CSP Inc. — Form 10-Q Summary
Business and period: CSP Inc. develops and markets IT integration solutions and high-performance cluster computer systems through its Systems and Service and System Integration segments. This unaudited report covers the fiscal third quarter and nine months ended June 30, 2013; comparisons are with the same periods in 2012. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $19.033 million | $22.354 million | $65.726 million | $62.476 million |
| Gross profit | $3.835 million | $5.229 million | $13.779 million | $14.767 million |
| Gross margin | 20% | 23% | 21% | 24% |
| Operating income (loss) | $(0.667) million | $1.205 million | $0.728 million | $2.638 million |
| Net income (loss) | $(0.478) million | $0.774 million | $0.377 million | $1.677 million |
| Basic and diluted EPS | $(0.14) | $0.23 basic; $0.22 diluted | $0.11 | $0.49 basic; $0.48 diluted |
- Quarterly drivers: Revenue fell 15%. Systems segment revenue declined $2.678 million and Service and System Integration revenue declined $0.643 million. The prior-year quarter included $2.0 million of royalty revenue, compared with none in the current quarter. SG&A increased 14% to $4.065 million, contributing to the quarterly operating loss.
- Nine-month drivers: Revenue increased 5%, led by a $6.948 million increase in Service and System Integration, partially offset by a $3.698 million decline in Systems. Product revenue rose 14%, while service revenue fell 15%, mainly because royalty revenue was approximately $0.8 million versus $5.0 million a year earlier. The lower royalty contribution reduced overall gross margin and earnings despite higher sales.
- For nine months, SG&A rose 9% to $11.790 million, primarily reflecting commissions and incentives, higher staffing costs, and bad debt expense in Service and System Integration. Systems SG&A included $0.3 million of proxy-contest legal and consulting costs.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $20.246 million at June 30, 2013, down $0.247 million from September 30, 2012. Current assets were $42.224 million and current liabilities were $16.432 million.
- Operating cash flow was $1.605 million for the nine months, compared with $3.431 million in 2012. Investing cash use was $0.856 million, including $0.675 million of property and equipment purchases; financing cash use was $0.920 million, including $1.034 million of dividends.
- Cash flow included collection of a $2.172 million officer life-insurance settlement receivable and a $1.060 million inventory reduction; accounts payable and accrued expenses decreased $1.955 million.
- The balance sheet reports no borrowings line; the filing does not provide a clear total-debt figure. It reports $64,000 of interest expense for the nine months. Pension and retirement liabilities totaled $9.827 million, including $9.128 million classified as long term.
- Foreign subsidiaries held approximately $9.3 million of cash, which management considers permanently reinvested and not available for U.S. activities without potentially unfavorable tax consequences. Management said cash, operating cash generation and available credit lines should cover foreseeable working-capital and capital-expenditure needs, while cautioning that additional financing may not be available on acceptable terms if needed.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management highlighted rapid technology change, new-product requirements and short product life cycles as risks to business performance.
- Management attributed weaker profitability mainly to lower royalty revenue and a less favorable contribution from the high-margin Systems segment. Service and System Integration margins improved year over year for the nine-month period, but overall company gross margin declined.
- Customer concentration is material: in the nine months, three customers accounted for 19%, 15% and 12% of revenue, respectively. Sales also shifted geographically, with Americas revenue up 27% and Europe revenue down 25% year over year.
- The company maintained a substantial valuation allowance against U.K. deferred tax assets because of cumulative losses and uncertainty about future taxable profits. The nine-month effective tax rate was 51%, versus 34% in 2012.
- The board declared dividends totaling $0.30 per share during the nine months. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether royalty revenue resumes, and how its absence or variability affects Systems revenue and consolidated margins.
- Whether U.S. hosting-customer growth can offset weaker demand and customer declines in Germany, the U.K. and defense-related business.
- Customer concentration, order timing and the sustainability of the nine-month revenue increase.
- Cash availability for U.S. operations given foreign cash restrictions, dividend payments, pension obligations and capital needs.
- The assumptions underlying the U.K. deferred-tax-asset valuation allowance and the elevated interim tax rate.