CVD Equipment Corporation

Greetings and thank you for standing by and welcome to CVD's Equipment Corporation's Fourth Quarter and Fiscal Year 2024 Financial Results Call. As a reminder, this conference is being recorded. We will begin with some prepared remarks followed by a question and answer session. Presenting on this call today will be Emmanuel Lakios, President and CEO and member of the CVD Board of Directors, and Richard 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 I 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, and 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 that 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 the company's 10-K for the year ending December 31, 2024. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made of as-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 Emmanuel Lakios.

Operator, thank you, and good afternoon, everyone. Thank you all for joining us today to discuss our fourth quarter and fiscal year 2024 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 question and answer session. Our fourth quarter 2024 revenue was $7.4 million. That represents an 80.3% increase from prior year fourth quarter, while it was lower than the $8.2 million we reported for the third quarter of 2024. Our revenue for the year 2024 was $26.9 million, 11.5% higher than prior year. As previously discussed, we launched and shipped a PVT-200 system to a new account for our PVT product line during the second quarter of 2024. As we stated on our last call, this was a strategic order for a silicon carbide 200 millimeter crystal ball growth. The customer for our first PVT 200 system is continuing to evaluate the performance of our system for possible additional orders. We do continue to support our installed base of PVT 150 systems. and pursue additional PVT-150 and PVT-200 orders. However, the silicon carbide market has remained challenging due to the global overcapacity of wafers and a decline in wafer prices. Our orders in the fourth quarter were $7.1 million driven by customer demand in both our CBD and SDC segments. During 2024, we continue to see an ongoing recovery of our aerospace and defense market. Previously announced in early November, we received a $3.5 million follow-on order for our CVI CVD 3500 from an existing aerospace customer. Orders for the full year of 2024 were $28.1 million. as compared to 25.8 million for the fiscal year 2023, an increase of 8.9%. As a reminder, during the first quarter of 2024, we did receive a $10 million multi-system order in our industrial market from a company in the business of coating OEM components with silicon carbide. We continue to be focused on four key strategic segments, aerospace defense, microelectronics, including high-power electronics, energy storage, including battery materials, and industrial. We also, on a selective basis, continue to support some legacy applications. In 2024, we completed the end-of-life for our Mesoscribe product line, which will allow us to focus on our core CBD and CO2 SDC product lines. We are encouraged our backlog on December 31st, 2024 was 19.4 million, which is 4.9% higher than our 2023 year-end backlog of 18.4 million. While our fourth quarter represents the second consecutive quarter of positive net income, we continue to expect our orders and revenue levels to continue to fluctuate given the nature of our emerging growth and markets that we serve. In addition, the current geopolitical environment, inclusive of the possible imposition of tariffs, may affect our supply chain and increase costs of components and materials. This will present us with new challenges in fiscal 2025 and beyond. We are staying the course. our strategic efforts to build critical customer relationships in the markets we serve, while carefully managing our expenses and operations in order to achieve our goal of long-term profitability and positive cash flow. All this while simultaneously focusing on growth and return on investment. I would like to turn the call over to our CFO, Richard Catalano. who will provide an overview of our fourth quarter and 2024 results.

