CPS Technologies Corp (CPSH) 2021 Q1 法說會逐字稿

Good afternoon, and thank you for standing by, and welcome to the CPS Technologies Corp. first quarter investor call. (Operator Instructions) Please be advised that this conference call is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Chuck Griffith. Thank you. Please go ahead, sir.

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 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 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.

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

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 2 topics. The first is COVID. As described in our press release, the first quarter results to us are a confirmation that most likely, the worst impacts of COVID-19 are behind us. In other words, our Q1 results are a 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.

The second important development for us relates to diversification of our customer base. Significant growth in the first quarter in what have historically been our 2 smaller product lines, namely hermetic packaging and armor. There was some 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 and 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 of 2020 is the result of reduced demand from our largest customer -- historically reduced demand from one customer.

Obviously, this reduction in demand has the effect of reducing customer concentration, but for a negative reason. However, we're very confident that this demand will return. And as it does, we're also very confident the growth in hermetic packaging and now beginning in this -- the second quarter, the growth in armor and other applications will also continue with the net result that the increased customer diversification is here to stay as we go forward.

With that overview, let me have Chuck jump into the numbers.

Sure. Thank you, Grant. So revenues totaled $4.9 million in quarter 1 of 2021 compared with $6.5 million generated in quarter 1 of 2020. That's a decrease of 25%. Reduced demand from our largest customer, as Grant just discussed, accounted for more than the total decrease in revenues. In 2020, in anticipation of potential supply disruption due to the COVID-19 pandemic, this customer accelerated their Q2 2020 purchases into Q1.

Gross margin in the first quarter of 2021 totaled $944,000 or 19% of sales. This compares with gross margin in quarter 1 2020 of $1.550 million 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 and administrative expenses totaled $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 of 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 '21 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 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 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, '21, equal to the $3.6 million at March 28, '20. The inventory turnover in the most recent 4 quarters was 4.1x compared to 6x for the 4 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 our armor contract.

Turning to the liability side. You will see the $193,000 drawn on our line of credit. Payables and accruals totaled $2.9 million at March 27, 2021, down from $3.4 million at March 28, 2020. Lastly, I'd like to point out the significant improvement in our current ratio over the course of the last 12 months. We started the period with a current ratio of 1.8 but finished the year at finished the year at -- finished the 12 months at 2.9.

And for further discussion, let me turn the call back over to Grant.

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 3 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 3 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 are setting targets and agendas for the next 25 and even 50 years in these areas. R&D spending and 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 U.S. spends more on defense than the next 10 largest countries combined. Aerospace and defense are markets, which, by their very nature, value reliability, performance, and in many specific applications, reduced weight. Our business historically has been -- about 70% of revenues have come from exports, and only about 5% to 10% of our revenues have been related to the U.S. defense area. We are putting a much greater emphasis on selling and marketing here in the U.S. and we are seeing the benefits in terms of bookings. From our perspective, we're really just scratching the surface.

As it relates to aerospace, we've issued press releases recently regarding being on the Mars rover, regarding playing a very important part in the methane satellite, which is -- will be launched in about 2 years. And in the fact that our products are found in essentially all of current generation GPS satellites. Our new Chief Operating Officer, Michael McCormack, comes out of the defense electronics industry and is also a West Point graduate. He understands how the defense department functions, how it defines needs and how it procures solutions. He understands both the electronics and the armor segments, and we're excited because we have real solutions that generate real value in both of these areas.

Another important market for us is the market for lids and heat spreaders for high-performance, application-specific integrated circuits, graphic chips, fiber optic applications and microprocessors. The fact that a shortage of application-specific integrated circuits is shutting down entire car assembly plants is an indication of how digital technology and products continue to penetrate almost every piece of equipment we use.

We are excited about opportunities in these areas. For example, a design win from about 4 years ago for a silicon photonic integrated circuit housing, which is used in optical communications, has just gone into volume production this year and will account for several hundred thousand dollars of revenue in this year and will continue to grow for several years thereafter.

The second major topic is our product pipeline. And by that, I refer to those products which are on the continuum that exists between achieving a design win when a customer has selected our product and the time when that product goes into volume production. Our product pipeline is stronger than it has ever been. The current pipeline, meaning those products where we have the design win but it is not yet in production, will generate significant growth as those products, where again we already have achieved the design win, go into production in the future just as this optical application I've described. However, we are taking action to increase the reach of our sales, marketing and business development efforts to achieve an increased number of design wins and these actions include additional hiring in the sales area, in the product development area and revamping our digital presence, in particular, our website and our social media presence and activity that is underway, and you'll see the results of that later on in the year.

