CSP Inc. (10-Q) — Fiscal Q1 2018
Reporting period: Three months ended December 31, 2017; comparative period is the three months ended December 31, 2016. CSP Inc. provides IT integration and managed services, advanced security products, network adapters, and high-performance computing systems through its Technology Solutions (TS) and High Performance Products (HPP) segments. Amounts below are in U.S. dollars; financial-statement amounts are generally in thousands.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $22.0 million | $19.9 million |
| Gross profit / margin | $5.1 million / 23% | $4.5 million / 22% |
| Operating income (loss) | $7,000 | ($102,000) |
| Net income (loss) | ($1.2 million) | ($43,000) |
| Diluted loss per share | ($0.32) | ($0.01) |
| Operating cash flow | $4.6 million | $2.3 million |
| Cash and cash equivalents, period end | $18.2 million | $15.0 million |
Interest expense was $18,000, versus $19,000 in the prior-year quarter. The filing does not provide a clear total debt or credit-facility availability value; no borrowings are separately presented on the balance sheet. Current assets were $51.7 million and current liabilities $27.8 million at December 31, 2017. Total liabilities were $40.4 million. The company declared a $0.11-per-share dividend, paid January 16, 2018.
Changes and operating drivers
- Revenue grew 10% year over year. TS revenue increased 14% to $19.5 million, led by higher services revenue and increased U.K. product shipments. HPP revenue declined 10% to $2.5 million, principally due to lower service royalties.
- Gross margin improved to 23% from 22%. TS gross margin rose to 19% from 16%, helped by improved service margins, particularly in the U.K. and Germany. HPP gross margin declined to 59% from 64%, reflecting fewer high-margin royalties and product/service mix.
- Operating expenses increased to $5.1 million from $4.6 million, largely due to variable compensation and additional sales and engineering staff in TS, as well as HPP security-product marketing and engineering costs.
- Despite near break-even operating results, the company recorded a $1.1 million income-tax provision, contributing to the $1.2 million net loss. Other expense was $105,000, versus $44,000 of other income, mainly reflecting a $93,000 foreign-exchange loss compared with a $54,000 gain.
- Operating cash flow rose to $4.6 million, with a $7.4 million decrease in accounts receivable and a $2.0 million increase in accounts payable and accrued expenses among the principal sources. Inventory, deferred costs, and other current assets increased by $1.3 million, $1.2 million, and $1.9 million, respectively.
Outlook, risks, and notable items
- Management stated that available cash, operating cash generation, and lines of credit are expected to cover working-capital and capital-expenditure needs for the foreseeable future. No quantified revenue or earnings guidance was provided. The filing cautions that additional financing may not be available on acceptable terms if required.
- The Tax Cuts and Jobs Act produced provisional one-time tax charges of $490,000 for remeasurement of deferred taxes and $649,000 for the deemed repatriation transition tax. The estimates were incomplete under SEC Staff Accounting Bulletin 118 and could change as the company completes its analysis. The company cited a blended federal rate of approximately 24% for FY2018 and 21% thereafter.
- Disclosure controls and procedures were assessed as ineffective at December 31, 2017 because management could not conclude that a previously identified material weakness had been remediated. The weakness concerns foreign-subsidiary revenue recognition, including satisfaction of recognition criteria and gross-versus-net presentation. Remediation work, including enhanced corporate review and staffing/process changes, was continuing.
- Risks highlighted include reliance on a small number of customers, dependence on U.S. federal government contracts, reliance on certain single-source suppliers, competition, and uncertainty around the tax-law changes. One customer represented 11% of quarterly revenue; two customers each represented 10% or more in the prior-year quarter. At period end, four customers each represented at least 10% of accounts receivable.
- Revenue from Europe increased 28% to $8.3 million, while Americas revenue was nearly flat at $13.2 million. The filing attributed much of the European increase to U.K. sales to a multinational customer.
Key facts for investors to verify
- Whether the provisional tax estimates, especially the deemed-repatriation calculation, change in subsequent quarters.
- Progress and evidence of remediation of the material weakness in revenue-recognition controls, and whether controls are later deemed effective.
- Durability of TS service growth and improved margins, and the effect of customer-specific shipments on revenue and receivables concentration.
- Cash-flow sustainability given that quarterly operating cash generation benefited substantially from receivables collections and payable increases.
- Debt, borrowing capacity, and line-of-credit terms: the filing does not clearly state total debt or available facility capacity.