Executive Summary / Key Takeaways

• CPS Technologies (NASDAQ:CPSH) is demonstrating a significant turnaround, achieving record revenue growth in Q1 and Q2 2025, successfully replacing prior defense contract revenue with diversified product demand.
• The company's core strength lies in its proprietary Metal Matrix Composites (MMC) and hermetic packaging, critical for high-performance applications in electrification, defense, and computing, with new technologies like Fiber Reinforced Aluminum (FRA) and radiation shielding poised for commercialization.
• Operational efficiencies are improving, with gross margins recovering from a challenging 2024, and management targets further expansion towards 20-25%.
• A strong balance sheet, including being debt-free and having a $3 million undrawn credit line, provides financial flexibility to support growth initiatives.
• Key risks include customer concentration, the ability to consistently pass on inflationary costs, and the successful commercialization of new technologies.

The Foundation: Advanced Materials for a Demanding World

CPS Technologies Corporation, initially founded in 1984 as Ceramics Process Systems Corporation, has evolved into a specialized leader in advanced material solutions. The company's core business revolves around proprietary metal-matrix composites (MMC) and hermetic packaging, serving critical needs across the electronics, power generation, automotive, defense, and aerospace industries. This historical focus on high-performance materials has shaped CPSH's current strategy: to leverage its unique material science expertise to address demanding technical requirements in high-growth markets.

The company's products are not off-the-shelf items; they are custom-engineered components integrated into complex systems built by its customers. This bespoke approach allows CPSH to embed itself deeply within customer supply chains, providing solutions that offer superior performance, enhanced reliability, and often reduced total costs. This positions CPSH at the forefront of several transformative industry trends. The global push towards electrification, driven by electric vehicles, high-speed rail, and renewable energy sources like wind turbines, creates a significant demand for CPSH’s advanced thermal management and structural components. Furthermore, the escalating power requirements of artificial intelligence (AI) workloads are spurring a dramatic increase in the need for electric power, particularly in high-voltage DC transmission applications and data centers, where CPSH's materials offer distinct advantages. Concurrently, ongoing defense modernization initiatives worldwide underscore the need for lightweight, high-strength materials, a domain where CPSH's specialized composites are highly relevant.

CPSH's technological differentiation is rooted in its proprietary Metal Matrix Composites (MMC), particularly Aluminum Silicon Carbide (AlSiC). This unique combination of metal and ceramic is instrumental in addressing the challenges related to frequent temperature cycling, a common issue in power electronics. AlSiC baseplates, for instance, offer extended lifetimes, which is a critical benefit for remote and offshore installations like wind farms, where servicing is difficult and costly. These materials are vital for applications such as Insulated Gate Bipolar Transistors (IGBTs) used in high-voltage DC transmission, providing a competitive edge in durability and thermal efficiency.

Beyond MMC, CPSH also specializes in hermetic packaging, providing essential enclosures for sensitive electronic components. The company has significantly enhanced its manufacturing capabilities in this area with the operationalization of a new 5-axis CNC machine in Q2 2024, supported by a $200,000 grant from the Massachusetts Manufacturing Accelerate program. This investment is expected to broaden CPSH's offerings and improve its appeal to new and existing customers. Management estimates the available market for 5-axis machined hermetic package components to exceed $50 million, with the potential for gross margins in the low to mid-30% range at high volumes, and even higher on smaller, custom orders. First customer shipments utilizing this new capability are anticipated in Summer 2025.

Innovation Pipeline: Expanding the Horizon

CPSH's strategic growth is not solely reliant on its established product lines; a robust innovation pipeline, heavily supported by government-funded research, is key to its long-term expansion. The company actively pursues Small Business Innovation Research (SBIR) awards and other federal contracts, which provide non-dilutive capital to develop new products and penetrate new markets. As of Q1 2025, CPSH boasts six active externally-funded research programs, including five SBIRs (two Phase 2, three Phase 1) and one contract from NAVAIR. These programs are exciting endorsements of CPSH's technology and are designed to lead to new growth opportunities.

