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| CSPI > SEC Filings for CSPI > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-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 nine months ended June 30, 2009 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 subsidiary.
• 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 nine months ended June 30, 2009 was $65.2 million versus $58.7 million for the nine months ended June 30, 2008, an increase of approximately 6.5 million, or 11%.
• Operating loss for the nine months ended June 30, 2009 was $256 thousand versus an operating loss of $582 thousand for the nine months ended June 30, 2008, a decrease in operating loss of approximately $326 thousand, or 56%, over the year-ago first nine months.
• Net loss for the nine months ended June 30, 2009 was approximately $182 thousand versus a net loss of $78 thousand for the nine months ended June 30, 2008, an increase in net loss of approximately $104 thousand, or 133%, over the year-ago first nine months.
• Net cash provided by operating activities was approximately $1.9 million for the nine months ended June 30, 2009 compared to net cash provided by operating activities for the nine months ended June 30, 2008 of $396 thousand.
June 30, % June 30, %
2009 of sales 2008 of sales
(Dollar amounts in thousands)
Sales $ 65,237 100 % $ 58,709 100 %
Costs and expenses:
Cost of sales 53,684 82 % 47,766 81 %
Engineering and development 1,542 2 % 1,650 3 %
Selling, general and administrative 10,267 16 % 9,875 17 %
Total costs and expenses 65,493 100 % 59,291 101 %
Operating loss (256 ) - % (582 ) (1 )%
Other income 87 - % 464 1 %
Loss before income taxes (169 ) - % (118 ) - %
Provision (benefit) for income taxes 13 - % (40 ) - %
Net loss $ (182 ) - % $ (78 ) - %
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Sales
The following table details our sales by operating segment for the nine months
ended June 30, 2009 and 2008:
Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
For the nine months ended June 30, 2009:
Product $ 3,968 $ 48,502 $ 52,470 80 %
Services 1,835 10,932 12,767 20 %
Total $ 5,803 $ 59,434 $ 65,237 100 %
% of Total 9 % 91 % 100 %
Service and
Systems % of
Systems Integration Total Total
For the nine months ended June 30, 2008:
Product $ 3,248 $ 43,006 $ 46,254 79 %
Services 231 12,224 12,455 21 %
Total $ 3,479 $ 55,230 $ 58,709 100 %
% of Total 6 % 94 % 100 %
Service and
System %
Systems Integration Total increase
$ Increase (Decrease)
Product $ 720 $ 5,496 $ 6,216 13 %
Services 1,604 (1,292 ) 312 3 %
Total $ 2,324 $ 4,204 $ 6,528 11 %
% increase 67 % 8 % 11 %
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Total revenues for the first nine months of fiscal year 2009 increased by approximately $6.5 million, or 11%, compared to the first nine months of fiscal year 2008. Approximately $2.3 million of this increase was in the Systems segment and approximately $4.2 million of the increase was from the Service and System Integration segment.
A significant factor impacting the fluctuation in total revenues, year over year, was the currency exchange rate fluctuation of the strengthening US Dollar versus both the Pound Sterling in Great Britain ("GBP") and the Euro in Germany for the nine month period ended June 30, 2009 versus the year-ago nine month period. This currency exchange fluctuation negatively impacted the current year nine-month period revenues when comparing to the prior fiscal year nine month period, by approximately $3.1 million. Hence, if the exchange rates between the GBP, the Euro and the US Dollar had stayed the same as the prior year nine month period, the increase in revenue would have been approximately $9.6 million.
Product revenues for the first nine months of fiscal year 2009 increased by approximately $6.2 million, or 13% compared to the first nine months of fiscal 2008. Service and System Integration segment product revenue increased by approximately $5.5 million, while Systems segment product revenue increased by approximately $720 thousand.