Thank you, Manny, and good afternoon. As Manny mentioned, our revenue for the fourth quarter was $7.4 million, as compared to $4.1 million in the prior year fourth quarter. This represents an increase of $3.3 million, or 80.3%. This increase in revenue versus the prior year quarter was primarily attributable to an increase in revenue of $2.8 million from our CBD equipment segment, and an increase of 0.5 million in revenue from our SDC segment. The increase in CBD equipment revenues resulted principally from increases in revenues from aerospace and industrial contracts in progress. The prior year fourth quarter was negatively impacted by a significant cost overrun on one of our contracts. Our SDC segment revenues was 28.8% higher than the fourth quarter of 2023, as demand for SDC's gas delivery systems remains strong. During the fourth quarter, we did record an additional non-cast charge to reduce the net realizable value of our PBT 150 inventory by approximately 300,000. This was based on our further assessment of the current market for silicon carbide equipment for 150 millimeter systems. This charge is in addition to the $1 million charge we recorded in the third quarter, resulting in a total charge of $1.3 million for the 2024 fiscal year. Our gross profit for the fourth quarter was $2 million, representing a gross profit margin of 27.3%, as compared to negative gross profit of $348,000 for the fourth quarter of 2023. Our gross profit margin percentage improved due to changes in contract mix, but this was offset by the inventory charge of $300,000, The gross profit in the fourth quarter of 2023 was also negatively impacted by that significant cost overrun on that particular contract. Operating income for the fourth quarter was $35,000. This compares to an operating loss of $2.5 million in the fourth quarter of 2023. After other income consisting principally of interest income, our net income for the fourth quarter was $132,000 or two cents per share for both basic and diluted. This compares to a net loss for the fourth quarter of 2023 of 2.3 million or 33 cents per share. Turning to our results for the full fiscal year, our revenue was 26.9 million. That's an increase of 2.8 million or 11.5% from fiscal 2023. This increase was primarily attributable to higher revenue of 1.9 million from our CBD equipment segment and 1.3 million increase from our SDC segment This was offset by lower tantaline revenues of a half a million dollars as a result of the sale of tantaline in May 2023. Our gross profit margin was 23.6 percent in 2024 as compared to 21 percent in the prior year. The increase in gross profit of 1.3 million was primarily attributable to higher revenues, improved margin on CBD equipment contracts, and the final mesoscribe sales And these positives were partially offset by the $1.3 million non-cash charge to reduce certain PBT inventory to their net realizable value. During fiscal 2024, we did recognize gains on the sales of equipment of $717,000. This was principally from our mesoscribe segment, which ceased operations as of September 30th, 2024. Our operating loss for the fiscal year was $2.4 million. as compared to an operating loss in the prior year of 4.9 million. After non-operating income, our net loss for the year was 1.9 million, or 28 cents per share. This compares to a net loss of 2023 of 4.2 million, or 62 cents per share. Turning to our balance sheet, our working capital at December 31st, 2024 was 13.9 million. This compares to 14.3 million in the prior year end. Our cash and cash equivalence balance was $12.6 million as of December 31st, 2024. Our return to consistent profitability is dependent upon, among other things, the receipt of new equipment orders, our ability to mitigate the impact of inflationary pressures, as well as managing our operating expenses and capital expenditures. In addition, our revenues and orders have historically fluctuated based on changes in order rate, as well as other factors in our manufacturing process that impacts the timing of our revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter. After considering all these factors, we believe our cash and cash equivalents and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We will continue to evaluate the demand for our products, assess our operations, and take actions anticipated to maintain our operating cash to support our working capital needs.

Rich, thank you for your presentation. Our focus remains on our customer markets, 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 year ahead. Your comments and questions are important to us. With the close of this presentation, I would like to open up the floor to questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Brett Reese with Jamie Montgomery Scott. Please proceed.

Hi, Manny. Hi, Rich. How are you guys doing?

We're well. Thank you, Fred.

Good to hear you're on the call. Hi, Brent.

How are you? Great. If you can just educate me and anybody else that's on the call, that large $10 million... silicon carbide protecting coating order you got in February of 2024. I mean, that's a big order. How did that come about? Did the customer come to you and ask you to come up with a solution, you know, to enhance the hardness and prevent the corrosion on whatever their products are? Your engineering staff came up with a solution and then we got the business...

So let me take the operating element of that, Brett. Thank you. We had developed the large volume silicon carbide CMC system for aerospace. And as you remember, we had originally developed received an order, combined two orders for four systems in total. Subsequently, we also now have received a fifth system, which we are in the process of fulfilling in 2024. But when we developed that tool through advertising of that system, it does deposit silicon carbide among one of many different materials. for the aerospace and defense market. And then obviously that was a need from this other customer in the industrial market. So it's a combination of their need. They saw our advertisement and came to us.

Okay. Now, you've probably almost finished completing the order, because at the time, I think it was a one year to 18 month time lag on doing that?

