CVD Equipment Corporation (NASDAQ:CVV) Q4 2018 Results Earnings Conference Call April 1, 2019 4:30 PM ET
Len Rosenbaum - President & CEO
Thomas McNeill - CFO
Conference Call Participants
Brett Reiss - Janney Montgomery Scott
Morton Howard - Bryn Mawr Trust
Greeting and welcome to the CVD Equipment's 2018 Fourth Quarter and Annual Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 Len Rosenbaum, President and CEO; and Tom McNeill,
Chief Financial Officer. We have posted our earnings press release and call reply 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 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-K for the year ended December 31, 2018. 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. Please begin.
Good afternoon, everyone, and thank you for joining our earnings call. The fourth quarter as well as 2018 in general was a year which really highlighted the uneven level of capital equipment sales that can occur. We experienced a reduction in our backlog due to the completion in the second quarter of the large order from our aerospace customer and delays in new orders by a number of customers for a variety of reasons.
This further reinforces the strategy CVD embarked on two years ago to develop our materials business. This will be done using CVD's technology and equipment manufacturing capability to expand product offerings that will grow and diversify our revenue mix and customer base, thereby helping to reduce risk and flatten the uneven levels of our results.
We will do this by tapping into new high margin growth markets in corrosion resistant, medical, aerospace, and defense coatings. To this end, we recently filed a key provisional patent for a family of novel fluid reactors. One target is for cardiopulmonary bypass surgery, a sizeable global market.
Specifically, we believe our materials technology can be used effectively in membrane oxygenator cartridges which are used to add oxygen to remove carbon dioxide from blood during surgery.
We also have customers anxious to use and test our next generation of Tantaline corrosion resistant material products. Our agreement with a major manufacturer of valves and fittings for an industrial line of these products clearly validates the commercial viability of our leading edge capability in materials. These are just some of the examples of why we are very optimistic about the future of our materials business.
One area of our materials business that has experienced healthy order growth during the fourth quarter was MesoScribe. The Direct Write applications are increasingly being adopted in aerospace, defense and satellite applications and they recently received three government contracts for product and application development. We believe MesoScribe's addition to CVD will continue to expand our product offerings and contribute to our overall business success.
To pursue the materials goal, on November 30, 2017, we purchased 180,000 square foot facility to be used for our materials production. While we incurred various delays in 2018, we now have site plan approval, the necessary building permit, and the build out is well in progress.
Before turning the call over to Tom McNeill, our new CFO, who will provide more details on our results. I'd like to conclude my remarks as follows; one, we have a team of experienced and knowledgeable employees that have developed industry-leading technology and know-how. We have provided the custom equipment support and materials required by our customers and the marketplace. We have historically delivered revenue and profitable growth, however, at times uneven and we have recognized the need to diversify our business and develop a more stable and consistent revenue stream.
To that end, we have invested $14 million in a building to house our materials division. We have invested $2.5 million in 2018 related to the building and equipment needed for the materials business. We have received the permits required to ready the materials facility, and we expect to start USA Materials production by Q3 2019 and to continue our diversification strategy.
Finally, we make – we continue making investments in next generation technology, equipment materials, and our diversification strategy, which we believe will position CVD for long-term success. This will ultimately deliver improved and consistent revenue and operating performance.
With that, it is my pleasure to introduce you to Tom McNeill, our new CFO, who will help guide and bring further financial clarity to our current and future operations. We at CVD are pleased to have Tom join our organization. Thank you.
Thank you, Len, and I'm glad to be here. Our annual revenue this year was $24.3 million as compared to $41.1 million last year, a decrease of $16.8 million or 40.8%. And our net loss for the year was $5.2 million or $0.80 per diluted share compared to a net profit of $5.3 million or $0.82 per diluted share last year.
In the fourth quarter, our revenue was $4.7 million as compared to $9.8 million last year, a decrease of $5.1 million or 51.9%. Our fourth quarter net loss was $1.9 million or $0.29 per diluted share as compared to net income of $1.6 million or $0.24 per diluted share last year.
Our revenue decrease during this year was primarily attributable to the completion of orders received from our largest customer in the aerospace industry, which represented $9.3 million or approximately 38.2% of our revenue this year as compared to $27.2 million or approximately 66.1% of our revenue last year.
We continue to receive additional orders and opportunities with new and existing customers and exclusive of our largest customer, sales increased 800,000 from $7.8 million to $8.6 million at year end December 2018.
Our revenue and orders for the fourth quarter and all of 2018 remained below our expectations. New orders, however, for the first quarter of 2019 were in excess of $6 million. The level of new orders from customers in the second half of 2018, however, will affect our revenue level in the first two quarters of 2019, which we anticipate will approximate our revenue in the last two quarters of 2018.
Our return to profitability depends upon among other things the receipt of higher levels of new equipment orders and ramp up of the materials business as well as receiving of reviewing planned expenditures and operating expenses for potential cost savings, including our ability to sublet a portion of the new facility.
We continue to monitor our staffing level to support current operations and the level of current and expected orders. With respect to our liquidity, as previously reported, our line of credit expired in September 2018 as we had elected not to renew our credit line at the time because renewal terms were not acceptable to us. We had not borrowed on a line of credit in the past 10 years and we believe we have sufficient cash and cash equivalents to meet our working capital needs over the next 12 months.
Our working capital was $15.4 million at year compared to working capital of $22.4 million last year. Our cash and cash equivalents were $11.4 million at year end compared to $14.2 million in 2017 and currently remains at approximately $11 million. The decrease in our working capital of $7 million was primarily attributable to overall sales reductions and the resultant operating loss. $2.5 million of capital invested in 2018 primarily related to building improvements in machinery for the CVD Materials operations, operating costs of approximately 400,000, exclusive of interest expense with regard to the new CVD Materials facility. And finally debt service payments of approximately $1.2 million, which includes payments on the investment in the CVD Materials building purchase in November 2017.
