CSP Inc. — FY2013 Form 10-K
Business context and reporting period
This annual report covers the fiscal year ended September 30, 2013, with FY2012 as the comparable period; it does not provide a separate fourth-quarter results summary. CSP operates two segments: Systems, which develops high-performance embedded computing products, and Service and System Integration, which resells third-party IT products and provides integration, consulting, maintenance and managed services.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $87.6 million | $84.8 million |
| Gross profit / margin | $18.6 million / 21% | $20.4 million / 24% |
| Operating income | $0.7 million | $5.0 million |
| Net income | $0.4 million | $6.6 million |
| Diluted EPS | $0.10 | $1.91 |
| Operating cash flow | $0.2 million | $6.3 million |
| Cash and cash equivalents at year-end | $18.6 million | $20.5 million |
Service and System Integration revenue rose 9% to $80.6 million; Systems revenue fell 37% to $7.0 million. Systems contributed 8% of revenue, compared with 13% in FY2012. Product revenue increased 11% to $65.8 million, while service revenue declined 14% to $21.8 million, principally because Systems royalty revenue fell to $0.8 million from $6.4 million. The high-margin royalty decline drove the lower consolidated gross margin.
Cash declined $1.9 million during the year. Current assets were $40.9 million and current liabilities $15.1 million. Foreign subsidiaries held $6.6 million of cash that management considered permanently reinvested and not available for U.S. use without unfavorable tax consequences. The company reported no outstanding conventional borrowings in the balance sheet; it maintained credit facilities permitting up to $2.5 million of borrowing. A $2.4 million inventory-line amount was included in accounts payable. Pension and retirement liabilities totaled $9.4 million.
Changes, unusual items and management outlook
- Revenue growth reflected the integration segment’s $7.0 million increase, partly offset by the Systems segment’s $4.1 million decline. U.S. integration product sales grew, while German and U.K. product sales weakened.
- FY2012 included $2.1 million of income from an officer life-insurance settlement; no comparable income was recognized in FY2013. FY2012 tax results also included reversal of a $3.0 million U.S. deferred-tax valuation allowance. FY2013 income-tax expense was $0.3 million, an effective rate of approximately 47%.
- Management expressed cautious optimism for FY2014. It expected royalty orders associated with the E2D program’s full-rate production phase, while noting defense-market uncertainty. In the integration segment, it planned to emphasize higher-margin consulting and managed services, even if that restrained near-term sales growth. No quantified guidance was provided.
- On November 4, 2013, after year-end, CSP acquired selected Myricom assets for $0.5 million cash, including interconnect technology, inventory and customer relationships. Purchase-price allocation was not finalized at filing.
Risks, contingencies and other disclosures
- Revenue is concentrated: three customers represented 18%, 15% and 12% of FY2013 revenue, respectively. The Department of Defense accounted for 7% of revenue, down from 13% in FY2012. Management cited sequestration and federal budget/procurement uncertainty.
- Systems products rely on certain sole-source suppliers; disruption, component shortages or price increases could affect shipments and margins. The company also faces technology, competition, customer-order timing, international, foreign-exchange, cybersecurity and key-personnel risks.
- Systems backlog fell to approximately $0.4 million from $3.1 million; integration backlog rose to $7.7 million from $7.1 million. Backlog is volatile, though the company expected it to be fulfilled within twelve months.
- The U.K. deferred-tax assets remained fully reserved because of cumulative losses. CSP disclosed $0.6 million of uncertain tax liabilities. It reported no material legal proceedings.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements; it did not audit internal control.
Investor verification priorities
- Verify the timing, value and collectability of anticipated E2D royalty orders and the effect of lower royalty revenue on Systems profitability.
- Assess customer concentration, changes in major-customer demand, and the effect of federal budget cuts and procurement timing.
- Reconcile operating cash generation with earnings, working-capital movements, dividends and capital spending; evaluate the availability of foreign-held cash and credit facilities.
- Review the Myricom acquisition’s final asset valuation, integration costs and contribution to sales or margins.
- Monitor gross-margin recovery, especially the mix of high-volume resale products versus consulting, managed services and royalties, as well as pension funding and deferred-tax-asset assumptions.