CSP Inc. (CSPI): How I Voted – Proxy Score 100

The CSP (CSPI) annual shareowners meeting is coming up February 11, 2014, so there isn’t much time to vote. Since most readers are not familiar with this obscure company, I’ll start with a description from GMI Ratings:

CSP Inc. (CSPI) along with its subsidiaries, develops and markets information technology (IT) integration solutions and high-performance cluster computer systems. The Company operates in two segments: Systems segment and Service and System Integration segment. The Systems segment consists primarily of CSPI’s MultiComputer Division (the MultiComputer Division), which designs and manufactures commercial high-performance computer signal processing systems for a variety of complex real time applications in defense and commercial markets. The Service and System Integration Segment consists of the computer maintenance and integration services and third-party computer hardware and software value added reseller (VAR) businesses of its Modcomp subsidiary (Modcomp). In November 2013, CSP Inc acquired Myricom Inc.

CSPI is small, with market capitalization of $28.6 million. Using Wikipedia’s rule of thumb, that makes CSPI a nano-cap. As such, my usual sources for voting advice, like ProxyDemocracy.org, don’t provide much coverage so I turned to Brett Davidson, who for several years published the CSPI Shareholder Forum and was active in pushing for corporate governance reforms. What follows is a good part of his response, which I’ll categorize as a guest post:

Since my meeting with the BOD, the company has taken a number of shareholder friendly actions.  They instituted my proposal to declassify the BOD.  They issued several onetime dividends and then instituted a $.10 quarterly dividend.  At the time it created a yield of more than 7%.  The company recently raised the dividend to $.11 quarterly and the dividend yield is currently 5.5%.  The company previously adopted a mandatory retirement age of 75 for directors.  One director left during the year and two others aged out.  I have no experience with the new directors.  I do have a good relationship with the Chairman (Shelton James) and consider him the likely driving force behind the governance changes.

The dividend acts as an incentive for the company to take some chances and go out and make some money.  The company will have the guaranteed royalty income nearly assuring that they will be profitable for the next 6 to 8 years and that should be more than enough to cover the dividend. If the Service and System Integration business segment shows any weakness the company could see income drop below the dividend coverage rate and the cash hoard start to drop.  Accumulating cash is not the greatest incentive to aggressively pursuing new income opportunities. However, it is an extremely good sign that a company that guarded their cash hoard so vigorously for years is now paying out a healthy dividend.  The coming performance and the strong dividend will likely drive shares appreciably higher in the next two years.

Without a strong track record, I am voting for all of the directors.  Like I stated above, I attribute much of the current change in attitude to the Chairman and he definitely gets my vote.  I am supporting the new CEO as a director since he is not the Chairman and because his performance has warranted support.  For example, he acquired some assets of a tech company that produces equipment CSPI uses in producing some of their systems.  The newly acquired business also has sales to other unrelated customers and creates an entirely new sales channel for the company.  The CEO is aggressively pursuing cross selling opportunities among the company’s two divisions.

I am also supporting the company’s employee stock purchase plan, since I favor of employees having a stake in the company they work for.  It creates more engaged employees.  The 15% discount has pros and cons, but in my view it is like a raise for employees and the company will hopefully get increased productivity in return.

I am voting to approve the compensation of the NEOs.  The CEO has performed well in a difficult year for the company.  Revenue increased 3% and the company remained profitable with no royalty revenues in 2013.  The CEO’s pay package certainly warrants close monitoring due to the fact that it is near $1 million, which is moving towards the high side for a company with $85 million in revenue and market cap of less than $30 million.  I believe part of the reason for the pay level is the fact that the company is headquartered in Boston, with the resulting steep cost of living.  I do like the fact that much of his bonus was paid in cash and relatively little was in options.  I frown on the use of options.  Because they use no cash, they are too often given out way too generously.

So there you have it.  That is how and why I am voting my CSPI shares. I have not been updating the CSPI Shareholder Forum.  My work is pretty much done.  I am probably going to take the site down soon.

Glancing at some more GMI data, I see average length of tenure for directors at CSPI is 8.6 years. Last year it was 14.5 and the industry average is 7.9, so they have moved dramatically in the right direction on the refreshment issue. One of the appointments was a woman, so maybe they will get more diverse thought and experience. I’m going with Davidson’s recommendations; voting with management 100%. I bought into CSPI after learning of Davidson’s involvement. He knows a lot more about the company than I do, so the decision is not difficult. However, compare my vote this year to last year (CSPI: How I Voted – Proxy Score 0%). What a difference a year can make!

According to the proxy:

In order for a proposal of one of our stockholders to be considered for inclusion in our proxy statement and proxy card for our 2015 Annual Meeting of Stockholders, the proposal must comply with SEC Rule 14a-8 and any other applicable rules and must be submitted to our corporate secretary at our executive offices located at 43 Manning Road, Billerica, Massachusetts 01821 at least 120 days prior to the anniversary date of this proxy statement. This proxy statement is dated January 3, 2014, so the date by which proposals must be received under Rule 14a-8 will be September 5, 2014.

CSPI appears to be in the right track but improvements in corporate governance probably could be made.  I’ve marked my database with the proposal deadline. If you have any ideas, please let me know.

Hybrid guest post: Brett Davidson is the publisher of the market beating Investletter investment advisory newsletter.  He strives to fashion himself as a real activist investor, like the Jim McRitchie’s of the world.  To take a look at a sample of his past performance and back issues of the newsletter surf on over to www.investletter.com. 

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