CVD EQUIPMENT CORPORATION You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with theSEC . In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results. Executive Summary We have served the advanced materials markets with chemical vapor and thermal process equipment for over 40 years. CVD designs, develops, and manufactures a broad range of chemical vapor deposition, gas control, and other state-of-the-art equipment and process solutions used to develop and manufacture materials and coatings for industrial applications and research. To learn more about CVD's systems and offerings, visit www.cvdequipement.com.
During 2022, the CVD team accomplished a number of milestones, including:
? Overall 57% revenue growth, led by sales of our PVT150 system that is used to
grow silicon carbide crystals;
? Received orders for 24 of our PVT150 systems in 2022 and a cumulative total
orders of 30 PVT150 systems in 2021 and 2022. We commenced marketing of our
PVT150 system to other potential customers during the latter part of 2022.
? Received a$3.7 million order from a major aerospace company for the production of a CVI system. The system will be used by our customer to manufacture CMCs) for their gas turbine jet engines.
? Total bookings for 2022 were approximately
million or 56.6% as compared to 2021.
? Increased our backlog by $7.4 million to $17.8 million .
? Expanded our facilities to enhance our manufacturing capabilities.
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Business Update Since early 2021, we have focused on bolstering our core business of equipment manufacturing. This has resulted in the rationalization of ourCVD Materials business, including the consolidation of our Tantaline business into our Nordborg,Denmark facility. Our core strategy is to focus on growth market applications end-user markets related to the "electrification of everything" and aerospace. The phrase "electrification of everything" refers to the shift from fossil fuels to the use of electricity to power devices, buildings, electric vehicles or EVs, and many other applications. With respect to aerospace, our systems are being used by our customers to produce ceramic matrix composite materials or CMCs that will be used in next generation jet engines with the objective of reducing jet fuel consumption and contributing to the decarbonization of that industry. During 2021, we received the first six (6) orders for our PVT150 system that is used by our customer to grow silicon carbide crystals. These crystals are than further processed into silicon carbide wafters by our customer and later processed into integrated circuits and other devices. Devices based on silicon carbide have been shown to reduce energy consumption in EVs and reduce the need for additional cooling elements. During 2022, we received an additional 24 orders from the same customer. We also launched our marketing campaign for the PVT150 in the latter part of 2022 as we seek orders from other potential customers.
During 2022, we completed the production of a system for a customer that deposits coatings onto powders used in silicon-graphite anodes that has the objective of increasing EV battery performance while lowering cost.
We believe that the receipt of a$3.7 million order from a major aerospace company in 2022 for the production of chemical vapor infiltration system reflects the beginnings of a revival in aircraft manufacturing. In prior years, we had sold Tow-Coating Systems to manufacture CMCs to another major jet engine manufacturer and have an installed base of such systems at that customer. During 2022, new order bookings approximated$33.1 million , representing an increase of approximately 56.6% compared to bookings of$21.1 million in 2021. We have achieved order growth in all segments, including a 100% growth in the CVD equipment portion of the business, with 33 system orders in 2022, that included the 24 PVT150 systems, as compared to a total of 23 systems booked in 2021. 34
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Results of Operations
Years Ended
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for the years endedDecember 31, 2022 and 2021 and the period-over-period dollar and percentage changes for those line items (in thousands, except percentages). December 31, December 31, 2022 2021 Change Percent Revenue$ 25,813 $ 16,447 9,366 57 % Cost of revenue 19,186 13,370 5,816 44 % Gross profit 6,627 3,077 3,550 115 % Operating expenses Research and development 1,906 1,785 121 7 % Selling and shipping 1,216 864 352 41 % General and administrative 5,328 5,092 236 5 % Total operating expenses 8,450 7,741 709 9 % Operating loss (1,823 ) (4,664 ) 2,841 (61 %) Other income (expense): Interest income 162 6 156 * Interest expense (8 ) (261 ) 253 * Employee retention credits 1,529 - 1,529 * Foreign exchange loss (95 ) (143 ) 48 * Gain on sale of building - 6,894 (6,894 ) * Gain on debt extinguishment - 2,443 (2,443 ) * Other income 15 500 (485 ) * Total other income, net 1,603 9,439 (7,836 ) * (Loss) income before income tax (220 ) 4,775 (4,995 ) * Income tax expense 4 28 (24 ) * Net (loss) income $ (224 )$ 4,747 (4,971 ) * * Not meaningful Revenue December 31, December 31, 2022 2021 Change Percent CVD Equipment$ 16,674 $ 8,589 $ 8,085 94 % SDC 6,541 4,849 1,692 35 % CVD Materials 3,171 3,355 (184 ) (5 %) Intersegment sales elimination (573 ) (346 ) (227 ) * Total$ 25,813 $ 16,447 $ 9,366 57 % * Not meaningful 35
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Our revenue for the year ended
