CVV - NASDAQ

Greetings, and welcome to the CVD Equipment Corporation 2022 Fourth Quarter and Full Fiscal 2022 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 Web site 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 that 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 the company's 10-K for the year ended December 31, 2022. Actual results may differ materially from those described during the 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.

Thank you, Paul. Welcome to 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 fourth quarter 2022 and our full fiscal year 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. Now, for our fourth quarter and 2022 results, we are pleased to be reporting a strong revenue growth for fiscal 2022, an increase of 57% over prior fiscal year. The fourth quarter revenue, while lower than our third quarter 2022, was 53% higher than our fourth quarter 2021. During the fourth quarter 2022, we recognized net income of $1.5 million. For the full fiscal year 2022, we recognized a net loss of $224,000. Both periods include the recognition of other income of $1.5 million for a federal employee retention credit. The 2022 and fourth quarter operating performance is aligned with our strategy of business focus, revenue growth, and return to profitability. The timing of the demand of our products, it's dependent on many factors such as our customers' market conditions, the acceptance of our products by our customers, and the general economic conditions. While our revenue and profitability will continue to fluctuate, and due to this timing of orders and shipments, we believe that we are on the right track to achieve consistent, long-term profitability in the years ahead. 2022 was an exciting period for all the stakeholders of CVD Equipment. The 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, specifically silicon carbide is fueling our present growth. The market segment focuses on high-power electronics which are used in the growing electric vehicle market. The end use applications are electric motor power converters, power charging, and transmission. For 2022, we have received orders exceeding $33 million for our CVD Systems and Services segment, as compared to approximately $31 million for the same period, 2021. This is a 52% year-on-year increase in orders for the CVD segment. Our Q4 2022 orders were $9.2 million. The 2022 orders included 24 additional units of our recently launched PVT-150 system for silicon carbide crystal growth. All unit orders were from our initial alpha/beta customer, and amounted to approximately $8.8 million. 10 of the 24 PVT-150 systems were ordered in the fourth quarter. The PVT-150 system is utilized to grow silicon carbide crystals which are [subsequently] (ph) fabricated into silicon carbide wafers. In the fourth quarter, we had the initial launch of the PVT-150 to the broader base of silicon carbide crystal growth customers. In the fourth quarter, we were selected and received a system from a major aircraft engine manufacturer, specifically the order was for a production chemical vapor and infiltration system valued at approximately $3.7 million. As I stated earlier, this system will be used to manufacture ceramic matrix composite materials for aerospace gas turbine engine components. 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's business. The remainder of the 2022 orders were for our legacy advanced R&D and FirstNano system's SDC division products as well as our non-core segments. Our SDC segment had increased sales over prior year of approximately 35%. That reflects a higher demand for our gas and liquid control system products. SDC is both an enabling captive supplier to the CVD Equipment group, as well as emergent supplier to the microelectronics and industrial markets. Our Tantaline and MesoScribe, which we deem as non-core product lines, were profitable in 2022. Supply chain issues relative to both inflation and lead times continue to negatively impact our revenue timing and profitability for all our segments of the company. In 2022, we installed additional machine centers, and added capacity to our Central Islip facility to increase our system output and to continue to drive towards increased operational self-reliance. The management of our product lead times along with the precise control of our equipment has been a competitive advantage for us. I would like to turn the call over to our CFO, Rich Catalano, who will provide you our fourth quarter and 2022 financial summary.

