CPS Technologies Corp. — 2021 Form 10-K
Business context and reporting period. CPS designs and manufactures custom metal matrix composite components and related products, including thermal-management parts, hermetic packages and armor, for electronics, transportation, energy, aerospace and defense markets. Fiscal 2021 was the 52 weeks ended December 25, 2021; comparisons are with the 52 weeks ended December 26, 2020. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $22.45 million | $20.87 million |
| Gross margin dollars / percentage of sales | $4.79 million / 21% | $4.17 million / 20% |
| SG&A expenses | $4.28 million | $3.26 million |
| Operating income | $0.51 million | $0.91 million |
| Net income | $3.22 million | $0.91 million |
| Basic / diluted EPS | $0.23 / $0.22 | $0.07 / $0.07 |
| Cash from operating activities | $2.01 million | $1.67 million |
| Cash and cash equivalents at year-end | $5.05 million | $0.20 million |
Revenue rose about 7%, chiefly on increased sales to the largest customer and initial armor production; reduced sales to a customer exposed to pandemic-related mass-transit weakness partly offset growth. Gross margin improved mainly from product mix. SG&A rose about 30%, including $0.3 million of one-time restructuring costs, overlapping CEO compensation, and added sales staff. Operating income declined despite higher sales.
Net income included a $2.71 million income-tax benefit from reversing the deferred-tax-asset valuation allowance. The reported increase in net income therefore substantially reflects a non-cash tax accounting item, rather than operating performance. The recognized net deferred tax asset was $2.82 million; management concluded it was more likely than not to be realized based on forecast future taxable income.
Fourth quarter
Q4 2021 revenue was $6.2 million, versus $4.2 million in Q4 2020. Gross margin was $1.4 million versus $0.5 million; SG&A was $1.0 million versus $0.8 million. The company recorded operating income of $0.3 million and net income of $0.2 million, compared with an operating loss and net loss of $0.3 million and $0.2 million, respectively, in Q4 2020. Higher armor and hermetic-package sales and pandemic effects on the prior-year quarter contributed to the revenue increase.
Liquidity, capital and debt
- Year-end current assets were $14.06 million and current liabilities were $5.10 million. Accounts receivable was $4.87 million, up from $2.91 million; inventory was $3.91 million, up from $3.71 million. Management reported year-end DSO of 72 days, or 63 days excluding $0.6 million of deferred revenue included in the calculation.
- Operating cash flow was $2.01 million; capital spending was $0.51 million. Financing provided $3.36 million, including $3.41 million from common-stock issuance, principally through an at-the-market offering. Year-end cash increased by $4.86 million.
- No borrowings were outstanding on the $3.0 million secured revolving credit line; the year-end borrowing base allowed approximately $2.9 million of additional borrowing. The facility is a demand note callable by the lender and bears interest at LIBOR plus 5.5%. The lender waived 2021 covenant compliance. Notes payable totaled approximately $0.15 million at year-end.
- Management expected to fund 2022 operations from existing cash and profits, while cautioning that loss of a significant customer or vendor could require external financing. No off-balance-sheet arrangements were reported.
Changes, outlook and risks
- Three largest customers provided 51% of 2021 revenue, down from 73% in 2020; individually they represented 24%, 16% and 11%. The company had 57 other customers. Customer concentration and variable order timing remain significant risks.
- Backlog was $25 million at year-end, mostly scheduled to ship in 2022. It consists of customer orders that may be cancellable under certain circumstances and is not a guarantee of revenue.
- Management identified electric and hybrid vehicles, wide-band-gap semiconductors, hermetic packages and armor as growth opportunities, but provided no quantified revenue or earnings guidance. Customer qualification and sales cycles can take months to years, and the company has no long-term volume-production contracts.
- CPS operated through the COVID-19 pandemic; management described improving customer and supplier conditions in 2021 but continued volatility, particularly in mass transit. The filing also identifies inflation and commodity-cost pressure, supply and manufacturing interruptions, hiring and retention challenges, competitive pricing, facility capacity needs, and geopolitical disruption, including Russia’s invasion of Ukraine, as risks.
- The company began armor production in 2021 and expanded its sales force and hermetic-package capabilities. It had 90 permanent full-time employees at year-end. The Norton facility lease was extended through February 2026 at annual rent of $152,000.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether the $2.82 million deferred tax asset is ultimately realized; its recoverability depends on future taxable income, and the auditor identified this assessment as a critical audit matter.
- Whether reported backlog ships as expected, and whether customer cancellations, order delays or changing demand affect revenue and margins.
- Whether customer concentration continues to decline and whether the largest customers maintain or expand orders.
- Whether the operating business can sustain profitability after excluding the one-time deferred-tax valuation-allowance reversal and absorbing higher SG&A and input costs.
- The effects of the ATM share issuance, employee option exercises and outstanding options on future share count and per-share results.
- Liquidity availability and covenant status under the callable revolving credit facility, including the lender’s 2021 waiver.