CPS Technologies Corporation — Q1 2013 Form 10-Q
Reporting period: Fiscal quarter ended March 30, 2013. The unaudited filing covers a manufacturer of metal-matrix composites and related electronic packages for electronics, power generation, automotive, and other markets.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $5.031 million | $3.555 million; up 42% |
| Gross margin | $914,000; 18% of sales | $(34,000); negative 2% of sales |
| Operating income (loss) | $15,000 | $(843,000) |
| Net income (loss) | $2,610 | $(534,335) |
| Basic and diluted EPS | $0.00 | $(0.04) |
| Operating cash flow | $(41,000) | $(295,000) |
| Capital expenditures | $187,000 | $151,000 |
Management attributed the revenue increase largely to traction-product baseplate sales. Improved gross margin reflected higher volume and the absence of additional outside-finishing costs incurred in Q1 2012. SG&A rose 11% to $900,000, principally from sales commissions. Interest expense was $10,000, versus $6,000.
Financial position and liquidity
- Cash was $306,000 at March 30, 2013, nearly unchanged from $307,000 at December 29, 2012. Net cash decreased by $1,000 during the quarter.
- Trade receivables rose to $4.144 million from $2.876 million; days sales outstanding increased to 74 from 63 in Q4 2012. Management said late-quarter sales increased the ending-balance-based DSO measure.
- Net inventory declined to $2.053 million from $2.457 million. Inventory at customer locations under consignment agreements was $787,000, down from $1.4 million.
- Current liabilities were $3.584 million and current assets were $6.989 million. The reported current ratio under bank covenants was 2.0x, above the 1.5x minimum.
- Bank line borrowings were $600,000, up from $500,000 at year-end. The company also reported $163,000 outstanding under its equipment lease line and capital lease obligations of $164,000 in total, including current and long-term portions.
- Net working capital was approximately $3.406 million, based on reported current assets less current liabilities. Total liabilities were $3.639 million; stockholders’ equity was $7.588 million.
Changes, outlook, and risks
- In early May 2013, CPS renewed its $2 million revolving credit line and $500,000 equipment finance facility with Sovereign Bank; both mature in May 2014. The credit line bears interest at prime plus 1%, is secured by receivables and other assets, and is cross-defaulted and cross-collateralized with the equipment facility.
- At quarter-end, CPS reported compliance with its bank covenants. Its borrowing base permitted $1.174 million of additional line-of-credit borrowing at that date; $173,000 remained available under the equipment lease line.
- Management expected to fund working capital for the remainder of 2013 from operating cash flow, cash, and borrowing availability, and said existing resources and facilities should meet cash needs for the foreseeable future. The filing gives no numerical earnings or revenue guidance and cautions that funding may be insufficient if revenue goals are missed or discretionary spending cannot be reduced.
- Customer concentration is a key risk: CPS sells to a limited number of customers, and losing one could require additional external financing. The company also cited the possibility of insufficient revenue or capital to meet business objectives.
- CPS had $325,000 of construction in progress and $225,000 in outstanding production-equipment purchase commitments. It planned to finance these with cash and operating funds.
- The company described a recently announced multi-year supply agreement with a major automotive tier-one supplier, but did not provide expected sales or financial contribution. Its U.S. Army armor work is conducted under a cooperative development agreement.
- Deferred tax assets totaled approximately $2.785 million; management recorded no valuation allowance, citing expected future taxable income. The company had approximately $3.303 million of federal net operating loss carryforwards at December 29, 2012.
- No material change to previously disclosed risk factors was reported; no legal proceedings were listed. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Investor verification priorities
- Track whether the traction-product sales increase and automotive supply agreement translate into sustained revenue, margins, and cash generation.
- Monitor receivables, DSO, customer concentration, and collection trends, given the sharp quarter-over-quarter increase in receivables.
- Verify available borrowing capacity and continued covenant compliance, particularly under the cross-collateralized credit and equipment facilities.
- Assess whether the company generates enough taxable income to realize its deferred tax assets and whether its cash-flow outlook remains achievable.
- Review the $225,000 equipment commitments, capital spending, and progress in converting construction in progress into productive capacity.