Q3 2023 CPS Technologies Corp Earnings Call
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Good day, everyone and welcome to the Cps technologies third quarter 2023 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Chuck Griffith Chief Financial Officer of C. P. S technologies, Sir the floor is yours.
Thank you operator, and good morning, everyone today, I'm joined by Brian Mackey, our President and CEO and we look forward to discussing our quarterly results with you, but first Chris witty Investor Relations adviser will provide a brief safe Harbor statement Chris.
Thanks, Chuck and good morning, everyone before we begin the business portion of today's call I would like to point out that statements. In this conference call that are not strictly historical.
Forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95, and should be considered as subject to the many uncertainties that exist in Cps is operations and environment.
These uncertainties include but are not limited to the wars in Ukraine, and Israel other geopolitical events economic conditions market demands and competitive factors.
These factors could cause actual results to differ materially from those in any forward looking statements.
Additional information can be found in our filings with the SEC.
Now I will turn the call over to Brian to offer his perspective on the third quarter results after which Chuck will review the financial results in greater detail Brian.
Thanks, Chris.
Today, we're pleased to announce third quarter revenue of $6 $3 million and an operating profit of approximately $131000 for the period ending September 32023.
As discussed on our previous earnings call.
The quarter was negatively impacted by shipment timing with certain deliveries being pushed into the last three months of 2023, our original expectations for 2023 as of year are unchanged.
Company remains on track for 2023 to be its best year ever in terms of revenue as well as underlying results.
Chuck will review this further in a moment.
During the third quarter, we announced two noteworthy wins for the company.
First we received an award valued at approximately $7 $7 million from our major longstanding customer for power module components and solutions. This contract represents a 50% increase for that customer over the prior four quarters with the systems to be employed primarily in high speed rail wind turbines and other green energy.
Applications.
This client is a multinational semiconductor manufacturer based overseas, which has come to rely on our unique capabilities for its cutting edge requirements and we're pleased to once again provide modules for the many important markets they serve.
Also we recently announced that the company had received a phase one <unk> award valued at approximately $200000 from the United States Department of energy, our first such grant from the Doe.
This study entitled modular radiation shielding for transportation end use of micro reactors will be led by Matthew Karnik, a talented materials scientists at our company.
Opening further potential customer penetration avenues for Cps.
Notably this is our fifth SBA R. S. GTR award in the past two years.
It's the first of these five from the department of energy and the third different member of our team to win an SBA Our award within the last couple of years, our renewed focus on R&D continues to provide external funds to help boost bolster our intellectual property portfolio validate our long term strategic vision and support our goal of accelerating the growth.
<unk> of our top line.
Aside from these wins the company is actively pursuing opportunities across all of its end markets for our military armor to transportation products electronics and industrial applications. The.
The overall outlook for the company remains bright.
Hybrid tech armor panels from kinetic protection the U S. Navy as prime contractor continue to provide best in class protection for the country's aircraft carriers. The panels are an integrated component of advanced ballistic shields and protection system upgrades by the Navy and we're pursuing opportunities across the rest of the fleet.
We had previously discussed that we would be testing other iterations of our armor and it as it related to a potential ground vehicle armor opportunity. Unfortunately that testing did not go as well as anticipated we're working to address the issues uncovered during those tests, but this will further delay any new order for armour with this potential customer.
The continued growth of Hermetic packaging for use in aerospace defense and power electronics also positioned Cps for further growth going forward as well increasing demand for our metal matrix composite industrial solutions.
We believe our unique technology and innovative approach to solving complex design problems.
Along with our expanding array of customers and the government and commercial space place us at the beginning of our next phase of growth.
Whether it's electric vehicles trains aerospace and defense or electronic applications Cps can provide the best approach to advancing our clients' new product development initiatives.
Our strong balance sheet can and will provide us with the financial flexibility to continue to invest in increasing our product development capabilities and pursuing opportunities that will accelerate topline growth and improve operating results in.
In the near term, we anticipate a very strong finish to the current fiscal year and remain on track for it being our best performance ever.
I continue to be upbeat about the company's ability to convert bids into backlog and backlog into revenue as we leverage our innovative solutions across a growing set of markets and new industry applications.
Now temporarily turn the call over to Chuck to provide more details about our financial results after which I'll provide some additional comments Chuck.
Chuck.
Brian.
