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| CSPI > SEC Filings for CSPI > Form 10-Q on 12-Feb-2009 | All Recent SEC Filings |
12-Feb-2009
Quarterly Report
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. 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.
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, goodwill, income taxes, deferred compensation and retirement plans, 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, 2008 in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Overview of the three months ended December 31, 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 which are used primarily in military applications and the process control and data acquisition 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:
• Total revenue for the quarter ended December 31, 2008 was $24.1 million versus $17.9 million for the quarter ended December 31, 2007, an increase of approximately $6.1 million, or 34%.
• Operating income for the quarter ended December 31, 2008 was $502 thousand versus an operating loss of $529 thousand for the quarter ended December 31, 2007, an improvement of approximately $1.0 million in operating income over the year-ago 1stquarter.
• Net cash used by operating activities was approximately $1.5 million for the quarter ended December 31, 2008 compared to net cash used by operating activities for the quarter ended December 31, 2007 of $757 thousand.
• The following table details our results of operations in dollars and as a percentage of sales for the three months ended December 31, 2008 and 2007:
December 31, % December 31, %
2008 of sales 2007 of sales
(Dollar amounts in thousands)
Sales $ 24,060 100 % $ 17,939 100 %
Costs and expenses:
Cost of sales 19,264 80 % 14,564 81 %
Engineering and development 539 2 % 642 4 %
Selling, general and administrative 3,755 16 % 3,262 18 %
Total costs and expenses 23,558 98 % 18,468 103 %
Operating income (loss) 502 2 % (529 ) (3 )%
Other income 135 1 % 131 1 %
Income (loss) before income taxes 637 3 % (398 ) (2 )%
Provision (benefit) for income taxes 257 1 % (139 ) (1 )%
Net income (loss) $ 380 2 % $ (259 ) (1 )%
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Sales
The following table details our sales by operating segment for the three months
ended December 31, 2008 and 2007:
Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
For the three months ended December 31, 2008:
Product $ 259 $ 18,153 $ 18,412 77 %
Services 1,460 4,188 5,648 23 %
Total $ 1,719 $ 22,341 $ 24,060 100 %
% of Total 7 % 93 % 100 %
Service and
Systems % of
Systems Integration Total Total
For the three months ended December 31, 2007:
Product $ 819 $ 13,411 $ 14,230 79 %
Services 63 3,646 3,709 21 %
Total $ 882 $ 17,057 $ 17,939 100 %
% of Total 5 % 95 % 100 %
Service and
System %
Systems Integration Total increase
$ Increase (Decrease)
Product $ (560 ) $ 4,742 $ 4,182 29 %
Services 1,397 542 1,939 52 %
Total $ 837 $ 5,284 $ 6,121 34 %
% increase 95 % 31 % 34 %
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Total revenues for the first quarter of fiscal year 2009 increased by approximately $6.1 million, or 34%, compared to the first quarter of fiscal year 2008. Approximately $837 thousand of this increase was in the Systems segment and approximately $5.3 million of the increase was from the Service and System Integration segment.
Product revenues for the first quarter of fiscal year 2009 increased by $4.2 million, or 29% compared to the first quarter of fiscal 2008. Service and System Integration segment product revenue increased by approximately $4.7 million, while Systems segment product revenue decreased by approximately $560 thousand.
The decrease in the Systems segment product revenue was due to a decrease in product sales to Kyokuto Boeki Kaisha ("KBK") of $394 thousand between the first quarter of fiscal year 2009 and the same period in fiscal year 2008, and a decrease in product sales to General Dynamics of approximately $179 thousand.
The increase in the Service and System Integration segment product sales was primarily due to a $4.4 million increase in shipments of third-party products in the U.S. division of the segment. This increase was due mainly to large orders sold to three of the division's largest customers. In addition, product sales of the segment's German division increased by approximately $221 thousand, due to an increase in sales volume of approximately $683 thousand, that was partially offset by the unfavorable exchange rate fluctuation of the Euro versus the US dollar which resulted in a decrease of $461 thousand.
Service revenues for the first quarter of fiscal year 2009 increased by approximately $1.9 million, or 52% compared to the first quarter of fiscal 2008. Service revenues in the Systems segment increased by approximately $1.4 million due to royalty revenues from Lockheed Martin, which were approximately $1.4 million in the first quarter of fiscal 2009 and zero in the first fiscal quarter of 2008. Service revenues in the Service and System Integration segment for the first quarter of fiscal year 2009 increased by approximately $542 thousand compared to the first quarter of fiscal 2008. This increase was due to service revenue from R2 Technologies ("R2") which the Company acquired on September 25, 2008. R2 generated $445 thousand in service revenues for the quarter ended December 31, 2008. In addition, services revenues increased in the legacy business of the US division of the segment due primarily to a large professional services order that was delivered during the quarter.
