CSP Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. The unaudited filing compares results with the corresponding 2019 periods. CSP develops and sells IT integration solutions, security products, managed IT services, network adapters, and high-performance computer systems through its Technology Solutions (TS) and High Performance Products (HPP) segments. Unless otherwise noted, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $16.095 million, down 2% from $16.350 million | $32.667 million, down 8% from $35.330 million |
| Gross profit / margin | $4.483 million / 28%, versus $3.746 million / 23% | $8.514 million / 26%, versus $8.095 million / 23% |
| Operating loss | $143,000, versus $771,000 | $545,000, versus $756,000 |
| Net loss | $732,000, or $0.18 per diluted share, versus $619,000, or $0.15 | $1.272 million, or $0.32 per diluted share, versus $569,000, or $0.15 |
Quarterly revenue was nearly flat overall, with TS services growth largely offset by lower product sales and HPP product declines. For the six-month period, lower TS product sales—especially in the U.K.—and lower HPP product sales drove the revenue decline. Service revenue increased in both segments. Management attributed higher gross margins and lower operating losses primarily to increased service revenue and service margins.
Unusual earnings items: Other income was $580,000 in Q2, including a $479,000 foreign-exchange gain, compared with $10,000 a year earlier. The gain was principally a non-cash remeasurement related to U.S. dollar and euro bank balances at the U.K. subsidiary. Q2 income tax expense was $1.169 million despite pretax income of $437,000; the six-month tax expense was $1.099 million despite a pretax loss of $173,000. CSP recorded a valuation allowance against deferred tax assets in light of recent results and COVID-19 uncertainty. The allowance is non-cash; management also anticipated federal tax refunds from NOL carrybacks under the CARES Act.
Cash and balance sheet at March 31, 2020: Cash and cash equivalents were $15.242 million, down from $18.099 million at September 30, 2019. Current assets were $40.689 million and current liabilities $14.438 million; total assets were $53.511 million and shareholders’ equity $28.442 million. The balance sheet included $2.474 million of notes payable and $1.584 million drawn on the inventory line of credit. Pension and retirement plan liabilities totaled $7.289 million. The company had $18.4 million available under its $20 million inventory line and reported compliance with its financial covenants.
Cash flow for the six months: Operating activities used $1.861 million, versus $3.662 million used in 2019. Investing activities used $384,000; financing activities used $753,000. Cash declined by $2.857 million. Significant cash uses included a $6.421 million decrease in accounts payable and accrued expenses, $1.263 million of dividends, and $874,000 of net line-of-credit payments.
Outlook, risks, and other developments
- CSP reported no significant COVID-19 effect through March 31, but said that since quarter-end it had seen significantly lower sales volume in both products and services. It could not reasonably estimate the pandemic’s further business impact.
- Management said available cash, operating cash generation, line availability, and proceeds from subsequent SBA loans were expected to meet working-capital and capital-expenditure needs for at least 12 months from the report date, based on current plans and conditions. No revenue or earnings guidance was provided.
- On April 17, 2020, CSP and subsidiary Modcomp received Paycheck Protection Program loans of $827,000 and $1.3536 million, respectively. The loans have two-year terms and 1% interest; forgiveness is subject to program requirements, and CSP gave no assurance that all or any portion would be forgiven.
- The company suspended its quarterly dividend and stock repurchase program pending further economic clarity. It had paid $1.263 million in dividends during the six-month period and repurchased 6,000 shares.
- Key disclosed risks include COVID-19 impacts on demand, operations and supply chains; reliance on a small number of customers; significant dependence on U.S. federal government contracts; single-source suppliers for certain components; and intense competition. Customer B represented 13% of Q2 revenue and 12% of six-month revenue, and approximately 31% of accounts and long-term receivables at March 31.
- Adoption of lease accounting standard ASC 842 created operating lease right-of-use assets and liabilities; management said it did not materially affect the income statement. Disclosure controls were deemed effective as of March 31.
Important facts for investors to verify
- Whether the post-quarter sales slowdown persisted, and its effect on orders, revenue, margins, and cash flow.
- Whether anticipated CARES Act tax refunds were received and whether the deferred-tax valuation allowance changes.
- PPP loan forgiveness eligibility and any repayment obligations.
- Customer concentration and collectability, particularly Customer B’s receivables and the long-term customer-financing portfolio.
- Continued covenant compliance, line-of-credit availability, and the sustainability of liquidity assumptions after dividend and repurchase suspensions.