CPS Technologies Corp. — Q1 2017 Form 10-Q
Business and period: CPS supplies metal-matrix composites and assembled electronic housings and packages to electronics, power generation, automotive, and other markets. This unaudited report covers the fiscal quarter ended April 1, 2017; comparisons are with the quarter ended April 2, 2016, except balance-sheet comparisons, which are with December 31, 2016.
Financial performance
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Revenue | $2.845 million | $5.216 million; down 45% |
| Gross profit (loss) and margin | $(80,000); approximately (3%) | $1.132 million; approximately 22% |
| Operating income (loss) | $(1.054) million | $223,000 |
| Net income (loss) | $(604,000); $(0.05) per share | $197,000; $0.01 per share |
| Operating cash flow | $(499,000) | $662,000 |
| Cash and equivalents | $2.876 million | $3.408 million at year-end |
| Current assets / current liabilities | $6.701 million / $1.430 million | Current ratio approximately 4.7 |
| Total assets / stockholders’ equity | $11.651 million / $10.221 million | $12.038 million / $10.751 million at year-end |
Cost of sales was $2.926 million, exceeding revenue. SG&A was $973,000, up 7%; it included approximately $100,000 of one-time legal and other costs for the annual proxy process. Excluding that expenditure, management said SG&A would have been down 4% year over year. Other income was $3,000. The company recorded a $447,000 income tax benefit, including federal and state benefits. The balance sheet reports no debt; the filing discusses borrowings only as a possible funding source.
Cash declined by $532,000 during the quarter. Investing cash use was $33,000, principally for property and equipment; there was no financing cash flow. Receivables were $1.753 million, down from $1.960 million at year-end, and inventory was $1.948 million, essentially flat. DSO improved from 61 to 55 days; inventory turnover was 5.4 times, versus a 6.4-times average for 2016.
Changes, outlook, and risks
- Management attributed the 45% revenue decline primarily to lower baseplate sales and, to a lesser extent, lower armor sales. It reported no significant pricing changes. Lower volume was identified as the main cause of the gross-margin deterioration and operating loss.
- The company announced a multi-year supply agreement with a major tier-one automotive supplier for AlSiC pin-fin baseplates for hybrid and electric vehicle motor controllers; the filing provides no quantified revenue outlook from the agreement.
- No numerical earnings or revenue guidance was provided. Management expected existing cash and, if necessary, borrowings to fund working-capital needs for the remainder of 2017 and cash requirements for the foreseeable future, but cautioned that this depends on revenue generation and spending reductions if goals are missed.
- Customer concentration is a material liquidity risk: management said the 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 adversely affect business objectives.
- Cash use was driven primarily by the operating loss, partly offset by lower receivables, increased payables, and depreciation exceeding capital expenditures. Operating lease obligations totaled $368,000, excluding unexercised extension options. The Norton and Attleboro facility leases were extended through February 2018, with options or terms described in the filing extending potential occupancy beyond that date.
- The company held a $3.274 million deferred tax asset and recorded no valuation allowance, based on management’s view that future taxable income would be sufficient to realize the tax benefits. Interim results are not necessarily indicative of full-year results.
The filing reported no legal proceedings, no material changes to the risk factors in the 2016 Form 10-K, and no material changes to internal control over financial reporting. Management stated that disclosure controls were effective. The company reported no significant exposure to interest-rate or foreign-currency changes and no use of derivatives.
Important facts for investors to verify
- Whether sales recover from the sharp year-over-year decline, particularly baseplate demand, and whether customer concentration remains manageable.
- Expected timing and commercial contribution of the automotive supply agreement, which is not quantified in this filing.
- Cash burn, working-capital trends, and whether available cash remains sufficient without external financing.
- Assumptions supporting realization of the deferred tax asset and the absence of a valuation allowance.
- Facility lease decisions and costs after the stated February 2018 lease terms and extension options.