CVD Equipment's (CVV) CEO Leonard Rosenbaum on Q1 2016 Results - Earnings Call Transcript

| About: CVD Equipment (CVV)

CVD Equipment Corporation (NASDAQ:CVV)

Q1 2016 Results Earnings Conference Call

May 16, 2016, 04:30 PM ET

Executives

Glen Charles - CFO

Leonard Rosenbaum - President and CEO

Analysts

Michael Potter - Monarch Capital Group

Doug Newman - UBS

Brett Reiss - Janney Montgomery Scott

Will Hamilton - Manatuck Hill

Operator

Good day ladies and gentlemen, and welcome to the CVD Equipment First Quarter 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded.

I would now like to turn the call over to your host Glen Charles, Chief Financial Officer. Thank you. You may begin.

Glen Charles

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today for our first quarter 2016 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 myself 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 event 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 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 are forward-looking statements 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 factor section of our 10-K for the year ended December 31, 2015 and our other reports filed with the SEC. 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?

Leonard Rosenbaum

Good afternoon, everyone, and thank you for joining us for our first quarter 2016 earnings conference call. As you know, last quarter was our first earnings conference call and I spent some time outlining CVD's position in our target markets and summarizing our growth strategy. Today I will briefly update you on the progress we are making towards achieving our strategic goals and then Glen you walk you through a summary of our 2016 first quarter financial results. After, we will be pleased to answer some questions.

Our primary mission is to develop and enable commercialization of next generation technologies by incorporating our technology into equipment build for customers, manufacturing processes. Over the last 33 years we have nurtured new technologies in various lab environments and followed those developments through production by building the equipment needed each step in the process.

Wanted to grow our business over the long term, we plan to continue to expand our capabilities in equipment design, process development, materials applications, IT and manufacturing as we work with new and existing customers.

Last quarter we updated you on our potentially large opportunity with the long time customer who is a large U.S. aerospace manufacturer. Over the last few years we have been engaged with them on different aspects of their manufacturing process to develop critical technology needed for the development of jet engines.

As we previously mentioned, systems have already been delivered in the factory and depending on the specific equipment are either in production being qualified for production and the initial start-up are soon to be started.

The negotiations for additional orders from this customer have been prolonged and have required substantial attention and resources. I am happy to saying negotiations have been ongoing and we are making progress.

We anticipate the favor of our outcome however until orders are actually placed that are all these concerns. As the order is received as anticipated, significant effort would be required during the second half of 2016 and continuing at least through 2017.

Obviously these are meaningful multi-million dollar decisions that take time as the customer plans to scale their business. We are cautiously optimistic that they will select CVV at this time for additional orders to ramp their capacity and if awarded additional follow-on orders for this equipment could also be significant.

We believe that dedicating much of our technical and manufacturing resources to the success of this large program was a prudent investment to make over this past several quarters. This investment paves the way for at the expansion that our largest customer is making.

The single customer focus has been significant and has impacted on our ability to target new business and build our backlog. However, we started in the fourth quarter in 2016 to dedicate more resources towards sourcing new opportunities with other customers, and have been busy coding for business in other segments including medical and various electronics applications.

Order received on these opportunities should continue to increase our backlog in the second half of this year. In closing, we remain focused on executing on this large opportunity and simultaneously building our backlog with other customers in the second half of the year. Our long history addressing a number of market enhances our ability to attract new customers and leverage existing ones with our unique offerings.

By continuing to stay at the forefront of next generation technologies, I'll react quickly to our customers changing needs we plan to expand our reach and grow our business over the long term.

Now let me turn this back over to Glen.

Glen Charles

Thank you, Len.

During the first quarter of 2016 we experienced a decline in revenue, operating income and net income as a result of the Company's focus on securing a significant contract with our largest aerospace customer.

Our revenue decreased 49% to $5.0 million for the current quarter from $9.7 million in 2015. We experienced an operating loss of $500,000 and incurred a net loss of $300,000. That same customer represents a 58.8% and 54.6% of our revenue for the three months ended March 31, 2016 and 2015 respectively.

Orders declined to $2.3 million compared to $5.2 million in orders in 2015 resulting in a backlog of $3.4 million as of March 31, 2016 compared to $16.6 million as of March 31, 2015. In addition to the distractions in a substantial amount of time spent on the contract negotiations, the Company standard for traffic process of selling equipment lend itself to uneven orders and backlog levels from period to period.

Approximately $400,000 or 11.8% of the first quarter 2016 backlog is from our largest customer as compared to $9.7 million or 58.4% from that same customer in 2015. Although timing for completion of the backlog varies depending on the product mix and can be as long as two years, we believe a significant portion of our current backlog will be completed within the next 12 months.

