CPS Technologies Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 28, 2019; comparison is with the 52-week fiscal year ended December 29, 2018. The company designs and manufactures custom metal matrix composite components and packages for electronics, transportation, energy, defense, and other markets.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $21.47 million | $21.58 million |
| Gross margin | $2.54 million; 12% of sales | $2.91 million; 13% of sales |
| Operating income (loss) | $(0.60) million | $(0.90) million |
| Net income (loss) | $(0.64) million; $(0.05) per share | $(3.71) million; $(0.28) per share |
| Operating cash flow | $(1.26) million | $(0.37) million |
| Cash at year-end | $0.13 million | $0.63 million |
- FY2019 cost of product sales was $18.93 million. Gross margin declined mainly because of product mix and higher material costs, partly offset by lower direct labor and factory overhead.
- Year-end accounts receivable was $4.09 million, up from $3.05 million; days sales outstanding rose to 67 from 45. Management cited the end of a 2% prompt-payment discount for its largest customer, with payment terms reverting to net 60 days, as a contributing factor.
- Inventory was $3.10 million, versus $3.19 million. Capital spending was $0.49 million; net cash used in investing activities was $0.48 million.
- Borrowings under the new revolving credit facility were $1.25 million at year-end. The $2.5 million facility bears interest at LIBOR plus 6.5%, is secured by receivables and other assets, and includes a demand note that permits the lender to call the loan. The filing reports $0.75 million of additional borrowing capacity under the borrowing base at year-end; access to the final $0.5 million of the facility was subject to the FY2019 loss condition.
- Year-end lease liabilities totaled $0.17 million. The filing reports no off-balance-sheet arrangements.
Changes versus the prior period
- Revenue decreased approximately 1%, primarily from lower baseplate sales, partly offset by increased hermetic-package sales. New contracts with the three largest customers produced reported price increases of $0.7 million, mitigating the sales decline; two contracts began in Q4 2019 and the third was to take effect in Q1–Q2 2020.
- SG&A declined 18% to $3.14 million, primarily following renegotiated outside-sales commission rates. The Q4 reduction also reflected elimination of the Senior Vice President of Sales and Marketing position.
- Net loss improved substantially from FY2018, when a $2.8 million income-tax charge was recorded after establishing a valuation allowance against deferred tax assets. FY2019 income-tax expense was $5,456; operating results remained loss-making.
- Q4 2019 revenue was $5.4 million, down 11% from $6.1 million in Q4 2018. Gross margin was $1.0 million versus $1.2 million. Operating income was $0.4 million versus $0.2 million, and net income was $0.4 million versus a $2.9 million net loss, with the prior-year quarter affected by the tax valuation reserve.
- Operating cash use increased to $1.26 million from $0.37 million. The company financed operations and working capital needs with beginning cash and credit-facility borrowings.
Outlook, risks, and unusual items
- Management expected to fund 2020 operations from existing cash and the existing credit facility. This expectation is subject to operating performance and credit availability; year-end cash was low, and the facility is callable on demand.
- Customer concentration is significant: the three largest customers generated 70% of FY2019 revenue (43%, 14%, and 13% individually), and together represented 85% of year-end receivables. Management warns that losing a major customer or vendor, insufficient revenue, or inability to obtain capital or reduce discretionary spending could require additional financing and adversely affect business objectives.
- More than 90% of product sales are custom. Customer forecasts and much of the stated demand are non-binding, and customer-specific inventory may have limited alternative use if orders are cancelled or expected demand fails to materialize.
- Management identified broader uncertainties including economic conditions, customer acceptance, material and manufacturing costs, customer and supplier financial condition, technology changes, competition, trade regulation, and conditions in countries where products are made or sold.
- A 2018 customer non-conformance claim related to third-party plating was settled in 2019 through the company’s insurer, with no loss to CPS. The filing reports no other litigation expected to have a material adverse effect.
- The company established a valuation allowance because it judged some deferred tax assets more likely than not to go unused. At year-end, full utilization of the deferred tax assets would require approximately $16 million of taxable income and reversals of temporary differences, according to management.
Important facts for investors to verify
- Confirm current cash, borrowing-base availability, lender conditions, and whether the demand facility remains available on acceptable terms.
- Track receivables collection, DSO, and the effects of the revised payment terms and pricing agreements, particularly with the largest customer.
- Assess whether new customer programs and design wins can offset baseplate declines and improve gross margin and operating cash flow.
- Review customer concentration and the recoverability of customer-specific inventory if demand or orders change.
- Reconcile the filing’s stockholders’ equity presentation: the balance-sheet total is stated as $5.366 million, while the equity components and statement of stockholders’ equity indicate $5.331 million. The reported balance-sheet total liabilities and equity also appears not to equal reported total assets; verify the filed financial statements or any subsequent correction.