Cps Technologies Corp/De/ Q4 FY2025 Earnings Call

Good morning, everyone, and welcome to CPS Technologies Fourth Quarter 2025 Earnings Call. It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO at CPS Technologies. Chuck, the floor is yours.

Thank you, Jenny, 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?

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 conflict in Ukraine, Israel and the Middle East, other geopolitical events, economic conditions, market demand, and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. 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 quarter, after which Chuck will review the financial results in greater detail. Brian?

Thanks, Chris. Good morning, everyone. As expected, we just closed out the best year in the company's history from a revenue standpoint with sales of $32.6 million. This was a milestone accomplishment for CPS and marks a strong comeback from where we were just a year ago. We continue to benefit from strong underlying demand and are well on our way to selecting a new site to expand and improve our production capabilities. We also have some news to share regarding HybridTech Armor. I'll speak more to both of these topics in a moment. As previously announced, we completed a secondary offering in the fourth quarter that raised $9.5 million of net proceeds. With our newly strengthened balance sheet, we are clearly in better shape than at any time in recent memory, and we expect 2026 to position our company very well for higher growth going forward. Let me now turn the call over to Chuck to provide further details about our financial results, after which I will provide some additional perspective on the quarter and our outlook. Chuck?

Thanks, Brian. The fourth quarter capped a year of significant achievement and puts the company on track for even better days ahead. CPS reported revenue of $8.2 million for the period compared with $5.9 million in the fourth quarter of fiscal 2024. As with the year in total, the increase was driven by strong product demand and higher overall shipments, benefiting from our third shift and expanded production capabilities. Revenue in Q4 was down from Q3 levels, primarily due to extended holiday periods for our customers, particularly overseas. We reported gross profit in the fourth quarter of $1.2 million or approximately 14.6% of sales compared with a gross loss of $0.3 million last year. As in other recent quarters, the increase year-over-year was due to higher revenue and greater manufacturing efficiencies. However, margins in Q4 took a step down versus Q3 due to the reduction in revenue as well as the dilutive impact on margins of the dramatically increased cost of gold. A number of our products are gold plated, and historically, the expense of some of these charges was rather nominal. Now, however, these dramatically increased costs are having a dilutive impact on margins as the margin for added gold cost is nominally 0. Going forward, we expect margins to expand as we continue to implement improvements to our operations, notwithstanding any short-term impacts when we move production at the appropriate time. We remain focused on expanding margins as we increase productivity and improve asset utilization at the new facility. Selling, general and administrative (SG&A) expenses totaled $1.3 million for the fourth quarter versus $1.0 million in the prior year. We continue to actively manage costs while ramping up production and investing for growth. SG&A remained fairly constant for each quarter of 2025. The company posted an operating loss of about $100,000 in the fourth quarter compared to approximately $1.3 million last year. We reported net income of around $12,000 or $0.00 per share versus a net loss of about $1 million or $0.07 per share in Q4 of fiscal 2024. Turning to the balance sheet. We ended the year with $4.5 million of cash and $8.8 million in marketable securities, a combined total of $13.3 million versus a combined total of $4.3 million at the beginning of 2025, which included $3.3 million in securities. As a reminder, we earlier completed a public offering which raised net proceeds for growth capital and funds to move to a larger manufacturing facility and further scale the business. Trade accounts receivable totaled $5.2 million in December 2024. Inventories rose to end of the fourth quarter, reflecting increased production and customer demand at the start of the fiscal year. On the liability side, payables and accruals totaled $4.3 million at the end of the fourth quarter versus $4.0 million in 2024. Now Brian will provide a more in-depth discussion of the period and outlook.

