CPS Technologies Corporation — Q3 2016 Form 10-Q
Business and period: CPS supplies metal-matrix composite materials and related electronic packages for electronics, power generation, automotive, and other markets. This unaudited report covers the quarter ended October 1, 2016, and the first nine months of fiscal 2016. The MD&A identifies the quarter as Q3; the income-statement heading appears to say “First Quarter Ended.”
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.327 million | $5.423 million | $12.478 million | $16.349 million |
| Gross margin | $386,000; 12% of sales | $974,000; 18% | $2.078 million; 17% | $3.409 million; 21% |
| Operating income (loss) | $(377,000) | $14,000 | $(486,000) | $323,000 |
| Net income (loss) | $(139,000) | $8,000 | $(200,000) | $196,000 |
| Basic and diluted EPS | $(0.01) | $0.00 | $(0.02) | $0.01 |
Cash flow and liquidity: Nine-month operating cash flow was $522,000, compared with $1.059 million in 2015. Capital spending was $520,000; investing cash flow was $(480,000). Cash increased $46,000 to $3.458 million. At October 1, current assets were $8.880 million and current liabilities $1.427 million; total assets were $12.391 million and stockholders’ equity $10.965 million. Accounts receivable was $2.456 million and net inventory $2.142 million.
Debt and facilities: No borrowings were outstanding under the $2 million revolving credit line. Based on the borrowing base, $1.229 million was available; the separate $500,000 equipment finance facility was unused. Both facilities mature in May 2017. CPS reported compliance with covenants, including a 6.2x current ratio against a 1.5x minimum. Operating lease obligations totaled $402,800.
Changes and management commentary
- Q3 revenue fell 39%; nine-month revenue fell 24%. Management attributed the decline mainly to lower baseplate sales, with hermetic packages, fracking balls, and lids also contributing. Nine-month armor revenue increased slightly but did not offset declines.
- Lower sales reduced gross margin and drove the operating loss. Reduced factory-support spending and lower SG&A partly offset the impact. Nine-month SG&A declined 17%, to $2.564 million.
- Q3 and nine-month results included $40,000 of other income from selling used equipment above book value.
- Management expected to fund remaining-2016 working capital needs through operating cash flow, cash balances, and credit-line borrowings if necessary, and said available resources should cover foreseeable cash requirements. No numerical earnings or revenue guidance was provided.
Risks, contingencies, and other items
- CPS depends on a limited number of customers; losing one could require additional external financing. Management cautioned that insufficient revenue or inability to reduce discretionary spending could materially impair business objectives and the ability to meet obligations.
- Approximately $802,000 of inventory was held at customers’ locations under consignment arrangements. Days sales outstanding rose to 66 days from 59 at year-end 2015.
- The company reported deferred tax assets totaling approximately $2.391 million and recorded a tax benefit despite its loss. Management provided no valuation allowance, believing future taxable income would allow realization; the filing says net operating loss carryforwards were fully used by year-end 2015.
- The Norton facility lease was extended through February 2018; the company also has an option to buy the property and a right of first refusal. No material changes to previously disclosed risk factors were reported, and no legal proceedings were listed.
Important facts for investors to verify
- Confirm the quarter presentation: the income-statement heading says “First Quarter Ended,” while the MD&A describes Q3 and the filing period ends October 1, 2016.
- Track whether sales recover in the affected product lines and whether lower volume continues to pressure gross margins and operating results.
- Monitor customer concentration, receivables and DSO, inventory levels, and the extent of consigned inventory.
- Assess cash generation, capital spending, covenant headroom, and the company’s ability to maintain financing access as the credit facilities approach their May 2017 maturity.
- Evaluate the assumptions supporting realization of deferred tax assets and management’s expectation of future taxable income.