CSP Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2012; fiscal year ends September 30. Financial statements are unaudited. Unless noted, amounts are in U.S. dollars.
Business context
CSP Inc. develops and markets IT integration solutions and high-performance cluster computer systems. It reports two segments: Systems and Service and System Integration. The latter generated 87% of nine-month revenue.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2012 (2011) | $22.4m ($18.8m) | $62.5m ($57.0m) |
| Gross profit; gross margin | $5.2m; 23% ($3.6m; 19%) | $14.8m; 24% ($12.4m; 22%) |
| Operating income (loss) | $1.2m (($0.3)m) | $2.6m ($0.8m) |
| Net income (loss) | $0.8m (($0.2)m) | $1.7m ($0.5m) |
| Diluted EPS | $0.22 (($0.06)) | $0.48 ($0.13) |
For the nine-month period, product revenue was $43.6m, up 2%; service revenue was $18.9m, up 32%. Cash provided by operations was $3.4m, compared with $2.4m in the prior-year period. Investing used $0.5m and financing used $0.4m. Cash and equivalents increased to $18.0m from $15.9m at September 30, 2011. Current assets were $42.0m and current liabilities $19.1m. The balance sheet reports no borrowings; interest expense was $64,000 for nine months. Pension and retirement plan liabilities totaled $9.5m, including current liabilities.
Material changes and drivers
- Revenue increased 10% for nine months and 19% for the quarter. Nine-month segment revenue rose 43% in Systems to $8.0m and 6% in Service and System Integration to $54.5m.
- Systems service growth was primarily driven by royalty revenue of approximately $5.0m for nine months, versus $1.6m a year earlier; the quarter included $2.0m of royalty revenue versus none in the prior-year quarter. This revenue carried a 100% gross margin.
- Nine-month gross margin improved to 24% from 22%, while Service and System Integration segment margin declined to 16% from 17%, reflecting contractor use, service labor and lower third-party maintenance revenue. Systems product margin weakened to 30% from 55%, partly due to low production volume, under-absorbed factory overhead and higher nonrecurring outside-fabrication engineering charges.
- Revenue concentration is notable: one customer contributed 20% of nine-month revenue and another 16%. Management cautions that significant future sales to certain new customers are not assured.
Outlook, risks and unusual items
- Management expects available cash, operating cash generation and credit-line availability to cover working capital and capital expenditure needs for the foreseeable future. No numerical revenue or earnings guidance is provided.
- Of the $18.0m cash balance, approximately $8.5m was held by foreign subsidiaries and considered permanently reinvested; management says repatriation would have unfavorable tax consequences. The filing warns that external financing, if needed, may not be available on acceptable terms or in time.
- Risks include rapidly changing technology and short product life cycles, customer concentration, foreign-exchange movements, and the possibility that new customers or royalty income may not recur. The company maintained a valuation allowance against certain deferred tax assets, citing uncertainty about future U.S. profitability and cumulative U.K. losses.
- Unrecognized tax liabilities were $417,000; the company said the amount would affect its effective tax rate if recognized. A $0.2m settlement of a former customer’s bankruptcy-related transfer claims was agreed in June 2012, closing the matter. The filing reports no other material legal proceedings.
- The board declared a $0.12-per-share dividend on August 7, payable August 31, 2012. The company paid a $0.10-per-share dividend during the reported nine months and repurchased 28,100 shares.
- Management concluded disclosure controls were effective as of June 30, 2012, and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether royalty income and revenue from concentrated or newly acquired customers continue in subsequent periods.
- Whether the improved reported profitability is sustainable given Systems product-margin pressure and declining service margins in Service and System Integration.
- Cash availability and use, including the restricted practical availability of foreign-held cash and the status of credit lines.
- Developments in pension obligations, deferred-tax-asset valuation allowances and the $417,000 uncertain tax liability.
- Subsequent results and cash effects of the August 2012 dividend and the settled bankruptcy-related claim.