CPS Technologies Corp. — Q1 2019 Form 10-Q
Reporting period: Fiscal quarter ended March 30, 2019; comparisons are to the quarter ended March 31, 2018 unless noted. CPS supplies advanced materials, including metal-matrix composites, and assembles electronic housings and packages for electronics, power-generation, automotive and other markets.
Financial performance and position
| Metric | Q1 2019 | Comparable period / date |
|---|---|---|
| Revenue | $5.270 million | $4.155 million; up 27% |
| Gross profit and margin | $159,000; about 3% of revenue | $144,000; about 3% |
| Operating loss | $744,000 | $764,000 |
| Net loss | $744,000; $0.06 per diluted share | $574,000; $0.04 per diluted share |
| Cash used in operations | $481,000 | $1.066 million |
| Capital expenditures | $116,000 | $143,000 |
| Cash and cash equivalents | $231,000 | $629,000 at December 29, 2018 |
| Line-of-credit borrowings | $200,000 | None at December 29, 2018 |
| Current assets / current liabilities | $6.704 million / $3.136 million | $7.031 million / $2.656 million at December 29, 2018 |
| Total liabilities / stockholders’ equity | $3.264 million / $5.153 million | $2.656 million / $5.836 million at December 29, 2018 |
Management reported net cash (cash less bank borrowings) of approximately $31,000 at quarter-end. The company had $3.192 million in accounts receivable and $3.078 million in net inventory. Days sales outstanding rose to 54 days from 45 at year-end; management said the prior-period figure was unusually low. Inventory turnover was 5.9 times over the latest four quarters, versus 6.0 times for 2018.
Material changes and management commentary
- Revenue increased due to nearly equal increases in hermetic packages and baseplates; price changes were insignificant.
- Gross profit was nearly flat despite higher sales. Management cited unfavorable customer and product mix, including a higher share of lower-margin hermetic packages, and, to a lesser extent, unfavorable manufacturing variances.
- SG&A was essentially flat at $904,000 versus $908,000, with higher marketing spending offset by lower sales commissions.
- The operating loss narrowed slightly, but the net loss increased from the prior-year quarter because Q1 2018 included a $190,000 income tax benefit. In Q1 2019, a $220,000 increase in the valuation allowance fully offset deferred tax benefits, leaving no income tax benefit reported.
- Operating cash use improved year over year, helped in part by working-capital movements. Cash declined during the quarter, and the company drew $200,000 on its revolving credit line.
Outlook, risks and unusual items
- Management expected existing cash and bank borrowings to fund operations for the remainder of 2019. No revenue, earnings or margin guidance was provided.
- The $1.5 million Santander revolving credit facility matures June 30, 2019, bears interest at prime plus 1%, and is secured by receivables and other assets. At quarter-end, the borrowing base permitted approximately $1.3 million of additional borrowing.
- The company did not meet the earnings covenant at March 30, 2019; Santander granted a waiver on May 13. The filing’s covenant table also reports a 2.1x current ratio against a 2.0x minimum and liabilities-to-tangible-net-worth of 0.6x against a 0.7x maximum; the debt-service coverage covenant was waived.
- Management cited dependence on a limited number of customers: losing one could require additional external financing. Insufficient revenue, additional capital or spending reductions could adversely affect business objectives.
- A European customer claim concerns nickel plating on some baseplates supplied during 2017–2018. The customer warned of possible additional costs and consequential damages; the amount is not quantifiable, insurance is involved, and no loss was accrued. The company said it expected an amicable resolution but acknowledged possible legal proceedings.
- CPS adopted lease accounting standard ASC 842 in Q1. It recognized a $276,000 right-of-use asset and lease liability at March 30; management said adoption did not materially affect operating results or liquidity.
- After quarter-end, Charles K. Griffith Jr. became CFO effective May 6, replacing the retiring CFO; he received options to purchase 75,000 shares.
Important facts for investors to verify
- Whether sales growth translates into improved gross margin, given the reported unfavorable product and customer mix.
- The status and renewal or replacement of the Santander facility before its June 30, 2019 maturity, including covenant compliance and available borrowing capacity.
- Cash burn, working-capital needs, and the company’s ability to fund operations if revenue weakens or a major customer is lost.
- Any developments, customer claims, insurance coverage or financial exposure related to the nickel-plating issue.
- The basis for the deferred-tax valuation allowance and whether tax benefits may be realized in future periods.