CPS Technologies Corporation — Form 10-Q Summary
Business and period. CPS supplies metal-matrix composites and electronic housings and packages to electronics, power generation, automotive, and other markets, and conducts armor-related development under a U.S. Army cooperative agreement extended through March 31, 2015. The cover identifies the period ended September 24, 2014, while the financial statements report the quarter ended September 27, 2014; the filing text does not explain the discrepancy.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $6.070 million | $5.974 million | $17.191 million | $16.306 million |
| Gross margin | $1.339 million; 22% | $1.718 million; 29% | $3.936 million; 23% | $3.996 million; 25% |
| Operating income | $321,000 | $659,000 | $639,000 | $1.029 million |
| Net income | $194,000 | $452,000 | $384,000 | $691,000 |
| Diluted EPS | $0.01 | $0.03 | $0.03 | $0.05 |
Cash flow and liquidity. For the first nine months, operating cash flow was negative $119,000, versus positive $1.129 million a year earlier. Capital spending was $370,000, and cash declined $515,000 to $1.056 million from $1.571 million at year-end 2013. The company attributed the cash decline primarily to a $2.1 million increase in receivables and inventory, partly offset by higher payables and accruals and operating earnings. At September 27, current assets were $8.933 million and current liabilities were $2.984 million; accounts receivable were $4.591 million and net inventory was $2.640 million.
Debt and facilities. CPS had no borrowings on its $2 million Santander revolving credit line, with the borrowing base permitting the full $2 million, and had $486,000 available under its $500,000 equipment lease line. Capital lease obligations had a $14,000 carrying value. Both facilities mature in May 2015; the company reported compliance with covenants. Its actual debt-service coverage, current, and liabilities-to-tangible-net-worth ratios were reported as 35x, 3.0x, and 0.3x, respectively, against minimums of 1.25x and 1.5x and a maximum of 1.0x.
Changes and management commentary
- Quarterly revenue increased 2%, while nine-month revenue rose 5%. Management attributed growth largely to fracking-ball sales—$535,000 in Q3 and approximately $800,000 over nine months—and, for the nine-month period, traction-product baseplates and price increases.
- Profitability weakened despite revenue growth. Management cited higher direct labor and manufacturing costs, unfavorable product mix, and lower prices in Q3; nine-month gross margin was also affected by product mix, partly offset by approximately $300,000 in price increases. Nine-month SG&A rose 11%, primarily with higher sales and marketing activity and stock-option costs.
- Q3 sales of fracking balls were partly offset by lower baseplate and hermetic-package sales. Management reported Q3 pricing reductions of approximately $50,000.
- Receivables increased from $2.9 million at year-end to $4.6 million; days sales outstanding rose from an unusually low 51 days to 68 days. Inventory rose from $2.2 million to $2.6 million, partly in preparation for fourth-quarter baseplate deliveries. Approximately $964,000 of inventory was held at customer locations on consignment.
Outlook, risks, and other items
- No quantified revenue or earnings guidance is provided. Management expected to fund working capital for the remainder of 2014 through operating cash flow, existing cash, and credit-line borrowings if needed, and believed resources would meet requirements for the foreseeable future. It cautioned that inadequate revenue or failure to reduce discretionary spending could impair its ability to meet obligations and business objectives.
- The company depends on a limited number of customers; losing a major customer could require additional external financing. Management also noted that interim results may not indicate full-year performance.
- The company had $2.255 million in current and non-current deferred tax assets and provided no valuation allowance, citing its expectation of sufficient future taxable income to realize the benefits.
- Facility leases and related commitments remain; reported operating-lease obligations totaled $252,600. The Attleboro lease was renewed through February 2016 after quarter-end, with options potentially extending use through February 2019.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management said disclosure controls were effective and there had been no material change in internal control over financial reporting.
Important facts for investors to verify
- Resolve the cover-page September 24 versus financial-statement September 27 period-end discrepancy.
- Track gross margin recovery, manufacturing labor and costs, sales mix, and whether new fracking-ball and automotive supply opportunities produce sustained revenue.
- Monitor collections, customer concentration, consigned inventory, and operating cash flow, given the period’s working-capital use.
- Review covenant compliance and the May 2015 renewal or replacement of the Santander credit and equipment facilities.
- Assess support for management’s deferred-tax-asset realization assumption and its liquidity outlook if revenue or operational targets are missed.