CPS Technologies Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to the CPS Technologies First Quarter Earnings Call. At this time, all participants have been placed on a listen only mode and we will open the floor for questions after the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith of CPS Technologies. Chuck, over to you.

Speaker 1

Thank you, Jenny, and good morning, everyone. Today, I'm joined by Brian Mackey, our President and CEO. We look forward to discussing our Q1 results with you. But first, Chris Witty, our Investor Relations Advisor, will provide a brief Safe Harbor statement. Chris?

Speaker 2

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 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, but are not limited to, the wars in Ukraine and Israel, other geopolitical events, economic conditions, market demands and competitive factors. Such 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.

Speaker 2

Now, I will turn the call over to Brian to offer his perspective on the Q1 highlights, Afterwards, Chuck will review the financial results in greater detail. Brian?

Speaker 3

Thank you, Chris. 1st quarter revenue was $5,900,000 with an operating loss of approximately $260,000 Revenue declined year over year due to production constraints related to continued quality control testing as well as production inefficiencies due to labor shortages and turnover. Bottom line results were similarly negatively impacted due to non revenue producing spend in the Q1, which I will discuss in more detail later. We anticipate that while demand remains strong across our product portfolio, the coming quarters, as we've discussed in the past, will also face headwinds from the anticipated drop off in near term armor revenue. I'll now turn the call over to Chuck to provide more details about our financial results, after which I'll provide some additional detail.

Speaker 3

Chuck?

Speaker 1

Thanks, Brian. As mentioned earlier, the company's revenue totaled $5,900,000 in the Q1 compared with $7,100,000 last year. We've had some level of difficulty filling opening manufacturing positions. Additionally, while we are cautiously optimistic that our quality issues have been resolved, we continue to run tests, which occupy machine time that would otherwise been spent on production for customers. We do, however, believe that strong demand across our other offerings should lead to top line growth as the year progresses.

Speaker 1

In addition, our Navy partner, Kinetic Protection, remains cautiously optimistic about additional work for other Navy ship classes with contracts possible later in 2024. Gross profit in the Q1 totaled $900,000 or approximately 15.3 percent of sales compared with $2,200,000 or 31.6 percent of sales last year. This decrease was due to the lower sales volumes in Q1 2024 on consistent fixed costs as well as the aforementioned testing being done on the quality issues. That said, we anticipate gross margins to improve in the second half of 2024. Selling, general and administrative or SG and A expenses totaled $1,200,000 in the Q1 versus $1,600,000 in the prior year period, as we remain focused on cost controls even while investing in new business development initiatives aimed to accelerate long term growth.

Speaker 1

The company had an operating loss of $260,000 in the Q1 compared with operating income of approximately $694,000 last year, and we posted a net loss of $143,000 or 0 point 0 $1 per share versus net income of $459,000 $3 per diluted share in Q1 of fiscal 2023. Turning to the balance sheet. We ended the quarter with $8,700,000 of cash versus $800,000 at the start of 2024. Trade accounts receivable as of March 30, 2024 totaled $3,800,000 versus $4,400,000 as of December 31, 2023. Inventories totaled $4,600,000 at the end of the first quarter, essentially equivalent with the $4,600,000 at the end of the fiscal year.

Speaker 1

Turning to the liability side, payables and accruals totaled 3 $300,000 at the end of the Q1 versus $3,600,000 as of the end of December. Now Brian will provide discussion of the Q1.

Speaker 3

Thank you, Chuck. First of all, I would like to discuss CPS vision for the future. Over the last few years, we've invested significant amounts of time, energy and dollars to the growth of CPS and we continue to do so. Today, we have 3 more salaried engineers and material scientists than we did in Q1 of 2023, including the addition of a lead for new product introduction in the Q1 of 2024. These additions provide more depth to our technical team, enable us to be more responsive to customer requests and improve our ability to win orders.

Speaker 3

Having said that, the financial return from these new personnel will take time to develop. As a direct example, in the Q1, we completed and shipped 8 new first articles. This 8 compares to 2 in the same period last year. These first articles are new parts which CPS has not made in the past, but if done successfully will lead to significant production runs in the future. Some of these would be an expansion of our portfolio with an existing customer, while others indicate a business opportunity with a new customer.

Speaker 3

Producing these first articles is engineering intensive and this was certainly one factor in the lower margins we saw in Q1. Nevertheless, we believe that incurring costs such as these today will be a significant contributing factor to the growth of CPS in the future. Also, our manufacturing licensing agreement with Triton Systems for fiber reinforced aluminum composites or FRA will soon set the stage for expanded offerings to address market needs, expanding our product portfolio heading into fiscal 2025. Our relationships in the aerospace and defense markets provide insight into the market demand for strong, durable and lightweight materials. FRA composites address these needs.

