CVD Equipment Corporation (CVV) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the CVD Equipment Fourth Quarter and Full-Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Annie Leschin, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for our fourth quarter 2016 earnings conference call. We will begin with some prepared remarks followed by a question-and-answer session. Presenting on the call today will be Len Rosenbaum, President and CEO; and Glen Charles, CFO. As a reminder, today’s call is being recorded. Additionally, we have posted our earnings release and call replay information on the Investor Relations event section of our website at www.cvdequipment.com. Before we begin, I’d like to remind you that many of the comments made on today’s call are 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, 2016. 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 circumstances or revised expectations. Now, I would like to turn the call over to Len. Len?

Good afternoon, everyone, and thank you for joining us for our fourth quarter 2016 earnings conference call. Today, I will update you on the progress we are making towards achieving our strategic goals, and then Glen will walk you through a summary of our quarterly financial results. After that, we will be happy to answer any questions. Fourth quarter was busy and exciting for CVD, with our focus squarely on building our pipeline during the last couple of quarters, both revenues and orders rebounded, resulted a strength in quarterly performance in the year. We acquired important assets from Tantaline A/S in Denmark to expand our product portfolio in corrosion resistance coatings to pharma, medical, oil and gas, and other industries that will diversify our revenue stream. Fourth quarter saw solid execution on our growth strategy. Revenues increased 50% from last quarter and backlog grew nearly five times the last year’s fourth quarter. We added various commercial and research customers, such as Naval Research Laboratory and began to return our core business to with historical run rate. Last year, we began to look at strategically to accelerate our growth, move out our revenue, and become more diversified. Specifically, we targeted advanced technologies with a solid customer demand and the opportunity to scale manufacturing through our equipment build out and bringing the products to market with a clear competitive advantage. The acquisition of various assets of Tantaline in December, we have expanded into the corrosion resistance market located in Denmark. Tantaline’s innovative chemical vapor technology is used to create a tantalum surface alloy on parts, such as valves, fittings, process chambers, medical devices, and other areas that are prone to corrosion in harsh environments. This technology can be applied to an assortment of industries, allowing us to reach into a number of adjacent markets, some of which we already served. By supplementing our traditional equipment products, Tantaline allows us our corrosion resistant technology, or a broad applications based. By building out an additional U.S. facility, we define to better address the demand we are seeing in this market through larger deposition tool built by CVD. Tantaline becomes part of our strategic plan to leverage our equipment know-how and proven ability to scale up deposition processes to offer high-quality, value-added materials, products, and services. Just three months into the integration, we are pleased with how well the process is building and we expect the acquisition to be accretive later this year. We’re very excited about the opportunities we see ahead. We build our pipelines in the coming year and expand our presence in corrosion resistance. To this end, we recently hired a new Vice President of Sales and Marketing, Emmanuel Lakios to help expand our global footprint and assist in implementing our vision to enable tomorrow’s technology. With an extensive background in the semiconductor, data storage, and optical device industry, Manny is charged with building and scaling our sales and distribution network globally. As a strategic thought leader, Manny will be a valuable asset, both on market efforts and as a key contributor to our senior management team. With our diverse line suite of products and capabilities, we see sizable opportunities for growth across our business segment in 2017. The progress we have made on our strategic initiatives to strengthen and expand our portfolio and geographic footprint to not only increase our core market share, but provide a significant improved prospect in new segments as well. Looking ahead, we see 2017 as a year of expansion and growth for CVD, as we fully integrate our acquisition, deliver on our backlog, and continue to build our business. We look forward to update you on the progress throughout the year. With that, I will turn the call over to Glen. Glen?

Thank you, Len. Revenue for the fourth quarter increased by 50% to $7.3 million compared to $4.8 million in the previous quarter, as we began to execute on our improved backlog. Fourth quarter gross margin declined to 46.2%, a sizable increase from the 34.6% of the prior quarter. As we ramp production staff and capacity to execute on our backlog, we anticipate that these margins will level off at roughly 39% to 40% as our cost increased. Total operating expenses for the fourth quarter increased 5.6% sequentially. Selling and shipping for the quarter increased 11.9% sequentially from 261,000 to 292,000, due to the timing and delivery of orders. General and administrative expenses for the quarter increased by 6.3% to $1.8 million from the prior quarter, primarily due to an uptick in personnel and facility operations for us. R&D decreased 14% in the third quarter to $129,000, as our investment in next-generation technology continued at a slower rate as we focused on order execution. We ended the fourth quarter with net income of 770,000, or $0.12 per diluted share, compared to a net loss of 85,000, or $0.01 loss per diluted share in the prior quarter. As Len mentioned, this upward trend is expected to continue as we expand our offerings and revenue streams and diversify our geographic footprint. In 2016, we generated $8.8 million in cash from operating activities compared to $1.7 million in 2015. We ended the year with $21.7 million in cash and cash equivalents, an increase of $5 million from the third quarter. Working capital grew to $20.5 million from $19.9 million at the end of the third quarter. And net accounts receivable decreased by $6.6 million from the third quarter, due to the timing of shipments and customer attainment. Backlog at the end of the year remained strong at $27.8 million, nearly five times last year’s level. We began 2017 with a sizable backlog, a more diversified revenue stream, and a growing pipeline all of which are setting the stage for a strong year. With that, I’ll turn the call over to the operator for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session [Operator Instructions] And our first question comes from Will Hamilton from Manatuck Hill. Please go ahead.

