Earnings Call Transcript - CVV Q3 2021

Operator, Operator

Greetings, and welcome to our CVD Equipment's 2021 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. 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 the 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 our filings with the SEC, including, but not limited to, the Risk Factors section of our 10-K for the year ended December 31, 2020. 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 Manny.

Emmanuel Lakios, CEO

Hello. Welcome to our CVD Equipment Corporation's quarterly conference call. My name is Emmanuel Lakios, CEO and President. I am pleased to be presenting to you today regarding important company developments and pertinent information related to our business as we will be providing substantive information; your thoughts are important to us. We look forward to your questions at the end of our conference call in the question-and-answer section. I would like to introduce our CFO, Mr. Thomas McNeill, who will provide you with our financial third quarter 2021 summary.

Thomas McNeill, CFO

Thank you, Manny, and good afternoon, everyone. CVD third quarter 2021 revenue was $4.3 million as compared to $4 million in the third quarter of 2020, an increase of $0.3 million or 8.4%. CVD's operating loss for the 3 months ended September 30, 2021 and 2020 was $0.9 million and $1.4 million, respectively, with Q3 2021 improving in performance by $0.5 million compared to Q3 2020. Included in other income for the 3 months ended September 30, 2021, was a gain on the sale of the building in the amount of $6.9 million. Net income for the third quarter was $6 million or $0.89 per diluted share as compared to a net loss of $1.3 million or $0.19 per diluted share in the third quarter of 2020. With respect to our 9 months results, as a result of the COVID-19 pandemic, CVD's new order bookings during 2020 were substantially impacted, which reduced revenues in subsequent quarters, resulting in revenue of $11.7 million for the first 9 months of 2021 as compared to $13.7 million in the first 9 months of 2020, a decrease of $2 million or 14.7%. CVD's operating loss for the 9 months ended September 30, 2021 and 2020 was $3.6 million and $2.4 million, respectively. Included in other income for the 9 months ended September 30, 2021, was a gain on the sale of the building in the amount of $6.9 million and the gain on debt extinguishment in the amount of $2.4 million, which was related to our PPP loan received due to the effects of the COVID-19 pandemic and the subsequent forgiveness of that debt. Net income for the first 9 months of 2021 was $5.9 million or $0.89 per diluted share as compared to a net loss of $0.8 million or $0.12 per diluted share for the first 9 months of 2020. Included in the first quarter of 2020, CVD's net income was favorably impacted by the CARES Act, which allows for the carryback of net operating losses and resulted in CVD recognizing an income tax benefit of $1.5 million in the 9 months ended September 30, 2020. Sequentially, CVD's revenue in the third quarter of 2021 was $4.3 million as compared to $4 million in the second quarter 2021, an increase of $0.3 million. The operating loss decreased to $0.9 million in the third quarter of '21 as compared to an operating loss of $1.1 million in the second quarter of 2021, an improvement of $0.2 million. During Q3 2021, CVD was impacted by increased costs on certain manufacturing material components as well as delays in supply chain deliveries. This may also impact CVD's ability to recognize revenue and reduce gross profit margins in future quarters as well as extend its manufacturing lead times and reduce manufacturing efficiencies. CVD has commenced placing orders with increased lead times to try to help mitigate the manufacturing delays as well as assessing other material suppliers to mitigate the potential cost impacts. In addition, CVD is utilizing its in-house flexible manufacturing to further mitigate both potential scheduled delivery delays and material cost increases. The company's backlog at September 30, 2021, improved by $1.8 million to $9.9 million as compared to $8.1 million at June 30, 2021. Since the first quarter of 2020, the company continued to experience significant negative effects from COVID, including reductions of new orders. And while the company's order activity has improved in the first 3 quarters of 2021, we believe its longer-term improvements will be benefited by the anticipated slow recovery in the aerospace markets, which industry reports indicate will begin to occur in the 2022 to 2023 timeframe. With respect to our building sale, as previously announced, we're pleased to have closed on the sale of our facility at 555 North Research in Central Islip, New York on July 26, 2021. With a sales price of $24.4 million, we satisfied our then mortgage debt of approximately $9.1 million on that facility and paid various transaction-related costs. The net proceeds of approximately $14 million improves our current cash position, which at September 30, 2021, is $17.4 million, and provides us with the balance sheet to bolster sustainable growth strategies. As a result of the gain on the sale of the building of approximately $6.9 million, we improved CVD's overall shareholder equity and retained earnings by approximately $6 million, and our retained earnings is now a positive $3 million at September 30, 2021. With respect to our liquidity, again, primarily the result of the sale of the 555 building, our cash and cash equivalents improved to $17.4 million at September 30, 2021, as compared to $7.7 million at December 31, 2020. Our working capital was $17.7 million at September 30, 2021, as compared to $8.1 million at December 31, 2020, an increase of $9.6 million or 118%. In addition, during the first 9 months of 2021, we have substantially reduced our CapEx from $1.2 million in the first 9 months of 2020 to $213,000 during the first 9 months of 2021 related to ceasing further USA spend on the Tantaline product line. The longer-term impacts from the COVID-19 outbreak are highly uncertain and cannot be predicted, especially now with the recent outbreaks of the COVID-19 Delta variant and impacts on a supply chain, as I previously discussed. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability. Our return to profitability is dependent upon, among other things, the receipt of new equipment orders, the lessening of the ongoing effects of COVID-19 on our business in the aerospace market, improvement in our operating efficiencies as well as managing planned capital expenditures and operating expenses. Based on all these factors, we believe our cash and cash equivalent position and projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months of the filing of this 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 as well as compliance with our loan covenant. And now I'd like to turn the call back over to Manny, our CEO.

