Operator: Good afternoon ladies and gentlemen, and welcome to the CPS Technologies third quarter 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. Sir, the floor is yours.
Chuck Griffith: Thank you Matthew, and good afternoon everybody. I’m joined by Michael McCormack, our President and Chief Executive Officer, as well as Anthony Koski, our Chief Development Officer. Michael will present his comments on our third quarter results, but before we begin the business portion of the call, I would like to point out the 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’s operations and environments. 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 statements. Now I’ll turn the call over to Michael to offer his perspectives on the third quarter results.
Michael McCormick: Thank you Chuck, and good afternoon everyone. We are pleased to once again be reporting positive and growing results to our investors. Today we are delighted to announce revenues of 6.7 million and an operating profit of 709,000 for the quarter ending October 1st, 2022. This is a 22 percent increase compared with the revenues of 5.5 million and a dramatic increase compared to the loss of 88,000 in operating [inaudible 00:01:45] for the corresponding quarter a year ago.
We are pleased to report that revenues in the third quarter of 2022 were the second highest in the company’s history, with Q2 being the highest. And we have now consecutively delivered the top three quarters in revenue performance in the company’s 38 year history. The optimistic news with the growth in revenue is also coupled with further good news with our book to bill ratio. For the past quarter our book to bill ratio was over two. And on the trailing four quarters, the basis by which we measure ourselves, is 1.36. This is above our organic [inaudible 00:02:22] and most importantly, calculated upon a growing revenue base.
On a fiscal year to date basis, our operating profit of 1.9 million compared to 201,000 for the first nine months of 2021. This is an increase of 858 percent. I’m very proud of the team’s efforts to continue driving new business and operational efficiency as we gain momentum in realizing the success of our strategic initiatives. We continue to perform and exceed against our operating plan, and we are on pace for a record year in 2022.
We are continuing to remain vigilant on ensuring availability of our goods throughout our supply base. The larger concerns today involve the impacts of inflation, logistics delays, and a limited labor force. We are not immune to these challenges, but we continue to diminish the possible impacts through proactive planning. To date, none of these issues have had a significant impact on our customers.
While inflation affects both wages and material costs, we have been able to mitigate these in the form of permanent increased manufacturing efficiencies, couples with incremental price increases. In an uncertain overall economic environment, we remain very pleased with our third quarter performance, and confident in our outlook. I’ll speak more later about the overall business progress moving forward, but for now, Chuck will discuss the financial details in more detail, thank you.
Chuck Griffith: Thank you Michael. The revenues totaled 6.7 million in Q3 2022, compared to $5.5 million generated in Q3 2021. An increase of 22 percent. This increase was due primarily to increased shipments of armor panels. For the first nine months of 2022 revenues totaled $20.5 million compared with $16.2 million for the nine months of 2021. The revenue over the first nine months of 2022 represents the best nine month period if company history.
Gross margin in Q3 2022 totaled $1.9 million, or 28 percent of sales. This compares with gross margin in Q3 2021 of $1.1 million at 19 percent of sales. This increase in margin was primarily due to the impact of higher sales on fixed factory costs, as well as product mix. For the first nine months of 2022, gross margin totaled $5.7 million compared to $3.4 million for the first nine months of 2021. [inaudible 00:04:58] general and administrative expenses, SGNA, totaled $1.2 million in Q3 2022 and remains steady when compared with SGNA expenses of 1.2 million in Q3 2021.
For the first nine months of 2022, SGNA totaled 3.8 million compared to 3.2 million for the first nine months of 2021. The company experienced operating income of $708,000 in Q3, compared with an operating loss of $88,000 in Q3 21. This increase in operating income is due primarily to the increase in revenue in gross margin previously discussed. For the first nine months of 2022 operating income totaled $1.9 million compared to $201,000 for the first nine months of 21.
This represents our highest opening nine months in operating income in CPS’s history. Turing to the balance sheet, we ended the quarter with $5.6 million of cash increasing from $5.1 million on hand at the end of 2021. The increase in cash was primarily due to our net profit offset by increased accounts receivable and inventory to support our higher sales levels. Although it remains open and available to us, no additional cash was raised under the ATM program in the third quarter of 2022.
