CPS Technologies Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks); comparisons are with the year ended December 30, 2017. The filing also reports fourth-quarter results. CPS designs and manufactures custom metal-matrix composite components for electronics, transportation, energy, defense and other markets.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $21.58 million | $14.58 million |
| Gross profit / margin | $2.91 million / 13% of sales | $1.66 million / 11% of sales |
| SG&A | $3.81 million | $3.61 million |
| Operating loss | $0.90 million | $1.95 million |
| Net loss | $3.71 million | $1.72 million |
| Operating cash flow | $(0.37) million | $(1.79) million |
| Capital expenditures | $0.35 million | $0.27 million |
- FY 2018 revenue rose 48%, primarily from higher baseplate shipments and CPS taking on the plating function for a major customer; management reported no significant price changes.
- Fourth-quarter revenue was $6.1 million, up 60% year over year. Gross profit increased to $1.2 million from $0.6 million, and operating results improved to a $0.2 million profit from a $0.4 million loss. The quarter nevertheless recorded a $2.9 million net loss, largely due to the deferred-tax valuation allowance.
- The FY 2018 income-tax provision was $2.78 million despite a pretax loss of $0.92 million. CPS established a $2.96 million valuation allowance against deferred tax assets, citing recent losses and concluding some or all of the assets were more likely than not to go unused. Net deferred tax assets fell to about $0.19 million from $3.04 million.
- Cash was $0.63 million at year-end, down from $1.34 million. Current assets were $7.03 million and current liabilities $2.66 million; the reported current ratio was 2.6. Accounts receivable were $3.05 million, while inventory increased to $3.19 million from $2.11 million, largely reflecting customer demand and CPS assuming responsibility for plating-related inventory.
- Shareholders’ equity declined to $5.84 million from $9.32 million, principally reflecting the net loss. The company reported no outstanding line-of-credit borrowings at year-end. Its secured revolving credit facility was $1.5 million, maturing June 30, 2019; CPS borrowed and repaid $0.9 million during 2018.
Material changes and business developments
- The three largest customers accounted for 65% of 2018 revenue, versus 54% in 2017. One customer alone represented 36%; four customers together represented 61% of year-end receivables.
- Revenue from Germany increased to 53% of total revenue from 42%; U.S. revenue was 33%, and other countries represented 14%.
- Management said it expected to fund 2019 operations with existing cash and bank borrowings. It warned that losing a major customer or vendor, insufficient revenue, or inability to obtain financing or reduce discretionary spending could materially affect business objectives.
- ASC 606 adoption did not materially affect the financial statements. The new lease standard, effective at the start of 2019, was expected to increase assets and liabilities by approximately $350,000.
Outlook, risks and contingencies
- No quantitative revenue or earnings guidance is provided. Management described growth opportunities in high-speed rail, electric and hybrid vehicles, defense, and other applications, while emphasizing dependence on continued demand and new customer design wins.
- Revenue is custom and customer-specific; production orders are preceded by prototype or evaluation periods, and customer forecasts are generally non-binding. Management said backlog is not meaningful because binding releases do not necessarily reflect underlying demand.
- A European customer asserted a claim related to nickel plating on baseplates. Approximately 15,000 baseplates from the vendor were assembled into modules during the relevant period, but CPS said only a small portion were affected. The customer estimated its claim at $1.0 million and reserved the right to seek further damages. CPS had not accrued a loss because the potential impact could not be quantified; insurance notifications were made, and legal proceedings remained possible.
- Other notable risks include customer concentration, working-capital needs, fixed costs, competition, customer acceptance and technology changes. CPS reported no material litigation otherwise and no off-balance-sheet arrangements.
- The $1.5 million credit facility is secured by receivables and other assets and includes financial covenants. The filing reports that the Q4 net-loss covenant was waived by Santander on March 8, 2019. The debt-service coverage actual is shown as “22” in the filing’s covenant table; its presentation is unclear.
Most important facts for investors to verify
- Whether baseplate sales growth and improved gross margin can continue, and whether higher inventory converts to shipments and cash.
- Customer concentration, including the largest customer’s 36% revenue share and the effect of any demand reduction or loss.
- The ultimate cost, insurance recovery and resolution of the nickel-plating claim, for which no liability was recorded.
- Cash needs and access to financing after the credit line’s June 2019 maturity, including covenant compliance and any renewal terms.
- Whether future taxable income can support realization of deferred tax assets and whether further valuation-allowance changes are needed.