Q4 2023 CPS Technologies Corp Earnings Call
Operator: Please hold the line and we'll be right back with you, www.larryweaver.com Good day and welcome to the CPS Technologies fourth quarter and year-end 2023 earnings conference call. At this time, all participants have been placed on a listen-only mode.
Hold the line and we'll be right back with you.
[music].
Good day and welcome to the Cps technologies fourth quarter and year end 2023 earnings conference call. At this time, all participants have been placed on listen only mode. The floor will be opened for your questions and comments. Following the presentation. It is now my pleasure to turn the floor over to your host Chuck Griffith CFO at C. P. S technologies.
Operator: The floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO at CPS Technology. Sir, the floor is yours.
Sir the floor is yours.
Chuck 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 advisor, will provide a brief safe harbor statement. Chris.
Thank you operator, and good morning, everyone today, I'm joined by Brian Mackey, our President and CEO.
Look forward to discussing our third 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 I 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 is opera.
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 statement.
<unk> 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.
Brian Mackey: Additional information can be found in our filings with the FCC. Now, we'll 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.
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 our fourth quarter results after which Chuck will review the financial results in greater detail Brian.
Thanks, Chris.
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 a 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.
Today, we're pleased to announce fourth quarter revenue of $6 $7 million and an operating profit of approximately $144000 well.
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 over $27 $6 million and are pleased with the backlog of $20 million as we begin fiscal 2020 for Chuck.
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 FRE composites with trading systems.
Which gives us the exclusive global rights to make and sell products using this technology.
So far a composites are comprised of high strength aluminum alloys, discontinuously reinforced with short ceramic fibers given.
Brian Mackey: 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 marketing. We think this will be an excellent addition to our product portfolio. 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.
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.
<unk> is already known as the World leader in advanced metal matrix composites, but adding <unk> capabilities will complement our core competencies.
Regarding 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 FRE composites here at Cps and begin to engage customers in relevant markets.
This will be an excellent addition to our product portfolio.
Second and also announced earlier this week, we received an award for the Massachusetts manufacturing accelerate program known as <unk>.
Sponsored proposals submitted by the company in the fourth quarter of 2023.
Brian Mackey: 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 two 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 and markets that are very familiar to us. In terms of the business today, among other things, we will continue to fulfill a 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.
This award valued at $20000 will support the purchase of a five axis CNC machining and.
And expand the company's manufacturing capabilities to better serve our clients.
This five access 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 two recent developments the licensing agreement for FRE and the purchase of a new five access machine.
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 a long term supply agreement announced last year, providing power module components and systems for a variety of rail and other applications to a multinational semiconductor manufacturer. We're on track with the shipment of product under this contract over the course of 2024.
Brian Mackey: 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 I SBIR grant from the Department of Energy, and we'll soon be submitting a Phase II 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 II SBIR proposal for thermal energy storage is under review by the Navy.
At the same time, we are working on our most recent phase one SB IR grant from the department of energy and will soon be submitting a phase II 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 II B IR proposal for thermal energy storage is under review by the Navy.
Brian Mackey: We're preparing a Phase II STTR proposal for tungsten material for the Army, and we're submitting several additional new Phase I SBIR proposals to 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.
We're preparing a phase II S T T. Our proposal for tungsten material for the army.
We're submitting several additional new phase one svar 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.
Brian Mackey: For fiscal 2024, however, I want to remind our audience that shipments of our hybrid tech armor panels for Connect Protection's Navy contract are expected to be complete as of the middle of the 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.
Want to remind our audience that shipments of our hybrid tech armor panels for connect protections Navy contract are expected to be complete as of the middle of the second quarter.
For the last year or so these sales have generated an average quarterly revenue of just over $2 million. So the completion of our sub contract 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 arm of orders that we are pursuing to enable us to resume and exceed our recent revenue run rate.
Brian Mackey: 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.
We're actively pursuing other opportunities for armored products across several military programs. We are hopeful of future contract to support other ship classes, but remain uncertain as to contract timing, particularly given the protracted continuing resolution.
In addition, as previously explained we are 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.
Chuck Griffith: 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 and acceleration. While headwinds related to Armour 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. Thanks, Brian.
