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| CSPI > SEC Filings for CSPI > Form 10-Q/A on 31-Aug-2009 | All Recent SEC Filings |
31-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.
Restatement of Previously Issued Financial Statements
As discussed more fully in Note 2, Restatement of Financial Statements, in Item 1 of this Form 10-Q/A (Amendment No. 1), we have restated our consolidated financial statements as of and for the three- and six-months ended March 31, 2009. This discussion and analysis should be read in conjunction with the restated consolidated financial statements and notes appearing in Item 1 of this Quarterly Report on Form 10-Q/A (Amendment No. 1).
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 six months ended March 31, 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 six months ended March 31, 2009 was $46.6 million versus $39.6 million for the six months ended March 31, 2008, an increase of approximately $7.0 million, or 18%.
• Operating income for the six months ended March 31, 2009 was $766 thousand versus an operating loss of $429 thousand for the six months ended March 31, 2008, an improvement of approximately $1.2 million in operating income over the year-ago first six months.
• Net cash used by operating activities was approximately $273 thousand for the six months ended March 31, 2009 compared to net cash used by operating activities for the six months ended March 31, 2008 of $4.7 million.
• The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2009 and 2008:
March 31,
2009 % March 31, %
(Restated) of sales 2008 of sales
(Dollar amounts in thousands)
Sales $ 46,566 100 % $ 39,554 100 %
Costs and expenses:
Cost of sales 37,849 81 % 32,042 81 %
Engineering and development 1,018 2 % 1,179 3 %
Selling, general and administrative 6,933 15 % 6,762 17 %
Total costs and expenses 45,800 98 % 39,983 101 %
Operating income (loss) 766 2 % (429 ) (1 )%
Other income 110 - % 342 1 %
Income (loss) before income taxes 876 2 % (87 ) - %
Provision (benefit) for income taxes 306 1 % (17 ) - %
Net income (loss) $ 570 1 % $ (70 ) - %
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Sales
The following table details our sales by operating segment for the six months
ended March 31, 2009 and 2008:
Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
For the six months ended March 31, 2009:
Product $ 2,548 $ 34,575 $ 37,123 80 %
Services 1,737 7,706 9,443 20 %
Total $ 4,285 $ 42,281 $ 46,566 100 %
% of Total 9 % 91 % 100 %
Service and
Systems % of
Systems Integration Total Total
For the six months ended March 31, 2008:
Product $ 2,055 $ 29,469 $ 31,524 80 %
Services 129 7,901 8,030 20 %
Total $ 2,184 $ 37,370 $ 39,554 100 %
% of Total 6 % 94 % 100 %
Service and
System %
Systems Integration Total increase
$ Increase (Decrease)
Product $ 493 $ 5,106 $ 5,599 18 %
Services 1,608 (195 ) 1,413 18 %
Total $ 2,101 $ 4,911 $ 7,012 18 %
% increase 96 % 13 % 18 %
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Total revenues for the first six months of fiscal year 2009 increased by approximately $7.0 million, or 18%, compared to the first six months of fiscal year 2008. Approximately $2.1 million of this increase was in the Systems segment and approximately $4.9 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 from the first half of fiscal 2008 compared to the first half of fiscal 2009. This currency exchange fluctuation negatively impacted the current 1st half year revenues when comparing to the prior fiscal year 1st half, by approximately $2.1 million. If the exchange rates between the GBP, the Euro and the US Dollar had stayed the same as the prior year six month period, the increase in revenue would have been approximately $9.1 million.
Product revenues for the first six months of fiscal year 2009 increased by approximately $5.6 million, or 18% compared to the first six months of fiscal 2008. Service and System Integration segment product revenue increased by approximately $5.1 million, while Systems segment product revenue increased by approximately $493 thousand.
Service and System Integration segment product sales for the 1st six months of fiscal 2009 versus the prior year 1st six months increased by approximately $5.1 million. This increase was primarily due to an $8.7 million increase in shipments of third-party products from the U.S. division of the segment, due mainly to large orders sold to three of the division's largest customers. Offsetting the increase from the U.S. division, product sales of the segment's German division decreased by approximately $3.8 million, due to a decrease in sales volume which accounted for approximately $2.7 million, and an unfavorable exchange rate fluctuation of the Euro versus the US dollar which accounted for $1.1 million of the decrease. The decrease in product sales volume from the German division of $2.7 million resulted from lower sales to two of the divisions largest customers; a cable and internet service provider and a large German systems integrator. Both of these customers had cited the global economic slowdown as reasons for the decrease in orders.
Systems segment product revenue for the first six months of fiscal year 2009 compared to the same period in fiscal year 2008 increased by approximately $493 thousand. This increase was due primarily to increased product sales to Lockheed Martin of approximately $852 thousand, increased sales to BAE Systems Inc of approximately $651 thousand and decreases in product sales to Kyokuto Boeki Kaisha ("KBK") of $866 thousand and General Dynamics of approximately $176 thousand.
