CPS Technologies Corporation (CPSH) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the CPS Technologies 2022 Earnings Call. At this and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith. Sir, the floor is yours.

Thank you, Matthew, and good afternoon, everybody. I'm joined today by Anthony Koski, our Corporate Development Officer; and Michael McCormack, our President and Chief Executive Officer. Michael will offer his comments on our fourth quarter and annual results. Before we begin the business portion of the 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' operations and environment. These uncertainties include the impact of COVID-19, the Russian invasion of Ukraine, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements. Now I will turn the call over to Michael to offer his perspective on the year and the fourth quarter results.

Thank you, Chuck. Good afternoon, everybody. Today, we are pleased to announce the fourth quarter revenues of $6.1 million and operating profit of $309,000 for the quarter ending December 31, 2022. This compares with revenues of $6.2 million and an operating profit of $312,000 for the fourth quarter ended December 25, 2021. For the fiscal year, we are delighted to report revenues of $26.6 million as compared to revenues of $22.4 million in fiscal year '21. The 19% annual organic growth rate over the previous fiscal year has been consistent with our strategy for growth since my arrival. Fiscal year '22 reflects the highest year ever in terms of revenue and operating profit in the company's 38-year history. For the fiscal year, we are reporting $2.2 million in operating profit compared to $513,000 in fiscal year '21. This is an over 300% improvement compared to last fiscal year. We are also delighted to report an impressive 6% improvement in gross margin over the entire fiscal year. This also marks our third consecutive year of profitability. Our book-to-bill of over 1.1 for the fiscal year '22 continues to reaffirm our growth strategy is working over a larger sample of data coupled with growing base. We are cautiously optimistic that the increased sales orders of fiscal year '22 will directly translate into steadily increasing revenue and operating profits in fiscal '23. I'll speak more later about the overall business progress moving forward on the call. But for now, Chuck will discuss the financial matters in more detail.

Thank you, Michael. Revenues totaled $6.1 million in Q4 2022 compared with $6.2 million generated in Q4 2021, a slight decrease. For the fiscal year '22, revenues totaled $26.6 million compared to $22.4 million for 2021. The revenue for 2022 represents the best year in company history. Gross margin in Q4 2022 totaled $1.6 million or 27% of sales. This compares with gross margin in Q4 2021 of $1.4 million at 21% of sales. For 2022, gross margin totaled $7.3 million compared with $4.8 million for 2021. This increase in margin was primarily due to the impact of higher sales on fixed factory costs as well as improved factory efficiencies and product yields. Selling easy for me to say, -- Selling, general, and administrative expenses totaled $1.3 million in Q4 2022, an increase of 30% when compared with SG&A expenses of $1.0 million in Q4 2021. For fiscal '22, SG&A totaled $5.1 million compared to $4.3 million in 2021. Several factors contributed to this increase. The company hired a Corporate Development Officer in early 2022, which was a new position. The company incurred higher variable compensation costs in 2022 due to its strong financial performance and travel costs were significantly higher in 2022 due to the limited nature of travel in 2021 due to the COVID-19 pandemic. The company generated operating income of $309,000 in Q4 2022 compared with operating income of $312,000 in Q4 2021. For 2022, operating income totaled $2.2 million compared with $0.5 million in 2021. This represents our highest annual operating income in CPS' history. Turning to the balance sheet. We ended the quarter with $8.3 million of cash, increasing from $5.1 million on hand at the end of 2021. The increase in cash was primarily due to our net profit, somewhat offset by inventory increases to support higher sales. Although it remains open and available to us, no additional cash was raised in 2022 under the ATM program. Accounts receivable at December 31, 2022, totaled $3.8 million, down from $4.9 million at December 25, 2021. This change was due to the reduction of deferred revenue occurring in the fourth quarter. Prepayments received in 2021 were used to pay for shipments shipped in the fourth quarter, thus immediately reducing accounts receivable rather than having to wait for the customer to pay their bill typically 30 to 45 days later. As such, our day's accounts receivable, our day's sales outstanding improved to 52 days compared to 72 days at the end of 2021. We also have another receivable of $686,000 primarily due to the employee retention tax credit. Inventories totaled $4.9 million at the end of December 31, '22 compared to $3.9 million at December 25, ‘21. This increase in inventory is due to increased work in process and raw materials needed to support our sales growth. In addition, in 2022, we had several large orders in inventory that were not scheduled to ship until early 2023. The inventory turnover in the most recent 4 quarters was 4.2x, an increase compared to the 4.7x for the period ended December 25, 2021, for the reasons stated above. Turning to the liability side, payables and accruals totaled $2.7 million at December 31, '22, down from $3.2 million at December 25, 2021. This change is due to the final payments in 2022 of accruals for our 2021 restructuring costs. Deferred revenue increased from $1.7 million at the end 21 to $2.5 million on December 31, 2022. Deferred revenue predominantly represents prepayments for large orders to help defray the impact on cash of large inventory purchases for these large sales orders. So for further discussion, I'd like to turn the call back over to Michael.