Speaker 3

As a reminder, FRA composites are comprised of high strength aluminum alloys, discontinuously reinforced with short ceramic fibers. These materials have demonstrated high strength at elevated temperatures, lightweight and superior endurance characteristics, which will facilitate the introduction of many new products for our military, commercial and industrial end markets. We are on track to initiate our manufacturing trials for FRA composites later this quarter and we have already begun speaking with customers about possible relevant applications. We're very excited to have these complementary products coming to market. We also previously announced the award we recently received from the Massachusetts Manufacturing Accelerate program.

Speaker 3

In response to customer demand for products requiring 5 axis machining capability, we requested and received $200,000 to support the purchase of a 5 axis CNC machine. These funds expand our manufacturing capabilities and enable us to be more responsive to customer requirements. We have ordered this CNC machine and also expect to have this up and running later this quarter. Again, this will pave the way for higher production of hermetic packaging and other products later this year. In addition, while our current armor contract is coming to completion, we are cautiously optimistic that working with Kinetic Protection, new Navy orders may be forthcoming later in 2024.

Speaker 3

We continue to believe these ballistic solutions have a large potential market across different types of ship classes as well as other military markets. We also continue to work with another customer on providing ballistic protection against higher threat levels. At the same time, we know that further SBIR opportunities, including follow on contracts, are possible in the weeks months to come. At the moment, we have 6 submitted proposals awaiting funding decisions from the DOE, DoD and NASA, including 4 Phase 1s and 2 Phase 2s. These ongoing R and D efforts are enabling us to directly address clearly defined market requirements.

Speaker 3

I'd like to share some details from our most recently completed SBIR program, which effectively demonstrates our ability to address problems identified by our customers, in this case, the Department of Energy. CPS was initially funded $200,000 by the DOE in response to our proposal entitled Modular Radiation Shielding for Transportation and Use of Micro Reactors. The problem statement focused on the ability produce lightweight and low complexity radiation shielding that would be of paramount importance to the deployment of advanced nuclear micro reactors. Lower shielding density promotes higher power density during transit for powered remote or mobile applications, including mining operations, disaster relief efforts, shipping and defense. During the 9 month Phase 1 period, which ended just last week, CPS successfully incorporated its proprietary techniques related to both injection molding and metal matrix composites or MMCs.

Speaker 3

We designed, fabricated and evaluated a novel MMC consisting of an aluminum matrix with both tungsten and boron carbide reinforcement particles. The resulting composite offers both neutron and gamma radiation shielding in an elegant compact solution as opposed to relying on multiple layers of dissimilar materials. Although further optimization is necessary, our baseline composite material demonstrates the capacity for neutron shielding and was highly effective at shielding gamma radiation at much lower mass compared to traditional materials. In fact, as a barrier to gamma radiation, our composite demonstrated performance similar to lead or tungsten, but with a reduction in mass of more than 55%. Our MMC design can be easily modified to suit different protection needs with variable volumes of both gamma and neutron absorbers.

Speaker 3

Our proposed solution will greatly reduce the mass of material needed while being highly customizable in size, shape and composition. The novel CPS process improves upon existing research to fabricate integrated radiation shields by achieving greater reinforcement loading with a robust, cost effective and mature processing technology. It's a great accomplishment, especially for just a Phase 1 program. Our technical team was invited to present its results just last week at the National Reactor Innovation Center Program Review at Idaho National Laboratory. We're now following up on several leads we've developed from that event.

Speaker 3

The feedback that our presentation received also highlighted the value of our approach for stationary applications, I. E, building construction due to the dramatically reduced additional $1,100,000 in funding over a 24 month period. It should come as no surprise, we're very pleased with the results of this to date, which has already generated meaningful dialogue related to near term opportunities for fielding our solution. DoD initiatives like Project Pele, which is working to demonstrate a mobile nuclear reactor for U. S.

Speaker 3

Military applications, again demonstrate the potential dual uses for our novel material solutions. Although we do not control the timing of when our proprietary offerings will enter the market, we continue to build our portfolio in service to our customers. Within the last few years, CPS has redoubled efforts to expand its product to meet new technology based requirements. One key element of this has been our participation in the SBIR programs of various federal agencies. Within the past 3 years, 5 of our 14 Phase 1 proposals have been selected for award.