Accounts receivable at October 21st 22 totaled $5.8 million up from 4.9 million in December or at December 25th 21. This increase includes an other receivable of $641,000 for the employee retention tax credits. Excluding the ERTC, our [inaudible 00:06:47] sales outstanding totaled 69 days at the end of the quarter, the same as the 69 days for the year end in 2021.
Inventories totaled $4.9 million at October 21st, 22, compared to $3.9 million at December 25th, 21. This increase in inventory is due to increased work and process and raw materials needed to support our expected sales growth. Inventory turnover in the most recent four quarters was 4.5 times a small reduction to the 4.7 times for the period end of December 25th 21. Turning to the liability side, payables and accruals totaled 2.9 million, down from 3.2 million at December 25th 21. This change is due to final payments in 2022 of accruals for last year’s restructuring costs.
And for further discussion, I’d like to turn the call back over to Michael.
Michael McCormick: Thank you Chuck. The year to date revenues, bookings, and operating profit of the business are the best in the company’s 38 year history. We are excited by the path we are on. But we still must execute to complete this record year of performance. We are committed to creating positive outcomes for our customers and are growing more confident and continue positive financial results will also be achieved for our shareholders.
This past quarter CPS has achieved multiple strategic wins that are a direct result of the team’s ability to execute on our growth initiatives. In Q3 we received the largest single order in the company’s history at 8.8 million for ballistic protection systems upgrade for the US Navy aircraft carriers. Utilizing CPS’s proprietary hybrid tech armor technology. In addition I’m also glad to share with you that our team successfully qualified several new hermetic packaging [inaudible 00:08:43] with a key new tier one customer resulting in an [inaudible 00:08:46] production order valued at 1 million and future initial projections at two to three times that starting in fiscal year 23 and continuing for years.
The armor order to support the Navy will more importantly allow us to make detailed plans to present to the Navy on how we can continue to deliver armor faster and more efficiently. As you are aware there are many surface ships in the US Navy that have similar needs to provide crucial crew protection while sailors and marines carry out their mission. In addition, the US Navy we have been in dialogues with both the Coast Guard and Allied Navy that have similar protection requirements that we are actively pursuing.
As you can see in the news about the conflict in Ukraine, ships are constantly at risk due to asymmetric threats. Swarms of drones or unmanned aerial vehicles, UAV’s, have demonstrated the ability to sink surface vessels. We need more armor on naval vessels to ensure our sailors and marines can fight back against this emerging threat, as well as be protected from legacy kinetic energy threats.
The company continues to improve and deliver on our commitments to customers and shareholders. These are pardon the pun electrifying times here at CPS. All our existing product line, middle matrix composite, hermetic packaging and armor continue to perform on or slightly ahead of plan. In addition, with our multiple contract research and development DRAD contracts with various US Government agencies, we now have a fourth product line in the business. The [CRAD? 00:10:19] as we call it line is focused on creating, productizing and delivering intellectual property based solutions directly to the government, tier one, and OEM customers.
These new IP based opportunities are significantly more substantial on value, and similarly take a bit more time to transition from possibility to testing to first article to full reproduction. However, we’re off to a great start with our CRAD efforts, and look forward to providing updates early next year on this growing part of our business.
Driving new business and increasing sales is the primary objective in continuing our positive momentum and entering CPS’s next phase of growth. We recently reorganized our sales team, now operating as business development with their traditional transition in leadership. Cheryl Oliveira, our longtime Vice President of Sales, will be retiring soon in 2023. Cheryl is an amazing person, colleague, and friend. Her tenacity, experience, and knowledge will be difficult to replace. But we all wish her the best in her future endeavors.
