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 High Performance Products (HPP) and Technology Solutions (TS) segments. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2015; comparisons are to the corresponding 2014 periods. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Revenue | $22.287 million, down 2% | $61.594 million, down 5% |
| Gross profit and margin | $5.266 million; 24% (27% in 2014) | $13.264 million; 22% (24% in 2014) |
| Operating income (loss) | $0.695 million, versus $0.967 million | $(0.865) million, versus $1.640 million |
| Net income (loss) | $0.249 million, versus $0.899 million | $(0.863) million, versus $1.412 million |
| EPS, basic | $0.07, versus $0.25 | $(0.25), versus $0.40 |
| Operating cash flow | Not stated for the quarter | $(3.497) million, versus $(0.036) million |
Quarterly product sales were $15.696 million and services sales $6.591 million. Nine-month product sales were $45.544 million and services sales $16.050 million. For the nine months, cash used in investing was $0.591 million and cash used in financing was $1.107 million, including $1.212 million of dividends paid. Cash declined by $6.002 million to $10.446 million, including a $0.807 million unfavorable exchange-rate effect.
At June 30, 2015, total assets were $45.982 million, current assets $39.036 million, current liabilities $16.833 million, and total liabilities $26.468 million. Shareholders’ equity was $19.514 million. The balance sheet presents no borrowings; interest expense for the nine months was $0.063 million. The filing says credit lines are available but does not state their size or unused capacity.
Material changes and management commentary
- Nine-month revenue fell $3.277 million. TS revenue declined $2.187 million and HPP revenue declined $1.090 million. Management attributed about $3.2 million of the TS shortfall to weaker euro and pound exchange rates, partly offset by higher product revenue.
- HPP’s nine-month revenue was affected by lower service royalties: $1.9 million related to three planes versus $3.8 million related to six planes in 2014. Management expected royalty revenue on two additional planes in fiscal Q4.
- For the quarter, HPP revenue fell 19%, chiefly due to timing of overseas defense shipments and lower Myricom revenue. TS revenue rose 3%, with U.S. and U.K. increases partly offset by lower German revenue.
- Quarterly TS gross margin fell to 14% from 16%, largely due to additional costs on U.K. fixed-price contracts that could not be billed to customers and lower product margins. Nine-month HPP gross margin fell to 55% from 64%, principally reflecting fewer high-margin aircraft royalties.
- Engineering and development expense was $2.305 million for nine months. CSP reported release of Myricom 10 Gigabyte Ethernet Adapters with DBL software on July 7, 2015.
Liquidity, outlook, risks and unusual items
Management stated that available cash, operating cash generation and credit-line availability should fund working capital and capital expenditure needs for the foreseeable future. It also cautioned that insufficient operating cash could require additional financing, which may not be available on acceptable terms or in time. Cash held by foreign subsidiaries was approximately $6.5 million and considered permanently reinvested.
Two customers each represented 15% of nine-month revenue; together they accounted for approximately 45% of accounts receivable at June 30. Management identifies customer concentration, dependence on U.S. federal government contracts, reliance on certain single-source components, intense competition, rapid technological change and short product life cycles as risks. Foreign exchange movements also affected reported revenue and expense.
For the nine months, CSP recorded a $0.277 million income tax benefit, including a $0.070 million reversal of uncertain tax positions following expiration of the statute of limitations. No tax benefit was recorded on the U.K. loss because of a valuation allowance. The comparative 2014 nine-month results included a $0.462 million after-tax bargain-purchase gain from the Myricom acquisition; no such gain was recorded in 2015. The board declared an additional $0.11-per-share dividend on August 12, payable September 11, 2015.
A material weakness in revenue-recognition controls remained unremediated as of June 30, 2015, and management concluded disclosure controls were not effective. The weakness involved ensuring revenue-recognition criteria were met and assessing gross-versus-net presentation. The company described enhanced transaction reviews and upgrades to international accounting staff but could not yet conclude remediation was complete.
Important facts for investors to verify
- Whether the two expected fourth-quarter aircraft royalties were recognized, and the timing and sustainability of HPP royalty revenue.
- Whether U.K. fixed-price contract losses and weaker TS margins continued after the quarter.
- Cash conversion and working-capital trends, particularly receivables growth, deferred revenue, and the rise in accounts payable and accrued expenses.
- The status of revenue-recognition control remediation and any related financial-statement adjustments.
- Customer concentration, foreign-currency exposure, and the amount and availability of credit lines if additional liquidity is needed.