CPS Technologies Corporation — Q3 2015 Form 10-Q
Reporting period: Fiscal quarter and nine months ended September 26, 2015. CPS supplies advanced material solutions, including metal-matrix composites, and assembles housings and packages for electronics, power, automotive, and other markets. Financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $5.423 million | $6.070 million | $16.349 million | $17.191 million |
| Gross margin | $0.974 million (18%) | $1.339 million (22%) | $3.409 million (21%) | $3.936 million (23%) |
| SG&A | $0.960 million | $1.018 million | $3.085 million | $3.297 million |
| Operating income | $0.014 million | $0.321 million | $0.323 million | $0.639 million |
| Net income | $0.008 million | $0.194 million | $0.196 million | $0.384 million |
| Diluted EPS | $0.00 | $0.01 | $0.01 | $0.03 |
Q3 revenue declined about 11% year over year; nine-month revenue declined about 5%. Gross margin fell in both comparisons, while lower SG&A only partly offset the deterioration in operating income and earnings.
Cash, liquidity, and obligations
- Cash and cash equivalents were $3.114 million at September 26, 2015, up from $2.306 million at December 27, 2014. Nine-month operating cash flow was $1.059 million, versus cash used of $0.119 million in the prior-year period; capital expenditures were $0.300 million.
- Current assets were $10.136 million and current liabilities $2.686 million. The company reported a 3.8x current ratio and said it complied with its bank covenants.
- No borrowings were outstanding under the $2.0 million revolving credit line; borrowing-base availability was reported as $1.728 million. The $0.5 million equipment-financing facility was unused. Both facilities mature in May 2016.
- Management expected working capital needs for the remainder of 2015 to be funded from operating cash flow, cash balances, and the credit line if needed. It also stated these sources should fund requirements for the foreseeable future, while cautioning that revenue shortfalls or inability to reduce discretionary spending could impair its ability to meet obligations.
- Operating lease obligations totaled $0.244 million. No outstanding commitments to purchase production equipment were reported.
Management commentary, changes, and risks
- Management attributed Q3 revenue weakness to the absence of a prior-year initial AMDR program shipment of nearly $0.3 million, approximately $0.2 million in price reductions, and approximately $0.2 million in sales returns for a new product. A mix shift included increased hermetic-package sales offset by lower baseplate sales.
- For the first nine months, management cited approximately $0.8 million in price reductions, nearly $0.3 million less AMDR revenue, and $0.2 million in sales returns, partly offset by higher unit sales, particularly hermetic packages. Manufacturing efficiencies partly offset the effect of lower pricing and returns.
- The U.S. Army cooperative agreement, extended through March 31, 2015, supported armor technology development; the filing reports no Q3 cooperative-agreement revenue.
- The company depends on a limited number of customers; management warned that losing any one could require additional external financing. CPS also noted that it may be unable to meet obligations if planned operational goals are missed and revenue is insufficient or discretionary spending cannot be reduced.
- Deferred tax assets totaled $2.220 million. The company recorded no valuation allowance, based on its belief that future taxable income would be sufficient to realize the tax benefits.
- No material changes to the risk factors in the 2014 Form 10-K were reported. The company disclosed no legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Whether price reductions and new-product returns persist, and how they affect gross margin and profitability.
- Customer concentration, order trends, and the timing and scale of the announced multi-year automotive supply agreement.
- Whether operating cash generation remains adequate and bank credit availability remains sufficient; verify the borrowing-base amount and covenant calculations.
- Whether future taxable income supports realization of the $2.220 million deferred tax asset.
- The filing provides no specific revenue or earnings guidance; its outlook is limited to liquidity and funding expectations.