CPS Technologies Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 26, 2015 (52 weeks); comparison is with fiscal 2014, ended December 27, 2014. The filing also reports fourth-quarter results. CPS designs and manufactures custom metal-matrix composite components and related assemblies for electronics, transportation, energy, defense and other markets.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $21.762 million | $23.138 million |
| Gross margin | $4.665 million (21.4% of revenue) | $5.471 million (23.6%) |
| Operating income | $619,000 (2.8%) | $1.216 million (5.3%) |
| Net income | $451,000 (2.1%) | $1.003 million (4.3%) |
| Diluted EPS | $0.03 | $0.07 |
| Cash provided by operations | $1.557 million | $1.282 million |
| Capital expenditures | $477,000 | $502,000 |
| Cash and cash equivalents at year-end | $3.413 million | $2.306 million |
| Working capital at year-end | $7.635 million | $6.871 million |
| Total assets / stockholders’ equity | $13.562 million / $11.007 million | $12.649 million / $10.246 million |
Year-end current liabilities were $2.554 million. CPS had no bank or lease-line borrowings and reported no long-term obligations. It had a $2 million revolving credit facility and a $500,000 equipment-financing facility, both maturing in May 2016; the company was in compliance with its covenants. Operating cash flow less capital expenditures was approximately $1.081 million in 2015.
Material changes and fourth-quarter results
- Annual revenue declined 6%, primarily from fewer baseplate shipments, approximately $900,000 in lower prices, and reduced shipments of an AMDR-program component; increased hermetic-package sales partly offset the declines.
- Gross margin fell by $806,000, and its rate declined by about 2.2 percentage points. Management attributed the decrease chiefly to lower prices. SG&A declined 5% to $4.046 million, partly offsetting the gross-profit decline.
- Operating income fell about 49%, and net income fell about 55% year over year. Manufacturing improvements partly offset lower prices and baseplate shipments.
- Fourth-quarter revenue was $5.412 million versus $5.947 million a year earlier. Gross margin was $1.257 million (about 23% of revenue) versus $1.535 million (about 26%); net income was $255,000 versus $619,000.
- Cash increased by $1.107 million during the year, mainly due to operating earnings and cash generation. Receivables were approximately flat at $3.572 million; days sales outstanding increased to 59 from 54.
Outlook, risks and notable items
- No numerical revenue or earnings guidance was provided. Management said it expects 2016 working-capital needs to be funded through operating cash flow, existing cash and, if needed, the credit line; it considered these resources sufficient for foreseeable requirements, while cautioning that this depends on revenue generation and spending control.
- Customer concentration remains significant: the three largest customers generated 60% of 2015 revenue (27%, 23% and 10%), compared with 68% in 2014. Those customers represented 63% of year-end receivables. A loss or deterioration in a major customer could materially affect results and financing needs.
- Germany accounted for 50% of revenue, and shipments outside the United States accounted for 80%. CPS cited electronics-industry cyclicality, product pricing and competition, execution and acceptance of new designs, technology substitution, exchange-rate exposure versus a Japanese competitor, and lower oil prices affecting fracking-ball sales as risks.
- The Army Research Laboratory cooperative agreement expired March 31, 2015. Related 2015 revenue was $42,000; CPS said it continued to receive funded U.S. Army orders, primarily for ballistic armor. Cooperative-agreement payments remain subject to government audit and adjustment.
- Inventory was $2.632 million, including $763,000 held at customer locations under consignment arrangements; the obsolescence reserve was $456,000. Products are custom and generally difficult to redirect if orders are canceled, although management reported no cancellation losses to date.
- Management concluded the deferred tax asset was more likely than not to be realized; approximately $6.2 million of future taxable income was estimated to be needed to use the asset and related temporary differences. This conclusion depends on future taxable income.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. The independent auditor issued an unqualified opinion on the financial statements; it did not audit or opine on internal control.
Important facts for investors to verify
- Whether baseplate demand and pricing recover, and whether new customer designs reach sustained production volumes.
- Recent developments with the three largest customers, including receivable collection and the continuing concentration of revenue.
- Renewal or replacement of the credit and equipment-financing facilities that were due to mature in May 2016.
- Inventory quality, consigned stock conversion into recognized sales, and adequacy of the obsolescence reserve.
- Realizability of deferred tax assets and any adjustments arising from audits of Army agreement billings or tax filings.