CSP Inc. Form 10-Q Summary
Business context and reporting period
For the three months ended December 31, 2011, CSP Inc. reported results for its Systems and Service and System Integration businesses. Comparisons are with the three months ended December 31, 2010; balance-sheet comparisons are with September 30, 2011. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2011 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $21.09 | $20.63; up 2% |
| Gross profit / margin | $4.82 / 23% | $4.53 / 22% |
| Operating income / margin | $0.76 / 3% | $0.64 / 3% |
| Net income | $0.46 | $0.39 |
| EPS, basic / diluted | $0.14 / $0.13 | $0.11 / $0.11 |
| Operating cash flow | $(0.94) | $0.78 |
| Cash and cash equivalents | $14.64 at Dec. 31 | $15.87 at Sept. 30 |
| Current assets / current liabilities | $39.55 / $17.38 | $37.88 / $15.87 at Sept. 30 |
| Total assets / shareholders’ equity | $44.81 / $18.22 | $43.11 / $17.90 at Sept. 30 |
Quarterly cash decreased $1.24. Operating cash use principally reflected a $4.40 increase in receivables and a $0.81 increase in other current assets, partly offset by lower inventory and higher deferred revenue and payables. The filing does not present a borrowings line on the balance sheet; it reports $0.021 of interest expense and $0.085 of cash interest paid. Pension and retirement-plan liabilities totaled $9.61, including $8.92 classified as long term.
Material changes versus the prior-year quarter
- Service revenue rose 11% to $5.94, while product revenue declined 1% to $15.15. Systems-segment revenue increased about $0.5; Service and System Integration revenue was essentially flat.
- Gross margin improved to 23% from 22%. Service and System Integration margin rose to 18% from 16%, as product mix improved; its service margin declined from 32% to 29%, partly due to greater contractor use. Systems-segment margin fell to 62% from 83%, mainly because high-margin royalty revenue was a smaller share of segment revenue.
- Engineering and development expense fell 25% to $0.38, reflecting lower consulting costs on next-generation MultiComputer development. SG&A rose 9% to $3.68, primarily due to higher bonus and commission expense.
- Revenue mix and customer exposure shifted materially: two customers accounted for 25% and 21% of quarterly revenue, respectively, versus 12% and 8% for those customers in the prior-year quarter.
Outlook, risks, contingencies and unusual items
- Management said available cash, operating cash generation and credit-line availability should meet working-capital and capital-expenditure needs for the foreseeable future. No quantified revenue or earnings guidance was provided.
- Management cautioned that rapid technology changes, new products and short product life cycles can adversely affect results. It also warned that external financing might not be available on acceptable terms if operating cash is insufficient.
- About $4.5 million of cash held by UK and German subsidiaries was considered permanently reinvested and unavailable for U.S. activities requiring repatriation, due to unfavorable tax consequences.
- The company recorded valuation allowances against certain deferred tax assets, citing uncertainty about future U.S. profitability and cumulative UK losses.
- A material weakness identified at September 30, 2011 involved assessing principal-versus-agent accounting for certain revenue arrangements. Management introduced data-mining and review procedures during the quarter; disclosure controls were deemed effective, but the filing does not state that the material weakness was fully remediated.
- Inventory included approximately $1.1 million of shipped goods for which revenue-recognition criteria were not yet met. Inventory reserves for obsolescence were approximately $4.3 million.
- The board declared a $0.10-per-share dividend in January, paid February 3, 2012; the filing cautions this does not imply future dividends. The company repurchased 16,827 shares during the quarter for about $58,000; approximately 211,998 shares remained authorized for repurchase.
Important facts for investors to verify
- Whether the new revenue-accounting controls fully remedied the previously reported material weakness and how they perform in subsequent periods.
- Whether customer concentration remains high and whether the large German customer’s receivables were collected after quarter-end.
- Whether operating cash flow improves as receivables normalize, and how much liquidity is practically available after excluding foreign-held cash.
- Whether segment margins, royalty revenue and contractor costs develop as expected, and whether deferred tax assets remain realizable.