CSP Inc. — Form 10-Q Summary
Business context and reporting period
For the first quarter of fiscal 2016, the three months ended December 31, 2015, CSP Inc. reported results for its High Performance Products (HPP) and Technology Solutions (TS) segments. The company develops and markets IT integration solutions and high-performance computer systems. Figures below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $23.676 million | $20.430 million |
| Gross profit / margin | $5.190 million / 21.9% | $3.955 million / 19.4% |
| Operating income (loss) | $0.343 million | $(0.921) million |
| Net income (loss) | $0.283 million | $(0.437) million |
| Diluted EPS | $0.07 | $(0.12) |
| Operating cash flow | $(0.413) million | $(4.602) million |
| Capital expenditures | $0.189 million | $0.103 million |
Revenue grew 16%. TS revenue rose $3.111 million to $20.859 million; HPP revenue increased $0.135 million to $2.817 million. Gross margin improved primarily on stronger TS product margins and HPP royalty revenue. Operating expenses were nearly flat at $4.847 million, versus $4.876 million.
Cash and cash equivalents were $10.531 million at December 31, down from $11.181 million at September 30, 2015. Current assets were $38.211 million and current liabilities $15.829 million. The balance sheet reports no borrowings; interest expense was $0.021 million. Total liabilities were $25.575 million, including $10.394 million of current and long-term pension and retirement liabilities. Operating cash use reflected, among other items, lower deferred revenue and accounts payable and higher inventory. Foreign subsidiaries held approximately $3.7 million of cash, which the company considers permanently reinvested abroad.
Material changes and notable items
- HPP service revenue included approximately $0.7 million in royalties tied to high-speed processing boards used in one and a half aircraft, compared with $0.1 million in the prior-year quarter. HPP product revenue fell 20%, primarily due to lower Myricom sales.
- TS revenue increased 18%, with growth in product and service sales across its U.S., German, and U.K. divisions.
- The company declared a $0.11-per-share dividend, paid January 11, 2016; the quarter included a $0.414 million dividend charge to retained earnings.
- Two customers each contributed more than 10% of revenue: 12% and 16%, respectively. One represented 30% of accounts receivable at quarter-end.
Outlook, risks, and controls
No specific revenue or earnings guidance was provided. Management said available cash, operating cash generation, and credit-line availability should meet working-capital and capital-expenditure needs for the foreseeable future. It cautioned that additional financing might be needed if operating cash is insufficient and that financing may not be available on acceptable terms.
Disclosed risks include customer concentration, dependence on U.S. federal government contracts, reliance on certain single-source suppliers, intense competition, and rapid technology change and short product life cycles. Management reported that disclosure controls were not effective as of December 31, 2015 because it could not conclude that a previously identified material weakness had been remediated. The weakness involved revenue-recognition controls, including verification that recognition criteria were met and assessment of gross-versus-net presentation. Remediation actions included additional corporate review and enhanced internal auditing; effectiveness was still being assessed.
Important facts for investors to verify
- Whether revenue-recognition controls have been remediated and independently tested, and whether any prior-period adjustments result.
- How sustainable the quarter’s margin improvement is, given the significant aircraft-related royalty contribution and lower HPP product sales.
- Customer concentration and collection exposure, particularly the customer accounting for 30% of receivables.
- Cash conversion and working-capital trends, including deferred revenue, inventory, and accounts payable.
- Funding needs and pension obligations, as well as the availability and terms of credit lines referenced by management.