| • FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • XBRL INSTANCE • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION • XBRL TAXONOMY EXTENSION DEFINITION • XBRL TAXONOMY EXTENSION LABELS • XBRL TAXONOMY EXTENSION PRESENTATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Commission File Number 0-10843
CSP Inc.
(Exact name of Registrant as specified in its Charter)
43 Manning Road
Billerica, Massachusetts 01821-3901
(978) 663-7598
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 7, 2012, the registrant had 3,428,676 shares of common stock issued and outstanding.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
See accompanying notes to unaudited consolidated financial statements.
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CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)
See accompanying notes to unaudited consolidated financial statements.
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CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Nine Months Ended June 30, 2012:
(Amounts in thousands)
See accompanying notes to unaudited consolidated financial statements.
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CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
See accompanying notes to unaudited consolidated financial statements.
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CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 2012 AND 2011
Organization and Business
CSP Inc. was founded in 1968 and is based in Billerica, Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSP Inc. and its subsidiaries (collectively “CSPI” or the “Company”) develop and market IT integration solutions and high-performance cluster computer systems. The Company operates in two segments, its Systems segment and its Service and System Integration segment.
The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted. Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates under different assumptions or conditions.
Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income by the assumed weighted average number of common shares outstanding.
We are required to present earnings per share, or EPS, utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.
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Basic and diluted earnings per share computations for the Company’s reported net income attributable to common stockholders are as follows:
All anti-dilutive securities, including stock options, are excluded from the diluted income per share computation. For the three and nine months ended June 30, 2012, 195,000 and 198,000 options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive.
4. Inventories
Inventories consist of the following:
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not been met, of approximately $1.0 million and $3.4 million as of June 30, 2012 and September 30, 2011, respectively.
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.4 million and $4.3 million as of June 30, 2012 and September 30, 2011, respectively.
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5. Accumulated Other Comprehensive Loss
The components of comprehensive income (loss) are as follows:
The components of Accumulated Other Comprehensive Loss are as follows:
6. Pension and Retirement Plans
The Company has defined benefit and defined contribution plans in the United Kingdom, Germany and the U.S. In the United Kingdom and Germany, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain current and former employees. The domestic supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. Domestically, the Company also provides for officer death benefits through post-retirement plans to certain officers. All of the Company’s defined benefit plans are closed to newly hired employees and have been for the two years ended September 30, 2011 and for the nine months ended June 30, 2012.
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.
Our pension plan in the United Kingdom is the only plan with plan assets. The plan assets consist of an investment in a commingled fund which in turn comprises a diversified mix of assets including corporate equity securities, government securities and corporate debt securities.
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The components of net periodic benefit costs related to the U.S. and international plans are as follows:
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7. Segment Information
The following table presents certain operating segment information.
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Profit (loss) from operations is sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by either non-operating charges/income or by income taxes. Non-operating charges/income consists principally of investment income and interest expense. All intercompany transactions have been eliminated.
The following table lists customers from which the Company derived revenues in excess of 10% of total revenues for the three and nine month periods ended June 30, 2012, and 2011.
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8. Fair Value Measures
Assets and Liabilities measured at fair value on a recurring basis are as follows:
These assets are included in cash and cash equivalents in the accompanying consolidated balance sheets. All other monetary assets and liabilities are short-term in nature and approximate their fair value. The Company did not have any transfers between Level 1, Level 2 or Level 3 measurements.
The Company had no liabilities measured at fair value as of June 30, 2012 or September 30, 2011. The Company had no assets or liabilities measured at fair value on a non recurring basis as of June 30, 2012 or September 30, 2011.
Pursuant to prior authorizations by the Board of Directors, the Company repurchased approximately 28 thousand shares of its outstanding common stock during the nine months ended June 30, 2012. As of June 30, 2012, approximately 201 thousand shares remain authorized for repurchase under the Company’s stock repurchase program.
On January 12, 2012, our Board of Directors declared a cash dividend of $0.10 per share which was paid on February 3, 2012 to stockholders of record as of January 27, 2012, the record date. On August 7, 2012, our board of directors declared a cash dividend of $0.12 per share payable on August 31, 2012 to stockholders of record as of August 23, 2012, the record date.
