CPS Technologies Corp (CPSH) 2022 Q2 法說會逐字稿

Good day, everyone, and welcome to the CPS Technologies Corp's Second Quarter Investors Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Chuck Griffith. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us. I'm joined today by Michael McCormack, our President and Chief Executive Officer, who will offer his comments on our second quarter results.

Before we begin the business portion of the call, I would like to point out 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 subject to the many uncertainties that exist in CPS' operations and environment. These uncertainties include the impact of COVID-19, the Russian invasion of Ukraine, economic conditions, market demand and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements.

Now I will turn the call over to Michael to offer his perspective on the second quarter results.

Thank you, Chuck. Today, we are delighted to announce revenues of $7 million and an operating profit of $669,000 for the quarter ending July 2, 2022. This is a 21% increase compared with revenues of $5.8 million and a 164% increase compared with the operating profit of $253,000 for the corresponding quarter a year ago ending June 26, 2021.

We are pleased to report that revenues in the second quarter of 2022 were the highest in the company's history and showed a 6.3% improvement over revenues of the first quarter of 2022, our previous record high for a quarter.

Aspects of our growth initiatives are beginning to show results from the challenging work and efforts that we have undertaken at CPS. We are cautiously optimistic that our growth initiatives and profitability changes we are executing will continue through fiscal year '22 and beyond. The team is continuing to drive growth and efficiency to sustain this momentum.

As the economy continues to progress and deal with the challenges of a seemingly endless new variants of the virus continuously emerging. There are also emerging new normal facts, such as inflation, material availability and transportation and shipping delays, that we are actively working to mitigate. Despite these uncertain times, we remain incredibly pleased with our second quarter performance and are confident in our outlook.

I'll speak more later about the overall business progress moving forward later on the call. But for now Chuck will discuss the financial results in a little bit more detail.

Thank you, Michael. Revenues totaled $7.1 million in the second quarter of 2022 compared with $5.9 million generated in Q2 2021, an increase of 21%. This increase was due to increased shipments of armor panels and hermetic packages, but in particular, base plates, which last year bore the largest negative impact from the COVID-19 pandemic.

For the first 6 months of 2022, revenues totaled $13.7 million compared with $10.7 million for the first half of 2021. The revenue over the first 6 months of 2022 represents the best 6-month period in company history.

Gross margin in Q2 2022 totaled $1.8 million or 26% of sales. This compares with gross margin in Q2 2021 of $1.4 million at 23% of sales. This increase in margin was primarily due to the impact of higher sales on fixed factory costs.

For the first 6 months of 2022, gross margin totaled $3.8 million compared to $2.3 million for the first half of 2021. That would be at 28% of sales and 21% of sales, respectively.

Selling, general and administrative expenses totaled $1.2 million in Q2 2022 compared with SG&A expenses of $1.1 million in Q2 2021. This increase in SG&A expense was due to increased compensation expense as a result of the addition of our new Chief Development Officer and other salary increases. For the first 6 months of 2022, SG&A totaled $2.6 million compared to $2.0 million for the first half of 2021.

The company experienced operating income of $669,000 in Q2 2022 compared with operating income of $253,000 in Q2 2021. This increase in operating income was due primarily to the increase in revenue and gross margin previously discussed.

For the first 6 months of 2022, operating income totaled $1.2 million compared with $289,000 for the first half of 2021. This represents our highest opening 6 months of operating income in CPS' history.

Turning to the balance sheet. We ended the quarter with $5.1 million of cash, basically the same as the $5.1 million on hand at the end of 2021. The neutrality of cash was primarily due to our net profit and reduction in accounts receivable, offset by increased inventory to support the higher sales and reductions in accounts payable and accrued expenses. Although it remains open and available to us, no additional cash was raised in the second quarter under the ATM program.

Accounts receivable at July 2, 2022, totaled $4.5 million, down from $4.9 million in December of 2021. Our days sales outstanding totaled 58 days at the end of the quarter compared to 69 days for the year ended 2021. The decrease in accounts receivable and DSO both relate to the inclusion of deferred revenue of $600,000 in the year-end accounts receivable balance which was collected during the first quarter of 2022.

Inventories totaled $4.7 million at July 2, 2022, compared with $3.9 million at December 25, 2021. This increase in inventory is due to increased work in process and raw materials needed to support our expected sales growth. The inventory turnover in the most recent 4 quarters was 4.6x, basically equivalent to 4.7x for the period ended December 25, 2021.

Turning to the liability side. Payables and accruals totaled $2.3 million at July 2, 2022, down from $3.2 million at December 25, 2021. This change is due to the continuing payments in 2021 accruals from the restructurings that we did last year.

And for further discussion, I'd like to turn the call back over to Michael.

Thank you, Chuck. It continues to be my humble honor to lead CPS on our growth journey. I appreciate these opportunities to share with our investors, and hopefully, interested new investors, of the current state of the business as well as our future. We generally appreciate your continued support and believe that CPS is a growing company that is on the move to improved outcomes.

All 3 of our product lines, metal matrix composites, hermetic packaging and armor, continue to perform on or slightly ahead of plans. The year-to-date operating profit of the business is the best half in the company's history and a 7% improvement over the first half of last fiscal year.

We are excited by the path we are on, but still must execute the second half of the year to solidify the growing value proposition of CPS. We are committed to creating positive outcomes for our customers and are growing more confident that continued positive financial results will also be achieved.

This past quarter, in addition to executing commerce at the highest levels of the company history, we implemented a new material resource planning and enterprise resource planning, MRP-ERP software tool. The new tool we selected was Aptean's Made2Manage. After a nearly a year of planning, we implemented the new system at the end of the quarter and are encouraged by the ease of working with this new tool.