The orders are staggered. On that $10 million order, there are three tools. Those are staggered in time to allow both the build and then the installation, and it'll be slight digestion on the performance. But we have all three slated over several quarters. So those will extend out into delivery into, I believe, the first or so quarter in 2026.

Are there other entities similarly situated to this customer that would need also what you've done for this customer. And can you piggyback on the successful completion for this customer to get other, you know, similar type orders? Because we're all frustrated. You've got a good engineering team, good niche business. You've done a fantastic job, you know, turning this company around from the prior chief executive officer, and yet we'd just like to see a greater level of sales.

Yes. So, yes, to answer a couple of questions and a voice of frustration, which I understand and accept, But let me go to your questions. Can it be applicable to other customers in the industrial space? The answer to that is yes. The question is capacity. Many of these customers of depositing the silicon carbide coatings on OEM components, as I said earlier, these serve marketplaces such as the crystal growth for silicon carbide wafers, taking OEM graphite components and coating them with a protective coating, which is the silicon carbide. It's also used in LED markets. It's used in other applications. The driver for this is going to be market growth in those particular areas. So it's not an adoption of technology because it's a mature technology. It is an expansion of capacity in that space. Today, the PVT space, as we know, for power electronics, for crystal growth for power electronics, as we know, is... not overly healthy, and that's due to the overcapacity of, you know, in China of wafers and the drop in price of those wafers. So, to answer your question in short, yes, it is applicable to other customers in the same space that do similar, if not the same thing, but it's going to be conditional on expansion of demand.

Okay. Now, the... know kind of unfair uh competition from china on the pvt 150s kind of knocked the wind out of our sails there do we still get recurring income on the you know 30 million dollar 30 uh you know units of installed base and what i mean we're not maybe going to get 30 new orders for PVT 200s, but could we get, over the next couple of years, five new orders, 10? What do you think the prospects are there?

I would like to say yes, but I can't. The reasoning for that is there's so much uncertainty right now on on the overcapacity, the undercutting of price. Wafers that were selling for $1,000, many of us on this call know that they're now selling for under $300, which is less than what I anticipate US manufacturers can make them for. The geopolitical and tariffs, how they play into the supply of wafers to the United States, I think anybody on this call's guess is probably as good, if possibly not better than mine. So I really, we need to allow the next quarter to two quarters to pass to understand where are we with wafer demand and where are we with pricing of wafers in the United States and in Europe.

Okay. This is a question from... you know, some of the people that talk to me on, you know, CBD, we have relationships with two of the leading aerospace, you know, engine manufacturers. How many major ones are there? And is it possible for us to, you know, get orders and begin relationships with, you know, some of the others in the industry?

Okay. So I think that's a fair question. And I think you're probably asking a lot of questions that everybody else wants to. You're a spokesperson for the shareholders, clearly. There are several. There are five that we speak to that we're aware of. And they're all household names. One of them is a joint venture of two of them. So we'll take them out of the equation. So there's really four that are in gas turbine engine component manufacturing that would be interested in our class of products, which are the ceramics and ceramic matrix composite materials, to be exact. And those four that are remaining, I don't like correcting you, but I will, there are three that we have now sold product to. We announced that we had sold a silicon bond code system to a third site which is presently being installed. So we have relationships and installed base at three of the four accounts. Now there are many different applications. They have some incumbents for certain processes in these applications. But we have our foot in the door at three of four accounts that we would target at this point. Now, that's in the gas turbine engine side. Then you also have the defense side, which are materials, advanced research materials for hypersonics and the such. And those at this point in time are very application and custom specific.

Okay. I do have other questions. But I will drop back in queue to have a courtesy to anyone else that wants to ask questions.

Thank you. Our next question comes from the line of David Hinn, a private investor. Please proceed.

Oh, David.

Hey, guys. Can you hear me?

Yes, we can, David. How are you? Hi, David.

Oh, good. How are you, Manny?

How are you doing? Good, thank you. Good to hear your voice.