Service revenues for the first six months of fiscal year 2009 increased by approximately $1.4 million, or 18% compared to the first six months of fiscal 2008. Service revenues in the Systems segment increased by approximately $1.6 million due to royalty revenues from Lockheed Martin, which were approximately $1.6 million in the first six months of fiscal 2009 and zero in the first fiscal six months of 2008.
Service revenues in the Service and System Integration segment for the first six months of fiscal year 2009 decreased by approximately $195 thousand compared to the first six months of fiscal 2008. This decrease was driven by lower service revenues from the segment's German and UK divisions which decreased by $381 thousand and $288 thousand, respectively; which amounted to an aggregate decrease from the European subsidiaries of $669 thousand. This decrease from the European subsidiaries was driven by the unfavorable exchange rate fluctuations of the Euro and GBP versus the US dollar which accounted for a decrease of approximately $1 million. In constant US Dollars, that is if those exchange rates had remained the same year over year, there was an increase in service revenues of approximately $312 thousand, from higher professional service revenues from the UK of approximately $105 thousand and higher maintenance and other service revenues of $207 thousand from the German division. In the US division of the Service and System Integration segment, service revenue increased by approximately $473 thousand, which resulted from R2 Technologies ("R2") which the Company acquired on September 25, 2008. R2 generated $711 thousand in service revenues for the six months ended March 31, 2009. Offsetting this increase, services revenues decreased in the legacy business of the US division of the segment due primarily to a lower volume of maintenance contracts during the six months ended March 31, 2009 versus the six months ended March 31, 2008.
Our sales by geographic area, based on the location to which the products were shipped or services rendered, are as follows:
For the Six Months Ended
March 31, March 31, $ Increase/ % Increase
2009 % 2008 % (Decrease) (Decrease)
(Dollar amounts in thousands)
North America $ 31,155 67 % $ 19,220 49 % $ 11,935 62 %
Europe 15,281 33 % 19,344 49 % (4,063 ) (21 )%
Asia Pacific 130 - % 990 2 % (860 ) (87 )%
Totals $ 46,566 100 % $ 39,554 100 % $ 7,012 18 %
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The increase in North American revenue for the first six months of 2009 versus the corresponding prior year six months was primarily the result of the increase in Systems segment sales to US customers which totaled approximately $2.9 million plus the increase in revenues of the US division of the Service and System Integration segment to North American customers of approximately $9.1 million. The decrease shown above in sales in 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 $4.0 million and $136 thousand, respectively. The impact of the strengthening US Dollar versus the Euro and GBP accounted for decreases in European sales of approximately $1.7 million from the German division and $441 thousand from the UK division, respectively. The decreased Asia Pacific sales were primarily the result of the decrease in sales to KBK of approximately $866 thousand, as described above.
Cost of Sales and Gross Margins
The following table details our cost of sales by operating segment for the six
months ended March 31, 2009 and 2008:
Service and
System % of
Systems Integration Total Total
(Restated - Dollar amounts in thousands)
For the six months ended March 31, 2009:
Product $ 1,487 $ 30,293 $ 31,780 84 %
Services 74 5,995 6,069 16 %
Total $ 1,561 $ 36,288 $ 37,849 100 %
% of Total 4 % 96 % 100 %
% of Sales 36 % 86 % 81 %
Gross Margins:
Product 42 % 12 % 14 %
Services 96 % 22 % 36 %
Total 64 % 14 % 19 %
Service and
System % of
Systems Integration Total Total
For the six months ended March 31, 2008:
Product $ 1,327 $ 24,580 $ 25,907 81 %
Services 71 6,064 6,135 19 %
Total $ 1,398 $ 30,644 $ 32,042 100 %
% of Total 4 % 96 % 100 %
% of Sales 64 % 82 % 81 %
Gross Margins:
Product 35 % 17 % 18 %
Services 45 % 23 % 24 %
Total 36 % 18 % 19 %
Service and
System
Systems Integration Total %
Increase (decrease)
Product $ 160 $ 5,713 $ 5,873 23 %
Services 3 (69 ) (66 ) (1 )%
Total $ 163 $ 5,644 $ 5,807 18 %
% Increase 12 % 18 % 18 %
% of Sales (28 )% 4 % - %
Gross Margins:
Product 7 % (5 )% (4 )%
Services 51 % (1 )% 12 %
Total 28 % (4 )% - %
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Total cost of sales for the six months ended March 31, 2009 increased by approximately $5.8 million compared to the six months ended March 31, 2008, to $37.8 million in the current year 1st six months from $32.0 million in the prior year period. The increase in cost of sales was proportionate to the overall increase in revenues, reflecting an overall 19% gross margin for the six months ended March 31, 2009 which was equal to the overall gross margin for the six months ended March 31, 2008.
