This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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.
spk04: Thank you, Matt, and good morning, everyone. Today, I'm joined by Brian Mackey, our President and CEO of We look forward to discussing our second quarter results with you. But first, Chris Witte, our investor relations advisor, will provide a brief safe harbor statement. Chris?
spk01: 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's 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. Now I would turn the call over to Brian to offer his perspective on the second quarter highlights, Afterwards, Chuck will review the financial results in greater detail. Brian?
spk03: Thanks, Chris. Our second quarter revenue was $5.0 million with an operating loss of approximately $1.3 million. 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. 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 the 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.
spk04: Chuck? Thanks, Brian. As was just mentioned, the company's revenue totaled $5.0 million in the second quarter compared with $7.4 million 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 million per quarter. 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 armor, 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. 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 third shift up and running next month for certain core manufacturing tasks. This is expected to significantly boost our top line growth, particularly in the fourth quarter and beyond. We have the orders. The difficulty has been in fulfilling them. We reported a gross loss in the second quarter of $0.2 million or approximately negative 4.6% of sales compared with gross profit of $2.2 million or approximately 29.6% of sales last year. This decrease was due to the impact of fixed costs on the lower revenue totals as well as other issues. One 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 2024. Selling general and administrative expenses, or SG&A, totaled $1.1 million in the second quarter versus $1.5 million in the prior year period, as we remain focused on controlling costs, even while investing in new product development efforts and business development initiatives to accelerate long-term growth. The company posted an operating loss of $1.3 million in the second quarter compared with operating income of approximately $0.7 million last year, and we reported a net loss of $1.0 million or $0.07 per share versus net income of $0.6 million or $0.04 per diluted share in Q2 of 2023. Turning to the balance sheet, we ended the quarter with $6.3 million of cash versus $8.8 million at the start of 2024. This cash balance does not include the fact that for the first time we had $0.75 million invested in T-bills at the end of the quarter to take advantage of higher interest rates over the longer term. Trade accounts receivable as of June 29th totaled $4.1 million versus $4.4 million as of December 31st, 2023. Inventories also totaled $4.1 million at the end of the second quarter compared with $4.6 million at the start of the fiscal year. Turning to the liability side, payables and accruals totaled $3.3 million at the end of the second quarter versus $3.6 million 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 second quarter.
spk03: 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 a third 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 fourth quarter and beyond. We also face supply chains. in the quarter. For the first time in the known history, the company, the producer of one of our ingredients in our MMC formulation ran out, which directly impacted our production in Q2, only receiving a new supply the first 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 During the quarter, the number of first articles we shipped for these two product lines was again eight, 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. During the quarter, we also announced a new SBIR Phase II award with the U.S. Navy Air Systems Command, valued at over $1 million, in which we'll continue to develop our novel metal matrix composite solutions for thermal energy storage applications. This Phase II 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. This new Phase II effort, now underway, represents the company's first 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 two outstanding Phase I proposals, as well as the Phase II proposal for radiation shielding, which I discussed at length last quarter. 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 second quarter, 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. 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. 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-60 helicopter flooring. CPS pursued this testing based on the results of our funded Phase I design effort, even though the Army did not allocate funding for a potential Phase II effort. Internal development of other products, such as high-temperature barrier material, is also ongoing. Later this month, we will also submit a Phase II proposal to the U.S. Army that is built upon our successful results in Phase I 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, first million-dollar Phase II SBIR award in over 25 years, first commissioning of five-axis CNC capabilities, first patent filing in many years by the company. 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?
spk00: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we pull for questions. Thank you. Once again, everyone, if you have any questions or comments, please press star then 1 on your phone. Please hold while we pull for questions. Your first question is coming from Greg Weaver from Invicta Capital.
spk02: Your line is live. 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? I mean, you had basically 100% flow through of the revenue drop and the gross profit drop.
spk04: Yeah, so we had... One item in particular, which unfortunately, depending on how you look at it, was the number one selling item in 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 But basically, many of our hermetic package products are gold-plated. 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, you know, when we actually produce the parts. So if the gold – if we – If we contract with them based on the gold price of $1,000 and the gold price of $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. The problem 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 had actually paid for the $2,500 gold with no ability to recover it. And so that one item all 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, you know, there were certainly other things. Brian mentioned, you know, we had an item that reduced revenue towards the end of the quarter because we couldn't get it. And, you know, first time in literally the history of the company. I don't know if you know Mark Oceanero. He's been here for well over 30 years. And, you know, it's never happened before. So, you know, just one of those kind of loopy things, I guess we could say, but. So I think that's, you know, that's, you know, obviously when we're at $5 million in revenue, that doesn't help, you know, absorb as many fixed costs as we want it to.
spk02: Gotcha. Okay. Appreciate the detail there, Chuck. So the current quarter from your comments, I'm reading through the lines here, but it sounds like it's a similar situation.
spk04: Yeah. Well, certainly, so that item that we didn't have came in the first week of July. So the quarter's 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. 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 ingredient not being available has been solved. and shouldn't happen again.
spk03: Yeah, I think to add to that, Greg, 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. You know, those products will then go out from there and become revenue a few weeks later. So that is certainly, uh, 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, um, more fully in place in Q4. Yeah.
spk04: And, and just to add a little bit to that. So, um, I, I think I mentioned it during, during the talk earlier. Um, the issue is not getting orders. The issue is fulfilling orders and we're, we're, we're moving ahead in that process. And, uh, I would expect significant improvement in Q3, but we'll see.
spk02: Any rework drag from the base plate problems before in this past quarter?
spk04: Not specifically to that, no. I mean, there are always you know, issues that come up, you know, now and again, and we're working through those, but, um, but not, not really in, in the second quarter or expected, uh, um, you know, going forward, um, expected anyway, going forward.
spk02: And was there any armor tag ends of that in the, in the 5 million?
spk04: Yeah. Yeah. There was, it was about a quarter of a million dollars of armor.
spk02: Okay. That, that, that was related to the kinetic protection. Right.
spk04: Yeah.
spk02: Yeah, exactly. Okay. So that's going away, but we're picking up on some of the other stuff that was slow. Okay. And, and the, so congrats on the, uh, the, uh, SBIR award. Um, so the million dollars that's over what timeframe. And it sounds like from your comment, Brian, that that's the revenue and starting to revenue already.
spk03: Yeah, we've already, uh, in Q3, uh, so that's, uh, The monthly invoicing by us over the 30 months. Yeah, 30 months.
spk04: It's about $100,000 a quarter ballpark.
spk02: Okay, good. Okay. Yeah, and 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.
spk00: Okay.
spk02: Yeah, I mean, hey, they're handing out money and helping you develop new products, you know. makes sense.
spk04: And really the future of those products, I think is, you know, there's, there's a lot of, a lot of potential. Maybe not just, you know, in terms of, you know, making them, getting them ready for market and then actually making them into a production line.
spk02: And just to 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, uh, grants or awards to qualify. Is someone just kind of focused on that now?
spk03: Yeah, our VP of R&D who's been with the company for three 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 Five or six phase one wins now, now the first phase two, 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 Dr. Ketcher, who leads our R&D team.
spk02: Great. Thank you. Well, good luck on that and getting the production smoothed out. Thank you. Thanks. Great.
spk00: Thank you. Once again, everyone, if you have any questions or comments, please press star then 1 on your phone. Please hold while I poll for questions. 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.
spk03: 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 the third quarter. If you have any questions in the interim, please reach out to our Investment Relations Advisor. Thanks.
spk04: Thanks, everybody.
spk00: Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Disclaimer