CSP Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016, compared with FY2015. This is an annual filing, not a standalone fourth-quarter report. CSP Inc. operates High Performance Products (HPP) and Technology Solutions (TS), the latter primarily a value-added IT reseller and services business.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $103.4 million | $89.3 million |
| Gross profit / margin | $25.0 million / 24% | $19.2 million / 21% |
| Operating income | $3.8 million | $0.2 million |
| Net income (loss) | $2.6 million | $(0.2) million |
| Diluted earnings (loss) per share | $0.67 | $(0.06) |
| Operating cash flow | $5.0 million | $(2.3) million |
| Cash and cash equivalents at year-end | $13.1 million | $11.2 million |
- Revenue rose 16%. TS revenue increased 15% to $87.0 million; HPP revenue increased 17% to $16.3 million.
- Gross margin improvement reflected higher margins in both segments. HPP benefited from $4.3 million in high-margin royalties tied to aircraft production; TS benefited from U.S. product mix and higher-margin service revenue.
- Cash increased $1.9 million. Operating cash flow benefited from net income and higher deferred revenue, partly offset by lower accounts payable and accrued expenses. Capital expenditures were $0.7 million and dividends paid were $1.7 million.
- Current assets were $41.8 million and current liabilities $17.4 million. The company had no borrowings on its $1.0 million general line of credit; $3.2 million was outstanding under the TS inventory credit facility, versus $2.9 million in FY2015. The filing reports compliance with that facility’s covenants.
- Total liabilities were $31.1 million, including $14.0 million of pension and retirement-plan liabilities. The defined benefit pension plans’ reported funded status was a $12.8 million deficit.
Changes and operating developments
- Revenue increased by $14.1 million, with most of the growth coming from TS. U.S. TS revenue rose; U.K. revenue increased, while German revenue declined by $2.5 million, mainly due to lower product sales.
- Two customers represented 32% of revenue: Customer A contributed $19.6 million (19%) and Customer B $13.2 million (13%).
- HPP backlog rose to $4.9 million from $1.6 million; TS backlog was $10.9 million compared with $10.1 million. Management expected both balances to ship or be delivered within the following 12 months.
- Other comprehensive loss was $3.5 million, principally reflecting a $3.6 million actuarial loss on the minimum pension liability; total comprehensive loss was $0.9 million despite net income.
Outlook, risks and unusual items
- Management said available cash, operating cash generation and credit availability should cover working-capital and capital-expenditure needs for the foreseeable future. No quantified revenue or earnings guidance was provided.
- HPP has discontinued development of new defense systems and expects to focus on supporting existing deployments. Management planned to introduce Myricom Sniffer10G software to the packet-capture market in FY2017. Adoption of the ARC Series with DBL was below expectations, with limited success in Windows environments.
- A material weakness in revenue-recognition controls at foreign subsidiaries remained unremediated at September 30, 2016. The issue involves assessing whether revenue recognition criteria are met and whether certain transactions should be reported gross or net. Management concluded both disclosure controls and internal control over financial reporting were ineffective.
- Inventory was written down by approximately $602,000 in FY2016. Foreign-currency effects included a $0.8 million adverse impact on cash and a $134,000 foreign-exchange loss in earnings.
- Risks include customer concentration, dependence on government-related business and a limited number of large orders, sole-source components, competition, technology and product-adoption risk, international operations, and pension funding sensitivity. Foreign subsidiaries held $6.4 million of cash that management considered permanently reinvested and unavailable for U.S. activities without tax consequences.
- The company declared four quarterly dividends of $0.11 per share during FY2016 and declared a further $0.11 dividend after year-end. No material legal proceedings were reported.
Investor verification checklist
- Review the remedial progress and financial-reporting implications of the continuing material weakness, especially controls at foreign subsidiaries and gross-versus-net revenue judgments.
- Assess the sustainability of FY2016 earnings and margin improvement, including dependence on $4.3 million of high-margin aircraft-related royalties and customer concentration.
- Verify pension assumptions, funding requirements, and the effect of the actuarial loss and reported pension deficit on future cash needs and equity.
- Monitor collection and conversion of segment backlogs, TS inventory-facility borrowing, and the use and accessibility of cash held overseas.
- Track FY2017 Myricom Sniffer10G launch and adoption, alongside the planned wind-down of new defense-system development and ongoing support obligations.