CPS Technologies Corp. — Q1 2021 Form 10-Q
Reporting period: Fiscal quarter ended March 27, 2021; comparative quarter ended March 28, 2020. CPS makes custom metal-matrix composite products, components and packages for electronics, power, automotive, aerospace, defense and other markets. Financial statements are unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $4.866 million | $6.512 million | Down 25% |
| Gross profit / margin | $944,000 / 19% | $1.550 million / 24% | Margin down about 5 percentage points |
| Operating income | $36,000 | $622,000 | Down 94% |
| Net income | $31,000 | $602,000 | Down 95% |
| Diluted EPS | $0.00 | $0.05 | Lower |
| Cash used in operations | $183,000 | $234,000 | Outflow in both periods |
SG&A was $908,000 versus $929,000. Lower gross profit, driven primarily by reduced sales and fixed costs that did not fall with volume, sharply reduced operating income. Management said increased manufacturing efficiencies partly mitigated the margin decline.
Cash, liquidity and debt
- At March 27, cash and equivalents were $168,000, versus $195,000 at December 26, 2020. CPS reported $193,000 drawn on its $3.0 million revolving line; management’s defined net cash position was negative $25,000.
- The borrowing base permitted a further $2.6 million of line-of-credit borrowing, and CPS was in compliance with its financial covenants. The facility is secured by receivables and other assets, bears interest at LIBOR plus 6.5%, and is callable on demand.
- Current assets were $7.871 million and current liabilities $2.754 million. Total liabilities were $3.410 million, including $198,000 of notes payable and $664,000 of operating lease liabilities.
- Operating cash outflow reflected, among other items, an $863,000 increase in accounts receivable. Receivables rose to $3.778 million; days sales outstanding increased to 70 from 62 at year-end.
- Inventory was $3.631 million, slightly below year-end. Management attributed lower inventory turnover in part to raw-material purchases for an armor contract scheduled to begin shipping in Q2 2021.
- Investing cash outflow was $30,000. Financing provided $186,000, including the line-of-credit draw and $10,000 of proceeds from employee option exercises.
Material changes and unusual items
- Management attributed the revenue decline mainly to reduced demand from its largest customer. That customer had accelerated Q2 2020 purchases into Q1 2020 ahead of anticipated pandemic-related supply disruption, then experienced lower demand. Increased aerospace business partly offset the decline.
- During the quarter, employees exercised 613,800 options; CPS issued shares and repurchased 120,196 shares to facilitate exercises. The filing reports 13.807 million shares outstanding at quarter-end and 14.375 million as of May 1, 2021.
- CPS recognized a $664,000 right-of-use asset and matching lease liability for its Norton facility lease, which expires in February 2026. The lease is triple-net; annual rent is stated to range from $152,000 to $165,000 through maturity.
- The balance sheet shows an income tax provision of $456, while the tax footnote says no provision was recorded because deferred tax assets reduced the current tax liability. The filing text does not reconcile these statements clearly.
Outlook, commentary and risks
Management said it believed the worst of the pandemic was behind CPS and expected continued improvement in upcoming quarters. It also cautioned that pandemic-related headwinds could constrain stronger growth for at least the next one or two quarters. The company remained open as part of the Defense Industrial Base and described workplace measures to reduce COVID-19 transmission.
Management expected existing cash and available bank borrowings to fund operations for the remainder of 2021 and believed resources sufficient for foreseeable requirements, but provided no numerical earnings or revenue guidance. It warned that customer concentration creates risk: losing a major customer, insufficient revenue, or failure to reduce discretionary spending could require additional financing and materially affect business objectives. Other stated pandemic risks include demand declines, higher freight costs, absenteeism and labor inefficiencies. The line of credit’s demand feature is an additional liquidity risk.
The filing states there were no material changes to previously disclosed risk factors, no legal proceedings, and no material changes in internal control over financial reporting. Interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether demand from the largest customer and the expected recovery continued, and whether aerospace growth or the planned armor shipments offset customer weakness.
- Receivables collection trends, DSO, operating cash flow and the extent of further line-of-credit borrowing.
- The tax-provision discrepancy between the operations statement and tax footnote.
- Actual gross-margin recovery as production volumes change, given the company’s fixed-cost base.
- Customer concentration, covenant compliance, and availability of the callable, asset-secured credit facility.