Our sales by geographic area, based on the location to which the products were shipped or services rendered, are as follows:
For the Three Months Ended
December 31, December 31, $ Increase/ % Increase
2008 % 2007 % (Decrease) (Decrease)
(Dollar amounts in thousands)
North America $ 15,542 65 % $ 9,589 54 % $ 5,953 62 %
Europe 8,491 35 % 7,925 44 % 566 7 %
Asia Pacific 27 - % 425 2 % (398 ) (94 )%
Totals $ 24,060 100 % $ 17,939 100 % $ 6,121 34 %
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The increase in North American revenue for the first quarter of 2009 versus the prior year quarter was primarily the result of the increase in royalty revenue to Lockheed Martin of $1.4 million plus the increase in sales in the US division of the Service and System Integration segment of $4.8 million. The increase shown above in sales in Europe was the result of higher sales in the German division, the UK division and the US division of the Service and System Integration segment, where sales in Europe increased by $310 thousand, $143 thousand and $113 thousand, respectively. The decreased Asia Pacific sales were the result of the decrease in sales to KBK, described above.
Cost of Sales and Gross Margins
The following table details our cost of sales by operating segment for the three
months ended December 31, 2008 and 2007:
Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
For the three months ended December 31, 2008:
Product $ 299 $ 15,720 $ 16,019 83 %
Services 54 3,191 3,245 17 %
Total $ 353 $ 18,911 $ 19,264 100 %
% of Total 2 % 98 % 100 %
% of Sales 21 % 85 % 80 %
Gross Margins (deficit):
Product (15 )% 13 % 13 %
Services 96 % 24 % 43 %
Total 79 % 15 % 20 %
Service and
System % of
Systems Integration Total Total
For the three months ended December 31, 2007:
Product $ 643 $ 11,120 $ 11,763 81 %
Services 51 2,750 2,801 19 %
Total $ 694 $ 13,870 $ 14,564 100 %
% of Total 5 % 95 % 100 %
% of Sales 79 % 81 % 81 %
Gross Margins:
Product 21 % 17 % 17 %
Services 19 % 25 % 24 %
Total 21 % 19 % 19 %
Service and
System
Systems Integration Total %
Increase (decrease)
Product $ (344 ) $ 4,600 $ 4,256 36 %
Services 3 441 444 16 %
Total $ (341 ) $ 5,041 $ 4,700 32 %
% Increase (decrease) (49 )% 36 % 32 %
% of Sales (58 )% 4 % (1 )%
Gross Margins:
Product (36 )% (4 )% (4 )%
Services 77 % (1 )% 19 %
Total 58 % (4 )% 1 %
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Total cost of sales for the quarter ended December 31, 2008 increased by approximately $4.7 million for the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007, to $19.3 million in the current year 1st quarter from $14.6 million in the prior year period. The increase in cost of sales was due, overall, to the increase in sales volume and revenues, reflecting an overall 1% increase in the overall gross margin to 20% for the current year quarter versus 19% in the prior year quarter. This increase in the overall gross margin was due primarily to the increased gross margin in the Systems segment, which increased by 58% (from 21% to 79%). This was due to $1.4 million in royalty sales to Lockheed Martin in the 1st quarter of fiscal 2009, which carry no cost of sales.
Gross profit margins for the Service and System Integration segment decreased by 4% gross margin from 19% for the prior year quarter to 15% for the current year quarter ended December 31, 2008. This decrease was due primarily to lower product gross margin for this segment due primarily to a number of large orders delivered in the 1st quarter of fiscal 2009, which had lower gross margin than the smaller sized orders shipped in the prior year 1st quarter. The combination of the 58% increase in gross margin in the Systems segment, offset by the 4% decrease in gross margin in the Service and System Integration segment, resulted in the 1% increase in the overall gross margin.
Engineering and Development Expenses
The following table details our engineering and development expenses by
operating segment for the three months ended December 31, 2008 and 2007:
For the three months ended
December 31, % of December 31, % of
2008 Total 2007 Total $ Decrease % Decrease
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 539 100 % $ 642 100 % $ (103 ) (16 )%
Service and System Integration - - % - - % - - %
Total $ 539 100 % $ 642 100 % $ (103 ) (16 )%
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Engineering and development expenses for the first quarter of fiscal 2009 decreased by approximately $103 thousand, or 16%, compared to the first quarter of fiscal 2008. The decrease relates primarily to a decrease in outside consultant expense in connection with the development of the next generation 3000 SERIES product of the MultiComputer division 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 three months ended December 31, 2008 and
2007:
For the Three Months Ended
December 31, % of December 31, % of
2008 Total 2007 Total $ Increase % Increase
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 951 25 % $ 913 28 % $ 38 4 %
Service and System Integration 2,804 75 % 2,349 72 % 455 19 %
Total $ 3,755 100 % $ 3,262 100 % $ 493 15 %
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Total selling, general and administrative expenses in the first quarter of fiscal 2009 increased by approximately $493 thousand, or 15%, compared to the corresponding quarter of fiscal 2008. The $455 thousand increase in the Service and System Integration segment which accounts primarily for the total increase, was the result of higher salary, fringe and other expenses related to the addition of R2 which totaled $315 thousand and higher commissions in the US division (which includes R2) of $143 thousand, due to the higher gross profit realized in the current fiscal year quarter versus the prior fiscal year quarter.