But the tool is only part of the solution. We need to combine the outstanding people of CPS with improved processes enabled by this tool. This will enable us to create a growing environment that can easily manage 2x the current business at CPS without incurring a linear increase in fixed costs.

We are encouraged at our gross margin and operating profit continuing to exceed our goals. The implementation of this new MRP-ERP tool will never be termed sexy, but we believe it will enable us to conduct more business with fewer resources, and then investors will realize that this is an essential to scale the business to greater heights.

Step number one in growing the business is and always will be sales. We have a tremendous sales staff, led by our Vice President of Sales, Cheryl Oliveira. Cheryl, working with Gregg Weatherman, Judy Levitre, Kevin Langley and now Anthony Koski, are the right team to achieve our near- and long-term goals for growth.

The sales team is supported by a growing technical staff. Material science doctors, Steve Kachur and Mark Occhionero lead our product development efforts. We have recently added another material scientist, [Matthew Kanic], engineers [Kevin Simple, Jorge Hanandez and Jonathan Lagely]. These staff additions, combined with our existing staff, makes for a strong technical team here at CPS.

As I've shared before, we have several opportunities to assist customers with new and innovative solutions. These solutions are at various stages of approval and implementation. But because these solutions are competitively sensitive, we treat them with an abundance of caution prior to any public release.

What I can share with you is that our engineers are working with sales staff recently launched 2 new products in the quarter. Both new products successfully passed the rigorous first on-field test with these customers, and we're anticipating low rate initial production awards during the second half of this fiscal year. Both clients are well-regarded aerospace and defense companies in the U.S.

We are also continuing to work on the benefits of additive manufacturing, 3D printing, into our product lines. Customers are requesting larger metal matrix composite components with features that are extremely difficult to manufacture. We have consistently -- we have had consistently good early results with substantially lowering the coefficient of thermal expansion, CTE, at the request of several customers and now in the process of sending invention disclosures and possible intellectual property patents to secure our competitive advantage in the future.

We still have lots of scientific work to be done to conduct the extensive characterization necessary to take the next steps, but I expect to report positively on these results later in the year.

As I've shared previously, CPS is quite active in utilizing the calls for technology on the Small Business Innovative Research, SBIR; and Small Business Technology Transfer, STTR, programs. I'm happy to report that the second Small Business Innovative Research award from the Navy is officially under contract now. We are continuing to make proposal submissions under these programs to assist in the manufacturing of different material sciences solutions, as in tungsten warheads and hypersonic vehicle insulation, to name a feel.

We anticipate hearing about the technical evaluation before the end of fiscal year. We are quite excited and proud of our success with the Department of Defense. And look forward to possible awards from other federal agencies, like the Department of Energy, DOE; and the Missile Defense Agency, MDA, in the months ahead.

We think there are numerous opportunities for CPS to provide products to both the military defense and commercial aerospace markets, as well as the commercial electronic vehicle, EV, market. There is always the demand for lower-cost, high-reliable and scalable metal matrix composites.

There is considerable evidence that trends are for increased use of MMCs for structural aerospace component parts and increased thermal management needs of the hybrid electric vehicle, HEV, and EV markets. We believe now that EVs have passed through the mass adoption tipping point of acceptance, and that CPS will see even more opportunities as vehicle manufacturers forecast even greater proliferation in the future.

Lastly, we are encouraged by our results, but even more by the opportunities to introduce additional MMCs in the market. We are making measured investments in research and development, coupled with our growing contract research awards, to further expand our technical expertise, but more importantly, our reach to potential customers. We enjoy a 38-year history of providing unique, value-added metal matrix composites to customers, and we think we have only begun to help customers and investors reach their goals.

The entire team at CPS believes we are on the right path to creating inherent shareholder value. We are fortunate to expand upon the solid base of business that's been built on since 1984. We appreciate the opportunities and continued support from our investors because we are in a growth mode, and as all know, growth requires cash.

We are beginning to deliver consistent and growing financial results, but our goal is not incremental improvement but a considerable one. This requires all parts of the business working well together. I can assure you that there is a tremendous amount of arduous work being done at the company for our customers and investors, and we remain focused on building an improved CPS that can serve customers for decades to come.

In closing, I'm encouraged by our performance to date this fiscal year. We are committed to growing both the top and bottom line while we advanced material science, from ideas to concepts, and concepts of the products, that our customers want and need today and tomorrow. We're not satisfied yet, but we are well on the journey. I'm always thankful to the Board of Directors representing our investors for entrusting me to lead this amazing company.

So with that, I will say this completes my advanced remarks, and Chuck and I will take any questions now, Connie.

We're ready for questions and answers, Connie?

(Operator Instructions) And we'll take our first question.

This is [Steve Aussie]. It sounds like a really great quarter and things looking good. Did you, i might have missed it, happen to mention what the book-to-bill is?

The book-to-bill remains consistently in our goal, between 1.10 and 1.25. I think we are slightly on the lower end right now. But this quarter that we're executing now, that is starting to rebound.

(Operator Instructions) And there are no further questions in the queue. I'd like to turn the conference back over to Mr. Griffith for any closing remarks.

Connie, thank you. This is Michael. Thank you, Steve, for the question and all for listening. Again, we had a great quarter. We appreciate the continued support. And onward than upward we go. Thank you very much, everybody, for joining us today.

Thank you, everyone.

And this concludes today's call. Thank you for your participation, and you may now disconnect.