Good day. Thank you for standing by, and welcome to CPS Technologies Corporation first quarter investor call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the call over to our speaker, Mr. Chuck Griffith. The floor is yours.
Thank you operator. Good afternoon everyone, and thank you for joining us. I'm joined by Michael McCormack, our President and Chief Executive Officer, who will offer his comments on our first quarter results. 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 as subject to the many uncertainties that exist in CPS's 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 statement. Now, I will turn the call over to Michael to offer his perspectives on the first quarter.
Thank you Chuck. Good afternoon everyone. Today, we are pleased to announce first quarter revenues of $6.7 million and an operating profit of $547,000 for the quarter ending April 2, 2022. This compares with revenues of $4.9 million and an operating profit of $36,000 for the quarter ended March 27, 2021. We are delighted to report that revenues in the first quarter 2022 were the highest in the company's history and showed 7% improvement over the revenues from the fourth quarter of 2021. Even more significantly, we show a revenue increase of 37% over the first quarter of 2021.
Further, we are beginning to see the benefits of the growth and cost control programs we have put in place as our first quarter operating profit was greater than the operating profit the entire 2021 fiscal year. We are encouraged to realize returns on the growth initiatives and operational changes we are executing. The team is continuing to drive growth and efficiencies to sustain this momentum. As the global e-economy progresses out of pandemic recovery and into new challenges, there are lasting impacts such as inflation, material availability, logistical delays, a contracting labor force that we are actively working to mitigate. In an uncertain overall economic environment, we remain incredibly pleased with our first quarter performance and are confident in our outlook.
I'll speak more later about the overall business progress moving forward in the call but for now, I'd like Chuck to discuss the financial results in a little bit more detail.
Thank you Michael. Revenues totaled $6.7 million in the first quarter of 2022, compared with $4.9 million generated in Q1 of 2021, an increase of 37%. This increase was due primarily to the increase in sales for armor and hermetic packages in Q1 2022, as well as the impact of the COVID-19 pandemic on our sales in Q1 2021. Gross margin in Q1 2022 totaled $2 million or 30% of sales. This compares with gross margin in Q1 2021 of $900,000 at 19% of sales. This increase in margin dollars directly correlates to the increased revenue due to the increased absorption of fixed costs and also to improved manufacturing efficiencies.
Selling, general, and administrative expenses totaled $1.4 million in Q1 2022, compared with SG&A expenses of $908,000 in Q1 2021. Compensation costs made up a little over half of this increase. In particular, increased accruals for variable compensation due to the better results in Q1 2022, as compared to Q1 2021. Share-based compensation being postponed to Q2 in 2021, but done as usual in Q1 of 2022, and three additional members of our sales team that were hired subsequent to Q1 2021. Basically, those three things made up the compensation differential. The other significant portion of the SG&A increase was due to commission expenses incurred as a result of the increase in sales.
The company experienced operating income of $547,000 in Q1 2022, compared with operating income of $36,000 in Q1 2021. This increase in operating income is due primarily to the increase in revenue and gross margin, as previously discussed. Turning to the balance sheet, we ended the quarter with $4.7 million of cash. This is a reduction in our cash position of $350,000 from the end of 2021. The decrease in cash was due primarily to the increase in inventory and reductions in accrued expenses, those were somewhat offset by our net profit. Although it remains open and available to us, no additional cash was raised under the ATM program in Q1 2022.
Accounts receivable at April 2, 2022 totaled $4.9 million, the same as the $4.9 million at December 25, 2021. Our day sales outstanding did improve to 66 days at the end of this quarter, compared to 72 days at the end of the year ending 2021. The decrease in DSO was due to the inclusion of deferred revenue of $0.6 million in the year-end accounts receivable balance, which was collected during the first quarter of 2022. Inventories totaled $4.7 million at April 2, 2022 compared to $3.9 million at December 25, 2021. This increase in inventory is due to increased work in process and raw materials needed to support our expected sales growth.
The inventory turnover in the most recent four quarters was 4.7 times, which is the same as it was at the end of 2021. Turning to the liability side, payables and accruals totaled $3.0 million at April 2, 2022, down from $3.2 million at December 25th, 2021. The small change is due to payments in Q1 of certain year-end accruals. For further discussion, I would like to turn the call back over to Michael.
