CVV - CVD Equipment Corporation (CVV) CEO Emmanuel Lakios on Q2 2022 Results - Earnings Call Transcript
CVD Equipment Corporation (CVV)
Q2 2022 Results Conference Call
August 15, 2022 05:00 PM ET
Company Participants
Emmanuel Lakios - President and CEO
Thomas McNeill - EVP and CFO
Conference Call Participants
Brett Reiss - Janney Montgomery Scott
Presentation
Operator
Greetings, and welcome to the CVD Equipment 2022 Second Quarter Results Conference Call. [Operator Instructions] 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 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 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, 2021. 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 the new circumstances or revised expectations.
Now I would like to turn the call over to Manny.
Emmanuel Lakios
Thank you, Diego. Welcome to our 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 second quarter 2022 performance and important company developments and pertinent information related to our business. While we will be providing [indiscernible] information, your thoughts are important to us, and we look forward to your questions at the end of our conference call in the Q&A session.
The first half of 2022, as we previously indicated, has been an exciting period for all the stakeholders of CVD Equipment. The order rate for the first half lends support to our belief that we are on the path to future profitability and growth. Our strategy of focusing on markets that support the electrification of everything is fueling our present growth. The market segment includes electric vehicle battery technology as well as high-power electronics for charging and power transmission.
Our Q2 2022 orders were $12.6 million, compared to $5.8 million in Q1 of the prior year. In the first half of 2022, we have received orders exceeding $16 million for our CVD Equipment products, as compared to approximately $9.6 million for the same period in 2021. That is a 72% year-on-year increase in orders for the company. These orders primarily consisted of 21 FirstNano CVD systems, compared to 23 systems orders for all of 2021. Of the 21 system orders, 14 are for our recently announced PVT-150 system, addressing silicon carbide growth and processing, 2 were for superconducting tape applications, and the remainder of the system orders are for battery nanomaterials, both R&D and production, advanced carbon-based capacitors and for our legacy advanced R&D FirstNano system. The systems are planned for shipments starting in the fourth quarter and into 2023.
We also received orders for consumables and spare parts that serve our installed base in the aerospace market. We have taken the last year to expand our engagement with additional gas turbine engine manufacturers for systems to produce ceramic matrix composite materials. This is a sign that the aerospace market is beginning to recover. However, we do not expect it to recover until at least 2023.
Our SDC product line also had an increase in order rates in the second quarter. Supply chain issues continue to negatively impact our revenue and profitability for all the segments of the company. The culprit pandemic and geopolitical instability in Russia, Ukraine and Eastern Europe have caused issues in the global supply chain. The negative effects have been felt by all companies with increases in commodity and product material cost as well as in product delivery uncertainty and unpredictability.
We continue to drive towards operational self-reliance. We received and installed additional machine centers in our Central Islip facility to offset supply chain issues related to machine components. We also are working closely with our OEM supply chain to mitigate as much as possible the delays in price escalations in components and materials.
I would like to now introduce our CFO, Mr. Thomas McNeill, who will provide our second quarter and year-to-date 2022 financial summary.
Thomas McNeill
Thank you, Manny, and good afternoon. CVD's revenue for the second quarter of 2022 was $5.8 million, as compared to $4 million for the second quarter of 2021, an increase of $1.8 million or 44%. Net loss for the second quarter of 2022 was $0.8 million or $0.12 per diluted share, as compared to net income of $1.5 million or $0.22 per diluted share in the second quarter of 2021. However, that quarter included a $2.4 million gain on debt extinguishment from the forgiveness of CVD's PPP loan.
CVD's operating loss for the second quarter of 2022 decreased by $0.2 million to $0.9 million for the second quarter of 2022, as compared to an operating loss of $1.1 million for the second quarter of 2021. This decrease was a result of increased revenue of $1.8 million and the resulting improvement of gross profit margins of $0.4 million, offset by increased operating expenses of $0.2 million. The increase in gross profit and gross profit margins was primarily the result of leveraging fixed costs on higher sales levels and our improved product mix, which offset certain component cost increases and compensation costs. In addition, operating expenses increased due to higher employee-related costs to support our greater demand and marketing and engineering efforts.
For the 6 months ended June 30, 2022, revenue was $10.5 million, as compared to $7.4 million in the same period in 2021, an increase of $3.1 million or 41.4%. Net loss for the 6 months ended June 30, 2022, was $1.8 million or $0.27 per diluted share, as compared to a net loss of $35,125 or $0.01 per diluted share for the same period in 2021. And again, that small loss of $35,000 in 2021 included a $2.4 million gain on debt extinguishment from the forgiveness of CVD's PPP loan.
