CPS Technologies Corporation — Q2 2017 Form 10-Q
Reporting period: Second quarter and six months ended July 1, 2017; comparative periods ended July 2, 2016. CPS makes metal-matrix composites and assembles electronic housings and packages for electronics, power generation, automotive, and other markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.724 million | $3.935 million | $6.569 million | $9.151 million |
| Gross profit / margin | $414,000 / 11% | $561,000 / 14% | $334,000 / 5% | $1.692 million / 18% |
| Operating loss | $519,000 | $332,000 | $1.573 million | $108,000 |
| Net loss | $333,000 | $259,000 | $938,000 | $62,000 |
| Net loss per share | $0.03 | $0.02 | $0.07 | $0.00 |
- Q2 revenue declined 5%; management attributed the decrease to lower hermetic-package and armor sales. First-half revenue fell 28%, primarily because of lower baseplate sales and, to a lesser degree, lower armor sales. The company reported no significant price changes.
- First-half operating cash flow was negative $1.406 million, versus positive $614,000 a year earlier. Capital expenditures were $60,000, compared with $457,000. Cash declined $1.466 million to $1.942 million.
- At July 1, total assets were $11.700 million, current assets $6.686 million, current liabilities $1.774 million, and stockholders’ equity $9.926 million. The current ratio was 3.8x. The company reported no debt borrowings under its credit line.
- Trade receivables were $2.706 million, up from $1.960 million at year-end; days sales outstanding increased from 61 to 65. Net inventory was $1.946 million, roughly unchanged from year-end.
Changes, outlook, and risks
- Q2 SG&A increased 5% year over year to $933,000. First-half SG&A rose 6% to $1.907 million. Management cited approximately $100,000 of Q1 proxy-related legal and other costs in Q2 discussion and approximately $200,000 for the first half; excluding these costs, it said SG&A would have declined 7% for Q2 and 5% for the first half.
- Management said existing cash, operating cash flows, and the Santander credit facility should fund requirements for the foreseeable future, including the remainder of 2017. It cautioned that insufficient revenue, inability to raise capital, or failure to reduce discretionary spending could adversely affect the company’s ability to meet obligations and achieve business objectives. No quantified revenue or earnings guidance is provided.
- In June 2017, CPS renewed a $1.5 million revolving credit line maturing at the end of May 2018, secured by receivables and other assets, at prime plus 1%. At quarter-end, it had no borrowings and an eligible borrowing base of $1.456 million. CPS reported compliance with covenants, including a $1.5 million minimum cash requirement; quarter-end cash was $1.942 million.
- The company relies on a limited number of customers; management warned that losing any one could require additional external financing. Facility operating-lease obligations totaled $309,200, including $117,600 remaining in 2017.
- CPS recorded a first-half income tax benefit of $630,000 and reported a $3.457 million deferred tax asset with no valuation allowance, based on management’s expectation of sufficient future taxable income. Interim results may not indicate full-year performance. The filing reported no legal proceedings and no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether revenue and gross margins recover, especially in baseplates, hermetic packages, and armor, and whether customer concentration affects orders.
- Cash consumption, receivable collection, and liquidity relative to the credit-line covenants and the facility’s borrowing base.
- The basis for recognizing the deferred tax asset and management’s future taxable-income expectations.
- The effect and duration of proxy-related legal and other costs, and the company’s ability to achieve its stated funding outlook.