Earnings Call Transcript - CVV Q4 2023

Operator, Operator

Greetings, and thank you for standing by, and welcome to the CVD Equipment Corporation's Fourth Quarter and Fiscal Year 2023 earnings 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 a member of the CVD Board of Directors; and Rich Catalano, Executive Vice President and Chief Financial Officer. We posted our earnings press release and call replay information on the Investor Relations section of our website. Before we 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 risk factors section of the company's 10-K for the year ended December 31, 2023. 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'll turn the call over to Emmanuel Lakios. Please go ahead, sir.

Emmanuel Lakios, President and CEO

Thank you, and good afternoon, everyone. Thank you all for joining us today to discuss our fourth quarter and fiscal 2023 financial results and other important company developments, and pertinent information related to our business. Your thoughts are important to us, and we look forward to your questions in our Q&A session. Fourth quarter 2023 revenue was $4.1 million, down significantly versus the prior year period as our business continues to experience fluctuations in revenue, given the nature of our emerging growth and markets we serve. We were disappointed with both the fourth quarter and full year performance. We'll stay the course of our strategy to return to consistent profitability with a focus on growth and return on investments. Our primary goal is to expand the presence and penetration of our equipment solutions into high-power electronics, battery materials, aerospace, and industrial applications. To this end, I am very pleased to announce that we started off 2024 with several key new order wins. First of all, we successfully penetrated a second PVT equipment customer with an evaluation unit for our newly launched PVT 200 system used to grow 200-millimeter silicon carbide crystals. This represents an important milestone for CVD with potential follow-on production orders, should our equipment effectively meet the customers' needs. Second, we received a $10 million multi-system order for our silicon carbide CVD coating reactors from an industrial customer. The tools will be used to deposit a silicon carbide protective coating on OEM components. We are encouraged by these orders as we continue to make investments in both research development and sales marketing, which include direct engagement with multiple potential customers all focused on our key markets. I will turn over our call to our CFO, Rich Catalano, who will provide you an overview of our fourth quarter and fiscal 2023 results. Rich?

Rich Catalano, CFO

Thank you, Manny, and good afternoon. Our revenue for fiscal 2023 was $24.1 million, a decrease of $1.7 million or about 7%. The decrease was primarily attributable to lower revenue in our CVD equipment segment of approximately $0.4 million related to lower PVT 150 system revenues that were offset by higher aerospace revenue. Our CVD materials business was lower by $2 million, which is due to the sale of our candle line subsidiary in May 2023, and the announced wind-down of our metal scrap operations. These decreases were offset by an increase of $0.6 million in our SDC segment due to higher demand. Our gross profit margin was 21% in 2023 as compared to 26% in the prior year. The decrease in gross profit of $1.6 million was primarily due to significant cost overruns on one large contract in 2023 and also lower PVT 150 and CVD materials revenues as compared to 2022. Our increase in operating expenses from the prior year is due to higher employee-related costs to support our planned growth in our business, additional selling expenditures, and higher professional fees. These costs were offset by lower bonus costs and lower expenses for CVD Materials due to the disposition of tangibles. Our operating loss for the fiscal year was $4.9 million as compared to an operating loss of $1.8 million in 2022. After non-operating income consisting principally of interest income, our net loss for the year was $4.2 million or $0.62 per share, basic and diluted. This compares to a net loss of $224,000 or $0.03 a share in 2022. The net loss in 2022 was offset by $1.5 million of other income related to the recognition of employee retention credits from fiscal 2021. Now turning to the fourth quarter of 2023. Our revenue for the quarter was $4.1 million, a decrease of $3.1 million or approximately 43%. This decrease was primarily attributable to lower revenue in our CVD segment of $1.8 million, and this was related to lower PVT system revenues compared to the prior year. Our system revenues for the fourth quarter were also impacted by an overrun that we had on that aforementioned launch contract. Our CVD Materials revenues were lower by about $1 million based on the sale and the wind-down. Our gross profit margin for the quarter was a negative 8.5% as compared to 28% in the prior year quarter. The negative gross margin in the quarter and the decrease in gross profit of $2.3 million was primarily due to the cost overruns on the contract that I mentioned, as well as lower PVT and CVD material revenues. The decrease in operating expenses of $0.1 million during the quarter as compared to the prior year was due to lower bonus costs and lower expenses for CVD materials. Again, this was partially offset by some of our higher employee-related costs. Our operating loss for the quarter was $2.5 million as compared to an operating loss of $221,000 in the prior year fourth quarter. After interest income, our net loss for the quarter was $2.3 million, or $0.33 per share. This compares to net income in the fourth quarter of 2022 of $1.5 million or $0.23 per share. But keep in mind that quarter had that $1.5 million special item related to the employee retention credits. Moving to our backlog, our backlog increased slightly from the prior year. It was $18.4 million as compared to $17.8 million as of last year. Our working capital was $14.3 million at December 31, 2023. This compares to $15.5 million at December 31, 2022. Our cash and cash equivalents at December 31, 2023, was $14 million, down slightly from the prior year, where it was $14.4 million. As to our future results, we are unable to predict what impact the current economic and geopolitical uncertainties will have on our financial position or future results of our operations and cash flows. Our return to consistent profitability is dependent on, among other things, the receipt of new equipment orders, our ability to mitigate the impact of supply chain disruptions and inflationary pressures, as well as managing planned capital expenditures and operating expenses. After considering all these factors, we believe our cash and cash equivalents and our projected cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We will continue to assess our operations and take actions as necessary to maintain sufficient levels of operating cash. At this point, I'll turn it back to Manny. Thank you for your presentation.

