CPS Technologies Corp (CPSH) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CPS Technologies Third Quarter Earnings Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Chuck Griffith. Sir, the floor is yours.

Thank you, Matthew, and good afternoon, everybody. I'm joined by Michael McCormack, our President and Chief Executive Officer; as well as Anthony Koski, our Chief Development Officer. Michael will present his comments on our third quarter results.

But 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 demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements.

Now I'll turn the call over to Michael to offer his perspectives on the third quarter results.

Thank you, Chuck, and good afternoon, everyone. We are pleased to once, again, be reporting positive and growing results to our investors. Today, we are delighted to announce revenues of $6.7 million and an operating profit of $709,000 for the quarter ending October 1, 2022. This is a 22% increase compared with the revenues of $5.5 million and a dramatic increase compared to the loss of $88,000 in operating profit for the corresponding quarter a year ago.

We are pleased to report that revenues in the third quarter of 2022 were the second highest in the company's history, with Q2 being the highest, and we have now consecutively delivered the top 3 quarters in revenue performance in the company's 38-year history.

The optimistic news with the growth in revenue is also coupled with further good news with our book-to-bill ratio. For the past quarter, our book-to-bill ratio was over 2. And on the trailing 4 quarters, the basis by which we measure ourselves, is 1.36. This is above our organic grade for and most importantly, calculated upon a growing revenue base.

On a fiscal year-to-date basis, our operating profit of $1.9 million compares to $201,000 for the first 9 months of 2021. This is an increase of 858%. I'm very proud of these efforts to continue driving new business and operational efficiencies as we gain momentum in realizing the success of our strategic initiatives. We continue to perform and exceed against our operating plan, and we are on pace for a record year in 2022.

We are continuing to remain vigilant on ensuring availability of raw goods throughout our supply base. The larger concerns today involve the impacts of inflation, logistics delays and a limited labor force. We are not immune to these challenges, but we continue to diminish the possible impact through proactive planning. To date, none of these issues have had a significant impact on our customers.

On inflation effects, both wages and material costs, we have been able to mitigate these in the form of permanent increased manufacturing efficiencies, coupled with incremental price increases. In an uncertain overall economic environment, we remain very pleased with our third quarter performance and confident in our outlook.

I'll speak more later about the overall business progress moving forward, but now Chuck will discuss the financial details in more detail. Thank you.

Thank you, Michael. So revenues totaled $6.7 million in Q3 2022 compared to $5.5 million generated in Q3 2021, an increase of 22%. This increase was due primarily to increased shipments of Armor panels. For the first 9 months of 2022, revenues totaled $20.5 million compared with $16.2 million for the 9 months of 2021. The revenue over the first 9 months of 2022 represents the best 9-month period in company history.

Gross margin in Q3 2022 totaled $1.9 million or 28% of sales. This compares with gross margin in Q3 2021 of $1.1 million at 19% of sales. This increase in margin was primarily due to the impact of higher sales on fixed factory costs as well as product mix. For the first 9 months of 2022, gross margin totaled $5.7 million compared to $3.4 million for the first 9 months of 2021.

Selling, general and administrative expenses, SG&A, totaled $1.2 million in Q3 2022 and remain steady when compared with SG&A expenses of $1.2 million in Q3 2021. For the first 9 months of 2022, SG&A totaled $3.8 million compared to $3.2 million for the first 9 months of 2021.

The company experienced operating income of $708,000 in Q3 compared with an operating loss of $88,000 in Q3 '21. This increase in operating income is due primarily to the increase in revenue and gross margin previously discussed. For the first 9 months of 2022, operating income totaled $1.9 million compared to $201,000 for the first 9 months of '21. This represents our highest opening 9 months in operating income in CPS' history.

Turning to the balance sheet. We ended the quarter with $5.6 million of cash, increasing from $5.1 million on hand at the end of 2021. The increase in cash was primarily due to our net profit, offset by increased accounts receivable and inventory to support our higher sales levels. Although it remains open and available to us, no additional cash was raised under the ATM program in the third quarter of 2022.

Accounts receivable at October 1, 2022, totaled $5.8 million, up from $4.9 million in December -- or at December 25, 2021. This increase includes other receivable of $641,000 for the employee retention tax credit. Excluding the ERTC, our days sales outstanding totaled 69 days at the end of the quarter, the same as the 69 days for the year ended 2021.

Inventories totaled $4.9 million at October 1, 2022, compared to $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 4.5x, a small reduction to the 4.7x for the period ended December 25, 2021.

Turning to the liability side. Payables and accruals totaled $2.9 million down from $3.2 million at December 25, 2021. This change is due to final payments in 2022 of accruals for last year's restructuring costs.

