CPS Technologies Corporation (CPSH) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Leah, and I will be your conference operator today. At this time, I would like to welcome everyone to the CPS Technologies Second Quarter Conference Call. [Operator Instructions] Thank you.Mr. Chuck Griffith, the floor is yours.

Thank you, operator, and good afternoon, everyone. I'm joined today by Grant Bennett, our President and CEO. Before we begin the business portion of the call, I would like to point out to all of you that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS' operations and environment. These uncertainties include economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement.Now I will turn the call over to Grant to offer his perspectives on the second quarter's results.

Thank you, Chuck, and thanks to each of you for joining the call.Let me begin by welcoming Chuck Griffith. Chuck participated in our last quarterly call as an observer. He now participates as our Chief Financial Officer. There's been a very thorough and smooth transition from Ralph Norwood to Chuck Griffith. And again, we welcome you, Chuck.Let me turn to our second quarter results. We had an unusually good quarter with revenues of $6.4 million and operating income of $258,000. Both the revenue and the operating income exceeded our plan.When we reported on our first quarter results, we highlighted two factors that had negative impacts on our results: one was product mix, and one were - one was yield issues with hermetic packages.In the second quarter, these two same topics, product mix and yields in hermetic packaging had positive impacts on our results. Products with higher margins were a greater percent of our total revenue. And as we have scaled up some new products in hermetic packaging, yields have improved. And as those products are generating revenue, the margins have improved.The increase in revenue was due to almost equal increases in AlSiC products and hermetic packages. Within the AlSiC products, a new product for a defense electronics customer generated a meaningful amount of the increased revenue.As mentioned in our press release and in the last several quarterly calls, we have a strategic objective of more deeply penetrating the U.S. defense electronics industries. And our salesmen stationed in Los Angeles is having a very positive impact on that objectiveAlthough the new product I refer to generating a meaningful amount of the increased revenue in Q2 is what I'll call project-based, and by that, I mean it is not and will not be in continuous production, but as so many of these defense programs do, there are periodic buys to meet individual projects - project objectives.So in this particular instance, this particular program will not generate revenue every quarter, but it will generate meaningful revenue in certain quarters going forward. We are seeking to reduce our customer concentration, and the fact that the increase in revenue this quarter was primarily from new customers indicates that we're making progress on that objective.Let me turn the time back to Chuck for a more thorough review of the second quarter financials.

Thank you, Grant.So revenues for the quarter totaled $6.4 million, representing a 22% increase versus quarter two of last year. And this was - increase was due, as Brent mentioned, to almost equal increases in the AlSiC and hermetic packaging businesses. Gross margin for the quarter amounted to 18% of sales compared to 11% in the second quarter last year. The largest factor affecting this percentage, other than sales volume, was a favorable mix in products and customers.Selling, general and administrative costs totaled $917,000, a little bit below last year's $931,000. As was the case in the first quarter, a reduction in sales commissions offset some lesser increases in other expense categories.The company experienced operating income for the quarter of $258,000 which compared to a loss incurred in Q2 2018 of $326,000. Higher revenue combined with higher margins are a wonderful thing.Finally, you will note that we did not record a tax credit in the quarter, and as a result, the loss for tax - the loss before tax equals the net loss after tax. This is due to the fact that we established a 100% valuation reserve at the end of 2018 for $3-plus million of tax credits.This fact that it's showing no tax credit or tax provision will continue for the next several quarters until it's clear that we have a return to profitability and that the credits are likely to be realized before they expire.Turning to the balance sheet. We ended the quarter with about $162,000 of cash and $800,000 of borrowings against our line of credit. This net cash of minus $638,000 reflects a substantial reduction in cash from the over $31,000 of net cash that existed at the end of the last quarter. This decrease in net cash was primarily due to the increase in accounts receivable which were a result of our increased revenue.Our accounts receivable at June 29, 2019, totaled $4.1 million compared to $3.2 million at March 30, 2019. Our days sales outstanding totaled 58 days at the end of the quarter. While this was an increase from 54 days at the end of quarter 1, the ratio doesn't reflect any change in our aging or terms, rather, it's just that we generated significant billings towards the end of the quarter.Inventories totaled $2.9 million at the end of June 29 compared with $3.1 million at March 30, 2019. Inventory turnover for the most recent 4 quarters was 6.2x compared with 5.9x for the 4 quarters ended March 30, 2019.Finally, you'll note that our net property plant and equipment was down slightly from last quarter, which reflects the fact that we spent less in capital expenditures than we had depreciation for the quarter.Turning to the liability side, you'll see that we had $800,000 drawn on our $1.25 million line of credit. Payables and accruals in total of $2.5 million were down from $2.8 million at March 30, 2019.Finally, at the end of the quarter, our current ratio was 2.2x, and our debt-to-equity ratio was 0.6x.At this point, I'd like to turn the call back to Grant for a few additional comments.