As was mentioned earlier, the Companys revenue totaled $6 $3 million in the third quarter compared to $6 $7 million last year with a slight decline year over year due to shipment timing and the delay of certain deliveries into the fourth quarter.
Given our solid overall backlog, we anticipate posting a very strong finish to fiscal 2023 at this time, we fully expect to significantly exceed the 2022 revenue total of $26 6 million.
Gross profit in the third quarter totaled $1 2 million or approximately 20% of sales compared with $1 9 million or roughly 28% of sales last year.
The decrease in both profit and gross margin year over year reflects the lower level of sales as well as some inventory write offs due to higher scrap unusual during the quarter.
We anticipate fourth quarter gross margins to be more in line with the second quarter.
Selling general and administrative expenses totaled $1 1 million in the third quarter versus $1 2 million in the prior year period.
SG&A amount represents a notable decrease from our SG&A numbers in the first half of this year.
The company generated operating income of $131000 in the third quarter compared with approximately 709000 last year and posted net earnings of <unk> <unk> per diluted share versus <unk> <unk> per diluted share in fiscal 2022.
Turning to the balance sheet, we ended the quarter with $8 $8 million of cash up from $8 3 million at the end of 2022, reflecting working capital changes and the impact of a decline in deferred revenue.
Trade accounts receivable as of September 32023 totaled $5 million versus $3 8 million as of December 31, 2022.
Our other receivable account balance was $17000 compared to $686000 at the end of last year, primarily reflecting the receipt of the employee retention tax credit in April.
Inventories totaled $4 $8 million as of September 30, compared to $4 $9 million at the start of the fiscal year.
Turning to the liability side payables and accruals totaled $3 $2 million at the end of the third quarter versus $2 7 million at the end as of December 31 2022.
Deferred revenue decreased from $2 8 million at the end of 2022% to $1 7 million as of September 32023.
As a reminder, deferred revenue predominantly represents prepayments for large orders to help to frame. It the impact on cash of large inventory purchases for those orders a number of these were shipped in 2023, resulting in the recognition of revenue and thus a decrease in deferred revenue.
So thank you and now Brian will discuss his first 90 days at Cps and what he sees for the future Brian. Thanks.
Thanks Chuck.
As everyone May recall I joined Cps at the beginning of August about three months ago.
As I expected when I accepted the opportunity to come to Cps My background is highly relevant to what we're doing here.
Spent many years in leadership positions of technically oriented companies, including a focus on material science to achieve growth with the goal of providing advanced solutions to our customers' greatest challenges.
I am excited by a number of things that we have in place today at Cps and by the opportunities that we have before US we have a long history of close relationships with a number of large stable customers, both domestically and abroad, particularly in metal matrix composites and hermetic packaging.
We will continue to support our customers' growth objectives by providing high quality products that meet their needs. We have a highly capable and motivated team here at Cps as well 2023 looks to be a record year and we're motivated to build on our own momentum.
I'd like to take a moment to focus on just one aspect of our growth strategy, which is externally funded product development as.
As we've mentioned we've seen a number of recent successes in this area to help build our product portfolio for the future.
As a quick review.
We completed a phase one svar regarding thermal management for the Navy then asked US continue with an option phase and asked us to submit a phase II proposal, which is currently under evaluation.
We completed a phase one as TCR regarding the use of tungsten materials for the army again, we will be submitting a phase II proposal to build on what we accomplished in phase one.
We also completed a phase one svar regarding army helicopter flooring for the United States Army.
While the army has elected not to designate any funds for a potential phase III study our flooring passed its testing in phase one with flying colors. We know that this is of interest to helicopter Oems and we're pursuing this opportunity.
As previously discussed this morning, we are currently working with new funding from the Doe on another phase <unk>.
You can expect to see US continue development efforts to build our product portfolio for the future.
These externally funded efforts in conjunction with our internally funded work are a key part of our plan to add relevant growth pass within the advanced materials space. These opportunities leverage our knowhow related to our current products and also take advantage of the technical expertise within our talented team.
I am excited about the future here at CBS.
Operator, if you could please open up the line for Q&A.
Certainly everyone. At this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that what posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Jim Mcilroy from Dawson James Your line is live.
Thank you good morning.
Can you share with us the bookings and the backlog for the quarter.
We don't normally give that information out.
Our certainly our backlog is very solid going forward.
For the next.
For the next several quarters.
I don't think I really want to give out any numbers at this point.
