Cps Technologies Corp/De/ Q4 FY2024 Earnings Call

Good day, and welcome to CPS Technologies Fourth Quarter and Year-End 2024 Earnings Call. It is now my pleasure to turn the floor over to your host, Chuck Griffith, Chief Financial Officer at CPS Technologies. Chuck, the floor is yours.

Thank you, Paul. 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?

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' operations and environment. These uncertainties include, but are not limited to, the ongoing conflicts in Ukraine and Israel, other geopolitical events, economic conditions, market demands, and competitive forces. 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, after which Chuck will review the financial results in greater detail. Brian?

Thank you, Chris. Fourth quarter revenue for CPS was $5.9 million with an operating loss of approximately $1.3 million. Sales declined year-over-year primarily due to the fulfillment of our U.S. Navy armor contract with Kinetic Protection, as previously discussed. But in the fourth quarter, our top-line rose significantly relative to the third quarter of 2024 due to increased customer shipments as our expanded production capacity came online. With strong customer demand, this trend of increasing growth is expected to continue through fiscal 2025 and with improving margins and other growth aspects of our business also taking hold. I'll now turn the call over to Chuck to provide further details about our financial results, after which I will provide some additional perspective.

Thanks, Brian. First of all, I'd like to thank everyone for their flexibility as we rescheduled this call from last week to this week. Effective for our 2024 audit, we have new auditors on board, PKF O'Connor Davies. We made the change to be sure to allow them to become sufficiently familiar with our company. We're impressed with their capabilities and are glad to have them in place as our auditors. As was just mentioned, the company's revenue totaled $5.9 million in the fourth quarter compared with $6.7 million last year. In the year-over-year comparison, most of the change was due to the fulfillment of our armor contract with Kinetic Protection earlier this year. We're pleased that most of the recent quarter provided revenue that equaled our best quarter from earlier in 2024, which was Q1, even though there were significant armor shipments in Q1 and none in Q4. The recent growth in sales of our other product lines filled this sizable gap. While revenue growth is accelerating due to other program wins, Kinetic Protection remains cautiously optimistic about landing additional armor orders for other naval ship classes in the coming year. We believe our armor offering has support in Congress and at key levels within the U.S. Navy. In the meantime, we are benefiting from continued strong demand for power module components and related solutions from both new and existing customers. Our product development efforts are also progressing according to plan. For example, we've received several SBIR awards, which are expected to expand our product portfolio in response to customer demand. Brian will discuss this more in a moment. We reported a gross loss in the fourth quarter of $0.3 million or approximately negative 4.6% of sales compared with a gross profit of $1.1 million or 17% of sales last year. This decrease was due to lower overall revenue and reduced manufacturing efficiencies, along with costs associated with hiring and training the third shift as we discussed in the past. Specifically, various nonrecurring costs were incurred in the quarter totaling nearly $600,000. These expenses were incurred as part of the ramp-up of production volumes, including excess material costs, additional labor, training expenses, and other inefficiencies. We expect that such one-time expenses are behind us, and we anticipate gross margin will improve as volumes climb in fiscal 2025. Selling, general, and administrative expenses totaled $1.0 million in the fourth quarter, basically the same as last year in the fourth quarter. As we remain focused on controlling costs even while investing in new business development initiatives aimed to accelerate long-term growth. We also had some one-time costs this quarter related to retaining the new auditing firm. The company posted an operating loss of $1.3 million in the fourth quarter compared with operating income of approximately $0.1 million last year. We reported a net loss of $1 million or $0.07 per share versus net income of $0.2 million or $0.01 per diluted share in Q4 of fiscal 2023. Turning to the balance sheet, we ended the year with $3.3 million of cash and $1 million in marketable securities as compared to $8.8 million in cash and no marketable securities at the start of 2024. Trade accounts receivable as of December 28, 2024, totaled $4.9 million versus $4.4 million as of December 31, 2023. Inventories totaled $4.3 million at the end of the fourth quarter compared with $4.6 million at the start of the fiscal year. Turning to the liability side, payables and accruals totaled $4.0 million at the end of the fourth quarter versus $3.6 million as of December 30, 2023. As I mentioned earlier, PKF O'Connor Davies is now in place as our new audit firm effective for the 2024 audit. We used Wolf and Company for many years and would like to publicly thank them for their service on our behalf. We felt that a full review of our audit services was appropriate at this time last year. Based on their robust capabilities, pricing, and strong track record, PKF O'Connor Davies was the firm we selected following that review. Now Brian will provide a more in-depth discussion of the period.