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.
Headwinds related to armor exist in the near term, we're committed to improving our topline profile strengthening operating results and in turn improving total return for our shareholders.
I will 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 Griffith: 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 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 dip in revenue in the 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.
Thanks, Brian.
As mentioned earlier, the Companys revenue totaled $6 $7 million in the fourth quarter as 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 U S carrier fleet will cause a dip in revenue near term, while our partner kinetic protection as cautiously optimistic about additional work for other Navy ships the length of the impact remains to be seen.
Yeah.
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.
Chuck Griffith: 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, on, 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 Administration Expenses totaled $1 million in the fourth quarter versus $1.3 million in the prior year period.
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 $5 million of write offs and return, but we've also devoted significant internal engineering hours to debt 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 administration expense.
It made it straight to expenses.
Totaled $1 million in the fourth quarter versus $1 3 million in the prior year period.
Chuck Griffith: We maintained our cost discipline in terms of overhead, and we're happy to do so. The company generated an 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 in cash, up from $8.3 million at the end of 2022. And this increase was in spite of a reduction in deferred revenue by almost two and a half million dollars in 2023. Trade accounts receivable as of 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.
Maintained our cost discipline in terms of overhead and we're happy to do so.
Company generated operating income of $144000 in the fourth quarter compared with approximately $309000 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, or December 30, <unk> 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.
Chuck Griffith: 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 resulted in recognition of revenue and thus decreased deferred revenue.
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 of our resulted in recognition of revenue and thus decrease in deferred revenue.
So thank you. This concludes my discussion of the financials. So now we will open the call up for questions operator.
Operator: So thank you. This concludes my discussion of the financials, so now we will open the call up for questions. Operator.
Thank you at this time, we will be conducting a question and answer session.
Operator: Thank you. At this time, we will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while asking your question you please pick up your handset and listen on speakerphone to provide optimum sound quality.
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Operator: Once again, please press star 1 on your phone at this time if you wish to ask a question. Please hold while we poll for questions. And once again, that is star one on your telephone if you wish to ask a question on today's call. The first question is coming from Jim McElary from Dawson James. Jim, your line is live. Thank you. Good morning.
And once again that is star one on your telephone if you wish to ask a question on today's call. The first question is coming from Jim Mcelroy from Dawson James Jamie Your line is live.
Thank you and good morning.
I was hoping you could.
Brian Mackey: I was hoping you could give a little bit more detail on the Trident license. Is it limited to certain End Markets, the timeframe of the license, and then where are you going to manufacture this product? Yeah, thanks, Jim. The FRA license is an exclusive global license to use that technology for any application.
Give a little bit more detail on the Triton license is it limited to certain.
And market.
The timeframe of the license and then where are you going to manufacture this product.
Yeah. Thanks, Jim.
The <unk>.
<unk> is a exclusive global license to use that technology for any application. So it is quite broad the timeframe.
Brian Mackey: 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 Triton Systems decides to pull that back, but there's a pretty high bar for that type of activity and ability to cure and those kinds 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 success for both of us.
Is essentially I would interpret as perpetual unless we sort of fall down on the job and trading systems decides to pull that back with theirs.
Pretty high bar for for that type of activity.
The ability to cure and those kinds of things.
So it's sort of not ended in a term theres a lot of joint interest in alignment between trading systems and what we'll be trying to do success for one of US a success for both of US. So we're very excited about the opportunity, they're it's a very well tested and material whose benefits are.
Brian Mackey: 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.
None.
To answer your question, we will be manufacturing that material here at our facility in Norton.
Metal matrix.
Positive material. So just like the Mmc's, we've been making for 39 years.
Brian Mackey: So just like the MMCs we've been making for 39 years, it's a pre-form infiltrated by aluminum. Of course, the first one is for primarily thermal conductivity, and the latter one is primarily for ballistic protection.
It's a pre form infiltrated by aluminum the armored products that we make as a pre form infiltrated by aluminum of course. The first one is for primarily thermal conductivity in the latter one is primarily for ballistic protection in this case it'll be late wait.
