CVD Equipment Corporation (NASDAQ:CVV): Navigating Challenges, Investing in Growth

Published on September 24, 2024 | Ticker: CVV

CVD Equipment Corporation (NASDAQ:CVV) is a leading provider of chemical vapor deposition (CVD), thermal processing, and other state-of-the-art equipment and process solutions used to develop and manufacture advanced materials and coatings for industrial applications and research. The company has a rich history spanning over four decades, during which it has established a strong reputation for innovation and quality in the advanced materials market.

Business Overview

CVD Equipment operates through three key segments: CVD Equipment, Stainless Design Concepts (SDC), and CVD Materials. The CVD Equipment segment manufactures and sells chemical vapor deposition, physical vapor transport, and similar equipment. The SDC segment designs and manufactures ultra-high purity gas and chemical delivery control systems. The CVD Materials segment provides material coatings for aerospace, medical, electronic, and other applications, although it is not considered a core business for the company.

The company's core strategy is to focus on growth market applications in end markets related to the "electrification of everything," aerospace, and industrial applications. This includes supporting the shift from fossil fuels to electricity in powering devices, buildings, electric vehicles (EVs), and many other applications. In the aerospace sector, CVD's systems are used by customers to produce ceramic matrix composite materials (CMCs) that will be used in next-generation gas turbine jet engines, with the objective of reducing jet fuel consumption and contributing to the decarbonization of the industry.

Financials

For the fiscal year ended December 31, 2023, CVD Equipment reported annual revenue of $24.1 million and a net loss of $4.18 million. The company's annual operating cash flow was -$206,000, and its annual free cash flow was -$624,000. These financial results reflect the challenges the company has faced in navigating the current economic and geopolitical landscape, including supply chain disruptions and inflationary pressures.

In the first quarter of 2024, the company reported revenue of $4.9 million, a significant decrease from the $8.7 million reported in the same period of the prior year. The decline was primarily attributable to lower revenue of $2.9 million from the CVD Equipment segment, a $0.4 million decrease in revenue from the SDC segment, and a $0.6 million decrease from the CVD Materials segment due to the disposition of Tantaline in May 2023 and the wind-down of MesoScribe's operations.

Gross profit for the first quarter of 2024 was $0.9 million, with a gross profit margin of 17.5%, compared to a gross profit of $2.4 million and a gross profit margin of 28.0% in the first quarter of 2023. The decrease in gross profit was primarily the result of lower gross profit margins on contracts in progress during the current period, as compared to the first quarter of 2023, which benefited from contracts with higher gross margins.

The company reported an operating loss of $1.6 million in the first quarter of 2024, compared to an operating loss of $0.2 million in the first quarter of 2023. This increase in the operating loss was due to the lower gross profit margin, partially offset by lower personnel costs from a reduction in the workforce in January 2024 and lower bonus accruals.

Liquidity

As of March 31, 2024, CVD Equipment had cash and cash equivalents of $11.9 million, compared to $14.0 million at December 31, 2023. The decrease in cash was primarily due to the net loss of $1.5 million, an increase in contract assets of $1.1 million, an increase in accounts receivable of $1.1 million, and an increase in inventories of $0.5 million, partially offset by an increase in contract liabilities of $1.1 million and non-cash items of $0.4 million.

The company's working capital at March 31, 2024, was $13.1 million, compared to $14.3 million at December 31, 2023. CVD Equipment believes that its cash and cash equivalents, along with its projected cash flow from operations, will be sufficient to meet its working capital and capital expenditure requirements for the next 12 months.

Backlog and Order Activity

CVD Equipment's backlog increased from $18.4 million at December 31, 2023, to $27.1 million at March 31, 2024. This increase was driven by several key order wins during the first quarter, including a strategic order for the company's PVT200 system from a new customer and a $10 million multisystem order for its industrial market silicon carbide CVD coating system.

The company's order activity has historically fluctuated based on changes in order rate, as well as other factors in its manufacturing process that impact the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter.

Risks and Uncertainties

CVD Equipment currently operates in a challenging economic environment, as the global economy continues to confront the remaining impacts from the pandemic, geopolitical conflicts, inflationary pressures, and adverse supply chain disruptions. Specific impacts on the company have included:

- Significant geopolitical developments across Europe and Asia (including the war in Ukraine) that have and may continue to restrict the company's ability to procure raw materials and components, as well as impact its ability to sell its products into China, Russia, and other Eastern European and Asian regions. - Supply chain disruptions that have led to much longer lead times to acquire raw materials for production and have led to inflationary pressures in both materials and labor. These supply chain disruptions have impacted the company's ability to recognize revenue in a timelier manner as they delay the company's manufacturing processes.

While management has initiated actions to mitigate the potential negative impacts to its revenue and profitability, the company is unable to predict the full impact that these uncertainties may have on its future results of operations and cash flows.

Outlook

Despite the challenges faced in the first quarter of 2024, CVD Equipment remains focused on its strategic growth initiatives. The company continues to invest in research and development, sales, and marketing activities, including direct engagement with multiple potential customers, to further penetrate key market opportunities.

The company's recent order wins, including the $10 million multisystem order for its industrial market silicon carbide CVD coating system and the order for its PVT200 system from a new customer, are encouraging signs of the company's ability to capitalize on the growing demand for its advanced materials and coatings solutions.

As CVD Equipment navigates the current economic and geopolitical landscape, the company remains cautiously optimistic about its long-term prospects. By carefully managing its cost structure, maintaining a strong liquidity position, and continuing to invest in innovation and customer relationships, the company is well-positioned to weather the near-term challenges and emerge as a stronger, more resilient organization.

Conclusion

CVD Equipment Corporation is a well-established player in the advanced materials market, with a proven track record of innovation and a focus on growth opportunities in the "electrification of everything," aerospace, and industrial sectors. While the company has faced headwinds in the first quarter of 2024, its recent order activity, strategic initiatives, and strong liquidity position suggest that it is well-equipped to navigate the current challenges and capitalize on future growth opportunities. As the company continues to execute on its strategic priorities, investors will be closely watching its ability to return to profitability and drive sustainable long-term value.

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