Transcript
Greetings, and welcome to the CVD Equipment 2022 Second 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 Thomas McNeill, Executive 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 Manny.
Thank you, Diego. 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 second quarter 2022 performance and important company developments and pertinent information related to our business. While we will be providing detailed information, your thoughts are important to us, and we look forward to your questions at the end of our conference call in the Q&A session. The first half of 2022, as we previously indicated, has been an exciting period for all the stakeholders of CVD Equipment. The order rate for the first half supports our belief that we are on the path to future profitability and growth. Our strategy of focusing on markets that support the electrification of everything is fueling our present growth. The market segment includes electric vehicle battery technology as well as high-power electronics for charging and power transmission. Our Q2 2022 orders were $12.6 million, compared to $5.8 million in Q1 of the prior year. In the first half of 2022, we received orders exceeding $16 million for our CVD Equipment products, compared to approximately $9.6 million for the same period in 2021. That is a 72% year-on-year increase in orders for the company. These orders primarily consisted of 21 FirstNano CVD systems, compared to 23 systems ordered for all of 2021. Of the 21 system orders, 14 are for our recently announced PVT-150 system, addressing silicon carbide growth and processing, 2 were for superconducting tape applications, and the remainder of the system orders are for battery nanomaterials, both R&D and production, advanced carbon-based capacitors, and for our legacy advanced R&D FirstNano system. The systems are planned for shipments starting in the fourth quarter and into 2023. We also received orders for consumables and spare parts that serve our installed base in the aerospace market. We have taken the last year to expand our engagement with additional gas turbine engine manufacturers for systems to produce ceramic matrix composite materials. This is a sign that the aerospace market is beginning to recover. However, we do not expect it to recover until at least 2023. Our SDC product line also had an increase in order rates in the second quarter. Supply chain issues continue to negatively impact our revenue and profitability for all the segments of the company. The pandemic and geopolitical instability in Russia, Ukraine, and Eastern Europe have caused issues in the global supply chain. The negative effects have been felt by all companies with increases in commodity and product material costs as well as in product delivery uncertainty and unpredictability. We continue to drive towards operational self-reliance. We received and installed additional machine centers in our Central Islip facility to offset supply chain issues related to machine components. We also are working closely with our OEM supply chain to mitigate, as much as possible, the delays in price escalations in components and materials. I would like to now introduce our CFO, Mr. Thomas McNeill, who will provide our second quarter and year-to-date 2022 financial summary.
Thank you, Manny, and good afternoon. CVD's revenue for the second quarter of 2022 was $5.8 million, compared to $4 million for the second quarter of 2021, an increase of $1.8 million or 44%. Net loss for the second quarter of 2022 was $0.8 million or $0.12 per diluted share, compared to net income of $1.5 million or $0.22 per diluted share in the second quarter of 2021. However, that quarter included a $2.4 million gain on debt extinguishment from the forgiveness of CVD's PPP loan. CVD's operating loss for the second quarter of 2022 decreased by $0.2 million to $0.9 million for the second quarter of 2022, compared to an operating loss of $1.1 million for the second quarter of 2021. This decrease was a result of increased revenue of $1.8 million and the resulting improvement of gross profit margins of $0.4 million, offset by increased operating expenses of $0.2 million. The increase in gross profit and gross profit margins was primarily the result of leveraging fixed costs on higher sales levels and improved product mix, which offset certain component cost increases and compensation costs. In addition, operating expenses increased due to higher employee-related costs to support our greater demand and marketing and engineering efforts. For the 6 months ended June 30, 2022, revenue was $10.5 million, compared to $7.4 million in the same period in 2021, an increase of $3.1 million or 41.4%. Net loss for the 6 months ended June 30, 2022, was $1.8 million or $0.27 per diluted share, compared to a net loss of $35,125 or $0.01 per diluted share for the same period in 2021. Again, that small loss of $35,000 in 2021 included a $2.4 million gain on debt extinguishment from the forgiveness of CVD's PPP loan. For the 6 months ended June 30, 2022, CVD's operating loss decreased by $0.8 million to $1.9 million, compared to an operating loss of $2.7 million for the same period in 2021. This improvement was the result of increased revenue of $3.1 million and the resulting improvement of gross profit margins of $0.8 million and decreased operating expenses of $0.1 million. The increase in gross profit and margins was primarily the result of leveraging fixed costs on higher sales levels and improved product mix, which more than offset certain component cost increases and compensation costs. Beginning in Q3 2021 and continuing to date, CVD has been impacted by increased costs on certain manufacturing material components as well as delays in supply chain deliveries. These increases and delays may also impact CVD's ability to recognize revenue and result in reduced gross profit margins in future quarters, extended manufacturing