CPS Technologies Corporation (NASDAQ:CPSH) Q4 2023 Earnings Call Transcript

CPS Technologies Corporation (NASDAQ:CPSH) Q4 2023 Earnings Call Transcript March 7, 2024

CPS Technologies Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the CPS Technologies Fourth Quarter and Year-End 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO at CPS Technologies. Sir, the floor is yours.

Charles Griffith: Thank you, operator, and good morning, everyone. Today, I’m joined by Brian Mackey, our President and CEO. We look forward to discussing our fourth quarter results with you. But first, Chris Witty, our Investor Relations adviser, will provide a brief safe harbor statement. Chris?

Chris Witty: Thanks, Chuck, and good morning, everyone. Before we begin the business portion of today’s call, I would like to point out that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS’s operations and environment. These uncertainties include, but are not limited to, the wars in Ukraine and Israel, other geopolitical events, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements. Additional information can be found in our filings with the SEC. Now I will turn the call over to Brian to offer his perspective on the fourth quarter results, after which Chuck will review the financial results in greater detail. Brian?

Brian Mackey: Thanks, Chris. Today, we’re pleased to announce fourth quarter revenue of $6.7 million and an operating profit of approximately $144,000. While revenue rose significantly year-over-year, operating profit continued to be negatively impacted by a quality problem with a major customer that we discussed previously. We ended the year with our best top line ever, $27.6 million, and are pleased with the backlog of $20 million as we begin fiscal 2024. Chuck will provide more detail in a minute. In addition, we recently announced two new developments that reflect our strategy for growth and bode well for our long-term outlook. First, CPS signed a manufacturing license agreement for fiber reinforced aluminum or FRA composites with Triton Systems, which gives us the exclusive global rights to make and sell products using this technology.

FRA composites are comprised of high-strength aluminum alloys discontinuously reinforced with short ceramic fibers. Given its superior performance characteristics, this technology will facilitate the introduction of many new products for our military, commercial and industrial end markets, which makes it a great fit for the company. CPS is already known as the world leader in advanced metal matrix composites, but adding FRA capabilities will complement our core competencies, broaden the company’s target markets and strengthen our mission to accelerate growth going forward. Over the coming weeks and months, we will be working to initiate manufacturing trials of FRA composites here at CPS and begin to engage customers in relevant markets. We think this will be an excellent addition to our product folio.

Second, and also announced earlier this week, we received an award for the Massachusetts Manufacturing Accelerate Program known as MMAP, in response to a proposal submitted by the company in the fourth quarter of 2023. This award valued at $20,000 will support the purchase of a 5-axis CNC machine and expand the company’s manufacturing capabilities to better serve our clients. This 5-axis machine, our first will pave the way for sales opportunities in hermetic packaging and other products with new and existing customers for which we would otherwise not be cost competitive. These 2 recent developments, the licensing agreement for FRA and the purchase of a new 5-axis machine, enable us to continue to broaden our revenue base and expand avenues of growth with clients in markets that are very familiar to us.

In terms of the business today, among other things, we will continue to fulfill long-term supply agreement announced last year, providing power model components and systems for a variety of rail and other applications to a multinational semiconductor manufacturer. We’re on track for the shipment of product under this contract over the course of 2024. At the same time, we are working on our most recent Phase 1 SBIR grant from the Department of Energy and we’ll soon be submitting a Phase 2 proposal to extend this program. We continue to invest in innovative next-generation technologies, advancing the company’s long-term growth profile and have several other government R&D opportunities in the pipeline. For example, a Phase 2 SBIR proposal for thermal energy storage is under review by the Navy.