Brian Mackey: In this case, it'll be lightweight, but also strong. So the kind of area one is an aircraft, like a bushing or a bearing liner for a helicopter. Obviously, lightweight is of high value, and there are any number of applications. We can make net-shaped 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 hole 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 handover is complete, this will be ours to manufacture and sell with their support. And just a couple more questions on the Triton license. So one, do you have minimum commitments that you need to satisfy, and then, It seems like... that.
But also strong so that kind of area. One is aircraft like a bushing ore bearing liner for a helicopter obviously lightweight is of high value.
The number of applications, we can make.
Net shape products for knees, and we can also make essentially ingots or blocks, which can't be machined, it's a machinable material to add through whole 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 trading systems, but once that handoff is complete.
This will be ours to manufacture and sell with their support.
And just a couple more questions on again on the Triton license.
One do you have minimum commitments that you need to.
At Assai and then.
It seems like.
That.
Brian Mackey: This will be something that will contribute to revenue, you know, maybe 12 to 18 months down the road. Is that too optimistic, too pessimistic? Yeah, it's certainly, but it's certainly not this quarter.
This will be something that would contribute to revenue.
Maybe 12 to 18 months down the road is that too optimistic too pessimistic.
Yes, it certainly.
Certainly not this quarter.
Brian Mackey: I mean, we'll be on the learning curve and making trial pieces 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 and are looking for a reliable supply chain before they can turn this on. You know, having said that, obviously, you don't get into a helicopter without sufficient testing, given, you know, a given set of specifications given by the OEM or whoever the case may be.
Well, we'll be on the learning curve, and making Ah trial pieces and things like that.
Intriguing part of it is also that there are interested customers who have dialogue with trading 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 is given a given set of specifications given the OEM or whoever the case may be so there will be a timeframe to it that will play out.
Brian Mackey: So there will be a time frame for it that will play out. You know, if anything, this year, it's going to be small revenue of early pieces and that kind of thing. And it'll go from there.
If anything this year, it's going to be small revenue.
The early pieces in that kind of thing and it will go from there.
And the other question about minimums.
Brian Mackey: And the other question about minimums, it's more just about, you know, 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. Okay, I have three other questions, but I'll just throw them all out at you.
It's more just about making material efforts to succeed in this market. So there's not a there's not a high bar for success as long as we're continuing to work on it which.
Which we certainly intend to do.
Okay I have three other questions, but I'll just throw them all out at you.
You talked about.
Chuck Griffith: 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 a small, impact on Q1. And then you opened up indicating that the backlog was $20 million. I was hoping you could tell me what it was a year ago. Okay, this is Chuck.
The revenue impact of the Navy completion, I was hoping that you could talk a little bit about the margin impact.
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 just hoping you could tell me what it was a year ago.
Okay. This is Chuck let me answer that so.
Chuck Griffith: Let me answer that. So in terms of the armor, that does tend to have a 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, you know, getting the throughput through the factory in order to increase the margin on the bottom line.
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 margins.
More than half of our overhead is fixed so it's really a function of.
Getting the getting the throughput through the factory.
In order to increase the increase the margin and the bottom line.
So we're certainly working to do that as Brian mentioned, we do have.
Chuck Griffith: 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 ARMA revenue. What was the second question again?
Other items that are our other orders that are.
Going to increase this year that are going to somewhat mitigate.
The loss of the pharma revenue.
What was the second question again.
The quality issue if there is some impact although small in Q1.
Chuck Griffith: The quality issue if there's some impact, although small and few one Yeah, from what we've seen so far, it's probably, I must say, it's probably not material to Q1, whereas it was certainly for the last three quarters of last year. You know, 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, Yeah, it's more of a nuisance. Maybe part of the trick, which makes it thorny technically, is that the defect doesn't show itself until it's been shipped to the ship and processed downstream. So connecting cause and effect has been challenging.
Yes.
From what we've seen so far it's probably.
I must say today, it's probably not material to Q1, whereas it was certainly for the last.
Three quarters of <unk>.
Last year.
<unk>.
At least I have it hasn't gone away.
But.
It appears to have.
Significantly significantly decreased.
To the point, where.
Well as I said, we're not we're not declaring victory, we're still we're still trying to get it down to.
Virtually zero, but.
We're at the point, where.
Yeah, it's more of a nuisance maybe.
