Cps Technologies Corp/De/ Q1 FY2022 Earnings Call

Good day. Thank you for standing by and welcome to CPS Technologies Corporation First Quarter Investor Call. Please be advised that today's conference is being recorded. I would now like to hand the call over to your speaker, Mr. Griffith. The floor is yours.

Thank you, operator. Good afternoon, everyone and thank you for joining us. I'm joined by Michael McCormack, our President and Chief Executive Officer, who will offer his comments on our first 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 as 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 will turn the call over to Michael to offer his perspectives on the first quarter.

Thank you, Chuck. Good afternoon, everyone. Today, we are pleased to announce first quarter revenues of $6.7 million and an operating profit of $547,000 for the quarter ending April 2, 2022. This compares with revenues of $4.9 million and an operating profit of $36,000 for the quarter ended March 27, 2021. We are delighted to report that revenues in the first quarter 2022 were the highest in the company's history and showed a 7% improvement over the revenues from the fourth quarter of 2021. Even more significantly, we show a revenue increase of 37% over the first quarter of 2021. Further, we are beginning to see the benefits of the growth in cost control programs we have put in place as our first quarter operating profit was greater than the operating profit for the entire 2021 fiscal year. We are encouraged to realize returns on the growth initiatives and operational changes we are executing. The team is continuing to drive growth and efficiencies to sustain this momentum. As the global economy progresses out of pandemic recovery and into new challenges, there are lasting impacts such as inflation, material availability, logistical delays and a contracting labor force that we are actively working to mitigate. In an uncertain overall economic environment, we remain incredibly pleased with our first quarter performance and are confident in our outlook. I'll speak more later about the overall business progress moving forward in the call but for now, I'd like Chuck to discuss the financial results in a little bit more detail.

Thank you, Michael. Revenues reached $6.7 million in the first quarter of 2022, up from $4.9 million in Q1 of 2021, marking a 37% increase. This growth was largely driven by higher sales of armor and hermetic packages in Q1 2022, as well as the impact of the COVID-19 pandemic on our sales in Q1 2021. The gross margin in Q1 2022 was $2 million, or 30% of sales, compared to $900,000, or 19% of sales, in Q1 2021. The increase in margin dollars corresponds directly to the rise in revenue due to better absorption of fixed costs and improvements in manufacturing efficiencies. Selling, general and administrative expenses amounted to $1.4 million in Q1 2022, compared to $908,000 in Q1 2021. More than half of this rise was attributed to increased compensation costs, particularly higher accruals for variable compensation linked to the stronger performance in Q1 2022 compared to Q1 2021, the postponement of share-based compensation to Q2 in 2021, and the addition of three new sales team members after Q1 2021. These three factors accounted for the compensation difference. A significant part of the SG&A increase was also due to higher commission expenses resulting from the increase in sales. The company reported operating income of $547,000 in Q1 2022, up from $36,000 in Q1 2021. This rise in operating income is mainly due to the growth in revenue and gross margin that we discussed earlier. Regarding the balance sheet, we concluded the quarter with $4.7 million in cash, which is a decrease of $350,000 from the end of 2021. This cash reduction is mainly attributed to increased inventory and lower accrued expenses, though these were partially offset by our net profit. Although it's still an option, no additional cash was raised through the ATM program in Q1 2022. As of April 2, 2022, accounts receivable totaled $4.9 million, unchanged from $4.9 million at December 25, 2021. Our days sales outstanding improved to 66 days at the end of this quarter from 72 days at the end of 2021. The reduction in DSO was due to the collection of $0.6 million in deferred revenue from the year-end accounts receivable balance during Q1 2022. Inventories reached $4.7 million on April 2, 2022, compared to $3.9 million at December 25, 2021. This increase in inventory is due to higher work in process and raw materials required to support our anticipated sales growth. The inventory turnover over the last four quarters was 4.7 times, the same as at the end of 2021. On the liability side, payables and accruals were $3.0 million on April 2, 2022, down from $3.2 million on December 25, 2021. This minor change is a result of certain year-end accrual payments made in Q1. Now, I would like to hand the call back to Michael for further discussion.