We generated a gross profit of $1.5 million resulting in a gross margin of 30.7% for the three months ended March 31, 2016 as compared to a gross profit of $3.8 million with a gross margin of 38.8% for the three months ended March 31, 2015. The decrease gross margin is primarily attributable to the lower revenues with comparable fixed costs.

Operating expenses decreased in 2016 due to reduced R&D, selling and shipping and G&A initiatives. Research and development expenses decreased 61% quarter-over-quarter. Due to attrition in our laboratory staff we have temporarily reduced our independently conducted research and product development for CVD products. Though we continue to conduct research on customer related product development which is included in cost of goods sold.

Lower personnel costs contributed to an 18% reduction in selling and shipping expenses for the first quarter of 2016 and general and administrative expenses decreased 14.8% largely as a result of a reduction at legal costs there in the current period. We sustained an operating loss of $500,000 compared to operating income of $1.2 million in the same period in 2015 and a net loss of $300,000 or $0.05 diluted share compared to net income of $700,000 or $0.11 per diluted share in the first quarter of 2015.

On a segmented business basis, the CVD division contributed a $606,000 loss in the first quarter of 2016 compared to earnings of $789,000 in 2015. We ended the current quarter with $12.3 million in cash and cash equivalents slightly less than the $13.1 million we ended with in 2015.

We also ended the first quarter of 2016 with healthy working capital of $19.7 million, a $200,000 decrease from 2015. We believe that our cash is more than sufficient to meet our working capital and CapEx requirements for the year.

Looking forward with the progress we have made in our negotiations with our aerospace customer for what would be the single largest contract in the Company's history, coupled with the opportunities that we are working on with new and other current customers, we are optimistic that we will achieve more favorable results in the second half of 2016 and beyond.

With that, I'll turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Michael Potter of Monarch Capital Group. Please go ahead.

Michael Potter

Hi, it’s Michael Potter from Monarch Capital Group. How are you? Just a quick question, on the release there is no share count, can you give us the fully diluted share count please?

Leonard Rosenbaum

As of March 31, we have 6,213,142 shares.

Michael Potter

Okay. And what was it same time last year?

Leonard Rosenbaum

Well last year it was 6,299, 194 because of the potential from options of issuing common shares.

Michael Potter

Sure. Do me a favor just included next go around I'd appreciate it. With regards to the new contract, I'm sorry, let me back up, an adjusted EBITDA for the quarter, can you give us the non-cash expenses?

Leonard Rosenbaum

Through about $300,000 negative EBITDA.

Michael Potter

And that includes stock option expense?

Leonard Rosenbaum

Yes.

Michael Potter

Okay. So was a negative $300,000 for Q1?

Leonard Rosenbaum

Correct.

Michael Potter

Okay. With regards to the, Glen with regard to the new contract or potential new contract, I know it's tough to put a clock on this or a timer on it. But do you anticipate this will be a Q2 event?

Glen Charles

Hopefully yes. No guarantee.

Michael Potter

Okay. So you're hopefully that sometime before the end of the second quarter you'll be able to make a release on the contract?

Glen Charles

Hopefully, as soon as we know further we’ll let the shareholders know also.

Michael Potter

Okay. And you mentioned quickly with regards to the reduction in R&D because of the - I guess the staffing issue. Can you just give us a little bit more information exactly what transpired with that line?

Glen Charles

Not much. We had one person I believe one or two. Not senior, but they did believe.

Michael Potter

Which line was the again, Glen, I'm sorry.

Glen Charles

Repeat that please.

Michael Potter

Can you give us the full story, I mean which line - which business segment was this again?

Glen Charles

There in our application lab for R&D.

Michael Potter

Application lab, okay.

Glen Charles

And number of the people are working now more on new product development and new core patient activity.

Michael Potter

Okay. So we had two people that lasts during the quarter and that's - so that was a staffing reduction and was there a further reduction in R&D expense as well or is that all from just two people leaving?

Glen Charles

Mostly from two people leaving and also charging of time to other areas such as sales and little of R&D.

Michael Potter

Got it. Do you anticipate this will be ongoing at least for 2016?

Glen Charles

Possibly but not necessarily. Okay, we'll adjust it as we see fit going forward whether we want to replace those personnel or move more of the time with people back from sales to actual product development will be something we'll determine going forward.

Michael Potter

Okay. Since we're halfway through Q2, is this at least the plan for Q2 to keep it in line with Q1?

Glen Charles

Well, one we don't give guidance and for part of Q2, the ends will probably be yes. Can we move on because there are other people Michael.