Thanks, Chuck. Let me first point out that as I'm sure our investors know, Chuck, our CFO, announced late last year he was finally looking forward to retirement. He has earned it after a full career, including the last 7 years at CPS, where he has positively impacted not only our financial reporting, but our strategy, growth trajectory and underlying operating results. Although we do not expect this to be his last earnings call with the company, I know the entire team here at CPS agrees with me that it's been a pleasure working with him these past several years, and we certainly hope retirement treats him well. Since joining the company in 2019, Chuck has been instrumental in heading the company's finance and accounting functions as well as providing overall leadership at CPS that has been crucial to driving the growth we've experienced. We are now actively searching for a successor as capable as he is, who will join the company in what we believe is an inflection point in support of future growth. This screening and interviewing effort will naturally be a key point of focus for us in the coming weeks. Now returning to our performance. We're obviously pleased with the rapid expansion of our sales and operations leading to record revenue this past year. I think it says a lot about our products, our markets, and the ability of our committed team here at CPS to raise production to meet demand. However, we know we have further to go with respect to both revenue and gross margins, which is why we're looking to upgrade our manufacturing capabilities as soon as possible. As we discussed last quarter, the key impetus for the capital raise in October is a planned move to a manufacturing facility nearby, which will provide for long-term growth and product expansion. In our current facility, we simply do not have enough space to respond to the continued growth in demand we're experiencing. Using some of the funds we recently raised, we are committed to finding and relocating to a new site to address our expansion requirements. With this in mind, we recently selected DAO Corporation to serve as our general contractor. They're an experienced organization here in the Boston area. With the input and assistance of the DAO team, we will soon select the best facility, negotiate a lease and initiate a build-out to meet our manufacturing requirements. Although the specific timing will depend on the amount of work needed to upfit the selected facility to address our production plans, we anticipate initiating the move several months from now. We're upbeat about the numerous positive aspects that will result once we have relocated. In addition to addressing our current space limitations, we anticipate greater operational efficiencies, reduced facility maintenance expenses and a dramatically improved working environment for our team. The new facility will likely provide a number of other advantages as well. As we are space constrained in our current facility, this also means we are generally revenue constrained, particularly now that our third shift of metal matrix composite product manufacturing is fully operational. Our commitment to relocate demonstrates our confidence in the growth opportunities that are before us. Sustained strong demand for our products, combined with expanded floor space and the addition of targeted production equipment will position us to meaningfully increase revenue and implement targeted gross margin improvements. Now an update regarding HybridTech Armor. With the passage of the FY '26 defense bill, Kinetic Protection, our partner and the prime contractor for these efforts is optimistic that orders supporting the U.S. Navy will resume in the latter half of the current calendar year. Whereas our orders in the 2021 to 2024 timeframe provided protection for crew-served weapon stations on aircraft carriers, these orders will be for a small quantity of U.S. Navy destroyers. Funding has been secured to implement ballistic shields on a handful of these vessels. Detailed contract negotiations are expected to begin in the coming months, and we will certainly keep our shareholders apprised as this continues to progress. With regard to our federally supported research activities, there's a lot to report as well. Since we reengaged with the government-funded programs in the SBIR and STTR in 2021, we have received 13 awards from either the Department of Defense or the Department of Energy. However, as our investors may know, these federal programs have not yet been reauthorized by Congress and therefore, they lapsed at the end of the previous federal fiscal year on September 30, 2025. The negative impact on CPS has thankfully been limited. Proposals we already submitted are not being reviewed and new research topics are not being published. However, on the positive side, our 4 ongoing contracts, 1 Phase 1 and 3 Phase II programs, as we've previously announced, continue to be executed and continue to be funded without interruption. Fortunately, within just the past few days, we have seen indications Congress has reached a compromise, which will enable reauthorization of these programs with full congressional approval potentially occurring later this month. It appears this reauthorization will be valid until September 30, 2031. Once federal SBIR employees are back at their desks, we anticipate the publication of new topics to resume and our pending applications to be reviewed. At the same time, we continue to strengthen our internal capabilities supported in part by strategic deployment of federal research funding. Over the past several months, we've made significant investments in capital equipment. For our Almax product line, the newly installed higher capacity mill now allows us to process ceramic fiber at twice our previous rate. With the system now fully up and running, we are producing a broader range of samples to support customer engagement and business development efforts. Also in September, we launched Phase 2 of our controlled fragmentation tungsten warhead program funded by the Army. As we have now installed a new sintering oven in our laboratory, we have established a fully operational work cell for manufacturing these alloys at CPS. Although still early in Phase II, we are now producing 40-millimeter warhead samples with unique geometries designed to exceed Army performance benchmarks. These new internal capabilities also enhance our ability to work with other centered metals and advanced ceramics. Collectively, these investments carefully integrated within our new facility and supported by our growing team will accelerate product development and strengthen our competitive position. The additional space at our new location will enable us to commercialize engaging emerging product lines as we pursue sizable market opportunities. This includes radiation shielding, where research continues with ongoing funding from the DOE where we are now actively working to develop and test larger scale samples while we continue to evaluate the applications of lightweight MMC radiation shielding across multiple industries. Overall, we expect these complementary processes to unlock new opportunities for our company that build upon and expand our existing intellectual property and manufacturing capabilities and ultimately lead to a greater array of offerings for our customers. In summary, we expect 2026 to be a year of solid revenue as we complete the relocation and lay the groundwork for sustained long-term growth going forward. Once fully operational in the new facility, we will be well positioned to meet increasing demand, implement additional initiatives targeting improved gross margins, and expand into large and attractive new markets. We can now open the call up for questions. Ken?

