CPS Technologies Corporation — Q1 2014 Form 10-Q
Business and period: The company supplies metal-matrix composite materials and assembled packages for electronics, power generation, automotive, and other markets. This unaudited quarter ended March 29, 2014; comparisons are with the quarter ended March 30, 2013.
Financial performance
- Revenue: $5.986 million, up 19% from $5.031 million. Product sales were $5.952 million; cooperative-agreement R&D revenue was $34,000. Management attributed much of the increase to traction-product baseplate sales.
- Margins and earnings: Gross profit was $1.538 million, or 26% of sales, versus $914,000, or 18%. Management cited higher volume and approximately $200,000 in price increases. Operating income was $413,000 versus $15,000; net income was $248,000 versus $3,000. Basic and diluted EPS were each $0.02, versus $0.00.
- Expenses and interest: SG&A rose 25% to $1.126 million, including higher sales and marketing, stock-option, bonus, 401(k), and investor-relations costs. Net interest expense declined to $1,000 from $10,000.
- Cash flow: Operating activities used $608,000, compared with $41,000 used a year earlier. The principal working-capital drag was a $1.590 million increase in trade receivables. Capital spending was $107,000; cash declined $714,000 to $857,000.
- Liquidity and balance sheet: At March 29, cash was $857,000, receivables $4.490 million, and inventory $2.209 million. Current assets were $8.244 million against current liabilities of $2.624 million; management reported a 3.1 current ratio. Total liabilities were $2.624 million, including $56,000 of current capital-lease obligations. There were no line-of-credit borrowings.
Changes, outlook, and risks
- Receivables increased from $2.900 million at year-end 2013; days sales outstanding rose from an unusually low 51 days to 68 days. Management linked the change to the timing of Q4 collections and higher Q1 sales. Inventory was broadly unchanged; $873,000 was held at customer locations under consignment agreements.
- In early May 2014, CPS renewed its $2 million revolving credit line and $500,000 equipment facility with Santander Bank, both through May 2015. The line was secured by receivables and other assets; the company reported compliance with covenants at quarter-end and availability to borrow up to $2 million based on the borrowing base.
- Management expected to fund 2014 working-capital needs through operating cash flow, existing cash, and credit-line borrowings when needed. It said these resources were expected to cover cash requirements for the foreseeable future, but cautioned that unmet operating goals, insufficient revenue, or inability to reduce discretionary spending could impair its ability to meet obligations.
- Customer concentration is a stated risk: losing one of a limited number of customers could require additional financing. The company also depends on future taxable income to realize deferred tax assets; it had recorded no valuation allowance.
- The U.S. Army cooperative agreement for armor development had been extended through July 14, 2014. The company also described a multi-year supply agreement with a major automotive tier-one supplier. The filing provides no numerical earnings or revenue guidance.
- No material changes to previously disclosed risk factors, no legal proceedings, and no material changes in internal control over financial reporting were reported. Management said disclosure controls were effective.
Investor facts to verify
- Whether the receivables increase converts to cash and whether DSO remains near the reported 68 days.
- Whether improved gross margin and profitability persist as sales mix and traction-product demand evolve.
- Whether operating cash flow improves and the company remains within Santander covenant requirements.
- Customer concentration, progress under the automotive supply agreement, and the Army agreement’s status after July 14, 2014.
- Whether future taxable income supports realization of the reported deferred tax assets without a valuation allowance.