The increase in Service and System Integration segment product sales for the first nine months of fiscal 2009 was due to a $9.9 million increase in shipments of third-party products from the U.S. division of the segment, due mainly to in increase in sales to the US division's four largest customers, which accounted for approximately $8.7 million of the increase plus product sales of approximately $3.0 million from the acquisition of R2 Technologies ("R2"), offset by a net decrease in sales to all other customers of approximately $1.7 million. R2 was acquired in September of 2008, hence the nine months ended June 30, 2008, included no sales from R2. Offsetting the increase from the US division, product sales of the segment's German division decreased by approximately $4.5 million, due to a decrease in sales volume which accounted for approximately $2.8 million, and an unfavorable exchange rate fluctuation of the Euro versus the US Dollar which accounted for approximately $1.7 million of the decrease. The decrease in product sales volume from the German division of $2.8 million was due to the economic and technology sector slowdown which resulted in lower sales volume from several of the division's largest customers; including a cable and internet service provider and a large German systems integrator. In the UK division, product sales increased by approximately $150 thousand due to a product order for a customer acquired from the R2 acquisition.
Systems segment product revenue for the first nine months of fiscal year 2009 compared to the same period in fiscal year 2008 increased by approximately $720 thousand. This increase was due primarily to increased product sales to Lockheed Martin which increased by approximately $1.7 million, increased sales to BAE Systems Inc of approximately $761 thousand offset by decreased product sales to Kyokuto Boeki Kaisha ("KBK") of approximately $1.5 million and General Dynamics of approximately $173 thousand.
Service revenues for the first nine months of fiscal year 2009 increased by approximately $312 thousand, or 3% compared to the first nine months of fiscal 2008. Service revenues in the Systems segment increased by approximately $1.6 million due to royalty revenues from Lockheed Martin.
Service revenues in the Service and System Integration segment for the first nine months of fiscal year 2009 decreased by approximately $1.3 million compared to the first nine months of fiscal 2008. This decrease was driven by lower service revenues from the segment's German and UK divisions which decreased by approximately $1.2 million and approximately $600 thousand, respectively; which amounted to an aggregate decrease from the European subsidiaries of approximately $1.8 million. This decrease from the European subsidiaries was driven, in large part, by the unfavorable exchange rate fluctuations of the Euro and GBP versus the US Dollar which accounted for approximately $1.4 million of the decrease. In constant US Dollars, that is, if those exchange rates had remained the same year over year, there was a decrease in service revenues from the European subsidiaries of approximately $400 thousand. This decrease in service revenue volume from the German and UK divisions was due to the economic and technology sector slowdown which resulted in lower sales volume from several of the segment's largest customers in Germany; including a cable and internet service provider and a large German systems integrator. In the US division of the Service and System Integration segment, service revenue increased by approximately $562 thousand, which resulted primarily from R2 which the Company acquired on September 25, 2008. R2 generated $845 thousand in service revenues for the nine months ended June 30, 2009. Offsetting this increase, services revenues decreased in the legacy business of the US division of the segment by approximately $285 thousand due primarily to a lower volume of maintenance contracts during the nine months ended June 30, 2009 versus the nine months ended June 30, 2008.
Our sales by geographic area, based on the location to which the products were shipped or services rendered, are as follows:
For the Nine Months Ended
June 30, June 30, $ Increase/ % Increase
2009 % 2008 % (Decrease) (Decrease)
(Dollar amounts in thousands)
Americas $ 42,416 65 % $ 27,246 46 % $ 15,170 56 %
Europe 22,209 34 % 28,210 48 % (6,001 ) (21 )%
Asia Pacific 612 1 % 3,253 6 % (2,641 ) (81 )%
Totals $ 65,237 100 % $ 58,709 100 % $ 6,528 11 %
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The increase in Americas revenue for the first nine months of 2009 versus the corresponding prior year nine months was primarily the result of the increase in Systems segment sales to US customers which increased by approximately $3.9 million plus the increase in revenues of the US division of the Service and System Integration segment to North American customers, which increased by approximately $11.3 million. The decrease shown above in sales to Europe was primarily the result of lower sales from the German and UK divisions of the Service and System Integration segment, where sales in Europe decreased by approximately $5.8 million and $435 thousand, respectively. The impact of the strengthening US Dollar versus the Euro and GBP accounted for approximately $2.6 million from the German division and $562 thousand from the UK division, respectively, of the total decreases in sales to Europe from these divisions, referred to previously. Offsetting the decreases in sales to Europe from the European divisions, sales to Europe from the US division of the Service and Systems Integration segment increased by approximately $250 thousand. The decreased Asia Pacific sales were primarily the result of the decrease in sales to KBK of approximately $1.6 million, as described above, from the Systems segment, and a decrease in sales to Asia Pacific from the US division of the Service and Systems Integration segment of approximately $1.1 million.