Okay. Thank you, and good morning, everyone, again. As Chuck just described, the fourth quarter was difficult financially, but we also believe the company demonstrated concretely the promising path that we are on. As expected, it was a transitional period, and we're on track for improved financial performance going forward. We're very pleased that our first production is fully operational with ramp-up weekly output, and we saw our Q4 top line growth of 40% sequentially from Q3. In addition, our margins are set to expand given that we had sizable nonrecurring expenses in the fourth quarter, as Chuck discussed. At the same time, we continue to rack up several wins that align with ongoing strong customer demand with our vision for fiscal 2025 and beyond. Our core businesses of metal matrix composites and hermetic packaging are on solid footing. We are actively fulfilling the $13.3 million contract that we recently finalized with a long-standing semiconductor manufacturer to provide power module components through September of this year. We have been fulfilling this contract since October, and our increased production capacity for various metal matrix composite products has materialized into greater shipping volumes to this and other key customers. As a reminder, our components are utilized primarily in high-speed rail, wind turbines, and electric vehicle applications. We anticipate continued strong demand. The course we've charted for CPS continues to build on these core product lines while also expanding our offerings. We are targeting new applications in key markets with demanding technical requirements, which we believe our technologies and capabilities are uniquely suited to address. In the past, I've talked about how we added internal 5-axis machining capability and leveraged $200,000 of funding from the Commonwealth of Massachusetts to do so. We are now actively fulfilling orders that rely on this newly added proficiency. Early this summer, we expect to achieve the milestone of our first such customer shipment. Our new 5-axis machining resources for hermetic packaging is a prime example of how we are expanding the sales opportunities that we can effectively pursue for our existing product lines. More broadly, we intend to add new product lines to our portfolio over time with new products that leverage our proprietary know-how, including the design, manufacture, and testing of aluminum infiltrated products to deliver unique material properties. Notably, 2025 has started off with our first commercial order for radiation shielding, which is CPS' first new commercial product in many years. The accelerated timeline to market of our radiation shielding is quite unusual and provides a strong endorsement for our technology and the approach of our technical team. Normally, SBIR programs seek to achieve proof of concept during a short Phase I program followed ideally by developing a workable product prototype during a longer Phase II. When federal funding ends, a small business like ours faces the challenge of achieving commercialization. But in our case, our Phase II effort funded by the DOE started only six months ago. Even though we have 18 months of funded development work remaining, we are now in parallel executing on a radiation shielding product order. While this order includes the potential for follow-on orders, we are most encouraged by the market's endorsement of our value proposition. This market includes several potential applications of interest, each potentially benefiting from the lightweight and customizable solution we have developed. Similarly, on our fiber reinforced aluminum or FRA, under our license agreement with Triton, we are also working toward commercialization. We have established FRA manufacturing capabilities in our facility and replicated the material performance results, including with third-party testing that were originally achieved by Triton. This enables us to progress our discussions with potential customers. Given FRA's relatively lightweight and higher strength at elevated operating temperatures, aerospace applications are one area of focus for us. We expect to have product samples in the hands of potential customers later this year. Internal efforts like these are augmented by the great success we have had winning new externally funded development contracts, which build on our pursuit of SBIR funding, which we initiated in 2021. Aside from the two active Phase-2 contracts, which began in 2024, we've been awarded three Phase-1 contracts since 2025. This is simply spectacular and speaks volumes to our innovative technologies as well as our researchers advancing these new applications in response to the defined needs of our customers, particularly the Department of Defense. All three awards are with the U.S. Army and are worth $250,000 each over a 6-month period. Of these, two support next-generation artillery requirements with one targeting the development of lightweight, ultra-low temperature sintered ceramic materials that provide electromagnetic protection for artillery shells, while the other is focused on additively manufacturing highly dense refractory tungsten alloys meant to replicate the performance attributes of depleted uranium. The third new SBIR is CPS' first funded effort to further develop FRA or fiber-reinforced aluminum just one year after we became the exclusive global licensor. The U.S. Army is committed to reducing the weight of military vehicles, and as I mentioned earlier, FRA is an ideal candidate given its lightweight and high strength at elevated operating temperatures. This is part of the army's hybrid electric powertrain and propulsion systems initiative, which aims to enhance fuel efficiency and extend the operational range of military vehicles. It's a great new way to showcase our technology. All three SBIR offer the promise of further development and funding in the quarters and years to come. In addition, we have other recent submissions, including SBIRs that are awaiting government response. We continue to identify specific customer challenges where we believe we can bring value with novel solutions based on our core competencies and material size. We're also continuing our work on a development effort funded by the U.S. Naval Air Systems Command. With this funding, CPS is developing composites for rocket motor cases and other related uses. With work that runs through Q3 of 2025, this program highlights additional applications where once again, CPS' unique capabilities bring value in the face of demanding operating environments. As we enter 2025, we are pleased with the beginnings of a turnaround from our Q3 results. Production is now stable and growing with three operating shifts, and we expect continued high shipment volumes for the quarters to come. We expect that as our new production operators gain experience, they will continue to improve over the next few quarters and allow us to generate improving bottom line results. In addition, as certain one-time expenses are behind us, and with new research contracts to be fulfilled, we anticipate improving gross margins and bottom-line results as the year plays out and efficiencies improve. We're experiencing continued strong demand for our metal matrix composite solutions as well as our hermetic packaging applications. At the same time, as I mentioned, we are actively seeking new customers in the aerospace industry that can benefit from FRA. We expect further development of this market this year. We are still optimistic given the product's excellent track record that Kinetic Protection could win armor orders for additional classes of Navy vessels in fiscal 2025, even given current budget challenges in Washington. Our ballistic solutions address a large market across various types of ships as well as other military applications, and we believe they have gained significant support, both within the Navy as well as on Capitol Hill. In closing, we're upbeat about the opportunities ahead of us and the outlook for CPS in 2025 and beyond. With continued strong market demand, expanded manufacturing capabilities, and promising advances that will further expand our product portfolio, we're well positioned for growth and improved performance in fiscal 2025 and beyond. Once again, let me thank our investors for their passion and patience as we navigated through several challenges last year. We're focused on winning new business, improving our operational execution, and expanding our addressable markets. In total, this should lead to greater overall performance and better financial returns, leaving us a stronger, more capable, and nimble company that is a reliable and critical partner to our customers in each vertical market that we serve. We can now open up the call for questions.

