Cps Technologies Corp/De/ Q3 FY2022 Earnings Call

Good afternoon, everyone, and welcome to the CPS Technologies Third Quarter Earnings Call. It is now my pleasure to hand it over to your host, Chuck Griffith. 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 three 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 four quarters, the basis by which we measure ourselves, it 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 nine 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 through 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. Revenues reached $6.7 million in the third quarter of 2022, compared to $5.5 million in the same period in 2021, marking a 22% increase. This growth was mainly driven by higher shipments of Armor panels. For the first nine months of 2022, revenues amounted to $20.5 million, up from $16.2 million in the first nine months of 2021. This revenue figure represents the best nine-month period in the company's history. Gross margin for Q3 2022 was $1.9 million, or 28% of sales, compared to a gross margin of $1.1 million, or 19% of sales, in Q3 2021. The increase in margin is largely attributed to the higher sales impacting fixed factory costs and product mix. For the first nine months of 2022, gross margin reached $5.7 million, versus $3.4 million for the same period in 2021. Selling, general, and administrative expenses totaled $1.2 million in Q3 2022, remaining stable compared to $1.2 million in Q3 2021. For the first nine months of 2022, SG&A expenses were $3.8 million, compared to $3.2 million in the first nine months of 2021. The company reported operating income of $708,000 in Q3, in contrast to an operating loss of $88,000 in Q3 2021. This increase in operating income is primarily due to the rise in revenue and gross margin discussed earlier. For the first nine months of 2022, operating income was $1.9 million, up from $201,000 for the same period in 2021, representing the highest nine-month operating income in CPS' history. Looking at the balance sheet, we closed the quarter with $5.6 million in cash, up from $5.1 million at the end of 2021. The cash increase stems mainly from our net profit, partially offset by higher accounts receivable and inventory needed to support increased sales. No additional cash was raised under the ATM program in Q3 2022. Accounts receivable as of October 1, 2022, was $5.8 million, up from $4.9 million at the end of December 2021. This rise includes other receivables of $641,000 associated with the employee retention tax credit. Excluding the ERTC, our days sales outstanding equaled 69 days at the end of the quarter, unchanged from the 69 days for the year ending 2021. Inventories were $4.9 million on October 1, 2022, compared to $3.9 million at the end of December 2021. This increase is due to more work in process and raw materials required to support projected sales growth. The inventory turnover ratio for the last four quarters was 4.5 times, a slight decrease from 4.7 times for the period ending December 2021. On the liabilities side, payables and accruals were $2.9 million, down from $3.2 million at the end of December 2021, resulting from final payments in 2022 for last year's restructuring costs. I will now turn the call back over to Michael for further discussion.

