CPS Technologies Corporation — Q2 2019 Form 10-Q
Business context and reporting period. CPS supplies advanced materials, including metal-matrix composites, and assembles housings and packages for electronics, power-generation, automotive, and other markets. This unaudited quarterly report covers the three and six months ended June 29, 2019; comparable periods ended June 30, 2018.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $6.367 million | $5.229 million | $11.636 million | $9.384 million |
| Gross margin | $1.175 million (18% of revenue) | $0.606 million (12%) | $1.334 million (11%) | $0.750 million (8%) |
| Operating income (loss) | $0.258 million | $(0.326) million | $(0.486) million | $(1.090) million |
| Net income (loss) | $0.251 million | $(0.257) million | $(0.494) million | $(0.832) million |
| Interest expense, net | $7,310 | $11,692 | $7,262 | $11,634 |
Q2 revenue rose 22% year over year, primarily on higher baseplate sales, with additional increases in hermetic packages and armor. First-half revenue rose 24%, mainly from baseplates and hybrid-circuit housings and packages. Management reported no significant price changes. Higher volume and product mix improved gross margin; greater sales also increased factory-overhead absorption. SG&A declined slightly in both comparisons, despite $25,000 of duplicate incoming and retiring CFO salary costs during eight weeks.
Cash flow, liquidity, and balance sheet
- For the first half, operating cash outflow was $1.101 million, investing cash outflow was $166,011, and financing cash inflow was $800,000 from line-of-credit borrowings. Cash declined $467,203, ending at $161,601, versus $628,804 at year-end 2018.
- At June 29, 2019, trade receivables were $4.110 million, net inventory was $2.901 million, current assets were $7.394 million, and current liabilities were $3.460 million. Management reported a 2.2x current ratio.
- The company had $800,000 outstanding on its $1.25 million Santander revolving credit facility, with $450,000 of additional borrowing capacity under the borrowing base. The facility is secured by receivables and other assets, bears interest at prime plus 1%, and matures at the end of September 2019. CPS reported compliance with its financial covenants at quarter-end.
- Total liabilities were $3.553 million, including $241,000 of operating lease liabilities; stockholders’ equity was $5.430 million. The company reported negative net cash of $638,000 after considering line-of-credit borrowings.
- Receivables increased from $3.053 million at year-end; days sales outstanding rose from 45 to 58 days, which management attributed in part to the timing of quarter-end sales. Inventory declined from $3.193 million, mainly because the summer manufacturing vacation began in the final week of Q2. Inventory turnover for the latest four quarters was 6.2x, versus a 6.0x 2018 average.
Outlook, risks, and unusual items
No quantified revenue or earnings guidance is provided. Management expects existing cash and, if necessary, bank borrowings to fund working-capital needs for the remainder of 2019 and believes these resources should meet cash requirements for the foreseeable future. It cautions that this depends on generating sufficient revenue and, if needed, reducing discretionary spending.
Management identified customer concentration as a financing risk: loss of any one of a limited number of customers could require additional external financing. Failure to generate sufficient revenue, raise capital, or reduce discretionary spending could materially impair business objectives. The September 2019 credit-facility maturity and its financial covenants are also important liquidity considerations.
A European customer had asserted a claim concerning nickel plating on baseplates, estimating damages of $1.0 million and reserving the right to seek more. On July 9, 2019, after quarter-end, the customer accepted a settlement offer covered by CPS’s insurer; the company said it did not expect to incur losses. No damages had been recorded before settlement because the potential impact had not been quantifiable. CPS adopted ASC 842 lease accounting in 2019, recognizing lease assets and liabilities; management said adoption did not materially affect operating results or liquidity. No material changes to the risk factors in the 2018 Form 10-K were reported.
Most important facts for investors to verify
- Whether CPS renewed or replaced the Santander credit facility at its September 2019 maturity, and whether it continued to meet covenants and retain borrowing availability.
- Whether stronger Q2 sales and gross margins continued, given the first-half operating and net losses.
- Whether receivables converted to cash and customer concentration or quarter-end sales timing affected collections and working-capital needs.
- The final resolution and any residual cost or exposure related to the insured nickel-plating claim.
- Whether actual cash needs and operating performance remained consistent with management’s funding outlook.