We’re preparing a Phase 2 STTR proposal for tungsten material for the Army and we’re submitting several additional new Phase 1 SBIR proposals with various federal agencies. Overall, we find these externally funded R&D opportunities very productive and rewarding so we will continue pursuing them even as we invest internally to broaden our range of products, expand the company’s client base and rapidly respond to changes in industry demand. Our unique metal matrix composite technology brings innovative cost-effective solutions to durability and efficiency problems faced by a host of customers and markets across the globe. For fiscal 2024, however, I want to remind our audience that shipments of our HybridTech Armor panels for Kinetic Protection Navy contract are expected to be complete as of the middle of second quarter.

For the last year or so, these sales have generated, on average, quarterly revenue of just over $2 million. So the completion of our subcontract will have a material effect on near-term revenue. However, we see growth in other product lines mitigating some of this impact, which we estimate will cover roughly half the revenue shortfall. Further out, we expect our other products as well as the potential for the additional armor orders that we are pursuing to enable us to resume and exceed our recent revenue run rate. We’re actively pursuing other opportunities for armor products across several military programs. We are hopeful of future contracts to support other ship classes but remain uncertain as to contract timing, particularly given the protracted continuing resolution.

In addition, as previously explained, we’re pursuing business on potential ground vehicle applications, but these efforts have been hampered due to testing that did not go as well as anticipated. We continue to work to address the relevant deficiencies, but cannot determine when such initiatives will move forward. Overall, based on current developments and a solid backlog, we remain well positioned for the future. We’re pursuing a number of new opportunities and taking steps to expand both the breadth and depth of our product portfolio, which should lay the groundwork for growth acceleration. While headwinds related to armor exist in the near term, we’re committed to improving our top line profile, strengthening operating results and, in turn, improving total return for our shareholders.

I’ll now turn the call over to Chuck to provide more details about our financial results, after which, we will open it up for questions. Chuck?

Charles Griffith: Thanks, Brian. As mentioned earlier, the company’s revenue totaled $6.7 million in the fourth quarter. That’s compared with $6.1 million last year, which represents a substantial growth year-over-year. We expect to continue posting solid results in the quarters to come. However, as Brian indicated, the negative impact from the completion of our armor contract outfitting the U.S. carrier fleet will cause a different revenue near term. While our partner Kinetic Protection is cautiously optimistic about additional work for other Navy ships, the length of the impact remains to be seen. Gross profit in the fourth quarter totaled $1.1 million or approximately 17% of sales and that compares with $1.6 million or 27% of sales last year.

The decrease in both profit and gross margin year-over-year was predominantly due to the quality issue with a major customer that we’ve discussed in the past. Not only did this result — excuse me, not only did this result in $0.5 million of write-offs and returns, but we’ve also devoted significant internal engineering hours to investigate and solve this problem. While we’re not ready to claim victory yet, we have seen signs of significant improvement and are optimistic that any impact on 2024 will be minimal. Selling, general and administration expense — administrative expenses totaled $1 million in the fourth quarter versus $1.3 million in the prior year period. We maintained our cost discipline in terms of overhead, and we’re happy to do so.

The company generated operating income of $144,000 in the fourth quarter compared with approximately $309,000 last year. Turning to the balance sheet. We ended the year with $8.8 million of cash, up from $8.3 million at the end of 2022. And this increase was in spite of the reduction in deferred revenue by almost $2.5 million during 2023. Trade accounts receivable as of December 31 — December 30, 2023, totaled $4.4 million versus $3.8 million as of December 31, 2022. Inventories totaled $4.6 million at the end of 2023 versus $4.9 million at the start of the fiscal year. Turning to the liability side. Payrolls and accruals totaled $3.6 million at the end of the fourth quarter versus $2.7 million as of December 31, 2022. Deferred revenue decreased, as I mentioned earlier, $2.3 million from $2.8 million at the end of 2022.

As a reminder, deferred revenue predominantly represents prepayments for large orders to help defray the impact on cash of large inventory purchased for those orders. A number of these shipments in 2023, resulting in recognition — or resulted in recognition of revenue and thus decreased deferred revenue. So thank you. This concludes my discussion of the financials. So now we will open the call up for questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. The first question is coming from James McIlree from Dawson James.

