CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019; comparisons are with the same 2018 periods. CSPi develops and sells IT integration solutions, cybersecurity products, managed IT services, network adapters, and high-performance computing systems. Its continuing operations comprise High Performance Products (HPP) and Technology Solutions (TS). Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Three months ended Mar. 31, 2019 | Six months ended Mar. 31, 2019 |
|---|---|---|
| Revenue | $16.35; down 2% year over year | $35.33; up 6% |
| Gross profit / margin | $3.75 / 23%, versus $3.98 / 24% | $8.10 / 23%, versus $8.35 / 25% |
| Operating loss | $0.77, versus $0.86 | $0.76, versus $0.70 |
| Net loss | $0.62; prior-year net loss was $0.59, including $0.15 income from discontinued operations | $0.57, versus $1.79, including a $0.06 loss from discontinued operations in 2018 |
| Net loss per share | $0.15 | $0.15, versus $0.47 |
| Operating cash flow | Not separately presented for the quarter | Cash used of $5.30, versus $0.73 used in total in 2018; continuing operations provided $0.001 in 2018 |
For the quarter, lower SG&A helped narrow the operating loss, but gross profit declined. For the six-month period, higher TS sales were more than offset at the gross-profit level by lower margins and reduced HPP royalties. Six-month continuing-operations net loss improved chiefly against a prior period affected by tax expense and discontinued operations.
Liquidity, balance sheet, and cash flows
- Cash and cash equivalents were $18.19 at March 31, down from $25.11 at September 30, 2018. Current assets were $44.47 and current liabilities $12.74, implying working capital of $31.73.
- Total liabilities were $19.66, including pension and retirement-plan liabilities of $5.97. The filing does not provide a clear total for interest-bearing debt; it reports $0.14 of principal payments on capital leases during the six months.
- Six-month cash use reflected increases in accounts receivable ($3.32) and other current assets ($1.40), lower accounts payable and accrued expenses ($3.21), and dividends paid ($1.22). Cash sources included a $2.12 increase in deferred revenue and a $1.46 inventory decrease.
- The company paid dividends of $0.30 per share during the six months. Cash held by the U.K. subsidiary was approximately $10.8.
Material changes and operating trends
- Quarterly revenue decreased $0.25. TS revenue was nearly flat as lower U.S. product sales were largely offset by service growth; HPP revenue fell 10%, mainly from lower Myricom product sales and E2D-related royalties.
- Six-month TS revenue increased $2.72, driven by large U.S. product orders and service growth. HPP revenue declined $0.63, primarily because high-margin royalties fell approximately $0.6. Overall six-month gross margin declined to 23% from 25%.
- HPP generated a quarterly operating loss of $1.09; TS operating income was $0.32. For the six months, HPP’s operating loss was $1.92 and TS operating income was $1.16.
- Customer concentration remains relevant: one customer accounted for 11% of quarterly revenue. At March 31, one customer represented about 20% of accounts receivable; two others represented 13% and 10%.
Outlook, risks, and unusual items
- Management gave no quantified revenue or earnings guidance. It stated that available cash, proceeds from the German sale, operating cash generation, and credit-line availability should meet working-capital and capital-expenditure needs for the foreseeable future. It cautioned that external financing might be needed if operating cash is insufficient and that financing may not be available on acceptable terms.
- The German managed-security-services business was sold in July 2018 and is reported as discontinued operations. The company received approximately $14.4 in cash at closing; an additional €0.4 was held in escrow and would be recorded if received. The sale generated an approximately $16.8 gain in fiscal 2018.
- ASC 606 was adopted effective October 1, 2018. It increased opening retained earnings by $0.16. For the six months, adoption reduced reported gross profit by $0.03 and increased net loss by $0.03 versus balances without adoption.
- Management identifies reliance on a small number of customers, U.S. federal contracts, certain single-source suppliers, competition, the German-business sale, and U.S. tax-law changes as risks. Engineering spending includes development of ARIA SDS cybersecurity products.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether TS order-driven revenue and service growth can continue, and whether lower HPP royalties persist.
- Monitor cash conversion and working-capital movements, particularly receivables, payables, and the new long-term receivable.
- Verify customer and contract concentration, including exposure to federal customers and significant receivable balances.
- Track segment profitability, gross-margin recovery, and returns from ARIA SDS development spending.
- Confirm receipt and accounting treatment of the €0.4 German-sale escrow and review the availability and terms of credit lines.