CVD Equipment - Earnings Call - Q2 2019

Transcript

Speaker 0

Greetings, and welcome to CVD Equipment's twenty nineteen Second Quarter Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 Len Rosenbaum, President and CEO and Tom McNeil, Chief Financial Officer. We have posted our earnings press release and call replay information to the Investor Relations section of our website at www.cddequipment.com. Before I begin, I'd 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 ks for the year ended December 3138. 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.

Speaker 1

Good afternoon, everyone, and thank you for joining our earnings call. The company's focus during the second quarter has been on getting our materials facility up and running in the third quarter, moving the Mesa Scribe facility from California to New York and pursuing additional equipment sales. With regard to our new materials facility, the company has invested approximately $4,000,000 in building improvements, machinery and other related expenses to date. With the operations at our new materials facility starting to come online during the third quarter of twenty nineteen, we have been increasing our marketing efforts by showcasing our new facility operations and offering material coatings services to new and existing customers. We have completed the move of MesoScribe into the new materials facility and they will be resuming operations during the third quarter along with bringing the first tantaline system online.

The expanded materials operations will enhance our capabilities in providing: one, corrosion resistant coatings through our Tantaline subsidiary for medical, pharma, oil and gas applications. Two, sensors through our MesoScribe subsidiary for defense, aerospace, and turbine applications. And three, through our CVD material subsidiary for carbon composite materials, medical coatings, electronic substrate materials, and further expansion into other coatings for defense, aerospace, medical and industrial applications. The high margin growth markets in corrosion resistant medical, aerospace and defense coatings can help flatten the uneven levels of our results. We have also been working on our fluid reactor technology, and have received an applied research and development award in collaboration with the Center of Biotechnology at Stony Brook University.

This will help further our novel patent pending technology on an improved ECMO device. We anticipate further collaboration for this promising technology and application. We know our orders in the 2019 were below anticipated levels. However, we are working a number of opportunities which we anticipate will result in an improvement during the second half of twenty nineteen. We continue to monitor our orders and expenditures, and we remain committed to returning to profitable quarterly results in Q1 twenty twenty.

With that, I would like to turn the call over to our CFO, Tom McNeil.

Speaker 2

Thank you, Lynn, and good afternoon. In the second quarter, our revenue was $4,900,000 as compared to $6,400,000 in 2018, a decrease of 1,500,000 or 23.6%. And our net loss was $1,400,000 or $0.21 per diluted share as compared to a net loss of $1,300,000 or $0.21 per diluted share in 2018. In the first half, our revenue was $8,400,000 as compared to $15,600,000 in 2018, a decrease of $7,200,000 or 46.1%. And our net loss was $3,600,000 or $0.55 per diluted share as compared to a net loss of $800,000 or $0.12 per share per diluted share in 2018.

Our revenue decrease during the quarter and the 2019 was primarily attributable to the completion of large aerospace equipment orders and not being able to replace them in a timely fashion. Our sequential revenue increased $1,500,000 in the second quarter to $4,900,000 an increase of 41.8%. During the second quarter, we received orders of approximately 3,300,000 which was below our expectations and compares to approximately $6,500,000 in the first quarter of twenty nineteen. This resulted in a decrease in order backlog at June 30 to approximately $4,500,000 as compared to approximately $6,000,000 at March 3139. As a result, the company's return to profitability continues to be dependent upon, among other things, the receipt of new equipment orders, the ramp up of our materials business and managing planned capital expenditures and operating expenses.

With respect to our gross profit margin percent, we improved to 10% in the second quarter as compared to negative 11% in the first quarter twenty nineteen. This is the result of improved operating efficiencies and higher revenue generating improved contribution margins as compared to Q1 twenty nineteen. Turning to our operating expenses. Our cost containment measures this year have resulted in a sequential decrease of $141,000 in our operating expenses during the second quarter, and we will see further reductions from those implemented actions in Q3. We believe that the cost containment measures we have been implementing should better align our expenses to order rates, thereby positioning the company to a return to profitability.

