CSP Inc. — Form 10-Q Summary
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 filing covers the fiscal third quarter and nine months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 |
|---|---|---|
| Revenue | $19.681 million, down 31% | $61.000 million, down 14% |
| Gross profit / margin | $3.621 million / 18%, versus $4.896 million / 17% | $12.398 million / 20%, versus $12.690 million / 18% |
| Operating income (loss) | $(0.271) million, versus $0.658 million | $0.803 million, versus $1.082 million |
| Net income (loss) | $(0.214) million; $(0.06) per diluted share | $0.461 million; $0.13 per diluted share |
| Operating cash flow | $2.419 million for nine months, versus $0.463 million |
Quarterly revenue fell primarily because U.S. service and system integration customers, including two major IT managed service providers, bought less product; the prior-year quarter also included a hotel network project and Systems-segment defense royalties that did not recur. For the nine-month period, product sales declined about $10.0 million, partly offset by higher service revenue in the Service and System Integration segment. Nine-month gross margin improved as sales mix and service-resource utilization improved.
Balance sheet, cash flow and liquidity
- At June 30, 2011, cash and cash equivalents were $17.482 million, compared with $15.531 million at September 30, 2010. Current assets were $35.900 million and current liabilities $13.273 million.
- Cash from operations was $2.419 million; investing activities used $0.389 million and financing activities used $0.374 million. Cash generation benefited from collections of receivables and lower inventory; accounts payable and accrued expenses declined $1.322 million.
- The filing reports no material conventional borrowing balance; listed obligations include a $25,000 capital lease and pension and retirement-plan liabilities of $9.718 million in total. Interest expense was $64,000 for nine months.
- Approximately $8.6 million of cash was held by foreign subsidiaries and management considered it permanently reinvested, citing unfavorable tax consequences of repatriation.
- The company repurchased approximately 109,000 shares for $448,000 during the nine months; 285,122 shares remained authorized for repurchase at June 30.
Material changes, outlook and risks
- Quarterly performance reversed from operating and net income in 2010 to losses in 2011. For the nine months, revenue and net income also declined year over year, despite improved gross margin.
- Management said available cash, operating cash generation and credit-line availability should meet working-capital and capital-expenditure needs for the foreseeable future. The filing provides no specific revenue or earnings guidance.
- Management cited rapidly changing technology, new-product demands and short product life cycles as risks to business performance. It also noted customer concentration: Verio represented 24% of quarterly revenue and 16% of nine-month revenue; Vodafone represented 11% of nine-month revenue.
- The company recorded a $271,000 uncertain tax liability related to tax positions, including research and development credits. Management maintained valuation allowances on certain deferred tax assets, citing uncertainty about future U.S. profitability and cumulative U.K. losses.
- The company received a subpoena seeking documents in connection with a government investigation of a third party; the filing does not describe the investigation’s outcome or quantify a potential exposure.
- Inventory included about $1.7 million of shipped goods for which revenue recognition criteria had not been met; inventory reserves were approximately $4.2 million. Management concluded disclosure controls were effective and reported no material change in internal controls during the period.
Important facts for investors to verify
- Whether the reduced purchases by major U.S. managed-service-provider customers persist, and how concentrated revenue remains.
- Whether gross-margin improvements can offset lower sales and support a return to operating profitability.
- How much of reported cash is practically available in the U.S., given the $8.6 million held abroad, and the terms and availability of credit lines.
- Potential funding requirements for pension obligations and the effects of tax-position uncertainty and deferred-tax valuation allowances.
- Any developments, costs or liabilities arising from the subpoena and third-party government investigation.
- Recognition and collectability of shipped inventory and the adequacy of inventory reserves.