Cost of Sales and Gross Margins
The following table details our cost of sales by operating segment for the nine
months ended June 30, 2009 and 2008:
Service and
System
Systems Integration Total % of Total
(Dollar amounts in thousands)
For the nine months ended June 30, 2009:
Product $ 2,295 $ 42,507 $ 44,802 83 %
Services 109 8,773 8,882 17 %
Total $ 2,404 $ 51,280 $ 53,684 100 %
% of Total 4 % 96 % 100 %
% of Sales 41 % 86 % 82 %
Gross Margins:
Product 42 % 12 % 15 %
Services 94 % 20 % 30 %
Total 59 % 14 % 18 %
Service and
System
Systems Integration Total % of Total
For the nine months ended June 30, 2008:
Product $ 1,956 $ 36,290 $ 38,246 80 %
Services 91 9,429 9,520 20 %
Total $ 2,047 $ 45,719 $ 47,766 100 %
% of Total 4 % 96 % 100 %
% of Sales 59 % 83 % 81 %
Gross Margins:
Product 40 % 16 % 17 %
Services 61 % 23 % 24 %
Total 41 % 17 % 19 %
Service and
System % increase
Systems Integration Total (decrease)
Increase (decrease)
Product $ 339 $ 6,217 $ 6,556 17 %
Services 18 (656 ) (638 ) (7 )%
Total $ 357 $ 5,561 $ 5,918 12 %
% Increase 17 % 12 % 12 %
% of Sales (18 )% 3 % 1 %
Gross Margins:
Product 2 % (4 )% (2 )%
Services 33 % (3 )% 6 %
Total 18 % (3 )% (1 )%
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Total cost of sales for the nine months ended June 30, 2009 increased by approximately $5.9 million compared to the nine months ended June 30, 2008, to $53.7 million from $47.8 million. The increase in cost of sales was the result of the increase in sales referred to above. The gross margin percentage for the nine months ended June 30, 2009 was 18% versus 19% gross margin for the nine months ended June 30, 2008.
The Systems segment gross margin increased by 18% from 41% for the nine months ended June 30, 2008 to 59% for the nine months ended June 30, 2009, and was due primarily to approximately $1.6 million in royalty income realized in the first nine months of fiscal 2009. No royalty income was realized in the nine months ended June 30, 2008. These royalty sales to Lockheed Martin carry no cost of sales.
Gross profit margins for the Service and System Integration segment decreased by 3% from 17% for the prior year nine months to 14% for the current year nine months ended June 30, 2009. This decrease was due primarily to approximately $11.0 million in low margin orders, that the Company defines as orders with lower than 8% gross margin, that were shipped in the 1st nine months of fiscal 2009. The low margin orders shipped during the nine months ended June 30, 2009 included sales of approximately $4.3 million with zero gross margin, because of a pricing dispute that was settled with one of the segment's largest vendors. The combination of the 18% increase in gross margin in the Systems segment, offset by the 3% decrease in gross margin in the Service and System Integration segment, resulted in the aggregate gross margin decrease of 1% for the first nine months of fiscal 2009.
