Operator: Good day, everyone. And welcome to the CPS Technologies Corp Second Quarter Investors Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Chuck Griffith. Please go ahead.
Chuck Griffith: Thank you, Operator. And good morning, everyone. Thank you for joining us. I am joined today by Michael McCormack, our President, and Chief Executive Officer, who will offer his comments on our second 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 subject to the many uncertainties that exist in CPS 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 second quarter results.
Michael McCormack: Thank you, Chuck. Today we are delighted to announce revenues of $7 million and an operating profit of $669,000 for the quarter ending July 2nd, 2022. This is a 21% increase compared with revenues of 5.8 million and 164% increase compared with the operating profit of 253,000 for the corresponding quarter a year ago, ending June 26, 2021. We are pleased to report that revenues in the second quarter of 2022 were the highest in the company’s history and showed a 6.3% improvement over revenues of the first quarter of 2020 to our previous record high for a quarter.
Aspects of our growth initiatives are beginning to show results from the challenging work and effort that we have undertaken at CPS. We are cautiously optimistic that our growth initiatives and profitability changes we are executing will continue through fiscal year 2022 and beyond. The team is continuing to drive growth and efficiency to sustain this momentum. As the economy continues to progress and deal with the challenges of seemingly endless new variants of the virus continuously emerging.
There are also emerging new normal factors such as inflation, material availability, and transportation and shipping delays that we are actively working to mitigate. Despite these uncertain times we remain incredibly pleased with our second quarter performance and are confident in our outlook. I’ll speak more later about the overall business progress moving forward later on the call. But for now, Chuck will discuss the financial results in a little bit more detail.
Chuck Griffith: Thank you, Michael. Revenues totaled $7.1 million in the second quarter of 2022, compared with 5.9 million generated in Q2 2021, an increase of 21%. This increase was due to increased shipments of armor panels and hermetic packages but in particular base plates, which last year bore the largest negative impact from the COVID-19 pandemic. For the first six months of 2022, revenues totaled $13.7 million compared with $10.7 million for the first half of 2021. The revenue over the first six months of 2022 represents the best six-month period in company history.
Gross margin in Q2 2022 totaled 1.8 million or 26% of sales. This compares with gross margin in Q2 2021 of 1.4 million at 23% of sales. This increase in margin was primarily due to the impact of higher sales on fixed factory costs. For the first six months of 2022 gross margin totaled $33.8 million, compared to $2.3 million for the first half of 2021. That would be a 28% of sales and 21% of sales, respectively. Selling general and administrative expenses totaled $1.2 million in Q2 2022, compared with SG&A expenses of 1.1 million in Q2 2021.
This increase in SG&A expense was due to increased compensation expenses as a result of the addition of our new Chief Development Officer and other salary increases. For the first six months of 2022, SG&A totaled 2.6 million, compared to 2.0 million for the first half of 2021. The company experienced operating income of 669,000 in Q2 2022, compared with operating income of 253,000 in Q2 2021. This increase in operating income is due primarily to the increase in revenue and gross margin previously discussed. For the first six months of 2022. Operating income totaled 1.2 million, compared with 289,000 for the first half of 2021. This represents our highest opening six months of operating income in CPS’s history.
Turning to the balance sheet, we ended the quarter with $5.1 million of cash basically the same as the $5.1 million on hand at the end of 2021. The neutrality of cash was primarily due to our net profit and reduction in accounts receivable, offset by increased inventory to support the higher sales and reductions in accounts payable and accrued expenses. Although it remains open and available to us no additional cash was raised in the second quarter under the ATM[?] Program.
Accounts receivable at July 2nd, 2022, totaled 4.5 million down from 4.9 million in December of 2021. Our Days Sales Outstanding totaled 58 days at the end of the quarter compared to 69 days for the year ended 2021. The decrease in accounts receivable and DSO both relate to the inclusion of deferred revenue of $600,000 in the year-end accounts receivable balance, which was collected during the first quarter of 2022. Inventories totaled 4.7 million at July 2nd, 2022, compared with 3.9 million at December 25th, 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 4.6 times basically equivalent to 4.7 times for the period ended December 25, 2021.