Thank you.We kind of touched on margins. Let me just make a comment about margins. As we're in the custom product business, margins vary significantly by product. This is due to many reasons, and margins will always vary somewhat by product.But as we have strengthened our cost and manufacturing accounting, we have a clearer picture of margins by product and product line, and we're involved on an ongoing basis to either raise the price if margins are unacceptable, in some rare cases, stop producing a product with very unacceptable margins or focusing our cost reduction efforts in order to improve margins where they make a significant difference. This is a product-by-product task, and it's an ongoing, continuous process, but I wanted to just comment that we're paying greater attention to that as we move forward.I think at this point, we'd like to open the call to questions.

[Operator Instructions] Your first question comes from the line of Dunn Lenny from Mutual Trust Company. Your line is open.

I believe Lenny Dunn, but that's okay. Anyhow, I'm very pleased to see you return to profitability. We, obviously, would love to see you stay focused on that. The cash flows looked pretty decent, too, and we certainly improved our balance sheet. What are you doing to address the cash flows? And that would be one of my questions. And then I have a follow-up question, but I'd like you to answer that first.

What do you mean by address the cash flow?

In other words, to continue having nice positive cash flows.

Well, the - I guess let me communicate that we believe, as we look at cash management, that we have the ability, either through cash on hand or borrowings, to move the company forward. In a growth mode, cash is consumed in working capital. And obviously, the greater the margins, the greater the cash that can be generated. But I guess I'm - we're focusing - managing the company ensuring we have sufficient cash but seeking growth and seeking improved margins.

And I actually have two more questions. I guess one is that we - I don't want to see this quarter as an aberration. I want to see the quarters that have losses as an aberration. Am I being realistic?

Well, this quarter was above plan. I used the word it was an unusually good quarter. We remain very positive about the future. We continue to see quarter-to-quarter volatility. And while on the one hand we're very excited about new programs, particularly in the U.S. defense sector, I alluded to the fact that one new program had a significant impact on this quarter results, we have another program where the order is booked, and it should have a meaningful impact in an upcoming quarter in the not too distant.But I'd also mentioned in the press release that we have fairly high customer concentration, meaning a relatively small number of customers account for a significant part of our revenue. And we seek to diversify our customer base so that if there are hiccups in any one particular customer, it doesn't have such an impact on our results. But again, let me simply say this quarter was above plan. And we believe the future looks bright.I guess I do want to just comment, though, as I mentioned in the press release that the - more than a majority of our revenues come from exports. And the fundamentals in the power module business, the fundamentals in the automotive, EV business, for example, are very strong. But we do sense uncertainty in our existing customers due to trade friction.And to be real candid, there appears to be a tilt from a preference to deal with the U.S. to a preference to deal with the Japanese and Chinese suppliers. And we simply need to be vigilant in recognizing that, but we feel like we need to acknowledge that it's there.

Well, I understand, but you have relationships that have been good over the years. You should be able to sustain them.

Absolutely. Yes, no doubt about it. No doubt about it.

It's not like you're walking in with a cold call. But...

Oh, no. I think without being specific at all, some of the European customers are saying, "Well, in case tariffs are imposed for some reason, we want to ensure we have other sources of supply." And they're not - the relationship is positive, but I just want to add that that's a dimension that I'm sure we're not alone in seeing.

