CPS Technologies Corporation — Q3 2012 Form 10-Q
Reporting period and business: Unaudited quarter ended September 29, 2012, and nine months then ended; comparisons are with the quarter and nine-month period ended October 1, 2011. CPS supplies metal-matrix composites and related components and packages for electronics, power generation, transportation, automotive, and defense applications. It also performs U.S. Army cooperative-agreement research and development.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $2.744 million | $4.901 million | $9.927 million | $15.583 million |
| Gross margin | $(236,000), (9%) | $892,000, 18% | $(77,000), (1%) | $2.707 million, 17% |
| Operating income (loss) | $(877,000) | $57,000 | $(2.372) million | $128,000 |
| Net income (loss) | $(531,000) | $28,000 | $(1.438) million | $57,000 |
| Basic and diluted EPS | $(0.04) | $0.00 | $(0.11) | $0.00 |
Q3 revenue declined 44%; nine-month revenue declined 36%. Product sales were $2.605 million for Q3 and $9.478 million year to date; cooperative-agreement R&D revenue was $139,000 and $449,000, respectively. SG&A declined to $641,000 in Q3 and $2.295 million year to date. Interest expense was $5,000 and $16,000, respectively.
Cash flow: Operating activities used $952,000 in the first nine months, compared with $123,000 used in 2011. Investing activities used $206,000; financing provided $236,000, including $400,000 drawn on the credit line. Cash declined $921,000 to $221,000.
Financial position and liquidity
At September 29, 2012, cash was $221,000, trade receivables $2.101 million, inventory $3.301 million, and current assets $5.739 million. Total assets were $10.113 million. Current liabilities were $2.475 million and total liabilities $2.572 million. Stockholders’ equity was $7.542 million.
The company had $400,000 outstanding on its $2 million revolving credit line. The borrowing base was $912,000, leaving $512,000 of borrowing-base capacity at quarter-end. Capital-lease obligations totaled approximately $235,000. The credit line and equipment lease facility mature in May 2013 and are cross-defaulted and cross-collateralized. The LOC bears interest at prime plus 1% (reported as 1.75% at the time).
Receivables decreased from $3.113 million at year-end 2011, while days sales outstanding rose from 66 to 69. Inventory increased from $3.139 million; $1.497 million was held at customer locations under consignment arrangements. The company reported $238,000 of production-equipment purchase commitments.
Material changes, outlook, and risks
- Management attributed weaker revenue to weak traction-product orders, reduced demand for heat spreaders and lids as products approach end of life, lower Army cooperative-agreement revenue, fewer hermetic-package sales, and lower hybrid/electric-vehicle baseplate sales. For the nine-month period, management also cited weak European economies and slower traction spending in China; a small increase in vehicle baseplates partly offset declines.
- Lower volumes reduced fixed-cost absorption; manufacturing yields also weakened. The company recorded about $100,000 of Q3 obsolescence charges, versus none in Q3 2011. Year-to-date margin was further affected by Q1 outside-finishing costs and obsolescence for products reaching end of life earlier than forecast.
- Management said it expected to fund remaining 2012 working-capital needs through existing cash and committed credit-line borrowings. It warned that its limited customer base makes it vulnerable to losing a major customer; inadequate revenue, financing, or spending reductions could materially impair business objectives. No numerical revenue or earnings guidance was provided.
- Tax benefits were $351,000 in Q3 and $950,000 year to date. The balance sheet reported a $2.431 million non-current deferred-tax asset at September 29; management had recorded no valuation allowance, citing expected future taxable income. The company reported a nine-month net loss.
- Bank covenant update: The filing’s quarter-end discussion says the company was in compliance, but a subsequent-events note reports that in November 2012 the bank waived a Q3 covenant violation and modified future covenants, expanded eligible receivables in the borrowing base, and reduced the equipment Lease Line from $1.25 million to $500,000. Both facilities mature in May 2013.
- Other commitments include facility leases; the filing lists $621,200 of operating lease obligations, $245,400 of capital-lease obligations including interest, and $238,000 of equipment purchase commitments. Legal proceedings: none reported. Management reported no material change in stated risk factors, and no significant exposure to interest-rate or foreign-currency movements.
Important facts for investors to verify
- Current compliance with the revised bank covenants, borrowing-base availability, and refinancing or renewal plans before the May 2013 maturities.
- Cash burn and whether revenue and customer collections can support operations without additional financing.
- Progress in recovering sales and margins, including traction products, end-of-life products, Army work, and automotive baseplates.
- Inventory recoverability, consigned stock, obsolescence exposure, and the timing of customer demand.
- Assumptions supporting realization of the deferred-tax asset despite reported losses.