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| CSPI > SEC Filings for CSPI > Form 10-K on 29-Dec-2008 | All Recent SEC Filings |
29-Dec-2008
Annual Report
The discussion below contains certain forward-looking statements related to, among others, but not limited to, statements concerning future revenues and future business plans. Actual results may vary from those contained in such forward-looking statements.
Overview of Fiscal 2008 Results of Operations
CSP Inc. operates in two segments:
• Systems-the Systems segment consists of our MultiComputer Division which designs, develops and manufactures signal processing computer platforms that are used primarily in military applications and the PCDA proprietary hardware business of our Modcomp division.
• Service and System Integration-the Service and System Integration segment includes the computer systems' maintenance and integration services and third-party computer hardware and software products businesses of our Modcomp subsidiary.
Highlights include:
• Revenue decreased by approximately $17.3 million, or 18%, to $76.8 million for the year ended September 30, 2008 versus $94.0 million for the year ended September 30, 2007.
• Operating income decreased by approximately $8 million, or 122%, to an operating loss of approximately $1.5 million for the year ended September 30, 2008 versus operating income of $6.6 million for the year ended September 30, 2007.
• Net income decreased by approximately $4.5 million, or 110%, to a net loss of approximately $407 thousand for the year ended September 30, 2008 versus net income of approximately $4.0 million for the year ended September 30, 2007.
• Net cash used by operations was approximately $280 thousand for the year ended September 30, 2008 compared to net cash provided by operations of $9.4 million for the year ended September 30, 2007.
The reduction in revenues of $17.3 million was substantially due to lower revenues in our Systems division where revenues were down by approximately $17.2 million versus the year ended September 30, 2007. In fiscal year 2007, we shipped the largest contract awarded to us in the Company's history, in the Multicomputer Division. This was a contract for Fast Cluster 220R systems from Raytheon Corporation, which totaled approximately $18.1 million in revenue for the year ended September 30, 2007. Sales to Raytheon were minimal for the year ended September 30, 2008.
Also in fiscal 2008 we were engaged in significant research and development efforts in the Systems segment making significant progress toward developing and launching our newest product line, the Fast Cluster Series 3000, which is designed to provide what we believe is the most advanced interconnect technology available today. The 3000 SERIES will provide our customers with another state-of-the-art, fully ruggedized open source system, which will be essential to our future growth opportunities.
We expect Systems segment revenues for fiscal year 2009 to be stronger than fiscal year 2008 revenues. However we do not expect that Systems segment revenues will return to the levels that we were able to realize in fiscal 2007. We are currently working with several of our long-standing customers, and additional prospects, in an effort to secure program wins for our next generation 3000 SERIES product line, for which there are a number of considerable opportunities. In addition, we continue to explore opportunities to further supply existing programs and new programs with our 2000 SERIES product line.
Revenues in the Service and System Integration segment in fiscal 2008 were $71.8 million versus fiscal 2007 revenues of $71.9 million. However, the US operations of this segment experienced strong sales growth in
fiscal 2008, of $3.7 million, an 11% increase over fiscal year 2007. This growth was due to several significant new accounts originating toward the end of fiscal 2007 that carried into fiscal 2008. Offsetting the growth in the US operation, revenues declined in the German operation of the segment for fiscal year 2008 versus fiscal 2007 by $3.2 million, or 9%. The decline was due primarily to the absence of large orders in fiscal 2008 compared with fiscal 2007. The lack of these large orders resulted in a decline in sales volume in Germany of approximately $6.9 million. However, this decline was offset by a favorable fluctuation of the Euro versus the US dollar, of approximately $3.6 million. We are cautiously optimistic that demand for IT products, maintenance, installation, consulting, outsourcing, unified communications products and services and network security will provide for growth of the business in fiscal 2009, despite the economic downturn. We continue to see demand for quality integrated IT infrastructure solutions and we plan to utilize our expertise to grow the business in the future.
