CPS Technologies Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 5 speakers on the call.

Operator

Good morning, everyone, and welcome to the CPS Technologies Second Quarter 2024 Earnings Call. At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith, Chief Financial Officer of Chief CPS Technologies. Sir, the floor is yours.

Speaker 1

Thank you, Matt, and good morning, everyone. Today, I'm joined by Brian Mackey, our President and CEO. We look forward to discussing our 2nd quarter 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 statement. Additional information can be found in our filings with the SEC.

Speaker 2

Now, I would turn the call over to Brian to offer his perspective on the 2nd quarter highlights, after which Chuck will review the financial results in greater detail. Brian?

Speaker 3

Thanks, Chris. Our second quarter revenue was $5,000,000 with an operating loss of approximately $1,300,000 Revenue for the quarter declined year over year primarily due to the fulfillment of our U. S. Navy armor contract with Kinetic Protection as expected, along with some shipment delays related to labor shortages and other issues, which I'll review further in a moment. Bottom line results for the quarter were also lower year over year due to the reduced revenue and production challenges that impacted both ongoing shipment volume and a new product introduction in hermetic packaging.

Speaker 3

While near term performance will continue to be negatively impacted by such issues, we are optimistic about the trends later this year and heading into fiscal 2025 as well as a number of growth drivers that are lining up for 2025 and beyond. I'll now turn the call over to Chuck to provide more details about our financial results, after which I will provide some additional detail. Chuck?

Speaker 1

Thanks, Brian. As was just mentioned, the company's revenue totaled $5,000,000 in the 2nd quarter compared with $7,400,000 last year. We previously announced that the fulfillment of armor orders for the U. S. Navy's fleet of aircraft carriers would negatively impact results by approximately $2,000,000 per quarter.

Speaker 1

Kinetic Protection with our full support continues to pursue additional work for other naval ship classes, and we're cautiously optimistic about additional orders. In parallel, our trailing 12 month book to bill ratio excluding ARMOUR remains on a growth trajectory running at 1.10 at the end of Q2 and has continued to tick upward early in Q3. However, our ability to fulfill open orders for non armor products has experienced challenges related to filling open manufacturing positions. We had an unusually high number of manufacturing personnel out of work on non work related disability, which created short term challenges for our production. Our local job market remains tight in Q2, which negatively impacted our ability to convert orders to shipments.

Speaker 1

Anecdotally, the local labor market seems to be loosening at this time. We have added and are now training a number of new hires, and we expect to have a 3rd shift up and running next month for certain core manufacturing tasks. This is expected to significantly boost our top line growth, particularly in the Q4 and beyond. We have the orders. The difficulty has been in fulfilling them.

Speaker 1

We reported a gross loss in the 2nd quarter of $200,000 or approximately negative 4.6 percent of sales compared with gross profit of $2,200,000 or approximately 29.6 percent of sales last year. This decrease was due to the impact of fixed cost on the lower revenue totals as well as other issues. 1 new hermetic packaging product in particular created significant losses as the ramp up to volume was more challenging than expected. We anticipate that gross margins will improve in the second half of twenty twenty four. Selling, general and administrative expenses or SG and A totaled $1,100,000 in the 2nd quarter versus $1,500,000 in the prior year period as we remained focused on controlling costs even while investing in new product development efforts and business development initiatives to accelerate long term growth.

Speaker 1

The company posted an operating loss of $1,300,000 in the second quarter compared with operating income $700,000 last year, and we reported a net loss of $1,000,000 or $0.07 per share versus net income of $600,000 or $0.04 per diluted share in Q2 of 2023. Turning to the balance sheet. We ended the quarter with $6,300,000 of cash versus $8,800,000 at the start of 2024. This cash balance does not include the fact that for the first time, we had $750,000 invested in T bills the end of the quarter to take advantage of higher interest rates over the longer term. Trade accounts receivable as of June 29 totaled $4,100,000 versus $4,400,000 as of December 31, 2023.

Speaker 1

Inventories also totaled $4,100,000 at the end of the 2nd quarter compared with $4,600,000 at the start of the fiscal year. Turning to the liability side, payables and accruals totaled $3,300,000 at the end of the second quarter versus $3,600,000 as of December 31, 2023. The balance sheet does remain very strong with a current ratio of 4.5. Now, Brian will provide a more in-depth discussion of the 2nd quarter.

Speaker 3

Thanks Chuck. During Q2, the tight local labor market impeded our ability to hire qualified individuals to fill open positions and expand as our order book grows for our non armor products. This negatively impacted our ability to fulfill orders. We have recently added new personnel in key manufacturing roles who are now in training and expect to have the 3rd shift up and running later this month. While this will likely not impact Q3 as much as we would like, it should improve our top line in the Q4 and beyond.

Speaker 3

We also faced supply chain constraints, which have impacted product shipments in the quarter. For the first time in the known history, the company is a producer of 1 of our ingredients in our MMC formulation ran out, which directly impacted our production in Q2, only receiving a new supply in the 1st week of Q3. We've taken steps to ensure this will not happen again. We remain cautiously optimistic that the coming quarters will show improvement in product completion and delivery to market. We are confident in the continued growth of our core product lines, MMC and Hermetic Packaging.