Um, so my first question is, um, the original aerospace customer purchased 30 million, uh, of tow coding equipment, I believe back in 2016. Um, and there were significant spare parts orders that came in after that. Um, it appears that those spare part orders haven't come in, uh, since COVID. So should we assume, uh, as investors at the company, uh, who made the $30 million purchase of tow coating systems, has found another solution. And do you think they may be in need of additional spare parts and you may even get large follow-up orders for similar systems in the future as they expand?

Okay. So I believe you asked two opposing questions. The first is where we have an installed base of tow coat systems You are absolutely accurate. We enjoyed and we supported them properly with spare parts, quality spare parts and quarts. When COVID hit and long-haul travel stopped, obviously the demand for airplanes, gas turbine engines, I think everybody knows this, and then obviously CMC components and then equipment, that stalled. So did spare parts. If you're not making the components, you don't need spare parts for those tools. I have to say that we have started to see an increase in spare parts and some consumables. And so we will continue to support that particular customer, both on spare parts and consumables, as well as continue to bid on contracts going forward for additional capacity.

Okay, great. And then moving on to the battery materials part of the business, you have one opportunity that you've cashed in on with 1D. Do you have a list of many other target companies who might benefit from a similar system? Or are you pretty much relying on 1D for that part of the business at this moment.

1D has an exceptional portfolio, a very deep and broad portfolio of IP for silicon nanowire growth on carbon. And we're pleased to have received the orders from 1D and provided them the systems. As you know, there are many different ways to add silicon, which improves the performance of the anode material, to the graphite. There are many established ways, whether it's just adding silicon in powder form, whether it's coating it, whether it's taking carbon and coating silicon. There are many different ways, and I believe that that horse race on which is the best mousetrap is going to continue for a period of time. We have proven that our tools work for that process. We also have grown silicon nanowires for other applications in medical, so we understand the growth process as well. We've evaluated and we continue to reach out to others that do add silicon in a CVD process differently than 1D does. And that space is much more heavily populated with competitors, but we again are in the early stages.

So you do think there might be potential opportunities to sell to other companies in that space?

Sure. A similar type system, but typically and likely not silicon nanowires. That space, 1D has done a great job in planting a lot of IP in that arena.

Okay, great. And then there was a second customer for a PVT system. You said they've been testing and evaluating it over the current year or the last half of this year. Can you provide any insight into its ongoing operation in the field, the PVT-200, and any feedback you might have received? And at what point will we know if you guys have won the, I think you called it a bake-off last year. So what time will you know if you won the bake-off?

Okay, good, all good questions. First, I can't obviously say who the customer is. That would be a bad. I can say that our tool is either meeting or exceeding our performance specification as we solve the system. And we have used, here in the factory, we have started to grow our what I would term process development for the sake of improving our equipment, bulls on our own. So we know we can grow a bull, it's not a quality electronic grade bull, but we can grow bulls. That's not quite our business to grow electronic grade. We don't want to compete with our customers, of course. But the tools meeting the specification, The question is going to be all ships rise when the current comes in, and all ships go down when the current goes out. So I would anticipate that all U.S. manufacturers of wafers and silicon carbide crystals are impacted by the geopolitical price cutting, and overcapacity that we've seen from China. So there's two steps. One is a design-in where we are technically, we check off the box, and we're in the process. That may take another quarter or two. Remember, these processes take a week to two weeks to run, and we only have one system at the location. So by the time, you can only get possibly 10 to 15 runs a quarter may not be enough to, one quarter may not be enough to move out the process. The second is demand. You're gonna need to be able to have the requirement for additional capacity. Again, the next quarter to two quarters, depending on what happens in the in the PV, not just PVT, but the wafer portion of the business will determine the demand in the U.S.

Okay, thanks for that. And then the last question I have is, it seems that operating margins, if you take out the one-time markdown of the PVT 150 system, which was, I think, a $300,000 markdown, your margins would have been over 30%, or your operating margins would have been over 30%. That's a significant improvement from recent quarters. Is that a trend upwards? Are we going to see continued improved margins above 30% over the next, let's say, year or two, from what you can tell? I think originally you had a hard time producing the first larger system earlier in the year, but now you have more practice fulfilling these orders. Do you think you'll become more efficient and operating margins will improve?