The Systems segment gross margin increased by 28% from 36% for the six months ended March 31, 2008 to 64% for the six months ended March 31, 2009, and was due primarily to approximately $1.6 million in royalty income realized in the first six months of fiscal 2009. No royalty income was realized in the six months ended March 31, 2008. These royalty sales to Lockheed Martin carry no cost of sales.
Gross profit margins for the Service and System Integration segment decreased by 4% from 18% for the prior year six months to 14% for the current year six months ended March 31, 2009. This decrease was due primarily to approximately $8.0 million in low margin orders, defined as orders with lower than 8% gross margin, that were shipped in the 1 st six months of fiscal 2009. The low margin orders shipped during the six months ended March 31, 2009 included sales of approximately $3.4 million with zero gross margin, because of a pricing dispute that was settled with one of the segment's largest vendors. These low margin orders accounted for approximately 3% of the reduction in gross margin while the remaining 1% reduction was due to downward pricing pressure which we attribute to the recessionary economic environment. The combination of the 28% 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 aggregate gross margin being unchanged at 19% for the first six months of fiscal 2009.
Engineering and Development Expenses
The following table details our engineering and development expenses by
operating segment for the six months ended March 31, 2009 and 2008:
For the Six months ended
March 31, % of March 31, % of
2009 Total 2008 Total $ Decrease % Decrease
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 1,018 100 % $ 1,179 100 % $ (161 ) (14 )%
Service and System Integration - - % - - % - - %
Total $ 1,018 100 % $ 1,179 100 % $ (161 ) (14 )%
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Engineering and development expenses for the first six months of fiscal 2009 decreased by approximately $161 thousand, or 14%, compared to the first six months 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 six months ended March 31, 2009 and 2008:
For the Six Months Ended
March 31,
2009 % of March 31, % of $ Increase % Increase
(Restated) Total 2008 Total (decrease) (decrease)
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 1,675 24 % $ 1,818 27 % $ (143 ) (8 )%
Service and System Integration 5,258 76 % 4,944 73 % 314 6 %
Total $ 6,933 100 % $ 6,762 100 % $ 171 3 %
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Total selling, general and administrative expenses in the first six months of fiscal 2009 increased by approximately $171 thousand, or 3%, compared to the corresponding six months of fiscal 2008. The $143 thousand decrease in the Systems segment SG&A expenses was the result of lower outside services and fees of approximately $26 thousand, lower officers' life insurance premiums of approximately $22 thousand and lower outside accounting service fees of approximately $48 thousand. The $314 thousand increase in the Service and System Integration segment SG&A expenses was the result of higher salary, commissions, fringe and other expenses related to the addition of R2 which totaled approximately $855 thousand. Offsetting the increase in the US division, SG&A expenses in the European subsidiaries decreased by a combined $589 thousand, $299 thousand of which was due to the stronger US Dollar versus the Euro and GBP, and $289 thousand and $290 thousand reduction in salaries, commissions and other expenses respectively, due to reduction in headcount in the UK, lower revenues in Germany and general cost cutting.
Other Income/Expenses
The following table details our other income/expenses for the six months ended
March 31, 2009 and 2008:
For the Six Months Ended
March 31, March 31, $ Increase
2009 2008 (Decrease)
(Amounts in thousands)
Interest expense $ (61 ) $ (46 ) $ (15 )
Interest income 176 385 (209 )
Foreign exchange gain 6 23 (17 )
Other expense, net (11 ) (20 ) 9
Total other income, net $ 110 $ 342 $ (232 )
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Total other income, net, decreased by approximately $232 thousand for the first six months of fiscal 2009 compared to the first six 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. In addition the balances of interest bearing assets in general were lower in the current fiscal year six month period versus the prior year.
Overview of the quarter ended March 31, 2009 Results of Operations
Highlights include:
• Revenue increased by approximately $891 thousand, or 4%, to $22.5 million for the quarter ended March 31, 2009 versus $21.6 million for the quarter ended March 31, 2008.
• Operating income increased by approximately $201 thousand, or 201%, to $301 thousand for the quarter ended March 31, 2009 versus $100 thousand for the quarter ended March 31, 2008.
• Net income increased by $23 thousand, or 12%, to $212 thousand for the quarter ended March 31, 2009 versus $189 thousand for the quarter ended March 31, 2008.
The following table details our results of operations in dollars and as a percentage of sales for the quarters ended March 31, 2009 and 2008:
March 31,
2009 % March 31, %
(Restated) of sales 2008 of sales
(Dollar amounts in thousands)
Sales $ 22,506 100 % $ 21,615 100 %
Costs and expenses:
Cost of sales 18,533 82 % 17,477 81 %
Engineering and development 479 2 % 538 3 %
Selling, general and administrative 3,193 14 % 3,500 16 %
Total costs and expenses 22,205 99 % 21,515 100 %
Operating income 301 1 % 100 - %
Other income (25 ) - % 211 1 %
. . .
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