Part of the trick, which makes it thorny technically is that the defect doesn't show itself until it's Ben Shim.
The shift in process downstream.
So connecting causing effect has been challenging but what we're now receiving from the customer of our reports with a dramatically reduced.
Chuck Griffith: But what we're now receiving from the customer are reports with a dramatically reduced defect rate based on product that we ship to them, let's say, you know, in the December timeframe that they process in January. And you had a backlog a year ago? Oh, yeah. I want to say it was probably about $27 million.
The defect rate based on product that we shipped to them.
Let's say December timeframe that they processed in January.
Okay.
Alright, and you had one backlog a year ago.
Oh, yes, I want to say it was probably about $27 million.
Chuck Griffith: I've just thought off the top of my head, but, you know, a big chunk of that was, you know, was armor. And I think in terms of, I think in terms of the backlog, one thing to keep in mind is that, with the exception of Armor, typically the orders that we're going to be receiving orders today that are going to ship in late Q2, early Q3. So there's still a lot of additional business to get out of that backlog before we yeah. And on the armor side, we don't enter the year with a significant backlog, but right. I mean, they're very real opportunities that we're actively pursuing. You know, we don't we don't control Navy decision-making and things like that, but That remains an active area going forward. Okay, great. Thanks a lot, guys. That's it for me.
This off the top of my head, but.
A big chunk of that was.
Armour and I think in terms of.
I think in terms of the backlog one thing to keep in mind is that.
With the exception of armor.
Typically the orders that we're going to be receiving orders today that are going to ship in.
Late Q2 early Q3, so there's still a lot of.
Additional business to get out of that backlog before we.
And on the Army side, we don't enter the year with significant backlog, but right. I mean, there are very real opportunities that we're actively pursuing.
We don't we don't control Navy decision, making and things like that but.
That remains an active area going forward.
Understood.
Great. Thanks, a lot guys. That's it for me.
Thank you Jim.
Jim McElary: Thank you, Jeff. Thank you. And the next question is coming from Michael White. Michael is a private investor. Michael, your line is live. How are you doing, guys?
Thank you and the next question is coming from Michael Weiss, Michael is a private investor Michael Your line is live.
How are you doing guys.
Michael White: Yeah, just a question on the interest income, and I noticed it went down significantly, 22 to 23, and your cash balances were up significantly, and I just want to have an answer about your cash management strategy. Yeah, let me address that. So, so. That's actually another income. And last year, that other income included $600,000 of the ERTC, the tax credit, the employer tax credit. Yeah, so actually, interest income was up significantly last year. I want to say it was probably $10,000 in 2022.
Just a question on the interest income.
And so went down significantly.
'twenty two to 'twenty three and your cash balances were up significantly and just wanted to have an answer about your cash management strategy.
Yes, let me, let me address that so so.
That's actually other income and last year that other income included $600000 of.
For the <unk>.
Tax credit.
The employer tax credit Ensign yeah. So so actually interest income was up this year significantly I want to say it was probably.
$10000 for 2022.
Chuck Griffith: And this year it was, you know, closer to 240, 250, something in that range. So, actually, the interest income is up significantly compared to the prior year. And in terms of cash management, I think that one thing that we've done is, which I think is good from a risk standpoint, is our bank has a Sweep Product, whereby $250,000 of cash goes to different FDIC insured banks around the country every night.
And this year was closer to two.
$242 50, something in that range.
So so actually the interest income is is up significantly compared to the prior year.
And in terms of cash management.
Thank you.
One thing that we've that we've done is.
Which I think is good from a risk standpoint is.
Our bank has a.
Sweep product whereby.
Every night.
$250000 of cash goes to different FDIC insured banks around the country.
So that.
Chuck Griffith: So, basically, we're protected from that standpoint, you know, if there's another Silicon Valley Bank or something like that, we don't, we don't. We don't have too many concerns about that kind of thing because it's basically automatically spread out every night, so we don't have issues from that standpoint. Other questions about cash or anything else? Yeah, what type of rates are you getting on that sweep?
Basically we're protected from that standpoint.
If there is another.
Silicon Valley Bank or something like that we don't we don't.
