CPS Technologies Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017. This annual filing also discusses fourth-quarter performance. The company designs and manufactures custom metal-matrix composite components, principally for electronics, transportation, automotive, energy, aerospace and defense markets.
Financial results and liquidity
- Revenue: $14.58 million, down 5% from $15.35 million in 2016, primarily because armor-product sales declined. No significant annual pricing changes were reported.
- Gross profit and margin: $1.66 million and 11.4% of revenue, versus $2.16 million and 14.0% in 2016. Management attributed the decline mainly to lower sales volume.
- Operating results: SG&A was $3.61 million, up 8%, including approximately $0.2 million of proxy-related legal and other costs and $0.2 million related to an executive officer’s separation. Operating loss widened to $1.95 million from $1.18 million.
- Net income: Net loss was $1.72 million, or $0.13 per share, compared with a $454,000 loss, or $0.03 per share, in 2016. The 2017 income-tax benefit was $222,000; the Tax Cuts and Jobs Act caused a $680,000 fourth-quarter deferred-tax remeasurement expense. The company reported a fourth-quarter net loss of $793,000, including an approximately $400,000 tax provision despite an operating loss.
- Fourth quarter: Revenue was $3.8 million, up 32% from $2.9 million, reflecting higher baseplate shipments. Gross profit rose to $563,000 from $77,000. SG&A increased to $959,000 from $773,000, including $230,000 of executive-separation costs. The filing’s fourth-quarter operating-loss comparison appears to contain a wording error; it gives $396,000 for 2017 and $696,000 for 2016 while describing the loss as declining.
- Cash flow: Operating activities used $1.79 million, versus $596,000 provided in 2016. Capital spending was $274,000, and investing activities used $274,000. Cash declined by $2.07 million to $1.34 million from $3.41 million.
- Working capital and liquidity: Receivables rose to $2.94 million from $1.96 million; days sales outstanding increased to 70 from 61. Inventory was $2.11 million, versus $1.97 million. Current assets were $6.49 million and current liabilities $1.70 million; the reported current ratio was 3.8.
- Debt and equity: No revolving-credit borrowings were outstanding at year-end; the $1.5 million facility was available and secured by receivables and other assets. It matured at the end of May 2018 and carried interest at prime plus 1%. The company reported compliance with covenants, including a 0.2 liabilities-to-tangible-net-worth ratio against a 0.5 maximum and $1.34 million cash against a $1.30 million minimum. Stockholders’ equity was $9.32 million, down from $10.75 million.
Changes, outlook and material matters
- Revenue concentration increased: the three largest customers represented 54% of 2017 revenue, versus 49% in 2016. Four customers accounted for 68% of year-end trade receivables. Germany generated 42% of revenue; 70% of revenue came from shipments outside the United States.
- Management said cash, operating cash flows and the credit line should fund requirements for the foreseeable future, but cautioned that insufficient revenue or inability to reduce discretionary spending could impair its ability to meet obligations. The filing provides no specific revenue or earnings guidance.
- Management expects attractive growth opportunities and believes future taxable income will allow realization of deferred tax assets. The company reported $3.04 million in net deferred tax assets, no valuation allowance, and approximately $2.37 million of federal net operating loss carryforwards.
- Quality claim contingency: In January 2018, a European customer notified CPS of a nonconformance involving nickel plating performed by a vendor from mid-September 2017 to mid-January 2018. Approximately 15,000 vendor-plated baseplates had been assembled into modules during the period; the company believed fewer than 15% of baseplates plated during the period were affected. Rework and screening were underway. The customer cited possible costs and consequential damages; the amount, if any, was not estimable, insurance had been notified, and no loss was recorded. Legal proceedings were possible.
- Key risks include electronics-market cyclicality, sales and earnings volatility, dependence on a small number of customers, product-development and customer-acceptance risks, competition and price pressure, potential need for additional capital, cybersecurity threats, and currency exposure relative to a Japanese competitor.
- The company reported no material litigation other than the plating-related potential claim, no off-balance-sheet arrangements, and effective management-assessed disclosure controls and internal control over financial reporting. The financial statements received an unqualified audit opinion; the auditor did not express an opinion on internal controls.
Important facts for investors to verify
- Resolution, screening results, customer claims, vendor recovery and insurance coverage for the nickel-plating issue.
- Cash burn, working-capital needs and the company’s ability to renew or replace the revolving credit facility that matured in May 2018.
- Whether revenue and gross margins recover after the annual decline, and whether fourth-quarter improvement continues; clarify the filing’s inconsistent operating-loss comparison.
- Customer concentration, receivables collection and the assumptions supporting realization of deferred tax assets.