CSP Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; comparative period is the three months ended December 31, 2017. CSPi provides IT integration solutions, security products, managed IT services, network adapters, and high-performance computing systems through its High Performance Products (HPP) and Technology Solutions (TS) segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $19.0 million | $16.6 million |
| Gross profit / gross margin | $4.35 million / 23% | $4.36 million / 26% |
| Operating income | $15,000 | $165,000 |
| Income from continuing operations | $50,000 | Loss of $995,000 |
| Net income (loss) | $50,000 | Loss of $1.20 million, including discontinued operations |
| Net income (loss) per diluted share | $0.01 | Loss of $0.32 |
| Cash from operating activities | Use of $3.96 million | Provided $4.55 million |
Revenue rose 14%. TS revenue increased 20% to $16.95 million, while HPP revenue declined 18% to $2.03 million. TS operating income was $842,000; HPP reported an operating loss of $827,000. Operating margin was approximately 0.1%, versus 1.0% a year earlier. No funded bank borrowing balance is separately identified in the presented balance sheet; the company made $70,000 of capital-lease principal payments and reported $67,000 of interest paid.
Liquidity and balance sheet
At December 31, 2018, cash and cash equivalents were $20.66 million, down $4.45 million from September 30, 2018. Current assets were $47.71 million and current liabilities $13.92 million. Total assets were $54.60 million and total liabilities $21.18 million. Pension and retirement-plan liabilities totaled $6.34 million, including $6.00 million noncurrent. The company declared a $0.15-per-share dividend, paid January 22, 2019; the related $603,000 cash dividend was accrued at quarter-end.
Operating cash use primarily reflected a $4.1 million increase in accounts receivable and a $0.7 million increase in other current assets, partly offset by lower inventory. Approximately $9.0 million of cash was held by the U.K. subsidiary. Management said available cash, proceeds from the German business sale, operating cash generation, and credit lines should cover working-capital and capital-expenditure needs for the foreseeable future.
Material changes and unusual items
- Higher TS product orders in the U.S. and increased U.S. services drove revenue growth; lower HPP royalties and reduced U.K. sales offset part of the increase. HPP royalties on high-speed processing boards declined approximately $0.5 million.
- Gross margin fell three percentage points. HPP margin declined to 48% from 59%, mainly because of lower high-margin royalties; TS margin remained 20%.
- Operating income decreased $150,000 as selling and marketing and engineering costs increased. Engineering and development expense rose to $745,000, partly for development of ARIA SDS cybersecurity products.
- The prior-year quarter included the German TS operations, sold in July 2018 and presented as discontinued operations; those operations had $5.37 million of revenue and a $205,000 net loss in the prior-year quarter. The sale produced approximately $14.4 million cash at closing and an approximately $16.8 million gain in FY2018; €400,000 remained in escrow, conditional on receipt.
- CSPi adopted ASC 606 effective October 1, 2018, recording a $158,000 increase to opening retained earnings. For this quarter, adoption increased reported sales by $106,000 but reduced gross profit and net income by $25,000 and $24,000, respectively, compared with balances without adoption.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management’s liquidity outlook is based on current plans and conditions and is not a guarantee. Identified risks include dependence on a limited number of customers, significant exposure to U.S. federal government contracts, reliance on single-source suppliers for certain components, intense competition, effects of the German divestiture, and changes in U.S. tax law. The company cautioned that insufficient operating cash could require additional financing, which might not be available on acceptable terms or when needed. The filing identifies commitments and contingencies but provides no specific quantified contingency amount in the presented text. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification points
- Assess whether the TS growth from large U.S. product orders is repeatable and whether HPP royalty revenue can recover.
- Monitor receivables and cash conversion: operating activities used $3.96 million, and one customer represented approximately $2.0 million, or 12%, of receivables at quarter-end.
- Confirm the status and collection of the €400,000 sale escrow and the company’s access to its stated credit lines.
- Review pension obligations, dividend payments, and the effect of ASC 606 when comparing reported results across periods.
- Evaluate customer, federal-contract, supplier-concentration, competition, and post-divestiture risks against the risk factors in the FY2018 Form 10-K.