CVD Equipment Corp
NASDAQ:CVV
Earnings Call Analysis
Summary
Q3-2023
In Q3 2023, CVD Equipment Corporation faced a revenue decline of $1.9 million (23.2%) versus the same quarter last year, but achieved a year-to-date revenue 7.6% above the prior year, mainly due to ramped-up new orders in the aerospace and defense sector totaling $4.1 million. There were no new PVT150 system orders in the high-power electronics market for the first three quarters. The company is divesting noncore businesses, exemplified by the sale of Tantaline subsidiary and MesoScribe assets fetching about $900,000. Operating losses grew to $1 million due to lower revenues and rising operating costs, with gross profit margins decreasing to 25.6%. The backlog stood at $16.6 million after some adjustments, and working capital remained healthy at $16.2 million. The company's future, hinging on new orders and cost management, appears cautiously funded for the coming year.
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Greetings, and thank you for standing by, and welcome to CVD Equipment Corporation's Third Quarter Fiscal Year 2023 Earnings Call. As a reminder, this conference is being recorded. [Operator Instructions] Presenting on the call today will be Manny Lakios, President and CEO and a member of the CVD Board of Directors; and Rich Catalano, 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 we begin, I would 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, 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, 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 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.
I would now like to turn the call over to Emmanuel Lakios. Please begin, sir.
Sherry, thank you, and good afternoon, everyone. Thank you all for joining us today to discuss our third quarter 2023 financial results and other 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.
As previously communicated, our order and revenue levels have historically fluctuated and will continue to do so. This is typical for the highly cyclical process equipment industry. As such, while we experienced a year-over-year decline in third quarter revenue of approximately $1.9 million, we are pleased that our year-to-date revenue for the first 9 months of 2023 continues to be $1.4 million or 7.6% higher than the prior year.
On the order front, during the third quarter, we booked $4.1 million of new orders, principally in our aerospace and defense sector. In the high-power electronics market, there were no PVT150 system orders received in the first 9 months of 2023. Our installed base of PVT150 systems are meeting our performance expectations, and we continue to support our existing PVT customer in their end product development goals.
We have expanded our marketing efforts to include direct outreach to multiple potential customers for our PVT systems as well as attended key silicon carbide-related trade shows and conferences including the ice cream conference this past September. The engaged customers both include silicon carbide wafer manufacturers as well as fully integrated wafer and device manufacturers. The success of our PVT150 and our recently launched PVT200 systems is dependent on the performance of our equipment in the field, overall market conditions, our customers' ability to qualify their end product with their customer and their ability to obtain funding required to purchase our equipment.
We continue to make progress divesting and winding down noncore business entities to allow our team to focus on the equipment product lines and pipeline of potential customer opportunities in our key strategic markets of high-power electronics, battery materials, energy storage and aerospace defense. As previously announced, we sold our Tantaline subsidiary in May 2023, and in August 23, the company entered into a purchase and license agreement with a third party to sell certain assets and to license certain intellectual property of our MesoScribe business in exchange for approximately $900,000. The purchase price is payable in several installments and continue upon certain performance metrics and other milestones.
During the third quarter, we welcomed 2 Board members Ms. Deborah Wasser and Dr. Ashraf Lotfi, both Board members bring extensive experience to the company in the areas of corporate governance and financial communications for Mrs. Wasser and high-power electronics for Dr. Lotfi. We remain committed to stay the course of our strategy to achieve consistent long-term profitability, growth and return on investment. Our return to profitability is subject to our ability to receive additional system orders and continue our efforts to reduce our overall operating costs. I would like to turn the call over to our CFO, Rich Catalano, who will provide an overview of our third quarter results.