We don't have too many concerns about that kind of thing because it's basically automatically spread out every night. So we don't have issues.
From that standpoint.
<unk>.
Other other questions about the cash or anything else, yes, what type of rates that you're getting on that cash sweep.
Chuck Griffith: We're in the, I want to say we're in the high threes, getting, you know, close to four. Any thought of laddering treasury bills, getting over 5%, which is a very liquid market? If you ever needed the cash, you could always sell them, but that ladder, I don't know, three months, six months, nine months? Yeah, so we have discussed it sort of. How do I say that? What is the word I want?
We're in the I want to say, we're in the high threes.
Close to four.
Any thought of lateral treasury bills getting over 5%.
Which is very very liquid market.
If you ever needed the cash you can always sell them, but that latter them now three months six months nine months.
Yes, so we have discussed it sort of.
How do I say that what is the word I want we've discussed it.
Chuck Griffith: We've discussed it, but not really to the point where we would, you know, want to pull the trigger on something like that. You know, I think it's a good idea. And yeah, but it's not something that, as I said, we pull the trigger on, but it's definitely something that we've, you know, that's on the radar. Let's say that. Yeah, 8.8 million. That's a nice cash reward you're sitting on.
But not really.
To the point, where we would want to pull the trigger on something like that.
It's a good idea.
Yes, but it's not something that as I said, we've pulled the trigger on but it's definitely something that we've you know that's on the radar, let's say that.
Yes, $8 8 million.
Nice.
Cash or what you're sitting on.
Michael White: And, you know, the stock, if you take that away from the market cap, the stock is very undervalued. Any thoughts to, you know, using some of your future free cash flow? I know you want to, I know, in the past, you've wanted to have a large cash reward, but use some of your future free cash flow to buy back stock? We have not discussed that, I don't believe. Yeah, I don't think we've discussed doing something like that at this point. I think... you know, we're looking at a number of opportunities. I think that the FRA, the fiber-reinforced aluminum, is an opportunity; the $200,000 grant from the state or from M M A P is another opportunity where we're looking at being able to invest cash, um, in order to, uh, you know, in order to better grow the company, and I think that we're kind of looking to use the cash for that purpose, you know, as opposed to, you know, you know Yeah, like I'm saying, I'm not saying to use all 8.8.
Sure.
Stock if you take that away from the market cap stock is very undervalued.
He thought too.
Using some of your future free cash flow I know you are going to.
Pass you've wanted to have a large cash what you some of your future free cash flow to buy back stock.
We have not discussed that I don't believe you do yes.
I don't think we I don't think we've discussed doing something like that at this point I think I think.
No.
We're looking at a number of opportunities I think the FRE the fiber reinforced the aluminum.
As an opportunity the $200000 grant from the state.
From MMA P.
As another opportunity, where we're looking at being able to invest cash.
In order to.
<unk>.
In order to better grow the company and I think that we're kind of looking.
To use the cash for that purpose.
As opposed to.
Buying back stock for example.
Alright, yeah, like I say and I'm, not saying use all the eight eight.
Michael White: But if you had 20, 25 to 30% of future cash, you know, that would send a message to the market that, hey, we believe the stock is undervalued. And, you know, if you did, you know, even 25% or 30% of future free cash flow, that's a significant number of shares you could be buying back. Yeah. Yeah, okay. All right. I'm glad you brought that up. And, you know, it's something that we can put on that radar screen. Alright, we're looking at the pre-market, and the stock price is going down to 201, so it looks pretty appetizing.
I know, it's a 20, 25% to 30% of future cash than a message to the market that we believe the stock is undervalued.
If you did.
25% or 30% of future free cash flow, that's a significant number of shares you could be buying back.
Yes.
Okay Alright.
Glad you brought it up in that.
It's something that.
We can put on them to put on that radar screen.
Alright, so looking at that.
The pre market.
Stock price going down our Q1.
Looks pretty advertising.
Michael White: Alright guys, thanks for your time. Thank you. Thank you. And once again, it is star one on your phone.
Alright, guys. Thanks for your time.
Thank you.
Thank you once again it is star one on your phone if you wish to ask a question today Thats Star one if you wish to enter the Q&A queue on today's call.