The increase in revenue versus the prior year period was primarily attributable to increased revenue of$8.1 million from theCVD Equipment segment related to equipment sales and spare parts, a$1.7 million increase in revenue from our SDC segment, offset, in part by, decreased revenue of$0.2 million from theCVD Materials segment. The increase in revenue in the period was principally the result of the recognition of revenue associated with our PVT150 systems. Sales of PVT150 systems were made to one customer in 2022 and represented 29.2% of our total revenues and 46% ofCVD Equipment segment revenues. Our order backlog atDecember 31, 2022 was approximately$17.8 million as compared toDecember 31, 2021 of$10.4 million . Our backlog atDecember 31, 2022 consists of approximately$16.2 million related to remaining performance obligations of contracts in progress and the balance of approximately$1.6 million represents orders received from customers. Historically, our revenues and orders have fluctuated based on changes in order rate as well as other factors in our manufacturing process that impacts the timing of revenue recognition. Accordingly, orders received from customers and revenue recognized may fluctuate from quarter to quarter. The revenue contributed by theCVD Equipment segment for the year endedDecember 31, 2022 represented 65% of overall revenue as compared to 52% of overall revenue for the year endedDecember 31, 2021 . The increase in revenues of$8.1 million or 94% resulted from an increase in orders in 2022 over 2021 due to increased demand for our products, principally for our PVT150 systems. The revenue contributed by the SDC segment for the year endedDecember 31, 2022 represented 25% of overall revenue as compared to 29% of overall revenue for the year endedDecember 31, 2021 Revenue for our SDC segment increased$1.7 million or 35% due to increased orders and demand for the SDC's products during 2022 as compared to the prior year. The revenue contributed by theCVD Materials segment for the year endedDecember 31, 2022 represented 12% of our overall revenue as compared to 20% of overall revenue for the year endedDecember 31, 2021 The decrease of$0.2 million was principally due to lower demand for coating services by our Tantaline subsidiary during 2022 as compared to 2021. Gross Profit Gross profit for the year endedDecember 31, 2022 amounted to$6.6 million , with a gross profit margin of 26%, compared to a gross profit of$3.1 million and a gross profit margin of 19% for the year endedDecember 31, 2021 . The increase in gross profit of$3.6 million was primarily the result of leveraging fixed costs on higher sales levels and improved product mix, which offset certain component cost increases and higher compensation costs. 36 --------------------------------------------------------------------------------
Research and Development For the year endedDecember 31, 2022 , research and development expenses were$1.9 million , or 7.4% of revenue as compared to$1.8 million , or 11% for the year endedDecember 31, 2021 . The increase in 2022 was the result of increased personnel and employee-related costs to develop new products for key growth markets. General engineering support and expenses related to the development of more standard products and value-added development of existing products are reflected as part of research and development expense. General engineering support and expenses are charged to costs of goods sold when work is performed directly on a customer order. Selling Selling expenses were$1.2 million or 4.7% of the revenue for the year endedDecember 31, 2022 as compared to$0.9 million or 5.3% for the year endedDecember 31, 2021 . The increase in 2022 was primarily the result of increased personnel and employee-related costs during to support increased marketing efforts. General and Administrative General and administrative expenses for the year endedDecember 31, 2022 were$5.3 million or 21% of revenue compared to$5.1 million or 31% of revenue for the year endedDecember 31, 2021 , an increase of$0.2 million . The increase in expenses was principally due to increases in personnel and employee-related costs of approximately$0,6 million to support the growth of our business, a severance charge of$0.1 million , a bad debt recovery in the prior year of$0.1 million and other increases of$0.3 million . Offsetting these increases were lower professional fees of approximately$0.3 million , decreased building-related costs of associated with the 555 Building that was sold inJuly 2021 of approximately$0.6 million . Other Income, Net
Other income, net was
During 2022, we conducted an analysis to determine if we were entitled to
employee retention credit ("ERC") under the Coronavirus Aid, Relief, and
Economic Security Act as amended by the Taxpayer Certainty and Disaster Tax
Relief Act of 2020 and the American Plan Act of 2021. Based in our analysis, we
determined that we are entitled to an ERC of approximately $1.5 million related
to payroll paid in the first and third quarters of 2021 under the applicable
Internal Revenue Service regulations related to ERCs. Accordingly, the Company
has recognized other income of $1.5 million for the year ended December 31,
2022 .
The gain on debt extinguishment in 2021 was the result of the forgiveness of the
Company's PPP loan in the amount of $2.4 million . The gain on the sale of the
building of $6.9 million in 2021 was the result of the sale of our 555 Building.
Other income from subleasing a portion of our 555 Building (which was sold on
July 26, 2021 ) was $500,000 for the year ended December 31, 2021 . The foreign
exchange losses in both 2022 and 2021 are related to an intercompany loan
between CVD and its Tantaline subsidiary in Denmark .