For the 6 months ended June 30, 2022, CVD's operating loss decreased by $0.8 million to $1.9 million, as compared to an operating loss of $2.7 million for the same period in 2021. This improvement was the result of increased revenue of $3.1 million and the result in improvement of gross profit margins of $0.8 million and decreased operating expenses of $0.1 million. The increase in gross profit and margins was primarily the result of leveraging fixed costs on higher sales levels and improved product mix, which more than offset certain component cost increases and compensation costs.
Beginning in Q3 2021 and continuing to date, CVD has been impacted by increased costs on certain manufacturing material components as well as delays in supply chain deliveries. These increases and delays may also impact CVD's ability to recognize revenue and result in reduced gross profit margins in future quarters, extended manufacturing lead times and reduced manufacturing efficiencies. CVD is also seeing inflationary effects that have resulted in increased cost for labor materials. We have placed orders with increased lead times to attempt to mitigate the manufacturing delays and continue to assess other material suppliers in an effort to alleviate the potential cost impacts. In addition, CVD is utilizing its flexible in-house manufacturing to further mitigate potential delivery delays and material cost increases.
Now turning to our backlog. Our backlog at June 30, 2022, was $16.7 million, as compared to $10.4 million at December 31, 2021, an increase of $6.3 million or 60.5%. This increase is due to the timing of the receipt of new orders for the 6 months ended June 30, 2022, of $16.7 million reduced by recognized revenue of $10.5 million. While the negative effects of the COVID-19 pandemic continue to impact the aerospace industry, generally in the form of reduced long distance travel and reduction of turbine engine sales, industry reports indicate improvement may begin to occur in the late '22, 2023 time frame.
Turning to our liquidity. Our cash and cash equivalents at June 30, 2022, was $12.2 million, as compared to $16.7 million at December 31, 2021. This decrease of $4.5 million is primarily the result of the satisfaction of our mortgage debt on our 555 facility in the amount of $1.7 million as well as our net loss adjusted for noncash items of $1.3 million during the 6 months ended June 30 and our capital expenses of $0.5 million to improve our manufacturing to further mitigate potential delivery delays and reduce costs. Our working capital was $15 million at June 30, as compared to $16.7 million at December 31, 2021, a decrease of $1.7 million or 10%.
The longer-term impacts from the COVID-19 outbreak are highly uncertain and cannot be predicted, especially now with the impacts on our supply chain as we previously discussed. And while we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there could be no assurance of the ultimate impact on the length of time period that the supply chain factors may impact our business. Our return to profitability is dependent upon, among other things: the substantial completion and delivery of existing orders, which include the significant first half of 2022 orders of approximately $16.7 million; the ongoing receipt of new equipment orders and others; the lessening of the ongoing effects of the COVID-19 pandemic on our business and the aerospace market; managing through the supply chain issues discussed; and improvement in operational efficiencies as well as managing planned capital expenditures and operating expenses.
Based upon all of these factors, we believe that our cash and cash equivalent positions and projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 to 18 months of the filing of our 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.
I'll now turn the call back over to Manny.
Emmanuel Lakios
Tom, thank you for your presentation. In summary, the second quarter and first half of 2022 have built on our efforts of 2021, which were and which was a year of transition, reorganization and focus on everything we do and those who we serve. Our focus remains on our customers, markets, employees, shareholders and the pursuit of growth and return to profitability. We look forward to the second half of 2022 and continue to be cautiously optimistic. Your comments and questions are important to us. With the close of our presentation, I'd like to open up the floor to your questions. Diego?
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Brett Reiss with Janney Montgomery Scott.
Brett Reiss
Just a headcount question, the amount of employees this quarter versus last quarter. And are you looking to hire more people? Or is your headcount pretty much where you want it to be?
Emmanuel Lakios
We -- clearly, with the order rate as strong as it's been, we've added additional capacity in our manufacturing floor. We've gone to a second shift in our machine shop. Again, that's part of this self-reliance. So we've added folks in the machine shop, in inspection, in welding, assembly, wiring. Those have occurred during this year. As you remember, in 2021, we went through a pruning exercise of -- and rightsizing the organization for the business level. We continue to rightsize the business. We've increased our staffing approximately 15 to 18 personnel [indiscernible] during this year.
Brett Reiss
And were you able to find the people with the proper skill sets at the right labor cost? Or is...
Emmanuel Lakios
That labor cost, I mean that is, I would say, that there's a lot under that watermark. We are finding -- we're able to attract talent, both in our engineering and also operations. We're very pleased with the people we brought on board this year. And it is in line with our ongoing labor costs here on the island. So I would say, yes, it's been positive for us. It's not a slam dunk, but we've also brought on -- one of our hires was a new HR director, and she's just done a wonderful job of being able to do and conduct talent acquisition over the last several months.
Brett Reiss
Right, right. That's good to hear. Now the things you're doing in-house to mitigate supply chain issues, if the supply chain issues receded and abated, would you still continue to make the things you've taken in-house? And would that going forward improve margins?