Emmanuel Lakios, CEO

Tom, thank you for your presentation. We've spent the first 9 months of 2021 shoring up our balance sheet and optimizing our market focus and product offering, all with the interest of maximizing our present or future profitability and viability. In Q3, we initiated our strategic planning for 2022. We also want to announce that we obtained strategic orders in our focused growth markets. During the third quarter, we closed on 2 electric vehicle battery nanomaterial system orders, 1 of which was with a production-use case customer, OneD Battery Sciences, and the other to a research and pilot production customer. Our order rate has now shown incremental recovery with orders in the range of $6 million per quarter in both the second and third quarters. We received 5 CVD system orders in the third quarter and 14 year-to-date. Our SDC division continues to show incremental order growth. It is our strategy to continue to focus on production applications for nanomaterials, including battery anodes as well as our aerospace and defense applications. We are also pleased to see a recent increase in our spare parts business within the aerospace market, and that gives us cautious optimism that our assessment that the timing of the resurgence in gas turbine engine demand will materialize in 2023. In our production group, we have seen and further have been addressing the global supply chain issue of increases in material costs and the general delay and uncertainty of material delivery. This will be a challenge for most companies. We have implemented vigorous supplier engagement as well as expanded our network of suppliers. Our vertically integrated manufacturing is being tapped to supply capacity to improve the delivery and cost of our products. We have ample capacity in our 355 Central Islip facility to accommodate a shift in our manufacturing strategy to assist in addressing any long-term supply chain issues. On another front, the sale of our 555 building was completed in July with the outcome of providing approximately $14 million of additional cash on hand. The sale of the building provides both short-term working capital as well as future growth opportunities. In summary, even with these positive indicators, the year is far from over, and we expect to face many challenges. However, our focus remains consistent on our customers, our employees, our shareholders and the pursuit of growth and return to profitability. Your comments and questions are important to us. With the close of this formal presentation, we'd like to open the floor to your questions.

Operator, Operator

Your first question comes from the line of Brett Reiss with Janney Montgomery Scott. Please proceed with your question.

Brett Reiss, Analyst

I have a series of questions with respect to the device you're delivering to the OneD Battery in the first quarter. Are we still on schedule to deliver that in the first quarter of 2022?

Emmanuel Lakios, CEO

The plan is to deliver in the first quarter, yes. And we are on schedule for that.

Brett Reiss, Analyst

Now it's a private company, but when you go on their website, they talk about this pilot plant to do the battery stuff in Wisconsin. Is that where the reactor, which we're making for them, is that where it's going to be employed by them?

Emmanuel Lakios, CEO

Well, Brett, this is a CVD Equipment conference call, and Vincent is a great CEO who could also address your questions. However, I'm not confident it is Wisconsin; it might be in the Pacific Northwest, possibly Washington state. I think it's simply inaccurate to say it's in Wisconsin, and I'm not sure they claimed that either.