Speaker 3

Historically, the government's rate of funding Phase 1 proposals for all applicants has been about 20%. And this has been even more competitive in recent years, perhaps down to 15%. So we're very pleased with our award rate so far, which is over 35%. This speaks volumes as to the capabilities of our team and our existing intellectual property. But more importantly, we see these awards as affirmation that we are addressing the problem statements of our customers as they define them within the context of the SBIR format.

Speaker 3

We know that providing such technical solutions will provide real growth opportunities going forward, many of which have potential applications with both commercial and military customers. In the meantime, we continue to fulfill the long term supply agreement announced last year, providing power module components and systems for a variety of rail and other applications to a multinational semiconductor manufacturer. We remain on track for the shipment of product under this contract over the course of 2024. As I said earlier, we are actively bidding on opportunities to accelerate growth in the future, while mitigating the negative impact this year due to the completion of our current naval armor contract. We continue to believe that expansion across other product lines should cover roughly half of the $2,000,000 quarterly revenue shortfall in 2024 related to ARMOUR, setting the stage for growth next year and beyond.

Speaker 3

We'd now like to open the call up for questions. Operator?

Operator

Thank you very much. We are now opening the floor I'm not seeing anyone come into queue. We do have a question in. Your first question is coming from Wolf Shek. Wolf, your line is live.

Speaker 4

Thank you. Good morning, gentlemen. Based on your presentation, sir, and I expect your acquaintance this way. Based on your presentation this morning, it sounds like you have a lot going for the company. What do you think will be the first product that you should be able to unleash and what kind of revenues do you think you'd be able to generate from this in this current year?

Speaker 3

Well, I think probably the most straightforward is the 5 axis, particularly for hermetic packaging, because that's been a request of customers over a period of time that we've been producing hermetic packaged products to begin with. So in the past, we've been not cost competitive on those because we don't have that 5 axis capability in house. So that's a low risk, near term execution opportunity. Once we have that machining capability in house, we'll be able to offer those products at a cost competitive pricing. Now that will be first articles and there will be Other things like the fiber reinforced aluminum, we're setting up manufacturing this quarter to begin trials and then we'll be replicating the performance results that are known to be attributed to FRA materials.

Speaker 3

And from there, we'll be working with these customers on playing that forward and that will also have a timeline to it where we validate the performance characteristics against the standardized testing criteria for various material performance properties and then translating that into products for a given application starting in probably the nearest on the time line with those aerial applications, whether it's bearing liners for rotary aircraft and similar applications.

Speaker 4

Thank you. What companies do you think will be your most will be most interested in these products? Do you have any feeling for that type of distribution?

Speaker 3

Well, on the hermetic packaging, we certainly it's customers that we're currently servicing today are the nearest opportunity. They're very familiar with us. We're familiar with them. We know which products are interested in getting quotes on with components that include 5 axis machining. To come back to the FRA, it's the OEMs out there that you could list that are in the business of aerial vehicles, whether it's helicopters or have value.

Speaker 3

Okay.

Speaker 4

Have value. Okay. One last thing is based on the comments and the conversation, it seems as though maybe you should put out some type of material to the street so they could fully understand what the company is all about and what the potential is. Not going excessively, but going within the proper constraints by making people aware of the potential.

Speaker 3

Right. Yes, that makes sense.

Speaker 4

Okay. Thank you.

Speaker 3

Thank you. Thank you, Wolf.

Operator

Thanks very much. And our next question is coming from Steven Fossey. Steven Fossey, your line is live.

Speaker 5

Thank you. Good morning. So I'm wondering if you could provide a little bit more information or color, whatever you want to call it, about the labor situation? Do you see that as a kind of a temporary situation, more of a long term availability problem that might translate into higher costs?

Speaker 1

Sure, Steve. So actually, I think this was it was more of a temporary during Q1 problem. We believe that we're now currently fully staffed for purposes of our business that we're going to be or our production that's going to be going on in Q2, the second half of Q2 and Q3 and on. So I think that was more temporary. If we get to the point where we have to add a whole bunch of people, that might rear its head again.

Speaker 1

But I think for now, we were just talking about it the other day that we're probably fully staffed or we are fully staffed and we should be in much better shape going forward.

Speaker 5

Okay, great. And if I could ask one more quick question. On the shielding work, you've highlighted it, so you're obviously kind of excited about that. How does that compare in a obviously, it's just a Phase 1, but in terms of cost versus current solutions, I mean, is it a do you save cost in the assembled system versus multilayer system or is it a more of a, this is a great elegant solution for applications that are more narrow driven by weight? Thanks.

