CPS Technologies Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the CPS Technologies Q1 2023 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO and Acting CEO at CPS Technologies. Sir, the floor is yours.

Speaker 1

Thank you, operator, and good afternoon, everyone. I'm joined today by Anthony Koski, our Corporate Development Officer. And in addition, I'd like to introduce Chris Witty from Darrow and Associates. Many of you have asked about Investor Relations on these calls, and we have made a decision to work with Chris and Darrow moving forward. So I'm now going to ask Chris to provide the Safe Harbor statement.

Speaker 1

Chris?

Speaker 2

Thanks, Chuck, and good afternoon, everyone. 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, our 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, in any forward looking statement. Additional information can be found in our filings with the SEC. Now, I'd like to turn the call over to Chuck to offer his perspectives on the Q1 results.

Speaker 2

Chuck?

Speaker 1

Thank you, Chris. So first, let's address the elephant in the room and that is the departure of Michael McCormick. So out of respect for Michael and his family and their privacy, I don't want to get into too much detail regarding his resignation. Suffice it to say that we will miss his drive, his leadership and his sense of humor. Michael was an advocate of Jim Collins' book, Good TO Great.

Speaker 1

Colin said, make sure you have the right people on the bus and in the right seats. Of the 4 senior managers, 3 were hired during Michael's tenure, And I am very humbled personally by the confidence he showed in retaining me. The point is that I'm trying to make that Michael built a great team Not just at the senior level, he made the company stronger and better throughout his tenure and he will be missed. Working with our product development team led by Doctor. Steve Catcher, we've been able to evaluate customer problems and find unique solutions to meet their needs.

Speaker 1

Finally, under Dan Barton's leadership, our operations team continues to produce technologically complex parts on time and within budget, making it that much easier for Anthony's group to win additional business. Now let's turn to the financial results. Today, we're pleased to announce 1st quarter revenue rose to $7,100,000 for the quarter ending April 1, 2023, compared with $6,700,000 in the prior year period. The $7,100,000 in revenue represents a new record high for CPS, surpassing the previous record set during the Q2 of 2022. Revenue growth in Q1 was driven by expansion with one of our major customers, which had been particularly hard hit by the COVID-nineteen pandemic as well as increased armor shipments.

Speaker 1

Gross profit in the Q1 of 2023 totaled $2,200,000 or 32% of sales. This compares with gross profit of $2,000,000 $2,000,000 or 30% of sales in the prior year period. This increase in gross margin was primarily due to the impact of higher sales on fixed factory costs as well as improved factory efficiencies Selling, general and administrative expenses totaled $1,600,000 in the Q1 versus 1 at $400,000 in the prior year period. Two factors were primarily responsible for this increase. Travel costs were significantly higher this year than in 2022, which have been negatively impacted by the COVID-nineteen pandemic.

Speaker 1

Many conferences last year were still virtual and many customers were still restricting on-site visits.

Speaker 3

As part

Speaker 1

of our plan to hire and retain good employees, we also increased the company's 401 match for 2023. The company generated operating income of $694,000 in the Q1 of 2023 compared with $547,000 last year. This increase of 27% was the result of higher gross profit, partially offset by greater SG and A expense, as I just discussed. This quarter's operating profit was our 2nd highest in over 10 years. Our book to bill for the quarter was 112%, Further enhancing the 110% book to bill we reported for 2022.

Speaker 1

We are cautiously optimistic that the of fiscal 2023 and into fiscal 2024. Turning to the balance sheet, we ended the quarter with $7,400,000 of cash versus $8,300,000 on hand at the end of fiscal 2022. The decrease in cash was due primarily to increases in accounts receivable and significant reductions in deferred revenue, partially offset by operating cash flow. Although it remains open and available to us, no additional cash was Before turning the call over to Anthony, let me just add, In the Q1, we also announced another SBIR win. Doctor.

Speaker 1

Kachur and his team will be working on the development of armor floor panels As the lightweight attributes of our hybrid tech armor make it ideally suited for this type of application. While there is no guarantee that this particular project will The likelihood of 1 or more of these becoming a major win for CPS increases dramatically. So you can see there are a lot of good things going on here at CPS. We believe the company is well positioned for strong performance in the quarters to come. And I would now like to turn the call over to Anthony, so he can get in A little more detail about the growing opportunities on the business development front.

Speaker 1

Anthony?