On September 25, 2008 the Company acquired substantially all of the assets of R2 Technology Services, Inc. ("R2"), through its Modcomp subsidiary, as part of our Service and System Integration business segment. R2 is an IT solutions and managed service provider that specializes in unified communications and IT security solutions. The Company acquired R2 to expand our 3rd party product and IT services offerings and for potential synergies which we may realize by cross selling our legacy and newly acquired product and service capabilities among the newly combined customer base. We expect that the acquisition of R2 will provide a significant increase to revenues of the Service and System Integration segment, and will be accretive to operating income of the segment as well. Revenues for R2 for the year ended September 30, 2008 were immaterial, because the acquisition occurred six days before year end.
The following table sets forth certain information which is based on data from our Consolidated Statements of Operations:
Percentage of sales Period to Period
Fiscal year ended September Dollar increase (decrease)
2008 2007 2008 compared to 2007
(Dollar amounts in thousands)
Sales 100.0 % 100.0 % $ (17,256 )
Costs and expenses:
Cost of sales 81.8 % 75.2 % (7,900 )
Engineering and development 2.8 % 2.7 % (401 )
Selling, general and administrative 17.3 % 15.1 % (952 )
Total costs and expenses 101.9 % 93.0 % (9,253 )
Operating income (loss) (1.9 )% 7.0 % (8,003 )
Other income 0.8 % 0.8 % (153 )
Income (loss) before income taxes (1.1 )% 7.8 % (8,156 )
Income tax expense (benefit) (0.6 )% 3.5 % (3,700 )
Net income (loss) (0.5 )% 4.3 % $ (4,456 )
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Results of Operations-2008 Compared to 2007
For the fiscal year ended September 30, 2008, sales decreased to $76.8 million, compared to $94.0 million for fiscal year ended September 30, 2007. The net loss for the year ended September 30, 2008 was $407 thousand, or $0.11 per diluted share compared with net income of $4.0 million, or $1.03 per diluted share for fiscal year ended September 30, 2007.
Revenue
The following table details the Company's sales by geographical region for
fiscal years September 30, 2008 and 2007:
For the Year Ended
September 30, September 30,
2008 % 2007 % $ Increase/ % Increase
(Dollar amounts in thousands) (Decrease) (Decrease)
North America $ 37,337 49 % $ 51,279 55 % $ (13,942 ) (27 )%
Europe 35,992 47 % 39,863 42 % (3,871 ) (10 )%
Asia Pacific 3,453 4 % 2,896 3 % 557 19 %
Totals $ 76,782 100 % $ 94,038 100 % $ (17,256 ) (18 )%
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North American revenue, for the year ended September 30, 2008, decreased versus the prior year due largely to the decrease in sales in the Systems segment related to the decrease in sales to Raytheon of $18.1 million offset by the increases in sales to General Dynamics, Lockheed Martin and BAE of approximately $180 thousand, $608 thousand and $764 thousand, respectively. In addition, sales increases to domestic customers in the US operation of the Service and System Integration segment were $2.6 million.
The decrease in revenues in Europe for the year ended September 30, 2008 versus the prior year was due primarily to sales volumes and foreign exchange rate fluctuations in the German operations of the Service and System Integration segment. Approximately $6.8 million of the decrease was related to decreased sales volume from the German division and approximately $569 thousand was due to lower sales volume from the UK division. Offsetting these decreases, the foreign exchange rate change of a stronger Euro versus the US dollar accounted for an increase in Europe sales of $3.6 million. The increase in sales in the Asia Pacific region was due to sales from the US division of the Service and System Integration segment of approximately $1.2 million offset by lower sales in the Systems segment to Kyokuto Boeki Kaisha ("KBK") for the year ended September 30, 2008 versus the prior year of approximately $604 thousand.
The Company's sales by geographic area are based upon the location of where the products were shipped or services rendered.