Thank you Chuck. This past quarter, we are continuing to make encouraging progress on the plans to translate our value creation through product development into definitive positive financial results that can be appreciated by the wide array of investors in CPS today and tomorrow. As Chuck had mentioned, we are quite encouraged to see the improvement in gross margin. I would like to particularly highlight the work by Dan Barton, our Head of Operations, and his entire team on the implementation of a continuous improvement program with sustainable, substantial, enduring improvements across every product line. We remain steadfast focused on increasing our ability to provide products to our customers at a reasonable cost.
We believe creating positive financial results quarter over quarter and year over year will continue to make CPS an attractive investment opportunity to a diverse array of investors, short-term, institutional, index funds, or even sophisticated investors that appreciate both our near and long-term benefits of our unique value proposition. We also acknowledge that one quarter does not make a year. However, our growing consistency of profitable performance has been a focus of mine since becoming the CEO. There are lots of opportunities for CPS to provide solutions to customers in the electric vehicle market. The movement from silicon semiconductors to silicon carbide wide bandgap semiconductors that operate at higher junction temperatures will necessitate the need for thermal management, high heat dissipation, and controlled expansion that we can provide with our metal matrix composite AlSiC.
CPS is serving this SiC WBG need today with our customers with a new power module format. In addition, we see continued growth and implementation of this format with the AlSiC metal matrix composite for the SiC WBG applications, as these solutions are better suited to efficient power conversion and offer improved power design flexibility. We have several design wins with our partners/customers that are still in the initial stages of product testing and maturity, and we are collaborating with them to ensure we have a robust plan to meet their future production high volume demands over their anticipated life cycle. There are also many opportunities within the United States Department of Defense strategic objectives to move to hybridization and electric vehicles for tactical and combat fleets. CPS recently attended the Michigan Defense Exposition where this was a big topic.
As you are aware, the U.S. Army ground vehicle expertise is specifically located in Michigan, and one of several reasons we created a presence in Detroit metro area and added Anthony Koski, who's located there, to the CPS staff as our corporate development officer. Anyway, still, our past success in the luxury end of the EV market has a lot of synergies with the defense market. I'd like to highlight the link between military platform electrification and the importance of size, weight, power, and cost, SWaP-C, and how this aligns directly to CPS' core competencies and value proposition of reduced weight, superior properties, and high reliability that directly contributes to the military's goals of high operational availability. In addition, many of our known competitors are prohibited from supplying key defense technologies in the United States due to existing national security regulations and laws.
We view accelerated acceptance of electric vehicles worldwide, the advancement of large U.S. Department of Defense modernization programs, as evidenced by the most recent significant funding addition to the proposed R&D budget, and the increased emphasis on modernizing U.S. transportation energy infrastructure as potential catalysts for future growth. Beyond fiscal year 2022, we remain cautiously optimistic that our collective growth initiatives, specifically in longer-term new product development investments, will expand the current product lines both in terms of revenues and earnings. As I had mentioned previously, we have re-engaged with the Small Business Innovation Research, SBIR, and Small Business Technology Transfer, STTR, programs, having made several submissions and will continue to do so. We have recently won two SBIRs within the Department of Defense.
The recent Navy award, like the initial award with the Army, is calling for novel solutions to thermal management electronics in the military that can also be commercialized. Our proposed solution is for an aluminum alloy matrix reinforced with nickel titanium for thermal energy storage devices. We are extremely excited that the Department of Defense thinks of CPS as a thought leader in thermal management, and more importantly, they are confident that we can convert theory into products that can be enabled the safety and security of our defense forces. We also have several proposed solutions in with the Department of Energy that we expect feedback by the end of the second quarter. Lastly, we continue to make measured investments to increase the capacity of our current high volume manufacturing.
We are working on a variety of additive manufacturing technologies. Additive manufacturing processes continue to mature, and we're looking at implementing 3D printing processes throughout all of our product lines. Modern processing techniques will allow for the possibility of improved performance and manufacturability. These improvements can range from flashy new material development to things not necessarily seen in the public eye that are quality, increased efficiency. There's still quite a bit of research and development, that's little R, big D, to refine our ceramic powder combinations with binder material to consistently replicate our current and future MMC formulation. We are making progress that are encouraging and will result in even greater production yields moving forward. All investors and listeners today should know that it's worth repeating that creating shareholder value is the focus of mine, the board of directors, and the entire CPS team.
