CPS Technologies Corporation — Q2 2016 Form 10-Q
Business context and reporting period. CPS supplies metal-matrix composite materials and assembled housings and packages for electronics, power generation, automotive, and other markets. This unaudited report covers the quarter ended July 2, 2016 and the six months then ended; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $3.935 million | $5.636 million | $9.151 million | $10.926 million |
| Gross margin | $561,000; 14% of sales | $1.299 million; 23% | $1.692 million; 18% | $2.434 million; 22% |
| Operating income (loss) | ($332,000) | $187,000 | ($108,000) | $309,000 |
| Net income (loss) | ($259,000) | $114,000 | ($62,000) | $188,000 |
| Basic and diluted EPS | ($0.02) | $0.01 | ($0.00) | $0.01 |
- Cash flow: First-half operating cash flow was $614,000, investing cash outflow was $457,000 (capital expenditures), and financing cash flow was $5,000. Cash increased $162,000 to $3.574 million.
- Liquidity and balance sheet: At July 2, cash was $3.574 million, current assets $9.133 million, and current liabilities $1.625 million. The current ratio was 5.6x. Total assets were $12.691 million and stockholders’ equity $11.066 million.
- Debt and credit availability: CPS had no borrowings on its $2 million revolving credit line; the borrowing base permitted $1.2 million of borrowing at period-end. The separate $500,000 equipment facility was unused. Both facilities mature in May 2017; the company reported compliance with covenants.
- Other metrics: Accounts receivable was $2.499 million, with days sales outstanding of 57, down from 59 at year-end 2015. Net inventory was $2.415 million, including $881,000 held at customer locations on consignment. Deferred tax assets totaled $2.194 million; no valuation allowance was recorded.
Changes versus comparable periods
- Q2 revenue declined 30%; first-half revenue fell 16%. Management attributed the declines mainly to lower baseplate sales and, to a lesser extent, lower hermetic package and lid sales. First-half armor sales partly offset the declines. Management reported no significant price changes.
- Lower sales volume reduced gross margin and drove the shift from operating profit to operating loss. Manufacturing efficiencies partly offset the Q2 margin decline.
- SG&A declined 20% in Q2 and 15% for the first half, reflecting lower incentive compensation, commissions, 401(k) matching, and legal/professional costs. Higher China-related selling and marketing costs partly offset savings.
- Working capital movements, particularly lower receivables and inventory, contributed to positive operating cash flow. Capital spending exceeded depreciation.
Outlook, risks, and other matters
- Management expected working capital needs for the remainder of 2016 to be funded by operating cash flow, cash balances, and credit-line borrowings if needed. It stated that these resources should meet cash requirements for the foreseeable future, but cautioned that revenue shortfalls or inability to reduce discretionary spending could impair the company’s ability to meet obligations.
- The company sells to a limited number of customers; losing a major customer could require additional external financing and materially affect business objectives. Results are also exposed to sales-volume changes in key product markets.
- No quantified revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- The Norton facility lease was extended through February 28, 2018. Remaining facility lease obligations were reported at $461,600. The company also planned to finance equipment under construction using cash and operating funds.
- The filing reports no material changes to previously disclosed risk factors, no legal proceedings, and no significant exposure to interest-rate or foreign-currency fluctuations. No derivatives were used.
Important facts for investors to verify
- Whether baseplate demand and revenue recover, and whether customer concentration or product mix continues to pressure margins.
- Whether positive operating cash flow persists after working-capital changes and planned capital expenditures.
- Availability of the credit line under its borrowing base and continued compliance with financial covenants.
- The assumptions supporting realization of the $2.194 million deferred tax asset without a valuation allowance.
- Customer consigned inventory levels, inventory obsolescence reserve, and the company’s ability to fund operations if revenue goals are not met.