CPS Technologies Corp. — Q1 2022 Form 10-Q
Reporting period: Fiscal quarter ended April 2, 2022; comparable quarter ended March 27, 2021. The company makes custom metal-matrix composite products, electronic housings and packages, and lightweight armor for electronics, transportation, defense and other markets. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2022 / April 2, 2022 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $6.653 million | $4.866 million; up 37% year over year |
| Gross profit and margin | $1.963 million; 29.5% | $0.944 million; 19.4% |
| Operating income and margin | $547,097; 8.2% | $35,669; 0.7% |
| Net income | $419,436; $0.03 per basic and diluted share | $30,903; $0.00 per share |
| Operating cash flow | $(379,267) | $(183,252) |
| Investing cash flow | $(94,683) | $(30,488) |
| Cash and cash equivalents | $4.700 million | $5.050 million at December 25, 2021 |
| Current assets / current liabilities | $14.643 million / $4.884 million | $14.058 million / $5.105 million at December 25, 2021 |
| Total liabilities | $5.373 million | $5.634 million at December 25, 2021 |
Cash decreased $351,000 during the quarter. Operating cash use reflected chiefly higher inventory and lower accrued expenses, partly offset by net income. Inventory rose $794,000 to $4.706 million. Working capital was approximately $9.758 million at quarter-end, versus $8.953 million at year-end.
Notes payable totaled approximately $140,000, including $52,000 current. The company had no borrowings on its $3.0 million revolving credit line; its borrowing base allowed the full $3.0 million to be drawn, and the company reported compliance with financial covenants. The facility is secured by receivables and other assets and includes a demand note. Lease liabilities totaled $558,000.
Changes and management commentary
- Revenue growth reflected recovery from pandemic-related sales reductions in Q1 2021, growth among each of the five largest customers, and Navy armor shipments that began in Q2 2021.
- Gross margin improved with manufacturing efficiencies and higher sales spreading fixed costs over greater volume.
- SG&A increased to $1.416 million from $908,000. Management cited higher compensation and variable-pay accruals, three additional sales-team members, director stock-option awards, and sales commissions.
- Q1 2022 share-based compensation expense was approximately $124,000, compared with $27,000 a year earlier. The quarter included 72,700 employee option exercises.
- The tax provision was $126,000. The company had reversed its deferred-tax valuation allowance in September 2021 after reassessing profitability and forecasts; Q1’s provision reflects estimated tax on quarterly income.
Outlook, risks and contingencies
Management expected continued improvement in upcoming quarters and said existing cash and operations should fund requirements for the remainder of 2022 and the foreseeable future. It cautioned that results depend on sales volume and new product design wins, and that losing a major customer could require additional external financing. Interim results are not necessarily indicative of full-year results. The filing provides no specific numerical revenue or earnings guidance.
- COVID-19 had a minimal Q1 financial impact, but absences required overtime; future variants, demand changes, freight costs and labor inefficiencies could affect results.
- The company reported minimal sales to Russia and Ukraine and no reliance on raw materials from that region, but noted potential indirect supply-chain and energy-cost effects from the war.
- Inflation has raised raw-material and other costs. Management said it had passed on most increases on new orders and mitigated some longer-term contract impacts through surcharges, but could not guarantee continued recovery of higher costs through pricing.
- Customer concentration, dependence on production volumes, and the possibility of insufficient revenue or discretionary-spending reductions are liquidity risks. The credit line’s demand feature is an additional financing consideration.
- No legal proceedings were reported, and the company disclosed no material changes to its 2021 Form 10-K risk factors. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether sales growth and improved gross margins persist, including the contributions from defense shipments and major customers.
- Inventory growth, cash conversion and operating cash use, particularly if working-capital needs continue to rise.
- Customer concentration, order visibility, design wins and the potential financing impact of losing a significant customer.
- Whether price increases and surcharges keep pace with inflation, and whether pandemic, freight or geopolitical disruptions raise costs.
- Tax expense and realization of deferred tax assets, alongside the company’s stated liquidity outlook and availability of its demand-based credit facility.