CPS Technologies Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2023; comparisons are to the quarter and six months ended July 2, 2022, unless otherwise noted. CPS makes custom advanced-material products, including metal-matrix composites, electronic housings and lightweight armor, for several industrial and defense markets. Financial statements are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $7.418 million | $7.071 million | $14.518 million | $13.723 million |
| Gross margin | $2.196 million (29.6%) | $1.829 million (25.9%) | $4.441 million (30.6%) | $3.792 million (27.6%) |
| Operating income | $731,000 | $669,000 | $1.425 million | $1.217 million |
| Net income | $601,000 | $455,000 | $1.060 million | $875,000 |
| Diluted EPS | $0.04 | $0.03 | $0.07 | $0.06 |
| Operating cash flow | Not separately presented for the quarter | $836,000 | $211,000 |
Financial position and liquidity
- Cash and cash equivalents were $8.681 million at July 1, 2023, up from $8.267 million at December 31, 2022. First-half cash increased by $414,000.
- Current assets were $18.932 million and current liabilities were $5.264 million. Trade and other receivables totaled $5.149 million; net inventory was $4.814 million.
- Total liabilities were $5.558 million. Note payable totaled $77,000; the company reported no borrowings on its new $3.0 million revolving credit facility and stated its borrowing base permitted the full $3.0 million to be drawn.
- First-half investing cash use was $434,000, primarily for property and equipment. Financing cash provided was $12,000.
- Management said existing cash and operations were expected to fund the remainder of 2023 and that cash balances should cover requirements for the foreseeable future, while noting there is no assurance if operating goals are missed.
Changes and management commentary
- Q2 revenue rose approximately 5% year over year; first-half revenue rose 6%. Management attributed the increase mainly to higher U.S. Navy armor shipments.
- Gross margin improved in both periods. Management cited manufacturing-efficiency efforts and greater sales volume spreading fixed costs.
- Q2 SG&A increased to $1.465 million from $1.159 million; first-half SG&A increased 17% to $3.016 million. Cited factors included increased travel, richer 401(k) matching and payroll costs, higher variable compensation accruals, and severance for a long-time employee.
- First-half net interest income was $95,000, compared with essentially zero net interest expense in the prior-year period, reflecting cash balances and higher interest rates.
- Accounts receivable rose to $5.149 million from $4.464 million at year-end; DSO increased from 56 to 62 days. Management said the year-end figure included $0.6 million of deferred revenue collected in Q1.
- The company replaced its Massachusetts Business Development Corporation line of credit with a $3.0 million facility from Rockland Trust in May 2023. It is secured by receivables and other assets and bears interest at the National Prime Rate.
Outlook, risks and contingencies
- No formal earnings or revenue guidance was provided. Management’s stated funding outlook is conditional on revenue generation and control of discretionary spending.
- The company depends on a limited number of customers; losing a major customer could require additional financing and adversely affect objectives.
- Inflation in raw materials and other costs, wage and benefit increases, and delays in adjusting customer prices may pressure margins. Management said it had generally passed cost increases through to customers but could not assure that this would continue.
- Management reported minimal sales to Russia and Ukraine and no reliance on raw materials from the region, but identified possible indirect supply-chain and energy-cost effects from the war in Ukraine. It also cautioned that COVID-19 and other factors could affect forward-looking results.
- The filing reports no legal proceedings and no material changes to the risk factors in the 2022 Form 10-K. The Norton facility lease runs through February 2026; the recorded lease liability was $400,000.
Important facts for investors to verify
- Whether Navy armor shipments and other customer demand are recurring, and how much revenue depends on a small number of customers.
- Whether improved gross margins can be sustained as volumes, product mix, manufacturing costs and fixed-cost absorption change.
- Whether pricing adjustments continue to offset inflation, including under customer agreements that may delay price changes.
- Receivables collection, rising DSO, deferred-revenue movements and working-capital requirements relative to operating cash flow.
- Terms and availability of the Rockland Trust credit facility, including its prime-based rate and collateral provisions.
- The balance sheet reports 14,511,544 shares outstanding at July 1, 2023, while the cover page reports 14,516,544 shares outstanding as of July 25, 2023; verify the share count and timing. The filing also notes 24,927 shares repurchased during the first half to facilitate employee option exercises.
- The MD&A’s Q2 revenue comparison contains an apparent period-label typo (“Q1 2022”); the financial statements show Q2 2022 revenue of $7.071 million.