With respect to our balance sheet, cash and cash equivalents were $8,600,000 at June 30 as compared to $11,400,000 at 12/31/2018. Working capital was 10,300,000.0 at June 30 as compared to 15,400,000.0 at 12/31/2018, a decrease of 5,100,000.0. This decrease was primarily attributable to overall reduced revenue and the resultant operating loss, dollars 1,400,000.0 of capital invested in the first half of twenty nineteen, primarily related to building improvements and machinery for the CVD Materials operations and debt service payments of approximately 600,000, which includes payments on our investment in the CVD Materials building. With respect to our accounts receivable, the decrease of approximately 2,000,000 from 4,100,000.0 at December 3138 to $2,100,000 at June 3039 was a result of normal collections and decreased revenue during the first half. While our cash is expected to decrease during the next quarter, we believe the cost containment measures we have been implementing should better align our expenses to our order rates, thereby reducing future operating losses and positioning the company to return to profitability as order levels increase.

As such, we believe our cash and cash equivalent positions and cash flow from operations will be sufficient to meet our working capital and capital expenditures for the next twelve months. And now I'd like to turn the call back over to the operator for your questions.

Speaker 0

Thank you. We will now be conducting a question and answer session.

Speaker 2

Session.

Speaker 0

You. Our first question comes from the line of Brett Reiss with Janney Montgomery Scott. Please proceed.

Speaker 3

Good afternoon, gentlemen. Hi, Len. Hi, Tom.

Speaker 1

Hi there. Good afternoon, Brett.

Speaker 3

The orders that were below expectations, you know, have you kind of done some soul searching or thought about, you know, why that is?

Speaker 1

We always do soul searching, and we always think about why. The issue here, you know, I think has a lot to do with timing, you know, at this point in time. There's nothing specifically that we saw that we lost to a customer, you know, to another vendor. So it's more timing and, you know, we've seen this before. We'll see it again.

You know, sometimes it comes in the other direction too.

Speaker 3

Right. Right. And there's nothing within your control that you you can tweak or alter, you know, so that the order flow, you know, comes in at a more rapid pace in the in the subsequent quarters?

Speaker 1

We've never been able to really tweak or control our customers. And when they place the order, that's really what they're doing. That's one of the main reasons for moving more towards the materials facility where we, you know, hopefully we'll have longer term contracts that are much more understandable and we can basically predict.

Speaker 3

Okay. Are we fully up and running in the new building now, you know, to to accept orders for the material handling business?

Speaker 1

As I said in statement below, we'll be operational in the third quarter in various degrees. You know, we are accepting orders, but, you know, we're really not gonna pursue to the level we would like until approximately the third quarter.

Speaker 3

Okay. Do do you expect, though, good rush of orders? Because on the first quarter call, in response to one of my questions, you know, you said that new customers had kind of kicked the tires, and the only thing, delaying orders was the, you know, start of the facility. So, you know, third quarter comes around and the facility is up and running. Can we expect the orders to, you know, to really flow?

Speaker 1

We can expect some orders to be received. We have already have some that we need to start delivering on. You know, but it's really just starting. We did our actual first test run just yesterday. And, you know, we need basically another, you know, three, four weeks to get it up and operational completely.

You know, a Mesa scribe will also be coming online in the third quarter.

Speaker 3

Has that move been fully completed? I mean, they're they're over from California. Nothing else has to be done?

Speaker 1

Everything in California is closed down. Everything is located here. It's still in some, stage of, reconnection of the equipment, and some of it's just starting to be tested.

Speaker 3

Okay. The award in collaboration with with Stony Brook, was there any dollar amount that that went to to you and Stony Brook to further the development of the oxygenator cartridge?

Speaker 1

It's matching funds. Stony Brook or the state, you know, is putting in approximately $40,000. We're putting in about 40,000, dollars And we're getting basically the testing that we need, with actual use of blood, to go to the next step with the unit. We're also starting to discuss with We're some of the other parties out there that would be interested in the technology. I think we'll have a lot more to say by the end of the third, or for sure by the end of the fourth quarter.

Speaker 3

Okay. Now some companies that, you know, are in a similar business to to you, there's a metric where, you know, they're able to say, you know, we've got bids outstanding on $50,000,000 in in new orders, up from 30,000,000 the prior quarter. Do do you have any internal similar metric that you can share with with us? You know, in other words, you know, how many how many fish hooks, you know, do you have in, you know, the pond, you know, to capture orders in either new equipment or this materials handling business that's kind of a new venture for you?