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As a result of our increased cash position from the sale of the 555 Building in
July 2021 and higher interest rates, interest income increased from $6,000 in
2021 to $162,000 in 2022. In addition, interest expense decreased principally
due to the satisfaction of the mortgage loans on our 555 Building on July 26,
2021 and on our 355 Building on March 1, 2022 .
Income Taxes
Income tax expense for the years ended December 31, 2022 and 2021, was $4,000
and $28,000 , respectively, related to minimum state taxes. We continue to
evaluate for potential utilization of our deferred tax asset, which has been
fully reserved for, on a quarterly basis, by reviewing our economic models,
including projections of future operating results.
Inflation and Supply
We experienced increased costs on certain materials and components as well as delays in supply chain delivery, which may also impact our ability to recognize revenue and reduce our gross profit margins, as well as extend our manufacturing lead times and reduce our manufacturing efficiencies. We have commenced placing orders with more lead time to help mitigate the manufacturing delays, as well as assessing other suppliers or components to attempt to mitigate the potential cost impacts. In addition, we are utilizing our in-house flexible manufacturing to attempt to further mitigate both potential schedule delivery delays and material cost increase. While we have initiated actions to mitigate the potential negative impacts to our revenue and profitability, there can be no assurance of the ultimate impact and the length of time that the supply chain factors may impact our revenues and profitability. Inflation has also had an impact on salaries and compensation. To remain competitive in the acquisition and retention of our employees, we have reviewed and adjusted salaries and implemented bonus incentives to mitigate the potential negative impacts of inflation on our employees.
Liquidity and Capital Resources
As ofDecember 31, 2022 , we had aggregate working capital of$15.5 million compared to aggregate working capital of$16.7 million atDecember 31, 2021 . Our cash and cash equivalents atDecember 31, 2022 and 2021 were$14.4 million and$16.7 million , respectively. Net cash provided by operating activities during 2022 was$194,000 . This is the result of the net loss of$224,000 as adjusted for non-cash expenses of depreciation and amortization and stock-based compensation of$1.3 million . Cash from operations decreased due to increases in a) accounts receivables of$2.3 million due to increases in our revenues, b) inventories of$1.3 million due to longer lead times and additional orders, and c) other receivables as we recorded a receivable of$1.5 million for ERC credits offset by an increase in contract liabilities of$2.4 million related to advance payments from customers in excess of costs incurred and from an increase of$1.0 million in accounts payable and accrued expenses. 38
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Capital expenditures in the year ended
We had a loan agreement with a bank that was secured by a mortgage on our
Central Islip headquarters at
We believe that our cash and cash equivalent positions and our projected cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months from the filing of this Form 10-K. We will continue to assess our operations and take actions anticipated to maintain our operating cash to support the working capital needs.
Critical Accounting Policies and Estimates
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our critical estimates include accounting for certain items such as revenues on long-term contracts recognized on the input method; and the recoverable value of our long-lived assets.
We consider the following significant accounting policies to be critical because of their complexity and the high degree of judgment involved in maintaining them.
Revenue Recognition
We design, manufacture, and sell custom chemical vapor deposition equipment
through contractual agreements. These system sales require us to deliver
functioning equipment that is generally completed within three to eighteen
months from commencement of order acceptance. We recognize revenue over time by
using an input method based on costs incurred as it depicts our progress toward
satisfaction of the performance obligation. Under this method, revenue arising
from fixed price contracts is recognized as work is performed based on the ratio
of costs incurred to date to the total estimated costs at completion of the
performance obligations.
39-------------------------------------------------------------------------------- Incurred costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Contract material costs are included in incurred costs when the project materials have been purchased or moved to work in process as required by the project's engineering design. Cost based input methods of revenue recognition require us to make estimates of costs to complete the projects. In making such estimates, significant judgment is required to evaluate assumptions related to the costs to complete the projects, including materials, labor, and other system costs. If the estimated total costs on any contract are greater than the net contract revenues, we recognize the entire estimated loss in the period the loss becomes known and can be reasonably estimated. We have been engaged in the production and delivery of goods on a continual basis under contractual arrangements for many years. Historically, we have demonstrated an ability to accurately estimate total revenues and total expenses relating to our long-term contracts. However, there exist many inherent risks and uncertainties in estimating revenues, expenses and progress toward completion, particularly on larger or longer-term contracts. If we do not estimate the total sales, related costs, and progress toward completion on such contracts, the estimated gross margins may be significantly impacted, or losses may need to be recognized in future periods. Any such resulting changes in margins or contract losses could be material to our results of operations and financial condition. Long-Lived Assets Long-lived assets consist primarily of property, plant and equipment. Long-lived assets are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset's carrying value to determine if impairment exists pursuant to the requirements of ASC 360-10-35, "Impairment or Disposal of Long-Lived Assets." If the asset is determined to be impaired, the impairment loss is measured on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.
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