Turning to the liability side. Payables and Accruals total 2.3 million at July 2nd, 2022, down from 3.2 million at December 25, 2021. This change is due to the continuing payment in 2021 accruals from the restructurings that we did last year. And for further discussion, I’d like to turn the call back over to Michael.
Michael McCormack: Thank you, Chuck. It continues to be my humble honor to lead CPS on our growth journey. I appreciate these opportunities to share with our investors and hopefully interested new investors of the current state of the business, as well as our future. We genuinely appreciate your continued support and belief that CPS is a growing company that is on the move to improved outcomes. All three of our product lines Metal Matrix Composites, Hermetic Packaging and Armor continue to perform on our slightly ahead of plans.
The year-to-date operating profits of the business is the best half in the company’s history and a 7% improvement over the first half of last fiscal year. We are excited by the path we are on but still must execute the second half of the year to solidify the growing value proposition of CPS. We are committed to creating positive outcomes for our customers and are growing more confident that continued positive financial results will also be achieved. This past quarter in addition to executing commerce at the highest levels of the company history we implemented a new material resource planning and enterprise resource planning MRP, ERP Software Tool. The new tool we selected was actions made to manage.
After a nearly year of planning we implemented the new system at the end of the quarter and are encouraged by the ease of working with this new tool. But the tool is only part of the solution. We need to combine the outstanding people at CPS with improved processes enabled by this tool. This will enable us to create and grow an environment that can easily manage two times the current business at CPS without incurring linear increase in fixed costs. We are encouraged that our gross margin and operating profit continue to exceed our goals. The implementation of this new MRP, ERP tool will never be termed sexy, but we believe it will enable us to conduct more business with fewer resources and that investors will realize that this is an essential to scale the business to greater heights.
Step number one in growing the business is and always will be sales. We have a tremendous sales staff led by our Vice President of Sales, Cheryl Oliveira. Cheryl is working with Gregg Weatherman, Judith Levitre, Kevin Langley, and now Anthony Koski are the right team to achieve our near and long-term goals for growth. The sales team is supported by a growing Technical Staff Material Science, Dr. Steve Kachur, and Mark Occhionero to lead our product development efforts.
We have recently added another Material Scientist, Matthew Koenig, Engineers Kevin Semple, Jorge Hernandez, and Jonathan Liguori. The staff additions combined with our existing staff make for a strong technical team here at CPS. As I’ve shared before we have several opportunities to assist customers with new and innovative solutions. These solutions are at various stages of approval and implementation but because these solutions are competitive, sensitive, we treat them with an abundance of caution prior to any public release.
What I can share with you is that our engineers are working with sales staff recently launched two new products in the quarter. Both new products successfully pass the rigorous first medical tests with these customers. And we are anticipating low-rate initial production awards during the second half of this fiscal year. Both clients are well-regarded aerospace and defense companies in the US. We are also continuing to work on the benefits of additive manufacturing 3D printing into our product lines.
Customers are requesting larger metal matrix components with features that are extremely difficult to manufacture. We have had consistently good early results with substantially lowering the Coefficient of Thermal Expansion, CTE at the request of several customers. And now in the process of some invention disclosures and possible intellectual property patents to secure our competitive advantage in the future. We still have lots of scientific work to be done to conduct extensive characterization necessary to take the next steps. They expect to report positively on these results later in the year.
As I’ve shared previously, CPS is quite active in utilizing the calls for technology and the Small Business Innovative Research, SBIR and Small Business Technology Transfer, STR Programs. I’m happy to report that the second Small Business Innovative Research Award from the Navy is officially under contract now. We are continuing to make proposals, submissions, missions under these programs to assist in the manufacturing of different material sciences solutions as in tungsten warheads and hypersonic vehicle insulation to name a few.
We anticipate hearing about the technical evaluation before the end of fiscal year. We are quite excited and proud of our success with the Department of Defense and look forward to possible awards from other federal agencies like the Department of Energy, DOE, and the Missile Defense Agency, MDA in the months ahead.