Our first question is coming from Chip Moore of ROTH Capital.

Congrats, Chuck, on retirement. Maybe just to start for me on the facility move. It sounds like you're obviously very close and you've got it down to a couple of sites. Just walk us through in a little more detail how you're thinking about timing and some of the moves in preparation for that? And then any early thoughts on capacity and future expansion? Will you have room to grow? And how are you thinking about some of those dynamics?

Thanks, Chip. We have narrowed our options down to a very small list of sites. With input from the DAO team, we are evaluating various aspects of these locations, such as electrical and plumbing needs, to meet our production requirements. This process will likely take a few months. Once we've chosen a facility, we will begin the move gradually, work center by work center. Our balance sheet reflects an increase in inventory levels to ensure we have products available during the downtime for the move. The timing and structure of the move will depend on which work cells need to be operational first to support our customers. We also need to revalidate our production equipment, which will cause some disruption, but we are taking steps to minimize that as much as possible. We expect to start the move in a few months, and it will take several months to complete the transition. We are considering a number of nearby facilities, so we don't anticipate significant negative impacts on our workforce, as their commute will likely remain similar. That was also an important factor for us. Chuck, do you have anything to add?

Yes. I think Brian mentioned several months ago, but I expect we will have a decision on this specific facility in about a month.

Yes, some number of weeks.

Okay. Yes, it sounds like final negotiations. So yes, that's helpful. And maybe if I step back, just on demand, I guess, for PSI in particular, you had a big customer re-up in October. Just broader demand there. And I think you've talked in the past about potential for another large customer out there, just given some of the capacity constraints. But what are you seeing in that market?

Yes. We continue to see that demand. That customer does order that you mentioned that orders their typical pattern for a 12-month need. So we're working to fulfill that as well. And as I mentioned, that's one of the items where we can build inventory ahead to satisfy their needs as we relocate. And coming back to that, you had asked a question about capacity. We do expect to increase capacity in the new facility. There's some equipment that we're ordering that will get delivered to the new facility. And we will also have additional floor space that will be available, but generally uncommitted in the short term because we simply know that these other opportunities continue to blossom. So we've got floor space earmarked to be able to take advantage of those in a way that we cannot in our current facility. And yes, that new potential customer that continues to play forward. They're working to validate the performance of our product, as you would expect before they make a larger commitment and those tests and discussions are ongoing.

Excellent. Excellent, Brian. And maybe one more for me on how to think about margin trajectory near term, right? I think the gold prices, how big impact is that now with gold continuing to move higher? And can you offset that at all? And then HybridTech Armor coming back, that should be beneficial to margins. It sounds like maybe that's not big volumes initially and a little later, but any more thoughts there?