A standout in this pipeline is Fiber Reinforced Aluminum (FRA), a technology exclusively licensed from Triton Systems in March 2024. FRA composites, comprising high-strength aluminum alloys reinforced with short ceramic fibers, offer a compelling combination of lightweight properties and higher strength at elevated operating temperatures. This makes FRA an appealing alternative for various applications, including aerospace bearings and liners, and as a replacement for titanium structures, with several relevant applications each having market sizes above $1 billion. CPSH's first externally-funded program for FRA, a $250,000 Phase 1 SBIR from the U.S. Army, aims to improve the mileage and operational range of hybrid electric military ground vehicles. The company expects to have material samples in the hands of potential customers later in 2025, with commercialization anticipated in fiscal 2025.

Another promising area is HybridTech Radiation Shielding. CPSH has designed a novel MMC solution for neutron and gamma radiation shielding that offers a lightweight and customizable alternative to traditional heavy concrete or lead walls. This technology targets an estimated $4 billion market with diverse form factors, including modular walls, cladding, glove boxes, and truck shells for applications such as the transportation of nuclear microreactors. While an initial commercial purchase order was unfortunately canceled due to reasons unrelated to CPSH, the company continues its Phase 2 DOE radiation shielding contract, which extends into late 2026, and is actively engaging with customers who have expressed interest in its unique solution.

Further expanding its defense portfolio, CPSH has secured two additional Phase 1 SBIRs with the U.S. Army for artillery applications. One focuses on developing ultra-low temperature co-fired ceramics for electromagnetic protection for artillery shells, while the other explores additively manufactured tungsten to replicate the shear properties of depleted uranium. These initiatives, along with a $200,000 NAVAIR contract for MMC solutions and a $1 million Phase 2 NAVAIR SBIR for thermal energy storage in advanced missiles, underscore CPSH's ability to develop advanced solutions for demanding operating environments. The real power of SBIR funding lies in its potential to establish CPSH as a sole-source provider for these critical military applications, providing a clear path from R&D to potential long-term production contracts.

Competitive Dynamics: Niche Strength in a Giants' Arena

CPSH operates in a specialized segment of the advanced materials market, positioning itself as a niche provider rather than a broad-spectrum competitor. This strategic focus allows CPSH to develop deep expertise and highly customized solutions, which can foster strong customer loyalty in specific high-performance applications. However, this also means CPSH competes against larger, more diversified players like Materion Corporation (MTRN), Rogers Corporation (ROG), Corning Incorporated (GLW), and DuPont de Nemours, Inc. (DD).

Compared to these industry giants, CPSH's competitive advantages are rooted in its proprietary technology and its ability to offer highly customized solutions. Its metal matrix composites, particularly AlSiC, provide superior thermal management and durability for demanding applications in electric vehicles, wind turbines, and avionics. This specialized performance can lead to stronger customer relationships and potentially better pricing power in its targeted niches. For instance, while Materion offers a broader range of advanced materials, CPSH's focused expertise in AlSiC for high-temperature cycling applications provides a distinct edge in efficiency and longevity. Similarly, against Rogers, which specializes in engineered materials for electronics, CPSH's composites for wide band gap semiconductors may offer greater efficiency in heat dissipation and reliability.

However, CPSH's smaller scale presents certain competitive disadvantages. Its operational costs per unit can be higher, and its overall market reach is more limited compared to the extensive global footprints and diversified portfolios of companies like Corning and DuPont. This can make it challenging for CPSH to match the growth rates and financial resilience of its larger rivals, who benefit from economies of scale and broader revenue streams. For example, while CPSH's gross profit margin (TTM) stands at 6.88%, Materion's is 19%, Rogers' is 33%, Corning's is 33%, and DuPont's is 36%. This disparity highlights the impact of scale and product mix on profitability. CPSH's operating profit margin (TTM) is -9.85%, significantly trailing its competitors, which are all positive.

