CPS Technologies Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks); the filing also reports fourth-quarter results. CPS makes custom metal-matrix composite components and related packages, primarily for electronics, transportation, automotive, and defense applications.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $21.406 million | $14.052 million |
| Gross profit (margin) | $5.357 million (25%) | $0.256 million (2%) |
| Operating income (loss) | $1.459 million | ($2.799 million) |
| Net income (loss) | $0.966 million | ($1.522 million) |
| Net income (loss) per diluted share | $0.07 | ($0.12) |
| Cash from operations | $2.437 million | ($0.926 million) |
| Cash and cash equivalents at year-end | $1.571 million | $0.307 million |
| Working capital | $5.205 million | $3.395 million |
| Total assets | $11.140 million | $10.349 million |
| Stockholders’ equity | $8.865 million | $7.532 million |
FY2013 product revenue was $21.095 million; cooperative-agreement revenue was $0.311 million. SG&A was $3.898 million, up 28% year over year. The company reported a $0.463 million income-tax provision, including $0.428 million of deferred tax expense.
Liquidity and debt: CPS had no line-of-credit borrowings at year-end and $76,000 of capital-lease obligations, all current. It maintained a $2 million revolving credit line and a $500,000 equipment lease facility, both scheduled to mature in May 2014. The borrowing base allowed up to $1.4 million of line-of-credit borrowing at year-end. The company reported compliance with its covenants; the reported current ratio was 3.3x.
Material changes and fourth-quarter results
- Revenue rose 52%, chiefly from traction and hybrid/electric-vehicle baseplates and, to a lesser extent, hermetic packages. Management attributed the substantial gross-margin recovery mainly to higher sales volume spreading fixed manufacturing costs, plus price increases.
- FY2013 operating performance reversed the FY2012 operating loss and net loss. In FY2012, lower volume, $292,000 of inventory obsolescence charges, and other manufacturing costs weighed on results.
- Fourth-quarter 2013 revenue was $5.100 million versus $4.125 million in fourth-quarter 2012. Gross profit was $1.362 million (27% of sales), compared with $0.333 million (8%). Net income was $276,000 versus a net loss of $84,000.
- Operating cash flow improved to $2.437 million. Inventory declined about 10% to $2.184 million, while accounts receivable was broadly flat at $2.900 million; reported days sales outstanding fell to 51 from 63.
Outlook, commentary, and risks
- Management expects to fund 2014 working-capital needs through operating cash flow, existing cash, and the credit line if needed, but provides no quantified revenue or earnings guidance. It cautions that insufficient revenue or inability to reduce discretionary spending could impair its ability to meet obligations.
- The Army Research Laboratory cooperative agreement was extended through July 14, 2014. It is 95% government-funded and subject to annual authorization and audit; $6.6 million had been authorized and invoiced through year-end, against a potential total of $8.34 million. Management warned that defense-spending pressure and contract expiration could limit military-sector revenue.
- Customer concentration is significant: the three largest customers represented 73% of FY2013 revenue (42%, 23%, and 8%), and together accounted for 82% of year-end trade receivables. Management says customer losses or financial deterioration could adversely affect results and liquidity.
- Other key risks include electronics-industry cycles, volatile order timing, competition and price pressure, product obsolescence or delayed design wins, reliance on key personnel, and possible need for additional capital. Most products are custom and may have limited alternative use if orders are cancelled.
- Management concluded that the $2.476 million deferred tax asset was more likely than not to be realized, supported by projected future taxable income; utilization requires about $6.3 million of taxable income. This assessment depends on future performance.
- No material litigation or off-balance-sheet arrangements were reported. The independent auditor issued an unqualified opinion on the financial statements; management reported effective internal controls, without auditor attestation.
Most important facts for investors to verify
- Whether the FY2013 sales and margin recovery is sustainable, including order trends and the contribution of price increases versus volume.
- Customer concentration, customer forecasts, and collection exposure, particularly the top three customers’ share of receivables.
- Renewal or replacement of the credit and equipment facilities that were due to mature in May 2014, and ongoing covenant compliance.
- Progress, funding authorization, audit outcomes, and post-expiration prospects for the Army agreement.
- Assumptions supporting deferred-tax-asset realization and the valuation of customer-specific inventory, including the $390,500 obsolescence reserve.