Michael Potter

I apologize, I'm sorry. Absolutely go ahead.

Operator

The next question comes from [Jerry Seeds] [ph], a Private Investor. Please go ahead.

Unidentified Analyst

It's been answered. It was the question of the reduction in personnel.

Operator

[Operator Instructions] The next question comes from [Michael Palmer] [ph], a Private Investor. Please go ahead.

Unidentified Analyst

Would Tesla affect you guys in any way possible because you are doing graphene and eventually they will be using graphene or graphite.

Leonard Rosenbaum

It might, I don’t know at this point.

Unidentified Analyst

Are you working with any graphite miners right now? Where do you get your graphite from?

Leonard Rosenbaum

Well, we don’t use graphite except in our equipment for applications there. If you are talking about it for graphene applications, typically we grow that or make it from gases.

Unidentified Analyst

Do you use synthetic graphite?

Leonard Rosenbaum

Well, I don’t know if you call it synthetic.

Unidentified Analyst

Okay. So you’re not working with any graphite mine at the moment.

Leonard Rosenbaum

No. We haven't. We did discuss certain things in R&D with some of them but we are not working directly with any of them at this point.

Unidentified Analyst

Who did you talk to?

Leonard Rosenbaum

It’s been a while. I don’t remember.

Unidentified Analyst

Okay. But eventually if Tesla starts using graphene, you guys will be one of the superiors I’d think now.

Leonard Rosenbaum

I have no idea how to answer that question, okay. It's always a possibility that we will work.

Unidentified Analyst

Okay. Thank you.

Operator

[Operator Instructions] The next question comes from Doug Newman of UBS. Please go ahead.

Doug Newman

Hi. I missed the early part of the call. Did you indicate as to why there were delays in orders from your aerospace customer? Or did they indicate?

Leonard Rosenbaum

There has been no real specific - I know some of the programs maybe running a little bit late from what I can tell at least. It's been ongoing negotiations. We've been getting more equipment that we shipped up and running so they may have wanted to see how that was performing. I don't have an insight into completely varied determination of schedules.

Doug Newman

Are they manufacturing an end product at this point using your equipment?

Leonard Rosenbaum

To the best of my knowledge, the answer is yes.

Doug Newman

And if say - well, are they planning on scaling that up and would they then need more equipment?

Leonard Rosenbaum

They won't need more equipment and I believe we have already scaled it.

Doug Newman

When you say you’ve already scaled it -

Leonard Rosenbaum

As mentioned in other conversations, we’ve started off with them a number of years ago, probably about four or five years, and we built smaller production equipment at that point which is in use.

We’ve built some additional pilot line equipment that's in use, we've built a larger pilot line system that’s in use, and they are just bringing a lot of this online at this time.

Doug Newman

So, if they were to run their plan at their anticipated run rate, would that require more equipment from you?

Leonard Rosenbaum

I expect so but that's really their knowledge more than mine.

Doug Newman

Okay, thanks.

Operator

The next question comes from Brett Reiss of Janney Montgomery Scott. Please go ahead.

Brett Reiss

Hi gentlemen. The aerospace customer that was so intimately involved in, can they at this point change versus in mid-stream or they are pretty much locked into using us?

Leonard Rosenbaum

I’m sure people could do whatever they want. Nobody has ever locked in totally to another person. We've done a lot of work and business with them. I expect that are a needed asset. But what they do is still under negotiation.

Brett Reiss

Okay. Now, this question is prohibitive of the ability of the company to multitask. The year-end 10Q, you had a list, that you had 38 engineers, 9 people in sales and marketing. I appreciate that this aerospace contract is huge, material and commended so much, attention, and resources, but were all of the nine sales people in marketing barked down with just the aerospace? Why weren’t you able to simultaneously pursue other business and shepherd this big contract with the aerospace customer along?

Leonard Rosenbaum

Well, it’s not just all of our sales people being involved, a lot of has to do with our engineering capability and the amount that the engineer is assigned, which was enormous. And if you - per my previous comments, we've done five major different types of systems with them, not just one. Each one required extensive engineering and extensive field sales administration et cetera.

Brett Reiss

Okay. So the effort involved here you really had to - just focusing on and it was a distraction from the other things.

Leonard Rosenbaum

Well, yes. And it was a good distraction. It got us further along with them. We wouldn’t be in the position we are in today if we didn’t do it. Whether that's a good or bad position depends on the future. If we book additional substantial orders, it probably was a good distraction.

If it doesn't occur then it’s probably a bad one. We liked them to take that path and we still feel that was a correct path at this time.