Thirdly, let me just comment on our core competency, which is our technology for combining metals and ceramics to form metal matrix composites. This core competency includes both the intellectual property, the core technology itself, and it includes the design, manufacturing and quality capabilities to produce products using this technology, ship these products on time and do so at attractive margins. Our primary metal matrix composite today is aluminum silicon carbide or AlSiC, but by no means is that our only metal matrix composite. We are extending our core competency primarily into adjacent technical spaces, which will allow us to produce new and novel solutions for customers. We recently issued a press release announcing a key hire into our product development team, Dr. Steve Kachur. We're excited at the activities underway to extend our core competencies and to create these new products.

Finally, many of you are aware, if you look at SEC filings that we recently filed a prospectus for something called an at-the-market stock offering. Since 1996, the CPS has funded our operations from funds generated by our operations, and we can continue to do so. However, we do see opportunities which due to their size and the speed with which they could development -- could develop would require funding that goes beyond funds generated by operations. So through the ATM mechanism, we're taking action to strengthen our balance sheet to ensure that we can seize these opportunities as we move forward.

Let me pause there, and let's open the call for questions.

(Operator Instructions) Your first question comes from the line of [Warren Silver.]

Congratulations you have filed (inaudible) to take home. When I read the prospectus, there's so many negatives in there, and I just thought we should clarify it. The appointment of Bill Holmes as the Senior Applications Engineer, Mike McCormack, as our Chief Operating Officer, and Stephen Kachur, as Grant mentioned at very end. They're making a transition into product development. They're no longer conceptualizing something and designing something. They're going into manufacturing. And I think it's very positive that they're working to raise up money.

I just wanted to mention on March 2, American Electric Power speaking for the Electric Highway Coalition, which includes American Electric Power, Southern Company, Duke Energy, Entergy and a small company called Tennessee Valley Authority. They plan to add additional electric vehicle fast chargers throughout to connect the Mid-Atlantic region, the Gulf Coast and the Central Plains area.

Now the electric power grid is basically supplied by ASEA Brown Boveri, which is part of ABB. I don't know if they sold it to Hitachi, whether it's Hitachi [AC], and the other company's General Electric. Now CPS has very strong dealings with General Electric and also ABB over the years. I'd like you to clarify this Grant, but we imagine that you have to use a lot of inverters because you're going from high voltage to low voltage to the fast chargers and it's got to be a huge market for us, and this is right now ballpark the area of expertise with 2 of our prime companies that we deal with over the years. Can you respond on this, please?

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 that 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 U.S., Cree, International Rectifier, Microsemi and several others. And we are very excited that 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 in the pipeline moving towards production are with these companies. The -- and again, what is -- the press has preceded -- the sizzle that's 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 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.

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 that 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 invested capital. So I think it's very positive, and I wish everyone good luck moving forward.

(Operator Instructions) There are no further questions at this time. Oh, we have Lenny Dunn.

Hello?

Hello, Lenny.

Just a quick question on the offering. Can you give us a little bit of an update has any of the aftermarket (inaudible) been sold so far?

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.

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.

Absolutely, absolutely.

And do you have any relatively immediate plans to utilize the money other than putting out on the balance sheet?

We -- the short answer is yes. The short answer is yes. Let me just leave it at that.

No, I'm not asking you be specific about things that you haven't done yet. But I'm assuming that anything you do be announced (inaudible) the time you do it. I'm not concerned with that. But you do have some ideas as to where you're (inaudible) the money.

Yes. Yes.

Okay. Well, I guess that's all I just -- I think you're picking an opportune time to raise funds. No problem with it.

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.

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 the 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 makes it extremely attractive to a lot of Tier 1 OEMs for U.S. 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 -- or Warren did. We have the luxury of both Bill Homes and Steve Kachur now to augment with (inaudible), our product development team, and we continue to work on inventing new armor solutions along with our long-time partner Jim Sorensen. And that is going -- advancing well, too. And I'm extremely optimistic that our armor business line is here to stay and growing.

Very good. Thank you, Michael. I -- internally, we think of our products as falling into 3 product families, AlSiC components, hermetic packages and armor. And AlSiC 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're 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 AlSiC 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? If...

(Operator Instructions) There are no further questions at this time. You may continue.

Very good. We once again, thank you. I realize 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 goodbye.

This concludes today's conference call. Thank you all for joining. You may now disconnect.