CSP Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017 (not a standalone fourth-quarter report). CSP Inc. operates through High Performance Products (HPP) and Technology Solutions (TS), its IT integration, resale, professional services and managed-services businesses.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $111.5 million | $103.4 million | Up 8% |
| Gross profit / margin | $25.5 million / 23% | $25.0 million / 24% | Profit up $0.4 million; margin down about 1 point |
| Operating income | $3.8 million | $3.8 million | Approximately flat |
| Net income | $2.5 million | $2.6 million | Down $0.1 million |
| Diluted EPS | $0.63 | $0.67 | Down $0.04 |
| Operating cash flow | $2.7 million | $5.0 million | Down $2.3 million |
| Cash and equivalents at year-end | $13.9 million | $13.1 million | Up $0.8 million |
- Revenue mix: TS revenue grew 12% to $97.6 million and represented 88% of sales. HPP revenue fell 15% to $13.8 million. TS growth was driven mainly by product sales across the U.S., U.K. and Germany; HPP weakness reflected lower Myricom adapter and Multicomputer sales.
- Margins and expenses: HPP gross margin rose to 68% from 62%, helped by $5.4 million of royalty income versus $4.3 million in FY2016. TS margin remained 17%. R&D fell 21% to $2.4 million; SG&A increased 6% to $19.4 million.
- Cash flow and liquidity: Operating cash flow declined amid an $8.1 million increase in accounts receivable, partly offset by higher payables and deferred revenue. Current assets were $51.7 million and current liabilities $26.0 million at year-end. Management said cash, operating cash generation and available credit were expected to meet working-capital and capital needs for the foreseeable future.
- Debt and obligations: The company reported no borrowings on its $1.0 million general line of credit. A U.S. inventory facility had $3.1 million outstanding, included in accounts payable and accrued expenses; the company reported covenant compliance. Pension and retirement liabilities totaled $12.4 million, including current and long-term amounts.
Changes, outlook and risks
- TS sales increased $10.6 million, while HPP sales decreased $2.5 million. Europe revenue rose 34%, primarily reflecting multinational customer sales through the U.K. division; Americas revenue declined about 2%.
- HPP backlog fell to approximately $0.8 million from $4.9 million; TS backlog increased to $12.7 million from $10.9 million. Management expected both backlogs to ship or be provided during FY2018.
- CSPI had no numerical revenue or earnings guidance. Management described continued support of existing defense products, while concentrating HPP development on Myricom and cybersecurity offerings, including nVoy and ARIA SDS. The filing describes ARIA as under development/“when available”; commercial adoption and revenue contribution remain uncertain.
- Customer concentration is significant: two customers generated approximately $33.2 million, or 30% of FY2017 revenue. Two customers each represented at least 10% of revenue; several customers also represented at least 10% of year-end receivables.
- Management identified a material weakness in foreign-subsidiary revenue-recognition controls, including evidence that recognition criteria were met and gross-versus-net presentation. The weakness, first identified in FY2015, had not been remediated as of September 30, 2017; disclosure controls were also deemed ineffective. The financial-statement auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Other principal risks include technology and product-development execution, intense competition, reliance on sole-source components, international operations and currency exposure, government budget and contracting changes, cybersecurity incidents, and volatile order timing. DoD subcontracting represented 6% of revenue in both FY2017 and FY2016.
- Other items: the company paid $0.44 per share in dividends during FY2017 ($1.7 million total); it reported no material legal proceedings. The Tax Cuts and Jobs Act had passed Congress shortly before filing, but its effect had not yet been quantified by the company.
Investor verification priorities
- Track remediation and testing of foreign revenue-recognition controls, and assess whether any revisions or restatements become necessary.
- Review receivables quality, collections and customer concentration, given the $8.1 million receivables increase and large customer balances.
- Evaluate whether TS growth and HPP royalty income can offset continuing declines in HPP product sales; verify conversion and timing of reported backlog.
- Assess launch timing, customer demand and investment needs for nVoy, ARIA SDS and related security products.
- Confirm the effect of the enacted tax changes, pension funding requirements and the company’s ongoing liquidity and credit-covenant position.