Thank you, Chuck. This past quarter, we are continuing to make encouraging progress on the plans to translate our value creation through product development into definitive positive financial results that can be appreciated by the wide array of investors in CPS today and tomorrow. As Chuck had mentioned, we are quite encouraged to see the improvement in gross margin. I would like to particularly highlight the work by Dan Barton, our Head of Operations and his entire team on the implementation of a continuous improvement program with sustainable, substantial, enduring improvements across every product line. We remain steadfast, focused on increasing our ability to provide products to our customers at a reasonable cost. We believe creating positive financial results quarter-over-quarter and year-over-year will continue to make CPS an attractive investment opportunity to a diverse array of investors, short-term, institutional, index fees or even sophisticated investors that appreciate both our near and long-term benefits of our unique value proposition. We also acknowledge that one quarter does not make a year. However, our growing consistency of profitable performance has been a focus of mine since becoming the CEO. There are lots of opportunities for CPS to provide solutions to customers in the electrical vehicle market. The movement from silicon semiconductors to silicon carbide wide-band-gap semiconductors that operate at higher junction temperatures will necessitate the need for thermal management, high heat dissipation and controlled expansion that we can provide with our metal matrix composite, AlSiC. CPS is serving this fixed WBG need today with our customers with a new power module format. In addition, we see continued growth in implementation of this format with the AlSiC metal matrix composite for the fixed WBG applications as these solutions are better suited to efficient power conversion and offer improved power design flexibility. We have several design wins with our partners/customers that are still in the initial stages of product testing and maturity and we are collaborating with them to ensure we have a robust plan to meet their future production, high-volume demand over their anticipated life cycle. There are also many opportunities within the United States Department of Defense strategic objectives to move to hybridization and electric vehicles for tactical and combat fleets. CPS recently attended the Michigan Defense Exposition, where this was a big topic. As you're aware, the Army ground vehicle expertise is specifically located in Michigan and one of several reasons we created a presence in the Detroit metro area and added Anthony Koski, who's located there to the CPS staff as our Corporate Development Officer. A way out still but our past success in the luxury end of the EV market has a lot of synergies with the defense market and I'd like to highlight the link between military platform electrification and the importance of size, weight, power and cost, SWaP-C and how this aligns directly to CPS' core competencies and value proposition of reduced weight, superior properties and high reliability that directly contributes to the military's goals of high operational availability. In addition, many of our known competitors are prohibited from supplying key defense technologies into the United States due to existing national security regulations and laws. We view accelerated acceptance of electric vehicles worldwide, the advancement of large U.S. Department of Defense modernization programs as evidenced by the most recent significant funding addition for the proposed R&D budget and the increased emphasis on modernizing U.S. transportation and energy infrastructure as a potential catalyst for future growth. Beyond fiscal year '22, we remain cautiously optimistic that our collective growth initiatives, specifically in longer-term new product development investments, will expand the current product lines both in terms of revenues and earnings. As I mentioned previously, we have reengaged with the Small Business Innovation Research, SBIR and Small Business Technology Transfer, STTR programs, having made several submissions and we'll continue to do so. We have recently won two SBIRs within the Department of Defense. The recent Navy award, like the initial award with the Army, is calling for novel solutions to thermal management electronics in the military that could also be commercialized. Our proposed solution is for an aluminum alloy matrix reinforcement nickel titanium for thermal energy storage devices. We are extremely excited that the Department of Defense thinks of CPS as a thought leader in thermal management and more importantly, they have confidence that we can convert theory into products that can enable the safety and security of our defense forces. We also have several proposal solutions in with the Department of Energy that we expect feedback by the end of the second quarter. Lastly, we continue to make measured investments to increase the capacity of our current high-volume manufacturing. We are working on a variety of additive manufacturing technologies. Additive manufacturing processes continue to mature and we're looking at implementing 3D printing processes throughout all of our product lines. Modern processing techniques will allow for the possibility of improved performance and manufacturability. These improvements can range from flashy new material development to things not necessarily seen in the public eye that have quality, increased efficiency. There's still quite a bit of research and development that's little R and big D to refine our ceramic powder combinations with binder material to consistently replicate our current and future MMC formulation, but we are making progress that are encouraging and will result in even greater production yields moving forward. All investors and listeners today should know that it's worth repeating that creating shareholder value is the focus of mine, the Board of Directors and the entire CPS team. We have had several internal metrics and ways which to measure the business beyond profit and cash flow. I find the best metric of results consistent with our overall growth strategy is the measurement of book-to-bill over a rolling 12 months. This is the first statistic I look at every day. For a business to thrive, it needs to book as much business as it delivers, whether it be daily, weekly, monthly, quarterly, or yearly. This would be a book-to-bill ratio of 1:1 to remain even. That is not our goal here at CPS. We are in growth mode. Since I transitioned to leadership here at CPS, we are averaging in the 1.4 to 1.6 book-to-bill ratio over the trailing 12 months basis. This is the result of a lot of arduous work and perseverance by sales, operations, finance, heck, all of us. Specifically though, our Vice President of Sales, Cheryl Oliveira and her entire team, Gregg Weatherman, Tim Davis, Judy Levitre, Kevin Langley as well as Jim Sorensen and our latest staff addition, Anthony Koski, all enabled by our engineers working in the product development, Dr. Steve Kachur, Dr. Mark Occhionero and Bill Holmes. In closing my remarks this afternoon, we are extremely pleased with our most recent quarterly performance. We still have lots to do. We're not satisfied with our initial results and look for even larger actionable opportunities to build the business and even increase the assurances that the current growth and profitability trend will be improved upon even further. And that concludes my opening remarks. Risa, I believe Chuck and I are available if there are any questions from folks on the line.