Speaker 3

Yes. The first application which we initially responded to was for the mobility of these micro reactors. So you're trying to transit these things to places where either the military might have a setup or there might disaster relief going on and that kind of thing. And obviously, the more weight that you have in the protection aspect of that truck, the less weight availability you have for the actual reactor itself. So you're able to increase the power density of the product that's being carried, which has a very real benefit for the user, the customer.

Speaker 3

And as we mentioned, what quickly became very apparent was even for non mobile applications, the construction costs related to massive amounts of concrete have a very real cost factor to the structure of that building, the concrete pad that it's built upon and those other things and the crane that's used to move pieces around. So being able to make a less dense, more adaptable piece of material that's uniform, so you can attach to it, you can modify it to suit the shape and the needs of that construction is also more valuable. Now concrete is not particularly expensive, but when you go to a tremendous amount of it and it's limiting your ability to build the structure that you want and move things in and out of it for testing and things like that. Those are some of the conversations that we're already having. And we don't have details about that cost comparison, but we can tell from the reaction we've had to it that it's intriguing to the users.

Speaker 3

So those are the things that we're going to continue to explore further.

Speaker 5

Okay. And if I could if you can indulge me in just one more. The deal with Triton, how much of that is an application pull versus a technology push? Is it a case of here's an application, we know we can do it, does the market versus this is a cool thing which expands on our capabilities and as possible markets?

Speaker 3

The appeal of FRA to the market is fairly obvious. And one of the benefits of where we stand today is that the properties of the material were well evaluated and tested by the Triton team. So the appeal of those the material performance is known to the market and is of interest. And what we're able now to do is indicate that we're a reliable, dependable element of their supply chain. If you're a helicopter OEM and you're interested in that material because of its performance benefits, you're not going to take it on unless you're sure that that supplier is going to be around for a long time.

Speaker 3

So we're able to do that and address these market requirements by offering this material that is already of interest to them, because they need lightweight, they need durability and that's what this material provides. So it's driven by what these aerial applications, first of all, require, but we also expect there will be other applications as well as we play this forward.

Speaker 5

Okay, great. Thanks. Appreciate that. That's all.

Operator

Thank you very much. Your next question is coming from Davis Moshe. Davis, your line is live.

Speaker 6

Hey, good morning, guys. Thanks for the call. Question, historically, you've had pretty much a forty-forty-twenty split between departments. Do you see that remaining consistent? And which kind of product lines are you seeing the most demand for going forward in growth capacity?

Speaker 1

Yes. So I think, obviously, for the short term, with the completion of the Connect Protection Armor order for the aircraft carriers, that 20 piece is going to make it more like fifty-fifty with the other 2 divisions or maybe 48, 48, but whatever with the others. But I think that we do have we're very optimistic that there will be something more coming down the armor pipe either with kinetic protection or as we continue to work on other armor applications with other possible customers. But I think in terms of the rest of it, I think hermetic packaging certainly has the opportunity for more growth. It's a bigger market and we have as Brian mentioned earlier, we have, I think, 7 of the 8 FAIs come in the our first articles that we did in the Q1 come from the hermetic packaging side of the business.

Speaker 1

So that certainly has the potential for more near term growth. I think the other aspects are probably more in the long term more in the long term area in terms of growth, the FRA, the shielding those certainly the FRA, we may see some small, small amount of revenue before the end of the year, but it's really not going to be material until we get into 'twenty five, 'twenty six that kind of thing.

Speaker 3

Yes. And the armor opportunities ahead of us could quickly bring that back to the historic ratios. So as we wrap up this order, we have ongoing conversations in that direction. Unfortunately, it's lumpy and we have this current situation, but very real opportunities that would bring that could bring that ratio back to the original number that you mentioned in that range, plus or minus.

Speaker 6

Got it. Thank you. And then what kind of capital requirements are you expecting this year? And do you expect to reach profitability for full year 2024?

Speaker 1

So I think in terms of the capital requirements, we're in good shape with that. The 5 axis machine, basically that money has already been allocated. We're as you can see from our balance sheet, we're in very good shape from a cash standpoint. So even if, God willing, somebody came and said, hey, we need you to start making FRA for us at a really high volume and we needed to go out and buy a new infiltrator for $1,000,000 that wouldn't be a stumbling block. We could easily handle that.

Speaker 1

So but I think in terms of just generally speaking, we're in good shape on the capital requirement side. We're able to get what we need to get when we get it and that's not a problem. Regarding your second question about profitability, that's a good question. At this point in time, I'm not sure. We certainly are expecting we projected profitability over the last 3 quarters in total.

