CPS Technologies Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016 (53 weeks), compared with the year ended December 26, 2015. The filing also reports fourth-quarter results. CPS designs and manufactures custom metal-matrix composite components, principally for electronics, transportation, energy, defense and other industrial markets.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $15.35 million | $21.76 million |
| Gross profit / margin | $2.16 million / 14% | $4.66 million / 21% |
| Operating income (loss) | $(1.18) million | $0.62 million |
| Net income (loss) | $(454) thousand; $(0.03) per share | $451 thousand; $0.03 per share |
| Operating cash flow | $596 thousand | $1.56 million |
| Cash and cash equivalents, year-end | $3.41 million | $3.41 million |
Revenue fell 29%, primarily due to lower baseplate sales. Hermetic packages, fracking balls and lids also declined, partly offset by higher armor revenue. Management reported no significant price reductions. Lower volume reduced gross margin despite lower factory-support spending; SG&A declined 18% to $3.34 million.
Fourth-quarter revenue was $2.9 million, down 47% from $5.4 million in the prior-year quarter. Gross profit fell to $77 thousand from $1.26 million; operating results shifted to a $696 thousand loss from $296 thousand of income. The quarter recorded a $253 thousand net loss versus $256 thousand of net income a year earlier.
Liquidity, debt and balance sheet
- Year-end current assets were $7.43 million and current liabilities were $1.29 million; the reported current ratio was 5.8x. Stockholders’ equity was $10.75 million.
- Accounts receivable decreased to $1.96 million from $3.57 million; days sales outstanding rose slightly, from 59 to 61 days. Inventory fell to $1.97 million from $2.63 million. The inventory obsolescence reserve increased to $551 thousand from $456 thousand.
- CPS had no borrowings under its Santander revolving credit line or equipment finance facility at year-end. The $2 million revolving line and $500 thousand equipment facility were due to mature in May 2017; the borrowing base permitted $994 thousand of additional revolver borrowing at year-end. The company was compliant with its covenants.
- Operating cash flow was positive, but lower than in 2015. Working-capital reductions approximately offset operating losses, and cash was essentially unchanged. Capital expenditures were $646 thousand.
Material changes and business developments
- Top three customers represented 49% of FY 2016 revenue, down from 60% in 2015; 75 other customers accounted for the balance. The three largest customers individually represented approximately 10%–20% each. Three customers accounted for 41% of year-end receivables.
- Approximately 90% of FY 2016 revenue came from commercial applications and 10% from defense-related applications. The expired Army cooperative research agreement generated no 2016 revenue; CPS continued to receive funded Army orders, primarily for armor.
- The company early-adopted the accounting standard requiring deferred taxes to be classified as noncurrent. The $2.83 million deferred tax asset was recorded without a valuation allowance; management judged it more likely than not to be realized.
Outlook, risks and unusual items
Management said cash, operating cash flows and the Santander facilities were expected to fund requirements for the foreseeable future, and expected to renew the facilities annually. It cautioned that this depended on sufficient revenue and/or reductions in discretionary spending; renewal was not assured. The filing provides no quantified revenue or earnings guidance.
- Key risks include dependence on a small number of customers, electronics-market cyclicality, order timing and volume volatility, customer adoption of new products, competition and potential product substitution, and fixed costs that amplify the effect of sales changes on results.
- Customer-specific inventory may be difficult to resell if orders are cancelled or anticipated demand does not materialize. Consigned inventory at customer locations was $848 thousand at year-end.
- Other disclosed exposures include defense-spending pressure, oil-price sensitivity of fracking-ball sales, yen-dollar movements affecting competition with a Japanese rival, and possible deferred-tax-asset remeasurement if tax laws change.
- FY 2016 other income of $51 thousand included $40 thousand from selling equipment above book value. The $676 thousand income-tax benefit was largely deferred; tax effects materially reduced the reported net loss.
- The company reported no material litigation or off-balance-sheet arrangements. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether baseplate demand and overall sales recover, and whether new customer design wins progress to production volumes.
- Whether gross margins improve as volume changes, given the sharp FY 2016 and fourth-quarter deterioration.
- Whether the Santander credit facilities were renewed after their May 2017 maturity and whether liquidity remains adequate if losses continue.
- Whether management’s taxable-income forecasts support realization of the $2.83 million deferred tax asset.
- Customer concentration, receivables exposure and the recoverability of customer-specific and consigned inventory, including the higher obsolescence reserve.