Thank you, Chuck. What a fantastic year. We established new records for the company in terms of revenue and operating profits. First, I would like to thank our investors for their patients. They are vision over the past 2 years to continuously support a small material science company as we competed against companies significantly larger than CPS is truly appreciated. We are beginning to realize there is an incredible pent-up demand for the products we have engineered and investors giving us the resource to compete and win is essential to our success. I must thank the incredible increase in number of customers with their continued confidence in our engineering and manufacturing capabilities. Lastly, all the employees did an outstanding job over the course of the year, and we define what creating shareholder value looks like moving forward at TPS. As I look back over the year, I'm very proud of the team we have assembled and the accomplishments of the team. Not only did we execute commerce at the highest and most profitable levels in history, but we transitioned from an outdated ERP to an integrated MRP-RP system that is already beginning to help us achieve even greater results. We returned to our technical cutting-edge roots, offering numerous small business innovative research, SBIR and small business technology transfer, STTR, proposals for various [indiscernible] agencies within the government. We won 4 awards and are hopeful to begin to convert some of these to Phase II awards that have multimillion, multiyear awards. So the obvious question is, what's next? What are we -- we are continuing to invest in people, processes and tools to build an even greater company. We are not content with results and know we can do even more. I'm quite pleased with the progress we are making in all aspects of the business: sales, product development, operations, finance, and support activities. Our business development efforts are now being run by Anthony Koski, -- we are sad to see the imminent time end of our Vice President of Sales, Sue Olivera, and with her and her husband Rick, the best in the next chapter. Anthony and team have built upon a base of clients that [indiscernible] has established and now have numerous growth opportunities, including some breakout prospects that could alter our future significantly in all 3 of our product lines: Metal make use composites, thematic packaging and HAMR. As a part of the transition, the business development group has restructured our growing technical product development team to jointly focus on building new customer relations and identifying new opportunities and build even more robust sales pipeline. As a result, we have civil developing opportunities in defense, aerospace and alternative energy markets with significant near- and long-term upside. Given both application and competitive facilities that cannot develop too many details, however, I am confident that our ability to listen to our customers and effectively respond to diverse and unique advanced material solutions that solve their most challenging issues will allow us to convert these opportunities and continue to identify new avenues for growth. And the leadership of Dr. Steve Katter and Dr. Marco Canara, we have reenergized the contract research and development R&D service business as evidenced by our SBIR and STTR program awards. These programs are highly competitive awards that encourage domestic small business to engage in federal research and development with the potential for commercialization. In addition to these programs, that they advance through R&D commendation. They afforded additional intellectual property protection and sole source manufacturing rights within the federal government. Operations led by Dan Botton have made significant strategy in the past year in a position for even greater results moving forward. The integration of the MRP with our new ERP has enabled the business to make more informed decisions on processing yield improvements as evidenced by the 6% improvement to gross margin during fiscal '22. We have made a concerted effort to ensure we grew the bottom line with the top line and Dan's organization executed the plan. As we look beyond '22 and into fiscal year '23 and future years, CPS is continuing to follow up on the success of the past years with improving production volumes. We have a before advancing material solutions that will enable our customers' products to function even more efficiently. We are qualifying more parts every week in our dialogue with several large aerospace and defense clients that see the value of CPS as an enabling technology. The future is quite bright at CPS. We have several large-scale future opportunities in all 3 product lines. These opportunities are far committing also within the markets we are focusing on, aerospace and defense and commercial consumer electronics. The entire staff is working diligently towards growth and product offerings while improving profitability. We are pleased with the recent fiscal year '24 performance and continued financial support our ever-growing shareholder base. We expect that we will continually and incrementally improve as we move forward quarter-to-quarter and year-to-year. We are aware of the unpredictability of the global marketplace that have positioned the business that we have more diversification in our product offerings and customer base. We believe that this diversification will lead to more consistent and growing results in the future. We have lots of additional opportunities today, both small and lived that keep the entire staff focused on finding the ideal innovative material solution to our customers' needs. In closing my prepared remarks, I would just like to thank the Board of Directors for their continued faith and confidence in my leadership for our investors, thank you for patience and belief that CPS is truly a unique material science company with a lot more to offer to clients. All of our employees, teammates and agents, thank you for a tremendous year, and we are looking forward to another prosperous ‘23 and beyond. Thank you. Chuck and I and Anthony, prepared to answer any questions at this time.

[Operator Instructions] Your first question is coming from [ Michael White ].

Mike, congratulations on the record setting in 2022 and a very impressive increase in gross margins. Before I ask my question, I would like to thank you and Dan Bart for your service in the country as well as acknowledge the tremendous [indiscernible] CPS. Right. I'm a long-term shareholder, and my question is, it's a record operating income in 2022 and cash balances of $8.3 million. Any plan to get that cash back to shareholders in a dividend or share buyback.

