CVD Equipment Corporation (CVV) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, greeting and welcome to CVD Equipment’s Third Quarter 2017 Earnings 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 pleasure to introduce to your host Annie Leschin of Investor Relations. Thank you. You may now begin.

Thank you, operator. And good afternoon, everyone. Thank you for joining us today for our third quarter 2017 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 section of our website at www.cvdequipment.com. Before we begin, I would 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-Q. Actual results could 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 Len. Len?

Good afternoon, everyone, and thank you for joining our third quarter earnings call. Today, I would like to update you on the progress we are making towards achieving our strategic goals to take CVD to the next level. Following that, Glen will walk you through a summary of our quarterly financial results and then we will take questions. Let me start with a review of third quarter results. This quarter we saw a strong performance in both revenue and earnings per share, both reached record highs, demonstrating our continued execution and diversification, while driving more to the bottom line. Our plan to broaden our customer base saw measurable results with 98% of the orders received for this quarter coming from customers other than our large aviation component supplier. Overall this was an exceptional quarter for CVD and we are pleased with our progress. As I mentioned on last quarter's call, the coming quarters are expected to show the progress we are making towards our goals of expanding the company by providing advanced material solutions to enable new and unique applications. That became more evident recently with two significant announcements. First, we entered into a contract to purchase a 180,000 square foot facility in centralized New York, to serve as the headquarters for our subsidiary CVD Materials Corporation. Second, we bought assets including all the IT of MesoScribe Technologies which is a specialty manufacturer of sensor products. These two actions support our combined organic and strategic initiatives to drive future growth. MesoScribe is the latest acquisition we have made to expand CVD into Advanced Materials Solutions. Its proprietary Direct Write Technology allows thermal spray coatings to be printed directly onto parts for electronic applications. Their existing sensor products and their ability to help us complement Tantaline by adding a wear resistant coating on top of our corrosion resistant coating is an important addition to the CVD portfolio. MesoScribe’s products are used in electronics, aerospace and defense applications. In aerospace for example, MesoScribe manufacturers printed instrumentation for use on production aircraft. The MesoPlasma Direct Write technology enables distributed sensing, damage detection, lightning strike protection, antennas, surveillance, wiring, heating & de-icing solutions for large and small aircraft. In power generation applications sensors can be printed on to customer supplied assemblies and gas turbine engine components to support engine testing, diagnostics and component health monitoring. Temperature sensors can be applied to both super-alloy and ceramic matrix composite materials to reduce wear during testing. Direct Write devices are both robust and reliable and enable precision production for cost effective implementation. By leveraging our equipment know how, business infrastructure and proven ability to scale up new technologies for high value added materials, products and services, we are creating new business opportunities and opening up new markets to position CVD for future growth. As part of our expansion plans announced earlier this year, the new building that we are in contract to purchase will serve as the new materials facility allowing us to increase production of our materials business in the US and support the anticipated growth and diversity of our business. After an extensive evaluation process we selected this facility because of its proximity, state and local incentives and overall lower capital outlay. The new facility meets all of our needs at a reasonable cost. Starting in mid 2018 in addition to our Danish facility Tantaline CVD will operate out of this new facility to process larger parts and further the development of corrosion and wear resistant coatings for unique applications. This new facility will provide the manufacturing, engineering, process development, administration for most CVD material product launch. We plan to hire engineers, scientists, technicians and office personnel as we work with customers to create a range of advanced high performance materials to drive our future growth across additional markets. Overall, this is a very exciting time for CVD. As noted in our results this quarter, we are accelerating in innovation across the company to drive increased revenue, productivity and profitability. In the last 12 months, we have demonstrated our ability to acquire important technologies and expand our customer base. Together with the ongoing generation of new IP in our application laboratory, we are confident that our expanding range of leading edge products, supported by our equipment and new materials facility will provide more diversified growth opportunities over the near and long-term. And with that, I will turn the call over to Glen. Glen?

