CPS Technologies Corporation — Q3 2017 Form 10-Q
Business context and reporting period. CPS develops and manufactures metal-matrix composites and electronic housings and packages for electronics, power generation, automotive, and other markets. This unaudited quarterly report covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding periods ended October 1, 2016.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.212 million | $3.327 million | $10.781 million | $12.478 million |
| Gross margin | $761,000 (18% of sales) | $386,000 (12%) | $1.095 million (10%) | $2.078 million (17%) |
| Operating income (loss) | $17,000 | $(377,000) | $(1.555) million | $(486,000) |
| Net income (loss) | $13,000 | $(139,000) | $(924,000) | $(200,000) |
| EPS, basic and diluted | $0.00 | $(0.01) | $(0.07) | $(0.02) |
Cash flow and liquidity. For the first nine months, operating cash use was $1.589 million and capital expenditures were $129,000. Cash fell by $1.718 million to $1.690 million from $3.408 million at year-end 2016. At September 30, current assets were $6.479 million and current liabilities $1.453 million, for a 4.5x current ratio. Trade receivables were $3.034 million; days sales outstanding rose to 65 from 61 at year-end. Net inventory was $1.675 million, including $490,000 held at customer locations on consignment.
Debt and obligations. CPS had no borrowings on its $1.5 million secured revolving credit line, and the full amount was available at quarter-end. The line matures at the end of May 2018 and bears interest at prime plus 1%. The company reported compliance with its financial covenants. Reported operating lease obligations totaled $250,400, due through 2019. No other debt balance is reported in the filing.
Material changes versus comparable periods
- Q3 revenue rose 27%, principally due to higher baseplate sales; gross margin improved and the company returned to modest operating and net income.
- Nine-month revenue fell 14%, attributed to lower armor-product and baseplate sales. Lower volume drove the decline in gross margin and a larger operating and net loss.
- Nine-month SG&A increased 3% to $2.651 million. Management attributed about $200,000 to additional legal and other costs related to the annual proxy process; excluding these costs, it said SG&A would have declined 4%.
- The nine-month 2017 income-tax benefit was $623,000, compared with a $237,000 benefit in 2016. The company recorded a $3.450 million deferred tax asset and said it had not provided a valuation allowance because it expects sufficient future taxable income.
Outlook, risks, and notable items
Management expected working-capital needs for the remainder of 2017 to be funded through operating cash flow, existing cash, and the credit line if needed, and believed these sources would cover foreseeable cash requirements. This is not a quantified revenue or earnings forecast. Management cautioned that insufficient revenue or failure to reduce discretionary spending could impair its ability to meet obligations and achieve business objectives.
The company depends on a limited number of customers; losing any one could require additional external financing. Its ability to meet plans also depends on revenue generation and expense control. Management noted that interim results are not necessarily indicative of full-year results. The filing reports no material change to the risk factors in the 2016 Form 10-K and no legal proceedings.
Other notable items: CPS exercised an option in October 2017 to extend its Norton facility lease through February 28, 2019. Senior Vice President and Chief Technology Officer Richard Adams resigned on October 25, 2017. In Q3 2016, the company recorded $40,000 from selling used equipment above book value; there was no comparable gain in Q3 2017. Management reported disclosure controls as effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Q3 baseplate sales improvement continues, and whether armor-product and baseplate demand recovers enough to improve year-to-date margins.
- Customer concentration and the potential effect of a major customer loss on revenue, cash needs, and access to financing.
- Cash use, receivable collections, and the assumptions supporting management’s expectation of sufficient future cash and taxable income.
- Compliance with the credit line’s financial covenants and the line’s renewal or repayment arrangements before its May 2018 maturity.
- The financial and operational impact, if any, of the CTO’s resignation and the extended facility lease.