The following table details the Company's sales for products and services by operating segment for the fiscal years September 30, 2008 and 2007:
Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
2008
Product $ 4,633 $ 55,670 $ 60,303 79 %
Services 324 16,155 16,479 21 %
Total $ 4,957 $ 71,825 $ 76,782 100 %
% of Total 6 % 94 % 100 %
2007
Product $ 21,193 $ 58,341 $ 79,534 85 %
Services 940 13,564 14,504 15 %
Total $ 22,133 $ 71,905 $ 94,038 100 %
% of Total 24 % 76 % 100 %
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Service and
System % (Increase)
Systems Integration Total Decrease
(Dollar amounts in thousands)
Increase (Decrease)
Product $ (16,560 ) $ (2,671 ) $ (19,231 ) (24 )%
Services (616 ) 2,591 1,975 14 %
Total $ (17,176 ) $ (80 ) $ (17,256 ) (18 )%
% Increase (decrease) (78 )% - % (18 )%
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Total revenues were $76.8 million for the year ended September 30, 2008 versus $94.0 million for the year ended September 30, 2007 for a decrease of approximately $17.3 million, or 18%. The decrease in revenue was due substantially to a decrease in Systems segment revenues of approximately $17.2 million. Service and System Integration segment revenues decreased by approximately $80 thousand.
Product revenues for fiscal 2008 decreased by approximately $19.2 million, while service revenue increased by approximately $2.0 million, versus fiscal 2007. Systems segment product revenue decreased by approximately $16.6 million while Service and System Integration segment product revenue decreased by approximately $2.7 million.
The $16.6 million decrease in the Systems segment product revenue was primarily due to the decrease in sales to Raytheon for fiscal 2008, which decreased by $18.1 million versus fiscal year 2007. Sales to Raytheon in fiscal 2007 were in connection with an order for sixteen systems that were shipped over the course of fiscal 2007. Sales to Raytheon for the year ended September 30, 2008 were approximately $86 thousand consisting of spare parts and repairs. In addition, product sales to KBK decreased by approximately $604 thousand for the year ended September 30, 2008 versus the prior year comparable period, while product sales to Lockheed Martin, BAE and General Dynamics increased by $ 1.2 million, $764 thousand and $180 thousand, respectively.
The $2.7 million decrease in the Service and System Integration segment product revenue was due to a $6.4 million decrease in product sales from the segment's German operations, offset by a $3.7 million increase in shipments in the segment's US operations. The German division decrease was due to lower sales volume of $8.8 million offset by an increase due to the stronger Euro versus the US dollar during the year ended September 30, 2008 versus the comparable period of fiscal 2007, which totaled approximately $2.4 million. The decrease in sales volume was due to lower sales to large customers, Atos Origin, Kabel Deutschland, Ish NRW GmbH and Bytemobile. Product sales to these customers decreased by $5.8 million, $3.8 million, $811 thousand and $710 thousand, respectively. These decreases were due to large project wins in the prior year, which did not recur in the current year due to the lack of significant IT investment and projects in fiscal year 2008. Offsetting these decreases, were sales to two customers, UnityMedia which totaled approximately $2.1 million and Huttenwerke Krupp Maannesmann which totaled approximately $300 thousand. In the US operation, the increase was made up of increased new-customer sales versus prior year new-customer sales, which accounted for approximately $794 thousand of the increase, while same-customer sales increased by $2.9 million.
Service revenues increased by approximately $2.0 million. Systems segment service revenues decreased by approximately $616 thousand, while Service and System Integration segment service revenue increased by approximately $2.6 million. The Systems segment service revenue decrease was primarily the result of the absence of any royalty revenue from Lockheed Martin which totaled approximately $558 thousand for the year ended September 30, 2007. In the Service and System Integration segment, service revenues from the German division increased by approximately $3.2 million, approximately $1.2 million of which was the result of the foreign currency fluctuation impact and approximately $2.0 million was due to increased sales volume. The increase in sales volume was due to higher levels of professional services for consulting work in archiving and identity and access management. Offsetting the increased services revenues in Germany, service revenue in the UK subsidiary of the Service and System Integration segment decreased by approximately $568 thousand. This decrease resulted primarily from the non-recurrence of a large development project to a single customer, NCH,
delivered in the third quarter of fiscal 2007, which accounted for a decrease in revenues of approximately $900. The UK division also realized increases in revenues from several other customers totaling approximately $300 for software maintenance and professional service contracts.
