CSP Inc. — Q1 FY2014 Form 10-Q
Business context and reporting period. CSP Inc. develops and markets IT integration solutions and high-performance cluster computer systems through its Systems and Service and System Integration segments. This unaudited report covers the three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012, unless stated otherwise. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $21.332 million | $20.870 million |
| Gross profit / margin | $4.533 million / 21% | $4.177 million / 20% |
| Operating income | $340,000 | $173,000 |
| Net income | $346,000 | $115,000 |
| Net income attributable to common stockholders / diluted EPS | $335,000 / $0.10 | $113,000 / $0.03 |
| Net cash used in operating activities | $3.720 million | $2.113 million |
| Cash and cash equivalents, quarter-end | $13.942 million | $17.715 million at December 31, 2012 |
Revenue increased 2%. Product sales fell 4% to $14.749 million, while service revenue rose 18% to $6.583 million. The Systems segment generated $2.289 million in sales, up $1.236 million; Service and System Integration generated $19.043 million, down $774,000. Reported gross margin improved one percentage point; excluding $138,000 of acquired inventory and intangible amortization, management stated gross margin was 22%.
Operating expenses increased to $4.655 million from $4.004 million, including higher engineering and development and SG&A expenses. Operating income included a $462,000 after-tax bargain purchase gain from acquiring Myricom. The quarter also included a $32,000 income tax benefit, compared with $117,000 tax expense in the prior-year quarter. The filing attributes the benefit partly to the accounting for the acquisition gain.
Liquidity, balance sheet and cash flow
- Cash declined $4.677 million during the quarter, from $18.619 million at September 30, 2013. Operating cash outflow was $3.720 million; investing outflow was $775,000, including $500,000 paid for Myricom and $273,000 in capital expenditures; financing outflow was $351,000, primarily the accrued dividend.
- Working-capital movements included a $3.366 million increase in accounts receivable and an $835,000 increase in inventories, partly offset by a $1.289 million increase in accounts payable and accrued expenses.
- At December 31, 2013, current assets were $42.271 million and current liabilities were $16.396 million. Total liabilities were $25.628 million and shareholders’ equity was $23.250 million.
- The balance sheet presents no borrowings. Interest expense was $21,000 for the quarter. Management refers to availability on lines of credit but does not provide a clear facility amount or unused capacity in this filing.
- Cash held by foreign subsidiaries was approximately $5.2 million and management considered it permanently reinvested abroad because repatriation would have unfavorable tax consequences.
Material changes, acquisition and other notable items
- On November 4, 2013, CSP acquired substantially all assets of Myricom for approximately $500,000 cash and assumed certain liabilities. Myricom contributed more than $800,000 of revenue during the quarter and was integrated into the Systems segment. The preliminary purchase-price allocation produced a $462,000 bargain purchase gain, net of tax; the valuation and allocation remained subject to finalization.
- Acquisition-related pro forma information, which the company cautions is not representative of actual or future results, shows revenue of $21.951 million and net income of $35,000 for the current quarter, versus revenue of $22.747 million and a net loss of $834,000 for the comparable prior period.
- Two customers represented 44% of quarterly revenue: Customer A was 29% and Customer B 15%, compared with 24% and 12%, respectively, in the prior-year quarter.
- The board declared a $0.10-per-share cash dividend, paid January 7, 2014. The quarter’s equity statement records $357,000 of dividends.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management believes available cash, operating cash generation and line-of-credit availability will cover working-capital and capital-expenditure needs for the foreseeable future, based on current plans and conditions. It cautions that insufficient operating cash could require additional financing, which may not be available on acceptable terms or at all.
Management identifies rapidly changing technology, new product introductions and short product life cycles as business risks, and says results depend on developing and enhancing products in a timely, cost-effective manner. The company maintains a substantial valuation allowance against U.K. deferred tax assets because of cumulative losses and uncertainty about future taxable earnings. Defined-benefit pension obligations are also reported; total pension and retirement plan liabilities were $9.471 million at quarter-end. The filing references commitments and contingencies but provides no specific material contingency amount in the supplied text.
Important facts for investors to verify
- How much of reported profitability came from the nonrecurring Myricom bargain purchase gain, and what are the finalized purchase allocation and integration costs?
- Whether operating cash flow improves as receivables and inventory convert to cash, and what explains the significant quarterly working-capital use.
- The amount, terms and availability of the referenced lines of credit, since the filing does not clearly state their capacity.
- Whether the two-customer revenue concentration persists and how the contrasting segment and geographic sales trends develop.
- The status of U.K. deferred tax asset realizability, pension funding requirements and any commitments or contingencies not quantified here.