CPS Technologies Corporation — Q3 2013 Form 10-Q
Reporting period: Fiscal quarter ended September 28, 2013; comparisons are with the quarter ended September 29, 2012. The filing also reports the first nine months of 2013. CPS develops and manufactures metal-matrix composite materials and related products for electronics, power generation, automotive and other markets, and conducts armor development under a U.S. Army cooperative agreement.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $5.974 million | $2.744 million | $16.306 million | $9.927 million |
| Gross margin | $1.718 million; 29% of revenue | $(236,000); (9%) | $3.996 million; 25% | $(77,000); (1%) |
| Operating income (loss) | $659,000 | $(877,000) | $1.029 million | $(2.372) million |
| Net income (loss) | $452,000; $0.03 per diluted share | $(531,000); $(0.04) per diluted share | $691,000; $0.05 per diluted share | $(1.438) million; $(0.11) per diluted share |
Product sales drove the revenue increase, particularly baseplates for traction and hybrid/electric vehicle applications, and to a lesser extent hermetic packages. Management attributed the margin improvement mainly to higher volume spreading fixed costs across more sales. SG&A increased 65% in Q3 to $1.059 million and 29% for the nine months to $2.967 million, reflecting higher commissions, incentive compensation and 401(k) matching, and legal expenses associated with an overseas patent suit.
Cash flow, liquidity and balance sheet
- For the first nine months of 2013, operating cash flow was $1.129 million, compared with cash used of $952,000 in the prior-year period. Investing cash outflow was $517,000, primarily for equipment; financing cash outflow was $323,000. Cash increased $289,000 to $596,000.
- At September 28, 2013, total assets were $11.480 million, total liabilities $2.958 million and stockholders’ equity $8.522 million. Current assets were $7.201 million and current liabilities $2.944 million; the reported covenant current ratio was 2.4.
- The $2 million revolving credit line had no outstanding borrowings, with the full $2 million available based on the reported borrowing base. It is secured, bears interest at prime plus 1%, and matures in May 2014. The company also reported a $163,000 equipment lease line balance and capital lease obligations totaling approximately $97,000. The equipment facility had $240,000 remaining; the filing separately describes $260,000 of financed equipment net carrying value.
- Receivables rose to $4.223 million from $2.876 million at year-end 2012; days sales outstanding were 64, versus 63 at year-end. Net inventory declined to $2.049 million from $2.457 million, including a $377,000 obsolescence reserve. About $935,000 of inventory was held at customer locations on consignment.
- Capital expenditures were $517,000 for the nine-month period. The company reported $527,000 of construction in progress and approximately $27,000 of equipment purchase commitments at quarter-end.
Changes, outlook and risks
- The company swung from losses to profits in both the quarter and nine-month period, alongside substantial revenue growth. At September 28, cash was $596,000 with no revolver borrowing, compared with $307,000 of cash and $500,000 drawn at December 29, 2012.
- Management expected working-capital needs for the remainder of 2013 to be funded by operating cash flow, cash on hand and credit-line borrowings if needed, and believed those resources sufficient for the foreseeable future. No specific revenue or earnings guidance was provided.
- Management cautioned that CPS sells to a limited number of customers; losing a major customer could require additional external financing. Failure to generate sufficient revenue, raise capital or reduce discretionary spending could materially impair business objectives or the ability to meet obligations.
- The Santander credit and equipment facilities are cross-defaulted and cross-collateralized, with financial covenants. CPS reported compliance at quarter-end. Its financial covenant table lists quarterly net income of $451,000 against a stated minimum of $1.00; the filing does not clearly specify the unit for that threshold.
- The company had a $2.593 million current and non-current deferred tax asset and no valuation allowance, based on management’s expectation of sufficient future taxable income to realize the benefits. Realization depends on that future income.
- The filing cites higher legal expense related to an overseas patent suit, but reports “None” under legal proceedings. It states there were no material changes to the risk factors in the 2012 Form 10-K. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated sales of vehicle-related baseplates are sustainable and how concentrated revenue is among major customers.
- Collection of the higher accounts-receivable balance, customer demand for consigned inventory, and the adequacy of the inventory reserve.
- Operating cash generation and liquidity needs, including equipment spending and the May 2014 maturity of the credit facilities.
- The status and potential financial impact of the overseas patent matter, and the basis and realization assumptions for deferred tax assets.
- The unit and calculation underlying the covenant table’s stated quarterly net-income minimum of “$1.00.”