Thank you, Len. The third quarter was an exceptional one for CVD as he reached new highs on the top and bottom line. Total revenue increased to $10.8 million, up 121.8% year-over-year and slightly above last quarter. Similarly earnings grew to $0.22 per share, an increase of $0.23 over the prior year and $0.02 sequentially. For the second quarter in a row, the majority of our $6.4 million in new orders received from customers other than the large aerospace components supplier. Our ability to respond to customer demand to expand our core business with new projects and customers and maintain a healthy working capital is a testament to our organizational efficiency and financial discipline. Nine months into the year, we have seen the strongest performance in the history of our company with revenue growing 129.7% higher than the same period last year and earnings increasing $0.73 to $0.58 per share from a loss of $0.15 in the same period last year. Gross margin for the quarter was 42.5% higher than our targeted rate of 38% to 40%. This compares to 34.6% last year and 40.7% last quarter. The increase was due to an advantageous combination of product mix at this stage of completion. While margins can vary quarter-to-quarter, we continue to be comfortable with our range of 38% to 40% going forward. Total operating expenses increased slightly quarter-over-quarter to $2.7 million from $2.6 million. Internal R&D investment increased to further expand and enhance our product offerings in preparation for growth from our materials division. R&D increased 42.7% over the prior quarter from 111,000 to 158,000. G&A increased 4.4% from $2.1 million to $2.2 million and selling and shipping decreased slightly. By the end of the third quarter total full time employees reached 204 compared to 173 at the beginning of this year. Third quarter net income grew 10.5% to $1.4 million from $1.3 million in the second quarter and a loss of 85,000 a year ago. Earnings per share climbed 10% to $0.22 compared to $0.20 last quarter and a loss of $0.01 a year ago. Backlog of $20.3 million at the end of the third quarter reflected our ongoing momentum in customer demand. During the quarter net accounts receivable increased to $4.1 million from $1.9 million due to projects and processes and the timing of customer payments. As a result, we ended the quarter with $17.2 million in cash and cash equivalents compared to $21.5 million at the end of last quarter. Working capital increased to $24.7 million from $23.1 million at June 30, 2017. After a record third quarter we expect to close out the year in a strong financial position. We're excited about our recent expansion and the various opportunities that we believe will result from the integration of our strategic acquisitions that extend our portfolio of coating products and services to our customers. With that, I'll turn the call over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Moe Howard [ph] from Bryn Mawr Trust. Please go ahead.

Hi. Your future sounds exciting, but I'm an impatient person to only having own this stock for about eight years. I admit I couldn't run a lemonade stand. But - so I don't know if I'm qualified to question your business abilities. But the coating company a year ago, it’s going to be 18 months before we actually are really in business with it. So everything just takes so long. Is there - will there be enough business sort of in the second half of 2018 to [indiscernible] for all this patience? That's my question.

Well, we're at 35 year overnight success; doing this for a long time and it does take time to build a proper organization. As you build it, you get a little bit more momentum going into the materials area will also take some time. And we expect long-term however that we will be receiving the benefits of what we're investing in today.

But will the costs of getting started damage the earnings per share for six months?

Well, it's affected it slightly already. It will affect it slightly in the future. But long-term if you don't invest dollars into something you're not going to get the return.

I wish you the best needless to say, I’ll see on Thursday.

Okay.

Thank you. Our next question comes from the line of Brett Reiss from Janney Montgomery Scott. Please go ahead.

Yeah. Hi, Len. Hi, Charles.

Hi, Brett.

There was Newsday news - newspaper account you know, when you bought the facility that the expansion would create 115 new jobs. Is that a good number?

That's what we forecast for over a period of about five years.

Okay. So it's five years. The composition of the 115 new jobs you know, how many are engineers which are tough to fill, scientists which have a different timeline. Can you can you give us some description of that?

