CSP Inc. Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparative period is the three months ended December 31, 2018. The interim financial statements are unaudited. CSP provides IT integration solutions, security products, managed services and high-performance computing products through its Technology Solutions (TS) and High Performance Products (HPP) segments. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $16.572 | $18.980 |
| Gross profit / margin | $4.031 / 24% | $4.349 / 23% |
| Operating income (loss) | ($0.402) | $0.015 |
| Net income (loss) | ($0.540) | $0.050 |
| Diluted loss (earnings) per share | ($0.14) | $0.01 |
| Cash from operating activities | ($0.370) | ($3.549) |
- Revenue declined 13% year over year. Product sales were $13.222 million and services revenue was $3.350 million.
- TS revenue fell $1.423 million to $15.531 million, largely from lower product sales, including a decline in UK sales to one major customer. HPP revenue fell $0.985 million to $1.041 million, mainly due to lower Myricom and Multicomputer product sales.
- Gross profit declined $0.318 million despite the margin rising to 24% from 23%. TS margin improved to 23% from 20%, while HPP gross profit fell to $0.507 million from $0.969 million.
- Operating expenses were $4.433 million, up from $4.334 million. SG&A increased $0.172 million; engineering and development expense was $0.672 million versus $0.745 million.
- Other expense was $0.208 million, compared with $0.037 million of other income a year earlier. The main adverse item was a $0.335 million foreign-exchange loss, partly offset by $0.173 million of interest income. The foreign-exchange loss was primarily a non-cash remeasurement related to the strengthening British pound.
Cash, debt and liquidity
- Cash and cash equivalents were $17.627 million at December 31, 2019, down $0.472 million from September 30, 2019. Cash included approximately $9.0 million held by the UK subsidiary.
- Current assets were $41.088 million and current liabilities were $14.459 million; working capital was approximately $26.629 million. The filing reports no clear consolidated debt total in its liquidity discussion.
- Balance-sheet borrowings included $0.871 million drawn on the line of credit and $2.532 million of notes payable, net of discounts. Notes payable relate to financing associated with multi-year customer agreements; the company borrowed $2.0 million in October 2019 at 5.1%. Finance lease liabilities were $0.578 million.
- Operating cash use was $0.370 million. Cash sources included collections of receivables and inventory reductions; uses included a $6.451 million decrease in accounts payable and accrued expenses. Investing cash use was $0.267 million and financing cash use was $0.133 million. Cash flow benefited from working-capital movements and should be considered alongside the underlying net loss.
- Management said available cash, expected operating cash generation and line-of-credit availability should cover working-capital and capital-expenditure needs for the foreseeable future. The filing cautions that additional financing, if needed, may not be available on acceptable terms or at all.
Material changes, outlook and risks
- ASC 842 lease accounting was adopted October 1, 2019. It added operating lease right-of-use assets and liabilities to the balance sheet; management said the quarter’s income statement was not materially affected.
- The board declared a $0.15-per-share dividend, paid January 15, 2020. Cash dividends declared were $0.623 million.
- No quantified revenue, earnings or other forward guidance is provided. Management’s stated liquidity outlook is based on current plans and business conditions.
- Key disclosed risks include dependence on a small number of customers, substantial reliance on U.S. federal government contracts, reliance on single-source suppliers for some key components, intense competition and changes in U.S. tax laws. Two customers represented 16% and 11% of quarterly revenue; one customer represented 32% of combined accounts and long-term receivables at December 31, 2019.
- Management identified estimates involving receivable collectability, inventory valuation, impairment, taxes, retirement plans and revenue recognition as areas requiring judgment. It reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the revenue decline, particularly weaker TS product sales and HPP product demand, persists or reflects timing and customer concentration.
- The collectability and concentration risk of long-term customer receivables, including the 32% exposure to one customer and the absence of an allowance for credit losses on receivables with terms over one year.
- The effect of foreign-exchange movements on earnings and the company’s substantial cash held in the UK subsidiary.
- Liquidity and financing needs, including line-of-credit availability, customer-related borrowings, and the impact of sizeable working-capital movements.
- The sustainability of the dividend and management’s outlook, which is qualitative rather than quantified in this filing.