Earnings Call Transcript - CVV Q3 2022

Operator, Operator

Greetings, and welcome to the CVD Equipment Corporation 2022 Third 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 Richard Catalano, 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 Emmanuel Lakios.

Emmanuel Lakios, CEO

Thank you. 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 third quarter 2022 performance and 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. Before discussing the results of the third quarter, I would like to first provide you with an update on our sale and leaseback transaction. In September, we announced that we had entered into an agreement to sell our main facility in Central Islip and lease it back for a period of 10 years with two five-year renewal options. The potential purchaser had 30 days to complete their due diligence, during which time they retained the ability to cancel the agreement. On November 3 and 4, we amended the agreement with the potential purchaser to extend the due diligence period to last Friday, November 11. On November 11, 2022, the potential purchaser notified the company that it was terminating the purchase agreement in its entirety. Each party will bear its own costs and expenses in connection with the foregoing. Either party will pay a termination fee with respect to the termination of the purchase agreement. While we are disappointed that we are not able to complete the sale and leaseback transaction, we may explore a sale and leaseback or other transactions in the future. Now back to our third quarter and year-to-date results. First, I'm pleased to report that we achieved an operating profit of $122,275 for the third quarter and net income of $63,538. While our revenue and profitability will continue to fluctuate due to the timing of orders and shipments, we believe that we are on the right track to achieve consistent long-term profitability over the years ahead. The first nine months of 2022 have been an exciting period for all the stakeholders of CVD Equipment. The year-to-date order rate for 2022 lends further support to our belief that we are on the right path. Our core strategy, which includes focusing on markets that support the electrification of everything, is fueling our present growth. This market segment continues to include electric vehicle battery technology as well as high-power electronics for power charging and transmission. Our Q3 2022 orders were $7.3 million compared to $6.1 million in Q3 of the prior year. Through the first nine months of 2022, we have received orders exceeding $15.5 million for our CVD systems and services segment as compared to approximately $8.3 million for the same period in 2021. This is an 86% year-over-year increase in orders for the equipment group. These orders primarily consisted of 22 FirstNano/CVD systems compared to 23 orders for the entire 2021 year. Of the 22 system orders, 14 were for our newly launched PVT-150 system that addresses silicon carbide growth and processing; two were for superconducting tape applications; and the remainder of the system orders are for battery nanomaterials, both R&D and production, as well as advanced carbon-based capacitors, and of course, for our legacy advanced R&D FirstNano system. We announced recently that we are selected and received an order in the fourth quarter from a major aircraft engine manufacturer. Specifically, the order is for a production chemical vapor and filtration system valued at approximately $3.7 million. As I stated earlier, the system will be used to manufacture ceramic matrix composite materials for our aerospace gas turbine engines. We believe that this order is a tangible sign of the beginning of the aerospace market recovery, which traditionally has been a significant part of the CVD Equipment Corporation business. We are also continuing to engage and market our CVI systems to other gas turbine engine manufacturers. We continue to receive orders for consumables and spare parts that serve our installed base in the aerospace market, while we believe that this new order rate is a sign that the aerospace market is beginning to recover. However, we do not expect it to fully recover for at least until the latter part of 2023. Our SDC segment had increased sales over the prior year of 23.1%, and increased orders in the third quarter that reflect a higher demand for our gas and liquid control system products. Our Tantaline and MesoScribe product lines continue to be profitable. Supply chain issues, though, continued to negatively impact our revenue timing and profitability for all the segments of the company. The lingering pandemic and geopolitical instability have impacted most global supply chains. The negative effect has been felt by all companies with increases in commodity and product material costs as well as in delayed product deliveries. We continue our drive towards increased operational self-reliance. We've received and installed additional machine centers in our Central Islip facility to offset the supply chain issues related to machine parts. In addition, we are working closely with our OEM suppliers to mitigate as much as possible the delivery delays and increases in prices and components of the materials. I would like to turn our call over to our CFO, Rich Catalano, who will provide our third quarter and year-to-date 2022 financial summary. Rich?