Speaker 1

We do track that information. It's typically not, you know, put out, but, you know, we're active. We're extremely active in quotations and we expect, you know, that some of them will come to fruition.

Speaker 3

Could you though say the the level of quotations? Is it higher this quarter than last quarter? To just give us some some sense on what the future looks like.

Speaker 1

I don't know if I personally have that data, but, you know, we are active. And as I've said in my, comments earlier, we expect to return to profitability in the first quarter.

Speaker 3

I'm gonna drop back in queue because I've asked a lot, and there may be others on the call, but I, you know, I I may wanna come back. Thank you, though.

Speaker 0

Thank you. Our next question comes from the line of Morton Howard with CVD. Please proceed. Morton Howard with CVD. Your line is live.

Have you a question, sir? Thank you. Our next question will come from I believe, I beg your pardon, Morton Howard with Edison. Your line is live. Sir, we're unable to hear you.

Our next question will be with Brett Reese with Janney Montgomery Scott. Please proceed.

Speaker 3

Alright. Thanks for the opportunity to ask a few others. The first half of the year, you've spent 1,400,000.0 on the building and and machinery. Are are we about finished with with those kind of CapEx expenditures? What what is the second half of the year gonna look like?

Speaker 1

That will depend more on order levels. For the second half of the year, it's not gonna change. It's gonna decrease. But for next year, it will more depend be more dependent on order levels.

Speaker 3

Right. Now are the margins on, you know, the old legacy, you know, equipment orders, about the same, less, greater than, you know, the new materials business?

Speaker 1

I'm not sure I totally understood your question, Brett, but I'll try to answer what I think I understood.

Speaker 3

Okay.

Speaker 1

K? We anticipate that the margins on the material side should be better than the equipment side. That's what you're asking.

Speaker 3

Yes. Yes. Oh, that's good. Now in the first quarter, you talked about some air force awards with MesoScribe. What's the status on on that?

Speaker 1

They'd be a work done.

Speaker 3

Okay. The large aerospace customer, do do we still, have a liaison contact person, you know, with with, with them, you know, should that the opportunity for that business ever come back into the fold?

Speaker 1

We're always having, you know, on and off discussions with them, whether it's for service or spare parts or for, you know, upgrades. And, you know, hopefully, you know, cautiously optimistic about the future.

Speaker 3

Right. Right. Now in in terms of reducing reducing your your expenses, are you finished there, or is there more to to come in the second half?

Speaker 1

That's sort of a fluctuating situation. It will depend a lot on order levels. It will depend a lot on completion of the new building, getting the equipment up and running. So, you know, there is potentially some additional cutting there, But, you know, it's really gonna be order level determined.

Speaker 2

Right. What what see Tom? Sorry. In in q two, the expense reductions cost containment, initiatives that we, achieved, were only a partial of the quarter. So think I highlighted in the press release or on a call, we'll see continued reductions from those, cost containment initiatives into q three.

Speaker 3

Right. Also, this is the first time in memory that the 10 q was issued, I think, simultaneous with the quarterly release. Is that your doing, Tom? Which if so, thank you.

Speaker 2

You're talking about the queue with the press release? Yes. Well, I'm I'm not sure. In the past, I think it's been done that way, always been done that way. But

Speaker 3

Alright. Well, you know, was nice to see that. What's the employee headcount now versus what it was at the end of the year?

Speaker 2

Yes. We're we're about a 180, down from about one one ninety five or so at the end of the year.

Speaker 3

Right. Right. I guess my last one Len, we we've been talking to one another, yeah, many, many years, and you've been at this a long time. How are your spirits? You know, just, and how's the esprit de corps at at CVD, today?

Speaker 1

Well, you know, everybody does a lot better with higher backlog and with, you know, larger orders. But, you know, we're all there participating and working hard, and we lot of like a lot of the technology areas that we're moving into, you know, especially the materials area, some of the aerospace applications, some of the medical.

Speaker 3

Okay. Thank you for answering my questions. And, of course, you know, I'm I'm I'm wishing and hoping for the best. Thank

Speaker 1

you.

Speaker 0

Thank you. We have reached the end of our Q and A session. Allow me to hand the floor back over to management for closing remarks.

Speaker 1

I thank everyone for joining our earnings call, and I look forward to speaking to you at the end of the third quarter. Thank you.

Speaker 0

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.