Thank you, Manny, and good afternoon. Our revenue for the fourth quarter of 2022 was $7.2 million. This compares to $4.7 million in the prior year fourth quarter. That represents an increase of $2.5 million or 53%. This increase in our revenue was primarily attributable to our PVT-150 product line which represented approximately $2.2 million or 30% of all revenues in the fourth quarter, as compared to no such revenues in the prior year fourth quarter. Our operating loss for the fourth quarter was $221,000. This was an improvement over the prior year, an improvement of approximately $800,000. This improvement in our operating results was driven by the increased revenue of $2.5 million that resulted in increased gross profit of $1.2 million that was offset somewhat by an increase in operating expenses of approximately $0.4 million. Our gross profit percentage was 28% in the fourth quarter as -- in this fourth quarter as compared to 16% in the prior-year fourth quarter. This improvement on our gross profit was primarily the result of leveraging our fixed costs over higher sales levels, as well as an improved product mix. These benefits were offset somewhat by increased material costs in material components, as well as compensation costs. The increase in our operating expenses are principally due to certain higher employee-related costs to support the growth of our business. That's including in marketing, as well as some general increase in our personnel cost overall. As Manny mentioned in the fourth quarter of '22, we completed our analysis of whether the company was entitled to an employee retention credit, and we determined that for two quarters in 2021, we were entitled to a credit of $1.5 million, and that was recorded as a non-operating income item in the fourth quarter. Based on the recognition of that ERC credit, our net income was $1.5 million, or about $0.23 per share, for both basic and diluted. Our fourth quarter of this year also benefited from interest income of $88,000 and a foreign exchange gain on our intercompany loan with our Denmark subsidiary of about $155,000. Overall, our net loss for the quarter was $1.2 million. Net income -- our net loss for the fourth quarter '21, I should say was $1.2 million or $0.18 per share. Just turning to the full-year of 2022 briefly, the revenue was $25.8 million. This compares to $16.7 in the same period of 2021. That's an increase of $9.4 million, or 57%. Similar to the fourth quarter, this increase in revenue was attributable to our PVT-150 product line, which represented approximately $7.5 million or 29% of our revenue in 2022. Again, we had no such revenues in '21. The operating loss for fiscal '22, overall for the full-year was $1.8 million. This represents an improvement of $2.8 million when we compare it to the loss we experienced in 2021 of $4.7 million. These improvements again in operating results were principally related of course to the increased revenue of 57% or $9.4 million, and that resulted in increased gross profit of $3.6 million. We also had an offsetting operating expense increase of approximately $700,000. Our gross profit for the full fiscal year was 26%. This compares to 19%. Again, the improvement is related to the fact that we had much higher sales levels and allowed us to spread our overhead costs. We also had some increase in our revenue operating expenses. We did have some, like I mentioned for the quarter, we had some increases as we grew the business, including marketing and general increases in our personnel costs. We did have a one-time severance charge of approximately $134,000. These increases were offset. We did have some reductions that were favorable. In July 2021, we did sell our building, another building we had here in Central Islip. The reduction in the operating cost for that building benefited operating expenses by approximately $600,000, and we also had lower professional fees of about $300,000 for the full-year. As previously mentioned, the year also benefited from the recognition of the employee retention credit. I would mention that in the prior-year, we did have two one-time benefits. We had a benefit of $6.9 million from the sale of a building, and we had $2.4 million from forgiveness of our PPP loan that obviously helped the bottom line. So, overall the net income for 2022 was -- net loss I should say for 2022 was $224,000 or $0.03 per share. The loss again, that includes the $1.5 million. Net income for the prior-year was $4.8 million or $0.71 earnings per share. But keep in mind, there were those two non-operating gains that totaled $9.3 million. Now, turning to our backlog, our backlog at December 31 2022 was $17.8 million. This compares to $10.4 million at the beginning of the year and this represents an increase of $7.4 million. Our backlog consists principally of remaining performance obligations that we have on our contracts in progress about $16.2 million and the balance of $1.6 million represents unfulfilled purchase orders that we've received. Turning to our balance sheet, our cash and cash equivalents at December 31 was $14.4 million as compared to $16.7 in the prior-year. This was a decrease of $2.3 million, very little movement from operations but that $2.3 million was principally the payoff of our mortgage on our Central Islip facility. And also we had capital expenditures of about $700,000. Our working capital at the end of this year is $15.5 million and this compares to $16.7 million at December 31, 2021. Just some closing notes, we are unable to predict the impact of the current economic and geopolitical uncertainties that will have on our financial position or our future results of operations and cash flows. Our return to consistent profitability will be dependent upon other things, the receipt of new equipment orders, our ability to mitigate the impact of supply chain disruptions and the inflationary pressures, as well as managing our planned capital expenditures and our operating expenses. In addition, our revenues and orders have historically fluctuated based on changes in order rate as well as 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, and we believe our cash and cash equivalents and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months, we will continue to assess our operations and take actions anticipated to maintain our operating cash to support our working capital needs. I'll now turn it back over to Manny.

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

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Brett Reiss with Janney Montgomery Scott. Please proceed with your question.

Hi, Manny. Hi, Rich.

Hey, Brett, how are you? Good to hear from you.

Good, good, another good respectable quarter.

Thank you.

The cash from the third quarter to fourth quarter was up $2.5 million. Half of it was a reduction in working capital. The other half, was that positive cash flow generation?

