CSP Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. This is an annual report, not a standalone fourth-quarter report. Filed January 13, 2012.
Business context
CSP Inc. operates two segments: Systems, which develops and sells high-performance cluster computers, and Service and System Integration, which provides IT integration, resale, consulting and managed services. The latter generated 89% of fiscal 2011 sales.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010, restated |
|---|---|---|
| Revenue | $73.645 million | $90.112 million |
| Gross profit / margin | $16.369 million / 22% | $17.191 million / 19% |
| Operating income | $0.809 million | $1.142 million |
| Net income | $0.369 million | $0.914 million |
| Diluted EPS | $0.10 | $0.25 |
| Cash from operating activities | $1.543 million | $(1.931) million |
| Cash and cash equivalents at year-end | $15.874 million | $15.531 million |
Revenue declined 18%, primarily due to a $16.0 million decrease in Service and System Integration sales, including reduced purchases by two major U.S. customers. Systems sales declined 6% to $7.822 million. Gross margin improved mainly because the integration segment had a better sales mix and improved service-resource utilization; Systems margin eased to 65% from 67%.
Current assets were $37.878 million and current liabilities $15.870 million. The company had no outstanding borrowings under its credit lines, which permitted up to $2.5 million in borrowing. Cash held by foreign subsidiaries was approximately $5.6 million and management considered it permanently reinvested, limiting its availability for U.S. purposes. Pension and retirement plan liabilities totaled $9.765 million.
Material changes, outlook and risks
- Restatement: The company restated fiscal 2010 and the first three fiscal 2011 quarterly statements for revenue and cost-of-sales presentation. Third-party maintenance and support sales for which CSP was not the primary obligor must be reported net; certain other services were reclassified from product to service revenue. Fiscal 2010 sales decreased by $4.906 million as restated. The company stated the adjustments did not affect gross profit, pretax income, net income, cash flow, assets, liabilities or equity.
- Controls: Management identified a material weakness in internal control over financial reporting related to applying principal-agent revenue guidance and concluded controls were ineffective at September 30, 2011. Management described transaction data-mining and review procedures intended to address the issue beginning in fiscal 2012. Disclosure controls were separately assessed as effective. The auditor did not attest to internal control effectiveness.
- Outlook: Management planned for relatively weak Service and System Integration demand in fiscal 2012 and intended to prioritize higher-margin business, while acknowledging possible pressure on sales growth. It expected additional significant FastCluster 3000-series orders in fiscal 2012 and beyond; no quantified revenue or earnings guidance was provided.
- Concentration and execution risks: Two customers represented 14% and 12% of fiscal 2011 revenue. Defense sales were approximately 10% of consolidated revenue and virtually all Systems segment sales. Results are also exposed to order timing, competition, economic conditions, technology changes, and sole-source component suppliers.
- Contingency: A former customer’s bankruptcy estate alleged approximately $1.3 million in preferential or avoidable transfers. CSP said it had a strong defense but accrued an estimated $0.1 million loss.
- Other items: CSP repurchased approximately 165,700 shares for $0.645 million during fiscal 2011. After year-end, the board declared a $0.10-per-share cash dividend; the filing cautions this does not imply future dividends.
Important facts for investors to verify
- Review the restated comparative statements and the planned remediation of the material weakness, including whether the controls operate effectively in subsequent filings.
- Assess whether revenue and margins stabilize as the company shifts toward higher-margin business, and whether the anticipated Systems orders materialize.
- Track dependence on major customers and defense programs, as well as supplier availability and backlog conversion.
- Evaluate cash accessibility, pension obligations, foreign-currency exposure and the outcome of the bankruptcy-related claim.
- Confirm subsequent-period results and any amendments to the first three fiscal 2011 quarterly reports, which the company said it planned to file by March 2, 2012.