James McIlree: I was hoping you could give a little bit more detail on the Triton license. Is it limited to certain end markets, the time frame of the license? And then where are you going to manufacture this product?

Brian Mackey: Yes. Thanks, Jim. The FLRAA license is an exclusive global license to use that technology for any application. So it’s quite broad. The time frame is essentially, I would interpret it as perpetual unless we sort of fall down on the job and the Triton Systems decides to pull that back, but there’s a pretty high bar for that type of activity and the ability to cure and those kind of things. So it’s sort of not ended in a term — there’s a lot of joint interest and alignment between Triton Systems and what we’ll be trying to do. Success for one of us is a success for both of us. So we’re very excited about the opportunity. It’s a very well-tested material whose benefits are known. To answer your question, we will be manufacturing that material here at our facility in Norton.

And it’s a metal matrix composite material. So just like the MMCs we’ve been making for 39 years, it’s a preform infiltrated by aluminum. The armor products that we make is a preform infiltrated by aluminum. Of course, the first one is for primarily thermal conductivity and the latter one is primarily for ballistic protection. In this case, it will be lightweight but also strong. So the kind of area one is aircraft, like pushing or a bearing liner for a helicopter. Obviously, lightweight is of high value. And there’s any number of applications. We can make net shape products from these, and we can also make essentially ingots or blocks which can be machined. It’s a machinable material to add a through haul or other feature. So it’s very well in line with our core competencies.

We will be on the learning curve for some of the nuances based on our relationship with Triton Systems. But once that handoff is complete, this will be ours to manufacture and sell with their support.

James McIlree: And just a couple of more questions on — again on the Triton license. So one, do you have minimum commitments that you need to satisfy? And then it seems like that this will be something that would contribute to revenue, maybe 12 to 18 months down the road. Is that too optimistic, too pessimistic?

Brian Mackey: Yes. It’s certainly not this quarter. I mean we’ll be on the learning curve and making trial piece and things like that. The intriguing part of it is also that there are interested customers who have dialogued with Triton Systems in the past, who are looking for a reliable supply chain before they can turn this on. Having said that, obviously, you don’t get into a helicopter without sufficient testing given set of specifications given the OEM or whoever the case may be. So there will be a time frame to it that will play out. If anything, this year, it’s going to be small revenue of early pieces and that kind of thing, and it will go from there. And the other question about minimums, it’s more just about making material efforts to succeed in this market. So there’s not a high bar for success as long as we’re continuing to work on it, which we certainly intend to do.

James McIlree: Okay. I have three other questions, I’ll just throw them all out at you. You talked about the revenue impact of the Navy completion. I was hoping that you could talk a little bit about the margin impact. And then on the quality issue, it sounds like there’s still going to be some although small impact on Q1. And then you opened up indicating that backlog was $20 million. I was hoping you could tell me what it was a year ago.

Charles Griffith: Okay. Well, this is Chuck. Let me answer that. So in terms of the armor, that does tend to be higher margin than our other products. So there will be somewhat of an impact on the bottom line from that standpoint as well. Although, again, I think that when it comes to that bottom line margin, more than half of our overhead is fixed. So it’s really a function of getting the throughput through the factory in order to increase the margin in the bottom line. So we’re certainly working to do that. As Brian mentioned, we do have other items that are — or other orders that are going to increase this year that are going to somewhat mitigate the loss of the armor revenue. What was the second question again?

James McIlree: The quality issue, if there is some impact, although small in Q1.

Charles Griffith: Yes. From what we’ve seen so far, it’s probably — I would say, say it’s probably not material to Q1 as whereas it was certainly for the last 3 quarters of last year. As I said, it hasn’t gone away, but it appears to have significantly decreased to the point where — well, as I said, we’re not declaring victory. We’re still trying to get it down to virtually zero, but we’re at the point where — it’s more of a nuisance maybe…