Cps Technologies Corp/De/ Q1 FY2021 Earnings Call

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.

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.

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 was 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 2021 compared to first quarter 2020 is the result of reduced demand from our largest customer historically, reduced demand from one customer.

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 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 totaled $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 $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 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 days 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, 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.

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 reliability, performance and in many specific applications, reduced weight. Our business historically has been 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.

Your first question comes in the line of Warren Silver. Your line is now open.

Good afternoon Grant and Members of the Board.

Hi, Warren.

Congratulations on your filing. After reading the prospectus, I noticed several negatives that I think should be clarified. The appointments of Bill Holmes as Senior Applications Engineer, Mike McCormick as Chief Operating Officer, and Steven Kachur signify that we are transitioning into product development. We're moving beyond just conceptualizing and designing to enter the manufacturing phase. It's encouraging that you're looking to raise funds. Additionally, on March 2, American Electric Power, as a representative of the electric highway coalition—which includes Southern Company, Duke Energy, Entergy, and the Tennessee Valley Authority—plans to add more electric vehicle fast chargers to connect the Mid Atlantic region, the Gulf Coast, and essential Plains area.

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, and modules into that market. And 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 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 press has preceded that the sizzle has preceded the steak 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.

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 a very positive thing. And I wish everyone good luck moving forward.

Thank you very much, Warren.

Thank you, Warren.

Thank you.

There are no further questions at this juncture – we have Lenny Dunn. Your line is now open.

Hello.

Hello, Lenny.

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?

No, we're currently in a blackout period until we make this earnings announcement, so nothing has 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 it on the balance sheet?

The short answer is, yes. The short answer is yes. Let me just leave it at that.

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.

Yeah, yes.

I believe it's important to choose the right time to raise funds. There's no issue with that. Thank you.

Thank you. Chuck and I are here in Norton, Massachusetts, and Michael McCormack, our Chief Operating Officer, is also on the call, but he is joining us from Florida where he is visiting some customers. Michael, could I ask you to comment a little bit on armor in particular?

Yes, thank you, everyone. As Grant mentioned, we have started shipping our first order of HybridTech armor over the past few weeks. We expect that this will take up most of the fiscal year, and we are cautiously optimistic that more orders will come in soon. We are in discussions with other potential partners in South Florida about various applications for the armor. Its environmental performance and lightweight design for tackling high kinetic energy threats make it very appealing to many Tier 1 OEMs in the US aerospace and defense sector. We are quite optimistic about this. There are several ongoing initiatives in armor development, and we are fortunate to have Bill Holmes and Steve Kachur joining Marco on our product development team. We are continuously working on new armor solutions with our long-time partner Jim Sorenson, and that effort is progressing well. I am very optimistic that our armor business line will remain strong and continue to grow.

Thank you, Michael. We view our products as divided into three main families: Al/SiC components, hermetic packages, and armor. Al/SiC components have traditionally been the largest segment of our business, and there are significant growth opportunities in this area. As I mentioned earlier, this segment has been most impacted by COVID, with delays in spending for rail projects. However, our work in producing high-reliability hermetic housings and packages for aerospace avionics has been very strong, and we believe this growth will persist. We are particularly focused on the Al/SiC hermetic package, which utilizes our aluminum silicon carbide instead of conventional materials. Customers need to thoroughly assess and confirm the reliability of this package prior to its adoption, but as more customers begin to embrace it, our reference selling becomes easier. We are excited about the growth potential in this area. Looking ahead, our overall product portfolio is stronger and more diversified than ever, with reduced customer concentration, which we believe will result in less quarter-to-quarter volatility. If there are any further questions…

There are no further questions at this time. You may continue.

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.

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