CSP Inc.
Q3 2010 Earnings Call Transcript

Published: 5 Aug 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to CSP Inc.’s third-quarter fiscal year 2010 conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference call. (OPERATOR INSTRUCTIONS.) I would now like to turn the call over to Mr. Gary Levine, CSP’s chief financial officer. Please proceed, Gary.

[Gary Levine:]

Thank you, and good morning, everyone. With me on the call today is our chairman, president and chief executive officer, Alex Lupinetti. I’ll take you through our third-quarter financial results, and then Alex will review our operations before we take your questions. But first, our safe harbor statement. During the call, we will take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 with respect to statements that may be deemed to be forward-looking under the Act. The Company cautions that numerous factors could cause actual results to differ materially from forward-looking statements made by the Company. Such risks include general economic conditions, market factors, competitive factors and pricing pressures, and others described in the Company’s filings with the SEC. Please refer to the section on forward-looking statements included in the Company’s filings with the Securities and Exchange Commission. With that, let’s get right into our financial review. We reported another quarter of excellent top- and bottom-line results for the third quarter of fiscal 2010. Our total third-quarter sales were 28.6 million dollars, an increase of 53% from Q3 of fiscal 2009, and up 19% compared with the sequential second quarter. The revenue growth for the quarter was primarily driven by increased sales at our Service and Systems Integration’s U.S. subsidiary as well as increased royalty payments in our Systems segment from Lockheed Martin. Our strong sales growth was partially offset by a negative foreign exchange effect of approximately 500,000 dollars due to the strong U.S. dollar in Q3 2010 versus Q3 2009. CSP’s total cost of sales for Q3 increased year over year to 23.7 million dollars from 15.8 million dollars in Q3 2009 due to higher sales volumes. Gross profit for the quarter increased 73% to 4.9 million dollars as a result of volume leverage and improved gross margins in our Systems segment, which was due to increased high-margin royalty payments. Overall gross margin increased 200 basis points to 17% from 15% a year ago. Our increase in gross profit would have been greater, but was negatively affected by a 306,000 dollar settlement agreement, which was recorded in cost of goods sold. The settlement was the result of a pricing dispute with one of MODCOMP’s largest vendors. Third-quarter Engineering and Development expense of approximately 500,000 dollars was essentially flat on a real dollar basis year over year, but was down as a percentage of sales from 2.8% last year to 1.7% in fiscal 2010. Our target range for Engineering and Development expenses is 2.4% to 2.6% of sales. SG&A expenses increased by 12% on a real-dollar basis to 3.7 million dollars in the quarter. This primarily reflected higher commissions paid and bonus expenses on increased profits. SG&A was 13.1% of sales in Q3 of fiscal 2010, compared with 17.9% of sales in Q3 last year. Our target range for SG&A expense is in the range of 18.0% to 18.4%. Other income in the third quarter of 2010 was an expense of 10,000 dollars compared with an expense of 23,000 dollars in Q3 last year. Our income tax rate was 15% in the third quarter. The low rate was the result of a reversal of an accrual for a significant FIN 48 item for an uncertain tax position. This decreased our federal tax expense in the quarter. We expect our effective tax rate will be approximately 40% for the fourth quarter. For the third quarter, we reported net income of 621,000 dollars, or 17 cents per share on a diluted basis, compared with a net loss of 752,000 dollars, or 21 cents per share, in the third quarter of fiscal 2009. Let’s now turn to the balance sheet . . . Cash and short-term investments decreased by approximately 1.1 million dollars, from 18.9 million dollars at fiscal year end September 30, 2009 to 17.8 million dollars as of June 30, 2010. The year-over-year decrease was due to changes in working capital as well as the effect of foreign exchange. Cash increased sequentially by 5.5 million dollars from the second quarter as a result of lower receivables. CSPI’s cash position can vary significantly from quarter to quarter due to the high working capital requirements needed to fund large projects at both our Systems and our Services and Systems Integration segments. We are pleased with our financial performance as we head into our fourth quarter of fiscal 2010. Going forward, we will continue to run the company with a cautious approach, tightly managing our expenses and focusing on efficient working capital management, with the goal of driving long-term profitable growth. With that, I’ll now turn the call over to Alex.

[Alex Lupinetti:]

Thanks Gary. And welcome to our call this morning. This was a very good quarter for CSP. We performed well financially and continued to execute our strategic plan. While our 53% year-over-year sales growth compares to a weak Q3 a year ago, we are pleased to have reported a 19% sequential increase in revenues – the third-straight quarter of sequential growth. Both of our operating segments performed very well during the quarter. The growth in our Systems segment, which consists of our MultiComputer business, was primarily driven by an increase in royalties from Lockheed Martin. Our MultiComputer business focuses on very high speed digital signal processing for defense electronics applications, including advanced radar in the intelligence, surveillance and reconnaissance, or ISR, space. During the quarter, we received about 1.6 million dollars in royalty payments for radar processing systems from Lockheed Martin for the E2D Advanced Hawkeye ISR aircraft. The payments are for aircraft being built as part of the Low Rate Initial Production Phase or LRIP. We expect to receive another 1.6 million dollars in royalty payments before year end, based on the current production schedule. Our Systems segment sells exclusively to the major prime contractors that sell to the U.S. Defense Department. Due to the ongoing global war on terror and the wars in Afghanistan and Iraq, there is reason to believe that the Defense Department will continue to invest in intelligence, surveillance and reconnaissance strategic programs to maintain our Nation’s military leadership. The E2D aircraft project is a great example of the DOD’s focus on ISR. We believe that our ongoing investments in technology positions CSP to capitalize on future ISR opportunities. CSP’s Service and Systems Integration segment also reported an excellent quarter. This segment includes our MODCOMP subsidiary, which provides solutions and services for complex IT environments that include storage and servers, network security, unified communications and consulting and managed services. The IT demand environment has improved and we have capitalized on our superb technical expertise and the ability to solve our customers’ complex IT problems. As Gary mentioned, our 54% year-over-year revenue growth was the result of increased sales at our U.S. Systems and Solutions division. SSD sales growth was primarily driven by two major projects in the quarter