Operator: If you wish to ask a question today, that's star one. If you wish to enter the q&a queue on today's call. The next question is coming from Greg Weber. Greg, your line is live. Hi, good morning, Brian, Chuck. Thanks for letting me know you're here.
The next question is coming from Greg Weaver Gregg your line of lives.
Hi, Good morning, Brian Chuck.
Thanks for letting me in here.
Greg Weber: All right, Chuck, I'm going to beat you up a little bit here because this gross margin situation, I mean, the reserve didn't cover what you needed, obviously, from Q3 to Q4 issues. You cited a $500,000 hit, so that's both periods or ever since the problem started? Yeah, that's that would cover the year, but most of it was probably in the fourth quarter. Oh, yeah, more than half of it was in the fourth quarter.
Alright, Chuck going to beat you up a little bit here because just.
This gross margin situation I mean, the reserve didn't cover what you needed obviously from Q3 for Q4 issue. So you.
You cited $500000 hit so I think that's both periods or ever since the problem started.
Yes.
That would cover the year, but but most of it was probably in the fourth quarter.
More than half of it was in the fourth quarter, let's say, yes.
Chuck Griffith: Let's say, "Yeah. Gotcha. So the production issue is that precipitated by changes made by CPSH or the customer or supply inputs? Any sense there?
Got you. So the production issue is that precipitated by changes made by Cps H or the customer or supply inputs any any sense there.
Brian Mackey: What we believe is there's a confluence of issues that individually from a few years ago did not seem to indicate any concern, but over time, culminating in 2023, resulted in the downstream appearance of this defect. And because it's kind of a multi-factor cause, it has been a thorny issue to get to the bottom of, and as I mentioned earlier, it doesn't show itself till later. So tying back, you know, a single product with a defect back to its origin, etc., has been challenging, but at the root of it seems to be a number of factors that literally go back a few years but didn't show up until 2023.
What we believe is there is a confluence of issues.
Individually.
From a few years ago individually did not seem to indicate.
Any concern but over time.
Culminating in 2023.
Results in the downstream appearance of this defect and because it's kind of a multi factor cause.
It has been a thorny issue to get to the bottom of it and as I mentioned earlier it doesn't show itself till later so Ty.
Tying back.
A single product with a defect back to its origin et cetera has been challenging but it's there.
At the root of it seem to be a number of factors that literally go back a few years, but didn't show themselves up to 2023.
Brian Mackey: Gotcha. Okay, helpful. So these are field failures. And as he mentioned at some point, they're not in the field. They're at the customer.
Got you. Okay helpful. So these are field failures and that he mentioned at some point they are not in the field.
There at the customer base.
Brian Mackey: Yes. Yeah. So basically, just to be more clear, the customer when they get our product, they bake it, and the product and the issue show up when they bake it. So they haven't put it into any of their production at that point. They just, it's more or less their own process because, you know, that. If it goes beyond that, and then it has a problem, then it obviously costs the customer a lot more money. They see it before it leaves their facility.
Basically the just to be more clear the customer when they get our products they bake it.
And the product and the issue shows up when they bake. It so they haven't put it into any of their production at that point. They just.
It's more or less their own <unk>.
<unk> because.
If it goes beyond that and then it has a problem and say that obviously cost a customer they see it before it would leave their facility right.
Brian Mackey: Right. Oh, good. Okay, so they're not adding any value other than baking it. So it's not in the field, and they're not adding parts to it and then having to throw it all away. Correct. It's not in the field.
Good okay, so theyre not adding any value other than baking it so they're not.
Not in the field and they are not adding parts to it and then having to throw it all away.
It's not in the field.
Brian Mackey: And, It's limited to a certain small family of products that are processed in a certain way. We weren't certain of that, you know, it's limited to this handful of things, but they have shown this defect that we've been. All right, that's helpful. That sounds a lot more manageable.
It's limited to a certain small family of products that are processed in a certain way, we we're certain of that.
It's limited to this handful of things, but they have shown this defect that we've been worked through.
Alright, that's helpful. That's it sounds a lot more manageable.
