CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; comparative periods ended June 30, 2015. Amounts below are in U.S. dollars. CSP develops and markets IT integration solutions and high-performance cluster computer systems through its High Performance Products (HPP) and Technology Solutions (TS) segments. Financial statements are unaudited.
Financial performance
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $26.9 million | $22.3 million | $77.7 million | $61.6 million |
| Gross profit / margin | $7.2 million / 27% | $5.3 million / 24% | $18.7 million / 24% | $13.3 million / 22% |
| Operating income (loss) | $1.9 million | $0.7 million | $3.1 million | $(0.9) million |
| Net income (loss) | $1.3 million | $0.2 million | $2.0 million | $(0.9) million |
| Diluted EPS | $0.32 | $0.07 | $0.52 | $(0.25) |
For the quarter, revenue grew 21%; TS contributed $21.3 million and HPP $5.6 million. For the nine-month period, revenue rose 26%; TS contributed $65.9 million and HPP $11.9 million. HPP’s nine-month revenue included $3.2 million of royalties, versus $2.0 million in the prior-year period.
Cash, liquidity and balance sheet
- Nine-month operating cash flow was $2.5 million, compared with cash used of $3.5 million a year earlier. Investing activities used $0.6 million and financing activities used $1.2 million, including $1.25 million of dividends. Cash increased $0.4 million to $11.6 million from September 30, 2015.
- At June 30, 2016, current assets were $41.4 million and current liabilities $18.1 million. Total liabilities were $27.5 million; pension and retirement plan liabilities totaled $10.1 million. The balance sheet does not show a borrowing balance; the filing does not provide a clear debt balance or line-of-credit capacity.
- Foreign subsidiaries held approximately $6.8 million of cash, which management considers permanently reinvested abroad. Management said cash, operating cash generation and available credit lines should cover foreseeable working-capital and capital-expenditure needs.
- The company paid dividends of $0.33 per share during the nine-month period. Accounts receivable rose $1.4 million from September 2015, while deferred revenue rose $0.7 million.
Material changes and operating drivers
- Quarterly revenue gains came from both segments, with TS up $3.0 million and HPP up $1.7 million. Nine-month gains were led by TS, up $13.5 million, while HPP increased $2.6 million.
- Gross margin improved in both periods. HPP benefited from higher-margin Multicomputer product mix; TS benefited from improved product margins and service margins, including better U.K. contract performance. Some U.S. TS product orders had above-average margins that management characterized as favorable one-time events.
- Nine-month operating results improved from a loss to income, primarily on higher gross profit; higher SG&A partly offset the improvement. SG&A rose 12% year over year for the nine-month period.
- Quarterly customer concentration was notable: three customers accounted for 13%, 11% and 10% of revenue, respectively. For the nine-month period, two customers represented 15% and 14% of revenue.
Outlook, risks and controls
- Management expected to recognize royalties associated with one aircraft in fiscal Q4 2016. The filing gives no broader revenue or earnings guidance.
- Management cited dependence on a small number of customers, substantial reliance on U.S. federal government contracts, possible single-source component supply, intense competition, and rapid technology change and short product life cycles as risks.
- Disclosure controls and procedures were concluded to be ineffective as of June 30, 2016. A previously identified material weakness in revenue-recognition monitoring had not been determined to be remediated. It involved verifying revenue recognition criteria, assessing gross-versus-net presentation, and balance-sheet reconciliations. The company described enhanced corporate review and accounting staffing changes as remediation measures but said it could not yet conclude remediation was complete.
- Management’s estimates involve areas including receivable and inventory reserves, revenue recognition, taxes, retirement plans and contingencies; actual results may differ. The company was evaluating the potential effects of new accounting standards, including revenue recognition and leases.
Important facts for investors to verify
- Whether the Q4 royalty recognition occurred as expected and how much revenue it generated.
- Whether quarterly margin gains, especially the TS one-time favorable orders, are repeatable.
- Customer and government-contract concentration, and the potential impact of changes in major customer demand.
- Progress in remediating the revenue-recognition material weakness and whether controls are subsequently deemed effective.
- Availability and terms of credit lines, since the filing does not specify their capacity, and the practical availability of cash held overseas.
- Potential exposure from pension obligations, inventory obsolescence reserves, and other commitments or contingencies; the filing text provides no specific quantified contingency amount.