CPS Technologies Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter ended October 1, 2011, and nine-month period then ended. Comparisons are with the quarter and nine-month period ended September 25, 2010; balance-sheet comparisons are with December 25, 2010. Financial statements are unaudited.
Business context
CPS develops and manufactures metal-matrix composites and assembles electronic housings and packages for electronics, transportation, automotive, and other markets. It also has a U.S. Army cooperative agreement to develop composite armor.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $4.901 million | $6.008 million | $15.583 million | $16.604 million |
| Gross margin dollars | $0.892 million | $1.484 million | $2.707 million | $3.919 million |
| Operating income | $0.057 million | $0.682 million | $0.128 million | $1.690 million |
| Net income | $0.028 million | $0.421 million | $0.057 million | $1.035 million |
| Basic and diluted EPS | $0.00 | $0.03 | $0.00 | $0.08 |
- Q3 revenue fell 18%; nine-month revenue fell 6%. Product sales were $4.508 million for Q3 and $13.848 million for the nine months. Cooperative-agreement R&D revenue was $0.393 million and $1.735 million, respectively.
- Management reported Q3 gross margin on product sales of 19%, down from 25%. For the nine-month periods, it reported 19%, down from 24%. The filing’s gross margin dollars include cooperative-agreement activity.
- SG&A was $0.835 million in Q3 versus $0.802 million, and $2.579 million for nine months versus $2.229 million. Higher compensation and benefits were partly offset by lower sales commissions.
Cash, liquidity, and obligations
- Cash was $1.149 million at October 1, down $0.655 million from year-end 2010. Nine-month operating cash flow was negative $0.123 million, compared with positive $1.269 million in 2010; investing cash use was $0.428 million and financing cash use was $0.104 million.
- Cash use reflected higher inventory and receivables and continued production-equipment investment. Inventory rose to $2.190 million from $1.524 million; accounts receivable rose to $4.199 million from $3.923 million. Finished goods included $0.715 million held at customer locations under consignment agreements.
- Current assets were $8.002 million and current liabilities $2.023 million at October 1. Total liabilities were $2.082 million, including $0.232 million of capital lease obligations. No borrowings were outstanding under the $1 million revolving credit line.
- The bank facilities mature in May 2012. The company reported compliance with financial covenants and $1.018 million of remaining equipment-finance capacity. It had $0.454 million of production-equipment purchase commitments, in addition to $0.312 million of equipment construction in progress.
Changes, outlook, and risks
- Management attributed lower revenue primarily to reduced demand for lids and heat spreaders used in network and internet routers and switches; increased traction and hybrid-vehicle baseplate demand partly offset the decline. Q3 also reflected lower hermetic-packaging revenue.
- Management said a manufacturing-yield problem that emerged in the second half of 2010 was not fully resolved until well into Q1 2011, contributing to weaker nine-month gross margins.
- No formal earnings or revenue guidance is provided. Management expected to fund working-capital needs for the remainder of 2011 from existing cash, but cautioned that loss of a major customer could require additional external financing. It also said failure to generate sufficient revenue, raise capital, or reduce discretionary spending could materially impair business objectives.
- Customer concentration, execution of equipment commitments, and access to financing are notable risks. The company said it could not assure that comparable equipment-leasing facilities would be available from other lenders.
- The company reported approximately $1.731 million of federal net operating loss carryforwards at December 25, 2010 and recorded deferred tax assets totaling $1.120 million at October 1, 2011, with no valuation allowance. Management believed future taxable income would be sufficient to realize those tax benefits.
- Subsequent to quarter-end, CPS hired a CFO and granted him options for 75,000 shares; it also granted 49,000 options to employees and reported exercise of 97,250 options. The filing reported no legal proceedings, no material changes to previously disclosed risk factors, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand for router and switch-related products and the reported manufacturing-yield issues improve, and whether traction and hybrid-vehicle demand can offset weakness.
- Whether the elevated inventory, including consigned finished goods, converts to sales and cash on expected terms.
- Cash requirements for equipment purchases and working capital, and the company’s ability to maintain covenant compliance and secure financing after the facilities’ May 2012 maturity.
- Customer concentration and the assumptions supporting realization of deferred tax assets without a valuation allowance.