We have a few questions in queue at this time. The first question is from Ron Richards, a private investor.

Congrats on that order for the radiation shielding. I was wondering if you know how big the market is for radiation shielding for trucking business?

Yes. Ron, thanks for your question. It's in development because the funding from the DOE, as you mentioned, was related to trucking primarily focused on secondary containment for micro reactors. Obviously, the less weight that's put onto the truck as barrier material, the more capacity the truck can have for its cargo. But some of that is, I think, realistically speaking, is further out on the timeline. So we're funded to develop the product with that application in mind. But what we have found is as we've talked to people in the industry with what we have, we're getting early interest for other applications. For example, facility managers are saying, I could build a concrete wall, that's heavy, but then I got to have a thicker concrete pad underneath it, which is a problem, and it's costly. And I also have smaller needs locally inside a room, inside a work area, maybe an elevated space up above where there's piping or other hazards. So in the more near term, we're seeing opportunities that are, frankly, unrelated to the trucking aspect, and there's even some applications that are a lot of our hermetic packaging solutions are going into aircraft or satellites, and there's radiation risk for all these components that are in space. So we're also having some discussions there. So there's a number of markets that are actively being discussed here at CPS.

Okay. Do you have any idea of what kind of revenues you might look at in the next year or two for those applications?

It's hard to put numbers on it. Because number one, the markets are diverse and sizable, but we have to be certified as a potential supplier. We have to have customers doing their application path and those sort of things. So getting introduced into certain products will take some time. It's hard to quantify, but we also see in this order that the customers saw what they needed, and we're frankly quick to act because they know what they need. So that's probably something of an outlier in an application that you can imagine is fairly conservative as far as what you're going to do for containment, but we think these opportunities will continue to come forward.

The next question will be from Francis Goldwind, Francis is a private investor.

I wanted to ask about the munitions round. Once you develop this, if it's accepted by the army, does that mean that you will be manufacturing those warheads?

