CPS Technologies Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter ended June 28, 2014; comparisons are with the quarter ended June 29, 2013. The company develops and manufactures metal-matrix composites and related component assemblies for electronics, power generation, automotive, and other markets.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $5.135 million | $5.301 million | $11.121 million | $10.332 million |
| Gross margin | $1.058 million (21% of sales) | $1.363 million (26%) | $2.597 million (23%) | $2.278 million (22%) |
| Operating income (loss) | $(95,000) | $355,000 | $318,000 | $370,000 |
| Net income (loss) | $(57,000) | $237,000 | $190,000 | $239,000 |
Q2 revenue declined 3% year over year, primarily because of lower baseplate sales. Higher manufacturing costs, including labor productivity, factory support, and material yields, contributed to the gross-margin decline; price increases partly offset those costs. SG&A rose 14% in the quarter, which management attributed largely to sales and marketing activity and higher legal fees. For the first half, revenue increased 8%, supported by Q1 traction-product baseplate sales and approximately $300,000 of price increases; gross margin improved, but higher SG&A and manufacturing costs left operating and net income below the prior-year period.
Cash flow, liquidity, and debt
- First-half operating cash flow was a use of $145,000, versus $556,000 provided in the first half of 2013. Capital expenditures were $265,000; cash declined by $426,000 to $1.145 million.
- At June 28, cash was $1.145 million, trade receivables $3.449 million, inventory $2.782 million, current assets $8.014 million, and current liabilities $2.413 million. The reported covenant current ratio was 3.3x.
- Receivables and inventory increased by approximately $548,000 and $598,000, respectively, from year-end. Management cited a more typical 60-day DSO, compared with an unusually low 51 days at year-end, and inventory built for early-Q3 deliveries before the July plant shutdown. $928,000 of inventory was held at customers’ locations under consignment agreements.
- The company had no borrowings on its renewed $2 million revolving line of credit; the borrowing base allowed up to $2 million of additional borrowing at quarter-end. Capital-lease obligations were approximately $35,000, with $465,000 remaining on the equipment lease facility. The facilities mature in May 2015, are cross-defaulted and cross-collateralized, and the company reported compliance with all covenants.
Outlook, risks, and other matters
- No quantified revenue or earnings guidance is provided. Management expected working-capital needs for the remainder of 2014 to be funded by operating cash flow, cash balances, and the credit line if needed, and believed available resources would cover cash requirements for the foreseeable future. It cautioned that insufficient revenue or inability to reduce discretionary spending could impair its ability to meet obligations and business objectives.
- The company disclosed dependence on a limited number of customers; losing a major customer could require additional external financing. Manufacturing costs and working-capital requirements are also relevant risks.
- A multi-year supply agreement with a major automotive tier-one supplier covers AlSiC pin-fin baseplates for hybrid and electric vehicle motor controllers. The U.S. Army cooperative agreement for armor technology had been extended through March 31, 2015.
- The company carried $2.370 million of deferred tax assets and recorded no valuation allowance, citing its expectation of sufficient future taxable income. Realization depends on that income being achieved.
- Management reported no material changes to critical accounting policies or previously disclosed risk factors. No legal proceedings were reported. The 10-Q states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q2 manufacturing-cost pressures and weaker baseplate sales persist, and whether gross margins recover.
- Whether receivables and inventory convert to cash as expected, given first-half negative operating cash flow and higher working-capital balances.
- Customer concentration, the performance and timing of the automotive supply agreement, and the potential for the Army program to generate revenue.
- Availability of credit and continued covenant compliance through the facilities’ May 2015 maturity.
- Whether future taxable income supports realization of the deferred tax assets.