CPS Technologies Corporation — Q3 2020 Form 10-Q
Business and period: CPS makes custom metal-matrix composite products and related housings and packages for electronics, power generation, transportation, automotive, and other markets. This unaudited report covers the fiscal quarter and nine months ended September 26, 2020; comparisons are with periods ended September 28, 2019, and balance-sheet amounts at December 28, 2019.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4.452 million | $4.387 million | $16.722 million | $16.024 million |
| Gross profit / margin | $938,000 / 21% | $223,000 / 5% | $3.671 million / 22% | $1.557 million / 10% |
| Operating income (loss) | $253,000 | ($479,000) | $1.205 million | ($966,000) |
| Net income (loss) | $231,000 | ($496,000) | $1.132 million | ($990,000) |
| Diluted EPS | $0.02 | ($0.04) | $0.09 | ($0.07) |
- Management attributed gross-margin improvement to price increases, product mix, and improved operating efficiency. Q3 revenue rose 1%; management cited 6% higher pricing offset by 5% lower sales volume. Nine-month revenue rose 4%, primarily from pricing that was 10% higher year over year.
- Q3 SG&A was $685,000, down 3%; nine-month SG&A was $2.466 million, down 2%. Reduced travel during the pandemic was the primary reason for lower expense.
- Interest expense was $21,000 in Q3 and $87,000 for the nine months, versus $16,000 and $24,000, respectively, in 2019. The nine-month statement reports a $456 income-tax provision.
- Operating cash flow was $682,000 for the nine months, versus cash used of $321,000 in 2019. Investing cash use was $281,000, including $286,000 of equipment purchases; financing cash use was $423,000. Cash declined $21,000 to $113,000.
Financial position and changes
- At September 26, 2020, total assets were $9.987 million and stockholders’ equity was $6.564 million, compared with $9.024 million and $5.331 million at December 28, 2019.
- Cash was $113,000; line-of-credit borrowings were $835,000. Management’s net-cash measure, after line-of-credit borrowings, was negative $722,000, improved from negative $1.116 million at year-end 2019.
- The revolving credit facility was increased to $3.0 million in May 2020. The company reported $1.835 million of additional borrowing availability at quarter-end. It is secured by receivables and other assets, bears interest at LIBOR plus 6.5%, is subject to financial covenants, and includes a demand note allowing the lender to call the loan at any time.
- Equipment-related note payable totaled approximately $225,000, of which $56,000 was current. The notes relate to an ultrasound microscope and manufacturing equipment; reported scheduled payments extend through 2024 and thereafter.
- Net inventory increased to $4.187 million from $3.100 million at year-end, including finished goods of $1.790 million versus $872,000. Receivables were $3.962 million versus $4.087 million; days sales outstanding increased to 80 from 67 at year-end. Accounts payable and accrued expenses declined to $1.222 million and $720,000, respectively. Deferred revenue increased to $358,000 from $21,000.
- During Q3, CPS repurchased 200,018 shares to facilitate employee option exercises. At September 26, 2020, 13,296,168 common shares were outstanding.
Outlook, commentary, and risks
- CPS remained open as an essential-services provider. Management said most customers remained operational, but customer demand became more volatile. Unexpected demand reductions by two major customers lowered Q3 revenue and left inventory built for expected orders; management expected inventory to decline over time but remain somewhat elevated for the next quarter or two.
- Management expected existing cash and, if needed, line-of-credit borrowings to fund working capital for the remainder of 2020 and stated these sources should meet cash needs for the foreseeable future. This is subject to risks if revenues fall short or spending cannot be reduced.
- The company depends on a limited number of customers; losing one could require additional external financing. The filing also notes that lower volume can disproportionately affect results because of fixed costs and that manufacturing yields for its technically complex products can vary.
- Management cited a negotiated settlement with a customer, including a $120,000 reserve adjustment that increased Q3 revenue, in connection with purchases below contractual levels. It also said greater credit availability allowed CPS to end prompt-pay discounts to certain customers, which management expected to benefit earnings.
- The filing provides no specific forward financial guidance. Management cautioned that pandemic-related customer volatility could continue for at least several quarters. No material changes to the risk factors in the 2019 Form 10-K were reported; no legal proceedings were reported.
Important facts for investors to verify
- Whether customer demand recovers and the elevated finished-goods inventory converts into shipments without further discounting or obsolescence.
- Whether pricing and improved operating efficiency sustain margins despite lower Q3 sales volume and higher interest expense.
- Liquidity and borrowing terms, particularly the demand feature of the secured credit line, covenant compliance, and remaining borrowing availability.
- Customer concentration and the potential effect of further order reductions on cash flow and financing needs.
- The treatment and future resolution of the $120,000 customer reserve adjustment and contractual purchase shortfall.