CPS Technologies Corporation — Q2 2013 Form 10-Q
Business context and reporting period. CPS supplies advanced material solutions, principally metal-matrix composites, and assembles housings and packages for electronics, power-generation, automotive, and other markets. The unaudited quarter ended June 29, 2013; both Q2 2013 and Q2 2012 comprised 13 weeks.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $5.301 million | $3.628 million | $10.332 million | $7.183 million |
| Gross margin | $1.363 million (26% of sales) | $193,000 (5%) | $2.278 million (22%) | $159,000 (2%) |
| Operating income (loss) | $355,000 | $(652,000) | $370,000 | $(1.495) million |
| Net income (loss) | $237,000 | $(373,000) | $239,000 | $(907,000) |
| Diluted EPS | $0.02 | $(0.03) | $0.02 | $(0.07) |
Product sales were $5.241 million in Q2 and $10.154 million in the first half; cooperative-agreement R&D revenue was $60,000 and $177,000, respectively. Q2 total revenue rose 46% year over year, and first-half revenue rose 44%. Management attributed growth mainly to traction-product baseplates, with hermetic packages also contributing in Q2. Higher volume and, to a lesser extent, improved manufacturing efficiency drove the gross-margin improvement. SG&A increased 19% in Q2 to $1.008 million and 15% in the first half to $1.908 million, mainly reflecting higher sales commissions; first-half costs also included higher legal expenses related to an overseas patent issue.
Cash flow, liquidity, and debt
- First-half operating cash flow was $556,000, versus cash used of $442,000 in the prior-year period. Investing used $279,000, principally for equipment; financing used $292,000.
- Cash and cash equivalents were $292,000 at June 29, 2013, including $70,000 restricted under the bank agreement; the balance sheet reports $222,000 as cash and cash equivalents plus $70,000 restricted cash. Year-end 2012 cash was $307,000.
- The company had no revolver borrowings at quarter-end, compared with $500,000 at year-end 2012. The $2 million revolving credit facility and $500,000 equipment finance facility were renewed through May 2014. The revolver rate is prime plus 1%; $1.973 million was available under its borrowing base at quarter-end. The equipment lease line had a $163,000 balance and $209,000 of remaining capacity.
- Reported capital-lease obligations totaled approximately $128,000. Total liabilities were $2.689 million and stockholders’ equity was $8.004 million at quarter-end. Current assets were $6.519 million and current liabilities $2.654 million; management reported a 2.5 current ratio.
- Receivables increased to $3.662 million from $2.876 million at year-end; days sales outstanding improved to 62 from 63. Net inventory declined to $2.080 million from $2.457 million, including a $317,000 obsolescence reserve. $892,000 of inventory was held at customer locations on consignment.
Outlook, risks, and other notable items
- Management expected to fund working capital for the remainder of 2013 from operating cash flow, existing cash, and the credit line as needed. It believed these resources would cover cash needs for the foreseeable future, but cautioned that this depended on revenue generation and the ability to reduce discretionary spending if operating goals were missed. No specific revenue or earnings guidance was provided.
- The company depends on a limited number of customers; losing a major customer could require additional external financing. Management also warned that insufficient revenue, inability to raise capital, or failure to reduce spending could adversely affect its objectives and ability to meet obligations.
- Bank facilities are secured and cross-defaulted/cross-collateralized, include financial covenants, and require $70,000 of restricted cash. CPS reported covenant compliance at June 29, 2013. The filing says the restricted cash would be released when the company reports Q2 net income.
- Management expects to realize its deferred tax assets based on sufficient future taxable income; no valuation allowance was recorded. This expectation is subject to future results.
- Capital expenditures were $279,000 in the first half. Construction in progress was $362,000, with approximately $51,000 of production-equipment purchase commitments. Management planned to finance these investments with cash, operating funds, and lease financing.
- The company announced a multi-year supply agreement with a major tier-one automotive supplier for AlSiC pin-fin baseplates used in hybrid and electric vehicle motor controllers. The filing does not quantify expected revenue or timing from this agreement.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no legal proceedings and no material changes to the risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- Whether traction-product baseplate demand and the strong year-over-year revenue and gross-margin gains continue.
- Customer concentration, customer forecasts, and the extent and collectability of consigned inventory and receivables.
- Cash generation and access to bank and equipment financing, including covenant compliance, restricted-cash terms, and facility maturity in May 2014.
- The assumptions supporting realization of $2.797 million in deferred tax assets and the company’s ability to sustain profitability.
- Commercial timing and potential contribution of the automotive supply agreement, and progress on the overseas patent matter.