Hi, Brett. This is Rich. Yes, I think our cash flow does fluctuate depending on as we complete contracts there will be payments toward the end of the contract. Also, upon the receipt of contracts, we typically receive a down payment for a certain percentage of the contract price. So, you will see some fluctuations in our cash balance from period-to-period.

Right. Now, the whole potential credit contraction that may unfold with the banks, it's basically a non-event for us because we really are not drawing on any bank lines of credit. We're in a commanding cash position. Is that a fair statement?

As at this point, we have very little debt after we paid off our mortgage loan last -- during the year -- during this year, I should say in 2022, we just took out one small equipment loan for about $400,000. And at this point, we're not relying on credit lines and the like. We're working with the working capital and the cash balances that we have.

Right. And the supply chain issues, they seem to be abating?

Well, they're being managed, Brett. We still have day-to-day, hand-to-hand combat with some of our suppliers, but we've been able to manage through that process in 2022. So, I can't say that it's abated, but we've taken actions to reduce the impact both on inflationary and supply chain delays. It doesn't mean that we'll continue, I think we all know there's quite a bit of inflationary pressure out there.

Right, I'll drop back in queue. Thank you.

Thank you, Brett.

Thank you, Brett.

Thank you. Our next question is from [John Gruber] (ph), private investor. Please proceed with your question.

Good afternoon. Yes, on the PVT-150, what's the outlook, and what's the gross margin profile of that product versus the corporate average? I’ll start with that question.

Of course. Hey, John, how are you. Glad you're on the call. This is Manny. First, the 150, one of the major differences on the 150, the PVT-150 versus some of the more what we have termed to be legacy products is that the 150 is a make-to-order versus a design make-to-order. So, by DNA, that gross margins are improved greatly on the PVT-150 products in that you are not engineering each and every one of the tools and charging the cost of goods sold line with that engineering cost. So, you will inherently see better gross margins on the make-to-orders versus the design make-to-order. With that said, we typically don't give out, specifically for our customers' sake, our gross margins. But we would anticipate that the contribution margin on increased sales on that should be 50%-plus as we increase the order rate for the PVT-150s.

So, 50% plus, that would be good. And where do we stand on getting new orders, new nameplates for the PVT-150? And what progress have you made with just the big boys in the boule business - in the silicon carbide business?

Sure. So, you've been doing this for a while. And so, the answer to your question is we follow a pretty regimented PLC process, product lifecycle. So, we developed a product. We shipped the first one, back in 2011. We productized it starting in December of 2021, and we started shipping in July of 2022. Typically, you ship one or two of them as alphas and betas. Well, we ended up shipping 20 of them last year, alphas and betas that I think are performing well in the installed base. And as we said, we have one customer for the alphas and betas. We subsequently received an order for 10 more production tools. And the only differences on those are documentation control reduction in workflows in the manufacturing shop, and we just term them alphas, betas, and production systems. You really can't tell the difference by looking at them. We launched the product officially this quarter. And we started to engage on different segments of the vertical integration chain. And what I mean by that is you have the boule manufacturer or boule wafer manufacturers, that's all they do, to sell wafer. And they're our first entrée into that space. And there are couple emerging ones. And there's one established. And then you have the folks that make their own equipment and make their own boules and make their own wafers. And then you have the fully integrated. And the fully integrated would be the onsemis,, the Wolfspeeds, and STs, II-VI, they, for the most part, make their own equipment, grow their boules, make their wafers, and also make devices. So, our primary attack was with our first customer on the boule wafer. We launched the product literally in the January-February timeframe, and we've been going to conferences. And we're starting now to be recognized as a provider of equipment to the crystal boule growth folks. It's going to take a bit of time for us to get some traction and adoption. And so what I would say with that is we're providing quotations and presentations now to several potential customers.

So, at year-end -- at year-end of this - calendar year-end, how many new customers do you think you could add into the portfolio of the PVT product for the boules?

In addition to serving the existing customer, because all customers are key, we -- our objective, and sales has an objective to penetrate two additional accounts.

Thank you very much. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Well, we appreciate the attendance on the call, and the support, and the loyalty from our shareholders and some of our employees who are also on the call. We again are cautiously optimistic. We have come from a position where we have grown as a team, since 2021, grown the bookings revenue, improved the gross margin line, operating profit line, and have shored up the balance sheet in that period of time. We continue to be cautiously optimistic and conservative. As we move forward, we look forward to a successful 2023. And again, we appreciate your attendance and support. Thank you.