Chuck Griffith: Is this related to that $7.7 million customer, or is this something else? Something else, something. Okay, so he's in so, so, Uh, the reserve, Chuck, you mentioned you didn't think there'd be a material impact in Q1, that's a function of the reserve, uh, obviously it's an unknown because the guy didn't send the stuff back, right? Yeah, yeah.
And is this related to that $7 $7 million customer or this is something else.
Right.
Something else something okay.
So.
So so.
The reserve Chuck You mentioned, you didn't think there'd be a material impact in Q1, that's a function of the reserves are.
Obviously, it's an unknown because the guy.
Yeah.
Yes, yes.
Okay. So.
Chuck Griffith: Okay, so Jim asked a question about gross margins. But so, post-ARMR, what should we think about as a target corporate gross margin, assuming we've got through this production issue? Um, I would target, you know, in the mid 20s.
I think Jim asked a question about the gross margins, but so post armor, what should we think about as the target corporate gross margin assuming we've got through this production issue.
I would target like you know in.
In the mid twenties.
Chuck Griffith: You know, I think that, Yeah, I'm kind of hesitant to predict the future, but that would certainly be what we'd be shooting for. And certainly, I think it's achievable. Okay, so then if we get some more armor business, then that should go back to this 30% neighborhood, hopefully. Hopefully, yes, from your lips to God's ears.
I think that.
Yeah.
I'm kind of hesitant to predict the future, but that would be that would certainly be what we'd be shooting for and certainly I think it's achievable.
Okay. So then if we get some more armor business then.
We'd go back to this 30% neighborhood hopefully.
Hopefully yes.
Your lips to God's ears.
Back up well.
Chuck Griffith: Well, it's nice when the company makes more money operating the company as opposed to interest income, right? So we'll focus on trying to get the operations going. So far, so good.
Well that's it.
Nice when the company makes more money operating the company as opposed to interest income right. So.
Right.
So I will focus on trying to get the operations going so good.
Brian Mackey: And, and I guess it sounds like Brian, your focus is obviously, for good reasons, kind of more on this armor from a growth perspective going forward with this new deal with Triton here. Yeah, the FRA is a very interesting avenue of growth. I mean, really, as of a week ago, I would say we have R&D plus three product lines, which are MMC, Hermetic Packaging, and Armor. The FRA is kind of, you could call it number four.
And I guess it sounds like Brian Your focus is obviously for good reasons it kind of more on the armor from a growth perspective going forward with this new deal with the trading.
Trading here.
Yes, the FRE.
It's a very interesting avenue of growth have been really as of a week ago. I would say, we have R&D plus three product lines, which are MMC hermetic packaging and armor.
That foray is kind of you could call it a number for you.
Brian Mackey: So you have MMC, Hermetic Packaging, Armor, and fiber-reinforced aluminum. But it suits all of our capabilities well; it suits our customer relationships very well. I mean, it's a lot of the same trade shows and the same dialogue, just with a different benefit from the properties of the material that we produce. And the other point is that even though where we are with armor in the near term gives us some challenges. Hermetic packaging and MMCs are growing. Those are growing numbers. They're just not, at the moment, growing fast enough to take up that entire near-term dip from Armour.
MMC Hermetic packaging armor and fiber reinforced aluminum.
But it suits all of our capabilities well it suits, our customer relationships very well.
There's a lot of the same tradeshows and same dialogue.
Just with a different benefit from the properties of the material that we produce.
And the other the other point is that even though where we are with the armor in the near term it gives us some challenges.
The other the hermetic packaging and the Mmc's are growing those are growing numbers theyre just not at the moment growing fast enough to take up that entire.
Near term dip from warmer so we see continued growth in those.
Brian Mackey: So we see continued growth in those. And then we'll be adding FRA to the product portfolio here over the coming months and are excited about what that does for us as well, as we continue to work on very real opportunities on the Armour. Okay, that's my fault. So this FRA, you mentioned about using bearing liners and things. So this is never meant to be in sheet form. It's just smaller little parts that are light and strong.
And then we will be adding <unk> to the product portfolio here over the coming months and are excited about what that does for us as well as we continue to work very real opportunities on the armor side.
Okay.
It's my fault. So there's that foray you mentioned about using like bearing liners and things. So this is never meant to be like sheet form just smaller little parts that are that are light and strong.
