CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013; filed May 13, 2013. CSP develops and markets IT integration solutions and high-performance cluster computer systems through its Systems and Service and System Integration segments. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Three months ended Mar. 31, 2013 | Three months ended Mar. 31, 2012 | Six months ended Mar. 31, 2013 | Six months ended Mar. 31, 2012 |
|---|---|---|---|---|
| Revenue | $25.82 | $19.03 | $46.69 | $40.12 |
| Gross profit / margin | $5.77 / 22% | $4.72 / 25% | $9.94 / 21% | $9.54 / 24% |
| Operating income / margin | $1.22 / 5% | $0.67 / 3% | $1.40 / 3% | $1.43 / 3% |
| Net income | $0.74 | $0.44 | $0.86 | $0.90 |
| Net income per diluted share | $0.21 | $0.13 | $0.25 | $0.26 |
| Operating cash flow | Not presented quarterly | $(3.78) | $(0.18) |
Quarterly revenue rose 36% year over year, while net income increased to $0.74 million from $0.44 million. For the six-month period, revenue rose 16%, but net income declined slightly. Quarterly SG&A was $4.17 million, up 17%; six-month SG&A was $7.73 million, up 7%.
For the six months, Service and System Integration generated $43.00 million in sales and $1.62 million in operating profit; Systems generated $3.69 million in sales and recorded a $0.22 million operating loss. The filing attributes growth primarily to higher U.S. integration-segment product sales. The Systems segment’s royalty revenue fell to about $0.8 million from $3.0 million year to date, including no royalty revenue in the current-year quarter versus $2.0 million in the prior-year quarter.
Liquidity, cash flow, and balance sheet
At March 31, 2013, cash and cash equivalents were $15.29 million, down from $20.49 million at September 30, 2012. Current assets were $44.69 million and current liabilities were $18.59 million. Total liabilities were $28.15 million, including $9.80 million in pension and retirement plan liabilities; the balance sheet reports no debt line item. The company recorded interest expense of $0.04 million for the six months. It refers to available lines of credit but gives no borrowing or availability amount in the provided text.
Six-month operating cash use was $3.78 million, principally reflecting an $8.34 million increase in receivables and an increase in other current assets. Investing activities used $0.66 million, mainly for $0.48 million of capital expenditures and life-insurance premiums; financing activities used $0.69 million for dividends. Cash declined by $5.20 million overall. About $5.1 million of cash was held by foreign subsidiaries and management considers it permanently reinvested abroad because repatriation would have unfavorable tax consequences.
Changes, outlook, and risks
- Quarterly growth was concentrated in Service and System Integration, whose sales rose to $23.19 million from $16.67 million. Systems-segment sales were $2.64 million, versus $2.36 million.
- Six-month gross margin fell to 21% from 24%, which management primarily links to lower royalty revenue and a smaller share of high-margin Systems-segment sales. Quarterly margin fell to 22% from 25% for similar reasons. Management also cites product mix, including lower-margin server sales, as a factor in integration-segment product margins.
- Customer concentration is material: in the quarter, two customers accounted for 23% and 18% of revenue. For the six months, those customers each represented 23% and 16%, respectively. Customer names are anonymized in the filing.
- Management said available cash, expected operating cash generation, and credit-line availability should cover working capital and capital expenditure needs for the foreseeable future. This is subject to risks: the filing cautions that additional financing might not be available on acceptable terms if operating cash proves insufficient.
- Other stated risks include rapid technology change, new product introductions and short product life cycles, and the need to develop and deliver products in a timely, cost-effective way. The company maintained a substantial valuation allowance against UK deferred tax assets because of cumulative losses and uncertainty about future profitability.
- The company paid a $0.20-per-share dividend, totaling $0.69 million, in December 2012. SG&A included proxy-contest legal and consulting costs in the Systems segment; the filing does not quantify those costs separately beyond approximately $0.3 million.
No specific revenue or earnings guidance is provided. Management reported that disclosure controls were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the period.
Important facts for investors to verify
- Whether the sharp increase in receivables and negative operating cash flow reverse through collections in subsequent periods.
- Whether recent U.S. customer and hosting-sector sales are repeatable, given that two customers represented substantial portions of revenue.
- Whether royalty revenue returns, and how its absence affects Systems-segment and consolidated margins.
- The amount and terms of credit-line capacity, which are not clearly quantified in the filing text, and the accessibility of overseas cash.
- Potential pension funding needs, the outlook for UK deferred tax assets, and any further proxy-contest costs.