CPS Technologies Corp. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 30, 2023 (52 weeks), compared with the year ended December 31, 2022 (53 weeks). The filing also reports selected fourth-quarter results. CPS designs and manufactures custom metal matrix composite components, hermetic packages, and armor for electronics, transportation, energy, aerospace, and defense markets.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $27.55 million | $26.59 million |
| Gross profit / margin | $6.83 million / 24.8% | $7.30 million / 27.5% |
| Operating income | $1.70 million | $2.23 million |
| Net income | $1.37 million | $2.13 million |
| Basic and diluted EPS | $0.09 | $0.15 |
| Cash from operating activities | $1.27 million | $3.55 million |
Revenue increased 4%, primarily on higher armor sales. Profitability declined mainly because of a product quality issue affecting a major customer, which caused returns, credits, and a reserve for potential further credits. SG&A was approximately flat at $5.13 million.
Fourth-quarter revenue was $6.7 million, up 10% from $6.1 million a year earlier. Gross profit declined to $1.1 million from $1.6 million; operating income was $0.1 million versus $0.3 million, and net income was $0.1 million versus $0.3 million.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $8.81 million at year-end, up from $8.27 million. Operating cash flow was $1.27 million; capital expenditures were $0.72 million.
- Current assets were $18.14 million and current liabilities were $4.07 million. Receivables were $4.39 million; inventory was $4.58 million.
- The company had no borrowings on its $3.0 million revolving credit facility, with the full $3.0 million available under its year-end borrowing base. Notes payable totaled approximately $54,900; operating lease liabilities totaled $332,000.
- Operating cash flow was lower year over year, principally reflecting a $2.47 million reduction in deferred revenue, partly offset by working-capital changes. Deferred revenue fell from $2.75 million at 2022 year-end to $0.28 million at 2023 year-end.
Material changes and unusual items
- A quality issue led to product returns and a reserve. Accrued expenses included a $288,000 reserve for potential credits, and the company also increased sales returns by $104,126 for parts credited in January 2024. Management said subsequent customer information indicated the issue was under control and not expected to materially affect 2024 results.
- Other income was $27,000 in 2023 versus $641,000 in 2022; the 2022 amount included the $641,000 Employee Retention Tax Credit, collected in 2023. The 2023 tax provision was $582,000, including $500,000 of deferred tax expense.
- Customer concentration increased: the three largest customers represented 60% of revenue in 2023, versus 53% in 2022. Their individual 2023 shares were 33%, 18%, and 9%.
- Backlog was $20 million at year-end, mostly scheduled to ship in 2024. Orders may be canceled or shipment timing extended, so backlog is not guaranteed revenue.
Outlook, risks, and contingencies
CPS provided no formal revenue or earnings guidance. Management expects to fund 2024 operations from existing cash and profits. It views demand for advanced thermal-management materials, wide-band-gap semiconductor applications, electric and hybrid vehicles, and armor as growth opportunities, while noting that new customer programs may require lengthy qualification and design cycles.
Key risks include dependence on a small number of customers, variable order timing and cancellations, product quality and return exposure, price and cost pressures, manufacturing capacity and hiring constraints, competition, and potential supply-chain, geopolitical, economic, and cybersecurity disruptions. The company reported no material litigation; it disputes a former European sales representative’s compensation claim and estimates any potential loss would be immaterial. The financial statements received an unqualified audit opinion. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an ICFR attestation.
Important facts for investors to verify
- Whether the customer quality issue is fully resolved and whether further returns, credits, or costs arise.
- How much of the $20 million backlog ships in 2024, and whether customer order changes affect it.
- Whether customer concentration, particularly the largest customer’s 33% revenue share, changes materially.
- Whether the company generates sufficient operating cash flow as deferred revenue normalizes and funds planned operations without drawing its credit line.
- Whether growth opportunities convert into recurring production orders while CPS manages capacity, labor, and facility needs.