CSP Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2015; the filing is an annual report, not a standalone fourth-quarter report. Comparisons are with fiscal 2014. CSPi provides high-performance computing and networking products (HPP) and IT integration, resale and managed services (TS).
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $89.3 million | $84.6 million |
| Gross profit / margin | $19.2 million / 21% | $20.8 million / 25% |
| Operating income | $0.2 million | $1.7 million |
| Net income (loss) | $(0.2) million; $(0.06) per share | $1.3 million; $0.37 per share |
| Cash from operations | $(2.3) million | $1.1 million |
| Cash and cash equivalents at year-end | $11.2 million | $16.4 million |
- Revenue rose 6%. TS revenue grew 8% to $75.4 million; HPP revenue declined 4% to $13.9 million.
- Product revenue increased to $66.4 million from $58.9 million, while service revenue decreased to $22.9 million from $25.7 million.
- Gross margin contracted mainly because HPP had lower plane-related royalty revenue, product mix changed, and the U.K. division incurred cost overruns. FY2014 also included a $0.5 million after-tax bargain-purchase gain from the Myricom acquisition.
- Operating cash use reflected an $8.2 million increase in accounts receivable, partly offset by a $4.5 million increase in accounts payable and accrued expenses. Cash fell $5.3 million during the year.
- Total assets were $47.0 million and total liabilities were $27.4 million. Pension and retirement plan liabilities totaled $10.7 million.
- The company reported $2.9 million outstanding under its U.S. inventory line of credit, versus $2.1 million in 2014. It did not borrow on its separate $1.0 million line of credit. Management said available cash, operating cash generation and credit availability should cover foreseeable working-capital and capital needs.
- Cash dividends paid totaled $1.6 million, or $0.44 per share. The board declared a further $0.11-per-share dividend in December 2015.
Changes, outlook and risks
- TS growth, particularly in the U.S. and U.K., more than offset lower German revenue. HPP product sales improved, but service revenue fell with lower royalties and repair volumes. Two customers generated 35% of FY2015 revenue ($31.4 million).
- Management expected to recognize royalty revenue related to five planes in FY2016. It also expected sales of its new 100G network adapters to begin in FY2016; the filing provides no quantified revenue or earnings guidance.
- Backlog at year-end was $1.6 million in HPP, up from $0.2 million, and $10.1 million in TS, up from $6.6 million. The company expected it to ship or be performed in FY2016; backlog can fluctuate substantially.
- R&D spending was $2.8 million, down from $3.5 million. The company continued investment in Myricom networking products and described a fourth-generation 10GbE adapter launch during FY2015.
- Management identified revenue-recognition controls—including confirming recognition criteria and gross-versus-net treatment—as a material weakness. It concluded that disclosure controls and internal control over financial reporting were not effective at September 30, 2015; remediation was not yet established despite added review procedures and accounting staff changes.
- Key risks include customer concentration, dependence on federal-government business and budget priorities, sole-source component suppliers, intense competition, technology and product-transition risks, international operations and foreign-exchange exposure. Foreign revenue was 34% of total revenue. The filing reports no material legal proceedings.
- The U.K. division recorded a loss, and CSPi maintained a full valuation allowance against U.K. deferred tax assets. The FY2015 tax expense was $0.2 million despite pretax income of only $16,000, largely because no tax benefit was recorded for the U.K. loss.
Most important facts for investors to verify
- Whether the revenue-recognition material weakness has been remediated and whether reported revenue and gross-versus-net presentation remain reliable.
- Whether receivables—up $8.2 million—and operating cash flow improve, and whether the two largest customers maintain their business.
- Whether gross margins recover, particularly in HPP royalties and U.K. services, and whether fixed-price contract cost overruns are contained.
- Whether FY2016 royalty expectations and 100G adapter commercialization translate into realized revenue, and how backlog converts to shipments and services.
- The availability and terms of the inventory credit facility, pension funding needs, and the practical availability of foreign-held cash; management considered $3.3 million of foreign subsidiary cash permanently reinvested.