Your first question comes from the line of Irwin Gomberg.

Congratulations on a record quarter. It's nice to see the company growing again. I have a few questions. On July 26, 2018, CPS announced it was working with Rafael Defense Systems to provide hybrid armor for some of their vehicles. On April 20, 2022, they announced to the defense market its new models. Is CPS providing some armor for some of these vehicles?

This is Michael. Thank you for the kind compliments for the business. As of May, we are continuing to work with Rafael. I do not know the specific application you're talking about but we have been working, in my entire 16 months here and prior, with Rafael in a variety of programs, testing various armor solutions. We continue to provide representative target solutions and we continue to shoot them and have very positive results. I can't answer the specifics of what's going on at the Rafael end, but we have a very good relationship with them. And regrettably, they're on holiday this week. But we were talking to them last week. We have quite a good relationship with them. We also have a joint venture with the Southwest Research Institute down in Texas, where we are doing some advanced modeling on armor solutions. So yes, we are still working with Rafael. Yes, they're a great partner. And yes, we continue to make progress, but I cannot specifically address the application.

They show on their website the vehicles with tiles all over for protection. So obviously, they're looking into the technology, whether they're going to use your solutions because obviously...

Yes, ceramic armor has been around for some time, but improvements over the past 20 years in U.S. combat have demonstrated that its lightweight nature and hardness provide significant survivability benefits. The body armor initiative in the U.S. has undoubtedly saved many lives. Scaling this technology for use in ground vehicles and, in our case, Navy platforms shows its advantages, particularly in weight savings compared to a traditional metallic monolithic solution.

Could you comment on any other hybrid armor contracts you're looking forward to?

Yes. Well, certainly, we haven't been awarded them. Let me just tell you that first. But we are working with partners here in the U.S. And I mentioned Rafael. We do have agents in the EU. Obviously, the European Union has become more sensitive to their armor needs with the invasion of Ukraine, and they have begun to invest more deeply into armor and what it could do and add to their survivability platform. So we have those dialogues going on. Here in the States, we have been focusing on solutions in next-generation platforms that are in the Defense Department budget so that we have accurate and predictable revenues and forecasts. So that's been our focus. It varies. I can share with you it varies from helicopter to ground vehicles. So the application of our HybridTech Armor has many, and we are continuing to research to find solutions that will fit within our customers' cost profile and ballistic profile.

