CPS Technologies Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2022; comparative periods ended June 26, 2021. Financial statements are unaudited.
Business context
CPS makes custom metal-matrix composite components, housings and packages, and lightweight armor for markets including aerospace and defense, transportation, power generation and electronics. Growth depends on demand for products already in production and securing new customer design wins.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $7.071 million | $5.862 million | $13.723 million | $10.728 million |
| Gross margin | $1.829 million (26%) | $1.352 million (23%) | $3.792 million (28%) | $2.296 million (21%) |
| Operating income | $669,000 | $253,000 | $1.217 million | $289,000 |
| Net income | $455,000 | $239,000 | $875,000 | $270,000 |
| Diluted EPS | $0.03 | $0.02 | $0.06 | $0.02 |
- Revenue rose 21% in Q2 and 28% in the first half. Management attributed growth to higher armor and hermetic-package shipments, improved baseplate shipments, and, for the first half, a longer period of armor sales than in 2021.
- Gross margin percentage improved as higher sales absorbed fixed factory costs. SG&A increased 5% in Q2 and 28% in the first half, reflecting added corporate development compensation, higher variable compensation, and armor commissions.
- First-half operating cash flow was $211,000, versus cash used of $130,000 a year earlier. Capital spending was $292,000. Cash increased by $26,000 to $5.076 million from year-end 2021.
- At July 2, current assets were $14.592 million and current liabilities were $4.226 million. Net working capital was approximately $10.366 million. Inventory rose to $4.666 million, principally to support an armor order; receivables were $4.537 million, and DSO declined to 58 days from 69 at year-end.
- Total liabilities were $4.674 million, including $124,000 of notes payable and $528,000 of operating lease liabilities. The $3.0 million revolving credit line was undrawn; the company reported compliance with its covenants. The lender may call the line on demand.
Material changes and management commentary
Compared with the prior-year periods, higher sales and better absorption of fixed costs lifted gross margin and operating income. First-half SG&A growth broadly matched revenue growth. The first-half tax provision was $342,000; the filing says charges against the deferred tax asset reflect estimated tax on 2022 income. Management said existing cash should fund operations for the remainder of 2022.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management described underlying demand for its solutions as growing, while noting dependence on sales volume and new design wins.
- The company serves a limited number of customers; losing a major customer could require external financing. Management also cautioned that inadequate revenue, capital raising or spending reductions could impair business objectives.
- Inflation in raw materials, including aluminum, and other operating costs has affected the business. CPS said it had passed on most increases on new orders and some costs under longer-term agreements, but future recovery through pricing is not assured.
- COVID-related absences required overtime during the quarter; management expected mild disruptions to continue and noted a more dangerous variant could hurt results. Potential Ukraine-related supply-chain and energy-cost impacts were also identified, though the company reported no direct impact to date.
- Commitments include the Norton facility lease, expiring February 2026, with a reported present-value liability of $528,000. The filing reported no legal proceedings and no material changes to risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether armor orders and baseplate demand continue to support revenue growth and factory utilization.
- Whether inventory buildup converts into shipments and cash, and whether margins withstand input-cost inflation.
- Customer concentration, payment terms and the potential financing consequences of losing a major customer.
- Availability and terms of liquidity, including the demand feature on the undrawn revolving credit line.
- Future tax expense and realization of deferred tax assets, given the prior valuation-allowance reversal and current-period tax charges.