As of the first of October, the leadership of the reorganized business development team has been transitioned to Anthony Koski, our Corporate Development Officer. Anthony joined CPS in April of this year, and has focused on executing strategic initiatives. Anthony brings over 12 years of defense acquisition and business development experience, having led, held leadership roles in both the Department of Defense, and defense industry. As a sales person myself, I recognize potential sales greatness when I see it, and I see it in Anthony.
We are quite fortunate to have two great leaders of our business development group back to back with Cheryl and Anthony. I’m confident under Anthony’s leadership that’s afforded by our fantastic team Gregg Weatherman, Judy, and Kevin, we will achieve our near and long term goals for growth. And probably sooner rather than later.
The business development team is focused on building the near term pipeline of high value opportunity that can be converted to significant production orders within 24 months. We are actively engaged in converting multiple, significant opportunities across all business lines. Active near term opportunities are primarily for thermal management and ballistic protection application in aerospace and defense and vehicle [alterfication? 00:12:37] market. These opportunities are at various stages of approval and implementation. But because these solutions are competitive, we treat them with an abundance of caution prior to any public release. I will say that our recent success in passing first article tests and convert them to low rate initial production with a key aerospace customer in Q3, we are demonstrating our business development and technical team’s ability to identify and convert new material solutions. This is just the beginning.
CPS is focused on converting potential opportunities into products. These products will generate revenue and profit for investors in the near and long term. This is how we are realizing shareholder value. We are equally committed to both customers and shareholders. I have already shared with you how bullish we are on armor, and our work in the aerospace and defense market. We are also very excited about the potential of CPS in the electric and hybrid electric vehicle market, as well as in building the infrastructure to support these markets.
This does have the potential to be a breakout crop for us. Perhaps not tomorrow or in 2023, but the potential is there. We are currently working with a customer who is selling to major automotive manufacturers, and are seeing significant growth in our business with them. That business is not necessarily enough to move the needle today, but is trending in the right direction. In fact, our bookings expected to convert in Q4 are greater than three times our year to date sales with this customer through September.
So the business prospects are trending positively, but there’s still a lot to do over the next few years. In general, we seek to have a stable potential breakout products in our pipeline of opportunities. But realize that to be a true breakout product, it takes time, and comes with patience, diligence, and a boatload of hard work. I would like all the shareholders to hear directly once again from me. We have three large initiatives ongoing to realize shareholder value.
Number one, we have purposely decided to operate principally in two markets. Infrastructure and aerospace and defense. We have chosen these markets because they are large and different markets with multiple paths to success. Success to CPS is a multi-year mutli-million dollar product opportunity that align with our core competency as a material [inaudible 00:15:03]. We provide proprietary light weight armor that is completely in line with the US defense modernization efforts.
We provide metal mixers composites, and hermetic packages that make electronics work more efficiently and last longer, both here on the planet earth and in space. Lastly, we provide easy transportation and infrastructure enable our products to allow the entire economy to realize it’s full of potential, in addition to supporting our national goals of on or reshoring critical technology manufacturing in New York Bay.
Number two, we have graduated from small business university. For years we’ve been sharing with customer’s investors the variety of benefits of our material solutions without realizing the full results of these initiatives. With new leadership in place throughout the company, we are now demonstrating that we can credibly deliver profitability and growth quarter over quarter, half year over half year and fiscal year to fiscal year. We are ready to take the next step in our growth plan.
Lastly, number three, we reformed to be and are operating as a materials technology company that is in constant pursuit of solutions through the advanced application of material science. We want to solve customers’ most demanding challenges. We thrive on working under pressure to deliver solutions that not only solve customers’ issues, but also we [wrote? 00:16:24] our investors for staying with CPS for this long journey.
Beyond fiscal year 22 we remain guardedly optimistic that our collective growth initiative, specifically in longer, new term product development investment, will expand the current product line both in terms of revenues and earnings. The recent hybrid tech armor award supporting the US Navy a record order for CPS and recent wins qualifying new products to expand the hermetic package product line will ensure we sustain this momentum in and through fiscal 23.