We continue to evaluate staffing levels to support the expected commencement of our CVD Materials operations in our new facility during the second or third quarter of 2019 and the level of current and expected orders. We believe our cash and cash equivalents positions and cash flow from operations will be sufficient to meet our working capital and capital expenditures required for the next 12 months.
With that, I'd like to turn back the call over to our operator for your questions.
Thank you [Operator Instructions] Our first question comes from the line of Brett Reiss with Janney Montgomery Scott. Please proceed.
The delays of customer orders in 2018 for a variety of reasons, can you go into a little bit more specificity on what that's all about and do these delays unlock and is that going to be a source of better order flow in 2019?
We would expect it to be a better order flow in 2019. One customer was acquired by another company, so things got put on hold. Another customer had -- their capital budget expenditure for 2018 moved to 2019, and there were a few others along the same lines.
Right. In past calls there was a hope that - because of so many of the resources that were devoted to the large aerospace customer that the Company would be able to get back into - a resurrection of the old legacy businesses, and it just seems that that didn't happen. Why didn't that happen? What didn't you see happening that resulted in anemic orders for the last couple of quarters with the legacy businesses?
Our business has always been lumpy for many, many years. And it seems to come in spurts, it rises up significantly high and then you go a number of months or even a quarter or two without any significance. Hopefully, the first quarter of this year is an example of this type of turnaround.
Now, the Tantaline materials handling business, do you have orders and backlog in hand that you hit the ground running to fill as soon as the building is up and running?
We do not look to take orders that far in advance for that business. We expect that we should promote that a lot more during the second quarter or this quarter, and it will take a little time. We don't want to be inundated in the beginning either. So, I expect that we should start seeing a positive return on that in the fourth quarter.
The subletting of the portion of the facility that we're not going to use, do the prospective tenants need the same type of approvals that you have or there is a lesser standard for them to come in and start to pay us rent?
There's somewhat of a lesser standard. But depending upon what their operations are going to be, they may need certain permits or approvals also.
Do you have any idea, Tom, what the burn of cash is going to be over the next couple of quarters?
Well, I could tell you that if you look at this past year was a $5 million loss, there's about $1 million in stock compensation and $1 million in depreciation/amortization. So on last year's base, the operating burn was about $3 million plus capital investments et cetera. So it'll certainly depend on the level of orders that we receive in the coming quarters, and that'll dictate to a certain degree as well as any actions we may or may not take based on timing of orders.
And then certainly to the extent that any - as much as we are showing the building, there is no guarantee any one we're showing the building today will actually sublet, but it's in a very good location, it's a nice building, and at some point we expect that will happen and that will help appreciably the expenses and the cash flow for the Company as we move forward.
Well, the broker that's showing the space, have you gotten positive feedback from the broker?
Yes. But again, as much as positive feedback that – until you sign on the dotted line, positive feedback is great. And so we're certainly positive on that, we're in the right space. And I think building on what Len said before, we ramped up the launch of the operations, readying, and that puts us in a great position to be able to market to new and existing customers as opposed to an empty building. So that's certainly a positive event.
With respect to the oxygenator cartridge, what are the – is there a variety of different business models you're looking at, so that ultimately the value that can be monetized to the benefit of the Company, and what's the timetable on that?
We don't have a timetable on it. We are pursuing it and we're not just pursuing the oxygenator cartridge. As I said earlier, it is a line of Fluid Reactors that are applicable to other industries also. So, right now we're pursuing the one for the oxygenator cartridge at this point. And you'll hear more about that going forward.
The number of employees at year end versus let's say the third quarter, can you give us some details on that?
Well, it is certain from the third quarter, I'm not sure I exactly have that number. But from year-over-year we're down from 231 to 197 and currently we're about give or take to 197 level, just a little lower.
Do you think that that's going to materially come down or is it a matter of kind of shifting employees around with the skill sets to match the new type of business that we hope we get in the coming quarters?
We've always shifted our employees around as needed and really whether it's an increase or a decrease in the current level will really depend upon order levels going forward.
How is the esprit de corps morale of the company these days?
I think it's good. I don't –I don't go out and pull everybody every day, but I do believe it's good and we're making progress.
[Operator Instructions] And thank you, our next question comes from the line of Morton Howard with Bryn Mawr Trust. Please proceed.
Supposedly the aerospace engine was a great success, it's a hot item and there is possibility of using that technology with a ceramic mix for other aerospace products. So if the engine was such a hot deal and is possible of other things, are we very discouraged over fiber gases and the number of orders from the aerospace company?
No, not completely. We expect that long-term additional product will be needed and we're hoping that we'll be the company that will fulfill it.
Well, but if it's such a hot engine, but they haven't needed any, I mean, if we've sold the last one a few months ago, I'm just surprised they don't anymore – anyway, all right so they don't. Then the other question is graphene was a very sexy item I never really believed in. I give you credit for saying you are not a graphene company, you're a chemical vapor deposition company. But is there any chance graphene can be a commercial product, I used to say in my lifetime but I'm even getting older, well, in my children's lifetime?
The answer to that is yes.
Thank you. We have no further questions in queue at this time. I'd like to return the floor back over to Management, for closing remarks.
Okay. I thank everyone for joining our fourth quarter and year end conference call, and I look forward to speaking to you again in the first quarter. Thank you very much.
Thank you. This will conclude today's teleconference you may disconnect your lines at this time. And thank you for your participation.