CVD Equipment Corporation (CVV) Q1 2018 Earnings Report, Transcript and Summary

Greeting and welcome to the CVD Equipment’s 2017 Full-Year Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. [indiscernible]. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone and thank you for joining us today for our 2017 year-end 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 to the Investor Relations section of our Web site at www.cvdequipment.com. Before we begin, I would like to remind you that many of our 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, 2017. 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 Len. Len?

Good afternoon, everyone, and thank you for joining our 2017 year-end 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 financial results, and then we will take questions. 2017 was an exciting year for CVD as we successfully executed on our delivery of orders and made additional progress on our objectives of accelerating growth, smoothing out revenue and becoming more diversified by providing advanced material solutions to enable new and unique applications. For the year, revenue almost doubled and earnings grew exponentially. In December we completed our purchase of 180,000 square foot facility in centralized New York. The facility will accommodate the manufacturing, engineering, process development, and administration space for our subsidiary CVD Materials. Our focus now is to bring the new facility online as quickly as possible and accelerate our capabilities of providing materials, coatings and surface treatments to meet our customer's needs. We plan to hire additional engineers, scientists, technicians, and office personnel as we work with customers to create a range of advanced high performance materials to drive future growth across additional markets. Some of the steps we've taken to expand our materials offerings are: the acquisition of MesoScribe in the fourth quarter broadened our materials operations with high performance [indiscernible] and sensors to aerospace, satellite, power generation, defense and other markets. This acquisition was part of our strategic plan to leverage our equipment know-how, business infrastructure, and proven ability to scale up new technologies, all offering high value added materials, products and services and was another step in our combined organic and acquisition gross initiative for 2017. We recently signed a distribution agreement to market CVD's Tantaline anti-corrosion surface treatment services throughout the Netherlands, Belgium, Germany, Luxembourg, and Switzerland. Tantaline's innovative chemical vapor technology is used to create a Tantaline surface alloy on parts such as valves, fittings, process chambers, mixers, medical devices, and other areas that are prone to corrosion and harsh environments. This is our first distributor in Europe and is part of our global growth strategy to deliver quality corrosion resistant applications and components to more industrial companies around the world. Last quarter we announced expanding our CVD Materials offerings with coating composite materials for medical application and gallium nitride materials for electronic applications. We’ve continued making progress in these areas and other markets and to partner with end users to supply the material coatings they require. In addition to our expansion in the materials areas, our equipment offerings continued to find new markets and applications. We received equipment orders from major universities and research laboratories with the growth of LED substrate and 2D TMD semiconductor materials. TMD's are atomically thin 2D films of optoelectronic semiconductor materials with diverse physical properties that are not achievable in both semiconductors. Exciting applications include flexible electronic and optoelectronic devices, biosensors and battery technology. In summary, this is a very exciting time for CVD. The core competencies we have developed in equipment and materials as well as in systems, manufacturing and process solutions should accelerate our penetration of existing and new vertical markets, which should broaden our customer base and provide more diversified growth opportunities over the near and long-term. With that, I will turn the call over to Glen. Glen?