As previously reported, the growing CPS technical team is executing several [inaudible 00:17:05] phase contract research and development wins with promising results technically, and potential for phase two awards next year. Collectively, the business and product development teams are growing our pipeline of high value opportunity. As an organization, we continue to make measured investments to increase our capacity, and ability to scale, as we prepare for the next phase of growth.
We at CPS all believe we are on the right path to creating inherent shareholder value, and now would like to explore doing this faster. Lastly. On behalf of the company we would like to pass on our condolences to the family and friends of Norm Wexler. We recently became aware of his passing at the last quarterly report. Norm was the largest individual shareholder in CPS. He was a passionate about the long term application of material science to create life changing products for the betterment of mankind. He will be sorely missed.
I’m always thankful to the investors and the board for entrusting me to lead this amazing company. So with that, I will complete my prepared opening remarks, and Chuck and I will take any other questions. Matt?
Operator: Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one 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 one on your phone. Please hold while we poll for questions.
Your first question is coming from Michael Massaro. Your line is live.
Michael Massaro: Hey, good afternoon guys. Congratulations on an absolutely incredible quarter, incredible year, all the new contracts and everything. Everything seems to be heading the right direction. Just wanted to, you talked about shareholder value. Just wanted to talk a little bit about the equity, just kind of like I don’t know if you guys use an investor relations department or just to see what’s going on, how the equity maybe can get more noticed so to speak. Just seems to kind of lag. But you have everything going on, congratulations, and I’ll let you guys take the floor.
Michael McCormick: Chuck, I’ll take this one. Hey Michael, thank you for your positive feedback. In fact, we just had a board meeting last week, this continues to be a big topic, investment relations. And we are finalizing our selection of how we’re gonna proceed. I think we have a course of action, we have two or three companies, Michael and others and we’ll probably be making a decision in Q4 and moving out. The business is growing, obviously, but the value proposition remains the same at what I just articulated. So, yes, more to follow, but yes, we agree, and soon to follow.
Operator: Thank you, your next question is coming from Irwin Gomberg. Your line is live.
Irwin Gomberg: Congratulation on a really strong quarter. I have three questions about the hermetic package market. One, how [emergent? 00:20:24] is the hermetic package market, two what percent of the market is CPS captured, and three, what percent of the market do you expect CPS to capture in the few years?
Michael McCormack: Hi Irwin, it’s Michael again. Thank you for the questions. You know, the hermetic packaging business is quite large. We think that there is opportunities for us to in the near term double a play within the hermetic packaging line. I think this year we’re probably on pace for 10 plus million. We probably could within two years double that. And that’s kind of what our goal is in the near term with hermetic packaging. One of the beauties about hermetic packaging, we are the only ones who can offer an [ALSICK? 00:21:18] hermetic package, a world class application of two of our product line. And we think there’s nothing but positive things ahead for us with hermetic packaging. Our history of glass to ceramic seals.
Again, the percentage of the overall market, to be determined. What we think we can address and service we think is twice what we’re doing today in the near term, 24 months.
Irwin Gomber: And longer term even more?
Michael McCormack: I think so too. And obviously, we have competitors in this space. But we continue to outshine and outperform them. And you know we’d have to collect more performance and then have more breakthrough products. We had, we just expressed shortly, we had a very nice hermetic packaging dealing with [Class? 00:22:09] this week that we sold to a tier one. They really liked our performance. We think that’s gonna convert from one million this year to three million next year and we’ll see where it takes us. But we have lots of opportunities in that.
And as you know, you send me maybe 50 press releases a week [laughs]. So I do read them, I assure you, and we stack them internally. So we appreciate the heads up of where to look and we’re trying to grow the business as fast as possible, but we’re also trying to recognize, we want to stay over our ski’s, right? We’ve waited a long time for this success and we don’t want it to be short term.
Irwin Gomber: Does any other competitor have AlSiC?
Michael McCormack: No, correct. That’s our distinguishing characteristic in the hermetic packaging business.
Operator: Thank you. Your next question is coming from Steven Fossey. Your line is live.
