CPS Technologies Corporation (CPSH) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, and thank you for standing by, and welcome to CPS Technologies Corp. First quarter Investor Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that this conference call is being recorded. I would now like to hand the conference over to your speaker today, Chuck Griffith. Thank you. Please go ahead sir.
Chuck Griffith: Thank you, operator, and good afternoon, everyone. I'm joined today by Grant Bennett, our President and CEO; and Michael McCormack, our COO. 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 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 the impact of COVID-19, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements.
Grant Bennett: Thank you, Chuck. Welcome, everyone. There appears to have been some difficulties with the press release being posted, but it's now posted with our results on it. Today, we announced revenues of $4.9 million, and an operating profit of $36,000 for the quarter ended March 27, 2021. This compares with revenues of $6.5 million and an operating profit of $622,000 for the quarter ended March 28, 2020. The financial results in the first quarter from our perspective were encouraging. And more accurately, I should say there were developments in the first quarter, including the financial results, which were encouraging. Let me touch on two topics. The first is COVID, as described in our press release, the first quarter results to us are confirmation that most likely the worst impacts of COVID-19 are behind us. In other words, our Q1 results are confirmation that the fourth quarter of last year was the nadir or the bottom in terms of the impact of COVID-19 on our customers demand. Our shipments increased in Q1, compared to Q4, of course, as indicated by the increased revenues, and very importantly, our book-to-bill ratio, which we don't normally publish, but the book-to-bill ratio in the first quarter was very positive, it was approximately $2 indicating that for every $1 of shipments, we booked $2 of orders. That book-to-bill ratio of $2 certainly suggests revenue growth in the quarters ahead. A second important development for us relates to diversification of our customer base, significant growth in the first quarter in what have historically been our two smaller product lines namely hermetic packaging and armor. There were very significant growth, primarily in the hermetic packaging line, but growth in both these areas is resulting in a reduction of customer concentration, or to flip the coin over an increase in the diversification of our customer base, and diversification of our revenue sources. This increasing diversification should somewhat reduce the volatility of revenues, quarter-to-quarter going forward. We indicated in the press release that the baseplate business was slow in the first quarter and is expected to remain sluggish throughout 2021. As spending on high speed rail and mass transit systems is delayed, due to the pandemic, to be very specific, more than 100% of the revenue decline in our first quarter 2020 compared to – excuse me, first quarter 2021 compared to first quarter 2020 is the result of reduced demand from our largest customer historically, reduced demand from one customer.
Chuck Griffith: Sure. Thank you, Grant. So revenues totaled $4.9 million in quarter one of 2021 compared with $6.5 million generated in quarter one of 2020. That's a decrease of 25%. Reduced demand from our largest customers as Grant just discussed, accounted for more than the total – more than the total decrease in revenues. In 2020, in anticipation of potential supply disruptions due to the COVID-19 pandemic, this customer accelerated their Q2 2020 purchases into Q1. Gross margin in the first quarter 2021 total 944,000 or 19% of sales this compares with gross margin in quarter one 2020 of 1,550,000 or 24% of sales, while increased manufacturing efficiencies mitigated the reduction in gross margin. Fixed costs which did not vary with decreased sales volumes were the predominant reason for this reduction. Selling, general administrative expenses totaled at 908,000 in Q1 2021, compared with SG&A expenses of 929,000 in Q1 2020. The hiring of our new Chief Operating Officer and increased costs associated with printing and distributing, our proxy material were offset by reduced variable compensation amounts due to a lower operating profit. The company experienced an operating profit of $36,000 in Q1 2021, compared with an operating profit of 622,000 in Q1 2020, as a result of the reduced gross margin. Turning to the balance sheet, we ended the quarter with $168,000 of cash and 193,000 of borrowings against our line of credit. This net – this net cash of minus 25,000 is an improvement of our cash position from the end of Q1 2020, when the net cash was minus $1.5 million. Accounts receivable at March 27, 2021, totaled $3.8 million compared with $6 million at March 28, 2020. Our day sales outstanding totaled 70 days at the end of the year compared with 77 days for the year ended 2020. Several factors contribute contributed to this reduction, not the least of which was the negotiation of better payment terms with one of our larger customers. Inventories totaled $3.6 million at March 27, 2021, equal to the $3.6 million at March 28, 2020. The inventory turnover in the most recent four quarters was 4.1 times compared to six times for the four quarters ended March 28, 2020. This decrease in turns is directly related to the decrease in purchases from our largest customers as previously discussed, as well as the buildup of raw materials for armor contract.