We think there are numerous opportunities for CPS to provide products to both the military, defense, and commercial aerospace markets, as well as the commercial electronic vehicle EV market. There is always a demand for low-cost, highly reliable, and scalable metal matrix composites. There is considerable evidence that trends are for increased use of MMCs for structural aerospace component parts and increased thermal management needs for the hybrid electric vehicle, HGV, and EV markets. We believe now that EVs have passed through the mass adoption tipping point of acceptance and that CPS will see even more opportunities as vehicle manufacturers forecast even greater proliferation in the future.
Lastly, we are encouraged by our results but even more by the opportunities to induce additional MMCs into the market. We are making measured investments in research and development coupled with a growing contract research awards to further expand our technical expertise but more importantly our reach to potential customers. We enjoy a 38-year history of providing unique, value-added metal matrix composites to customers. And we think we have only begun to help customers and investors reach their goals.
The entire team at CPS believes we are on the right path to creating inherent shareholder value. We are fortunate to expand upon the solid base of business that’s been built on since 1984. We appreciate the opportunities and continued support from our investors because we are in a growth mode and as you all know growth requires cash. We are beginning to deliver consistent and growing financial results, but our goal is not incremental improvement but a considerable one. This requires all parts of the business working well together. I can assure you that there is a tremendous amount of arduous work being done at the company for our customers and investors. And we remain focused on building an improved CPS that can serve customers for decades to come.
In closing I’m encouraged by our performance to date this fiscal year we are committed to growing both the top and bottom line while we advance material science from ideas to concepts and concepts to products that our customers want and need today and tomorrow. We’re not satisfied yet, but we are well on a journey. I’m always thankful to the board of directors representing our investors for entrusting me to lead this amazing company. So, with that, I will say this completes my advanced remarks, and Chuck and I will take any questions now. Connie.
Chuck Griffith: We’re ready for questions and answers Connie.
Operator: Thank you. If you would like to ask a question today, please signal by pressing star one on your touchtone telephone. If you’re using the speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Again, please press star one to ask a question and we’ll pause for just a moment to allow everyone the opportunity to signal for a question. And again, it is star one to ask a question. And we’ll take our first question.
Steve: Hi. Good morning, guys. This is Steve Voss. How are you?
Speaker: Hi, Steve.
Steve: That sounds like a really great quarter and things looking good. Did you, I might have missed it, happen to mention what Book-to-Bill is?
Michael McCormack: The Book-to-Bill remains consistently in our goal between 1.10 and 1.25. I think we are slightly on the lower end right now. But this quarter that we are executing now that is starting to rebound.
Steve: Okay, great. Thank you.
Operator: And again, if you’d like to ask a question it is star one. And there are no further questions in the queue. I’d like to turn the conference back over to Mr. Griffith for any closing remarks.
Michael McCormack: Connie, thank you. This is Michael. Thank you, Steve, for the question and all of us for listening. Again, we had a great quarter. We appreciate the continued support and onward and upward we go. Thank you very much everybody for joining us today.
Chuck Griffith: Thank you, everyone.
Operator: And this concludes today’s call. Thank you for your participation and you may now disconnect.
CPS is a technology and manufacturing leader in producing high-performance energy management components that facilitate the electrification of the economy. Our products and intellectual property include critical pieces of the technology puzzle for electric trains and subway cars, wind turbines, hybrid vehicles, electric vehicles, the smart electric grid, 5G infrastructure and others. CPS hermetic packages can be found in many Aerospace and Satellite applications including the GPS III satellite and the Mars rover. CPS armor products provide exceptional ballistic protection and environmental durability at very light weight. CPS is committed to innovation and to supporting our customers in building solutions to this planet’s problems.
Statements made in this document that are not historical facts or which apply prospectively, including those relating to 2021 financial results, are forward-looking statements that involve risks and uncertainties. These forward-looking statements are identified by the use of terms and phrases such as “will,” “intends,” “believes,” “expects,” “plans,” “anticipates” and similar expressions. Investors should not rely on forward looking statements because they are subject to a variety of risks and uncertainties and other factors that could cause actual results to differ materially from the company’s expectation. Additional information concerning risk factors is contained from time to time in the company’s SEC filings, including its Annual Report on Form 10-K and other periodic reports filed with the SEC. Forward-looking statements contained in this press release speak only as of the date of this release. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. The company expressly disclaims any obligation to update the information contained in this transcript.