Emmanuel Lakios
So the company has -- interesting that you say that. Yes, it will improve margins because, obviously, we don't pay somebody else's gross margin. And the company has historically been a very vertically integrated house, primarily because it was doing many one-offs, and it was more cost-effective to do that. What we found is our investment in some capital equipment this year has allowed us to elevate our level of excellence in machining, coupled that with -- so that's capability -- coupled that with going to a second shift has allowed us to do additional capacity.
I would anticipate that we will continue doing that in that it does greatly support our competitiveness in this marketplace. Do I see the effect of the supply chain going away in the next 3, 6, 9 months? My crystal ball is as good as anybody else's. I think we've wisely invested. The equipment is installed, and all of it will be operational and producing value by the end of this month. So yes, there is a gross margin benefit. Yes, there is a competitive advantage. We can deliver products in much shorter periods of time. I would say that one example is our PVT-150. We received orders back, as you remember, in December, late December. We have already shipped several of those in approximately 6 months. That's world-class, and I compliment the entire team, both engineering and manufacturing, for that. So yes, there is an advantage. Yes, we'll continue to do that.
Brett Reiss
Great. Now one last one. In the virtual annual meeting, you listed 3 types of different devices that you manufacture with respect to battery technology, a carbon 300 machine, a powder coat 1100 and then the PVT-150, which seems to have become the crown jewel. Can you just briefly, to this lay person who's not an engineer, tell me what each of these devices do and that part of the $300 million total addressable market you mentioned at the annual meeting?
Emmanuel Lakios
Yes. So yes, it is. And it's the electrification of everything. It's not entirely due to -- it's not battery material per se, all 3 of those applications. The carbon 300 was launched earlier in the year. We've gotten multiple orders for that. It was launched latter part of 2021. And we launched, being delivered to customer, and we've had multiple orders for those. And that is for advanced carbon technology used in the battery carbon nanotubes per se exactly. The powder coat 1100 is a coating system that this one specifically was for growing silicon nanowires on carbon powder in an evolutionary enhancement of the carbon material used in the anode of batteries.
And the PVT-150 is a product utilized to grow silicon carbon -- silicon carbide boules for silicon carbide wafers used in power electronics, both charging and also for transmission switching. It's referred to as high-power electronics. So each of those are different products, different technologies. Some are carbon-based. Some are silicon nanowire-based and very large production systems. Others are silicon carbide growth systems using different techniques. But all those, and I appreciate you asking the question, all 3 of those are products that we've launched of standard products that we hope to become standard in the marketplace that we've launched over the last several quarters.
Brett Reiss
Now are there -- how proprietary in nature are these 3 products? And what are the barriers to entry to competition? And is your major competitor, the -- your customer who might want to do these things in-house?
Emmanuel Lakios
Our customers manufacture them in-house? The world has really gone away from that. Part of the -- when you look at the competitive nature of our products, there is the element of the process capability, the ability to reach temperature, control the temperature, they'd be able to deposit at certain rates, be able to have a certain capacity be able to do that in a safe environment and in a safe manner and way, which goes into much of our environmental, health and management elements that go into the design of our products, the control aspects, the production worthiness. And then that's really from the technical performance of the tool set.
On the flip side, you also have cost of ownership. The capital cost, the ability to manufacture these more -- and that's your previous question -- more efficiently and have a proper gross margin to invest in future products and return for our investors as well as providing the right value to our customers. And that's where we couple all those elements together, that's how we create our barrier to entry against our competition.
Operator
[Operator Instructions] Our next question comes from [indiscernible].
Unidentified Analyst
First, the comments, thank you for hosting this call. Thank you for your transparency and your candor. It all very much is very much appreciated. So thank you, above all else.
Emmanuel Lakios
Appreciate it. You're welcome. Thank you.
Unidentified Analyst
And I have a few questions just to better understand what I think I'm seeing. Could you comment if the growth has been market share gains or it's been industry growth in general?
Emmanuel Lakios
It's, quite honestly, it's both. It's demand on new technology for both carbon, for silicon nanowires, for the battery material, that is, and also for silicon carbide. So from that perspective, it's market expansion. But there are other competitors in the marketplace that we won these orders from. So there is a -- we did carve out more market presence and market share in the last few quarters. So it's [indiscernible] it's a bit of both.
Unidentified Analyst
And I've been looking at the 10-K to understand who the competition is, and I do not believe I'm seeing specific companies named. If it's appropriate to ask -- and if it's not, please don't comment. Are there any competitors who you can name as being peers or being benchmarks for their growth rates and their margins?
Emmanuel Lakios
Well, there are companies that we would say are we want to target our performance, but they're not competitors of ours. They're much larger companies. As far as our direct competitors, we likely would not want to advertise who those are on this call.