Hey, good afternoon, guys, and congrats on returning to profitability. A question on aviation customer. It appears that it was that $1.2 million in the quarter, which was a little bit less than I was expecting, or just if you could update us on the timing of sort of a completion on that – on the orders that you received of the last year and you announced another one on business, the most recent quarter?

We’re looking at probably about five, six, maybe seven quarters.

From today, or from the end of the year?

From the beginning of the year.

Okay. So if I lump in the $10 million that you received from the – during this March quarter, we’re talking about $6 million to $7 million per quarter?

No, first of all, we completed about – through the end of 2016, we completed about 20% of the large order that came through in June of last year. Okay, now it doesn’t run smoothly from quarter-to-quarter. It’s going to – we’re going to get pieces of it throughout the next six to seven quarters. And in addition to that, now we’ve received an additional $10 million as well, which we will be recognizing over the next year-and-a-half or so.

Okay, so then we’ll introduce this – I’m sorry deliver this. But Q3 was $2.1 million, this quarter was $2.2 million, about $3.3 million out of the original – the last order of $30 million.

I don’t know why you’re getting the – this quarter, this quarter’s numbers about $4 million – over $4 million relative to the – to that job?

I’m getting it from what was disclosed in the 10-K. 10-K, we get 45% of revenues from their top customer. 45% of the $20 million – $21 million.

Now you can’t take it of the full $21 million, if $21 million also recognize something some from the beginning of the year. Okay, we recognized about $2.1 million in the third quarter from that job and we recognized another $4 million in change in the fourth quarter, okay about 20% of that.

Okay. I’ll take it offline.

Okay.

Last question is, it just relates to your efforts outside of obviously aviation, it looks like pretty good progress this year in terms of maybe of the bookings and revenues. So maybe to elaborate on some of the end markets there where you’re seeing that improvement?

That’s pretty much the traditional markets we have been in. We have slowed down quite a while due to the magnitude of the aviation orders that we have received. And now we’re just basically reinstating that and we’re expecting it to go further this year. now the traditional markets were research, semiconductors, LED application, coatings on in medical, coatings or a lot of other applications and new technology that’s being developed.

All right. Thanks, guys.

The next question comes from Brett Reiss from Janney Montgomery Scott. Please go ahead.

Hi, Glen.

Hello.

Hi. The historic run rate that you mentioned of your other businesses that you think you’ve returned to, what – can you fresh our recollection, what is that – what had that been per quarter?

We’re looking in the range of $5 million to $6 million, some quarters maybe slightly more, some less.

Okay. Have you been able to get up to that historic run rate, or when in 2017 do you think you’ll be able to get up to that historic $5 million to $6 million run rate?

We typically don’t give guidance. We’re very pleased with the quotation activity in another areas today. And we see, the fact that, there’s no reason we should have been returning to, at least, that level.

Okay. Now that historic run rate of the other normal business is the tantalum a business over and above that, is that – would that be incremental to that $5 million or $6 million that you hope to get up to?

We’re not counting that into our numbers based on past run rates. We expect that to be over the existing run rates. Currently, it’s the small, not material amount. We expect it to slowly gather more momentum this year and especially next year hopefully with the new plans going on already [ph].

Okay. Now, I listen to Glen’s answer to the prior questionnaire. If you have completed 20% of the large aerospace order, that means you’ve got $34 million basically left. You divide that by six, that’s another $5.6 million a quarter, or if it takes seven quarters to complete, that’s close to $5 million. So with your historic run rate also that we can get back up to $5 million to $6 million plus the $5 million or $6 million, you’re running from the work down of the aerospace order. You’re looking at – we could come in a quarter in 2017, where you’re doing conservatively $10 million to $11 million in revenues?

Well, we have approached that in the past. Okay, and there’s no reason going forward we should be able to [count it] [ph] either. Remember the linearity is not exactly always to everyone’s liking.

Okay. Do you think you’re going to be able to exceed that, when you look towards the second-half of 2017?

Brett, we don’t give guidance. And I’d love to be able to have a crystal ball and know for sure myself. But with – we have a strong backlog position at this point. It’s hopefully getting stronger and we can continue to expand into new areas.

Okay. And one or two last ones and then I’ll drop back in queue. That $10 million add-on order from the aerospace customer, do you think that hit for now, or we might get additional add-on sometime in the 2017 calendar year?

Again, cautiously optimistic that we will see additional orders going forward with them. But we’re running a business based on what we have today, what we can control, and be very happy to take additional orders.

Great. And one last one, I think, you were thinking of opening up some sort of facility to distribute, or market the Tantaline business in the United States. Have you made any progress on that?

We’re reviewing various possibilities and locations and we haven’t made a decision yet. But we are definitely looking to go forward with that.

Great. Thank you for taking my questions. I’ll drop back. Thank you.

You’re welcome.

Our next question comes from Joe First from First Associates. Please go ahead.

Thank you. But your – I – my questions have been answered by the previous two callers. Thank you.

You’re welcome.

[Operator Instructions] Our next question comes from Gordon Howard from Bryn Mawr Trust. Please go ahead.

Hi, way back you thought down the road, you’d be doing still $100 million might even need more plan. Is that dream still in effect?

We do expect that at some point in time, we will do in excess of $100 million, yes.

God bless you. Keep going.

Thank you.

Thank you. This does conclude the question-and-answer session. I’d like to turn the call back over to management for any closing comments.

I thank, everyone, for joining us today, and I look forward to speaking with you again in the future.