CPS Technologies Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 27, 2020. CPS makes custom metal-matrix composite products and electronic housings and packages for markets including wireless communications, microprocessors, transportation, power generation, defense, and avionics.
Financial performance and liquidity
- Q2 revenue: $5.76 million, down 10% from $6.37 million in Q2 2019. The filing attributes the decline mainly to lower baseplate sales and an unusually large order in the prior-year quarter. Price increases of 10% offset part of the decline.
- Q2 profitability: Gross margin was $1.18 million, or 21% of sales, versus $1.17 million, or 18%, a year earlier. Operating income was $331,000 versus $258,000; net income was $299,000 versus $251,000. Diluted EPS was $0.02 in both periods.
- First-half results: Revenue was $12.27 million, up 5% from $11.64 million. Gross margin increased to $2.73 million, or 22% of sales, from $1.33 million, or 11%. Operating income was $952,000 versus an operating loss of $486,000; net income was $901,000 versus a net loss of $494,000. Diluted EPS was $0.07 versus a loss of $0.04.
- Expenses and interest: Q2 SG&A declined 7% to $853,000; first-half SG&A declined 2% to $1.78 million. Interest expense was $32,000 in Q2 and $51,000 for the first half, compared with $7,000 in each prior-year comparable period. The company reported no income tax provision.
- Cash flow: First-half operating cash flow was positive $443,000, compared with negative $1.10 million in 2019. Capital spending was $233,000; net cash used in investing was $228,000. Cash decreased $17,000 to $117,000. Working-capital changes included increases in receivables and inventory, partly offset by higher payables and deferred revenue.
- Balance sheet and liquidity: At June 27, cash was $117,000, accounts receivable $4.98 million, inventory $3.87 million, current assets $9.14 million, and current liabilities $4.33 million. CPS reported $1.03 million drawn on its $3.0 million revolving line and said its borrowing base allowed another $1.97 million. Management calculated net cash, after line-of-credit borrowings, at negative $910,000.
- Debt and equity: The line of credit is a demand facility, secured by receivables and other assets, with interest at LIBOR plus 6.5%; covenants were met or waived. CPS also financed a $209,000 ultrasound microscope purchase with a five-year note at 6.47%; $197,000 remained outstanding at quarter-end. Stockholders’ equity was $6.31 million.
Changes, outlook, and risks
- Q2 revenue declined year over year, but gross margin percentage and operating income improved. For the first half, pricing and product mix contributed to higher revenue and substantially stronger margins and earnings.
- Receivables rose to $4.98 million, and days sales outstanding increased from 67 at year-end to 78. CPS attributed the increase to greater sales to one large customer with longer payment terms. Inventory rose to $3.87 million, partly due to finished goods awaiting outside plating for its two largest customers; inventory turnover declined to 5.5 times from a 6.2-times 2019 average.
- COVID-19 effects included reduced Q2 purchases by a major customer that had built inventory in Q1 and faced weaker demand from its own customers. CPS expected that customer’s purchases to be lower in Q3 and Q4 and anticipated at least modest ongoing negative effects. Other identified risks included lower demand, higher freight costs, absenteeism, labor inefficiencies, and overtime. The company remained open as part of the Defense Industrial Base.
- Management expected existing cash and, if needed, bank borrowings to fund operations for the remainder of 2020 and stated they should cover cash requirements for the foreseeable future. This expectation is qualified by risks that revenue or spending reductions may be insufficient to meet obligations. CPS also warned that loss of a major customer could require additional financing.
- The company said expanded credit availability allowed it to end prompt-pay discounts to certain customers, which it expected to benefit earnings. The line’s demand feature and reliance on a limited number of customers remain important risks. No specific numerical earnings or revenue guidance was provided.
- Other disclosures: lease liabilities totaled $100,000, with the principal capitalized lease expiring in February 2021. CPS reported no legal proceedings, no material changes to its previously disclosed risk factors, and no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether the major customer’s lower Q3–Q4 orders and broader COVID-19 effects materialized, and how customer concentration affects revenue.
- Receivable collection trends, the elevated 78-day DSO, and inventory levels, including goods awaiting outside plating and inventory turnover.
- Availability and terms of the secured, callable credit line, covenant status, and the company’s ability to fund operations given negative net cash.
- Whether pricing and product mix sustain first-half margin gains as quarterly sales fluctuate.
- Whether management’s liquidity expectations remain achievable if demand weakens or operating costs rise.