We have had several internal metrics with which to measure the business beyond profit and cash flow. I find the best metric of results consistent with our overall growth strategy is the measurement of book-to-bill over a rolling 12 months. This is the first statistic I look at every day. For a business to thrive, it needs to book as much business as it delivers, whether it be daily, weekly, monthly, quarterly, yearly. This would be a book-to-bill ratio of 1x1 to remain even. That is not our goal here at CPS. We are in growth mode. Since I transitioned to leadership here at CPS, we are averaging in the 1.4x1.6 book-to-bill ratio over the trailing 12 months basis.
This is a result of a lot of arduous work and perseverance by sales, operations, finance, heck, all of us. Specifically, though, our Vice President of Sales, Cheryl Oliveira, and her entire team, Gregg Weatherman, Timothy Davis, Judy Vetri, Kevin Langley, as well as Jim Sorenson and our latest staff addition, Anthony Koski, all enabled by our engineers working in the product development, Dr. Stephen Kachur, Dr. Mark Occhionero, and William Holmes. In closing my remarks this afternoon, we are extremely pleased with our most recent quarterly performance. We still have lots to do. We're not satisfied with our initial results and look for even larger, actionable opportunities to build the business and even increase the assurances that the current growth and profitability trend will be improved upon even further. That concludes my opening remarks.
Raissa, I believe Chuck and I are available if there are any questions from folks on the line.
As a reminder, to ask a question you will need to press star one on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Irwin Gomberg. Your line is open.
Yeah. Congratulations on a record quarter. It's nice to see company growing again. I have a few questions. On July 26, 2018, CPS announced it was working with Rafael Advanced Defense Systems to provide hybrid armor for some of their vehicles. On April 20th, 2022, they announced to the defense market its new models. Is CPS providing some armor for some of these vehicles?
This is Michael. Thank you for the kind compliments for the business. As of May, we are continuing to work with Rafael. I do not know the specific application you're talking about, but we have been working in my entire 16 months here and prior with Rafael in a variety of programs, testing various armor solutions. We continue to provide representative target solutions, and we continue to shoot them and have very positive results. I can't answer what's going on at the Rafael end, but we have a very good relationship with them. You know, regrettably, they're on holiday this week, but we were talking to them last week. We have a quite good relationship with them.
We also have a joint venture with the Southwest Research Institute down in Texas, where we are doing some advanced modeling on armor solutions. Yes, we are still working with Rafael. Yes, they're a great partner. Yes, we continue to make progress, but I cannot specifically address, you know, the application where.
Right. I mean, they show on their website the vehicles with tiles all over it for protection. So obviously they're looking into the technology, whether they're gonna use your solutions, because obviously.
Yeah. Well you know, obviously ceramic armor has been. It's not new, right? The advances over the last 20 years of U.S. combat has shown that the lightweight performance, the hardness of ceramic provides lots of survivability features. You know, certainly the body armor initiative here in the U.S. has saved hundreds, if not thousands of lives.
Right.
I think putting that to scale, whether it be ground vehicles or in our case today, we provide it in scale for Navy platforms. You can see the obvious value to that with the weight savings versus a metallic monolithic solution.
Right. Yeah. Could you comment on any other, you know, HybridTech Armor type, you know, contracts you might be looking forward to?
Yeah. Well certainly we're you know, we haven't been awarded them. Let me just tell you that first. We are working with partners here in the U.S., and I mentioned Rafael. We do have agents in the EU. Obviously, the European Union has become more sensitive to their armor needs with the invasion of Ukraine, and they've begun to invest more deeply into armor and what it could do and add to their survivability platform. We have those dialogues going on. Here in the States, we've been focusing on solutions in next generation platforms that are in the Defense Department budget so that we have accurate and predictable revenues and forecasts. That's been our focus. It varies. I can share with you, it varies from helicopter to ground vehicles.
The application of our HybridTech Armor has many, and we are continuing to research to find solutions that will fit within our customers' cost profile and ballistic profile.
Great. Last question, you know, Lucid announced last week that they have a 1200-volt module on one car that they're gonna start marketing. They have a picture of the module. It didn't look like there was any copper in there. I mean, 1200 volts obviously, I mean, the heat dissipation, it sort of fits what you're trying to do. Can you make any comments about that?
Yeah. I don't know what specifically you're talking about, but we're encouraged that as we go up in height is it 1,200 volts you said?
Right.