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

Thank you, Chuck. The year-to-date revenues, bookings and operating profit of the business are the best in the company's 38-year history. We are excited by the path we are on, but we still must execute to complete this record year of performance. We are committed to creating positive outcomes for our customers and are growing more confident, and continued positive financial results will also be achieved for our shareholders.

This past quarter, CPS has achieved multiple strategic routes that are a direct result of the team's ability to execute on our growth initiatives. In Q3, we received the largest single order in the company's history at 8.8 million for ballistic protection systems upgrades for the U.S. Navy aircraft carriers, utilizing CPS' proprietary HybridTech Armor technology.

In addition, I'm also glad to share with you that our team successfully qualified several new hermetic packaging products, with a key new Tier 1 customer, resulting in an initial production order valued at $1 million and future initial projections at 2 to 3x that starting in fiscal year '23 and continuing for years.

The Armor order to support the Navy will more importantly, allow us to make detailed plans to present to the Navy on how we can continue to deliver Armor faster and more efficiently. As you are aware, there are many surface ships in the U.S. Navy that have similar needs to provide crucial crew protection, while seals and marines carry out their mission.

In addition, the U.S. Navy, we have been in dialogues with both the Coast Guide and Allied Navy, to have similar protection requirements that we are actively pursuing. As you can see in the news about the conflict in Ukraine, ships are constantly at risk due to asymmetric threats, (inaudible) of drones or unmanned aerial vehicles, UAVs, have demonstrated the ability to sink surface vessels. We need more armor on naval vessels to ensure our seals and marines can fight back against this emerging threat as well as be protected from legacy kinetic energy threats.

The company continues to improve and deliver on our commitments to customers and shareholders. These are hardened upon electrifying times here at CPS. All our existing product lines, metal matrix composite, hematic packaging and armor continue to perform on or slightly ahead of plan. In addition, with our multiple contract research and development, CRAD, contracts with various U.S. government agencies, we now have a fourth product line in the business.

The CRAD, as we call it, line is focused on creating, productizing and delivering intellectual property-based solutions directly to the government, Tier 1 and OEM customers. These new IP-based opportunities are significantly more substantial on value and similarly take a bit more time to transition from possibilities to testing, to first article, to full rate production. However, we're off to a great start with our CRAD efforts and look forward to providing updates early next year on this growing part of our business.

Driving new business and increasing sales is the primary objective and continuing our positive momentum and entering CPS' next phase of growth. We recently reorganized our sales team, now operating as business development, with a traditional transition and leadership, Cheryl Oliveira, our long-time Vice President of Sales, will be retiring soon in 2023. Cheryl is an amazing person, colleague and friend. Her tenacity, experience and knowledge will be difficult to replace. We all wish her the best in her future endeavors.

As of the 1st of October, the leadership of the reorganized business development team has been transitioned to Anthony Koski, our Corporate Development Officer. Anthony joined CPS in April of this year and is focused on executing strategic initiatives. Anthony brings over 12 years of defense acquisition and business development experience, having led -- held leadership roles in both the Department of Defense and defense industry. As a salesperson myself, I recognize potential sales greatness when I see it, and I see it in Anthony. We are quite fortunate to have 2 great leaders of our business development group back to back with Cheryl and Anthony. I'm confident under Anthony's leadership and supported by our fantastic team, Gregg Weatherman, Judy and Kevin, we will achieve our near- and long-term goals for growth and probably sooner rather than later.

The business development team is focused on building the near-term pipeline of high-value opportunity that could be converted to significant production orders within 24 months. We are actively engaged in converting multiple significant opportunities across all business lines, active near-term opportunities at primary for thermal management and ballistic protection application in aerospace and defense and vehicle electrification market. These opportunities are at (inaudible) approval and implantation. But because these solutions are competitive, we treat them with abundance of caution prior to any public release.

I will say that our recent success in passing first article test and reverting to low rate initial production, with a key aerospace customer in Q3, we are demonstrating our business development and tech team's ability to identify and convert new material solutions. This is just the beginning.

CPS is focused on converting potential opportunities into products. These products will generate revenue and profit for our investors in the near and long term. This is how we are realizing shareholder value. We are equally committed to both customers and shareholders. I've already shared with you how bullish we are on Armor and our work in the aerospace and defense market. We are also very excited about the potential of CPS in the electric and hybrid electric vehicle markets as well as in building the infrastructure in (inaudible) markets.

This does have the potential to be a breakout crop for us. Perhaps not tomorrow or in 2023, but the potential is there. We are currently working with a customer who is selling to major automotive manufacturers and are seeing significant growth in our business with them. That business is not necessarily enough to move the needle today, but it's trending in the right direction. In fact, our bookings expected to convert in Q4 are greater than 3Q, our year-to-date sales for this customer through September. So the business prospects are trending positively, but there's still a lot to do over the next few years.