Speaker 1

And that's but it's not going to be like 2 years ago where we had $2,000,000 of profit at the end of the year. It's going to be much more narrow. And certainly, if things go poorly, it could shift to the other side and could be non profitable here. But we're hoping that we can get profitable for the last three quarters anyway. But it will be tight.

Speaker 5

Okay. Thank you.

Speaker 3

Okay.

Operator

Thank you very much. And your next question is coming from Greg Weaver. Greg, your line is live.

Speaker 7

Hi. Good morning, Brian and Chuck. Just a quick question. So the 5 Access tool, the press release has it as an award. So you what they're awarding us.

Speaker 7

So

Speaker 1

basically, we're covering we have to cover what they're awarding us. So basically, we're talking about a $400,000 piece of equipment, including installation, blah, blah, blah. We got half of it.

Speaker 3

Yes. It's a dollar per dollar match requirement. So we were we are receiving the $200,000 from Massachusetts with the commitment to spend that much. A portion of that is on labor and other things. So, in aggregate, it's a $400,000 spend, but it's not alone.

Speaker 3

It's not there's no obligation to return it or anything like that. It's putting it to good use to add jobs to the manufacturing community of Massachusetts.

Speaker 7

Okay, great. That's great. And on the testing constraints you referenced, right, to trying to make sure the parts are good before you ship them out. Is that a temporary situation or is that an ongoing thing now just in line just to be sure and are you buying more equipment to help just a bottleneck there? It sounds like it's a bottleneck.

Speaker 1

Yes. So it is a temporary situation. We basically what it's requiring is that some of our production equipment is going to make, in this case, base plates for further testing. So instead of making them and selling for the customer, we're making them and then we're testing them. And we during the initial part of the problem where we're trying to find the solutions, we would do like 50 pieces at a time in the Q1 to make a decision.

Speaker 1

We've got to start getting we think we know where we're going. Now we need to start getting statistically significant runs. So instead of 50 pieces, we're looking at 500 pieces and 500 more and 500 more. So that's the significant amount of production that would otherwise have gone to a customer at a pretty good amount. So we do feel we're getting to the end of that.

Speaker 1

There is additional testing being done this quarter. But I think the expectation is that, as Brian likes to say, we're not ready to spike the football yet, but we're getting very close to the goal line. So I think hopefully we'll be able to put that behind us relatively soon.

Speaker 7

Okay, great. And in the just reported quarter, how large was the armor revenue

Speaker 1

roughly? The armor revenue was between it was $1,700,000 maybe something like that.

Speaker 7

Okay. And that's basically nil in the current quarter?

Speaker 1

No, no. There's been some. We definitely have we've definitely shipped stuff in Q2 as well. It's down, but it's not gone yet.

Speaker 7

Okay. It will be gone by Q3. So what should I think about then in terms of gross margin? Because as I recollect, the armor business was a nice adder, but yet here with $1,700,000 of armor, you had 15 percent gross margin, right?

Speaker 1

I mean, what was that thought? Yes. So we expect the margin to go up. As I said, I think there was a significant expense that goes through the testing process and that all that becomes part of our cost of sales. So that's definitely had a negative impact on margin.

Speaker 1

The other thing is, Brian had mentioned that we have 3 more engineers now than we did a year ago. I think that we were viewing this as sort of an investment. Unfortunately, GAAP says that's not an investment. You have to expense those people immediately. So I think that I don't expect we're going to be getting back to the levels that we were at a year ago when we were in the high 20s.

Speaker 1

Even I think 1 quarter we were at 30%. But I do think that we should be improving over what we had in the Q1 because of a number of these other expenses that we won't have going forward.

Speaker 7

Even at a lower run rate?

Speaker 1

Yes. Yes. Yes, I think that my fingers crossed, God willing, that this quarter probably had the lowest that it's going to be. But yes, but I think it should go up a bit more.

Speaker 7

Okay. That'll do it for me now. Hopefully, we can catch up next week at the Sidoti. Thanks. Sounds great, Craig.

Speaker 7

Thanks. Okay. Bye bye.

Operator

Thank you very much. Well, we appear to be at the end of our question and answer session. I will now hand back over to Brian for any closing comments.

Speaker 3

Great. Thanks everyone for joining us today and for your ongoing interest in CPS Technologies. We look forward to speaking with you again after the end of the Q2. If you have any questions in the interim, please reach out to our Investor Relations advisor. Thanks.

Operator

Thank you very much, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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