11. Income Taxes
We follow the applicable accounting provisions which clarify the accounting for uncertainty in income tax positions. These provisions require us to recognize in the consolidated financial statements only those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit.
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As of June 30, 2012, the total amount of uncertain tax liabilities was $417 thousand, all of which would affect our effective tax rate if recognized. We recognize interest and potential penalties accrued related to unrecognized tax benefits in our provision for income taxes.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
We file income tax returns in the U.S. federal jurisdictions and various state and foreign jurisdictions. The Internal Revenue Service has completed an examination of fiscal year 2007, which did not result in any tax adjustment relating to our uncertain tax positions. The Company has reviewed the tax positions taken on returns filed domestically and in its foreign jurisdictions for all open years, generally fiscal 2008 through 2011, and believes that tax adjustments in any audited year will not be material, except for the uncertain tax position described above.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The discussion below contains certain forward-looking statements related to, among others, but not limited to, statements concerning future revenues and future business plans. In addition, forward-looking statements include statements in which we use words such as “expect,” “believe,” “anticipate,” “intend,” or similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure you that these expectations will prove to have been correct, and actual results may vary from those contained in such forward-looking statements.
Markets for our products and services are characterized by rapidly changing technology, new product introductions and short product life cycles. These changes can adversely affect our business and operating results. Our success will depend on our ability to enhance our existing products and services and to develop and introduce, on a timely and cost effective basis, new products that keep pace with technological developments and address increasing customer requirements. The inability to meet these demands could adversely affect our business and operating results.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, income taxes, deferred compensation and retirement plans, estimated selling prices used for revenue recognition and contingencies. We base our estimates on historical performance and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies is contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview of the nine months ended June 30, 2012 Results of Operations
Highlights include:
The following table details our results of operations in dollars and as a percentage of sales for the nine months ended June 30, 2012 and 2011:
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Sales
The following table details our sales by operating segment for the nine months ended June 30, 2012 and 2011:
As shown above, total revenues increased by approximately $5.4 million, or 10%, for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. Revenue in the Systems segment increased for the current year nine month period versus the prior year nine month period by approximately $2.4 million, while revenues in the Service and System Integration segment increased by approximately $3.0 million.
Product revenues increased by approximately $0.8 million, or 2%, for the nine months ended June 30, 2012 compared to the comparable period of the prior fiscal year. Product revenues in the Service and System Integration segment increased by approximately $1.8 million while in the Systems segment product revenue decreased by approximately $1.0 million for the nine month period ended June 30, 2012 versus the nine month period ended June 30, 2011.
In the US division of the Service and System Integration segment, product sales decreased by approximately $2.9 million, offset by increases in sales in this segment’s German division of approximately $3.5 million and in the UK division of approximately $1.2 million.
In the US division, sales to several of the Company's prior year largest customers decreased by a total of approximately $5.6 million. This decrease was offset by increased product sales to two newly acquired IT infrastructure hosting company customers of approximately $1.8 million, and an increase of $0.9 million in product sales to a newly acquired university customer.
In Germany, the $3.5 million increase was net of an unfavorable foreign currency impact of approximately $0.8 million, therefore on a volume basis in constant dollars the increase was approximately $4.3 million. This sales volume increase was driven by increased sales to the division’s largest customer, a large UK-based wireless carrier, of approximately $3.6 million, and an overall increase to two new customers of $4.0 million. There can be no assurance that there will be significant sales to either or both of these customers in the future. These increases were offset by decreases to three of the divisions long-term customers. The aggregate decrease in sales volume to these three customers amounted to approximately $3.6 million. The increase in sales in the UK division was the result of increased third party product sales versus the prior year. This was the result of the Company's efforts to start up a third-party reseller business, offering a wider array of third-party technology products within the UK operation.
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The decrease in product revenues in the Systems segment of approximately $1.0 million was due to a decrease in sales to our Japanese defense department customer of approximately $0.3 million, and a decrease of $0.7 million in sales of parts, components and spares to existing US defense department customers.