Engineering and Development Expenses
The following table details our engineering and development expenses by
operating segment for the nine months ended June 30, 2009 and 2008:
For the Nine months ended
June 30, % of June 30, % of
2009 Total 2008 Total $ Decrease % Decrease
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 1,542 100 % $ 1,650 100 % $ (108 ) (7 )%
Service and System Integration - - % - - % - - %
Total $ 1,542 100 % $ 1,650 100 % $ (108 ) (7 )%
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Engineering and development expenses for the first nine months of fiscal 2009 decreased by approximately $108 thousand, or 7%, compared to the first nine months of fiscal 2008. The decrease relates primarily to decreases in outside consultant expense and salaries expense in connection with the reduced development activities for 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 nine months ended June 30, 2009 and 2008:
For the Nine Months Ended
June 30, % of June 30, % of $ Increase % Increase
2009 Total 2008 Total (decrease) (decrease)
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 2,496 24 % $ 2,608 26 % $ (112 ) (4 )%
Service and System Integration 7,771 76 % 7,267 74 % 504 7 %
Total $ 10,267 100 % $ 9,875 100 % $ 392 4 %
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Total selling, general and administrative expenses in the first nine months of fiscal 2009 increased by approximately $392 thousand, or 4%, compared to the corresponding nine months of fiscal 2008. The $112 thousand decrease in the Systems segment SG&A expenses was the result of lower consulting & outside services expenses of $56 thousand, lower pension costs of $72 thousand, lower audit/tax fees $65 thousand, offset by higher incentive compensation expenses of $76 thousand, due to the higher sales volume.
The $504 thousand increase in the Service and System Integration segment SG&A expenses was the result of an increase of approximately $1.3 million in the US division which was the result of increased commissions' expense of approximately $138 thousand. In addition, salaries & benefits costs increased by approximately $890 thousand, amortization of goodwill and intangibles by approximately $84 thousand and facilities costs by approximately $126 thousand in connection with the R2 acquisition. In Germany, SG&A
expenses decreased on a constant dollar basis by approximately $167 thousand due to lower commissions, bonus and general salaries and wages expenses. In the UK, SG&A expenses decreased by approximately $100 thousand in constant dollars versus the prior year, due to lower salaries from lower headcount and reduced rent expense, from reducing the facility square footage. Foreign exchange rate fluctuation accounted for approximately $488 thousand of reduction in SG&A expenses.
Other Income/Expenses
The following table details our other income/expenses for the nine months ended
June 30, 2009 and 2008:
For the Nine Months Ended
June 30, June 30,
2009 2008 $ Decrease
(Amounts in thousands)
Interest expense $ (89 ) $ (68 ) $ (21 )
Interest income 204 519 (315 )
Foreign exchange gain 6 28 (22 )
Other expense, net (34 ) (15 ) (19 )
Total other income, net $ 87 $ 464 $ (377 )
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Total other income, net, decreased by approximately $377 thousand for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. This decrease is primarily due to a decrease in interest income that was primarily earned on money market funds in fiscal 2009 as opposed to our auction rate security ("ARS") portfolio in fiscal 2008. We divested our holdings in ARSs since the year-ago period because of the preponderance of failed auctions in the ARS market. The ARSs earned higher rates of interest than do the money market funds. In addition, the balances of interest bearing assets in general were lower in the current fiscal year nine month period versus the prior year.
Overview of the quarter ended June 30, 2009 Results of Operations
Highlights include:
• Revenue decreased by approximately $484 thousand, or 3%, to $18.7 million for the quarter ended June 30, 2009 versus $19.2 million for the quarter ended June 30, 2008.
• Operating loss increased by approximately $870 thousand, or 569%, to approximately $1.0 million for the quarter ended June 30, 2009 versus approximately $153 thousand for the quarter ended June 30, 2008.
• Net loss increased by $744 thousand, to $752 thousand for the quarter ended June 30, 2009 versus $8 thousand for the quarter ended June 30, 2008.
The following table details our results of operations in dollars and as a percentage of sales for the quarters ended June 30, 2009 and 2008:
June 30, % June 30, %
2009 of sales 2008 of sales
(Dollar amounts in thousands)
Sales $ 18,671 100 % $ 19,155 100 %
Costs and expenses:
. . .
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