Other Income/Expenses
The following table details our other income/expenses for the three months ended
December 31, 2008 and 2007:
For the Three Months Ended
December 31, December 31, $ Increase
2008 2007 (Decrease)
(Amounts in thousands)
Interest expense $ (28 ) $ (24 ) $ (4 )
Interest income 134 170 (36 )
Foreign exchange gain 35 1 34
Other expense, net (6 ) (16 ) 10
Total other income , net $ 135 $ 131 $ 4
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Total other income, net, increased $4 thousand for the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. This increase is primarily due to a decrease in interest income related to lower interest rates during the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. This decrease was offset by an increase in foreign exchange gain primarily related to exchange rate fluctuations between the British Pound and the Euro.
Income Taxes
Income Tax Provision
The Company recorded an income tax provision of $257 thousand for the quarter ended December 31, 2008 reflecting an effective income tax rate of 40% compared to an income tax benefit of $139 thousand for the quarter ended December 31, 2007, which reflected an effective tax benefit rate of 35%. Our benefit for the quarter ended December 31, 2007 was due to the carry back of the loss of our US operation for the quarter.
In assessing the realizability of deferred tax assets, we considered our taxable future earnings and the expected timing of the reversal of temporary differences. Accordingly, we have recorded a valuation allowance which reduces the gross deferred tax asset to an amount which we believe will more likely than not be realized. Our inability to project future profitability beyond fiscal year 2010 in the U.S. and cumulative losses incurred in recent years in the U.K. represent sufficient negative evidence under SFAS 109 to record a valuation allowance against certain deferred tax assets. We maintained a substantial valuation allowance against our U.K. deferred tax assets as we have experienced cumulative losses and do not have any indication that the operation will be profitable in the future to an extent that will allow us to utilize much of our net operating loss carryforwards. To the extent that actual experience deviates from our assumptions, our projections would be affected and hence our assessment of realizability of our deferred tax asset may change.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents and short-term investments, which decreased by approximately $4.3 million to $14.2 million as of December 31, 2008 compared to $18.5 million as of September 30, 2008. At December 31, 2008 the investments consist of auction rate securities which were redeemed at par value in January 2009. The Company's cash equivalents of $3.1 million are held in money market funds.
The Company used $1.5 million of cash from operations during the quarter due in part to the following : an increase in accounts receivable primarily from the U.S. Service and Systems Integration segment which increased by $1.6 million from the increased quarterly revenue, a decrease in account payables and accrued expenses and deferred revenue which was primarily from the Service and Systems Integration segment in Germany that was reduced by $1.4 million for vendor payments and $1.3 million in U.S. Service and Systems integration segment, from recognition of the sale to Taylor Bean & Whitaker, that were offset by decreases in the other current assets.
Approximately $3.3 million of cash was provided from investing activities for the quarter ended December 31, 2008, consisting primarily of $3.5 million from sales of our auction rate securities, offset by $109 thousand used to purchase capital equipment and $61 thousand in life insurance premiums paid.
We used approximately $1.6 million in financing activities during the quarter ended December 31, 2008 which consisted of $1.5 million to pay off our line of credit balance and $216 thousand to buyback CSPI stock, offset by $79 thousand in proceeds for stock issued through the Employee Stock Purchase Plan.
For the quarter ended December 31, 2008, the effects of foreign exchange rate fluctuations on cash was a use of cash of approximately $1 million. This was due primarily to the significant reduction in the value of the British Pound versus the US dollar.
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through bank loans, sale of securities or other means. There is no assurance that we will be able to raise any such capital on terms acceptable to us, on a timely basis or at all. If we are unable to secure additional financing, we may not be able to complete development or enhancement of products, take advantage of future opportunities, respond to competition or continue to effectively operate our business.
Based on our current plans and business conditions, management believes that the Company's available cash and cash equivalents and cash generated from operations and investments will be sufficient to provide for the Company's working capital and capital expenditure requirements for the foreseeable future.
Inflation and Changing Prices
Management does not believe that inflation and changing prices had significant impact on sales, revenues or income from continuing operations during the three month periods ended December 31, 2008 and 2007. There is no assurance that our business will not be materially and adversely affected by inflation and changing prices in the future.
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