Thank you, Len. The momentum we saw in 2017 resulted in the strongest year ever in our company's history. Revenue for 2017 grew 96.3% to $41.1 million from $21 million in the prior year. Gross margin for the year was 42.8% compared to 33.9% in 2016. The increase was due to a combination of the higher revenue, a favorable product mix in the stage of order completion. While our gross margin can vary quarter-to-quarter, overall we continue to be comfortable with the range of 38% to 40% going forward. Total operating expenses for the year were $10.4 million or 25.2% of revenue compared to $7.8 million or 37.4% of revenue for 2016. Internal R&D investment increased by .8% to $437,000. Selling and shipping increased 28% to $1.4 million and G&A increased by 23.3% to $8.5 million. We continue to invest in technical, research and development, personnel and facilities to support the expansion of our CVD Materials, Tantaline, and MesoScribe subsidiaries. These investments are providing the platform that will drive our future growth. For the year, earnings grew to $5.3 million or $0.82 per diluted share compared to a loss of $149,000 for a loss of $0.02 per diluted share in the prior year. With all that we accomplished during the year, at the end of 2017, we still maintain a healthy net cash balance of $14.2 million, although less than the $21.7 million at year-end 2016. The decrease of $7.5 million was a result of investments related to the acquisition of MesoScribe, the purchase of our new facility as well as the timing of payments received from customers. Accounts receivable increased by $1.5 million to $2.1 million at year-end compared to $600,000 at year-end 2016. This increase is principally due to the timing of shipments in customer payments. Working capital at the end of 2017 was $22.4 million compared to $20.5 million at the end of 2016. To summarize, 2017 was a truly satisfying year for CVD. Our strategy of diversification by focusing on opportunities with both new and existing customers throughout the year resulted in 64.4% of our orders coming from customers other than our large aerospace component supplier compared to only 22% in 2016. We delivered on our growth strategy of expansion with the acquisition of MesoScribe and the purchase of the new facility, which will provide us with a bit added capability and future capacity to expand and further diversify our core customer base. These accomplishments together with our solid financial position have set the stage for an exciting future. With that, I will turn the call over to the operator for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Brett Reiss with Janney Montgomery Scott. Please proceed with your question.

Yes. Hi, Len. Hi, Glen. How are you doing?

Good. How are you, Brett?

I’m good. I’m good. In the past you said you could grow your core business other than aerospace 10% to 15%. Are you able to hit that sequentially quarter to -- from the third quarter?

Yes. From a -- an order perspective, our orders in the fourth quarter grew from our core business to approximately 41% other than -- that [indiscernible] our aerospace customer related.

That’s great. How much more do you -- what remain in the work down of the backlog from the large aerospace customer?

It's probably in other ones, two quarters.

Okay. Now cash quarter-to-quarter went down $3 million, what did you use the money for in this last quarter?

Primarily the building purchase.

Okay. Could you give us an update on the status of moving in and utilizing the facility?

We are waiting for permits, in the meantime we are waiting. We are painting the facility, taking care of the floor [ph], some lighting, various things that we can do without permits. We’ve submitted for the permits and we are waiting to -- for them to get back to us.

Right. Have you started interviewing for the additional engineering talent that’s going to open the [indiscernible] in the facility?

We have.

Do you have backlog numbers that you can share with us?

Yes. As of December 31, 2017, our backlog was $15.5 million.

Okay. I’m going to drop back in queue. Thank you for taking my questions.

You’re welcome.

Our next question comes from Will Hamilton of Manatuck Hill. Please proceed with your question.

Hi, guys. So based on that backlog number, was orders around $4.5 million? I don’t know if I miss that in your comments over the orders.

Orders were just below $5.5 million. One thing to take note though at the backlog is that about -- of our backlog -- of the $15.5 million, only $6.5 million remains from our largest customer. The rest is backlog from -- other than the largest customer. Although it went down, that is still now more concentrated in a diversified base of customers.

Okay. So of the $15.5 million, $6.5 million you’re saying is the aviation? Is that what you just said?

Yes.

Okay. Okay, so then during the quarter what was that aviation customer in terms of revenue?

About $6.7 million.

Okay. So like Glen you said essentially one quarter left or so, maybe two if you stretch it out?

One to two.

Yes. So what’s the sort of dialogue any in terms of another order from them? Anything, any color you can provide there?

No different than before. We're optimistic and we will have to wait and see.

Can you guys give us any color on Q1 orders, since it's now April 2?

Not at this time.

Any plans in the future now that we’ve a new ERP system in to get these numbers out faster than two days after the quarter, the following quarter?

That’s definitely the intent going forward hopefully through the many quarters, maybe not so much with the second quarter -- the first quarter, excuse me, but starting in the second we should start to [indiscernible].

Okay. That will be great. Lastly, just in terms of the non-aviation revenue, could you ballpark what you think it could be as a percentage of sales in 2018?

Say that again please, Will.

Can you give us a percentage of what you think the non-aviation revenue will be in 2018? Roughly speak, I know you don't like to provide guidance, but just could it be 10%, 15%, 20%, what do you …?