Specific log.
Okay can you tell us if bookings were greater than revenue.
And.
And the trailing 12 months, it's actually exactly even if a 100% or one one to one.
Okay, great. Thank you and.
Yes.
I'm, sorry, Brian you talked about.
The externally developed.
External development as a as a source of funding research and I understand I.
I understand the philosophy behind that and I understand the benefits for it but what I would like to.
Try to understand is how large a portion of revenue.
That would be currently and.
If you were to get what you wanted out of those projects.
Percent of revenue would it be generating.
Let's say 12 months or 24 months from now.
Yeah.
So the two parts of your question the revenue from our phase one is relatively small those are typically $200000 of funding could be $1 50, it could be $2 50, but its typically in that range.
Normally a phase two amount of funding for <unk> would be.
Whereas the phase one of say $250000 might be over a nine months period, a phase two would typically be more around the range of $1, one or $1 $2 million.
To fund research over a period of 24 months, that's what's most typical from the Dod and Doe.
So on the revenue side.
Nice revenue, but it's mostly the value to us is to fund that future growth.
<unk> of that.
To translate that into what would be considered a phase three or a commercial effort.
With funding from literally customers buying those products is going to depend on the <unk>.
Success of the phase II and the interest the nice thing about the Dod.
Is there typically funding that research because they have a real need and if you can get to the finish line technically.
The ideal outcome is that they are ready to purchase and youre going to be scaling our volume to meet those needs and of course, that's going to depend on the application and what the technology is that we're working on so it's it's difficult to project the revenue.
But the nice thing about that SBA or with the Dod is again, it's a need that they have.
But it also comes with the intellectual property that's developed under that program, which remains the companys property, even though it was funded by the department of defense and it also eliminates the need for future competition. So typically the Dod contracting officers going to say, we need competitive bids to make sure we're getting competitive pricing and the response to that is that the.
<unk> proposal was a competitive bid during the phase one and the reward for the small business of succeeding in its technical development is the singular ownership of that intellectual property for many many years after that.
Right understood got it Okay and then.
So it sounds like Q4 is going to be a nice rebound from Q3.
That's correct because of.
Because of that will you.
B.
Requiring additional working capital.
You mentioned in your commentary that working capital was a source of cash in Q3. So can we expect a reversal of that in Q4.
Probably.
Certainly.
It won't be an issue for us.
With almost $9 million as of the end of the quarter.
That's that's plenty of.
Cash in order to fund that working capital and as as I think you guys know, we've got our $3 million line of credit if we need it.
With our bank so.
There is nothing to do on it at this point it hasn't been for a while but so we do have that extra stores.
If it's necessary, but I don't think it will be I think.
We will still have even with the working capital increase that we that we may need to.
To generate should generate the higher sales for the quarter, we'll still have we'll still be in very good shape from a cash standpoint, but we do expect Q4 to be more in line with Q1 and Q2 from this year.
A variety of respects.
<unk>.
Relative versus what we've experienced currently in Q3.
Got it.
Yeah.
Okay. That's it for me Thanks, a lot.
Yes. Thank you.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone.
Your next question is coming from Ron Richard Your line is live.
Hey, guys.
November 2022 conference call. It was mentioned that the hermetic packaging revenues would be about $10 million.
Okay.
Those revenues could double.
By 2024, and I was wondering therefore slowing up.
Projection for $20 million of revenues and a medic packaging for 2024.
I would say not.
We've had some reductions from one of our major hermetic package customers.
If we take I mean, you can't but if we were if we were to take that out.
Then the Hermetic packaging business regarding other customers is growing significantly.
We've got one customer in particular that was.
Virtual virtually.
Not well they were extremely non material.
About a year ago and.
They're going to be well over or are they already are this year, well over $1 billion and we.
Expect and hope that that will.
At least that piece anyway will at least double in this coming year as well in 2024.
But in terms of the total.
Doubling of Hermetic packaging, I don't think thats going to happen, but certainly.
It's continuing to grow even in spite of the of.
That one major customer, yes, it's continuing to grow and it's certainly an area of focus for us we see opportunities there for us to continue to drive those numbers up.
And I think you'll see that going forward.
Okay and then.
One other question on the Navy ships.
We're talking about expanding to.
Other shows besides the aircraft carriers do you have any yes.
Yes on the timeline when you might get some orders until those ships.