Richard Catalano, CFO

Thank you, Manny, and good afternoon. Our revenue for the third quarter of 2022 was $8.1 million; this compares to $4.3 million for the third quarter of 2021. That represents an increase of $3.8 million or 88.4%. Net income for the third quarter was $63,538 or $0.01 per basic and diluted share; this compares to net income of $6 million for the year or $0.89 per basic and diluted share in the third quarter of 2021. However, keep in mind that the 2021 quarter included a $6.9 million nonoperating gain on the sale of one of our buildings. Operating income for the third quarter of 2022 was $122,275. This represents an improvement of $1 million from both the operating losses of $9 million that we reported in both the second quarter of this year and also the third quarter of 2021. This improvement in operating results from the prior year quarter was an increase related to increased revenue of $3.8 million, and this resulted in increased gross profit of $1.6 million. This was offset by an increased operating expense of about $0.5 million. The increase in gross profit was primarily the result of leveraging our fixed costs on higher sales levels as well as an improved product mix. This offset increases that we had in certain material components and compensation costs. The increase in our operating expenses is due to higher employee-related costs to support the growth of our business, including additional marketing and engineering efforts as we incurred an employee severance charge during the quarter. For the nine months ended September 30, 2022, our revenue was $18.6 million as compared to $11.7 million for the same period in 2021. This is an increase of $6.9 million or 58.4%. The net loss for the nine months ended September 30, 2022, was $1.8 million or $0.26 per basic and diluted share. This compares to net income of $5.9 million or $0.89 per basic and diluted share in the same period of 2021. However, you should note that in the nine months ended September 30, 2021, it included two nonoperating gains that totaled $9.3 million. We had a $6.9 million gain on the sale of the building and a $2.4 million gain on debt extinguishment from the forgiveness of the company's PPP loan. For the nine months ended September 30, 2022, our operating loss decreased by $2 million to $1.6 million as compared to the operating loss that we had in the same period in 2021. This improvement was the result of the increased revenue of $6.9 million that resulted in an additional gross profit of $2.3 million; this was offset by increased operating expenses of $0.3 million. Similar to the results for the third quarter, the increase in gross profit was primarily the result of our leveraging our fixed costs on higher sales levels as well as an improved mix. This has been offset by higher material component costs and higher compensation costs. Our operating expenses increased over the prior year due to higher employee-related costs as we were focused on growing our business. So we had additional marketing and engineering costs for R&D. This increase was offset by lower building costs; however, we did consolidate our Central Islip operations in 2021, and we also benefited from lower professional fees as compared to the prior year. Now turning to our backlog. Our backlog at September 30, 2022, was $15.7 million as compared to $10.4 million at the beginning of the year as of December 31, 2021. This represents an increase of $5.3 million or 50.9%. Our cash and cash equivalents at September 30th was $11.9 million; this compares to $16.7 million at December 31, 2021. This is a decrease of $4.8 million, and this is primarily the result of the satisfaction of our mortgage debt on our Central Islip facility earlier in the year that was for $1.8 million. We have our net loss as adjusted for noncash items of $2.3 million, and we also invested in our capital, and our PPE of approximately $0.6 million. Our working capital at September 30th was $15 million, and this compares to $16.7 million at December 31, 2021. We continue to be unable to predict the extent of the lingering impact of the pandemic and the current geopolitical uncertainties will have on our financial position and results of operations for the balance of 2022 and, of course, going forward into 2023 and beyond. Due to various uncertainties regarding our supply chain disruptions, rising costs, and the impact on the aerospace sector that impacted the company over the past couple of years. The impact can be material in the future periods, whether indirectly or directly. Again, the longer-term impacts on the pandemic and the geopolitical uncertainties are still uncertain and cannot ultimately be predicted. Our return to consistent profitability is dependent among other things on 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. In addition, our revenues and orders have historically fluctuated based on changes in order rate as well as other factors in our manufacturing process that impacts the timing of our revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter. After considering all these factors, we believe our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 to 18 months. Should the current economic environment continue longer or even worsen, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support our working capital needs.

Emmanuel Lakios, CEO

Rich, thank you for your presentation. In summary, the third quarter and year-to-date results of 2022 reflect the actions we took since 2021 to reorganize, focus on everything we do and those whom we actually serve. Our focus remains on our customer markets, our employees, our shareholders, and the pursuit of growth and return to consistent profitability. We look forward to continuing to build on our success in the year ahead and continue to be cautiously optimistic. Your comments and questions are important to us. With the close of our presentation, I would like to open the floor to your questions.

Operator, Operator

Thank you. The floor is now open for questions. Our first question comes from Brett Reiss with Janney Montgomery. Please state your question.

Brett Reiss, Analyst

Thank you, operator. Hi, Manny, hi Rich.

Emmanuel Lakios, CEO

Brett, how are you?

Brett Reiss, Analyst

Good, good, good. First, congrats on a profitable quarter. It's nice to see. And welcome aboard to Rich.

Richard Catalano, CFO

Thank you, Brett.

Brett Reiss, Analyst

First question, the battery type orders, if we go into a recession, do you think that part of the business will be somewhat recession resistant?

Emmanuel Lakios, CEO

So when you speak about the batteries, if it's the batteries exclusively or if it's charging of the batteries and the battery nanomaterial used in the battery because they do go hand in hand. As far as being recession-proof on a macro scale, it's possible. I can't really comment on that. However, I can mention that there is a lot of funding going into silicon carbide for power electronics used for converters and also in the automobile, as well as in the charging station and transmission, as well as new battery material. We've seen an increase more so in the demand for silicon carbide growth systems to date, than the evolutionary new nanomaterials for battery. So is it recession-proof? I really can't say. But I can say though that there are plans to continue to expand, and our market research indicates that the silicon carbide market will continue to expand over the next several years. We hope to partake in that.

Brett Reiss, Analyst

Okay. Did the potential buyer of the property sale that didn't go through tell you why they decided not to purchase it? Was it due to rising interest rates?

Emmanuel Lakios, CEO

Clearly, from the time we started the discussion and we received the initial offer, the interest rates have risen by several points. As you can imagine, that has affected most real estate transactions. I'm confident that played a role in their decision.

Brett Reiss, Analyst

If rates move back down, could the buyer come back or is he gone?

Emmanuel Lakios, CEO

Would they come back? I can't speculate on whether or not they particularly would come back, but I do think that the building was fairly priced initially. The real estate market is cyclical; that's all I can really say.

Brett Reiss, Analyst

Okay. And one last one. The margins you're enjoying on the $3.7 million aerospace order, you're happy with the margins?

Emmanuel Lakios, CEO

Yes, yes.

Brett Reiss, Analyst

Once again, fantastic on the profitable quarter, and I will drop back in queue.

Emmanuel Lakios, CEO

Thanks, Brett.

Operator, Operator

It appears we don't have any questions at this time. Oh, wait, one just came in from George. Please go ahead with your question.