CSP Inc. (CSPi) — Form 10-Q Summary
Business context and reporting period: Fiscal second quarter and six months ended March 31, 2012; comparative periods ended March 31, 2011. CSPi develops and markets IT integration solutions and high-performance cluster computer systems through its Systems and Service and System Integration segments. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 | Prior-year comparison |
|---|---|---|---|
| Revenue | $19.03 | $40.12 | Up 8% and 5%, respectively |
| Gross profit / margin | $4.72 / 25% | $9.54 / 24% | Margins were 24% and 23%, respectively |
| Operating income | $0.67 | $1.43 | Up 55% and 33%, respectively |
| Net income | $0.44 | $0.90 | Up 55% and 34%, respectively |
| EPS, basic and diluted | $0.13 | $0.26 | Prior year: $0.08 and $0.19 |
Six-month sales growth came from services, up 26% to $12.84 million; product revenue declined 3% to $27.28 million. Systems-segment service revenue benefited from royalty income of approximately $3.0 million for the six months, versus $1.6 million in the prior period. Service and System Integration sales rose 4%, led by European operations.
For the six months, operating cash flow was negative $0.18 million, compared with negative $0.59 million in 2011. Capital expenditures were $0.30 million; dividends paid were $0.34 million and share repurchases were $0.08 million. Cash and cash equivalents were $14.83 million at March 31, down from $15.87 million at September 30, 2011. Current assets were $38.09 million and current liabilities $15.77 million. The balance sheet lists no borrowings; six-month interest expense was $0.04 million. Total pension and retirement plan liabilities were $9.78 million.
Material changes and management commentary
- Quarterly revenue growth included a substantial increase in Systems service royalties, while Systems product revenue fell by $1.71 million, mainly due to lower sales to a Japanese defense department customer.
- Six-month gross margin improved by one percentage point. Higher royalty revenue supported Systems margins, but Systems product margin fell to 26% from 56%, which management attributed to low production volume and under-absorption of fixed factory costs.
- Service and System Integration gross margin was flat at 17% for the six-month period; contractor use and lower third-party maintenance revenue weighed on service margins.
- SG&A rose 8% for the six months, principally from higher bonus and commission expense. Engineering and development expense declined 16% as consulting spending on next-generation MultiComputer products decreased.
Liquidity, outlook, and risks
Management said available cash, expected operating cash generation, and credit-line availability should cover working capital and capital expenditures for the foreseeable future. The filing also cautions that additional financing may not be available on acceptable terms if needed. Approximately $5.6 million of cash held by foreign subsidiaries was considered permanently reinvested and unavailable for U.S. activities without unfavorable tax consequences.
The filing gives no specific revenue or earnings guidance. Management highlighted rapidly changing technology, new product introductions, short product life cycles, and the need to develop products on time and cost-effectively. Customer concentration is significant: one customer contributed 30% of quarterly revenue and 26% of six-month revenue. Revenue from another customer was 17% of six-month sales. The company maintained a substantial U.K. deferred-tax-asset valuation allowance due to cumulative losses and cited uncertainty about future U.S. profitability beyond fiscal 2012.
Inventory included approximately $1.6 million of shipped goods for which revenue-recognition criteria had not yet been met. Inventory reserves for obsolescence were approximately $4.3 million. The filing reports commitments and contingencies but the supplied text does not provide a clear description or quantified amount. Disclosure controls were deemed effective at the reasonable-assurance level; no material change in internal control was reported.
Important facts for investors to verify
- Whether royalty revenue and the increase in Systems service sales are repeatable, and how dependent results are on a small number of customers.
- Progress in recovering Systems product margins from low factory utilization, and the sustainability of the reported gross-margin improvement.
- Working-capital cash demands, including receivables and other current assets, and the availability and terms of credit lines.
- Restrictions on foreign-held cash, pension obligations, and the potential impact of deferred-tax valuation allowances.
- The status of shipped inventory awaiting revenue recognition and the nature and amount of commitments or contingencies.