Great. And then last question. Wolfspeed announced last week that they have a 1,200-volt module on one car that they're going to start marketing and they have a picture of the module. It didn't look like there was any copper in there. I mean 1,200 volts obviously. I mean the heat dissipation sort of fits with what you're trying to do. Can you make any comments about that?

Yes. I'm not sure what you're specifically referring to, but we were encouraged that as we advance into the 1,200-volt module you mentioned.

Right.

Yes. Obviously, the benefits of our metal matrix composites become even more pronounced. So I think that to your point, we expect to exceed the properties that you can get with the copper solution.

Are there other solutions for a 1,200-volt module besides yours?

I don't know. But do you?

I'm not sure, but I think at 1,200 volts we're in a gray area where, if you want to be more efficient, our solution is a good option. If you're looking for a cheaper alternative, that is also possible. I believe that is accurate.

Yes. I'll get with the two doctors tomorrow and see if we can post something and tell you something or more about that.

Yes. That's a better idea.

Great. And Wolfspeed has talked about car companies moving up. They have 400 and 800 volts and they said 800 volts is becoming more popular in their future. At that voltage, would AlSiC be used? Or they can get away with...

Absolutely. I mean we don't know the full details of an application for some of our customers, but we are talking in those ranges with them though.

I see. But that's, what, '24, '25, you think before it really becomes a...

Time frame, are you talking about years, calendar year?

Yes, years, right.

Yes. It's challenging to assign a specific number to it. As I mentioned earlier, the methods companies use to validate and test a product solution differ widely. We are definitely in the material science sector, and we know that the cycle to deliver can be lengthy, but once established, there’s potential for longevity. I can’t provide an exact timeline, but I believe it falls within the three to five-year range.

Right. And I mean you're obviously studying this market, you know the market. Is there any possibility you can make a module? I mean not AlSiC but something better than copper but not as good as AlSiC to try and get...

Yes. We always explore various combinations of metals and ceramics. One of the reasons we are very proud of our achievements with the AlSiC-9 and 12 is that we are not limited to just AlSiC. We work with all combinations of metal matrix composites and are open to a wide range of solutions. I know Dr. Mark and Dr. Steve are constantly working on these. Additionally, we recently secured a new contract that involves aluminum, nickel, and titanium, indicating that we have expanded beyond just AlSiC.

I see which is smart, I think. As long as you're in the metal business, why not provide what the market is looking for in a better way. So congratulations. I think you've done a wonderful job. The company has done fine since you've come aboard and obviously, I'm sure that's part of your reason that that's happened.

Thank you.

Your next question comes from the line of Patrick White.

Congratulations on a solid quarter there, both Mike and Chuck, excellent work and particularly on the gross margins. And following up on that little bit. With the book to DSO running at 1.2, 1.4 or higher, is it conceivable that you'd be able to maintain this kind of gross margins going forward? Or is that just a function of the hybrid armor that's being delivered now in '22 and maybe it's going to be tough to keep those margins at that kind of level?

Well, certainly, that's our goal, right? Our goal is to keep the margins up. We're working actively, Patrick, with a variety of things. Chuck alluded to some of the fixed costs with the higher volume helping us. But in total, we have many initiatives being run through operations, whether it be sales or whether it be the purchasing department. We're managing a lot of variables there and we're just doing hard work with it. And it's not easy and it's very much complementary to our staff that they have been able to reduce our costs. And we think we're on to something. But like I alluded to, Patrick, one quarter doesn't make a year, right? We need a couple more quarters of this before I'll say that we've made it. But we are trending positively.

Okay. On the EVs, you mentioned maybe several design wins working through those right now at testing and getting those to maturity. Are those wins going to be strictly limited to individual, luxury-type vehicles? Or are you working on something that might be more platform-driven, too, that extends beyond certain limited vehicles?

Yes. Certainly more of the latter, right? And so when we talk to our customers, they are talking some extremely high numbers in high production and we're like, great, when, right, to the earlier calls. And so we continue to have dialogue with them about being realistic on the demands but there are really high volumes of parts being asked to be quoted and us to demonstrate the production capacity to answer that.