Mike, this is Michael. Thank you for your comments about Dan and I service. It was our privilege to serve. The cash position currently is there to help us grow, Michael. We have plans to expand operations, and we are using the cash that we're building up to give us more options to build growth in the company, a dividend or a share buyback program is not a recommendation all needs for the Board of Directors and obviously the deciding factor on that. But to date, we're in a growth mode and growth requires cash. And so we're very pleased with our position right now on our cash.

Congratulations I know record sales and earnings here. Can you give us some update on your armor efforts?

Sure, [ Aaron ]. Nice to talk to you again. Yes, a tremendous year. I think the entire team performed really well. Our Armor efforts are continuing to go as planned. We, I think, announced during the year additional orders of the strike-based panels to our private KT, who in turn provides us to the U.S. Navy. We still continue to advance our overseas partners a solution that we think by the end of '23 may have the final decision for a production award not only Erin we also won a small business innovative research award to develop a new UH-60 Black Hawk on the floor, and we continue to do testing and evaluation with the Southwest Research and it down in San Antonio, Texas to try to qualify our armor for even greater applications on the larger full nations in the military.

Right. In the past on some conference calls, you have referenced possible [indiscernible] for limitary vehicles going to South Asia. Can you update us on this program?

Yes. Yes. So that program is still a living and going well. We continue to do optimization testing. We're actually moving into a new phase now, which is integration testing, so where we have to make provisions for mounting onto a vehicle and we expect that, that test will happen sometime in Q2. And then hopefully, like I alluded to, Irwin, that production decision will be made later in the year.

Right. Do you have competition on the system or…

Yes. Well, we always have competition, right? And so one of the advantages of our ARMOR system is that it's a relatively lightweight for the threats we're trying to defeat. So when you go with a monolithic steel or aluminum, we have a significant advantage in weight, which provides the vehicle to operate as intended. I think as you recall, there were lots of instances during the U.S. war front where we were over burning vehicles with so much armor that they have second and third or effects on the vehicle and drivetrain and chassis. So I think one of the advantages of our solution is lightweight to stop a significant threat.

Great. On the Irish vehicles, I mean, these are mostly new programs. So any chance of when they upgrade the old systems that could use your systems?

Yes. Well, certainly, there's always opportunity to do that, right? And so what happens right now is it's a more deliberate contracting schedule right now in the U.S. But Anthony has been attending several meetings up in the Detroit Arsenal to talk about future years and upgrades to U.S. fleet, and that's obviously a significant opportunity for us. But that's a long process with big friends that we have to work with. So...

Good. And there's carriers called lightning aircraft carriers, wouldn't that be an obvious area that they're in a way, many aircraft carriers that would use your system.

Yes. Well, certainly, there are a lot of surface vessels in the U.S. Navy and allied navies that could benefit from our hybrid team. It has the advantage of relatively lightweight for high be ballistic threats and also can withstand the harsh environmental conditions. So I think that bodes well for our future with Sophos vessels and the U.S. Navy and the allies.

[Operator Instructions] Your next question is coming from [ Ron Richards ].

On the last conference call, you talked about being very excited about the electric vehicle market. I was wondering if there any updates on electric vehicles.

Well, we certainly have lots of progress to report. Anthony, do you want to land? Do you want to take this one?

Yes. Ron, thanks for the question. So yes, we certainly made a lot of progress. Certainly, the commercial vehicle market is definitely competitive and certainly a cost-sensitive market. So we continue to work with customers and system integrators to try and identify where can we bring value. So we're certainly making progress in those discussions and understanding where some of the gaps are in trying to understand this investment in U.S. infrastructure in the EV market and how we can bring value there. But again, it's a long process. It's a long qualification process, and we're really working on understanding what the needs and gaps are in that market so that we can identify a technology to bring value to those needs. So we're certainly making progress. But again, it is a competitive process, and it also is very cost sensitive. So we're really focusing on what is the value proposition and how can we meet those needs.

Okay. And one other question I had was you were talking about possibly hiring Investor Relations firm in the fourth quarter also. Any progress on that?

Yes. So this is Ron, this is Michael. So we have now got down to a few IR firms, if you will, and we've decided that we are going to begin by attending 2 investor relations conferences in fiscal '23, on remotely and one in person. And so we've targeted, I think one is in Q2 and one is in -- don't hold me to its either Q3 or Q4. And then we'll measure our success with that. We certainly appreciate the opportunity to talk to investors directly, and we like that approach. And so we're going to try that first, Ron, but we do have 2 or 3 IR firms. We are still engaged with talking about how they can help us add value.

[Operator Instructions] There are no further questions in the queue.

Okay. Well, Matthew, thank you for hosting us today. Anthony, I think Dan is out probably in the room to check. And we think the future is -- go ahead.

I just said Dan did come in yet here.

Yes. We think the future is very bright for CPS. We are continuing to make progress on just about every front. We've had a lot of success in '22. We just wanted to share that with our investors in the community today. But we're not done. We're going to move forward in '23. You can kind of see the book print of our growth plan, and that continues to show very good results. So -- that's kind of what we're doing. I appreciate everybody calling in today and listening in and thank you for your continued support.

Thank you very much [indiscernible]. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Thank you, Max.