Thank you, Manny, and good afternoon. Our revenue for the third quarter of 2023 was $6.2 million as compared to $8.1 million for the third quarter of 2022. This represents a decrease of $1.9 million or 23.2%. This decrease in our revenue was primarily attributable to lower revenue in our CVD Equipment segment of $1 million primarily related to lower PVT system revenues that was partially offset by higher aerospace revenue. Our CVD materials revenues were lower by $0.7 million due to the sale of our Tantaline subsidiary in May 2023 and the wind down of our MesoScribe operations. There were certain customer contracts where our revenue was to be recognized at the point of time when the equipment was to be transferred to our customer based on contractual terms. These contracts were modified during the 3 months ended September 30, 2023, such that the revenue under these contracts will now be recognized over time using the input method. Our revenue for the 3 months ended September 30, 2023, includes $1.8 million of revenues that was deferred at June 30, 2023, and recognized on the date of the contract modification. Our operating loss for the third quarter of 2023 was $1 million as compared to operating income of $0.1 million for the third quarter '22. The increase in operating loss was due to lower revenues as well as increased operating costs.
Our gross profit margin percentage was 25.6% in the current third quarter as compared to 29.8% in the prior year quarter. The decline in gross profit margin from the prior year was primarily due to results and changes in our contract mix, increases in certain component costs as well as higher compensation costs as well as lower gross profit due to the sale, again, of our Tantaline subsidiary and the wind-down of our MesoScribe operations. The increase in third quarter operating expenses from the prior quarter is due to higher employee-related costs to support the growth of our business, additional selling expenditures as well as higher professional fees.
At the nonoperating income, which consisted principally of interest income, our net loss for the third quarter was $753,000 or $0.11 per share for both basic and diluted. This compares to net income of $63,000 last year or $0.01 per share for basic and diluted.
Our backlog at September 30 was $16.6 million. This -- as compared to $17.8 million as of the beginning of the year, as our orders were slightly less than revenues by approximately $100,000. Our reported backlog at September 30 was also reduced, however, by about $0.5 million related to Tantaline and $0.6 million related to the planned wind down of MesoScribe.
Our working capital at September 30 was $16.2 million. This compares to $15.5 million as of the beginning of the year. And our cash and cash equivalents was $14.3 million, very similar to the $14.4 million we started at the beginning of 2023.
In July 2023, we did collect $1.6 million of employee retention credits from the IRS related -- announced credits related to the fiscal 2021 period.
As for our future operating results, we are unable to predict what impact the current economic and geopolitical uncertainties will have on our financial position and future results of operations or our cash flows. Our return to consistent profitability is dependent, among other things, to receipt of new equipment orders, our ability to mitigate the impact of supply chain disruptions as well -- and inflationary pressures as well as managing planned capital expenditures and operating expenses. After considering all these factors, we believe our cash equivalents and our projected cash flows 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 will take actions as necessary to maintain our operating cash to support our working capital needs.
I will now turn it back to Manny.
Rich, thank you for your presentation. In summary, the financial results of 2023 reflects our efforts to continue to focus on our strategic markets and products. Overall, our focus remains on our customers, our employees, our shareholders and the pursuit of growth and return to consistent profitability. We look forward to continuing to build on our success in the years ahead and remain cautiously optimistic. Your comments or questions are important to us. With the close of the formal presentation, I would like to open the floor off to your questions.
[Operator Instructions] Our first question is from Brett Reiss with Janney Montgomery Scott.
The softness in the PVT orders, that means, I guess, your existing customer has decided not to expand what -- do you have any idea why that is?
Well, I can't speak for the customer themselves, but what I can say is that the tools are performing as to our expectations and also to our specifications. They are in the normal process of installation, adoption, ramp-up and qualification of their end product. And as I always say, it's a matter of when, not if. And we continue to be very supportive of them. So again, I can't really say any more about their particular business.
Okay. And I recall also with the PVTs that you were in discussions with a second potential customer. But the roadblock there had been that second potential customer needed to do some sort of capital raise, which, from my end, that's -- this is a bit of a challenging market for capital raises.
It is. And as we say and as we commented in the script, the -- our success in all of our products is our ability to perform -- our product performance, our ability to perform as a company as well as the customers' acceptance and qualification in the marketplace and their ability to raise funding. Back in the first quarter of the year, we launched the PVT150 to the broader community of potential customers, and that includes anyone who makes a wafer both for their own consumption or sell it as a merchant. And yes, we have had both start-up companies. And back in the March time frame, I may also say that we hired our sales manager and we stepped up our game and our presence in many of the trade shows. And we've gotten good, what I would call, market awareness. We've created awareness of the CVD brand at all of the high-power electronics, silicon carbide growth companies.