As shown in the table above, service revenues increased by approximately $4.6 million, or 32%. This increase was made up of an increase in the Systems segment of $3.4 million and an increase in the Service and System Integration segment of approximately $1.2 million. The increase in the Systems segment service revenue was due to higher royalty income recorded in the nine months ended June 30, 2012 which was approximately $5.0 million versus $1.6 million for the nine months ended June 30, 2011. The increase in service revenues in the Service and System Integration segment was primarily from the German division, where service revenue increased by approximately $1.4 million, offset by relatively minor decreases in service revenues of approximately $0.1 million in each of the US and UK divisions. In Germany, there was an unfavorable currency fluctuation impact to service revenues of approximately $0.6 million, therefore sales volume in constant dollars increased by approximately $1.9 million. This increase in sales volume was driven by increased service revenues to the German division's largest customer, a UK-based wireless carrier, of approximately $2.6 million, offset by decreases in service revenues of approximately $0.7 million of all other customers combined.
Our sales by geographic area, based on the location to which the products were shipped or services rendered, are as follows:
The decrease in Americas revenue for the nine months ended June 30, 2012 versus the nine months ended June 30, 2011 was primarily the result of the fluctuations described above in the Systems segment where combined product and service sales to US customers increased by an aggregate $2.7 million while in the US division of the Service and System Integration segment, sales to customers in the Americas were lower by approximately $3.3 million.
The increase in sales in Europe was primarily the result of the higher sales described above from the German and UK divisions of the Service and System Integration segment. The decrease in Asia sales was the result of the decrease in sales to our existing customer that supplies a large Japanese defense program (see discussion above).
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Cost of Sales and Gross Margins
The following table details our cost of sales by operating segment for the nine months ended June 30, 2012 and 2011:
Total cost of sales increased by approximately $3.1 million when comparing the nine months ended June 30, 2012 versus the nine months ended June 30, 2011. This increase in cost of sales of 7% overall is consistent with the increase in sales of 10% overall as described previously. The resulting higher gross profit margin ("GPM") of 24% for the nine months ended June 30, 2012 versus 22% for 2011 was due to several factors which are discussed below.
In the Service and System Integration segment, the overall GPM was 16% for the nine months ended June 30, 2012 versus 17% for the prior year nine month period. Product GPM in the segment increased from 13% for the nine months ended June 30, 2011, to 14% for the nine months ended June 30, 2012, while the segment’s service GPM decreased from 28% to 24% . The product GPM increase was due to a more favorable product mix in the current year nine month period versus the prior year. Current year product sales included more networking and data security products as opposed to sales of servers and other lower margin products in the prior year nine month period in both the US and German divisions. The decrease in service GPM in the Service and System Integration segment from 28% for the nine month period ended June 30, 2011 to 24% for the nine months ended June 30, 2012 was due to several factors including greater use of contractors versus in-house resources particularly in Germany and lower third party maintenance revenue for which the Company is not the primary obligor, in the nine months ended June 30, 2012 versus the nine months ended June 30, 2011. (Note, third party maintenance for which the Company is not the primary obligor is recorded at net value, with no cost of sales.)
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In the Systems segment, the overall GPM increased from 67% to 75% as shown in the table above. This was because in the current year nine month period, royalty revenue, which carries a 100% GPM, made up a much greater percentage of total Systems segment revenue (63%), versus the prior year nine month period royalty revenue which was 29% of total system segment revenue. Offsetting the favorable GPM impact of the greater royalty revenue in the current year nine month period, however, was the impact of significantly lower product GPM in the current nine month period versus the prior year. As shown in the table above, the GPM on product sales was only 30% for the current year nine month period versus the prior year product GPM of 55%. The reason for this is because in the current nine month period the low volume of production and product sales resulted in insufficient absorption of fixed factory overhead, therefore these fixed costs were proportionately higher versus production and sales volume, which resulted in the low GPM on product sales in the current year nine month period. In addition, we incurred significantly higher nonrecurring engineering charges for re-tooling and other services from our outside fabrication houses for the nine months ended June 30, 2012 versus the prior year nine month period.
