CPS Technologies Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparative periods ended October 1, 2022. Financial statements are unaudited.
Business context
CPS develops and manufactures custom advanced-material components, including metal-matrix composites, housings and packages, and lightweight armor. Products serve aerospace and defense, communications, power and transportation, and other electronics markets. Performance depends partly on production volume and winning new customer designs; fixed manufacturing and engineering costs can amplify the effect of sales changes on results.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $6.285 million | $6.748 million | $20.803 million | $20.472 million |
| Gross profit / margin | $1.236 million / 20% | $1.883 million / 28% | $5.677 million / 27% | $5.675 million / 28% |
| Operating income | $131,000 | $709,000 | $1.556 million | $1.925 million |
| Net income | $171,000 | $988,000 | $1.231 million | $1.862 million |
| Diluted EPS | $0.01 | $0.07 | $0.08 | $0.13 |
Q3 revenue declined 7% year over year, primarily because customers moved expected shipments into Q4, mainly armor shipments. CPS built finished-goods armor inventory for those shipments. Gross margin contracted as lower sales spread fixed manufacturing costs over less volume and outsourced testing increased costs while testing equipment is being replaced.
Nine-month revenue increased 2%: lower hermetic-package shipments were more than offset by higher MMC shipments. Gross profit was essentially flat, while operating income and net income declined. Management attributed higher nine-month SG&A (up 10%) to increased travel, a richer 401(k) match, and severance for a long-time employee. The lower 2023 net income also reflects the absence of the Employee Retention Tax Credit recognized in 2022; 2022 other income included approximately $646,000.
Cash, liquidity and debt
- Cash and equivalents were $8.779 million at September 30, 2023, up from $8.267 million at December 31, 2022. Current assets were $18.968 million and current liabilities were $5.110 million.
- Operating cash flow for the first nine months was $1.071 million, versus $872,000 a year earlier. Capital expenditures were $567,000; cash increased by $512,000 over the period.
- Trade receivables were $5.006 million; reported total accounts receivable, including other receivables, was approximately $5.023 million. Trade-receivable DSO rose from 52 days at year-end 2022 to 72 days at Q3 2023. Inventory was $4.828 million, approximately unchanged from year-end.
- The company reported $66,000 of note payable and $367,000 of operating lease liabilities. It had no borrowings under its $3.0 million Rockland Trust revolving credit line at quarter-end, with the full $3.0 million available under its borrowing base. The line is secured by receivables and other assets and bears interest at the National Prime Rate.
Management said existing cash was expected to fund working-capital needs for the remainder of 2023. No formal revenue or earnings guidance is provided in the filing.
Outlook, risks and other notable matters
- Management described underlying demand for MMC, hybrid-circuit housings and armor as growing, but results remain sensitive to customer demand, production volume, product mix and design wins.
- The company continues to rely on a limited number of customers; losing a major customer could materially harm future results. Management also cautioned that insufficient revenue, additional capital or reductions in discretionary spending could adversely affect business objectives.
- The filing identifies geopolitical events, including the Russia-Ukraine war and Israel/Gaza conflict, as factors that could cause actual results to differ from forward-looking statements. Management reported no material changes to the company’s stated risk factors.
- The Norton facility lease runs through February 2026, with an option to renew through February 2032. The filing reports no legal proceedings and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the customer shipments deferred from Q3, particularly armor shipments, were delivered in Q4 as expected.
- Whether gross margins recover after shipment timing normalizes and replacement testing equipment reduces outsourced-testing costs.
- Whether elevated DSO and receivables convert to cash, and whether the company continues to fund operations from cash and operating cash flow.
- Customer concentration, design-win progress, and the effect of customer demand and product mix on production volume.
- Availability and terms of the secured $3.0 million credit line, and any changes to management’s stated cash-funding outlook.