Cost of Sales, Gross Profit and Gross Margins
The following table details our cost of sales by operating segment for fiscal
years ended September 30, 2008 and 2007:
Service and
system
Systems integration Total
(Dollar amounts in thousands)
2008
Cost of Sales:
Product $ 2,916 $ 47,395 $ 50,311
Services 109 12,363 12,472
Total 3,025 59,758 62,783
% of Total 5 % 95 % 100 %
% of sales 61 % 83 % 82 %
Gross Profit:
Product $ 1,717 $ 8,275 $ 9,992
Services 215 3,792 4,007
Total 1,932 12,067 13,999
% of Total 14 % 86 % 100 %
Gross Margins:
Product 37 % 15 % 17 %
Services 66 % 23 % 24 %
Total 39 % 17 % 18 %
2007
Cost of Sales:
Product $ 8,498 $ 51,224 $ 59,722
Services 281 10,680 10,961
Total 8,779 61,904 70,683
% of Total 12 % 88 % 100 %
% of sales 40 % 86 % 75 %
Gross Profit:
Product $ 12,695 $ 7,117 $ 19,812
Services 659 2,884 3,543
Total 13,354 10,001 23,355
% of Total 57 % 43 % 100 %
Gross Margins:
Product 60 % 12 % 25 %
Services 70 % 21 % 24 %
Total 60 % 14 % 25 %
Increase (Decrease)
Cost of Sales:
Product $ (5,582 ) $ (3,829 ) $ (9,411 )
Services (172 ) 1,683 1,511
Total (5,754 ) (2,146 ) (7,900 )
% decrease (66 )% (3 )% (11 )%
% of Sales 21 % (3 )% 7 %
Gross Profit:
Product $ (10,978 ) $ 1,158 $ (9,820 )
Services (444 ) 908 464
Total (11,422 ) 2,066 (9,356 )
% Increase (decrease) (86 )% 21 % (40 )%
Gross Margins:
Product (23 )% 3 % (8 )%
Services (4 )% 2 % -
Total (21 )% 3 % (7 )%
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Total cost of sales decreased by approximately $7.9 million for the fiscal year ended September 30, 2008, over the fiscal year ended September 30, 2007, to $62.8 million, down from $70.7 million in the prior fiscal year. The decrease in cost of sales was due, overall, to the decrease in sales, although while sales decreased by 18%, cost of sales decreased by only 11%. This resulted in an overall 7% decline in gross margin to 18% for the fiscal ended September 30, 2008 versus 25% in the prior fiscal year. This decrease in the overall gross margin was due to (i) the lower level of Systems segment sales as discussed above, coupled with the significant decline in the gross margins in the Systems segment which decreased from 60% gross margin for the fiscal year ended September 30, 2007 to 39% for the fiscal year ended September 30, 2008, a decline of 21% in the gross margin. The decline was due in large part to low production levels associated with the low level of sales in the segment, resulting in a higher volume of unabsorbed overhead charged to cost of sales, and also to prior year Systems segment revenues having included approximately $558 thousand in royalty revenue, which carry no cost of sales; versus no royalty revenue in the fiscal year ended September 30, 2008.
The gross profit margin for the Service and System Integration segment increased by 3% gross margin from 14% for the prior year fiscal year to 17% for the fiscal year ended September 30, 2008. This increase was due primarily to greater number of smaller orders, which generally carry higher gross margin than large, high volume orders, coupled with more favorable sales mix toward products that carry higher margins than those sold in the prior year.