Brett Reiss, Analyst

I own CVD, and that's what I'm really interested in. When you read what possibly they may have, it seems like this could be the first plant among many. Are they possibly going to need one of your devices for every location that they're going to open up?

Emmanuel Lakios, CEO

They will need a CVD reactor for each and every one of their locations and sites. That's correct. As they publicized, they have a very interesting and attractive model that I would probably suggest the listeners go to their website. We are doing our utmost and feel confident that we will be the supplier of choice for each of those sites.

Brett Reiss, Analyst

Now if what they have really lifts off and clicks, they have barriers to entry because of their patents and their intellectual property. What do we bring to that equation? Are they using us solely for our know-how and experience or do we have something proprietary that no one else could deliver on should they go with somebody else?

Emmanuel Lakios, CEO

Brett, our competitive advantage typically lies in our performance. We are committed to delivering on time according to the specified requirements, assisting with installations, and maintaining our partnerships. We are happy to have been chosen and view this as a long-term strategic relationship rather than a one-time engagement. We are dedicated to developing and nurturing our collaboration with them, as we consider them an important customer for many years ahead.

Brett Reiss, Analyst

Once our device is installed in their plant and being used, is there any future recurring revenue stream that would accrue to us?

Emmanuel Lakios, CEO

Of course, because it's a production application or a pilot production application similar to our aerospace installed base. We will continue to support them even for just the installed base without additional orders, which we would hope and expect that they will be successful and adopted. And we will have, again, supply them consumables and spare parts under separate contracts.

Brett Reiss, Analyst

Different line of questioning. You changed the way your sales force is compensated. And of course, you report backlog when you get a firm order. But some of the companies I follow have a metric where they'll sometimes say that there are x dollar amounts of tenders or potential orders outstanding. They're not firm orders, but these are submissions that are out there. Do you have something similar that you monitor? And if so, has that gone up because you've changed the way you compensate your sales force?

Emmanuel Lakios, CEO

We have a competitive compensation package for all our employees, which is also partially based on the performance of the company to our objectives, and that's been communicated to the entire rack and file from executives to every level in the organization. There's also metrics associated with individual or group performance, which is specific to the department of the function. For the sales team, you can imagine it's order rate. That's answer with your first question. The second question is we monitor our opportunities. Clearly, there are people, Jeff and his team, that monitor it on a daily and every hour of the day on the opportunities. But we update our internal forecast on a weekly basis, looking at all our probabilities and all our opportunities. And we do a weighted average of total opportunities to we compare that to the best few, and then we compare our forecast that we actually commit to ourselves, management, the team that commits to myself on what we anticipate our forecast would be, which was what we roll into our financial forecast. The ratios are strong ratios from the aspect of the best few to what we have in our forecast. And then the opportunities to real opportunities to what's actually what we call our best few. So it goes through a couple of filters or iterations. I'm pleased with the ratio of those numbers. We have ample targeted accounts in our forecast, and we have backups for those as well.

Brett Reiss, Analyst

Now since, as you said, aerospace is picking up again, the type of reactor you successfully made for General Electric some years back. Is there any possibility of getting some more additional orders either from General Electric or any other aerospace manufacturer similar to those large orders we got 2 or 3 years ago?

Emmanuel Lakios, CEO

I appreciate the question and the context. To clarify, we have never confirmed receiving orders from General Electric. They play a significant role in the Ceramic Matrix Composites and gas turbine engine sector. The customer we have supplied will begin to recover in terms of engine and component demand, which will eventually benefit us. Initially, we expect to observe growth in our spare parts and consumables business as they start purchasing materials for their gas turbine engine components. We've noticed some positive trends, but we are not yet back to our 2019 levels. I estimate it may take another year to a year and a half until 2023 for us to see those consumable levels return and for their capacity to be maximized, at which point they would need to invest in additional equipment. This does not rule out other market players entering. We are actively engaging with not only our existing one or two customers but also others through rotations, proposals, and discussions. However, I do not expect a demand recovery until 2023 for engine components, as equipment purchases are necessary beforehand. We are in talks with various component manufacturers, and while some may buy sooner, we are maintaining a conservative outlook. We will communicate any significant changes in our direction when they occur. Currently, we see signs of recovery, but we need to remain cautious, especially given the unexpected impact of COVID last year.

Operator, Operator

Your next question comes from the line of Martin Howard, a private investor. Please proceed with your question.