Speaker 3

During the quarter, the number of first articles we shipped for these two product lines was again 8, the same as in Q1. Although the revenue from these new first articles is limited, they represent future revenue growth opportunities as our customers evaluate the first articles we provide before potentially transitioning to volume purchases. Regarding armor, we remain positive about the likelihood of Kinetic Protection winning new armor orders for additional classes of Navy vessels. This work continues. And we believe our ballistic solutions have a large potential market across various military applications.

Speaker 3

During the quarter, we also announced a new SBIR Phase 2 award with the U. S. Navy Air Systems Command valued at over $1,000,000 in which we'll continue to develop our novel metal matrix composite solutions for thermal energy storage applications. This Phase 2 contract will address the needs of NAVAIR's advanced anti radiation guided missile extended range program, where advanced energy storage enables extended range missile capability. Our novel composites are lightweight, dimensionally stable materials that can reduce size, weight and power consumption, providing a more durable, easier to manage solution than conventional methods.

Speaker 3

This new Phase 2 effort now underway represents the company's 1st such award in many years. But more importantly, it highlights our ability to develop advanced solutions that will lead to commercial opportunities. Such wins underscore not only our unique capabilities, but the successful execution of a long term growth strategy based on focused product development that's responsive to customer demand. We continue to pursue funding opportunities with various federal agencies, particularly where we can provide a unique solution that addresses customers' requirements. We currently have 2 outstanding Phase 1 proposals as well as the Phase 2 proposal for radiation shielding, which I discussed at length last quarter.

Speaker 3

As a reminder, CPS successfully designed a novel MMC that provides neutron and gamma radiation shielding in a compact solution. Earlier this month, we submitted a provisional patent application to the USPTO, which covers our core design methodology. With this filing now complete, we can have more direct discussions with potential customers, including those who first learned of our solution during our presentation at the National Reactor Innovation Center Program Review at Idaho National Laboratory in April. The early positive feedback we have received indicates interest from potential customers with both stationary and mobile applications. In the Q2, we also got our new 5 axis CNC machine up and running, thanks to the $200,000 matching grant from the Massachusetts Manufacturing Accelerate program.

Speaker 3

This capital investment broadens our offerings in response to customer demand, improving our appeal to new and existing customers, particularly in hermetic packaging. While we have leveraged both federal and state resources to directly address market requirements, we are also pursuing internal growth opportunities through new product development. As we indicated with our plan last quarter, in Q2, we successfully completed our first manufacturing trials of fiber reinforced aluminum or FRA per our exclusive global licensing agreement with Triton Systems. In the near term, we will be expanding our production trials, validating the material properties of the FRA samples we produce and continuing to engage potential customers. FRA offers a compelling solution for applications that require stronger material, including at elevated temperatures with reduced weight.

Speaker 3

We anticipate having products ready for market in fiscal 2025. Similar to the internal effort to develop and commercialize FRA materials, we also recently had a successful test of our lightweight UH-sixty helicopter flooring. CPS pursued this testing based on the results of our funded Phase 1 design effort, even though the Army did not allocate funding for a potential Phase 2 effort. Internal development of other products such as high temperature barrier material is also ongoing. Later this month, we will also submit a Phase 2 proposal to the U.

Speaker 3

S. Army that is built upon our successful results in Phase 1 related to controlled fragmentation tungsten warheads. Overall, we are executing our strategy to win additional business, expand into new markets and increase our manufacturing capabilities to accelerate top line growth in the quarters to come. We will improve order fulfillment for our core product lines and continue to build upon the various firsts that we have recently accomplished. First production of FRA material, 1st $1,000,000 Phase 2 SBIR award in over 25 years, 1st commissioning of 5 axis CNC capabilities, 1st patent filing in many years by the company.

Speaker 3

While near term headwinds remain, we are upbeat about the future as we enter the second half of fiscal 2024. We can now open the call up for questions. Operator?

Operator

Certainly. Your first question is coming from Greg Weaver from Invicta Capital. Your line is live.

Speaker 4

Hi. Good morning, Brian and Chuck. Thanks for the opportunity to ask a question here. You can guess where I'm going to go here. The gross profit, could you give a little more detail, Chuck, maybe in terms of quantification of how much the manufacturing issues ate into the result?

Speaker 4

I mean, you had basically 100% flow through of the revenue drop and the gross profit drop.

Speaker 1

Yes. So we had one item in particular, which unfortunately, depending on how you look at it, was the number one selling item in the Hermetic Packaging. It was a new item for us. And unfortunately, we had to make almost twice as many of them in order to get that high volume out to the customer. And what particularly hurt us is I don't want to get too technical, but basically many of our cosmetic packaged products are gold plated.

Speaker 1

And typically with our customers, what happens is we will price the product based on a particular gold price. And in many cases, that gold price is artificially low. And then we bill them for the differential when we actually produce the parts. So if the gold if we contract with them based on a gold price $1,000 and the gold price is $2,500 we'll bill them for that differential that we have to pay to our plater, obviously. We'll bill them for that differential.