lead times, and reduced manufacturing efficiencies. CVD is also seeing inflationary effects that have resulted in increased costs for labor materials. We have placed orders with increased lead times to attempt to mitigate the manufacturing delays and continue to assess other material suppliers in an effort to alleviate the potential cost impacts. In addition, CVD is utilizing its flexible in-house manufacturing to further mitigate potential delivery delays and material cost increases. Our backlog at June 30, 2022, was $16.7 million, compared to $10.4 million at December 31, 2021, an increase of $6.3 million or 60.5%. This increase is due to the timing of the receipt of new orders for the 6 months ended June 30, 2022, of $16.7 million reduced by recognized revenue of $10.5 million. While the negative effects of the COVID-19 pandemic continue to impact the aerospace industry, generally in the form of reduced long-distance travel and reduction of turbine engine sales, industry reports indicate improvement may begin to occur in the late '22, 2023 time frame. Our cash and cash equivalents at June 30, 2022, was $12.2 million, compared to $16.7 million at December 31, 2021. This decrease of $4.5 million is primarily the result of the satisfaction of our mortgage debt on our 555 facility in the amount of $1.7 million as well as our net loss adjusted for noncash items of $1.3 million during the 6 months ended June 30 and our capital expenses of $0.5 million to improve our manufacturing to further mitigate potential delivery delays and reduce costs. Our working capital was $15 million at June 30, compared to $16.7 million at December 31, 2021, a decrease of $1.7 million or 10%. The longer-term impacts from the COVID-19 outbreak are highly uncertain and cannot be predicted, especially now with the impacts on our supply chain, as we previously discussed. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there is no assurance of the ultimate impact on the length of time that the supply chain factors may impact our business. Our return to profitability is dependent upon, among other things: the substantial completion and delivery of existing orders, which include the significant first half of 2022 orders of approximately $16.7 million; the ongoing receipt of new equipment orders and others; the lessening of the ongoing effects of the COVID-19 pandemic on our business and the aerospace market; managing through the supply chain issues discussed; and improvement in operational efficiencies as well as managing planned capital expenditures and operating expenses. Based on all of these factors, we believe that our cash and cash equivalent positions and projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 to 18 months of the filing of our Form 10-Q. Should the current environment continue longer or worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs.
Tom, thank you for your presentation. In summary, the second quarter and first half of 2022 have built on our efforts of 2021, which was a year of transition, reorganization, and focus on everything we do and those whom we serve. Our focus remains on our customers, markets, employees, shareholders, and the pursuit of growth and return to profitability. We look forward to the second half of 2022 and continue to be cautiously optimistic. Your comments and questions are important to us. With the close of our presentation, I'd like to open up the floor to your questions. Diego?
And our first question comes from Brett Reiss with Janney Montgomery Scott.
Just a headcount question, the amount of employees this quarter versus last quarter. And are you looking to hire more people? Or is your headcount pretty much where you want it to be?
We have clearly seen a strong order rate, which has led us to increase our manufacturing capacity. We have implemented a second shift in our machine shop. This move is part of our goal for self-reliance. We have brought on additional staff in the machine shop, inspection, welding, assembly, and wiring throughout this year. As a reminder, in 2021, we underwent an exercise to adjust and align the organization with our business needs. We are still making adjustments to the business. This year, we have increased our staffing by approximately 15 to 18 personnel.
And were you able to find the people with the proper skill sets at the right labor cost?
That labor cost has a lot of factors to consider. We are successfully attracting talent in both engineering and operations. We are very pleased with the new hires we have made this year, and this aligns with our ongoing labor costs here on the island. Overall, it's been a positive experience for us. While it's not guaranteed, we have also hired a new HR director who has done an excellent job with talent acquisition over the past several months.
Right, right. That's good to hear. Now the things you're doing in-house to mitigate supply chain issues, if the supply chain issues receded and abated, would you still continue to make the things you've taken in-house? And would that going forward improve margins?
The company will see an improvement in margins because we are not relying on someone else's gross margin. Historically, we have been very vertically integrated, mainly due to the nature of our one-off projects, which made it more cost-effective to operate this way. Our investment in capital equipment this year has enhanced our machining capabilities, and adding a second shift has increased our capacity. I expect this trend to continue as it significantly strengthens our competitiveness in the market. As for the supply chain situation, I can't predict when it will normalize. However, we have made smart investments, and all the installed equipment will be up and running, generating value by the end of this month. This will provide us with a gross margin advantage and a competitive edge, as we will be able to deliver products more quickly.