The majority will be operating personnel. You know, one of the reasons for going into the materials facility is to get some standardization and repeatability and long-term supply contracts and that is done mostly through manufacturing or operating personnel.

Right. Is the facility ready to go or you have to first get in there and do certain things you know, before it's - you know ready to do the things it has to do?

There are certain things that need to be done. The facility is completely built. There is outside work, there is inside work. There is equipment that will have to be moved in, utilities improvement, facility improvements.

Okay. I'll drop back in queue. Len, thank you and I’ll see you Thursday too.

You’re welcome.

Yeah.

Thank you. Our next question comes from the line of Otis Bradley, Private Investor. Please go ahead.

Hi, everybody. Congratulations, that was a fabulous quarter. Is there any area where you see a slowdown, specifically your aerospace?

Well, as I repeat each quarter, we're cautiously optimistic. We continue to be that. And - but in the meantime we are expanding our core business and we are moving ahead with the materials side.

Specifically has General Electric announced anything that could be negative for your business?

I don't keep track of what GE announces. Okay. So I don't have any information on that.

Okay.

You know, we're optimistic in the complete aviation industry, not specifically one company or the other, but overall.

Okay, good. Thank you. See you Thursday.

Thank you. Our next question comes from the line of Will Hamilton from Manatuck Hill. Please go ahead.

Hey. Good afternoon, guys. Just as it relates to the aviation customer. So in the last I guess, six quarters there's been about 40 million of orders received, which I count correctly you've done about 26 million worth. So are we - I know you're cautiously optimistic Len, but are we closer to maybe additional follow-on order from them based on their longer term production plans and where their plan stands?

I'm not privy to their inside thinking. You know, our customer we do discuss you know what is going to be needed in the future. But we really don't address significantly what the exact timeframe is. A lot of it has to do with not only what we do, but with other aspects of that business.

Okay. Just a question then on MesoScribe, I saw that - so you're requiring this for 800,000, 500,000 down right now right?

Yes.

And was there any revenues right now, any backlogs they have currently, any sort of color you can provide on that side of things?

There's been marginal revenue, but that's about it at this point.

Marginal being like less than a $1 million is what you're saying?

That's a fair statement.

And do they have - on that can you explain how the revenues come in, as it just book and ship type or is there a longer term type contracts, orders, backlog?

Similar in a lot of ways to the equipment orders we get, which have to be designed, developed and manufactured. A lot of their orders are in the same manner. They're producing items which are new to the market, new technology and it's not something that just fits and off the shelf type products.

Okay. Is there plan to integrate this into existing facilities or even the new facility. How do we think about – what’s the plan to expand it?

Well, currently they are operating in California, that will continue to be. There's room for expansion out there if needed. And you know, obviously with the new facility here we can also supplement their needs if required.

Okay. And last question. The margin profile is sort of similar to Tantaline or more similar to the CVD business?

No were more similar to Tantaline once they're fully up and running on a higher revenue basis, the margin should be higher than what we see in the equipment business.

All right. Thank you.

Thank you. Our next question comes from the line of Peter Miselis from Research Funding Solutions. Please go ahead.

Thank you. Glen, couple of questions on margins please. The gross margin as you stated was 42.5% above the targeted range. Yet you're still comfortable with the 38% to 40%, 38% to 42% range. As the overall mix gets richer with more materials business, do you see the possibility of raising that targeted gross margin range?

Yes, I do. As it gets more - as materials gets more involved, the margins that we anticipate from that business should be higher than our equipment business, okay, but for the near future at least I'm comfortable with our target range between 38% to 40%.

Okay. What kind of critical mass revenues would you need to see in the materials businesses in the aggregate to get you to increase that comfort range?

I'm not at liberty to disclose this at that point - at this point.

Okay.

We’ll see when we get there.

Okay. Moving on to operating expenses, a little bit higher this quarter than in the second quarter 25.04 versus 23.8 in the last quarter. Can you give us a little color or shed a little light on why the sequential increase from Q2 to Q3?