No, but you're - you have unique abilities that would be hard for someone else to replicate. And you're very dependable, which, of course, adds to it. So it seems like it's pretty salable.

Yes, that's absolutely right. Yes, absolutely.

My next question, which I ask on a regular basis quarterly, is that we don't want to continue to remain a secret public company. And you had mentioned the last time that you expected to - I think it was Sidoti in September. Is that still on the table?

We have not yet signed up for any conferences. I'm anxious that Chuck becomes fully up to speed, which he is certainly doing. So let me just say we're - we attended one investor conference last year, and we want to continue to attend investor conferences. Again, we have not - we don't have any to announce, but we're looking at that.

But let's say you have - but last time around, you said that you would do the Sidoti one in September. And my concern is that - we're long-term shareholders already for a couple of years now, and we're anxious to have other people involved. We don't want to sell our shares, but for the shares to lift, you're going to need to have other people knowing about you. And a $1.06 stock doesn't attract a lot of attention.You have to go out there just like you have to go out to get orders from customers. You have to expose yourself to the microcap institutions to buy this kind of stock. And I don't think I'm out of line in asking you to actually act and get something done and not wait another year before we get some exposure.

Thank you. Let me just say we hear you.

Because it's time, I mean you have a good quarter you can show people. You have a very good story to tell. The balance sheet is improving. You have the blue chips so go scale it out there in front of people.

[Operator Instructions] Your next question comes from the line of Mike Hyde from Jefferies. Your line is open.

On defense electronics, that's such a huge - that's such a broad area. Can you give us a better idea both on the AlSiC side and in hermetic packaging, if that, too, is defense related? What kinds of products we're talking about?

Sure. The specific products, if I just reflect on what we have shipped in the last quarter, the program that I have alluded to is generating revenue, was a very large AlSiC base plate that plays an important role in the cockpit of a military aircraft. Revenue - I alluded to a program that when we booked the order that we'll be shipping in a future quarter. That relates to the - in that case, it is a hermetic package that's used in a radar application primarily on ships.Other applications that I can refer to are, let's call it, an interposer or essentially a spacer or double-sided substrate that is used in communication satellites. Another application would be some components that go into - some complex AlSiC components that are used in some laser applications. So those are the kinds of - these are all very custom.Again, so far, the business we've been booking, I used the term project-based. For example, in the satellite area, you'll get an order to ship x number of parts, and then there'll be a 6- or 9-month hiatus, and then the order will come back for a similar number of parts for the next satellite. But those are the typical - those are actual, not typical, but those are actual examples of end applications that we have been shipping.

Well, good. Those are all, of course, electronics applications. And from time to time also, you do have structural stuff that's gone to the navy, on decks of ships and stuff like that. And I assume that too could pop up any quarter again?

Yes, you're referring, I think, specifically to a program that we've referred to before, in this case, relating to armor, actually. And we've been involved in a formal trial at sea, which has been completely successful. And any further progress is dependent upon congressional funding. And although we've dipped our toe into understanding the timing of that, we can simply - I wish we could individually accelerate it. But that's yet another example.

And lastly, can we assume that as far as Europe is concerned, you're pretty much back to normal in the relationship and what you're expecting even though there are trade tensions with Infineon and European customers, the supply kinks and logistics bottlenecks that you experienced are not happening?

Yes. We have referred in the past specifically to revenue was constrained by one of our large customers had a shortage of a different component that is needed for their assembly, and that supply shortage has been fully resolved. We're just - many companies in Europe seem to operate on a fiscal year beginning in October. And in fact, most of our largest customers in Europe do that.And so we're just now beginning negotiations for contracts for their new fiscal year, which would begin October 1. And we're just starting those negotiations. They will be concluded before the end of this quarter, obviously. And we're just too early to make any comment on them.

[Operator Instructions] There are no further questions at this time. Presenters, please continue.

Thank you very much. Again, we appreciate your time. We, as usual, invite you if you are in the Boston area to stop by and see what these products actually are that we make. We're located between Boston and Providence, and we'd love to have any of you visit. We thank you for your time, and we'll say goodnight.

This concludes today's conference call. Thank you all for joining. You may now disconnect. Have a great day, everyone.