Executive Summary / Key Takeaways

• CPS Technologies achieved record quarterly revenue of $7.5 million in Q1 2025, demonstrating significant growth (27% YoY) and successfully replacing revenue previously derived from a completed Armor contract.
• The company returned to operating profitability in Q1 2025 ($130k operating income), driven by higher sales volume, improved manufacturing efficiencies, and reduced operating expenses, signaling a positive inflection point after recent losses.
• Growth is fueled by strong demand for core Metal-Matrix Composites (AlSiC) and hermetic packaging products, operational improvements including a third production shift, and new market opportunities in areas like wind power and AI infrastructure.
• A robust pipeline of new product development, particularly in Fiber Reinforced Aluminum (FRA) and Radiation Shielding, supported by numerous government contracts (SBIRs, NAVAIR, DOE), offers significant potential for future growth and market expansion into aerospace and defense.
• While execution risks related to manufacturing yields and commercialization timelines persist, management is optimistic about continued margin expansion and achieving record full-year revenue in 2025 based on current backlog and capabilities.

Setting the Scene: Advanced Materials for Demanding Environments

CPS Technologies Corporation, tracing its roots back to 1984 as Ceramics Process Systems Corporation and reincorporated in Delaware in 1987, has built its foundation on providing advanced material solutions for industries where performance and reliability are paramount. Specializing primarily in metal-matrix composites (MMC), particularly Aluminum Silicon Carbide (AlSiC), and the assembly of hermetic packages for hybrid circuits, CPSH serves critical sectors including electronics, power generation, automotive, and defense. The company's strategic focus has always been on developing custom, high-performance components tailored to stringent customer requirements, a model that necessitates significant fixed investments in engineering and production capabilities. Growth, therefore, is intimately tied to both sustained demand for existing products and the successful development and adoption of new applications.

The market landscape CPSH operates within is characterized by the need for materials that can withstand extreme conditions – high temperatures, thermal cycling, demanding power loads, and harsh environments. This positions CPSH against larger, more diversified materials and semiconductor companies. Competitors like Materion Corporation (MTRN) offer a broad portfolio of advanced materials, while Monolithic Power Systems Inc. (MPWR) and Wolfspeed Inc. (WOLF) are key players in power management semiconductors and wide band gap materials, respectively. Arconic Corporation (ARNC) competes in lightweight alloys for aerospace and automotive. While these larger players often possess greater scale, financial resources, and broader market reach, CPSH differentiates itself through its specialized expertise and proprietary technology in metal-matrix composites and hermetic packaging.

The Technological Edge: HybridTech and Beyond

At the heart of CPSH's offering is its proprietary HybridTech metal-matrix composite technology, particularly AlSiC. This material combines the lightweight properties of aluminum with the stiffness and low thermal expansion of silicon carbide, resulting in components with superior thermal management capabilities, high strength-to-weight ratios, and excellent dimensional stability under varying temperatures. These properties are critical for applications like baseplates in high-power modules for electric trains, wind turbines, and electric vehicles, where efficient heat dissipation is essential for performance and longevity. Compared to traditional materials, CPSH's AlSiC can offer significant advantages in thermal efficiency and durability, contributing to lower operating costs and extended product lifetimes for customers.

Beyond its core AlSiC products, CPSH is actively investing in research and development to expand its technological portfolio and address new market needs. A key initiative is Fiber Reinforced Aluminum (FRA), licensed exclusively from Triton Systems. FRA leverages the lightweight and high-strength properties of aluminum reinforced with ceramic fibers, offering enhanced strength, particularly at elevated temperatures. This technology is being explored for high-value applications in aerospace (e.g., bearings, liners, potential replacement for titanium structures) and military vehicles, with estimated market sizes exceeding $1 billion. Management expects to have material samples in potential customers' hands later in 2025 and is targeting commercialization in fiscal 2025.

Another promising area is HybridTech Radiation Shielding, initially developed under a DOE contract. CPSH's novel MMC design provides lightweight shielding against neutron and gamma radiation, addressing a need in the transportation and use of microreactors. While an initial commercial order was canceled due to unrelated customer program termination, the company continues development under a $1.1 million DOE Phase 2 contract through late 2026 and sees growing market interest for various applications, including modular walls and glove boxes, within an estimated $4 billion market.

Furthermore, CPSH is developing MMC composites for thermal energy storage under a NAVAIR Phase 2 contract ($1M+ over 24 months) and advanced materials for artillery applications under multiple Army Phase 1 SBIRs ($250k each over 6 months). These R&D efforts, often government-funded, not only contribute directly to revenue but also serve as endorsements of CPSH's technological capabilities and provide potential pathways to becoming a sole-source provider for future programs.

Operationally, CPSH has enhanced its capabilities by commissioning a new internal 5-axis CNC machining capability, partially funded by a Massachusetts grant. This investment is expected to broaden offerings in hermetic packaging, a market segment estimated to exceed $50 million for 5-axis machined components, with potential gross margins in the low to mid-30% range at high volumes. First customer shipments utilizing this capability are anticipated in summer 2025.

Recent Performance: Overcoming Headwinds and Achieving a Turnaround

Fiscal year 2024 presented significant challenges for CPSH. The expected completion of a major U.S. Navy Armor contract with Kinetic Protection in April 2024 resulted in a substantial decline in revenue compared to the prior year, particularly impacting Q2, Q3, and Q4 2024 results. This was compounded by a temporary slowdown in purchases from a major semiconductor customer working through excess inventory and operational difficulties.