In general, we seek to have a stable potential breakout products in our pipeline of opportunities, but realized that to be a true breakout product, it takes time and comes with patience, diligence and boat load of hard work.

I would like to -- all the shareholders to hear directly once again from me. We have 3 large initiatives ongoing to realize shareholder value. Number one, we have purposely decided to operate principally in 2 markets, infrastructure and aerospace and defense. We have chosen these markets because they are large and different markets with multiple paths to success.

CPS -- success to CPS is a multiyear, multimillion dollar product opportunities that align with our core competencies as a material science firm. We provide proprietary lightweight armor that is completely aligned with the U.S. defense modernization efforts. We provide metal matrix composites and hermetic packages that make electronics work more efficiently and last longer, both here on the planet Earth and into space.

Lastly, we provide EV transportation infrastructure enabler products that allow the entire economy to realize its full potential, in addition to supporting our national goals of on or reshoring critical technology manufacturing in the U.S.A.

Number two, we have graduated from Small Business University. For years, we've been sharing with customers and investors, the variety of benefits of our material solutions without realizing the full results of these initiatives. With new leadership in place throughout the company, we are now demonstrating that we can credibly deliver profitability and growth quarter-over-quarter, half year over half year, fiscal year to fiscal year. We are ready to take the next step in our growth plans.

Lastly, number three, we were formed to be and are operating as a materials technology company that is a constant pursuit of solutions through the advanced application of material science. We want to solve customers' most demanding challenges. We thrive on working under pressure to deliver solutions that not only solve customers' issues, but also reward our investors for staying with CPS for this long journey.

Beyond fiscal year '22, we remain guidedly optimistic that our collective growth initiatives, specifically in longer near-term product development investments, will expand the current product lines both in terms of revenues and earnings. The recent HybridTech Armor award supporting the U.S. Navy a record order for CPA and recent wins qualifying new products to expand the Hermetic Package product line will ensure we sustain this momentum in and through fiscal '23.

As previously reported, the growing CPS technical team is executing several early phase contract research and development wins, with promising results technically and potential for Phase II awards next year. Collectively, the business and product development teams are growing our pipeline of high-value opportunities.

As an organization, we continue to make measured investments to increase our capacity and ability to scale as we prepare for the next phase of growth. We, at CPS, all believe we are on the right path to creating inherent shareholder value. And now I would like to explore doing this faster.

Lastly, on behalf of the company, we'd like to pass on our condolences to the family and friends of Norm Wechsler. We recently became aware of his passing after the last quarterly report. Norm was the largest individual shareholder in CPS, who was passionate about the long-term application of material science to create life-changing products for the betterment of mankind. He will be surely missed.

I'm always thankful to the investors and the Board for entrusting to lead this amazing company. So with that, I will complete my prepared opening remarks, and Chuck and I will take any of your questions. Matt?

(Operator Instructions) Your first question is coming from Michael Massaro.

Congratulations on absolutely incredible quarter, incredible year, all the new contracts and everything. Everything seems to be heading in the right direction. Just wonder you talked about shareholder value. I just want to talk a little bit about the equity, just kind of like, I don't know if you guys use an Investor Relations department or just to see what's going on. How the equity maybe can get more noticed, so to speak? Just kind of seems to lag, but you have everything going on. Congratulations. I'll let you guys take the floor.

Chuck, I'll take this one. Michael, thank you for your positive feedback. In fact, we just had a Board meeting last week. This continues to be a very big topic, Investor Relations, and we are finalizing our selection of how we're going to proceed. I think we have a course of action with 2 or 3 companies, Michael and others, and we'll probably be making the decision in Q4 and moving out. The business is growing, obviously, but the value proposition remains the same in what I just articulated. So yes, more to follow, but yes, we agree and soon to follow.

Your next question is coming from Erwin Gomberg.

Congratulations on a really strong quarter. I have 3 questions about the hermetic package market. One, how is the hermetic sale package market? Two, what percent of the market is CPS captured? And three, what percent of the market do you expect CPS to capture in a few years?

Erwin, it's Michael again. Thank you for the questions. The hermetic packaging business is quite large. We think that there is opportunities for us to, in the near term, double play within the hermetic packaging line. I think this year, we're probably on pace for 10-plus million. We probably could, within 2 years, double that, and that's kind of what our goal is in the near term with hermetic packaging.

One of the beauties about hermetic packaging, we are the only ones who can offer an AlSiC Hermetic Package, a world-class allocation of 2 of our product lines. And we think there's nothing but positive things ahead for us with hermetic packaging, our history of glass and metal seals, glass and ceramic seals.

So again, the percentage of the overall market to be determined. What we think we can address and service, we think is twice what we're doing today in the near term, 24 months.

And longer term, even more?

I think so, too, right? And obviously, we have competitors in this space, but we continue to outshine and outperform them. And we have to collect more performance, and then have more breakthrough products. We had -- we just discussed shortly, we had a very nice -- I'm dealing with glass this week that we sold to a Tier 1. They really liked the performance.

