CSP Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Financial statements are unaudited. Unless stated otherwise, results below are continuing operations; Germany’s Technology Solutions business is reported as discontinued operations.
Business context and key financials
CSPi provides IT integration, security and managed services, network adapters, 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 rounded to millions.
| Metric | Three months ended June 30, 2018 | Prior-year quarter | Nine months ended June 30, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $20.04 million | $26.43 million | $53.28 million | $60.13 million |
| Gross profit / margin | $5.21 million / 26% | $6.15 million / 23% | $13.56 million / 25% | $14.36 million / 24% |
| Operating income (loss) | $0.22 million | $1.34 million | $(0.48) million | $1.70 million |
| Net income (loss), continuing operations | $0.43 million | $0.93 million | $(1.29) million | $1.22 million |
| Net income (loss), including discontinued operations | $0.003 million | $0.70 million | $(1.79) million | $1.08 million |
At June 30, cash and cash equivalents from continuing operations were $10.42 million, versus $10.42 million at September 30, 2017. The balance sheet reports total assets of $58.96 million, total liabilities of $40.89 million, and shareholders’ equity of $18.07 million. No separate debt balance is clearly presented. Current assets and liabilities include substantial Germany held-for-sale balances.
For the nine months, net cash provided by operating activities was $1.02 million including discontinued operations; continuing operations used $0.11 million, compared with providing $4.50 million in the prior-year period. Investing activities used $0.57 million and financing activities used $1.22 million, including $1.32 million of dividends. Interest expense was $0.06 million for the nine months.
Material changes and management commentary
- Quarterly revenue declined 24%; the company attributed most of the decrease to lower TS product sales, including prior-year sales to a major U.S. customer that did not recur. TS service revenue grew, partly offsetting the product decline.
- Nine-month revenue fell 11%. HPP revenue declined 22%, principally because high-speed processing board royalties were lower; TS revenue declined 9%, as product revenue weakness outweighed service growth.
- Quarterly gross margin percentage improved to 26% from 23%, helped by a greater contribution from higher-margin TS services. Nine-month gross margin rose to 25% from 24%, but gross profit dollars fell. HPP’s nine-month gross margin percentage declined to 60% from 67% as royalty revenue decreased.
- Engineering and development expense increased, primarily for development of new ARIA security products, including higher engineering headcount and consulting costs. Nine-month SG&A also rose, particularly in TS.
- Foreign-exchange gains contributed $0.42 million to quarterly other income and $0.31 million for the nine months. The nine-month tax expense included approximately $1.14 million of provisional Tax Act charges: $0.49 million for deferred-tax remeasurement and $0.65 million for deemed repatriation.
Sale, outlook, and risks
On June 27, 2018, CSPi agreed to sell its German TS subsidiary to Reply AG for €10.0 million, subject to adjustments. The sale closed July 31, 2018; CSPi reported receiving approximately €12.343 million at closing, including an adjustment for net cash. Germany generated a $0.50 million net loss for the nine months and is presented as discontinued operations. The filing does not provide specific revenue or earnings guidance. Management said available cash, operating cash generation, credit-line availability, and sale proceeds were expected to cover working capital and capital spending for at least 12 months from the filing date.
Management identified customer concentration, dependence on U.S. federal contracts, reliance on certain single-source suppliers, competition, the German sale, and U.S. tax-law changes as risks. Disclosure controls were deemed ineffective as of June 30 because management could not conclude that a previously identified material weakness had been remediated. The weakness concerned foreign-subsidiary revenue recognition, including whether recognition criteria were met and whether transactions were reported gross or net. Remediation efforts included enhanced corporate review; management said evaluation and improvement work would continue.
Important facts for investors to verify
- Whether revenue-recognition control remediation is completed and independently validated.
- The final accounting and net proceeds from the German subsidiary sale, including any closing or post-closing adjustments.
- How recurring TS service growth and development of ARIA products affect revenue, margins, and cash generation after Germany’s divestiture.
- The final impact of provisional Tax Act estimates and the company’s liquidity and credit-line availability.
- Customer concentration and the timing or recurrence of large customer orders and HPP royalty revenues.