CPS Technologies Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 29, 2018. The unaudited statements cover CPS Technologies, a manufacturer of metal-matrix composite products and electronic housings and packages for electronics, power generation, automotive and other markets.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.116 million | $4.212 million | $15.500 million | $10.781 million |
| Gross profit / margin | $964,000 / 16% | $761,000 / 18% | $1.713 million / 11% | $1.095 million / 10% |
| Operating income (loss) | $(19,000) | $17,000 | $(1.109) million | $(1.555) million |
| Net income (loss) | $(14,000) | $13,000 | $(845,000) | $(924,000) |
| Basic and diluted EPS | $(0.00) | $0.00 | $(0.06) | $(0.07) |
Revenue rose 45% in Q3 and 44% for the nine-month period, primarily from increased baseplate sales; management reported no significant price changes for the nine months. Gross profit dollars increased, but the Q3 gross margin rate declined. Q3 SG&A increased 32% to $983,000, attributed mainly to higher sales commissions and, to a lesser extent, professional fees. For the nine months, SG&A rose 6%; management noted approximately $200,000 of additional one-time proxy-related costs in the 2017 comparison period.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $88,000 at September 29, 2018, down from $1.340 million at December 30, 2017. The company reported $900,000 outstanding on its line of credit, making net cash (cash less borrowings) negative $812,000.
- For the first nine months, operating cash use was $1.822 million, versus $1.589 million in 2017; investing cash use was $330,000, primarily capital expenditures. Financing provided $900,000 from line-of-credit borrowings.
- Trade receivables increased to $3.902 million from $2.943 million; DSO improved to 57 days from 70. Net inventory increased to $3.571 million from $2.110 million, mainly due to higher demand and CPS taking responsibility for plating-related inventory. Consigned inventory at customer locations rose to $2.336 million from $742,000.
- Current assets were $7.670 million and current liabilities $3.796 million; the reported current ratio was 2.0x. Total assets were $12.407 million and stockholders’ equity $8.611 million.
- The $1.5 million revolving credit facility was renewed in early November 2018 through June 30, 2019, secured by receivables and other assets, at prime plus 1%. At quarter-end, $900,000 was drawn and the borrowing base allowed a further $600,000. The bank waived the net-profit covenant violation on November 8; CPS reported compliance with the other covenants at September 29.
Outlook, risks and notable items
- No formal earnings guidance is provided. Management expected existing cash and, if needed, borrowings to fund working-capital requirements for the remainder of 2018 and stated these sources should meet cash requirements for the foreseeable future, while cautioning there was no assurance if revenue or spending goals were not met.
- A European customer made a claim concerning nickel plating on baseplates. The customer estimated the claim at $1.0 million and reserved the right to seek additional damages. Some affected baseplates had already been assembled into modules; the company said only a small portion of the approximately 15,000 baseplates supplied during the relevant period were affected. CPS said the potential financial impact could not then be quantified, recorded no damages liability, notified its insurer, and expected an amicable resolution while acknowledging possible legal proceedings.
- Management cited customer concentration: losing a major customer could require additional external financing. Insufficient revenue or failure to reduce discretionary spending could adversely affect business objectives.
- Facility operating lease obligations totaled approximately $403,000. The Norton lease runs through February 2021; the Attleboro lease expires in February 2019, with management believing it could be extended on similar terms.
- ASC 606 adoption in 2018 had no material financial-statement impact. The company noted that adoption of the new lease standard could increase recognized assets and liabilities, potentially materially depending on lease renewals and future leases.
Key facts for investors to verify
- Whether sales growth, particularly baseplate demand, continues and improves operating profitability and gross margins.
- Cash burn, working-capital needs, customer concentration, and availability under the renewed credit line.
- Compliance with future credit covenants following the net-profit covenant waiver.
- Any developments, customer claims, insurance recoveries, or recorded liabilities related to the nickel-plating issue.
- Inventory levels and the implications of CPS owning plating-related and consigned inventory.