Gross profit decreased by approximately $9.4 million comparing the year ended September 30, 2008 to the year ended September 30, 2007, due to (i) the overall decrease in sales volume described above which accounted for $4.3 million of the decrease in gross profit and (ii) the 7% decrease in gross margin explained above, which accounted for approximately $5.1 million of the overall decrease in gross profit.
Engineering and Development Expenses
The following table details engineering and development expenses by operating
segment for fiscal years ended September 30, 2008 and 2007:
% of % of
2008 Total 2007 Total $ Decrease % Decrease
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 2,171 100 % $ 2,523 98 % $ (352 ) (14 )%
Service and System Integration - - % 49 2 % (49 ) (100 )%
Total $ 2,171 100 % $ 2,572 100 % $ (401 ) (16 )%
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Engineering and development expenses decreased overall by approximately $401 thousand, or 16%, in fiscal 2008 compared to 2007. The decrease was primarily due to less research and development in the Systems Segment related to the 3000 SERIES product line.
Selling, General and Administrative
The following table details selling, general and administrative expense by
operating segment for fiscal years ending September 30, 2008 and 2007:
% of % of $ Increase % Increase
2008 Total 2007 Total (Decrease) (Decrease)
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 3,485 26 % $ 5,650 40 % $ (2,165 ) (38 )%
Service and System Integration 9,794 74 % 8,581 60 % 1,213 14 %
Total $ 13,279 100 % $ 14,231 100 % $ (952 ) (7 )%
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Overall, selling, general and administrative costs decreased by approximately $952 thousand, or 7%, in fiscal 2008 compared to 2007. The Systems segment selling, general and administrative expenses decreased by approximately $2.2 million year over year, due to lower commission expense of approximately $350 thousand and the absence of bonus expense for the year ended September 30, 2008, which was approximately $1.1 million for the year ended September 30, 2007. The lower commission and bonus expenses were due to the decrease in sales volume in the Systems segment and net loss in fiscal 2008 for the segment in the year ended September 30, 2008 versus the prior year. Also, in the Systems segment, audit fees and pension expense for the year ended September 30, 2008 were lower by $633 thousand and $165 thousand respectively, compared to the prior year.
The Service and Systems Integration segment selling, general and administrative expenses increased by approximately $1.2 million. This increase was due to higher sales and marketing expenses in the German division of approximately $1 million due to higher marketing event expenses of $186 thousand , headcount increases of $160 thousand, a restructuring charge for $240 thousand and exchange rate fluctuation which accounted for $353 thousand of the increase. Sales and marketing expenses in the US operation increased by $449 thousand due to higher commissions of $375 thousand and higher sales salaries of $89 thousand. In the UK, selling, general and administration expenses decreased by approximately $204 thousand due to reduction in headcount.
Other Income/Expenses
The following table details Other Income/Expenses for fiscal years ended
September 30, 2008 and 2007:
% of % of $ Increase % Increase
2008 Total 2007 Total (Decrease) (Decrease)
(Dollar amounts in thousands)
Interest income $ 682 117 % $ 553 75 % $ 129 23 %
Interest expense (91 ) (16 )% (97 ) (13 )% 6 (6 )%
Gain (loss) on disposal of fixed
assets (27 ) (4 )% 3 - % (30 ) (1,000 )%
Insurance settlements - - % 240 33 % (240 ) (100 )%
Other income, net 19 3 % 38 5 % (19 ) (50 )%
Total other income, net $ 583 100 % $ 737 100 % $ (154 ) (21 )%
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The increase in interest income was due primarily to higher balances of interest-generating assets during fiscal 2008 versus fiscal 2007. In fiscal 2007, the Company received a life insurance settlement, upon the death of a former officer, on a policy owned by the Company, that was purchased to secure the retirement benefits of the former officer, for which we realized a gain of . . .
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