Well, what it means is, in this case, the two munitions SBIR we've been funded for are a little different than the third one related to FRA. In these two related to the munitions, the technical team at the army wrote up a very specific topic. And they said, we have a very specific challenge that we need someone to solve if we knew how to solve it, we wouldn't be writing this up, but we're writing up a question, and we're looking for someone with the right answer. So CPS proposed an answer based on our technical capabilities and what would come about after that is if we can satisfy again, Phase-1 being concept, you claim you could do it, can you prove it in the lab. And potentially, if we're funded by Phase I, okay, let's make a prototype that the army can actually test on. And then if they can validate that it satisfies their need, the question would become, do we become a commercial provider of product to the Army? So it's not necessarily a given, but the fact that they're spending R&D money to find a solution tells you that they have a very real need. And the real power of the SBIR funding is that it comes with the potential to be the sole source provider down the road. In the past, there are some contract officers that say, well, I need multiple bids, you need to share your technology with another manufacturer. And the appropriate answer to that is we do satisfy your competitive requirement as a federal agency because we competed on the SBIR way back at the beginning of Phase I. So you can be a sole source provider. It's a powerful tool for an SBIR program, and we will be working on these munitions problems over the next six months. And then hopefully, that transitions into a Phase-2, and that would then be an offering to the Army that they would need to decide to engage for a particular application or program.

What do you think the timeline for that process would be? Just an approximate timeline. Is it months? Is it years?

This SBIR is a 6-month Phase-1 aimed at achieving proof of concept. The two programs have recently commenced, and we will be working on them until Q3. At that point, we plan to propose Phase-2 to the Army based on the progress made in Phase-1. If they move forward with Phase-2, it could involve funding of around $1 million to $1.1 million over 24 months, during which we aim to deliver a prototype. At that stage, the federal program might either be extended or concluded. This is the typical timeline to reach a demonstrable solution, although we experienced quicker progress with the radiation shielding. A duration of about six months plus two years is usually expected in the SBIR framework.

And on the radiation shielding, coming back to the prior question, I understand that you don't have specific customers. But have you sat down with a sort of back of an envelope and said what's the size of the addressable market here, potentially high and medium, low?

Our work is still in the early stages, and I am not ready to provide specific numbers because we are exploring various applications and markets that have come to our attention as customers show interest. This interest leads to further discussions. Therefore, we have not fully quantified these different applications.

Could you talk a little bit about your fixed cost element in your cost of goods? The loss of the armor program resulted in a reduction in revenues, but the cost of goods didn't change significantly. Why is that?

The margins on our traditional products, such as metal matrix composites and hermetic packages, are not performing as well as they did with our armor products. A significant factor in this is that we spent most of the second half of 2024 ramping up for increased production demands, which involved considerable expenses that should eventually decrease. We had to hire additional staff for the third shift, who needed training before they could effectively work. Some started training at the beginning of July, but we didn't start the third shift until the last week of August. We incurred several expenses that were either nonproductive or minimally productive during this time. After launching the third shift, we also faced high turnover rates, as some workers initially committed to third shift but left shortly after starting. This led to an additional $200,000 in labor costs for the fourth quarter alone. This situation affected not only labor costs but also the quality and yields of the products we manufacture. Although base plates are conceptually simple, they are challenging to produce, and any minor imperfections can render them unusable. New employees may struggle with the delicate handling required, leading to lower yields. However, we anticipate that as Q1 progresses and we move further into 2025, many of these issues will subside. Making base plates is a complex process, which means that while training new employees takes time, it also creates a barrier for competitors looking to enter this market. Producing base plates requires more than just basic equipment; it is a technologically advanced product.

The next question is coming from Greg Weaver, a private investor.

Nice to see all the SBIR. I mean it's great to get paid to develop your own tech. I might ask this before, but remind me again, is this a revenue item or a cost offset?

When we submit the budget to create the product, we include an allocation for profit and overhead absorption. Additionally, I think our involvement in these SBIRs has allowed us to bring in scientists who are working on these projects. Therefore, it serves as a cost offset while also contributing positively to our bottom line.

So the funding shows up on the revenue line item, though, and then?

Yes.

So reading your PR. So I'm to believe that the bookings in the quarter then were greater than $5.9 million because you mentioned about your backlog being up.

That would be fair to say, yes. Definitely.

Okay. I can't remember. Do you disclose the backlog at year-end or quarterly in the Q? I can't remember.

We don't. We don't.