Engineering and Development Expenses
The following table details our engineering and development expenses by operating segment for the nine months ended June 30, 2012 and 2011:
The $0.2 million decrease in engineering and development expenses displayed above was due to lower engineering consulting expenditures in connection with the development of the next generation of MultiComputer products in the Systems segment.
Selling, General and Administrative
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the nine months ended June 30, 2012 and 2011:
The increase in SG&A expense in both segments was primarily the result of an increase in bonus and commission expense owing to the more favorable revenue, gross profit and overall operating results for the nine months ended June 30, 2012 versus the comparable period in the prior year.
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Other Income/Expenses
The following table details our other income/expenses for the nine months ended June 30, 2012 and 2011:
Other income (expense), net, for the nine month periods ended June 30, 2012 and 2011was not significant nor was the change from the prior year nine month period to that of the current year.
Overview of the three months ended June 30, 2012 Results of Operations
Highlights include:
The following table details our results of operations in dollars and as a percentage of sales for the three months ended June 30, 2012 and 2011:
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Sales
The following table details our sales by operating segment for the three months ended June 30, 2012 and 2011:
As shown above, total revenues increased by approximately $3.6 million, or 19%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Revenue in the Systems segment increased for the current year three month period versus the prior year three month period by approximately $1.8 million, while revenues in the Service and System Integration segment increased by approximately $1.7 million.
Product revenues increased by approximately $1.6 million, or 11%, for the three months ended June 30, 2012 compared to the comparable period of the prior fiscal year. This change in product revenues was made up of an increase in product revenues in the Service and System Integration segment of approximately $1.8 million and an offsetting decrease in product revenues in the Systems segment of approximately $0.2 million for the three month period ended June 30, 2012 versus the three month period ended June 30, 2011.
The increase in the Service and System Integration segment product sales of approximately $1.8 million was due primarily to an increase in sales in this segment’s German division of approximately $1.9 million and in the UK division of approximately $0.2 million, offset by a decrease in product sales in the US division of the segment of approximately $0.3 million.
In Germany, the $1.9 million increase was net of an unfavorable foreign currency fluctuation impact of approximately $0.5 million, with respect to the change in product revenues. On a sales volume basis in constant dollars the increase was approximately $2.5 million. This sales volume increase was driven by increased sales to the division’s largest customer, a large UK-based wireless carrier, of approximately $1.1 million, and an overall increase to two new customers of approximately $3.3 million. There can be no assurance that there will be significant sales to either or both of these customers in the future. These increases were offset by decreases to two of the divisions long-term customers. The aggregate decrease in sales volume to these two customers amounted to approximately $1.9 million. The increase in sales in the UK division was the result of increased third party product sales versus the prior year. This was the result of the Company's efforts to start up a third-party reseller business offering a wider array of third-party technology products within the UK operation.
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In the US division, sales to three of its prior year largest customers decreased by a total of approximately $2.0 million. This decrease was off set by increased product sales to two newly acquired university customers of approximately $0.9 million, an increase of $0.4 million in product sales to two newly acquired IT infrastructure hosting company customers and an increase in sales to one of the division's large banking industry customers of $0.2 million.
The decrease in product revenues in the Systems segment of approximately $0.2 million resulted primarily from higher sales to our Japanese defense department customer which increased by approximately $0.9 million when comparing the quarter ended June 30, 2012 to the quarter ended June 30, 2011. Sale of parts, components and spares into existing programs to our US defense department customers decreased by approximately $1.1 million.
As shown in the table above, service revenues increased by approximately $2.0 million, or 48%. This increase was made up of an increase in Systems segment service revenues of approximately $2.0 million. Service revenues in the Service and System Integration segment were essentially unchanged from the year-ago third quarter. The increase in Systems segment service revenues was due to royalty income recorded in the three months ended June 30, 2012 of approximately $2.0 million versus no royalty for the three months ended June 30, 2011.
Our sales by geographic area, based on the location to which the products were shipped or services rendered, are as follows:
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