We think that's going to convert from 1 million this year to 3 million next year, and we'll see where it takes us. But we have lots of opportunities in that. And as you know, I mean, you send maybe the press release of the week. So I do read them, and I assure you, and we do -- we staff them internally. And so we appreciate the heads-up of where to look. And we're trying to grow the business as fast as possible, but we're also trying to recognize we want to stay over our (inaudible), right? We waited a long time for the success, and we don't want it to be short term.

Right. Any other competitor of AlSiC?

No.

Only Hermetic seal?

Correct. That's our distinguishing characteristic in the medical packaging business.

Your next question is coming from Stephen Fasi.

So can you comment perhaps about the HybridTech Armor order? How much of that -- how long it would take you, say, to fill that order, in what capacity?

I'll talk briefly about it. And if I can add more, I'll let you know. I mean, obviously, we're very excited about the armor order. It reflects more than 5 aircraft carriers worth of armor. We continue to build and deliver. The issue with armor is that aircraft carrier is very critical assets to the U.S. Navy and the national protection, and they don't spend a lot of time in dry dock or in dock in general. So we have to have a very coordinated schedule about when we deliver, when it gets installed, et cetera, et cetera.

So we know at least one ship that is on, but we've delivered 2, maybe 3 at this point. But it's really availability of the aircraft carriers. And then obviously, with the uncertainty with the South China Sea, the Ukraine thing, I don't see many aircraft carriers coming in anytime soon. But I'm not in charge of natural security. But it's a very difficult thing to time out, right? And it's a critical asset. It's 4 sovereign [acres] of U.S. soil, that's seen around the world, right? It's a tough asset to get on. And I'm very proud that we're on it.

I wish we run more faster, but we have to get them to come in to dock, right? And so I think they'll probably on a pace, just like the Navy has articulated to us, probably 2 or 3 carriers a year plus other aircraft, other surface vessels as they see, and we'll keep open from there.

Okay. If I could just follow up quickly I think it was a little confusing when I first asked the question. How much of that capacity -- you have extra capacity to make panels versus what the Navy is currently demanding?

Yes. So obviously, I think you've been to the facility, right? So we have -- so we've only -- we're only doing one shift of armor manufacturing, right? So I can tell you that we can triple the output, tripling the footprint, right? I mean Dan, Bart and our operations guys probably driving the current to a tree as we talk. But we certainly have the capacity today to triple the amount of armor we're doing. And we have plans to make that 6x what we're doing today with relative ease.

So I think right now, we continue to train, deliver prospects for new opportunities and see what happens.

(Operator Instructions) Your next question is coming from Warren Silver.

I'm proud to see that the company is making a transition into the actual manufacturing environment. One thing I'm concerned about is Wolfspeed or formally Cree announced that they were using our product line and order silicon carbide production. And then at the end of the day, Tesla in conglomerate, announced that they manufacture Land Rover and Jaguar that they're using the work speed for all their AV production. Could we elaborate on that what the potential is? And workforce to spend $1 billion in a new plant in North Carolina, and I think they have one in the New York state. What is our capacity to supply them or how many products that they're using from our production?

Warren, it's Michael, How are you?

Okay. Pretty good. I'm 85 years old now, and I visually retired for (inaudible) after 60 years on June 30. I'm sorry to hear that Norm passed away. I always would listen to his comments over the years. And if we can speed up the growth at 85, I'd appreciate it.

Well, nobody on the planet is getting younger. As to your question, I mean I really can't speak for Wolfspeed or Cree. You would have to refer your questions to them. But as you know, they are clients of ours, and we do have a lot of products with them. We have a lot of dialogue going on with them, and we have a lot of opportunity with them Warren.

And so for me to comment specifically on what we're doing with this client in particular and match it up to their press releases, would probably be premature on my part. But I will tell you this that we are continuing to see progress. Not all of it's positive. Some of it goes a little sideways. It's the product business, but we do continue to be their manufacturer of choice when it comes to MMC.

So we like that position. We like to keep creating that. And to your point, there are many high-end positive decisions that would have to be made similar to what they have had to make with their decisions with Arkansas and North Carolina. But if you want to know specifically, from Wolfspeed or Cree, you'd have to call them.

So I hope that helps, Warren. I just -- I can't speak for them.

(Operator Instructions) There are no further questions in the queue.

Okay. Matthew, this is Michael. And for those of you who are still on, thank you, everybody, for listening in today. I'm sure the transcript will be out shortly. I think a lot of positive things are going on with the firm. Chuck, myself, Anthony, Dan, the leadership team, we think we are on the right path, and we appreciate the continued support by our investors and colleagues.

So with that, Matt, I'll say good night.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.