CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; comparisons are to the corresponding 2016 periods. 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 millions unless noted.
Financial performance
| Metric | Three months ended Mar. 31, 2017 | Three months ended Mar. 31, 2016 | Six months ended Mar. 31, 2017 | Six months ended Mar. 31, 2016 |
|---|---|---|---|---|
| Revenue | $25.316 | $27.139 | $45.232 | $50.815 |
| Gross profit | $5.695 | $6.333 | $10.147 | $11.523 |
| Gross margin | 22% reported | 23% reported | 22% reported | 23% reported |
| Operating income | $0.622 | $0.878 | $0.520 | $1.221 |
| Net income | $0.428 | $0.503 | $0.385 | $0.786 |
| Net income attributable to common stockholders | $0.410 | $0.480 | $0.357 | $0.756 |
| Diluted EPS | $0.11 | $0.13 | $0.09 | $0.20 |
- Revenue and segment trends: Q2 revenue declined 7%, primarily as TS revenue fell $1.8 million; HPP revenue was nearly unchanged. For the six months, revenue fell 11%, with TS down $5.5 million and HPP down $0.1 million. HPP benefited from high-margin processing-board royalties, while lower TS sales and margins weighed on results.
- Profitability: Q2 operating income decreased $0.3 million, reflecting lower gross profit, partly offset by lower operating expenses. First-half operating income fell $0.7 million. HPP gross margin improved, but TS gross margin declined; management cited weaker service mix and underutilized U.K. engineering resources in the quarter.
- Cash flow and liquidity: First-half operating cash flow was a use of $0.768 million, versus $0.089 million provided in 2016. Cash declined $2.065 million to $11.038 million from September 30, 2016. Accounts receivable increased $5.2 million, inventory $1.0 million, and deferred costs $1.1 million; increases in payables and deferred revenue each provided about $2.8 million. Capital expenditures were $0.178 million and dividends paid were $0.858 million.
- Balance sheet: Current assets were $46.329 million and current liabilities $22.396 million at March 31, 2017. Total liabilities were $35.598 million, including $12.977 million in pension and retirement liabilities. The balance sheet does not list borrowings; the filing refers to availability on lines of credit but does not state their amount.
Material changes, outlook, and risks
- Management attributed much of the TS decline to order timing from major U.S. and German customers. HPP first-half royalty revenue was about $2.2 million, compared with $1.1 million in the prior-year period. The company expected to recognize royalties tied to an equivalent number of boards used in two aircraft during fiscal Q3; no broader revenue or earnings guidance was provided.
- Two customers each generated at least 10% of first-half revenue: Customer A contributed 14% and Customer B 13%. Customer B represented 36% of accounts receivable at March 31, 2017 ($8.7 million), versus 13% at September 30, 2016. Management attributed the receivable and foreign-cash movements to customer order and payment timing and said it saw no deterioration in receivables.
- Management stated available cash, operating cash generation, and credit-line availability should meet working-capital and capital-expenditure needs for the foreseeable future, while warning that additional financing might be needed if operating cash is insufficient and could be unavailable on acceptable terms.
- Disclosure controls were concluded to be ineffective because the company could not determine that a previously identified material weakness had been remediated. The weakness relates to revenue-recognition controls at foreign subsidiaries, including whether recognition criteria were met and gross-versus-net accounting was assessed. Remediation measures included additional corporate review, international accounting staff upgrades, and process improvements; management planned further work during fiscal 2017.
- Other stated risks include customer concentration, dependence on U.S. federal-government contracts, reliance on certain single-source suppliers, and intense competition. The filing provides no specific new contingency amount. The company paid two quarterly dividends of $0.11 per share in the period.
Important facts for investors to verify
- Whether TS orders recover after the customer timing-related declines, and whether customer concentration or receivable exposure changes.
- Whether HPP royalty revenue continues as expected and how much it contributes to segment and consolidated margins.
- Operating cash conversion, collections from Customer B, and the availability and terms of credit lines.
- Progress and evidence of remediation of the material weakness in foreign-subsidiary revenue recognition controls.
- The six-month diluted EPS is reported as $0.09, while net income attributable to common stockholders is $0.357 million; investors should consult the filing’s EPS reconciliation for the calculation.