1200 volt module? Yeah. You know, obviously the benefits of our metal matrix composites become even more pronounced. I think that, to your point, it—we yes, exceed the properties that you can get with a copper solution.
Are there other solutions for a 1200 volt module besides yours?
I don't know. Do you? I don't.
I think at 1,200 volts, I think we're kind of in that gray area where if you wanna, you know, be more efficient, you can use our solution. If you wanna try to get away with a cheaper solution, you can. I believe that is correct.
Yeah. I'll get with the two docs tomorrow and see if we can post something and tell you something a little more about that.
Yeah, that's a better idea.
Yeah.
Great. Wolfspeed's talked about car companies moving up. You know, they have 400- and 800-volt, and they said 800-volt's becoming more popular in their future. At that voltage, would AlSiC be used or they can get away with-
Absolutely. I mean, we don't know the full details of an application for some of our customers, but, you know, we are talking in those ranges with them, so.
I see. That's what, 2024, 2025, you think, before it really becomes a-
Timeframe? Are you talking years, calendar years?
Yeah years, right.
Yeah. You know to me, it's hard to put a number on it, right? I mentioned in my earlier remarks that, you know, the process by which people go through to validate a product solution and test it varies from company to company. It certainly, you know, we're in the metal matrix, materials science business, and we know it's a long cycle to deliver, but then you get to stay for a long time, right?
Right.
It would be difficult for me to say, but I think you're on those lines. It's 3-5 years out.
Right. I mean obviously, you've been studying this market, you know the market. Is there any possibility you could make a module, I mean, not AlSiC, but something better than copper but not as good as AlSiC to try and get.
Yeah. You know, we always work on different combinations of metals and ceramics. One of the reasons we're very proud of our accomplishments with the AlSiC nine and twelve, but we're not just AlSiC, right? We do all combinations of metal matrix composites, and we're open to all kinds of solutions. I know Mark Occhionero and Dr. Steve are working on those all the time. I think to my remarks earlier, you know, we've won a new contract using aluminum nickel titanium. We're not just AlSiC anymore.
I see, which is smart. I think it. You know, as long as you're in the metal business, why not provide what the market's looking for in a better way?
Yeah.
Congratulations. I think you've done a wonderful job. Company's done fine since you've come aboard, and obviously, I'm sure that's part of your reason that that's happened. Thank you.
Well, thank you.
for your help.
Thank you.
That's all my questions.
Your next question comes from the line of Patrick White. Your line is open.
Congratulations on a solid quarter there, both Mike and Chuck. Excellent work, and particularly on the gross margins. Following up on that a little bit, with the book-to-bill running at 1.2, 1.4 or higher, is it conceivable that you'll be able to maintain those kind of gross margins going forward? Or, is that just a function of the HybridTech Armor that's being delivered now in 2022 and maybe, it's gonna be tough to keep those margins at that kind of levels?
Well, certainly that's our goal, right? Our goal is to keep the margins up. We're working actively, Patrick, with a variety of things. Chuck alluded to some of the fixed costs, you know, with the higher volume help us. In total, we have many initiatives being run through operations, whether it be sales, whether it be the purchasing department. We're managing a lot of variables here, and we're just doing, you know, hard work with it. It's not easy, and it's very much complementary to our staff that they have been able to reduce our costs. We think we're onto something, but like I alluded to, Patrick, one quarter doesn't make a year, right?
We need a couple more quarters of this, before I'll say that we've made it. We are trending positively.
Okay. On the EVs, you mentioned maybe several design wins working through those right now with testing and getting those to maturity. Are those wins going to be strictly limited to individual luxury type vehicles, or are you working on something that might be more platform driven to that extent beyond certain limited vehicles?
Yeah, certainly more of the latter, right? When we talk to our customers, they are talking some extremely high numbers in high production. We are like, "Great. When?" Right? To the earlier callers. We continue to have dialogue with them about being realistic on the demands. But there are really high volumes of parts being asked to be quoted and us to demonstrate the production capacity to bring to that.
Okay. Would that require a capital raise to handle it?
I don't know at this time. Right now, we obviously continue to do something like planning. We look at different ways to optimize our factory here. We're in a you know a 40,000 sq ft facility on site. We have the ability to expand here, and it's always difficult when you get into facilities and expansion, you know, do you get the contract first or the expand first? That's kind of the dialogue that we've been working through these days with them is, you know, what's best, to keep costs low, keep us competitive, and keep the orders flowing to CPS. Where maybe is the question. Is the answer.