Speaker 4

Thank you, Chuck, and hello, everyone. Another quarter of record results is certainly a great way to start 2023. First, I'd like to take this opportunity to echo Chuck's earlier comments on Michael's departure. He has been very influential to the organization and me personally as a mentor and a friend. We wish him and his family all the best and We are actively pursuing opportunities within the Advanced Materials space, prioritizing high value projects with significant potential upside.

Speaker 4

Although the development, qualification and overall sales cycle can be long term in material solutions, we are 100% committed to realizing the long term This long game approach has not prevented us from converting many opportunities into near term wins as demonstrated by our strong book to bill ratio. Considering this is calculated on a growing revenue number, as Chuck mentioned, makes it even more significant. We remain focused on managing our sales pipeline and ensuring we have an adequate funnel to meet our top line goals for the year. Suffice it to say that the pipeline is growing and diverse. It includes both existing and developing customers and products.

Speaker 4

I am pleased At the rate we were able to convert in Q1 and I'm optimistic we will be able to hit our sales goals for the year, including solid growth over fiscal 2022. A few more highlights from the Q1. The business development team is expanding. We recently welcomed Joe England as our new Senior Business Development Manager. Joe has over 15 years of experience in aerospace composites manufacturing, having previously held leadership positions in both engineering and business development.

Speaker 4

Joe has hit the ground running and is already generating high value prospects. We are excited to have him on the team and are confident he will make a significant contribution to the organization. As previously announced, in Q1, we received a significant order for hermetic packages from a leading aerospace electronics manufacturer. I'm not able to disclose the company or the specific applications, but I can share that the packages will primarily support U. S.

Speaker 4

I would also like to highlight that this represents a 100% increase in sales from this customer and includes both existing and new product designs. This is a direct result of our team's ability to actively listen to our customers We are confident that we will be able to continue driving incremental growth with this client and increase our portfolio of parts supporting our ongoing and developing programs. We also initiated over 30 We are pleased to have hit our target for Q1. Lastly, we successfully delivered new armor panels for qualification testing on a significant international opportunity supporting enhanced survivability of combat vehicles. This effort builds upon our proven hybrid technology Thank you.

Speaker 4

This concludes my prepared remarks. Chuck and I are now available to answer any questions. Operator, please go ahead.

Operator

Thank you. At this time, we will be conducting a question and answer session. Question today is coming from Chris Vachowski. Chris, your line is live.

Speaker 5

Hello. Congratulations on the great results. Can you give us kind of an estimate of how much of your revenues are commercial and how much They are for government military programs?

Speaker 1

Sure. I believe that the parts that are going to defense contractors, so we're not selling directly to the government. I'm not sure if that's your question. But the portion going to Defense Contractors, I want to say, is about 30% to 40% In that range?

Speaker 5

Okay. Yes, that's what I was asking about. And my The main reason for that is because defense contracts can be volatile in terms of starting and ending of programs. And do you see that kind of in productivity upcoming or are you it seems like you're in the beginning of programs on all of your Yes. So it

Speaker 1

does Yes. So we haven't seen that yet. And I think we're actually seeing a Growth in that part of our business, we're getting a lot of these defense contractors coming to us With products for the first time or at least the first time that we're seeing them because of the confidence that we've been building with them. So I think we're actually very excited about the future of the defense portion of our business. I don't know, Anthony, do you want to add anything to that?

Speaker 5

Yes. The only thing

Speaker 4

I would add is, obviously, I do refer to the government contracting And programs can be lumpy, I'll use that as a word to describe it. And so as Chuck alluded to, we haven't seen a significant I think that using the armor as a perfect example, you were actively delivering on our program with economic protection for the U. S. Navy. And a lot of times with contracts like that, they're significant in scale And then you kind of work them off a bit.

Speaker 4

And then once you get towards the end, you're working on the next contracting action. So it's all about kind of foreseeing that Life cycle of the program and ensuring that we have an adequate pipeline of what's next to

Speaker 1

kind of backfill so that

Speaker 4

we don't See that lumpiness in the business. But yes, we haven't seen a ton of it yet, but we're actively

Speaker 5

Okay. That's good to hear. Another question is on the More on the commercial side, it might also be defense, but on the non armor, the electronic side for Using your products for cooling plates for electronics, it seems like looking at You are listening to other conference calls. It seems like the power electronics market in Industrial Power Electronics is very strong despite of what might be happening with the economy. Are you seeing a corresponding strength there?

Speaker 5

And Ru, is there a possibility for you to move into Not really extremely high powered devices, But more of kind of more plentiful industrial devices that might be slower power?

