CSP Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019. This is an annual filing, not a standalone fourth-quarter report. CSPi provides IT integration and managed services through Technology Solutions (TS), and cybersecurity, networking and legacy high-performance products through High Performance Products (HPP).
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $79.1 million | $72.9 million |
| Gross profit / margin | $18.0 million / 23% | $18.4 million / 25% |
| Operating loss | $0.8 million | $1.6 million |
| Continuing-operations net loss | $0.4 million | $2.0 million |
| Net income (loss), including discontinued operations | $(0.4) million | $14.4 million |
| Operating cash flow | $(3.3) million | $2.9 million |
- Revenue and segments: Revenue grew 8%. TS sales rose 14% to $71.2 million, with U.S. growth partly offset by lower U.K. sales. HPP sales fell 25% to $7.9 million, mainly from lower Myricom shipments and royalty revenue. TS generated $2.3 million of segment operating income; HPP recorded a $3.1 million operating loss.
- Margins and expenses: Gross profit declined $0.4 million despite higher sales. TS gross margin held at 20%; HPP margin fell from 59% to 52%, primarily due to lower high-margin Multicomputer royalties. R&D expense decreased to $2.8 million from $3.3 million; SG&A declined to $16.1 million from $16.7 million.
- Cash and liquidity: Cash and equivalents were $18.1 million at year-end, down $7.0 million. Current assets were $46.5 million and current liabilities $20.0 million. Operating cash use reflected, among other items, increases in receivables, other assets and deferred costs, and a $5.3 million long-term receivable. Cash dividends paid were $2.5 million.
- Debt and obligations: The balance sheet reported $2.5 million outstanding on the inventory credit line and $1.0 million of note payable, plus capital-lease obligations of approximately $0.7 million. The separate $1.0 million revolving line of credit closed during FY2019. The company said it complied with the inventory-line covenants. Pension and retirement plan liabilities totaled $7.2 million.
- Other balance-sheet items: Total assets were $59.4 million and shareholders’ equity $30.4 million. A customer financing arrangement contributed $5.3 million in long-term receivables; the filing reports $7.4 million of accounts and long-term receivables from one customer.
Material changes versus FY2018
- FY2019 revenue growth was concentrated in TS’s U.S. business; TS revenue increased $8.7 million overall, while HPP revenue declined $2.6 million. One TS customer accounted for much of U.S. growth, and reduced activity from a major customer contributed to the U.K./Europe decline.
- Gross margin fell two percentage points as the mix shifted and HPP royalty revenue declined. Operating loss narrowed, partly reflecting lower operating expenses.
- FY2018 net income included a one-time $16.8 million gain from the sale of Modcomp GmbH, which generated $14.4 million cash proceeds and was classified as discontinued operations. FY2018’s reported net income therefore is not directly comparable with FY2019’s continuing business results.
- Cash fell from $25.1 million to $18.1 million, while operating cash flow moved from $2.9 million provided to $3.3 million used.
Outlook, commentary, risks and unusual items
- Management expects to invest in ARIA SDS cybersecurity products, managed services and wireless services. ARIA SDS recorded its first sale in the second half of FY2019; management expected additional revenue beginning in FY2020’s second quarter and increasing through the year. These are expectations, not guaranteed results.
- Management stated that available cash, operating cash generation and credit facilities should cover working-capital and capital-expenditure needs for the foreseeable future. However, FY2019 operating cash flow was negative.
- Key risks include customer concentration, reliance on government and defense business, competition, rapid technology change, product-development and market-acceptance uncertainty, and dependence on sole-source component suppliers. One customer represented 13% of FY2019 revenue and 36% of accounts and long-term receivables at year-end.
- Foreign revenue was 8% of sales versus 17% in FY2018; the filing cites currency, regulatory and Brexit-related risks. Cybersecurity incidents, contract performance, federal budget changes, and hiring and retention are also identified risks.
- The company adopted ASC 606 in FY2019 using the modified retrospective approach, increasing opening retained earnings by $158,000. Management anticipated a material balance-sheet effect from adopting the new lease standard in FY2020, with no material income-statement effect expected.
- No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor’s report did not include an internal-control attestation.
Important facts for investors to verify
- Whether ARIA SDS generated the anticipated FY2020 revenue and achieved meaningful customer, reseller, MSSP or OEM adoption.
- How sustainable TS growth is, given its reliance on a small number of customers and the substantial customer concentration in receivables.
- Whether HPP can stabilize margins and offset continued declines in legacy royalty and Multicomputer revenue.
- Cash conversion and working-capital trends, including collection of the customer financing receivable and the effect of dividend payments.
- Current borrowing balances, covenant compliance, and the financial impact of lease obligations and pension liabilities.
- Whether FY2019 and FY2020 tax-asset realizability assumptions remain supportable, particularly for state and U.K. deferred tax assets.