CPS Technologies Corporation — Q1 2015 Form 10-Q
Business context and period: The unaudited quarter ended March 28, 2015. CPS develops and manufactures metal-matrix composites and related electronic housings and packages for electronics, power generation, automotive, and other markets. The company also had a U.S. Army cooperative technology-development agreement extended through March 31, 2015.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $5.290 million | $5.986 million |
| Gross margin | $1.135 million; 21% of sales | $1.538 million; 26% of sales |
| Income from operations | $123,000 | $413,000 |
| Net income | $73,787 | $247,619 |
| Diluted earnings per share | $0.01 | $0.02 |
| Net cash used in operating activities | $57,712 | $608,497 |
| Capital expenditures | $97,595 | $106,806 |
Liquidity, debt, and balance sheet
- Cash was $2.172 million at March 28, down from $2.306 million at December 27, 2014. The quarter’s net cash decrease was $133,606.
- Current assets were $9.662 million and current liabilities were $2.573 million; management reported a current ratio of 3.5 against a 1.5 minimum covenant.
- Trade receivables rose to $4.084 million from $3.589 million. Management attributed the increase primarily to collections of an unusually high share of Q4 2014 sales during that quarter; DSO rose from 54 days to 69 days.
- Net inventory was $2.534 million, approximately flat quarter over quarter. $754,000 was held at customer locations under consignment arrangements.
- No borrowings were outstanding under the $2 million revolving credit line or the equipment finance facility at quarter end. The company was covenant-compliant; reported debt-service coverage was 16 versus a 1.25 minimum, and liabilities to tangible net worth were 0.3 versus a 1.0 maximum.
- In April 2015, CPS renewed both facilities through May 2016. The renewed revolving line bears interest at prime, is secured by receivables and other assets, and is subject to financial covenants.
Material changes and management commentary
- Revenue declined 12% year over year. Management attributed the decrease mainly to lower traction-product baseplate sales and, to a lesser extent, dissolvable ball sealers used in fracking.
- Gross margin fell to 21% from 26%, reflecting lower sales volume and approximately $200,000 of price decreases, partly offset by manufacturing efficiencies.
- SG&A declined 10% to $1.013 million, primarily because of reduced sales and marketing activity, including commissions, travel, and conference costs. Lower revenue was the main reason operating profit and net income declined.
- Management said cash, operating cash flow, and available credit should fund working-capital needs for the remainder of 2015 and cash requirements for the foreseeable future. It cautioned that insufficient revenue, inability to raise capital, or failure to reduce discretionary spending could adversely affect business objectives and the ability to meet obligations.
- The company depends on a limited number of customers; losing any one could require additional external financing. Management also noted that interim results are not necessarily indicative of full-year results. No specific earnings or revenue guidance was provided.
- Deferred tax assets totaled $2.273 million. Management recorded no valuation allowance, believing future taxable income would be sufficient to realize the assets. CPS reported no material changes to its risk factors, no legal proceedings, and no significant exposure to interest-rate or foreign-currency risk.
Important facts for investors to verify
- Whether lower traction-product and fracking-related sales persist, and how the customer supply agreement for hybrid/electric vehicle motor-controller baseplates develops.
- Customer concentration and the potential financing impact of losing a major customer.
- Renewed credit-line terms, borrowing availability, and ongoing covenant compliance.
- Receivables collection trends, DSO, consigned inventory levels, and inventory turnover.
- The assumptions supporting realization of deferred tax assets and the impact, if any, of the Army agreement’s March 31, 2015 end date.