CSP Inc. — Form 10-Q Summary
Business context and period: CSP Inc. develops and markets IT integration solutions and high-performance cluster computer systems through its High Performance Products and Solutions (HPPS) and Information Technology Solutions (ITS) segments. This unaudited report covers the quarter and nine months ended June 30, 2014, compared with the same 2013 periods. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Nine months ended June 30, 2014 | Nine months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $22.636 | $19.033 | $64.871 | $65.726 |
| Gross profit / margin | $6.104 / 27% | $3.835 / 20% | $15.719 / 24% | $13.779 / 21% |
| Operating income (loss) | $0.967 | $(0.667) | $1.640 | $0.728 |
| Net income (loss) | $0.899 | $(0.478) | $1.412 | $0.377 |
| Diluted EPS | $0.25 | $(0.14) | $0.39 | $0.11 |
- Quarter revenue grew 19%, driven by HPPS and higher royalty revenue; year-to-date revenue declined 1% as ITS sales fell more than HPPS sales increased.
- Year-to-date product revenue decreased $4.9 million, while service revenue increased $4.0 million. HPPS revenue rose $6.1 million and ITS revenue fell $6.9 million. Higher royalty revenue was a major contributor to improved gross margins.
- Cash from operations was a use of $0.036 million for the nine months, versus $1.605 million provided in 2013. Investing used $1.031 million and financing used $1.142 million, including $1.148 million in dividends. Cash declined $2.169 million to $16.450 million.
- At June 30, current assets were $43.052 million and current liabilities $17.364 million. Total liabilities were $26.111 million, including $9.448 million of pension and retirement liabilities. The balance sheet presents no separate debt balance; nine-month interest expense was $0.064 million.
- The company paid $0.10, $0.11 and $0.11 per share in dividends during the period. Cash held by foreign subsidiaries was approximately $7.5 million and management considered it permanently reinvested due to unfavorable repatriation tax consequences.
Material changes, outlook and risks
- Myricom was acquired on November 4, 2013 for approximately $0.5 million cash, with certain liabilities assumed. The acquisition generated a $0.462 million after-tax bargain purchase gain included in nine-month results. Myricom contributed approximately $4.7 million of revenue since acquisition.
- Management attributed lower ITS product sales primarily to the loss of a major customer in the U.S. IT-hosting vertical and the absence of a large prior-year education project. One customer represented 18% of nine-month revenue; another represented 19%. Customer B accounted for 20% of receivables at quarter-end.
- 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. It warns that technology changes, short product life cycles, and the ability to develop products on time and cost-effectively could adversely affect results. Management also cautioned that additional financing might not be available on acceptable terms if needed.
- Foreign-exchange losses were $0.120 million year to date, mainly related to U.S.-dollar holdings in the U.K. The nine-month tax rate was unusually low, in part because of the acquisition accounting and a $0.3 million reversal of uncertain tax positions after the statute of limitations expired. A substantial valuation allowance remains against U.K. deferred tax assets.
- Disclosure controls were reported ineffective as of June 30, 2014. The identified material weakness concerned applying principal-versus-agent revenue recognition guidance to certain arrangements. Management enhanced corporate review procedures but could not yet conclude that the weakness was remediated.
Important facts for investors to verify
- Whether the revenue-recognition material weakness has been fully remediated and whether any revenue arrangements require adjustment.
- The sustainability of royalty income and the extent to which improved margins depend on it, versus acquired Myricom sales.
- Future ITS performance following the loss of the major U.S. IT-hosting customer, and exposure to significant customer concentration.
- Operating cash conversion, working-capital needs, access to credit lines, and the availability of cash held overseas.
- The assumptions behind pension liabilities, deferred-tax asset realizability, and the valuation allowance on U.K. tax assets.