CPS Technologies Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 27, 2014 (52 weeks); the filing also reports fourth-quarter results. CPS makes custom metal-matrix composite components and assemblies, principally for electronics, with additional automotive, defense, and oil-and-gas applications.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $23.14 million | $21.41 million |
| Product revenue | $22.95 million | $21.09 million |
| Gross margin | $5.47 million (about 24% of revenue) | $5.36 million (about 25%) |
| Operating income | $1.22 million | $1.46 million |
| Net income | $1.00 million; diluted EPS $0.07 | $0.97 million; diluted EPS $0.07 |
| Cash from operations | $1.28 million | $2.44 million |
| Cash and cash equivalents at year-end | $2.31 million | $1.57 million |
| Working capital at year-end | $6.87 million | $5.21 million |
| Total assets / stockholders’ equity | $12.65 million / $10.25 million | $11.14 million / $8.86 million |
Revenue rose about 8%, while operating income declined about 17%; management attributed the operating-profit decrease to higher manufacturing and marketing costs and an unfavorable product mix, partly offset by higher volume. Net income increased modestly. Operating cash flow fell year over year, with higher receivables and inventory absorbing cash. Capital expenditures were approximately $0.50 million, and cash increased by $0.73 million.
At year-end, CPS had no bank borrowings or outstanding capital-lease obligations. It had a $2 million revolving credit line and a $500,000 equipment-finance facility, both scheduled to mature in May 2015; neither was drawn. The reported current ratio was 3.9, and the company was in compliance with its financial covenants. Operating lease commitments totaled approximately $725,000.
Fourth quarter: Revenue was $5.95 million versus $5.10 million in Q4 2013. Gross margin was $1.54 million (26% of sales) versus $1.36 million (27%); operating income was $578,000 versus $431,000; and net income was $619,000 versus $276,000.
Material changes and business developments
- FY2014 growth was supported by approximately $1.2 million of fracking-ball sales, compared with none in 2013, and increased baseplate sales for traction and hybrid/electric vehicles.
- Gross margin dollars increased slightly, but margin percentage declined amid higher manufacturing costs, product mix, and price reductions. Q4 sales benefited from baseplates and, to a lesser extent, fracking balls; approximately $300,000 of price decreases partly offset volume gains.
- The three largest customers contributed 69% of revenue (38%, 21%, and 10%); those customers accounted for 66% of year-end trade receivables. The customer base and revenue concentration remain significant risks.
- The U.S. Army cooperative agreement was extended through March 31, 2015. It is 95% government-funded, subject to incremental authorization and audit, and had $6.8 million authorized and invoiced through year-end. FY2014 agreement revenue was $189,000.
- In January 2015, the company’s shares moved from the OTCQB to the NASDAQ Capital Market, continuing under ticker CPSH.
Outlook, risks, and unusual items
Management said it expected to fund 2015 working-capital needs through operating cash flow, cash on hand, and the credit line if needed, and believed available resources would cover requirements for the foreseeable future. This expectation is not assured; management warned that lower revenue or inability to reduce discretionary spending could impair its ability to meet obligations or business objectives. The filing provides no quantified revenue or earnings guidance.
Key risks include cyclical and volatile electronics demand, reliance on a small number of customers, order timing and product mix, price and competitive pressure, product-development and customer-acceptance risk, and the possibility that new technologies or lower-cost materials displace CPS products. The filing also identifies exposure to a stronger U.S. dollar versus the Japanese yen, oil-price-related weakness in fracking-ball sales, and possible reductions in defense spending. The Army agreement was due to expire in 2015.
Inventory was $2.53 million, including $1.0 million held at customer locations on consignment; nearly all inventory is customer-specific and may be difficult to resell if orders are canceled. Management recorded no valuation allowance against approximately $2.30 million of deferred tax assets, concluding realization was more likely than not. It estimated that about $5.8 million of taxable income would be needed to use the relevant tax attributes. These estimates depend on future taxable income.
The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Net-income inconsistency: The audited statements report FY2014 net income of $1,002,768, while the MD&A narrative states $1,033,000. Confirm the audited figure and any related per-share references.
- Credit-line pricing and renewal: The filing describes the line rate as prime plus one-half percentage point but gives a conflicting parenthetical “.05%”; confirm the executed terms and post-May 2015 renewal status.
- Customer exposure: Track revenue and receivables concentration, customer order releases, and collection trends; year-end DSO was 54 days versus 51 a year earlier.
- Cash conversion and inventory: Monitor operating cash flow, receivables, customer-specific inventory, consignment balances, and reserves as sales change.
- Government funding and tax assets: Verify the outcome of the Army agreement after March 31, 2015, and whether future taxable income supports realization of deferred tax assets.