CSP Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016. CSP develops and markets IT integration solutions and high-performance cluster computer systems through its High Performance Products (HPP) and Technology Solutions (TS) segments. Amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless noted.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $19.916 million | $23.676 million |
| Gross profit / margin | $4.452 million / 22% | $5.190 million / 22% |
| Operating income (loss) | $(102,000) | $343,000 |
| Net income (loss) | $(43,000) | $283,000 |
| Basic and diluted loss per share | $(0.01) | Basic $0.08; diluted $0.07 |
| Cash provided by (used in) operations | $2.292 million | $(413,000) |
- HPP revenue was $2.751 million, down 2%; segment operating income was $46,000. TS revenue was $17.165 million, down 18%; segment operating loss was $148,000.
- HPP gross margin was 64%, up from 57%, helped by high-margin service mix and lower inventory-reserve adjustments. TS gross margin was 16%, down from 17%, reflecting less German service revenue and U.K. engineering underutilization.
- Cash and cash equivalents were $15.039 million at December 31, 2016, up from $13.103 million at September 30, 2016. Current assets were $43.502 million and current liabilities were $19.823 million. Total liabilities were $32.844 million; the filing does not provide a clear total-debt balance.
- Operating cash flow benefited notably from a $3.244 million increase in accounts payable and accrued expenses and a $2.039 million decrease in accounts receivable. Significant cash uses included a $1.938 million increase in deferred costs and a $1.079 million increase in inventory. Capital expenditures were $72,000.
Changes versus the prior comparable quarter
- Revenue fell $3.760 million, or 16%. TS accounted for a $3.694 million decrease, while HPP declined $66,000. TS product revenue decreased 13% and service revenue decreased 30%.
- Revenue declines were concentrated in Europe, down 28%, and the Americas, down 8%. Management attributed the Americas decline partly to sales timing with a major customer; the European decline reflected lower German product sales and less U.K. cross-selling.
- Gross profit decreased $738,000 while the consolidated gross-margin percentage remained 22%. Lower gross profit, partly offset by $293,000 of lower operating expenses, moved operating results from income to a loss.
- Net income shifted to a $43,000 loss from $283,000 of income. Operating cash flow improved from a $413,000 use to $2.292 million provided.
Outlook, risks, and notable items
- No quantitative revenue or earnings guidance is provided. Management believes available cash, operating cash generation, and credit-line availability will meet working-capital and capital-expenditure needs for the foreseeable future; it cautions that additional financing may be needed if operating cash is insufficient.
- Management cites dependence on a small number of customers, significant U.S. federal-government contracts, reliance in some cases on single-source suppliers, and intense competition as risks. Two customers each represented at least 10% of quarterly revenue; together they accounted for 25%. They represented 10% and 17% of receivables, respectively, at quarter-end.
- Disclosure controls and procedures were reported as not effective because management could not conclude that a previously identified material weakness had been remediated. The weakness concerns foreign-subsidiary revenue recognition, including whether recognition criteria were met and whether certain revenue should be reported gross or net. Remediation efforts included enhanced corporate review and changes to international accounting staffing; further improvements were planned during fiscal 2017.
- The board declared a $0.11-per-share cash dividend on January 12, 2017; it was paid February 8, 2017. The company reported $4.2 million of cash held by foreign subsidiaries and considered it permanently reinvested in those locations.
- Implementation effects of the new revenue-recognition standard had not yet been determined; the company had not selected a transition method. The potential effect of the new inventory standard also had not yet been assessed.
Important facts for investors to verify
- Whether the revenue-recognition material weakness has been remediated and whether any related revenue adjustments or control deficiencies arise.
- Whether the sharp TS revenue decline reflects timing or a sustained change in demand, especially in Germany and the U.K., and how customer concentration affects future results.
- The quality and sustainability of operating cash flow, given the quarter’s substantial contribution from higher payables and lower receivables, alongside rising deferred costs and inventory.
- The filing reports 3.821 million shares outstanding at December 31, 2016, while its cover page reports 3,906,083 shares issued and outstanding as of February 13, 2017; investors may wish to reconcile the change.