Customer concentration is another vulnerability for CPSH. While recent contract wins are positive, reliance on a limited number of customers means the loss of any one could materially impact financial performance. Furthermore, the company faces competitive pressures from a major Japanese competitor, particularly in pricing for foreign customers. Fluctuations in foreign exchange rates can make CPSH's pricing less competitive, and its ability to pass on cost increases (including those from tariffs) to foreign customers is somewhat limited due to this rival. Despite these challenges, the inherent difficulty in manufacturing CPSH's highly technical products creates significant barriers to entry for new competitors, protecting its niche. The high R&D requirements and specialized technical expertise needed to produce these advanced materials limit the pool of potential challengers, benefiting CPSH's long-term positioning.

Financial Resilience: From Headwinds to Record Performance

The year 2024 presented CPSH with significant financial and operational headwinds. The completion of a major U.S. Navy Armor contract with Kinetic Protection, which previously contributed approximately $2 million in revenue per quarter, created a substantial revenue gap. Concurrently, the company grappled with operational challenges, including labor shortages due to an unusually high number of manufacturing personnel on disability and a tight local job market, which hindered order fulfillment. Production was further impacted by quality control issues with a new hermetic packaging product, leading to significant scrap rates and unrecoverable gold plating costs. Supply chain constraints, such as running out of a critical MMC ingredient, also disrupted production. These issues, coupled with initial startup costs for a new third shift and a major customer temporarily reducing purchases due to excess inventory, contributed to a gross loss in Q2 and Q3 2024, and nearly $600,000 in non-recurring expenses in Q4 2024.

Despite these challenges, CPSH demonstrated remarkable resilience and strategic execution, culminating in a significant turnaround. In Q1 2025, the company achieved a record quarterly revenue of $7.5 million, notably without any Armor sales, signaling its success in fully replacing the lost Armor revenue with growth in other product lines. This momentum continued into Q2 2025, with product sales reaching $8.08 million, marking a robust 60.6% increase year-over-year from $5.03 million in Q2 2024. For the first six months of 2025, total revenue climbed to $15.58 million, a 42.4% increase from $10.94 million in the same period of 2024.

Profitability has also seen a significant recovery. After experiencing a gross loss of $0.23 million (-5% of sales) in Q2 2024, CPSH reported a gross profit of $1.34 million (17% of sales) in Q2 2025. For the first six months of 2025, gross profit reached $2.57 million (16% of sales), a substantial improvement from $0.68 million (6% of sales) in the prior year period. The company returned to operating profitability in Q1 2025 with $130,000 and sustained it in Q2 2025 with $136,927, leading to an operating income of $266,578 for the first six months of 2025, a stark contrast to the $1.57 million operating loss in the same period of 2024. Net income for Q2 2025 was $103,833, and $199,795 for the first six months of 2025, reversing significant losses from the prior year.

CPSH's liquidity and balance sheet remain strong. As of June 28, 2025, cash and cash equivalents stood at $2.37 million, complemented by $1.04 million in marketable securities. While cash balances decreased from year-end 2024 due to working capital needs, management expects a recovery to continue.

Critically, the company became debt-free in Q1 2025 after fully paying off a 5-year note payable.

It also maintains a $3.0 million revolving line of credit, entirely undrawn as of June 28, 2025, providing ample financial flexibility. The current ratio at June 28, 2025, was a healthy 3.34. This financial strength, coupled with increasing accounts receivable ($5.60 million) and inventories ($5.20 million) to support growing sales, underscores CPSH's operational resilience and its capacity to fund ongoing growth initiatives.

Outlook: A Path to Sustained Growth and Profitability

Management expresses strong confidence in CPSH's trajectory for fiscal 2025, anticipating a record year for revenue. This optimistic outlook is underpinned by several key assumptions and strategic initiatives. The company benefits from a robust order backlog and increased manufacturing capabilities, notably the successful implementation of a third production shift in September 2024. This expansion is expected to drive continued high shipment volumes.