So that's all a positive. Today, we're engaged with companies that are fully integrated, which means that they grow crystals, make wafers, make power electronics from that down to the start-up companies that just grow crystals and make wafers to the established very large companies that just grow crystals and make wafers. So we have a broad breadth of opportunities in our sales funnel. So even though that some of the and particularly one of our potential customers was not able to raise the capital needed, we've added additional accounts that fit the bill of what I said. And we're at the level of providing quotations and discussion with some of them on terms and conditions.
So again, as I say, it's a when, not an if statement. The tools perform. The market exists. The venture market is very, very soft as you indicate, and that both troubles us. But we also have accounts that are very well funded also, potential accounts. So it's a broad mix.
And to answer your question, yes, we're engaged with -- and having in-depth conversations with other potential accounts as well.
Right, right. In prepping for this call, I kind of perused your website, which I see has been revamped and it looked very good. But in poking around your website, I see you guys are involved with wide bound gap semiconductors, and there seems to be a lot of military use for wide bound gap semiconductors. With what -- with the state of the world being what it is, is that potential business for you guys?
Well, just a little bit about this unfortunate climate that we're in with 2 conflicts -- 2 major conflict zones. High-power electronics, our large band gap with semiconductors, gallium nitride is one. Silicon carbide is another base material as such. So we already are in that in the high-power electronics area. The other is obviously gallium nitride, which we sell R&D systems to.
So we -- in that area, we have not seen a large uptick for military applications. We have seen interest in some of our other products, R&D products that are for aerospace and defense, which are electronic space. But we've seen and in our press release, we noted that we had -- we've had a strong aerospace and defense market share mix this year with the CDI tools for the large gas turbine engines. We also, this past quarter, received 2 orders for R&D systems from notable names in the area of ceramic matrix composite materials as well as materials that would be utilized potentially in high-speed, would almost say hypersonic applications. So that's an area where CVD has had a history in our legacies, and we're glad that -- and pleased with the performance of our aerospace and defense product line because, quite frankly, it is part of our business. It's one of the legs. It helps, of course, more than pay the bills, and it gives us runway as we -- it allows us to tread water while our high-power electronic silicon carbide crystal growth system gets adopted, and we -- again, is the when, not the if statement.
Okay. Also from your website, we're getting out of the Tantaline business, but we're still in the tantalum business when it comes to our initiatives with implants.
Yes, that is -- that was -- there are some applications that we have, whether it's [ tens ] or whether it's actual implant devices, which are more bone related. It's not a large portion of our business, but yes, of course, we continue to sell the equipment related to those applications.
Okay. And one last thing. I didn't see any employment openings at CVD. Does that mean your headcount right now for the existing level of business is kind of where you want to be? And what is the head count these days?
We're north of 130 employees in our facility here in Central Islip in Upstate New York, in our Sogeti site. And we think we're properly sized. We continue to find ways to improve our efficiencies, and we always continue to look at talent as it may come along as we need the talent. So we monitor our both near-term and long-term order rate, and we adjust our headcount accordingly.
Right, right. If interest rates are topping out and start to come down and therefore, cap rates in real estate come down, do you still have an appetite to sell and lease back your existing facility for added working capital?
We have ample -- we never have enough, but we have ample working capital to fund our 2024 objectives and business plan. So it's good, but you never want to raise money when you need it. So we would continue to look at options as they avail themselves. But we're not actively looking though.
[indiscernible] There are no more questions at this time. I would like to turn the conference back over to management for closing comments.
Thank you, Sherry, and thank you to everyone for dialing in today. We appreciate your attendance on the call. As well, we appreciate your loyalty and also the loyalty of our employees and suppliers. If you have any further questions, feel free to reach out to myself or Rich. Happy Thanksgiving to all. And this concludes our third quarter call. Thank you.
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