It's an area, where we're actively pursuing.
Translating that technology from the aircraft carriers to other vessels the timing of that is hard to predict.
But we know we've got a good solution there with our partner and we're actively working that but it's difficult to predict timing.
Okay. Thank you.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone.
Your next question is coming from Greg Weaver from at victory Capital. Your line is live.
Hi, good morning.
Good morning, and welcome aboard Brian So I guess.
What would you consider the best Unexploited opportunity is now to bet the company for a while and kind of maybe any changes or improvements you want to focus on.
Well I think we have a number of opportunities as just mentioned I think we have.
Clearly have growth opportunities within Hermetic packaging I think we have some interesting things that we're considering within metal matrix composites.
We also have a.
This ongoing.
Installations of armor solutions on the aircraft carriers, which is exciting knowing that we have a solution that the army is excited by and interested in lightweight ballistic protection et cetera.
And what I consider our fourth category, which is these new things that we're actively working on.
I think that's going to yield results.
And as I mentioned, a minute ago I mean, when the Dod you need something they need something sometimes you have to wait for their validation process and the right program timing to come along but.
We've got interesting opportunities there.
This organization is a company I mean, we're continuing to improve we've got a strong team <unk> seen a number of changes over the last few years that we're continuing to implement to drive our growth. So I think our customers will see that.
When it comes to quality of product and things like that so I'm excited about what we're doing.
Okay and on the <unk> front.
Specifically for the heat sinks and things like that that's kind of not as much.
Our focus.
There is ongoing discussions there with the interest of our customers and how we can make those products better and move those to both improvements in what we're providing on a day to day basis as well as what are the next generation of product.
Would be and how we can address that so.
It's where the advantage of these long term relationships, where we can have these collaborative discussions I think is another area that we're pursuing that can yield results in the future.
Okay. That's helpful. Thank you.
Chuck.
On the <unk>.
Gross margin you helped a little bit, saying there was inventory write offs due.
Due to scrap in the quarter, but I mean the incremental.
Flow through is over 100% right I mean, your revenue drop versus the gross profit dollar drop.
Sequentially.
So.
You didn't burn inventory either so.
So so basically.
The biggest individual factor of course was the reduction in.
And revenue and the impact of that on our on our fixed costs.
But.
The secondary one was so we had a quality issue with one of our major customers.
We set up.
Some significant reserves for potential returns.
And we also have to go through our inventory too to look at it for those quality issues and we had.
So we had a number of parts that we ended up.
Scrapping now we think that.
We are close to the root cause for that quality issue and that it should go away soon but.
But it is something that we are.
That we're working on to fixed and Thats really why we have that are.
A fairly large reserve in there.
And our.
Which reduced revenue and increased our liabilities. So when we put when we booked a reserve.
The reserve so that was.
Top line and.
All other cogs or added to Cogs.
Correct, yes.
Yes that makes sense okay.
What product area was this.
Quality control.
Issuance.
MMC has its analysis.
Yes.
Just kind of an odd.
Yes, I don't want to get into the science of it because.
By area. It was a number of events that came together and as Chuck indicated.
We've made a lot of progress on the root cause and then will finish that up and turn that to implementation et cetera, and we think the reserve that you see reflected as going to satisfy that but we're not quite at the end of that road to make sure we are to the bottom of it.
So for the current quarter. We're in there is still some yield issues, but the reserve is going to cover that and you've absorbed that in Q3.
We believe so yes right. Okay. So we're back to the I mean, you had great margins over the last few quarters Thats one of the things I'm. Most excited about that you can get that earnings are going so this 30% ish margin areas not unrealistic then that wasn't a fluke.
Correct, Yes, we think as this gets cleaned up we think we'll return to that.
<unk> strongly in that direction, what you saw in the first half.
We think thats more representative of what Youll see going forward, including this quarter Q4.
Okay perfect. Thank you I appreciate it.
And good luck.
Thank you. Thank you.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone. Please hold while we poll for questions.
Thank you that concludes our Q&A session I will now hand, the conference back to President and Chief Executive Officer, Brian Mackey for closing remarks. Please go ahead.
Okay.
Thank you for joining us today.
For your ongoing interest in what we're doing here at Cps technologies.
We look forward to speaking with you again after the end of our fiscal year.
If you have any questions in the interim please reach out to our Investor Relations adviser.
There's no further questions I think that concludes the call. Thank you.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.