Brian Mackey: Yeah, exactly. I mean, a helicopter might have, you know, these components. They might have 60 to 80 of them that are of different diameters. And that's what we'll be looking to make when we make our, you know, for example, a base plate from MMC; we make the net shape product that the customer is going to use. So we can readily take our knowledge of how to make a net shape component and apply it to fiber reinforced aluminum.
Yes, exactly I mean helicopter might have.
These components they might have one helicopter with a 60% to 80 of these components that are of different diameters and that's what we'll be looking to make when we make our for example, a base play from MMC, we make the net shape product that the customer is going to use us.
We can readily.
Take our knowledge in how to make a net shape component and apply it to fiber reinforced aluminum so instead of making a block of FRE and then needing to machine that down to a component.
Brian Mackey: So instead of making a block of FRA and then needing to machine that down to a component, as soon as our team looks at this technology, they say, well, we can make a net shape. And when you produce it, you might have to do a little cleanup, but you basically will have a bearing liner ready to sell. So then it's making different diameters and confirming that it meets the product requirements for customer testing and things like that.
As soon as our team looks at this technology, they say well, we can we can make a netscape and when you.
Produce it may have to do a little cleanup, but you basically we will have a bearing line are ready to sell so that it's making different diameters and confirming that it meets the product requirements for customer tests and things like that and there are customers that are interested that trading has worked within the past who are eager for a reliable.
Brian Mackey: And there are customers that are interested that Triton has worked with in the past who are eager for a reliable supply chain. So there are a lot of things that are very interesting about it for us. Gotcha. Okay, so historically, it hasn't been taken off that much because maybe cost and having to machine it down, but you guys think you can reduce the cost by near net molding. Yeah, I think some of the hesitation was, well, you know, what's the supply base? You know, you're an OEM; you're not going to adopt a family of products and incorporate them and go all the way to introduction unless you know that five, 10 years down the road, your supply base is going to be there.
Supply chain. So there's a lot of things that are very interesting about it for us.
Got you okay. So historically it hasn't got taken off that much because maybe cost and having the machine. It down but you guys think you can reduce the cost by near net.
Yeah.
And I think some of the hesitation was well.
What's the supply base.
In OEM youre, not going to adopt a family of products and incorporate them and go all the way to the introduction unless you know that 510 years down the road your supply base is going to be there. So when we say what we've been doing this for 39 years, where metal matrix composite company et cetera, et cetera or domestically located.
Brian Mackey: So when we say, well, we've been doing this for 39 years, and we're a metal matrix composite company, etc, etc, we're domestically located, no foreign entanglements, all that kind of good stuff. Currently working on different things with the DoD, you know, it satisfies a lot of those questions.
Foreign entanglements, all that kind of good stuff.
Currently working on different things with the Vod.
It satisfies a lot of those questions. So then you're talking about product capabilities and product introduction and we're excited about it.
Brian Mackey: So then you're talking about product capabilities and product introduction, and we're excited about Gotcha. Okay. Thank you. I appreciate the color.
Okay. Thank you I appreciate the color good luck.
Greg Weber: Good luck. Thanks. Thank you. And once again, please press star one on your phone if you wish to ask a question. Please press star 1 if you wish to ask a question. We'll give you a few moments. Thank you for the opportunity to ask a question. Again, that is star one if you wish to ask a question on today's show.
Thanks.
Thank you and once again, please press star one on your phone if you wish to ask a question.
Please press star one if you wish to ask a question we will give a few moments to give people the opportunity to ask a question.
Once again that is star one if you wish to ask a question on today's call.
At this point there are no other callers in the queue. So I will turn the call back to management for any closing remarks.
Operator: At this point, there are no other callers in the queue, so I will turn the call back to management for any closing remarks. Okay, thank you for joining us today and for your ongoing interest in CPS technologies. We look forward to speaking with you again after the end of the first quarter, which is upcoming. If you have any questions in the interim, please reach out to our investor relations advisor. Thanks. 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.
Okay. Thank you for joining us today and for your ongoing interest in Cps technologies.
We look forward to speaking with you again after the end of the first quarter, which is upcoming do you have any questions in the interim please reach out to our Investor relations.
Thanks.
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.