Unidentified Analyst
And just -- I hope this is sort of in a different direction, but I noticed an article in the Wall Street Journal published October 24, 2016, Germany withdraws approval of Chinese takeover of Aixtron. I'm wondering if this dynamic exists in America or what you're doing has national security, national security concerns and therefore, once you become vertically integrated in Made in America, customers might strongly prefer to go to you and not go to someone who's based overseas, so is there some type of national security and Made in America preference going forward?
Emmanuel Lakios
Going back to 2016 and the whole Aixtron issue there that they had, sometimes I can -- I'm not sure I remember what I had for breakfast, but -- and so I can't comment on that one. But I can say that there is clearly an initiative for both battery manufacturing and also for associated electric vehicle and electrification of everything preferenced to be manufactured in the U.S. And we are a U.S. competitor and supplier. So therefore, we would benefit from that.
Unidentified Analyst
And if I could just ask at a high level, what's your scarcest resource, what you wish you have more of? Is it human capital? Is it access to financial capital? What's been holding you back to really unleash the full potential?
Emmanuel Lakios
Supply chain issues. Supply chain issues. Our -- we -- simple answer, it's having a -- and most equipment companies, if not all equipment companies, are suffering with the same.
Operator
And our next question comes from [indiscernible].
Unidentified Analyst
I remember asking before about the product [indiscernible]. And you said it wasn't that big a deal. It may come, and don't get excited about it. I thank you for downplaying it. Has it gotten any closer to being a potential commercial product?
Emmanuel Lakios
[Indiscernible], thank you again for your question, and I greatly appreciate it. And let me say that, even though we are not a medical device company, we are an equipment and carbon technology and other process technology company, we do continue to have applications development such as the device that you're referring to now. When we say downplay, we don't emphasize it. We try not to downplay much, but we don't emphasize certain things in our business. But we have received some government funding to continue our carbon technology development. Our carbon-carbon, that is, technology development for such devices.
So in the background, we continue to do R&D. I want to just really underscore, a lot of research, it's not a development, it's not a product. And -- but we are continuing, and we have gotten some external funding for that specific application to use our carbon-carbon technology in.
Unidentified Analyst
Well, thank you for giving us realistic expectations. So I asked you before, where is the dream? And it sounds to me like the dream is -- using this new phrase -- the electrification of America. It sounds [indiscernible].
Emmanuel Lakios
It's expanding. Yes. Thank you, again. It's an expanding marketplace. It's a large market. It's an expanding market. It's somewhere where we can clearly carve ourselves a good position, a good market share. We also have -- I mean we have not -- we still support aerospace, as I mentioned, and I do believe aerospace will come back. I do like the ASPs on the aerospace products, multimillion-dollar tools and different complexity, of course, solid recurring revenue on the production consumables and spare parts as we add value to them in that area. I believe having our hands in multiple growth markets and large markets is the future of the company.
Unidentified Analyst
I was the stockholder of 15 years. I've had various amounts of stock. And I appreciate the fact that you're not [BSing] us. You're being realistic and optimistic both, and I appreciate it. So I thank you for your thoughts. I appreciate it. Bye.
Operator
Yes. We have another question coming from [indiscernible].
Unidentified Analyst
At a high level, as the company becomes profitable at some point going forward, I'd love to appreciate how the company thinks about capital allocation. Do you have any thoughts about repurchasing shares at the price that's compelling versus doing strategic M&A? Just how you think about those different buckets from your point of view.
Emmanuel Lakios
I can't say we've spent a lot of time thinking about repurchasing shares. We spent quite a bit of time looking at both organic and inorganic growth for the company. As you clearly stated, as we continue down the path of getting to profitability. I think those become more frequent discussions on how do we grow the company long term, medium to long term. But for the moment in time, we have our organic products, and we've just launched these products, they're in what I would term the alpha/beta phase. And we still have work to do there. And we are, for the first half of this year, excited about the booking rate of $16 million compared to last year, if I remember correctly, which I do, we did approximately $21 million. So, so far, our strategy of focusing on internal growth and profitability works. And I think I answered the question on the capital nature and repurchase and M&A. We have nothing to really report on right now.
Operator
There are no further questions at this time. I'll hand the floor back over to Mr. Lakios for closing remarks.
Emmanuel Lakios
Well, I appreciate all the questions. In summary, the second quarter and first half of 2022 have built on our, again, on our efforts of '21. We greatly appreciate the support of our shareholders, our employees, of course, our Board of Directors and suppliers and, of course, value our customers. We thank you for your attendance today, and we look forward to giving you further updates in the next period of time. Thank you.
Operator
Thank you. That concludes today's conference. All parties may disconnect. Have a great evening.
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CVD Equipment Corporation (CVV) CEO Emmanuel Lakios on Q2 2022 Results - Earnings Call Transcript