Great. Now one last one. In the virtual annual meeting, you listed three types of different devices that you manufacture with respect to battery technology, a carbon 300 machine, a powder coat 1100, and then the PVT-150, which seems to have become the crown jewel. Can you just briefly, to this layperson who's not an engineer, tell me what each of these devices does and that part of the $300 million total addressable market you mentioned at the annual meeting?
Yes, it is about the electrification of everything. It's not solely related to battery materials; there are three applications involved. The carbon 300 was launched earlier this year and has received multiple orders since its introduction in late 2021. This product features advanced carbon technology for battery carbon nanotubes. The powder coat 1100 is a coating system designed for growing silicon nanowires on carbon powder, enhancing the carbon material used in battery anodes. The PVT-150 is a product used to grow silicon carbide boules for silicon carbide wafers, essential for high-power electronics, including charging and transmission switching. Each of these products utilizes different technologies; some are carbon-based while others rely on silicon nanowires or silicon carbide growth systems. All three of these products are standard offerings that we aim to establish in the market, having launched them over the past few quarters.
How proprietary are these three products, and what are the barriers to entry for competition? Is your major competitor also your customer who may consider bringing these capabilities in-house?
Our customers used to manufacture these in-house, but that trend has changed. When examining the competitive landscape of our products, we consider several factors, including process capabilities, temperature control, deposition rates, and safe operations, all of which are essential to the environmental and health standards in our product designs. Technical performance of our tools is crucial. Additionally, the cost of ownership is significant, involving capital expenses and the efficiency of manufacturing processes. This efficiency relates to maintaining a good gross margin that enables investment in future products, yielding returns for our investors while delivering value to our customers. By integrating all these elements, we establish a barrier to entry against our competitors.
Our next question comes from an undisclosed source.
First, thank you for hosting this call. Thank you for your transparency and candor. It is very much appreciated. So, thank you, above all else.
Appreciate it. You're welcome. Thank you.
Could you comment if the growth has been market share gains or industry growth in general?
It's both. There's a demand for new technology related to carbon, silicon nanowires, and battery materials, as well as silicon carbide. From that perspective, it's about market expansion. However, we have also faced competition from other players in the market from whom we secured these orders. We have increased our market presence and market share in recent quarters.
I have been reviewing the 10-K to identify the competition, but I am not seeing specific companies listed. If it's appropriate to ask, could you name any competitors that serve as peers or benchmarks for their growth rates and margins?
Well, there are companies that we would say we want to target as our performance, but they're not competitors of ours. They're much larger companies. As far as our direct competitors, we likely would not want to advertise who those are on this call.
I'm wondering if there is some type of national security and Made in America preference going forward?
There is clearly an initiative for both battery manufacturing and associated electric vehicle electrification to be manufactured in the U.S. And we are a U.S. competitor and supplier. Therefore, we would benefit from that.
What's your scarcest resource? Is it human capital? Is it access to financial capital? What's been holding you back?
Supply chain issues. Our simple answer is that most equipment companies, if not all, are facing the same challenges.
Our next question comes from an unidentified source.
Has it gotten any closer to being a potential commercial product?
We are not a medical device company; we are an equipment and carbon technology company. We do continue to have applications development such as the device that you're referring to now. We do continue R&D. A lot of research, it's not a development, it's not a product. But we are continuing, and we have gotten some external funding for that specific application using our carbon-carbon technology.
It sounds to me like the dream is the electrification of America?
It's an expanding marketplace with significant potential. We can clearly establish a strong position and gain market share. We also continue to support aerospace, and I believe it will rebound. I appreciate the average selling prices of aerospace products, which include multimillion-dollar tools of varying complexities, and we have solid recurring revenue from production consumables and spare parts as we enhance their value. I believe that being involved in multiple large growth markets is key to our future success.
I appreciate the fact that you're being realistic and optimistic both.
There are no further questions at this time. I'll hand the floor back over to Mr. Lakios for closing remarks.
I appreciate all the questions. In summary, the second quarter and first half of 2022 have built on our efforts of '21. We greatly appreciate the support of our shareholders, our employees, our Board of Directors, suppliers, and, of course, value our customers. We thank you for your attendance today, and we look forward to giving you further updates in the next period of time. Thank you.
Thank you. That concludes today's conference. All parties may disconnect. Have a great evening.