I expect it to be much larger than that, the non-aviation section.

So more than 50% of the revenue?

Yes.

Okay.

Right now we're [multiple speakers] anticipating major orders only in the non-aerospace.

Okay. And most of that coming from the new Tantaline business or some other …?

No, our existing core business and we will keep building on the MesoScribe and Tantaline this year.

Okay. All right. Thank you.

Our next question comes from Gordon Howard of Bryn Mawr Trust. Please proceed with your question.

Hi. My question is, what’s the Tantaline [indiscernible], everything takes forever. This new building sounds like waiting for permits, drives us nuts, but that's what it is. Do you expect Tantaline for getting what they do in Europe to be -- maybe in the multimillions in 2019?

I hope so. I anticipate that. The need is there. It's a matter of us getting the facility here going so we could do some more research and also provide some production add up here.

Okay, great.

Only the research we need to get moving on a lot quicker.

Okay. Thank you.

You’re welcome.

Our next question comes from Jay Harris of Axiom Capital Management. Please proceed with your question.

I wonder if you could provide a little color on what the permitting process is all about? How long after the permits issue would it take you to get into production? A little about the ordering pattern or the perspective ordering pattern from customers, any color you could provide would be appreciated.

Well, some of the orders we already have from customers that we will probably try to start producing here in our existing facility, but eventually move it over to the new facility. The permits will take anywhere from 1 to 6 months depending upon the different phases that we’re trying to bring on the new building. Once we have the initial permit, it will still be a number of months before we can get into production because we can't really do any work in there that has to do with the manufacturing until after we get our permits.

And -- so that means you will be installing equipment after the permits issue?

Yes.

And what do you think the install -- the time it will take to install that equipment?

Well, we’re doing it in different phases. And the first phase will be -- hopefully we will have equipment installed by the end of the second quarter. But then we’re going to go with additional phases, so we can get at least some production going where we will need additional permits for additional equipment and additional things that we're doing in the building.

What is the nature of your capacity to service customers out of before the new building is up and running?

It's okay at this point. It's somewhat limited, especially we get any large capital equipment orders that’s going to limit us a little bit more. That’s why we’re trying to push out the moving into the new building with the materials operations as soon as possible.

Does that mean that you’re likely to have materials revenues in the June quarter?

Well, we’re already having some materials revenue already, okay, both at Tantaline, MesoScribe and some of the CVD Materials orders. They haven't been as significant, but I think you will start to see an increase in them starting in second quarter.

And are you going to be in the position to breakout those revenues as a percentage of total when you report the second quarter?

We’re going to start doing that. I'm not sure exactly which quarter we are going to start, as soon as it becomes somewhat material.

Okay. And can you provide some color -- I know you don't give guidance, but can you provide some color as to how you look at '18 as a whole relative to on the top line, relative to '17? And what are the key variables?

Key variables could be associated with our large aerospace customer, what they intend to do if anything this year. Other than that we're proceeding it as quick as we can with our core business and with the materials side, which -- we are making significant movement on it and we’re pleased with this increases over the last two quarters.

All right. Well, looking forward to future indications of progress. Thank you.

Thank you.

[Operator Instructions] Our next question comes from Gordon Howard of Bryn Mawr Trust. Please proceed with your question.

I have a [indiscernible] question probably. Here all these ads on TV where New York State was to get business. I know they made it helpful to you in buying these buildings and help financing and all that stuff. Why wouldn't the permitters [indiscernible] working to help create jobs? What keeps them so slow?

We do have some contacts at the local permitting office and they’re helping us quite a bit, but it still takes time. Lot of these state [indiscernible] offices are not necessarily funded as well as they would like to be to employ the staff they need to get the building permits in the [indiscernible]. But we are working with them as close as we can and, yes, they are helping us.

Okay. Thank you.

Ladies and gentlemen, we’ve reached the end of our question-and-answer session. I would like to turn the call back to Mr. Leonard Rosenbaum for closing comments.

Thanks everybody for joining us for our 2017 year-end conference call, and I look forward to speaking to you in about six weeks for our first quarter 2018 call. Thank you very much.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.