Okay. Would that require a capital raise to handle...

I don't know at this time. Right now, we are continuing our planning and exploring various ways to optimize our factory. We have a 40,000-square-foot facility with the potential for expansion. However, managing facilities and expansion can be challenging. We are currently discussing the possibility of securing a contract for that expansion. Our focus is on keeping costs low, maintaining our competitiveness, and ensuring that orders continue to flow to CPS. So perhaps that is the answer.

That would be a good problem to have, would it not?

Yes. That's the way we call it. We call it a high-rent problem here, too.

Okay. Can you add any color? I think one of the small business awards, you mentioned aluminum alloy in the commentary and storage devices. Of course, the storage market is exploding from a commercial standpoint. This is military. Can you elaborate upon the application and whether it has broader market application for just commercial storage?

Certainly, we are not yet aware of how the Navy plans to utilize it. They tend to compartmentalize their technology pursuits. While we have a general idea of which Navy division is involved, we don't know their specific intentions. This is all part of the program. As we move forward with Phase 1, which is a solid initiative, the total funding amounts to $250,000 over 10 to 12 months for contract research and development. There are various phases and performance milestones we need to achieve to progress the program. During this Phase 1, we will gather additional information about applications that will guide us toward Phase 2 and further development.

Okay, work in progress. I have one last question. I have a cold today, so I'm struggling. You mentioned improvements in the manufacturing processes in 3D printing. Can you elaborate upon whether exploring 3D printing might enable your outfit costs down to a point where they become extremely attractive in the power module space?

Yes. I certainly hope for AlSiC to be cheaper than copper someday. However, we have not reached that point yet. We are focused on reducing production costs, improving manufacturing consistency, and enabling our sales team to communicate the value to clients. Lowering costs to remain competitive is always a good strategy, whether through additive manufacturing or optimizing current processes, and these options can complement each other. We are examining all aspects of our processes. Ultimately, our aim is to produce high-quality products at the lowest cost so that our customers can compete effectively in the market. We are open to exploring these opportunities.

Your next question comes from the line of Kenneth Pound.

Yes, a good quarter, a lot of talking about the military. Is there any updates on what's going on in the EV market? Also, I know you guys do business with trains and other things with this technology.

The EV market, encompassing both commercial and defense sectors, is still recovering from the impacts of COVID. We've been engaging with our customers, who are predicting an uptick in demand for 2023. While I view this segment as currently lagging, opportunities remain for us, and we are executing well. Our communication with customers continues to be strong, and I anticipate growth ahead. The potential for the EV market is significant, and while I don’t want to hype it too much, we have been dedicated to this area for a long time. We've secured design wins and are progressing from these initial successes to larger volumes as our customers complete their testing phases.

Pieces, not dollars.

Not dollars, pieces. And that continues to advance. So it's a long cycle to get our solutions approved and in line, but we're in that in many different phases. Some are at tens. Some are at hundreds. Some are in thousands. So I like the way they could be feathering in to us, but we just need to keep pursuing improvements and delivering. And hopefully, good things will happen for CPS.

You mentioned locating someone in Michigan for good reasons. A lot of the EV stuff, at least in the passenger stuff that's going on in California, is there an idea to have some more presence there to go to shows or other kinds of things that they're doing out here out West?

Yes, we already have Gregg Weatherman based in California, and I believe he is attending the show this week.

At Space Tech event.

Long Beach...

Next week, I guess.

I think it's this week or next week, but we already had Gregg in California. And we also have Tim down in Florida. So he's kind of got the space coast. And then we thought that positioning Anthony geographically in the Michigan area would kind of give us a nice kind of triangle of where we want to be executing commerce.

There are no further questions at this time. Please continue.

Okay. If there are no more questions, Chuck, I spoke a lot. Would you like to wrap things up?

Thank you, everyone, for joining us. I hope to bring you equally positive or even better news in about 90 days. Thank you.

Thank you, everybody. Thank you, Risa.

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