Brett Reiss

Right. And once the business with this big customer starts to flow, it will free up resources so that the opportunity in the new medical products can be pursued and other avenues so that you can utilize the surplus capacity that you have in the new plant.

Leonard Rosenbaum

Well, we already started to do that. And as I mentioned in the last quarter of 2015 and we continue to do it in 2016. Going forward even with the larger order, the distraction won't be a severe because we anticipate that the engineering involved will not be a substantial.

Brett Reiss

Okay. Now there are other major companies that are moving towards composite materials because of what you’ve been to do with this large aerospace customer, are you going to maybe become the go-to-firm for the other large companies with composites. Is that a possibility?

Leonard Rosenbaum

Well, let me see if I can answer that a little differently. We've worked with other companies in the past with composite materials, and I expect to work with other companies in the future with composite materials.

Brett Reiss

And then one last one on the lawsuit front, I mean, everything - the one or two bad breaks we had there, that's all behind us and the deck looks clean going forward?

Leonard Rosenbaum

There is nothing out there at this time and we hope there is nothing out there in the future.

Brett Reiss

Great. And I’ll drop back in queue. Thank you for taking my multiple questions.

Operator

The next question comes from Will Hamilton of Manatuck Hill. Please go ahead.

Will Hamilton

Good afternoon guys. One more question on commercial aerospace if I may. In terms of - you made the comment that this would be your largest contract you received in corporate history. I was wondering if you could just roughly size it for us. We’re talking north of $20 million.

Leonard Rosenbaum

Since we're still in negotiations, I’d prefer not to disclose any information concerning pricing at this point.

Will Hamilton

Okay. I know that in the five sort of different systems you’ve provided them in the past, one was in that $20 million range, so would it be similar to that or we’re talking smaller units?

Leonard Rosenbaum

There was no one $20 million order in the past, okay. You may be confusing a number of different ones that were associated in lumping them together.

Will Hamilton

Okay. And do you acknowledge that - still through that - there isn't a competing solution out there. If it's just a questions or timing and if they still go this route?

Leonard Rosenbaum

I'm sure there are other competing solutions potential. I don't know what they would be or who they would be. And I anticipate that based on our past performance that hopefully they will continue to work with us.

Will Hamilton

Okay. And last question from me just changing to the medical implant market or device to customer. How much as a percentage of sales was that this quarter. Do you have that?

Leonard Rosenbaum

No I don't have that information.

Will Hamilton

But is it more than 10%, I mean you would have to - I guess disclosed that in the Q.

Glen Charles

Right, it was less than 10%.

Will Hamilton

Less than 10%. Okay, so just a question on that and what - that obviously dropped off in the fourth quarter, was that - are you waiting on follow-on orders from them as well?

Leonard Rosenbaum

No, we haven't built schedule, that's through the rest of this year.

Will Hamilton

Okay. So this was sort of temporary in terms of the law relative to what you were building for them at the second half of last year?

Leonard Rosenbaum

Not sure how to answer that one. I'm not sure I understand the question.

Will Hamilton

Well in the fourth quarter it was 30% of your sales which was about $2.5 million and so if you are talking obviously less than 10%, it's under $500,000 this quarter. So I was just wondering A, is there orders I guess in the backlog from them or are you waiting for a new order for them for more systems.

Leonard Rosenbaum

Well as I said, we haven't built schedule for the rest of the year, so there are orders in the backlog.

Will Hamilton

Okay. So pick up from this - because obviously that contributed to the drop off. So I was just wondering.

Leonard Rosenbaum

Okay.

Will Hamilton

Thanks.

Operator

The next question comes from Jeff Gilbert of [indiscernible] Investments. Please go ahead.

Unidentified Analyst

Thanks for taking my call, just two quick questions. Historically speaking and this just might be a, an alternate way to ask previous caller's question, but historically speaking what was and has been your largest order to date.

Leonard Rosenbaum

Largest order to date, from anyone?

Unidentified Analyst

Correct

Leonard Rosenbaum

Probably around $12 million.

Unidentified Analyst

Thank you. And then just not sure if you disclosed this but reading of your 10-K, 2015 63% of your sales were accounted for by two customers. Have you disclosed either into those two clients?

Leonard Rosenbaum

We cannot disclose the names of our customers. Most cases because we're under NDAs with them.

Unidentified Analyst

Sounds good. Thanks for taking my call.

Operator

This concludes the time allocated for questions. I would now like to turn the floor back over to management for closing comments.

Leonard Rosenbaum

Thank you for joining the conference call for the first quarter. And I'll be happy to keep you up-to-date on future order levels as I come forward and I look forward if nothing else to speak with you at the end of the second quarter. Thank you.

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