CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted. CSP develops IT integration solutions and high-performance computing systems through its High Performance Products (HPP) and Technology Solutions (TS) segments.
Financial results
| Metric | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2015 |
|---|---|---|
| Revenue | $18.877; prior year $20.903 | $39.307; prior year $42.235 |
| Gross profit / margin | $4.043 / 21%; prior year $5.082 / 24% | $7.998 / 20%; prior year $9.615 / 23% |
| Operating income (loss) | $(0.639); prior year $0.333 | $(1.560); prior year $0.673 |
| Net income (loss) | $(0.675); diluted EPS $(0.19) | $(1.112); diluted EPS $(0.31) |
| Operating cash flow | Not provided for the quarter | $(5.674); prior year $(4.306) |
For the six-month period, investing cash outflow was $0.332 and financing cash outflow was $0.703. Cash declined $7.426, including a $0.717 adverse foreign-exchange effect. Cash and equivalents were $9.022 at March 31, versus $16.448 at September 30, 2014. Current assets were $35.388 and current liabilities $13.199. The balance sheet reports no borrowings as a separate liability; pension and retirement liabilities totaled $9.956, including current amounts. The company paid $0.808 in dividends, or $0.22 per share, during the six months.
Changes and management commentary
- Second-quarter revenue fell 10%; six-month revenue fell 7%. TS revenue declined $1.448 in Q2 and $2.743 for the six months, while HPP six-month revenue was down $0.185.
- Management attributed weaker results chiefly to the absence of high-margin aircraft royalty revenue recognized in the prior-year periods. No plane royalties were recorded in the first six months of fiscal 2015, compared with $1.8 million in the prior-year six-month period. Management expected royalties on five planes in the second half of fiscal 2015; this is an expectation, not firm guidance.
- TS weakness reflected lower German and U.S. revenue and, in Germany, the weaker euro; management said non-currency changes largely reflected order timing. HPP product revenue benefited from Myricom products, while HPP service revenue declined.
- Six-month engineering and development expense rose $0.252 to $1.679, primarily for Myricom product development. The company expected new products in the second half of fiscal 2015.
- Management cited a $0.610 six-month income tax benefit, primarily associated with U.S. operating losses; no tax benefit was recorded on U.K. losses because of a valuation allowance.
Liquidity, risks, and controls
Management believed available cash, operating cash generation, and availability under lines of credit would cover working-capital and capital-expenditure needs for the foreseeable future. It cautioned that insufficient operating cash could require additional financing, which might not be available on acceptable terms or in time. Approximately $3.4 million of cash was held by U.K. and German subsidiaries and considered permanently reinvested.
Risks highlighted include rapid technology change and short product life cycles, foreign-exchange movements, reliance on a small number of customers, and uncertainty in revenue timing. Two customers each accounted for more than 10% of six-month revenue; Customer B represented 31% of receivables at March 31, 2015.
Management concluded disclosure controls were not effective as of March 31, 2015 because it could not conclude that a previously identified material weakness had been remediated. The weakness concerned applying principal-versus-agent revenue-recognition guidance. Enhanced corporate-level review procedures had been implemented, but remediation remained unconfirmed.
Investor verification points
- Whether the expected five-plane royalties were recognized in the second half, and their timing and amount.
- Whether revenue declines and order timing in TS, particularly in Germany and the U.S., persisted or reversed.
- Cash conversion and working-capital movements, especially receivables, inventory, and deferred revenue.
- Progress in remediating the revenue-recognition material weakness and any related reporting changes.
- Customer concentration, Customer B’s receivable balance and collection, and foreign-currency exposure.