CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012, compared with the three months ended December 31, 2011, unless otherwise noted. CSP develops and markets IT integration solutions and high-performance cluster computer systems through its Systems and Service and System Integration segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $20.870 million | $21.093 million |
| Gross profit / margin | $4.177 million / 20% | $4.823 million / 23% |
| Operating income / margin | $173,000 / about 0.8% | $764,000 / about 3.6% |
| Net income | $115,000 | $461,000 |
| EPS, basic / diluted | $0.03 / $0.03 | $0.14 / $0.13 |
| Cash from operating activities | Used $2.113 million | Used $943,000 |
Revenue declined 1%. Product sales rose $151,000 while services revenue fell $374,000. Cost of sales increased 3% despite lower sales, reducing gross profit by $646,000. Operating expenses were down $55,000: lower SG&A partly offset higher engineering and development spending. Other income was $59,000, versus $34,000 of other expense in the prior-year quarter. The effective tax rate rose to 50% from 37%, primarily because of accrued interest and penalties related to uncertain tax positions.
Segments and material changes
- Systems: Revenue fell $1.293 million, to $1.053 million, and the segment reported an operating loss of $373,000 versus operating income of $12,000. Lower sales to a Japanese defense-program customer and U.S. defense customers contributed to the decline. Royalty income was lower, at about $800,000 versus $1.0 million, but made up a larger share of segment revenue; the segment’s reported gross margin rose to 90% from 62%.
- Service and System Integration: Revenue grew $1.070 million, to $19.817 million, but operating profit was $546,000 versus $752,000. U.S. product sales benefited from approximately $3.0 million of sales to newly acquired customers. German sales declined, including weaker business with a large UK-based wireless carrier. Segment gross margin fell to 16% from 18%, reflecting product mix and lower German service-engineer utilization.
- Two customers accounted for approximately 24% and 12% of current-quarter revenue, compared with 25% and 21% in the prior-year quarter.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $17.715 million at December 31, 2012, down $2.778 million from September 30, 2012. Current assets were $44.498 million and current liabilities were $18.335 million.
- Operating cash use was driven chiefly by a $4.101 million increase in accounts receivable and other working-capital changes. Sources included collection of a $2.172 million officer life-insurance settlement receivable and a $573,000 inventory reduction. Investing activities used $120,000; financing activities used $689,000 for dividends.
- Foreign subsidiaries held approximately $6.1 million of cash, which management considers permanently reinvested and unavailable for U.S. use without unfavorable tax consequences. The filing reports no debt balance as a separate balance-sheet line; quarterly interest expense was $21,000.
- Long-term pension and retirement-plan liabilities were $9.489 million. The company paid a $0.20-per-share cash dividend on December 28, 2012, totaling $689,000.
Outlook, risks, and other items
No numerical revenue or earnings guidance is provided. Management believes available cash, operating cash generation, and credit-line availability will cover working-capital and capital-expenditure needs for the foreseeable future, based on current plans and conditions. It cautions that financing may be needed if operating cash is insufficient and that additional financing may not be available on acceptable terms or at all.
Management identifies rapidly changing technology, new product introductions, and short product life cycles as risks to results. Other considerations include customer concentration, foreign-exchange exposure, pension obligations, and the substantial valuation allowance against U.K. deferred tax assets, reflecting cumulative losses and limited expected ability to use tax-loss carryforwards. The quarter included $17,000 of gain on sale of fixed assets and the life-insurance settlement collection noted above. The filing lists commitments and contingencies but provides no clear details in the supplied text. Management judged disclosure controls effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the elevated receivables and negative operating cash flow convert to cash in subsequent quarters.
- Whether Systems revenue and operating performance recover, and whether the Service and System Integration segment sustains recent U.S. customer gains while improving margins.
- How customer concentration and the large-customer declines in Germany and defense-related business affect future sales.
- What portion of reported cash is practically available to fund U.S. operations, and the terms and availability of credit lines.
- Developments in pension funding, uncertain tax positions, and the recoverability of U.K. deferred tax assets.