CPS Technologies Corp. — Q1 2016 Form 10-Q
Reporting period: Fiscal quarter ended April 2, 2016. The company manufactures advanced materials, including metal-matrix composites, and related electronic housings and packages for electronics, power generation, automotive, and other markets. Q1 2016 was a 14-week quarter; the comparable 2015 quarter was 13 weeks.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $5.216 million | $5.290 million | Down 1%; product sales declined slightly, while armor and hermetic package sales increased. No significant price changes. |
| Gross profit / margin | $1.132 million / 21.7% | $1.135 million / 21.5% | Gross profit was essentially flat; margin improved slightly. |
| Operating income / margin | $223,388 / 4.3% | $122,527 / 2.3% | Improved primarily because of lower selling, general and administrative expenses. |
| Net income | $197,128 per financial statements | $73,787 | Financial statements show a substantial increase; MD&A instead reports Q1 2016 net income of $137,000, an inconsistency to verify. |
| EPS | $0.01 basic and diluted | $0.01 basic and diluted | As reported. |
| Operating cash flow | $662,105 | $(57,712) | Improved, principally reflecting an $871,033 reduction in receivables. |
| Capital expenditures | $366,987 | $97,595 | Higher investment in property and equipment. |
| Cash and equivalents | $3.710 million | $3.413 million at Dec. 26, 2015 | Up $297,011 during the quarter. |
| Debt and credit availability | No borrowings | — | $2 million revolving line and $500,000 equipment facility renewed in April 2016, both maturing May 2017. Borrowing base supported $1.536 million under the line at quarter-end. |
Financial position and material changes
- At April 2, 2016, current assets were $9.622 million and current liabilities $1.941 million, implying working capital of approximately $7.681 million and a current ratio of approximately 5.0.
- Cash increased while accounts receivable fell to $2.701 million from $3.572 million; days sales outstanding decreased from 59 to 50. Management attributes collections in part to the 14-week quarter.
- Inventory was essentially unchanged at $2.627 million. Consigned inventory at customers’ locations increased to $961,000 from $763,000.
- Current liabilities declined by approximately $614,000, primarily from lower accounts payable and accrued expenses. Stockholders’ equity was $11.285 million; the company reported no debt borrowings.
- SG&A fell 10% to $908,000, reflecting lower incentive compensation, 401(k) match, payroll taxes, professional fees, and legal expenses, partly offset by China sales and marketing costs.
- Revenue included no cooperative-agreement R&D revenue, versus $42,254 in Q1 2015. The U.S. Army cooperative agreement had expired March 31, 2015.
Outlook, risks, and other disclosures
- No specific revenue or earnings guidance is provided. Management expects working-capital needs for the remainder of 2016 to be funded by operating cash flow, existing cash, and credit-line borrowings if needed; management believes available resources will meet requirements for the foreseeable future, but gives no assurance.
- The company depends on a limited number of customers; losing a major customer could require additional external financing. Insufficient revenue, failure to raise capital, or inability to reduce discretionary spending could materially affect business objectives.
- Bank covenants were satisfied at quarter-end. Reported actual current ratio was 4.9 versus a 1.5 minimum; liabilities to tangible net worth was 0.2 versus a 1.0 maximum. The debt-service coverage covenant was listed as not applicable.
- Facility leases extend through February 2017, with options that could extend occupancy through February 2019. Contractual operating lease payments totaled $520,400, excluding unexercised options. The company reported $835,000 of construction in progress and no outstanding production-equipment purchase commitments.
- Deferred tax assets totaled $2.121 million. Management recorded no valuation allowance, believing future taxable income will permit realization; all remaining net operating loss carryforwards were used in 2015.
- Management reported no material changes to risk factors, no legal proceedings, no material change in internal control over financial reporting, and no significant exposure to interest-rate or foreign-currency changes. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile the MD&A’s $137,000 Q1 2016 net-income figure with the unaudited income statement’s $197,128 figure and the corresponding cash-flow statement.
- Assess comparability given the 14-week current quarter versus the 13-week prior-year quarter, including the effect on revenue, collections, and operating results.
- Monitor customer concentration, sales mix and the pace of automotive, armor, and other emerging-market programs.
- Track cash generation, receivables, consigned inventory, capital spending, and credit availability, including compliance with bank covenants.
- Evaluate deferred-tax-asset realization against future taxable income and the company’s facility lease requirements after February 2017.