CPS Technologies Corporation — Q1 2012 Form 10-Q
Reporting period: Fiscal quarter ended March 31, 2012; comparisons are with the quarter ended April 2, 2011 unless noted. CPS supplies metal-matrix composites and related packages for electronics, transportation, energy, automotive, and defense applications. Financial statements are unaudited.
Financial results
| Metric | Q1 2012 | Prior-year quarter |
|---|---|---|
| Total revenue | $3.555 million | $5.840 million |
| Product sales | $3.343 million | $5.048 million |
| Cooperative-agreement R&D revenue | $212,123 | $792,487 |
| Gross margin | $(33,840) | $856,060 |
| Operating income (loss) | $(842,563) | $39,114 |
| Net income (loss) | $(534,335) | $16,143 |
| Basic and diluted EPS | $(0.04) | $0.00 |
| Operating cash flow | $(294,787) | $(535,476) |
| Capital expenditures | $150,958 | $202,026 |
- Revenue declined 39%. Management attributed the shortfall to weak traction-product orders, end-of-life declines in certain heat spreaders and lids, lower Army research-agreement revenue, and weak hermetic-package demand. Higher hybrid- and electric-vehicle baseplate sales partly offset those declines.
- Product gross margin was approximately negative 2%, versus 16% in the prior-year quarter, according to management. Lower sales volumes increased the effect of fixed costs, and outside finishing costs also weighed on margins. SG&A was $808,723, slightly below the prior-year $816,946.
- The income-tax line was a $314,000 benefit, including federal and state benefits. The company reported deferred tax assets totaling $1.795 million and stated that it had recorded no valuation allowance because it expects sufficient future taxable income to realize them.
- Cash and cash equivalents fell to $621,050 at March 31 from $1.142 million at December 31, 2011. Cash used in operating, investing, and financing activities was approximately $295,000, $151,000, and $76,000, respectively; the net cash decrease was $521,379.
- Receivables decreased to $2.485 million from $3.113 million; days sales outstanding improved to 63 from 66 days in Q4 2011. Inventory rose to $3.421 million from $3.139 million; $1.474 million was held at customer locations under consignment agreements.
- Total liabilities were $2.389 million, including $332,608 of current and long-term capital-lease obligations. Stockholders’ equity was $8.326 million. The filing reported no line-of-credit borrowings at March 31.
Outlook, liquidity, and risks
- Management expected business to accelerate in the second half of 2012 and said it expected to fund working-capital needs for the remainder of the year using cash and the committed bank line. This is management’s expectation, not quantified earnings or revenue guidance.
- In early May 2012, after quarter-end, CPS increased its revolving credit line from $1 million to $2 million and renewed its $1.25 million equipment finance facility. Both mature in May 2013. The line is secured by receivables and other assets, bears interest at prime plus 1%, and includes financial covenants; the facilities are cross-defaulted and cross-collateralized. CPS said it was compliant with existing covenants at March 31.
- The company had $920,000 remaining under the equipment finance facility and $285,000 of production-equipment purchase commitments. It intended to finance equipment under construction and committed purchases with cash and operating funds.
- Management warned that CPS sells to a limited number of customers and that losing a major customer could require additional external financing. Failure to generate sufficient revenue, raise capital, or reduce discretionary spending could adversely affect its business objectives.
- Other reported exposures include ongoing lease commitments. The filing reported no legal proceedings, no material changes to previously disclosed risk factors, and no significant exposure to interest-rate changes or foreign-currency fluctuations. Management identified no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the expected second-half acceleration materializes, particularly in vehicle baseplates and other products identified as offsets to weaker demand.
- Customer concentration and order trends in traction products, electronics, hermetic packages, and Army-funded development work.
- Cash use, access to the expanded credit line, covenant compliance, and the funding of equipment commitments.
- Whether future taxable income supports realization of the $1.795 million deferred-tax asset, given the reported quarterly loss.
- The gross-margin disclosure: management’s text compares negative 2% in Q1 2012 with 16% but contains an apparent period-label typo; the comparative statements show the prior-year quarter ended April 2, 2011.