CSP Inc. — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018; fiscal year ends September 30. CSP develops and sells IT integration solutions, security and managed services, network adapters, and high-performance computing systems through its High Performance Products (HPP) and Technology Solutions (TS) segments. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2018 | Six months ended Mar. 31, 2018 |
|---|---|---|
| Revenue | $21.982 million, down 13% year over year | $43.981 million, down 3% |
| Gross profit / margin | $4.930 million / 22%; margin unchanged | $10.063 million / 23%, versus 22% |
| Operating income (loss) | $(723) thousand, versus $622 thousand income | $(716) thousand, versus $520 thousand income |
| Net income (loss) | $(594) thousand, versus $428 thousand income; diluted EPS $(0.16) | $(1.794) million, versus $385 thousand income; diluted EPS $(0.47) |
| Cash flow | Six-month operating cash use of $734 thousand; investing cash use $455 thousand; financing cash use $778 thousand. Cash declined $1.918 million. | |
| Cash and liquidity | Cash was $11.967 million at March 31, versus $13.885 million at September 30. Current assets were $47.095 million and current liabilities $23.764 million. |
No borrowings are listed on the balance sheet; the filing reports six-month interest expense of $36 thousand. Pension and retirement plan liabilities totaled $12.764 million, including $12.212 million long term. The filing does not provide a separate debt balance or a quantified total for contingencies.
Changes versus prior-year periods
- Second-quarter revenue fell $3.334 million. TS product revenue declined, partly offset by stronger TS services; HPP revenue fell sharply, primarily because of lower high-speed processing board royalties and reduced multicomputer shipments.
- For the six-month period, HPP revenue declined $1.906 million, while TS revenue increased $655 thousand. TS service revenue growth helped lift TS gross margin percentage to 20% from 16%; HPP margin fell to 54% from 64% as high-margin royalty revenue decreased.
- Operating expenses rose: second-quarter expenses increased $580 thousand, including higher variable compensation, sales and engineering hires, and HPP engineering costs. Six-month SG&A increased $864 thousand and engineering and development increased $288 thousand.
- Six-month results included a $974 thousand income tax expense, primarily reflecting approximately $1.1 million of provisional Tax Act charges recorded in the first quarter: $649 thousand for the deemed repatriation tax and $490 thousand for remeasurement of deferred taxes. The quarterly tax benefit was $128 thousand.
Outlook, risks, and unusual items
- Management gave no specific revenue or earnings guidance. It believes cash, operating cash generation, and available lines of credit will meet working-capital and capital-expenditure needs for at least 12 months from filing. It cautions that additional financing, if needed, may not be available on acceptable terms or at all.
- Disclosure controls were deemed ineffective as of March 31, 2018 because management could not conclude that a previously identified material weakness had been remediated. The weakness concerns revenue recognition controls at foreign subsidiaries, including assessment of recognition criteria and gross-versus-net presentation. Remediation steps included enhanced corporate review; further evaluation and improvements were planned.
- Customer concentration is material: two customers each represented 12% and 13% of second-quarter revenue. At quarter-end, one customer represented 29% of accounts receivable; two others represented 12% each. Management stated it did not believe these receivables posed significant credit risk.
- Other disclosed risks include reliance on U.S. federal government contracts, single-source suppliers for some key components, competition, and uncertainty in Tax Act accounting. Revenue from a large prior-year HPP order and E2D-related royalties also affected comparisons.
- The company paid dividends of $0.11 per share in January and March 2018 ($0.22 per share for the six months; $878 thousand cash outflow). It was assessing the impact of the new revenue-recognition standard, effective for the company October 1, 2018, and other pending accounting standards.
Investor verification priorities
- Track HPP royalty revenue and product shipments, and whether deferred TS customer orders return in the third quarter.
- Confirm progress in remediating the foreign-subsidiary revenue-recognition material weakness and the effectiveness of related controls.
- Monitor cash conversion, accounts payable and deferred-cost movements, customer receivable concentration, and access to credit facilities.
- Check subsequent updates to the provisional Tax Act estimates and the implementation impact of the new revenue-recognition standard.
- Assess whether dividend payments remain supported by operating cash flow, given the six-month operating cash outflow and net loss.