CPS Technologies Corporation — FY2012 Form 10-K
Business and reporting period. CPS manufactures custom metal-matrix composite components and hybrid-circuit housings for electronics, power-control, automotive, defense and other markets. Fiscal 2012 ended December 29, 2012, and comprised 52 weeks; fiscal 2011 comprised 53 weeks. The filing is an annual report, not a standalone fourth-quarter filing.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $14.05 million | $19.81 million |
| Product revenue | $13.45 million | $17.64 million |
| Gross margin | $256,000; about 1.8% of revenue | $2.96 million; about 14.9% of revenue |
| Operating income (loss) | $(2.80) million | $(336,000) |
| Net income (loss) | $(1.52) million; $(0.12) per diluted share | $(46,000); approximately $0.00 per diluted share |
| Cash from operating activities | $(926,000) | $82,000 |
- Revenue fell 29%. Management attributed the decline to weaker traction and high-power markets, reduced demand for products nearing end of life, and lower Army contract revenue.
- Gross margin contracted sharply as lower volume left manufacturing fixed costs spread over fewer sales. Other pressures included a $292,000 obsolescence charge for lids, outside finishing costs and lower prices on certain baseplates. Fourth-quarter gross margin improved to $333,000, or about 8% of sales, from $248,000, or about 6%, a year earlier.
- The reported $1.31 million income-tax benefit reduced the net loss relative to the pretax loss. CPS recorded deferred tax assets without a valuation allowance; realization depends on management’s forecast of sufficient future taxable income.
- Cash and cash equivalents were $307,000, versus $1.14 million a year earlier. Working capital was $3.40 million, down from $5.50 million; current assets were $6.14 million and current liabilities $2.74 million. Total assets were $10.35 million and stockholders’ equity $7.53 million.
- Bank borrowings were $500,000 at year-end, compared with none in 2011. The revolving facility had a $2.0 million stated maximum, subject to a borrowing base; CPS reported approximately $900,000 of additional borrowing capacity at year-end. Capital-lease obligations totaled approximately $200,000, including $123,000 current. Total liabilities were $2.82 million.
- Inventory declined to $2.46 million from $3.14 million; $1.1 million was held at customer locations on consignment. Accounts receivable were $2.88 million, with 63 days sales outstanding, versus 66 days.
Material changes and management commentary
- Product revenue declined about 24%; cooperative-agreement revenue fell to $597,000 from $2.16 million. The Army-funded work generated $95,000 gross margin in 2012.
- SG&A decreased to $3.06 million from $3.29 million, partly because CPS suspended its 401(k) match and paid lower sales commissions. The company had 134 full-time and five part-time employees at year-end.
- Three customers generated 63% of 2012 revenue, down from 71% in 2011; the largest accounted for 38%. The top three also represented 63% of year-end receivables. Germany accounted for 58% of revenue, and 79% of revenue came from shipments outside the United States.
- The Army cooperative agreement was extended to July 14, 2013. The agreement’s maximum potential funding was $8.34 million, with $6.6 million authorized through year-end 2012; CPS expected to invoice the full authorized amount before the extension ended. Payments are subject to audit and adjustment.
Outlook, risks and unusual items
- Management said existing cash, operating cash flows and the bank credit and equipment-lease facilities were expected to fund requirements for the foreseeable future, and expected to fund 2013 working capital needs from cash and the revolving line. It cautioned that this depends on achieving operational goals and that adequate revenue or spending reductions are not assured. No specific revenue or earnings guidance was provided.
- Key risks include customer concentration; electronics-industry cyclicality; volatile order timing and sales mix; pricing and competition; product-development and customer-adoption risk; customer-specific inventory exposure; and possible need for additional capital. Management noted that most products are custom and may not be saleable to another customer if orders are cancelled.
- The Army agreement was expected to expire in 2013, and management cited defense-spending pressure as a risk to military-sector revenue. The company also disclosed an overseas patent issue that increased fourth-quarter legal expense.
- The $307,000 inventory obsolescence reserve was a significant 2012 change; the filing attributes $292,000 of charges to lids reaching end of life earlier than forecast. CPS also wrote off $13,000 of construction in progress.
- The company reported no material litigation or off-balance-sheet arrangements. The independent auditor issued an unqualified opinion, and management concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Important facts for investors to verify
- Whether sales volumes and gross margins recovered after the steep 2012 decline, particularly in traction, high-power and lid products.
- Whether the Army agreement’s authorized funding was fully invoiced and whether follow-on defense work was obtained after the July 2013 extension.
- Liquidity and borrowing-base availability, facility renewal terms, and cash burn if operating losses continue.
- Customer-specific and consigned inventory exposure, including the adequacy of the obsolescence reserve.
- The assumptions supporting full realization of the $2.79 million deferred tax asset, including the earnings forecasts and NOL limitations.
- Customer and geographic concentration, including developments at the customer responsible for 38% of revenue.