CSP Inc. (NASDAQ: CSPI) — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended June 30, 2023. CSP develops and markets IT integration solutions, security products, managed IT services, network adapters and high-performance computing systems. Its two segments are Technology Solutions (TS) and High Performance Products (HPP). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales | $17.708 | $13.326 | $49.321 | $37.676 |
| Gross profit / margin | $5.927 / 33% | $4.974 / 37% | $16.734 / 34% | $12.788 / 34% |
| Operating income (loss) | $0.575 | $0.019 | $2.176 | ($0.401) |
| Income before taxes | $0.822 | $0.695 | $2.308 | $0.502 |
| Income tax benefit (expense) | $1.692 | ($0.011) | $1.488 | ($0.028) |
| Net income | $2.514 | $0.684 | $3.796 | $0.474 |
| EPS, basic / diluted | $0.53 / $0.52 | $0.15 / $0.15 | $0.82 / $0.80 | $0.11 / $0.11 |
Q3 sales rose 33% year over year, with product sales up to $12.934 million and services at $4.774 million. TS sales increased 30% to $16.373 million; HPP sales rose 81% to $1.335 million. Nine-month sales increased 31%; TS contributed $44.021 million and HPP $5.300 million.
Q3 gross margin percentage fell four percentage points, primarily because TS product sales included several large, lower-margin transactions; HPP’s higher-margin product mix partly offset this. Nine-month gross margin percentage was unchanged year over year. The Q3 and nine-month tax benefits principally reflect a $1.8 million release of the U.S. deferred-tax-asset valuation allowance. Thus, reported net income materially exceeds pretax income; the tax benefit is not a measure of operating earnings.
Cash, liquidity and debt
- Cash and cash equivalents were $13.848 million at June 30, down from $23.982 million at September 30, 2022. The company also held $2.351 million of Treasury-bill investments, with maturities through August 2023.
- Operating cash flow was a use of $4.948 million for the nine months, versus $0.220 million provided in the prior-year period. Cash uses included an $8.393 million decrease in accounts payable and accrued expenses and a $0.950 million increase in long-term receivables. Investing activities used $2.681 million; financing activities used $2.600 million, including $0.466 million of dividends and $1.816 million of net line-of-credit repayments.
- Borrowings were $1.308 million on the $15 million inventory line of credit and $0.443 million of current notes payable; no noncurrent notes remained. The company reported compliance with line-of-credit financial covenants and $13.7 million of availability, including permitted inventory borrowing. Vendor obligations with imputed interest are separate from bank borrowings.
- Accounts receivable were $23.523 million and long-term receivables $8.361 million. Approximately $8.2 million of accounts receivable reflected customer sales payable over more than one year; the company reported a 5.8% average weighted interest rate on these extended-term receivables. One customer represented 38% of total accounts and long-term receivables at quarter-end.
- Total assets were $67.603 million, total liabilities $23.376 million and shareholders’ equity $44.227 million. The company paid dividends of $0.10 per share during the nine-month period.
Material changes and management commentary
- Year-over-year sales growth was driven mainly by TS U.S. product sales. For the nine-month period, HPP growth also included fulfillment of a $1.8 million Myricom order placed in FY2022 but delayed by supply constraints.
- Q3 operating income improved to $0.575 million from $0.019 million; nine-month results turned from an operating loss to income. Nine-month other income declined to $0.132 million from $0.903 million, principally because a $0.709 million foreign-exchange loss replaced a $0.777 million gain. Management described this remeasurement loss as noncash.
- Management said backlog remained strong and reported growth in TS product and software sales, third-party maintenance, managed services and cloud software. It gave no specific numerical revenue or earnings guidance.
- Management believes cash, operating cash generation and available credit will meet working-capital and capital-expenditure needs for at least 12 months from the filing date. It noted that insufficient operating cash could require additional financing.
- Supply-chain lead times had improved, but shortages persisted with some TS and HPP suppliers. HPP relies on sole-source suppliers for certain components. Management also cited inflationary price increases, customer concentration, reliance on U.S. federal contracts, competition, foreign-exchange exposure and potential effects of geopolitical disruption as risks. The filing reports no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective as of June 30, 2023; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether TS sales growth and backlog convert into sustained revenue and cash generation, given negative operating cash flow during the nine-month period.
- The collectability and timing of extended-term customer receivables, including the concentration represented by one customer and the scheduled collections disclosed by management.
- Whether Q3’s lower consolidated gross margin persists, particularly as TS product mix and large lower-margin transactions change.
- The recurring earnings and tax implications after the $1.8 million deferred-tax valuation-allowance release; management retained allowances for certain U.S. state credits and U.K. deferred tax assets.
- Whether supplier constraints, sole-source component dependencies, customer concentration and foreign-exchange movements materially affect future results.