Emmanuel Lakios, President and CEO

In summary, our focus remains on our customers, our employees, our shareholders, and the pursuit of growth and return to consistent profitability. We do look forward to continuing to build on our recent wins and remain cautiously optimistic. Your comments and questions are important to us with the close of the presentation. I would now like to open the floor up to your questions.

Operator, Operator

Our first question today is from Brett Reiss from Janney Montgomery Scott.

Brett Reiss, Analyst

Do you believe that the cause of the cost overrun was an isolated incident and that you have implemented measures to prevent it from happening again?

Emmanuel Lakios, President and CEO

It's correct that if that's the end of the first question, yes, we do understand where the clusters of issues originated. There are different factors that contributed to that, which I can't elaborate on right now, but we understand what those were. We have implemented some corrective actions to mitigate that going forward.

Brett Reiss, Analyst

Right. Now the backlog would be the reported $18.4 million. Can I add the $10 million from the multi-system order, plus the new PBT 200? So the backlog is $28 million-plus?

Emmanuel Lakios, President and CEO

Minus whatever we ship and any minor adjustments that may come off whatever we ship in the first quarter, correct.

Brett Reiss, Analyst

Right. That's good. And it's been now about a year with no new PVT 150 orders. Why do you think that is?

Emmanuel Lakios, President and CEO

I think, first and foremost, the demand for silicon carbide devices has adjusted over the next couple of years and has been pushed out significantly for the customers we've dealt with in our installed base. The slowdown in the marketplace has affected all segments, from startups to well-established companies. Additionally, it takes a certain period of time to qualify wafers and customers. Our tools perform well on the 150 basis, and this level of tactical performance has resulted in the recent PVT 200 order from our second customer. We plan to execute on that contract successfully, but again, it takes time for evaluation. Importantly, we have secured that second account, and we are happy about the successful launch of our first order of the 200 millimeter system.

Brett Reiss, Analyst

Right. Now, since things have kind of slowed down enthusiasm with electric vehicles, are there other areas in your business that can take up the slack and where you can allocate more attention and corporate resources?

Emmanuel Lakios, President and CEO

Yes, I understand your point. We do have four markets of end-use applications that we target. The good news in terms of demand and orders is that we also serve the aerospace and defense market, encompassing applications from ceramic matrix composites to high-temperature carbide and hypersonics. Additionally, with this recent order for silicon carbide component coating deposition system, approximately valued at $10 million, we are optimistic. We also have battery applications, and these multiple markets help us remain stable until a more substantial application such as silicon carbide production materializes. We are active in markets that show varying degrees of health.

Brett Reiss, Analyst

That's it for me. Yes, I wish you both a happy holiday and thank you for taking my questions.

Operator, Operator

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Manny for any further or closing comments.

Emmanuel Lakios, President and CEO

Kevin, thank you. I want to thank all of you for dialing in today. I want to wish you all a pleasant weekend and happy holidays, and we appreciate your attendance on this call and the support and loyalty of our shareholders, our employees, and all of you who are on the call today. If there are further questions, please reach out to myself or Rich directly, and this concludes our call. Thank you.

Operator, Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.