That would be a good problem to have, would it not?
Yes. Hey, that's the way we call it. We call it a high rent problem here too.
Okay. Can you add any color? I think one of the small business awards you mentioned aluminum alloy in the commentary and storage devices. Of course, the storage market is exploding from a commercial standpoint. This is military. Can you elaborate upon the application and whether it has broader market application for just commercial storage?
Yeah. Well certainly, we don't know the application yet with the Navy of what they're gonna do with it. They very much compartmentalize when they're pursuing technologies. We kind of know generally what part of the Navy it's in, but we don't know specifically what they're gonna do with it yet. I think that's part of the program. As we execute phase one, which is a nice program. I think in total it's $250,000 over the course of 10-12 months for contract research and development. There are different phases and performance gates that we have to meet to continue to advance the program.
I think during this phase one, we get more information about applications that will lend us towards a phase two and further development.
Okay. Work in progress. Excuse me. I have one last question. I have a cold today, so I'm struggling. You mentioned, you know, improvements in the manufacturing processes and 3D printing. Can you elaborate upon whether exploring 3D printing might enable you to get your unit costs down to a point where they become extremely attractive in the power module space?
Yeah. Wel certainly, you know, I dream of AlSiC less than copper every day right? That's. We're not there yet. The idea of reducing our production costs, improving our manufacturing consistency, and enabling our salespeople to make the value proposition to clients is always a good approach, right? The idea of lowering our costs to remain competitive, whether that be with additive manufacturing, improved current processes, and they're not mutually exclusive, right? We continue to look at all of those parts of the processes. In the end, our goal is to produce quality products at the lowest cost so our customers can be competitive in the market. We're open.
Good. Yeah. Thanks, I appreciate it. Take care.
Take care. Thank you.
Again, to ask a question, you will need to press star one on your telephone keypad. Your next question comes from the line of Kenneth Pounds. Your line is open.
Yes, good quarter. A lot of talking about the military. Is there any updates on what's going on in the EV market? Also, I know you guys do business with planes and other things that dissipate heat.
Yeah. Well, I made a story about the EV market in both commercial and defense. The transportation segment of the market continues to lag from the COVID hangover, if you will. We have been in contact with our customers, and they are forecasting increasing demand, but that's in 2023. I still think that's a lagging segment of the market. The business is still there for us. We're still executing. We're doing a good job, and we have good communication with these folks. Yeah, I think it's gonna be growing, and the EV market could be really huge, right? I don't wanna oversell that, but you know, we've been working on that here for a long time. We've had design wins. We're continuing to get advanced.
You know, we advance from design win to a couple of hundred to a couple of thousand, as they go through all their testing pieces.
Pieces, not dollars.
Not dollars. Pieces. That continues to advance. You know, it's a long cycle to get our solutions and approved and in line, but we're in that in many different phases. Some are at 10, some are at hundreds, some are in thousands. I like the way they could be feathering into us, but we just need to keep pursuing improvements and delivering and hopefully good things will happen for CPS.
You mentioned locating someone in Michigan for, you know, good reasons. A lot of EV stuff, at least in the, you know, passenger stuff is going on in California. Is there an idea to have some more presence there to go to shows or other kinds of things that they're doing, you know, out here, out west?
Yeah. Well, certainly we have a gentleman stationed in California already. So, you know, we would-
Okay.
We already have Gregg Weatherman stationed in California. I think he's at a show this week.
Yeah, Space Tech is set this week.
One week or one week ago.
Next week, yeah.
I think it's this week or next week. We already had Chuck Griffith in California, and we also have Tim Davis down in Florida. He's kind of got the Space Coast. We thought that positioning Anthony Koski geographically in the Michigan area would kinda give us a nice kinda triangle of where we wanna be executing commerce.
Great. Yeah. Okay, I didn't know about that. That sounds real good. Great. Well, thank you so much.
Thank you sir.
Thanks.
Have a good day.
There are no further questions at this time. Please continue.
Okay. Well, if we have no further Chuck, I did most of the talking. You wanna take us home?
I'll just say thank you everybody for joining us, and hopefully we'll have equally or better good news in 90 days or so. Thank you.
Thank you, everybody.
Thanks, everybody.
This concludes today's conference call. Thank you. You may now disconnect.