CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019; comparisons are to the periods ended June 30, 2018 unless noted. CSPi provides IT integration solutions, security products and services, and high-performance computing products through its High Performance Products (HPP) and Technology Solutions (TS) segments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $21.57 vs. $20.04; up 8% | $56.90 vs. $53.28; up 7% |
| Gross profit / margin | $4.84 / 22%, vs. $5.21 / 26% | $12.93 / 23%, vs. $13.56 / 25% |
| Operating income (loss) | $0.15 vs. $0.22 | $(0.61) vs. $(0.48) |
| Net income (loss) | $0.53 vs. $0.003; diluted EPS $0.12 vs. approximately break-even | $(0.04) vs. $(1.79); diluted EPS $(0.01) vs. $(0.47) |
| Operating cash flow | Not separately presented for the quarter | $(5.34), compared with $1.02 provided in the prior-year period, including discontinued operations |
Quarterly revenue growth was driven by TS, whose sales increased $2.47 million, while HPP sales fell $0.95 million. HPP’s high-margin royalty revenue declined, reducing its quarterly gross profit by $0.91 million; TS gross profit increased $0.54 million. Over nine months, TS revenue rose $5.19 million while HPP revenue declined $1.57 million, primarily due to lower royalties. The nine-month operating loss widened despite lower engineering and SG&A expense.
Financial position and liquidity
- At June 30, 2019, cash and cash equivalents were $16.79 million, down from $25.11 million at September 30, 2018. Cash held by the U.K. subsidiary was approximately $10.5 million.
- Current assets were $48.29 million and current liabilities were $17.15 million. Accounts receivable was $16.65 million and inventory was $9.87 million; inventory included approximately $3.7 million of obsolescence reserves.
- Total liabilities were $23.92 million, including $5.51 million of noncurrent pension and retirement-plan liabilities. The filing does not present a conventional bank-debt balance; it reports $0.21 million of capital-lease principal payments during the nine months.
- Nine-month operating cash use of $5.34 million reflected, among other items, increases in accounts receivable ($3.58 million), inventory ($2.68 million), and other current assets ($2.15 million). Investing cash use was $0.73 million, financing cash use was $1.93 million, including $1.84 million of dividends, and exchange-rate effects reduced cash by $0.31 million.
Management said available cash, expected operating cash generation, and availability under lines of credit should cover working-capital and capital-expenditure needs for the foreseeable future. The filing does not state the amount available under those credit lines.
Changes, outlook, risks, and unusual items
- Revenue recognition: CSPi adopted ASC 606 on October 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $0.16 million. For the nine months, adoption increased reported revenue by $0.60 million and gross profit by $0.02 million; reported net loss was approximately $0.001 million lower. No prior-period statements were restated.
- Discontinued operations: The German TS operation was sold in July 2018 for approximately $14.4 million cash at closing; the company recorded an approximately $16.8 million gain in fiscal 2018. It contributed no revenue or results to the 2019 periods shown. An additional €0.4 million was in escrow and would be recorded if received.
- Dividends: Three quarterly dividends of $0.15 per share were paid during the nine months, totaling $1.84 million.
- Taxes: The quarter included a $0.33 million tax benefit, with a reported effective tax benefit rate of 158%; management attributed the unusual rate to U.K. pension contributions, tax adjustments, and the research and development credit. The nine-month tax benefit was $0.47 million; comparison with 2018 is affected by the prior-year Tax Act impact.
- Outlook and risks: No numerical revenue or earnings guidance is provided. Identified risks include customer concentration, reliance on U.S. federal government contracts, dependence on certain single-source components, competition, the German-operation sale, tax-law changes, and foreign exchange exposure. One customer represented 14% of quarterly revenue. Management cautioned that actual results may differ from forward-looking statements.
- The company said disclosure controls were effective as of June 30, 2019 and reported no material change in internal control over financial reporting during the nine-month period.
Investor verification priorities
- Whether TS growth from large U.S. product orders is repeatable, given the customer concentration and the filing’s discussion of orders that did not recur in the U.K.
- Whether HPP royalty revenue stabilizes and whether its decline continues to pressure gross margin.
- Why operating cash flow was materially negative despite reported revenue growth, and whether receivables, inventory, and other current assets convert to cash.
- The amount and terms of available credit lines, and the expected cash requirements for pension obligations and dividends.
- The status and collectability of the €0.4 million sale escrow, and the ongoing effects of ASC 606 on reported revenue and margins.