And I've said it before. Thank you, David. And I think you tied the pieces together. Earlier in 2024, in fulfilling the first contract, we shipped the product to the level of performance specification. We needed a bit of rework. both in engineering and also in operations. That was the first article. The first article businesses are pretty difficult. We do charge the engineering to the cost of goods sold line, so you see all of the cost of developing a product on these first articles, again, in the gross margin line. So clearly, when we do a development of a product in this manner, the return on investment is on the first tool. That tool was more painful than any of us would have liked. The second, third, and fourth system are trailing much favorably to the first system, hence why you've seen an improvement in the gross margins over the last couple of quarters. A lot of the technology that we developed or redeveloped in the first system, we also have ported, we put it on the shelf as technology, and we ported it into the industrial order that we received, those three systems. So a lot of that learning went into subsequent similar class products.

Okay, great. Go ahead.

No, no, I think to answer your question is yes, you understand the storyline pretty well.

Okay, and you expect margins to continue north of 30% over the next, let's say, year or two?

It'll depend on absorption of our overhead if we keep the volume at that level and we control any missteps on the first article, control of first article costs. I That's our objective.

Okay, thank you so much. I'm going to allow someone else to ask some questions. Thank you so much.

Thank you, David.

Okay. Thank you. Our next question comes from the line of Brett Reese with Jamie Montgomery Scott. Please proceed.

Great. Can you hear me again? I'm sorry.

Yeah, no, of course, Brett. Thank you.

Great, great. I've got one or two more questions, but I don't want to be remiss in not telling you how appreciative I am and rich for the continued controlling of costs, your work in capital management, and the cash levels are still at very nice, robust levels, so we appreciate that. The question with what's going on with this business with Musk and Doge, is there any potential for you to hire some engineering talent from the government, from people that are looking for employment in the private sector?

Interesting. I think Elon will probably hire any good engineers first, but we believe we've properly sized the organization for our engineering development programs as well as our capacity with our operating engineers. At this point in time, we're not looking at any hiring in the short term.

The tariff stuff, did you inventory some of the things that might be in short supply? Are there preliminary discussions how to apportion extra costs between you and customers? The tariff thing is driving not only you, but I'm sure a lot of other businesses are crazy. How are you? Do you have plans?

Good question. Tariffs, we've seen the impact of tariffs. We were not buying an excessive amount of product from China in our CVD product line in Central Islet. In SDC, there are some components that are purchased in China. And just as we did during the COVID period, a time with supply chain basically disassembling on us, we went out and bought some periods of safety stock of components. And we continue to look at that and do that intelligently, I think, at SDC. On the CVD side of things, we identified some suppliers, and actually was through the advent of use of AI, identified some suppliers in China for certain components. The fact of the matter is you can still buy product from China with, I think there was a 45% total tariff. Rich, but I think I'm right, about 45% tariff on that product group. And it was still almost half of what we would have bought it from a U.S. distributor. So on that job, we actually reduced our material content. But to report to you, yes, we're seeing tariffs on products from China, but for us, that should not impact us severely other than indirect. When one of our suppliers buys a lot of product from China, that's when it will impact us. But at this point in time, it's early. We have not seen that effect. But it is a risk. And that's part of my earlier discussion is, we'll see the challenges in 2025 due to the tariffs and this whole, at some point in time, you know, I'm hoping that, you know, we don't have a restriction of materials coming into the US.

Great. Thank you for taking my questions. And if I don't speak to you again, have a good summer.

Thank you, Brad. Thank you. Good to hear your voice.

Thank you. There are no further questions at this time. I'd like to pass the call back over to Emmanuel for any closing remarks.

Thank you, operator, and thanks for everyone dialing in today and for all the good questions. We appreciate the attendance on the call and your support and the continued loyalty that you have in us and faith, as well as that of our employees If there are no further questions, please reach out to Rich or myself directly. This concludes our call for today. Thank you.

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