CPS Technologies Corp. — Q3 2022 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 1, 2022; results are unaudited. CPS develops and manufactures custom metal-matrix composite products, hybrid-circuit housings and packages, and lightweight armor for markets including aerospace and defense, transportation, power generation, and electronics.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6.75 million | $5.51 million | $20.47 million | $16.24 million |
| Gross margin | $1.88 million (28%) | $1.14 million (21%) | $5.68 million (28%) | $3.43 million (21%) |
| Operating income (loss) | $709,000 | ($88,000) | $1.93 million | $201,000 |
| Net income | $988,000 | $2.73 million | $1.86 million | $3.00 million |
| Diluted EPS | $0.07 | $0.18 | $0.13 | $0.21 |
- Quarterly revenue rose 22% year over year, primarily from armor production and higher sales to other aerospace and defense customers. Nine-month revenue rose 26%, reflecting growth in armor and hermetic package products.
- Management attributed the improved gross margin and operating results to higher sales volumes spreading fixed manufacturing costs over more production. Q3 SG&A declined 4% year over year, partly because Q3 2021 included $327,000 of non-recurring restructuring costs. Nine-month SG&A increased 16%, driven by hiring, variable compensation, and armor-shipment commissions.
- Net income declined year over year despite stronger operating performance. Q3 2021 included a $2.8 million income-tax benefit from reversing a deferred-tax-asset valuation allowance; Q3 2022 instead included an estimated tax charge. Q3 2022 also recognized a $641,086 Employee Retention Tax Credit (ERTC) in other income and accounts receivable.
Cash, liquidity, and debt
- Cash and cash equivalents were $5.60 million at October 1, 2022, up from $5.05 million at December 25, 2021. Current assets were $16.55 million and current liabilities $4.82 million.
- Nine-month operating cash flow was $872,000, versus $549,000 a year earlier. Investing cash outflow was $392,000, mainly for property and equipment; financing cash inflow was $68,000. Accounts receivable and inventory increased by approximately $966,000 and $957,000, respectively, during the period.
- Trade receivables were $5.84 million, including the $641,086 ERTC receivable; inventory was $4.87 million. Management said the inventory increase supported higher sales and reflected product mix. Trade-receivable DSO was 69 days, down from 72 days at year-end 2021.
- The company had no borrowings on its $3.0 million revolving credit line; the reported borrowing base permitted up to $3.0 million of borrowing. The line is secured by receivables and other assets and includes a demand note. Note payable totaled approximately $109,000. Total liabilities were $5.22 million.
Outlook, risks, and other items
- No formal revenue or earnings guidance is provided. Management expects existing cash to fund working-capital needs for the remainder of 2022 and believes cash and borrowing availability, if needed, should support requirements for the foreseeable future, while noting there is no assurance if operating goals are missed.
- Management cautions that CPS continues to rely on a limited number of customers; losing a major customer could require additional external financing. Failure to generate sufficient revenue, raise capital, or reduce discretionary spending could adversely affect business objectives.
- The company reported compliance with debt covenants, no material change in risk factors, and no legal proceedings. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
- The Norton facility lease runs through February 2026, with a renewal option; the recognized lease liability was $497,000. No outstanding commitments to purchase production equipment were reported.
Investor facts to verify
- Whether the $641,086 ERTC receivable is collected and whether any related tax or recognition assumptions change.
- Whether revenue growth and the 28% gross margin are sustained as customer demand and product mix evolve.
- Customer concentration, order visibility, and the effect of any major customer loss on cash needs.
- Working-capital conversion, particularly the growth in receivables and inventory relative to sales and operating cash flow.
- Availability and terms of the demand-based credit line, including covenant status and borrowing-base capacity.