Speaker 1

The problem with that we had with this particular product was that the scrap did not occur until after the parts were plated. And what that meant was that we had already paid not just for the cost that we assumed for that $1,000 gold, but we actually paid for the $2,500 gold with no ability to recover it. And so that one item in and of itself, I can't say we would have a great gross margin without it, but we would have had a positive gross margin without it, for sure. So that was particularly hurtful, I guess. And then there were certainly other things.

Speaker 1

Brian mentioned, we had an item that reduced revenue towards the end of the quarter that because we couldn't get it. And first time in literally the history of the company, I don't know if you know Mark Oceaneiro, he's been here for well over 30 years and it's never happened before. So just one of those kind of luky things, I guess, we could say. But so I think that's obviously when we're at $5,000,000 in revenue that doesn't help absorb as many fixed costs as we want it to.

Speaker 4

Got you. Okay. Appreciate the detail there, Chuck. So the current quarter from your comments, I'm reading through the lines here, but it sounds like a similar situation?

Speaker 1

Well, certainly so that item that we didn't have came in the 1st week of July. So the quarter is off to a slow start based on that. But we think so talking about the hermetic packaging item, we solved the problem, right? We know what caused the issues that caused us to have to scrap all those parts. Those issues have been solved.

Speaker 1

We've been manufacturing the product now with a good yield. We're not throwing half the product away after it's been plated. So that's been solved. And as of today, the other issue of the missing the ingredient not being available has been solved and shouldn't happen again. Yes.

Speaker 3

I think to add to that, Craig, as Chuck described, some of these issues have come to an end. They either ended in Q2 or early Q3. The labor shortage and hiring process is one that extended more into this quarter with those people being trained and implementing that shift later this month. Those products will then go out from there and become revenue a few weeks later. So that is certainly an impact to Q3 until we catch up on the amount of volume going out the door to fulfill these open orders, which will be more fully in

Speaker 1

place in Q4. Yes. And just to add a little bit to that. So I think I mentioned it during the talk earlier. The issue is not getting orders.

Speaker 1

The issue is fulfilling orders. And moving ahead in that process. And I would expect Order completed. I would expect significant improvement in Q3, but we'll see. We'll see.

Speaker 1

Okay.

Speaker 4

Any rework drag from the baseplate problems before in this quarter, this past quarter?

Speaker 1

Not specifically to that, no. I mean, there are always issues that come up now and again and we're working through those, but not really in that second quarter or expected going forward expected anyway going forward.

Speaker 4

And was there any armor or tag ends of that in the 5,000,000

Speaker 1

dollars Yes, yes. It was about $250,000 of armor.

Speaker 4

Okay. That was related to the kinetic protection?

Speaker 1

Right. Yes,

Speaker 4

exactly. Okay. So that's going away, but we're picking up on some of the other stuff that was slow. Okay. And so congrats on the SBIR award.

Speaker 4

So the $1,000,000 that's over what timeframe and it sounds like from your comment, Brian, that that's the revenue and starting to revenue already?

Speaker 3

Yes, we've already In Q3. In Q3. So that's a monthly invoicing by us over the 30 months.

Speaker 1

Yes, 30 months. It's about $100,000 a quarter ballpark.

Speaker 4

Okay, good. Okay. Yes, I'm glad to hear you're out trying to get more of these awards because that's helpful to help them cover your overhead and develop new products. So

Speaker 1

Absolutely. Okay.

Speaker 3

We're very excited

Speaker 1

about that actually. Yes.

Speaker 4

I mean, they have to hand out money and helping you develop new products makes sense.

Speaker 1

Yes. And really the future of those products, I think, is there's a lot of potential. Good. In terms of making them getting them ready for market and then actually making them into a production line.

Speaker 4

And just a follow on, have you got a specific person or persons on staff now that are chasing these? I know it's a lot of paperwork to do these grants or awards to qualify someone just kind of focused on that now?

Speaker 3

Yes. Our VP of R and D who's been with the company for 3 years now has that depth of experience and I'm very familiar with SBIR as well. But that's where you see the renewed effort into SBIR at CPS starting a few years ago where we've gotten the 5 or 6 Phase 1 wins now and now the first Phase 2, and we're going to continue in that direction. It fluctuates, but we see opportunities where the offerings that we can put together may or may not address the DoD, DOE, maybe NASA opportunities. So that's certainly going to continue from us, because we now have that system in place, led by Doctor.

Speaker 3

Catcher, who leads our R and D team.

Speaker 1

Great. Thank you. Well, good luck

Speaker 4

on that and getting the production smoothed up. Thank you.

Speaker 3

Thanks, Greg.

Operator

Thank you. Thank you. There are no further questions in the queue. I'll now hand the conference back to Brian Mackey, President and CEO, for closing remarks. Please go ahead.

Speaker 3

Great. Thank you for joining us today and for your ongoing interest in CPS Technologies. We look forward to speaking with you again after the end of Q3. If you have any questions in the interim, please reach out to our Investment Relations advisor. Thanks.

Speaker 1

Thanks, everybody.

Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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CPS Technologies Q2 2024
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