Brian, I might have missed it. I heard you mention the significant contract with your European partner regarding the plates. Did you mention something about September of this year? And did you bring up any changes in pricing related to that?

Yes. So what happened here, Greg, was that's a customer who buys typically out of one-year commitment, and that's from October one to September 30. We had an earlier agreement with them, which kept product flowing, but was not fully resolved on quantity and pricing and that kept us going in Q4 of 2024. Subsequently, we finalized pricing and quantities, which resolved at that $13.3 million. That was resolved a couple of months ago, but well into that 12-month period, but that agreement is for that 12-month period. So we're actively fulfilling that through the end of September under that $13.3 million contract.

Do you know if the price increased at all? Do you receive any credit for the products that have already been shipped?

Yes, that was retro. The pricing was retroactive to 10.1 million.

10.1. So we saw that already in Q4.

Correct. Yes.

Your gross margins have increased, but they remain negative. You mentioned earlier that you offset the Armor loss, yet you also indicated you're underutilized and lacking volume, which is affecting your gross margins. Can you help clarify this? It seems like scrap and rework might be the underlying issues here.

That is a major factor without getting into specific numbers. Our yields went down fairly significantly from the first six months of 2024 to the last six months of 2024 as we added these folks. Yes, so yes, basically that's the main piece. We also have a number of items that go through as expenses. And as we ramped up and we've built up purchases so that we could handle the additional manufacturing capacity or needs, we bought more of some of these supplies, not inventory items, but supplies to make sure that we didn't run out, so that we didn't have to shut down operations for two days while we waited for something to come in. So there was a growth in that expense category as we ramped up more than we would expect on an ongoing day-to-day or week-to-week basis. There were a number of factors that we expect to either go away completely or certainly diminish as time goes by during 2025.

Well, we're 80% of the way through Q1 here, I guess, how is manufacturing these days?

Much better.

Before I was pressing you, you said, 'well, if I could do six million rev, I hopefully get 15% to 20% positive gross margins,' right? I mean is that realistic?

I believe we are still aiming for a margin of 15% to 20%. That is where we expect to be once we have a strong team in place, which I think is very realistic. In fact, I believe we are actually aiming for margins even higher than that.

Yes, I would add, Chuck, some of the harsh realities of Q4 in a couple of different buckets. I mean one is employee training, number two, poor efficiency of the new employee, and then you have a yield defect impact. Those three different challenges improve at different paces over time. I think we're going to see that play forward in Q1, Q2, et cetera. Obviously, the distraction of the first employee goes away once that other person is in the job and the other things take more time for a new person to be as capable as somebody who's been here five or ten years.

Got you, Brian.

I want to add that we know that an employee who has been with us for five or ten years is significantly more productive than someone who has only been here for three or four months. There is a clear and noticeable difference. We have data supporting this, and we are confident in its accuracy.

Right. Sure. Well, good luck, I guess, getting the kinks out, and we'll tune in here for Q1 shortly. Thank you.

We did have a follow-up from Ron Richards.

I've been a shareholder for years and on previous conference calls, I've asked about this Southeast Asian Armor contract. You had scheduled a shoot and the shoot didn't go as well as planned. I was wondering if that Armor would have been reworked for that project? And how is that going?

Yes. There's existing development work going on to restore that potential. That's an active program that's worked on by our technical team in parallel to all the other things that we have going on. But that remains an opportunity for the future as we work to get back towards the ballistic performance and certainty of a shoot and that kind of thing. Yes, that was a challenge from a while ago that we're still working to resolve and it's part of what our team is working on as we understand the fundamentals of that particular design for that particular specification, each Armor customer has its own qualification tests, the velocity of what projectile at what angle to the panel and that sort of thing. All those factors are what our team is looking at to get back to that test cycle.

There's no projection on any kind of timeline when that might have another test that would be further out.

That would be further out. There's nothing on the schedule right now. We do have some testing going on, but it's preliminary to actual shoot.

We are testing it. I believe the question was about a test organized by the customer. We are conducting CPS testing, but a customer test would take more time to arrange.

There were no other questions at this time. I would now like to hand the call back to Brian Mackey for closing remarks.

Okay. Thanks, everyone, for joining our call. As Ron and Greg mentioned, it won't be that long to our Q1 call. But thank you for joining us today. If you have any separate questions, please follow up with Chris Witty, our Investment Relations adviser. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.

Thank you, everyone.