CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014; comparative periods ended March 31, 2013. CSP develops and markets IT integration solutions and high-performance cluster computer systems through its High Performance Products and Solutions (HPPS) and Information Technology Solutions (ITS) segments. Financial statements are unaudited; amounts below are in millions except per-share data.
Key financial results
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $20.90 | $25.82 | $42.24 | $46.69 |
| Gross profit / margin | $5.08 / 24% | $5.77 / 22% | $9.62 / 23% | $9.94 / 21% |
| Operating income | $0.33 | $1.22 | $0.67 | $1.40 |
| Net income | $0.17 | $0.74 | $0.51 | $0.86 |
| Basic and diluted EPS | $0.05 | $0.21 | $0.14 | $0.25 |
For the six-month period, operating expenses rose to $9.40 million from $8.55 million, including higher engineering and development costs associated with Myricom. Results included a $0.46 million after-tax bargain-purchase gain from the acquisition. Six-month income tax expense was $0.09 million versus $0.57 million; management attributed the lower effective rate partly to the accounting treatment of the acquisition gain.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $12.86 million at March 31, down $5.76 million from September 30, 2013. Current assets were $46.04 million and current liabilities $20.46 million, a current ratio of approximately 2.25.
- Six-month operating cash flow was negative $4.31 million, compared with negative $3.78 million a year earlier. Investing cash flow was negative $0.87 million, including $0.50 million paid for Myricom; financing cash flow was negative $0.75 million, primarily dividends.
- Working-capital movements included an $8.76 million increase in accounts receivable and a $0.76 million increase in inventory, partly offset by increases in accounts payable/accruals and deferred revenue. Management linked the receivables increase largely to significant quarter-end shipments to a major customer on 90-day terms.
- Total liabilities were $29.58 million, including $9.45 million in pension and retirement-plan liabilities. The balance sheet does not show a separate borrowing balance; six-month interest expense was $0.04 million.
- Foreign subsidiaries held approximately $4.5 million of cash that management considers permanently reinvested and not available for U.S. use without unfavorable tax consequences. The company paid $0.21 per share in dividends during the six months.
Changes, acquisition and management commentary
- Six-month revenue fell 10%; product sales declined 17%, partly offset by an 11% increase in services. ITS revenue declined $6.29 million, while HPPS revenue rose $1.83 million, including Myricom contributions and higher royalty revenue.
- Second-quarter revenue fell 19% year over year. Lower ITS product sales, particularly in U.S. IT hosting, and reduced sales to a Japanese defense-supplier customer weighed on results. Gross margin improved, but lower sales and higher operating costs reduced operating income and net income.
- CSP acquired substantially all Myricom assets on November 4, 2013, paying about $0.50 million in cash and assuming certain liabilities. Myricom contributed approximately $2.5 million of revenue for the six-month period. The acquisition added interconnect technology, customers and technical personnel; the bargain-purchase gain and acquired inventory/intangible amortization affected reported results.
- Customer concentration is material: Customer B represented 27% of second-quarter revenue and 21% of six-month revenue. Its receivable balance was $12.8 million, or 57% of total receivables, at March 31. Management stated it did not believe this represented particular credit risk.
- Management expects available cash, operating cash generation and credit-line availability to meet working-capital and capital-expenditure needs for the foreseeable future. The filing provides no numerical revenue or earnings guidance. Management cautioned that technology changes, new products and short product life cycles create business risk, and that additional financing might be needed if operating cash is insufficient.
Controls, risks and unusual items
- Management concluded disclosure controls and procedures were not effective as of March 31, 2014. A material weakness involved insufficient assessment and application of ASC 605-45 principal-versus-agent guidance to certain revenue arrangements. Management was evaluating remediation alternatives.
- The company maintains a substantial valuation allowance against U.K. deferred tax assets because of cumulative losses and uncertainty about future taxable profits.
- Other identified exposures include pension obligations, foreign-exchange losses, customer and vertical-market concentration, and dependence on timely product development. The filing states that actual results may differ from estimates; it does not provide a clear quantified estimate of the potential impact of these risks.
Investor verification points
- Track collection of the $12.8 million Customer B receivable and subsequent cash flow, given its 90-day terms and concentration.
- Assess whether ITS demand—especially U.S. IT hosting—and product sales recover, and whether HPPS growth and royalty revenue can offset declines.
- Review Myricom’s ongoing revenue, margins, integration costs and the effects of acquisition-related amortization.
- Monitor remediation and testing of the disclosed revenue-recognition material weakness and any resulting financial-statement changes.
- Verify cash availability, foreign cash restrictions, pension funding needs and the terms and availability of credit lines.