

It’s going to be a combination of business as usual, we’ve also as I started or as I mentioned at the shareholder meeting last year, we are looking at other technology areas that we can get into. We like areas that are fragmented to certain extend. We are not big player, can really wants to get there. And we are approaching those, in fact we already got our first order for this year in that area and we’re expecting that to little expand even further.

[Robert Littlehale:]

Thank you.

[Leonard Rosenbaum:]

You’re welcome.

[Operator:]

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

[Brett Reiss:]

My question was asked and answered and I hope you feel better Leonard.

[Leonard Rosenbaum:]

Thank you.

[Brett Reiss:]

Okay.

[Leonard Rosenbaum:]

So do I.

[Brett Reiss:]

Okay. Yes.

[Operator:]

Our next question comes from Richard Ashley, a Private Investor. Please state your question.

[Richard Ashley:]

Hi guys. Just two questions, can you tell us what your backlog stands as of today?

[Leonard Rosenbaum:]

No, as I said earlier, we don’t give guidance and that’s part of guidance at this point. It will be out with the first quarter. You know RFQ activity as I mentioned is definitely up and some very interesting areas we’re - let’s roll with that.

[Richard Ashley:]

Okay. And you provide no annual sales guidance?

[Leonard Rosenbaum:]

Correct.

[Richard Ashley:]

Okay, thank you, guys.

[Operator:]

Our next question comes from Jerry Sheets [ph], a Private Investor. Please state your question.

[Unidentified Analyst:]

Hi. First I join in wishing you good luck with your call. But as I understand it and correct me if I am mistaken. With respect to your largest customer, you have various systems which are devoted to different aspects of items that it’s working on, and accordingly there are different metrics with respect to margins on those different systems. Am I correct?

[Leonard Rosenbaum:]

Yes.

[Unidentified Analyst:]

Now are all of those systems geared toward a single end use, or is it a verity of prospective end uses. In context since if we are talking aerospace, would all of these be different aspects of products geared toward a plane or what they be geared some toward a plane and some for ancillary equipment?

[Leonard Rosenbaum:]

They are all geared towards jet engine manufacturing.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question comes from Dick Feldman with Axiom Capital. Please state your question.

[Dick Feldman:]

I wonder if you could go into some detail on the medical side of the business, it appears that you are doing well and if it subject to saying massive uncertainty that maybe present in the aerospace business?

[Leonard Rosenbaum:]

Well with the - our main medical customer at this point it’s significantly further along the normal jet engine manufacturing. We’re producing production units constantly and we expect that we’ll do well. If you read Barron's this last week, you will see that the medical industry with implants is doing very well, so you might want to take a look there. Also we’re working with another medical company that we started about two years ago with which we hope come full vision a little bit more. And in about 30 days is my estimate, you’ll see a coauthored paper between us and a major university on implants being used in the body that you don’t need to remove, such as you go in for an operation and you get stapled shut, they can stay in there from now on.

[Dick Feldman:]

So, would it be fair to say that in the applications that you are already developed, you see other companies being interested in them as well as looking at new applications?

[Leonard Rosenbaum:]

Yes, absolutely.

[Dick Feldman:]

Okay, alright, good luck and feel better.

[Leonard Rosenbaum:]

Thank you.

[Operator:]

Our next question comes from Philip Lee with Mangrove Partners. Please state your question.

[Philip Lee:]

Hi, good afternoon. I am sorry if that has been addressed already but still there were two customers last year, the aircraft one and the medical supply, you talked about waiting on orders but the airplane engine customer, what’s the status of the medical one, are they still making orders or is that program kind of largely over?

[Leonard Rosenbaum:]

We’re manufacturing or we shipping throughout this year.

[Philip Lee:]

Okay, thank you.

[Leonard Rosenbaum:]

You’re welcome.

[Operator:]

[Operator Instructions] Our next question comes from Farjad Mir with Horton Fund. Please state your question.

[Farjad Mir:]

Hi guys, congrats on the good quarter. I just had a quick question on the percentage completion accounting. How frequently is the ETC estimate to complete and the EAC estimate at complete done?

[Glen Charles:]

On a quarterly basis.

[Farjad Mir:]

Okay, thank you.

[Operator:]

There are no further questions at this time. I’d like to turn the call back over to management for closing remarks.

[Leonard Rosenbaum:]

Okay. Thank you everyone for joining our first call. And I look forward to the next one with you, okay. I wish everybody the best. Thank you. Bye.

[Operator:]

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