CPS Technologies Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; comparative quarter ended June 28, 2014. Six-month results compare the periods ended June 27, 2015 and June 28, 2014. CPS develops and manufactures metal-matrix composites and related electronic housings and packages for electronics, power generation, automotive, and other markets.
Financial performance
- Q2 revenue: $5.636 million, up 10% year over year. Product sales growth, including baseplates and hermetic packages, was partly offset by about $0.4 million in price decreases.
- Q2 gross margin: $1.299 million, or 23% of revenue, versus $1.058 million, or 21%, in Q2 2014. Higher volume and manufacturing efficiencies partly offset price reductions.
- Q2 operating income and net income: $187,000 and $114,000, respectively, compared with an operating loss of $95,000 and net loss of $57,000 a year earlier. Basic and diluted EPS were each $0.01.
- First-half revenue: $10.926 million, down 2% year over year, principally reflecting approximately $0.6 million in price reductions, partly offset by higher package and baseplate sales.
- First-half gross margin: $2.434 million, or 22% of revenue, versus $2.597 million, or 23%. Operating income was $309,000 versus $318,000; net income was $188,000 versus $190,000. EPS was $0.01 basic and diluted in both periods.
- Operating expenses: Q2 SG&A declined 4% to $1.112 million; first-half SG&A declined 7% to $2.125 million, mainly due to lower marketing and sales-related spending.
- Cash flow: First-half operating cash flow was $569,000, compared with cash used of $145,000 in the prior-year period. Capital expenditures were $171,000. Cash increased by $448,000 to $2.753 million.
Financial position and liquidity
- At June 27, 2015, current assets were $10.096 million and current liabilities were $2.727 million; the reported current ratio was 3.7x. Total assets were $13.353 million and stockholders’ equity was $10.626 million.
- Inventory was $2.801 million, up from $2.529 million at year-end, partly because CPS built baseplates for early-Q3 delivery ahead of the July plant shutdown. $1.1 million of inventory was held at customer locations under consignment agreements.
- Trade receivables were $3.840 million. Days sales outstanding rose from an unusually low 54 days at year-end 2014 to 61 days at quarter-end.
- CPS reported no line-of-credit borrowings. Its renewed Santander revolving facility provides up to $2 million, subject to the borrowing base, and the $500,000 equipment finance facility was unused. Both mature in May 2016; CPS reported compliance with covenants.
- Management expected working capital needs for the remainder of 2015 to be funded by operating cash flow, existing cash, and credit-line borrowings if needed. Management also stated these sources should cover foreseeable cash requirements, while cautioning that this depends on revenue generation and spending control.
Changes, outlook, and risks
- Quarterly results improved significantly year over year, with revenue growth and a return to operating and net profitability. First-half revenue and gross margin were lower than the prior year, while operating income and net income were broadly steady.
- The U.S. Army cooperative agreement for armor development, extended through March 31, 2015, had ended. CPS also cited a multi-year supply agreement with a major automotive tier-one supplier for baseplates used in hybrid and electric-vehicle motor controllers.
- The filing gives no specific forward revenue or earnings guidance. Management’s outlook for liquidity is based on expected operating cash flow, cash balances, and available credit facilities.
- CPS said it sells to a limited number of customers; losing a major customer could require external financing. Failure to generate sufficient revenue, raise capital, or reduce discretionary spending could materially affect business objectives and the ability to meet obligations.
- Other items to monitor include pricing pressure, inventory levels and turnover, customer-held consigned inventory, and lease commitments. Facility operating-lease payments totaled $302,300, with $117,600 listed for the remainder of FY2015. No material changes to the 2014 Form 10-K risk factors were reported; no legal proceedings were listed.
Important facts for investors to verify
- Whether Q2 revenue growth and improved gross margin persist despite price reductions and the first-half revenue decline.
- Customer concentration, the scale and timing of automotive program deliveries, and demand following expiration of the Army agreement.
- Inventory conversion, consignment exposure, and receivables collection trends.
- Availability and terms of the Santander facilities, covenant compliance, and management’s ability to fund operations from cash generation.
- Expected lease, equipment, and other commitments and any changes to the company’s liquidity outlook.