CPS Technologies Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011 (53 weeks), compared with the year ended December 25, 2010 (52 weeks). The company manufactures custom metal-matrix composite components and related packages, primarily for electronics and motor-control applications, and develops composite armor with the U.S. Army.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $19.81 million | $21.40 million |
| Product revenue | $17.64 million | $19.91 million |
| Gross margin | $2.96 million | $4.02 million |
| Product gross margin rate | 16% | 19% |
| Operating income (loss) | $(336,000) | $1.05 million |
| Net income (loss) | $(46,000) | $710,000 |
| Cash from operations | $82,000 | $1.60 million |
| Cash and cash equivalents at year-end | $1.14 million | $1.80 million |
- Revenue declined 7% year over year. Product sales fell about 11%, principally from weaker demand for router and switch lids and heat spreaders and lower prices on certain products. Increased traction and hybrid-vehicle baseplate demand partly offset the decline.
- Lower product volume and pricing reduced gross margin; manufacturing improvements provided a partial offset. SG&A rose to $3.29 million from $2.96 million, mainly due to compensation and benefits, including a new 401(k) match.
- The $323,000 income-tax benefit partly offset the pretax loss. Year-end working capital was $5.58 million; total assets were $11.33 million and stockholders’ equity was $8.80 million.
- Inventory increased to $3.14 million from $1.52 million, chiefly finished goods built against customer forecasts. Accounts receivable declined to $3.11 million from $3.92 million; days sales outstanding improved to 66 from 74.
- There were no borrowings on the $1 million revolving credit line at year-end. Capital-lease obligations totaled $408,000; the company reported $200,000 of long-term obligations. The $1.25 million equipment finance facility had about $842,000 available. Management reported compliance with credit covenants.
- Capital expenditures were $635,000. Cash declined by $661,000, with inventory growth the principal stated driver, partly offset by lower receivables and higher payables.
Material changes and operating context
- Fourth-quarter 2011 revenue was $4.22 million versus $4.79 million in Q4 2010; gross margin was $249,000 versus $97,000. The company reported a Q4 net loss of $103,000, compared with a $325,000 loss in Q4 2010.
- Three customers contributed 71% of FY2011 revenue (42%, 15%, and 14%), up from 68% in 2010. Those customers represented 67% of year-end trade receivables.
- Revenue by destination was 52% Germany, 41% United States, and 7% other countries. Shipments to customer locations outside the United States represented 73% of revenue.
- Backlog was $19.9 million at year-end, down from $23.5 million: $19.0 million of product orders and $943,000 remaining under the Army cooperative agreement. Management said virtually all product backlog was expected to ship in 2012; product orders are subject to cancellation fees.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expected 2012 working-capital needs to be funded by cash and the bank line, and believed available cash, operating cash flows, and financing facilities would cover foreseeable requirements, while cautioning that this was not assured.
- Management sees potential longer-term growth from hybrid and electric vehicles, motor controllers, and armor, but growth depends on customer demand and winning new product designs. The Army agreement is funded incrementally, subject to annual objectives and congressional authorization; reimbursements are subject to Defense Contract Audit Agency review.
- Key risks include electronics-industry cyclicality, volatile orders and product mix, pricing and competition, customer concentration, dependence on key personnel, and possible need for additional capital. Custom, customer-specific inventory may be difficult to resell if orders are cancelled; most year-end finished goods were at customer sites under consignment arrangements.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness.
- No material litigation, unresolved SEC staff comments, or off-balance-sheet arrangements were reported. The company disclosed no significant exposure to interest-rate or foreign-currency movements and used no derivatives.
Important facts for investors to verify
- Whether product demand, pricing, and margins recover after the FY2011 decline, especially in electronics and router/switch markets.
- Whether major customers’ forecasts convert into shipments and cash collection, given customer concentration and the $1.6 million inventory increase.
- Whether the Army agreement receives further funding and how audit adjustments or the agreement’s completion affect revenue and costs.
- Renewal and availability of the bank credit and equipment facilities, which were due to expire in May 2012, and continued covenant compliance.
- The realizability of deferred tax assets, including $1.37 million of federal net operating loss carryforwards, which management expected to use against future taxable income.