Production bottlenecks emerged due to a tight local labor market, leading to labor shortages that hampered the company's ability to fulfill growing orders for its core products. The ramp-up of a third production shift, initiated in late summer 2024 to address capacity constraints, initially led to reduced manufacturing efficiencies and lower yields as new staff were trained. These issues, along with supply chain constraints like a temporary shortage of a key MMC ingredient in Q2 2024 and significant scrap losses on a new hermetic packaging product after plating, negatively impacted gross margins and resulted in operating losses in Q3 and Q4 2024. Q4 2024, in particular, saw approximately $600k in nonrecurring costs related to the third shift ramp-up.

However, the first quarter of fiscal year 2025 marked a significant turnaround. CPSH reported record quarterly revenue of $7.51 million, a 27% increase year-over-year from $5.91 million in Q1 2024 and a sequential increase from Q4 2024. Crucially, this revenue growth fully offset the absence of Armor revenue ($0 in Q1 2025 vs. $2.8M in Q1 2024), demonstrating robust demand and successful fulfillment of orders for core AlSiC and hermetic packaging products.

Gross profit improved to $1.23 million (16.4% of sales) in Q1 2025, up from $0.91 million (15.3% of sales) in Q1 2024. This margin expansion was primarily attributed to the impact of higher sales volumes absorbing fixed costs and improving manufacturing efficiencies as the third shift gained experience. Selling, general, and administrative expenses also decreased by 6% year-over-year. These factors combined led to a return to operating profitability, with operating income of $129.7 thousand in Q1 2025 compared to an operating loss of $259.6 thousand in Q1 2024. Net income for the quarter was $96 thousand, reversing a net loss of $143 thousand in the prior-year period.

Financial Health and Liquidity

As of March 29, 2025, CPSH held $1.93 million in cash and cash equivalents and $1.04 million in marketable securities. The decrease in cash from $3.28 million at the end of 2024 was predominantly due to increased working capital needs associated with higher sales volume, particularly a rise in trade accounts receivable to $6.30 million from $4.86 million. Inventories also increased to $4.81 million to support growing production.

The company successfully paid off a note payable during Q1 2025 and remains debt-free aside from lease liabilities. It maintains access to a $3 million revolving line of credit with no outstanding borrowings as of the end of Q1 2025. Management expressed confidence in the company's ability to fund operations for the remainder of 2025 using existing cash balances and cash flow from operations, believing current liquidity is sufficient for the foreseeable future.

Outlook and Growth Trajectory

Management is decidedly optimistic about the outlook for fiscal year 2025, projecting it to be a record year for revenue. This confidence is underpinned by a strong order backlog, increased manufacturing capacity with the fully operational third shift, and anticipated continued robust demand for core products.

The strategic rationale for expected margin and profitability expansion throughout 2025 is tied to improving operational efficiencies and higher asset utilization as production volumes climb. Management is targeting a return to gross margins in the 20-25% range, acknowledging this may take time but is a key focus area.

Beyond the strength in core markets, several new initiatives are expected to contribute to future growth:

• Wind and AI Infrastructure: Growing demand for high-voltage DC transmission driven by wind farms and AI data centers presents a significant opportunity for AlSiC-based power modules, leveraging the material's durability in remote applications.
• New Product Commercialization: The planned commercialization of Fiber Reinforced Aluminum (FRA) and continued development and potential initial commercial sales of Radiation Shielding in 2025 could open up substantial new revenue streams.
• Enhanced Hermetic Packaging: The 5-axis machining capability is expected to broaden market opportunities and potentially improve margins in this segment starting this summer.
• Potential Armor Rebound: While not guaranteed, the possibility of future Armor orders for other Navy ship classes remains an upside potential.

Risks and Challenges

Despite the positive momentum, several risks and challenges warrant investor attention:

• Operational Execution: While yields are improving, successfully optimizing the efficiency and output of the new third shift and managing the complexities of manufacturing high-precision custom components remain critical.
• Customer Concentration: Selling to a limited number of customers exposes the company to significant risk if a major customer reduces orders or is lost.
• Macroeconomic Factors: Inflation, supply chain disruptions, and potential tariffs could impact raw material costs and the ability to pass these costs onto customers, potentially pressuring margins. Global geopolitical conflicts, while not directly impacting raw materials currently, pose a broader risk to supply chains and energy costs.
• Commercialization Timelines: The transition of promising R&D projects like FRA and Radiation Shielding from development to significant commercial revenue involves inherent uncertainties and timelines that may differ from expectations, as demonstrated by the canceled radiation shielding order.
• Competitive Pressures: While CPSH has technological advantages in specific niches, larger competitors with greater scale and R&D budgets could potentially out-innovate or leverage cost efficiencies to gain market share. Currency fluctuations can also impact competitiveness against international rivals.

Conclusion

CPS Technologies appears to be at a significant inflection point, successfully transitioning from a period marked by the completion of a major contract and operational headwinds to one defined by record revenue and a return to profitability. The strength of its core Metal-Matrix Composite and hermetic packaging businesses, coupled with strategic investments in manufacturing capacity and a robust pipeline of promising new technologies like Fiber Reinforced Aluminum and Radiation Shielding, paints a compelling picture of future growth potential.

While challenges related to operational execution, customer concentration, and macroeconomic factors persist, management's clear focus on improving efficiencies and expanding the product portfolio positions CPSH to capitalize on growing demand in high-performance material markets. The Q1 2025 results provide concrete evidence that the turnaround is underway, suggesting that CPSH is well-equipped to leverage its unique technological capabilities to drive both top-line growth and bottom-line expansion in the coming quarters, potentially making 2025 a record year for the company.