Steven Fossey: Can you comment perhaps about the hybrid tech armor order, how much of that, how long it would take you say to fill that order [crosstalk 00:23:41]
Michael McCormack: I’ll talk briefly about it and if I can add more I’ll let you know. Obviously, we’re very excited about the armor order, it reflects more than five aircraft carriers worth of armor. We continue to build, deliver. The issue with armor is that aircraft carriers are very critical assets to the US Navy and the national protection, and they don’t spend a lot of time in dry dock, or in dock in general. So we have to have a very coordinated schedule about when we deliver, when it gets installed, etc., etc.
So we know at least one ship set is on, but we’ve delivered two, maybe three at this point. But it’s really availability of the aircraft carriers. And then obviously with the uncertainty with the South China Sea, the Ukraine thing, I don’t see many aircraft carriers coming in anytime soon. But, I’m not in charge of national security [laughs]. But it’s a very difficult thing to time out. And it’s a critical asset, its four sovereign acres of US soil at sea around the world.
It’s a tough asset to get on. And I’m very proud that we are on it. I wish we were on more, faster, but we have to get them to come in to dock. And so I think we’re probably on a pace, just like the Navy has articulated to us, probably two or three carriers a year plus other aircraft, other surface vessels that they see and we’ll keep going from there.
Steven Fossey: If I could just follow up quickly on that, I think it was a little confusing when I first asked the question [laughs]. How much of that capacity is, do you have extra capacity to make panels versus what the Navy is currently demanding?
Michael McCormack: Yeah, I think you’ve been to the facility right? So we’re only doing one shift of armor and manufacturing, so I can tell you that we can triple the output without tripling the footprint. I mean, Dan Bardon, our operation guy is probably driving his car into a tree as we talk, but we certainly have the capacity today to triple the amount of armor that we’re doing. And we have plans to make that six times what we’re doing today with relative ease.
And right now, we continue to train, deliver prospect for new armor opportunities, and see what happens.
Operator: Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Your next question is coming from Warren Silver. Your line is live.
Warren Silver: Good afternoon gentlemen. I’m proud to see that the company is making the transition into actual manufacturing and volume. One thing I’m concerned about is work speed or [inaudible 00:26:57] announced that they were using our product line [inaudible 00:27:03]. And then the other day, [inaudible 00:27:07] conglomerate announced that they make manufacture of Land Rover and Jaguar that they usually the work speed for all the EV production. Could you elaborate on that, what the potential is and [Workforce? 00:27:26] has spent a billion dollars on a new plant in North Carolina, and I think they have one in New York State and what is our capacity to supply them for how many products are they using from our production?
Michael McCormack: As to your question, I really can’t speak for [Wolfspeed or Cree? 00:28:12] you would have to refer your questions to them. But as you know, they’re clients of ours, and we do have a lot of products with them, we have a lot of dialogue going on with them, and we have a lot of opportunity with them. And so for me to comment specifically on what we’re doing with this client in particular, and match it up to their press releases would probably be premature on my part. But I will tell you this, that we are continuing to see progress. Not all of it is positive. Some of it goes a little sideways, it’s the product business. But we do continue to be their manufacturer of choice when it comes to MMC. So we like that position, we like to keep creating that, and to your point, there are many high end positive decisions that would have to be made, similar to what they’ve had to make with their decisions with Arkansas and North Carolina.
But if you want to know specifically from Wolfspeed and Cree, you’d have to call them. I hope that helps Warren, I just can’t speak for them.
Operator: Thank you. As a final reminder ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Please hold while I poll for questions. There are no further questions in the queue.
Michael McCormack: OK, Matthew, this is Michael, and for those of you who are still on, thank you everybody for listening in today. I’m sure the transcript will be out shortly. I think a lot of positive things are going on at the firm. Chuck, myself, Anthony, Dan, [Seacatcher? 00:30:03] the leadership team, we think we’re on the right path, and we appreciate the continued support by our investors and colleagues. So with that, Matt, I’ll say good night.
Operator: Thank you ladies and gentlemen, 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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