It's just additional personnel and occupancy costs that we've had.

Okay. And is the additional personnel from sales force additions?

I don't – you mean in the sales area?

Yes, yes, adding staff in the sales area, yes.

Somewhat, yes. It's a combination of sales, as well as R&D expense, as well as the G&A personnel.

Okay. And since you're bringing on more full time employees, would that necessarily imply a higher sustainable or going forward rate on your operating expense line?

Yes.

Okay. All right. And you know, it's nice to see the materials business growing out with the new facility and MesoScribe. As we progressed through 2018 could we expect to see an accelerated pace of acquisitions or an increase in the size of coming acquisitions?

We'll determine that as we go forward. We're looking constantly for new and unique technologies that fit in with our core business. And one of the big things that we’re considering in an acquisition is how can the core company or the equipment business enhance what they're doing, with Tantaline for example we're building the equipment at the equipment division used in the new materials facility. That gives us a significant benefit in increasing our margins going forward. So we do keep an eye on you know, what unique things about the technologies we acquire you know, will benefit us, not only are we looking for inorganic you know, expansion, we're also looking at organic. I don't know most people picked up in one of the press releases, in one of the last two was that we also booked an order in substrate materials for the electronics industry that's moving into the facility for materials and we also have orders now for ceramic matrix composite applications that we’re also moving in there.

Okay. Great. Thanks, Len and Glen. Looks like you have some nice momentum in that area. Thanks.

Thank you.

Thank you. Our next question comes from the line of Russ Mack, a Private Investor. Please go ahead.

Hi. Can you tell us what percentage of your business comes from China and to what extent is China a competitor for our company? Thank you.

China traditionally has not been a competitor. In the past the percentage from China can vary significantly, you know in a given year, lately it's been a small percentage going into the past or in the past we've seen as much as about 20%, 30% going into China. We see them more as potential additional expansion in the future with some of the technology that will develop in the materials facility, if it benefits us and we wish to put a facility over in the Far East.

Thank you.

Thank you. Our next question is a follow up from the line of Brett Reiss with Janney Montgomery Scott. Please go ahead.

Yeah, thanks for the additional question. The - what growth rate are you targeting or think you can achieve in the core business?

The core business traditionally goes you know, anywhere from 10% to 20% a year you know, some years it’s higher, some years its lower, but were looking at 10% to 20% is the increase.

Well, it be nice as a kind of underlying base you are able to achieve that with all the other good things, so that would be great. Thank you.

That’s something that we have been able to achieve over the past six months, as we mentioned that over 90% of our orders that we've received have been from the core business.

Right, right. You know, when we consolidated some years ago from the two facilities into the one facility you know, that didn’t result in some hick ups to operations. Do you anticipate that kind of large hick up as we bring on this new facility?

No we're not moving out of our existing facility. The equipment division will continue to operate properly the way it has been over the last number of quarters. We want to get the new materials facility up and running as quick, so we can get the Tantaline and the electronic and ceramic matrix composite applications moving forward. But it's only a hiccup in a sense of not being able to move quick enough to leverage the new facilities to give us a return on investment there.

Right. All right. Thanks for taking the additional questions.

Thank you. Our next question is a follow up from the line of Moe Howard [ph] with Bryn Mawr Trust. Please go ahead.

Okay. The last - maybe a few months ago you announced the addition of a veteran of the electronic industry who you were very proud to have joined the team. Has it worked out pretty well or it’s been so-so?

Well, I personally think oh, yes.

He is sitting right here next.

Okay. I'd like to meet him on Thursday. Talk to you later. Thank you again, bye.

You’re welcome.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

Okay. Thank you for attending the conference call and I look forward to talking to as many of you on Thursday. That can be at our annual shareholders meeting or to talk to you next quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for participation and have a wonderful day.