Grant Bennett: Thank you, Chuck. Last week we held our annual meeting of shareholders. I thank you for voting by returning your proxies and for most of you thank you for your vote. We welcome the many new shareholders who have joined us over the last year. In our most recent quarterly investor call, the first one of this year, I tried to outline the fundamentals of our business what I call the big picture. I summarized three topics essential to understanding our business, namely our core competencies, our product pipeline, and our primary markets. I certainly won't repeat that message in full, but let me use that framework by commenting on developments in each of these three areas. Let me do so in reverse order. First, our primary markets, high voltage power modules has been and remains a major market for us. Today, our products are primarily used in high speed railway and subway car applications, but they are also used in wind turbines, the electric grid, electric vehicles, and electric vehicle charging stations. I would expect most of you would agree with us that these latter markets; wind turbines, the grid, electric vehicles, and electric vehicle charging stations are in the early stages of long-term growth, governments and agendas for the next 25 and even 50 years in these areas. R&D spending and the introduction of new products into the marketplace are accelerating rapidly. In short, as it relates to this market, we believe we're in the right place at the right time and look forward to significant opportunity and significant growth. Second market for us is the aerospace and defense market. The United States is by far the largest market for anything aerospace and defense related. Speaking just about defense for a minute, the US spends more on defense than the next 10 largest countries combined. Aerospace and defense are markets which by their very nature, value a reliability performance and in many specific applications, reduced weight. Our business historically has been about 70 – about 70% of revenues have come from export, and only about 5% to 10% of our revenues have been related to the US defense area. We are putting a much greater emphasis on selling and marketing here in the US. And we are seeing the benefits in terms of bookings. From our perspective, we're really just scratching the surface.
Operator: Your first question comes in the line of Warren Silver . Your line is now open.
Q – Unidentified Analyst: Good afternoon Grant and Members of the Board.
Grant Bennett: Hi, Warren.
Q – Unidentified Analyst: Congratulations you have filed an when I read the prospectus there were so many negatives in there. I just thought you should clarify it. The appointment of Bill Holmes as a senior Applications Engineer; Mike McCormick, as our Chief Operating Officer and Steven Kachur as Grant mentioned at the very end, we're making a transition into product development. So no longer conceptualizing something and designing something we're going into manufacturing. And I think it's very positive that they're looking to raise up money. I just wanted to mention on March 2, American Electric Power speaking for the electronic – electric highway coalition, which includes American Electric Power, Southern Company, Duke Energy, Entergy, and a small company called the Tennessee Valley Authority. They plan to add additional electric vehicle fast charges throughout to connect the Mid Atlantic region, the Gulf Coast and essential Plains area.
Grant Bennett: Thank you, Warren. Yes, I certainly can confirm that ABB or now what's referred to as ABB Hitachi Power Grids is a major customer of ours. And they are very, very active in particular in the EV charging area, providing equipment, components, modules, into that market. And the GE is an important customer of ours. There are several other players who are Tier 1 suppliers into the automotive market itself and Tier 1 suppliers into the companies that make the overall charging systems. These are companies like Infineon, or here in the US Cree, International Rectifier, Microsemi and several others. And we are very excited that we – we have a strong position with these companies around the world. And again, if you were to look at our product pipeline, many of the design wins that are that are in the pipeline moving towards production are with these companies. The – and again, what is – the press has preceded that the sizzle has preceded the stake in many of these areas for many years. In other words, there's been lots of discussions about Electric Vehicles, for example. But they still only equate for a very small percent of the automotive sales. But that is rapidly changing. And likewise, the use of renewable energy provides tremendous opportunities for our baseplates for high reliability modules for use in the grid. So when I – when I say we're in the right place at the right time, I really mean that, we have some proven solutions that we believe will increasingly be used by a wider number of customers.