Yes, thank you. I hope gold prices have reached their peak. They have more than doubled in the past year, which factors into our calculations. While we are billing more for gold, we're also spending significantly more, which negatively affects our margin percentage. The overall bottom line margin is likely to remain stable, possibly with slight improvements, but it may vary by one or two points depending on quarterly volume. Another challenge for our margins is the growth in inventory. We approach inventory valuations and standard costs conservatively, meaning as we increase inventory, we incur expenses that won’t be realized until sales occur later on. This inventory growth acts as a headwind for margins. However, once we start producing again, I anticipate we could see the reverse effect, but I can't specify whether that will be an increase of one, two, or three points. It should nonetheless provide a positive effect rather than a negative one.

Our next question is from Steven Fuse, a private investor.

I was going to ask about the facilities move, but that's pretty well taken care of. I do have a quick question about exposure to rising aluminum costs and whether that could become a margin issue since it is linked to the price of copper as well. I'm not sure about your specific grades of aluminum, but...

Aluminum makes up a relatively small portion of our overall production costs, so its impact isn't significant. While it may present a challenge, the gradual increase gives our sales team the chance to factor it into new pricing for many of our products. Some customers who order infrequently might not adjust their prices regularly, but many others who place orders more frequently can adapt to this change. Overall, I don't see it as a major concern since aluminum costs represent a minor part of our product expenses.

Some of our sourcing decisions have changed as well. I would say, to your point, Steve, that the market has been more dynamic than perhaps at other times in history. Therefore, our purchasing team has needed to be more agile to secure the best available cost.

Our next question is coming from a private investor.

I'd like to ask a question about tungsten alloys. I understand you have a process called binder jet additive manufacturing to create high-density tungsten alloys, and you're moving away from depleted uranium. What is the potential revenue from this? Additionally, would this process create a competitive advantage for your company that would prevent other competitors from entering the market?

Joe, what you're speaking to specifically is some of the SBIR funding that we were awarded in 2025, particularly for Phase 1 related to U.S. Army artillery, who is trying to move away from depleted uranium, and our proposal to accomplish that was the binder jet approach that you discussed as a way to construct a product, a layer from tungsten, which is cost-effective. We had nice technical results from that funded effort. We're looking to continue that work in relevant directions. That's something that will continue to play out over time. But I think it's a good example of the places where we are using our historic intellectual property and know-how and our manufacturing equipment to develop new technologies for just the reason you described. We want that protective moat around these things that we're bringing to market. Our new facility will enable us the space not only in a much bigger laboratory area, but also that undedicated floor space to move into when we go to small quantities or large quantities. So in the bigger picture of our portfolio, that's exactly what we're trying to do is have more intellectual property for that protective moat. That one specific opportunity will continue to play forward. That's not going to be significant revenue in 2026 or anything like that, but it's a great example of the types of things that we're broadening into but staying close to home in our material science space.

That's a good answer. But can you provide an estimate of the potential sales figures you are looking at?

The long-term picture for that will be very large. If the Army engages that solution to use for its artillery, that's a very large market, and that's kind of the view we have of any number of these markets. I mean, with very minimal exception, I mean we're not looking for needles in a haystack. These are haystacks. We don't spend a ton of time deciding if it's a huge haystack or a large one because, frankly, we're a $32 million revenue company from 2025. So that's a very large market potential as are many of these things because it could potentially be a solution that the Army engages for its artillery, and those are big numbers.

Well, that appears to be the end of our question-and-answer session. I will now hand back over to Brian for any closing comments.

Super. Okay. Thanks, everyone, for joining us and for your ongoing interest in CPS. We look forward to speaking to you again at the end of our first quarter. If you have any questions in the interim, please reach out to Chris Witty, our Investor Relations Adviser.

Thank you very much. That does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.