A primary focus for management is the continued expansion of gross margins. While Q2 2025 saw margins at 17%, management aims for 20-25%, and potentially higher, as new production operators gain experience and manufacturing yields improve from their trough in late 2024. The non-recurring costs associated with the production ramp-up are largely behind the company, further supporting margin recovery. The $13.3 million contract with a long-standing semiconductor manufacturer for power module components, extending through September 2025, provides a stable revenue base and contributes to increased capacity utilization.

Beyond existing contracts, new market opportunities are expected to fuel future growth. The increasing demand for electric power driven by AI is leading to significant interest in AlSiC materials for wind farms and high-voltage DC transmission applications, representing substantial new volume beyond legacy traction businesses. While the U.S. Navy Armor contract concluded in April 2024, management remains cautiously optimistic about future armor orders for other naval ship classes, citing strong support within the Navy and on Capitol Hill, with potential positive impacts from a strong defense budget next year.

The commercialization of new product lines is also a critical growth catalyst. Fiber Reinforced Aluminum (FRA) is expected to begin commercialization in fiscal 2025, with material samples reaching potential customers later this year. HybridTech Radiation Shielding continues its Phase 2 DOE contract into late 2026, and ongoing discussions with potential customers could generate additional revenue in 2025. The new 5-axis machining capability is set to begin customer shipments in Summer 2025, broadening hermetic packaging offerings and tapping into a multi-million dollar market. These strategic advancements, combined with a disciplined approach to operational efficiency, position CPSH for sustained top-line growth and improved profitability in the coming quarters.

Investment Risks: Navigating the Path Forward

While CPSH's outlook is positive, investors should be mindful of several pertinent risks and challenges that could impact the investment thesis. Customer concentration remains a key concern; the company continues to sell to a limited number of customers, and the loss of any one could necessitate additional external financing. This risk is amplified by the custom nature of its products, which can lead to deep but narrow customer relationships.

Inflation and tariffs pose ongoing cost pressures. While CPSH has largely been able to pass along cost increases to customers, there is no guarantee this will continue, especially given the lag between cost increases and pricing adjustments in some long-term agreements. The presence of a major Japanese competitor, particularly for foreign customers, limits CPSH's ability to raise prices to offset cost increases, as it must remain competitive on a global scale.

Execution risk related to operational efficiencies and new product commercialization is also present. While yields are improving, the company's ability to consistently achieve higher gross margins depends on the continued training and productivity gains of its newer third-shift operators. The successful commercialization of new technologies like FRA and radiation shielding, while promising, is subject to customer adoption cycles and further development milestones. Finally, while CPSH does not directly source from conflict zones, indirect impacts from geopolitical events on global supply chains and inflationary pressures could still affect the company's cost structure and profitability.

Conclusion

CPS Technologies is undergoing a compelling transformation, moving beyond a period of significant headwinds to a trajectory of renewed growth and profitability. The company's core strength in proprietary metal-matrix composites and hermetic packaging is proving resilient, successfully replacing lost defense contract revenue with robust demand from the electrification, AI, and broader defense sectors. This operational turnaround, marked by record revenues in Q1 and Q2 2025 and a return to operating profitability, underscores CPSH's ability to execute its strategic vision.

The strategic emphasis on technological differentiation and a robust innovation pipeline, fueled by government-funded research, positions CPSH for long-term expansion into high-value markets. Emerging technologies like Fiber Reinforced Aluminum and HybridTech Radiation Shielding offer substantial market opportunities, leveraging CPSH's unique material science capabilities to address critical customer needs. While competitive pressures from larger, more diversified players and inherent risks like customer concentration persist, CPSH's niche expertise, custom solutions, and high barriers to entry provide a strong foundation. The company's improving operational efficiencies, coupled with a strong balance sheet, suggest a clear path towards sustained margin expansion and overall financial health. For investors, CPSH represents an intriguing opportunity in the advanced materials space, driven by a compelling narrative of operational recovery and strategic innovation in critical, high-growth industries.