Speaker 1

Yes. I think the answer to that question is yes. We what we're seeing is I'll give you an example is The chips that they're putting on these plates typically had been silicon and now there's And what that means is that with silicon carbide, as you may know, is more efficient than silicon, Especially this is important when we get to things like electric vehicles and battery storage and the ability to run on a run farther on the same charge. However, the silicon carbide runs at a hotter temperature than silicon, and that makes The AlSiC application more suited towards those middle range A copper baseplate, for example, but as we get to as we start running hotter, then You may want to consider AlSiC. So there was always an area where you always used AlSiC In an area where you always used copper and then there was a gray area in between.

Speaker 1

And I think what we're seeing is that gray area Shifting towards using more of an AlSiC solution because of as you start developing silicon carbide. So there are certainly applications. We've certainly been involved in our products going into electric vehicles, which, of What portion of that market we could potentially end up in, I really couldn't say at this point, But it's certainly something that we could see some great results in. And I'll ask if you want to expand on any of that.

Speaker 4

No, I mean, you pretty much covered it, Chuck. It's We've made a lot of great progress in engaging with a lot of the semiconductor manufacturers that are starting to heavily utilize silicon carbide as Chuck described. And just as we mature those discussions and understanding, we're still kind of targeting in that higher end, Higher performance applications, Formula E, military fleet electrification, a few couple of examples. The wider commercial HEV and EV market, as silicon carbide As the material continues to be used more and more to improve efficiencies and power density, it does increase the heat. But when you're dealing with Commercial marketplace and commercial EV that you're dealing

Speaker 1

with the price for and

Speaker 4

you got competition overseas that you're dealing with. No, I still see that at least in the near term, having a bigger play in those

Speaker 5

That's great. That's good to hear. And I was hoping that you would say that kind of the cut off line where your devices Applicable is going lower. So can you lastly, can you perhaps give us an What that cut off line is that you kind of market the device Either by voltage or by power of silicon carbide, is it like anything over 600 volts or 1600?

Speaker 1

I can't give you that number. I don't

Speaker 4

know if we have necessarily a specific line, but I think that you're kind of right in that range. So we've always kind of operated in this 1100 to 1200 volt, that was kind of where AlSiC started coming into play. And I think with the introduction of silicon carbide, it's probably getting closer to That's a 700 to 800 volt, but that's not something that's been A line in the sand that we've kind of drawn to say that this is what we're going to market to, but it certainly expands that area that we have reached to.

Speaker 5

All right. Good to hear. That's it for me. Good luck.

Speaker 1

Thank you, Chris.

Operator

Thank And the next question is coming from Steven Fosse. Steven, your line is live.

Speaker 3

Thank you. Hi, good afternoon. So just a quick question about the vehicle armor. You guys at least, I'm sort of trying to work from memory here, but we're Looking into vehicle AMR or working with somebody maybe a couple of years ago, can you say whether it's the same customer or a Different customer without necessarily I'm not necessarily asking the name, I'm just wondering.

Speaker 1

We've been working with Revit along at least in the 4 years since I've been here. It's been mainly that one customer.

Operator

Thank you. There were no other questions in queue at this time. And we did have one more question coming in. And that question is coming from Ron Richards. Ron, your line is open.

Speaker 6

Hey, guys. I was looking over a previous conference call and I noticed in the August 2022 conference call, you were talking about working on the benefits of Additive Manufacturing and 3 d Printing, and you talked about possibly updating your work in that area that you were We're doing some work for several customers. Any updates on that project?

Speaker 1

Yes. So we have one of the SBIRs that we've been working on 3 d printing and that one is still moving forward. We've also done some internal work with 3 d printing. In fact, Doctor. Catcher was showing me just Today, some really complex parts that we've made that could be for a, I'll just say a company everybody on this call has heard of.

Speaker 1

And it's very interesting. So I think it's still early To talk about major commercial applications at this point in time, but we're definitely working on it and We're definitely moving forward with that and think it certainly could be an area that could be very successful for us.

Speaker 6

Okay. And also I was wondering with the hermetic steel, have you guys been involved with Starlink using your hermetic fields?

Speaker 4

Not I can take this one. So not directly, recently bought A lot of our customers sell into StarLink, but So our Molecular Plank has been a target of ours for quite some time now, and we're actively beginning to reengage them. We actually kind of just started

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CPS Technologies Q1 2023
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