CSP Inc. Form 10-Q Summary
Business context and reporting period
CSP Inc. provides IT integration and managed services, security products, network adapters, and high-performance computing products through its Technology Solutions (TS) and High Performance Products (HPP) segments. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $13.53; down 37% year over year | $46.20; down 19% |
| Gross profit / margin | $4.22 / 31%, versus $4.84 / 22% | $12.74 / 28%, versus $12.93 / 23% |
| Operating income (loss) | $(0.39), versus $0.15 | $(0.94), versus $(0.61) |
| Net income (loss) | $(0.21), versus $0.53 | $(1.48), versus $(0.04) |
| Basic and diluted loss per share | $(0.05) | $(0.37) |
- For the nine-month period, operating cash flow was $1.23, compared with cash used of $4.57 a year earlier. Cash and equivalents rose to $19.98 from $18.10 at September 30, 2019.
- At June 30, current assets were $41.53 and current liabilities $14.12. The company reported $1.11 drawn on its inventory line of credit and $4.60 of notes payable; $13.9 of the line was available. Operating lease liabilities totaled $2.24, and finance lease liabilities $0.41.
- Working-capital cash inflows included a $4.23 decrease in accounts receivable and a $1.06 decrease in inventory; a $6.91 decrease in accounts payable and accrued expenses was a significant cash use.
- Capital expenditures were $0.29 for the nine months. Dividends paid totaled $1.26; the company suspended dividends and share repurchases on May 14, 2020.
Material changes versus prior comparable periods
- Third-quarter revenue fell mainly because prior-year large, low-margin deals did not recur. TS revenue declined $7.48, while HPP revenue declined $0.56. Product revenue fell sharply; services revenue was more resilient, including higher managed-service and royalty revenue.
- Despite lower gross profit dollars, gross margin improved in both the quarter and year to date. Management attributed the improvement to product mix, vendor rebates and higher-margin software in TS, and a greater services and royalty contribution in HPP.
- Nine-month operating loss widened by $0.33 as lower product revenue outweighed higher gross margin percentage and relatively stable operating expenses.
- Nine-month net loss increased substantially, partly because income tax expense was $1.11 versus a $0.47 tax benefit in the prior-year period. The current-period provision included a valuation allowance on deferred tax assets.
Outlook, commentary and risks
- Management said COVID-19 and related restrictions adversely affected business activity and that it could not reasonably estimate the extent or duration of the pandemic’s impact. Most employees were working remotely. The filing identifies customer demand, operations, supply chains and third-party performance as potential areas of disruption.
- Management expects to continue doing business with customers associated with prior-year deals, but gives no quantified revenue or earnings guidance. It believes cash, operating cash generation, SBA loan proceeds and available credit should fund working capital and capital expenditure needs for at least 12 months from the report date.
- The company and subsidiary received PPP loans totaling approximately $2.18, with a two-year term and 1% interest. The company intends to use the proceeds in accordance with program requirements but says it cannot assure full or partial forgiveness.
- The nine-month tax expense reflects management’s conclusion that some deferred tax assets may not be realizable in light of recent results and the pandemic. The filing notes that the valuation allowance is noncash and anticipated CARES Act NOL carryback benefits may result in a cash refund.
- Customer concentration remains notable: one customer represented 23% of quarterly revenue and 15% of nine-month revenue, and accounted for approximately 39% of accounts and long-term receivables at June 30. Management cites dependence on a small number of customers, U.S. federal government contracts, and certain single-source suppliers among its risks.
Important facts for investors to verify
- Whether the decline in product sales and the anticipated return of prior-year customers translate into improved revenue in subsequent periods.
- Customer concentration and collection risk, particularly the large share of receivables attributable to one customer.
- PPP loan forgiveness eligibility and the final impact of the deferred-tax-asset valuation allowance and NOL carryback.
- Compliance with inventory-line covenants and whether the available credit and cash remain adequate if operating cash flow weakens.
- The duration and financial effects of COVID-19, given management’s statement that the impact cannot yet be reasonably estimated.