CSP Inc. — Form 10-Q Summary
Business context and reporting period. CSP Inc. develops and markets IT integration solutions and high-performance cluster computer systems through its High Performance Products (HPP) and Technology Solutions (TS) segments. This unaudited filing covers the quarter and six months ended March 31, 2016; comparisons are with the same periods in 2015. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Revenue | $27.1; up 44% | $50.8; up 29% |
| Gross profit / margin | $6.3 / 23% (prior year 21%) | $11.5 / 23% (prior year 20%) |
| Operating income (loss) | $0.9 (prior year loss of $0.6) | $1.2 (prior year loss of $1.6) |
| Net income (loss) | $0.5 (prior year loss of $0.7); diluted EPS $0.13 | $0.8 (prior year loss of $1.1); diluted EPS $0.20 |
| Operating cash flow | Not presented separately for the quarter | $0.1 (prior year use of $5.7) |
| Cash and cash equivalents | $10.0 at March 31, 2016, down from $11.2 at September 30, 2015 |
For the six months, investing activities used $0.5 million, including $0.3 million of property and equipment purchases; financing activities used $0.8 million, principally dividends. Cash declined by $1.2 million overall. Current assets were $41.2 million and current liabilities $18.6 million, for working capital of $22.5 million. The balance sheet lists no borrowings; it reports pension liabilities of $10.4 million in total. The filing also refers to availability on lines of credit but does not give a clear amount.
Material changes and business drivers
- TS drove most growth: quarterly revenue rose $7.5 million, led by U.S. product sales; HPP revenue rose $0.8 million. For the six-month period, TS revenue increased $10.6 million and HPP $0.9 million.
- HPP recognized approximately $1.1 million in royalties in the first half, versus $0.1 million a year earlier, from high-speed processing boards used in aircraft. These high-margin royalties contributed to HPP gross-margin improvement. TS margins also improved, particularly on German service projects, reflecting project mix and better engineering-staff utilization.
- SG&A increased $0.8 million, or 11%, in the first half, partly due to higher commissions and variable compensation; engineering and development expense decreased slightly.
- Two customers each represented at least 10% of revenue: together, approximately 34% of quarterly and 32% of six-month revenue. At March 31, those customers accounted for about 50% of accounts receivable combined.
Outlook, risks and other notable matters
- Management expects to recognize royalty revenue associated with the equivalent of four aircraft in fiscal 2016’s third and fourth quarters. The filing provides no broader quantitative revenue or earnings guidance.
- Management believes cash, operating cash generation and credit-line availability will meet working-capital and capital-expenditure needs for the foreseeable future. Approximately $3.9 million of cash was held by foreign subsidiaries and considered permanently reinvested.
- Disclosure controls and procedures were deemed ineffective at March 31, 2016. The company said it could not yet conclude that a previously identified material weakness was remediated. The weakness concerns revenue-recognition controls, including verifying recognition criteria and assessing gross-versus-net presentation. Remediation steps included additional corporate review and improvements to international accounting operations.
- Risks cited include dependence on a small number of customers and U.S. federal government contracts, reliance on certain single-source suppliers, intense competition, and fast-changing technology and short product life cycles. The filing states that additional financing may be needed if operating cash is insufficient, with no assurance it could be obtained on acceptable terms.
- The company paid $0.22 per share in dividends during the first half. Income tax expense was $0.3 million for the quarter and $0.3 million for the six months.
Key facts for investors to verify
- Whether reported revenue growth and margins are sustainable apart from aircraft-related royalty revenue and large customer orders.
- Progress in remediating the revenue-recognition material weakness and whether controls become effective.
- Customer concentration, collections and receivables exposure, especially the two customers representing about half of receivables.
- Operating cash conversion, working-capital needs, and the amount and terms of available credit lines.
- Timing and amount of expected aircraft royalties in the second half of fiscal 2016, and the continuing funding requirements of pension plans.