Unidentified Analyst: Thank you very much. I'm also very happy that we're expanding our capital base. Because in the prospectus, they mentioned that by selling shares, there's a small dilution, and that's true, but we have a $6 million capital base for making roughly 20%. If we increase the capital base from $6 million to $30 million or $25 million, or whatever the numbers are, we're going to have a greater return on our invested capital. So I think it's very positive thing. And I wish everyone good luck moving forward.
Grant Bennett: Thank you very much, Warren.
Chuck Griffith: Thank you, Warren.
Unidentified Analyst: Thank you.
Operator: There are no further questions at this juncture – we have Lenny Dunn . Your line is now open.
Unidentified Analyst: Hello.
Grant Bennett: Hello, Lenny.
Unidentified Analyst: Yeah, hi. Just a quick question on the offering. Can you give us a little bit of an update as any of the aftermarket prospectus sold so far?
Grant Bennett: No, we've -- we're in a blackout period right now until we make this earnings announcement. So we haven't -- nothing's been done at this point in time.
Unidentified Analyst: Okay. And I assume that this will be done in a very orderly fashion. So you don't hurt the share price in the process?
Grant Bennett: Absolutely, absolutely.
Unidentified Analyst: And do you have any relatively immediate plans to utilize the money other than putting out on the balance sheet?
Chuck Griffith: We -- the short answer is, yes. The short answer is yes. Let me just leave it at that.
Unidentified Analyst: No, I'm not asking you to be specific about things that you haven't done yet. But I’m assuming that anything you do be responsible and then you do it. I'm not concerned with that. But you do have some ideas as to where you're throwing the money.
Grant Bennett: Yeah, yes.
Unidentified Analyst: Okay. Well, I guess -- so I just -- I think picking an opportune time to raise funds. No problem with it. Thank you.
Grant Bennett: Thank you. Thank you. We -- Chuck and I are here in Norton, Massachusetts and Michael McCormack, our Chief Operating Officer is also on the call, but joining us from Florida where he is visiting some customers. Michael, I wonder if I could put you on the spot and just ask you to comment a little bit on armor in particular.
Michael McCormack: Yes, absolutely, Grant. Thank you, everybody. So, as Grant alluded to, we have begun shipments of our first order of HybridTech armor and that has commenced over the last few weeks. We anticipate that will take us majority of the fiscal year. We are very cautiously optimistic that additional orders will follow shortly. We are talking with other potential partners down here in South Florida about other applications for the armor. Obviously, the environmental performance and it's extremely lightweight for defeating relatively high kinetic energy threats and makes it extremely attractive to a lot of Tier 1 OEMs for US aerospace and defense market. And we're quite bullish on that. And we have quite a few initiatives ongoing with armor development. I think Grant also mentioned are warranted, we have the luxury of Bill Holmes and Steve Kachur are now to augment with Marco, our product development team and we continue to work on inventing new armor solutions along with our longtime partner Jim Sorenson. And that is going -- advancing well too. And I'm extremely optimistic that our armor business line is here to stay and grow.
Grant Bennett: Very good. Thank you, Michael. I -- internally, we think of our products as falling into three product families; Al/SiC components, our hermetic packages, and armor. And Al/SiC components has historically been the largest part of our business and the growth opportunities are very significant there. As I alluded earlier, it has been most affected by COVID as slowing -- as spending has been delayed or slowed for rail projects, but our activity in making high reliability hermetic housings and packages used in aerospace, avionics applications, that business has been very, very strong. And we were very pleased that, we believe that growth will continue. And we're particularly interested that from our point of view, what we refer to as the Al/SiC hermetic package, hermetic package that is based on our aluminum silicon carbide rather than conventional materials. It -- customers need to thoroughly evaluate and understand and demonstrate the reliability of that package before they adopt it. But as more customers are adopting that, the reference selling becomes more straightforward. And we're very excited about the growth potential there. So again, I come back to say, as we look at the future, we are -- our product portfolio in total is stronger than it's ever been. And it is more diversified with less customer concentration and therefore, we believe, there'll be less quarter to quarter volatility, as we look forward. If any more questions…
Operator: There are no further questions at this time. You may continue.
Grant Bennett: Very good. We once again thank you. I realized that very few were traveling, but we reiterate our invitation to come visit us if you're in the greater Boston area. And we look forward to our next call. And we'll say, thank you and good night.
Operator: This concludes today's conference calls. Thank you all for joining. You may now disconnect.