Thank you, Chuck. Our year-to-date revenues, bookings, and operating profit are the best we've seen in our 38-year history. We are enthusiastic about our current trajectory, but we must continue executing to finish this record year successfully. Our commitment to delivering positive outcomes for our customers is solid, and we’re increasingly confident that we’ll also deliver favorable financial results for our shareholders. In the last quarter, CPS secured several strategic achievements thanks to the team's effective execution of our growth initiatives. In Q3, we received the largest single order in our history, worth 8.8 million, for ballistic protection system upgrades for U.S. Navy aircraft carriers, utilizing our proprietary HybridTech Armor technology. I'm also pleased to report that we qualified several new hermetic packaging products with a key Tier 1 customer, leading to an initial production order valued at $1 million, with projections for future orders being 2 to 3 times that beginning in fiscal year '23. The Navy order will enable us to present detailed plans on how we can deliver Armor more quickly and efficiently. There are numerous surface ships in the U.S. Navy needing crucial crew protection as seals and marines complete their missions. Beyond the Navy, we are also engaged with the Coast Guard and Allied Navies, which have similar protection needs that we are actively addressing. Given the situation in Ukraine, naval ships face significant risks from asymmetrical threats such as swarms of drones, which have shown they can sink surface vessels. Increasing armor on naval vessels is essential for protecting our seals and marines and aiding in their response to both emerging threats and existing kinetic energy threats. Our company remains focused on delivering on commitments to our customers and shareholders. These are exciting times at CPS. All our existing product lines—metal matrix composite, hermetic packaging, and armor—are performing at or above expectations. Additionally, thanks to our multiple contract research and development contracts with various U.S. government agencies, we have established a fourth product line. The CRAD line focuses on creating, productizing, and delivering intellectual property-based solutions to government, Tier 1, and OEM customers. These new IP-based opportunities are significantly valuable but take more time to move from initial ideas to testing, then to first article, and finally to full rate production. However, we’re off to a promising start with our CRAD initiatives and look forward to updating you on this segment of our business early next year. Our primary goal is driving new business and boosting sales while maintaining our positive momentum as we enter our next growth phase. We have recently restructured our sales team to operate as a business development unit, transitioning leadership from Cheryl Oliveira, our long-time Vice President of Sales, who will retire soon in 2023. Cheryl has been a remarkable colleague and friend, and her tenacity and knowledge will be challenging to replace. We wish her all the best in her future endeavors. As of October 1st, leadership of the reorganized business development team is now with Anthony Koski, our Corporate Development Officer. Anthony joined CPS in April and is focused on our strategic initiatives. With over 12 years of defense acquisition and business development experience, he's held leadership roles in both the Department of Defense and the defense industry. As a sales professional, I can recognize potential, and I see that in Anthony. We are fortunate to have had two great leaders in our business development group with Cheryl and now Anthony. I am confident that under Anthony's leadership, along with our great team, we will achieve our growth objectives sooner than anticipated. The business development team is focused on building a short-term pipeline of high-value opportunities that can convert into significant production orders within 24 months. We are actively pursuing various significant opportunities across all business lines, particularly in thermal management and ballistic protection for aerospace, defense, and vehicle electrification markets. These opportunities are at different stages of approval and implementation, and due to their competitive nature, we approach them with caution before any public announcements. Our recent success in passing first article tests and entering low rate initial production with a key aerospace customer in Q3 showcases our capability in identifying and converting new material solutions. This is just the beginning. CPS is committed to transforming potential opportunities into products that will generate revenue and profits for our investors in both the near and long term. This is how we drive shareholder value. We are dedicated to our customers and our shareholders. I’ve already mentioned our optimism regarding Armor and our work in the aerospace and defense market. Furthermore, we are excited about CPS's potential in electric and hybrid electric vehicle markets, as well as in building the necessary infrastructure for these sectors. This could potentially lead to significant breakthroughs for us; while not immediately or necessarily in 2023, the prospects are promising. We are currently collaborating with a customer who supplies major automotive manufacturers and experiencing notable growth in our business with them. Although this growth may not have an immediate impact, it is trending positively. In fact, our expected bookings for Q4 are greater than the sales we achieved with this customer through September. While there remains much to accomplish over the next few years, we aim to maintain a consistent pipeline of potentially breakout products. However, achieving true breakout success requires time, patience, diligence, and hard work. I want to reiterate to all our shareholders that our strategies center on three large initiatives for realizing shareholder value. First, we specifically chose to operate in two principal markets—infrastructure and aerospace and defense—because they are sizable markets with diverse pathways to success. Our opportunities align with our core competencies as a materials science firm, allowing us to provide lightweight armor that complements U.S. defense modernization efforts. We offer metal matrix composites and hermetic packages that enhance electronics performance and longevity, both on Earth and in space. Lastly, we supply enabling products for EV transportation infrastructure, supporting our economy’s potential and national objectives of on-reshoring critical technology manufacturing in the U.S. Second, we have evolved from Small Business University. For years, we have communicated the benefits of our material solutions to customers and investors without fully realizing the impacts of these initiatives. With new leadership in place, we are now proving our capacity for profitability and growth on a quarter-by-quarter and year-by-year basis. We are ready to advance our growth plans. Lastly, we are positioned as a materials technology company constantly seeking solutions through advanced material science applications. We aim to address our customers' most demanding challenges, thriving under pressure to deliver solutions that not only resolve customer issues but also reward our investors for their long-term support of CPS. Moving beyond fiscal year '22, we cautiously remain optimistic that our growth initiatives, especially in long-term product development investments, will enhance our current product lines in terms of revenues and earnings. The recent HybridTech Armor award for the U.S. Navy and our record contract for CPA, along with recent victories qualifying new products to extend the Hermetic Package product line, will help us sustain this momentum into fiscal '23. As we previously reported, our growing technical team at CPS is pursuing several early-phase contract research and development wins with promising technical results and the potential for Phase II awards next year. Collectively, our business and product development teams are expanding our pipeline of high-value opportunities. As an organization, we continue to make measured investments to boost our capacity and scalability as we gear up for the next growth phase. We at CPS believe we are on the right track toward creating inherent shareholder value, and I would like to explore ways to accelerate this process. Lastly, on behalf of the company, we extend our condolences to the family and friends of Norm Wechsler, who recently passed away after our last quarterly report. Norm was the largest individual shareholder in CPS and was passionate about leveraging material science to develop life-changing products for the betterment of mankind. He will be greatly missed. I am grateful to our investors and the Board for their trust in me to lead this remarkable company. With that, I will conclude my prepared remarks, and Chuck and I will take any questions you may have. Matt?

Your first question is coming from Michael Massaro.

Congratulations on an 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 two or three 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 three questions about the hermetic package market. One, how is the hermetic sale package market? Two, what percent of the market has 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 are opportunities for us to, in the near term, double our play within the hermetic packaging line. I think this year, we're probably on pace for 10-plus million. We probably could, within two 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 two 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 is 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 agree with you on that. We have competitors in this market, but we continue to excel and surpass them. We need to gather more performance data and develop more innovative products. We recently had a successful transaction involving glass that we supplied to a Tier 1 customer, who was very impressed with the performance. We anticipate that this will grow from 1 million this year to 3 million next year, and we are eager to see how it evolves. There are many opportunities ahead. Additionally, we stay informed by reviewing the press releases we receive and appreciate any guidance on where to focus our efforts. We are committed to growing the business as quickly as we can, while also ensuring that we maintain our stability. We've invested a lot of time waiting for this success, and we want to ensure it lasts long 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.

Can you provide some insights regarding the HybridTech Armor order? How long will it take to fulfill that order, and in what capacity will it be done?

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 carriers are very critical assets to the U.S. Navy and 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 a question of the availability of the aircraft carriers. And then obviously, with the uncertainty with the South China Sea and the Ukraine situation, I don't see many aircraft carriers coming in anytime soon. But I'm not in charge of national 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 could 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 surface vessels as they see fit and we'll keep open from there.

I would like to clarify my previous question. How much extra capacity do you have to produce panels compared to the demands from the Navy?

Yes. So obviously, I think you've been to the facility, right? So we are 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 are 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.

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 formerly Cree announced that they were using our product line and order silicon carbide production. And then at the end of the day, Tesla and 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 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 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, we are continuing to see progress. Not all of it is 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 can't speak for them.

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, and the leadership team, we think we are on the right path, and we appreciate the continued support from 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.