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CSPI > SEC Filings for CSPI > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for CSP INC /MA/

Form 10-Q for CSP INC /MA/


15-May-2014

Quarterly Report


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.

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, 2013 in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Explanatory note

Beginning in the current period ending and as of March 31, 2014, we have renamed our segments. We have renamed the segment that was formerly known as the Systems segment to the High Performance Products and Solutions ("HPPS") segment. We have also renamed the segment that was formerly known as the Service and System Integration segment to the Information Technology Solutions ("ITS") segment.

Overview of the six months ended March 31, 2014 Results of Operations

Overview:

Revenue decreased by approximately $4.5 million, or 10%, to $42.2 million for the six months ended March 31, 2014 versus $46.7 million for the six months ended March 31, 2013. Our gross profit margin percentage increased overall, from 21% for the six months ended March 31, 2013 to 23% for the six months ended March 31, 2014. Operating income decreased by $0.7 million to approximately $0.7 million for the six-month period ended March 31, 2014 versus $1.4 million for the six months ended March 31, 2013. This decrease in operating income was due to a decrease in gross profit of approximately $0.3 million, an increase in operating expenses of approximately $0.9 million, due in large part to the operating expenses of Myricom, partially offset by a bargain purchase gain of $0.5 million on the acquisition of Myricom, Inc. during the six months ended March 31, 2014. Net income was $0.5 million for six-month period ended March 31, 2014 versus $0.9 million for the six months ended March 31, 2013.


The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2014 and 2013:

                                                                  %                                  %
                                          March 31, 2014      of sales       March 31, 2013      of sales
                                                           (Dollar amounts in thousands)
Sales                                    $       42,235          100  %     $        46,693          100 %
Costs and expenses:
Cost of sales                                    32,620           77  %              36,749           79 %
Engineering and development                       1,427            3  %                 824            2 %
Selling, general and administrative               7,977           19  %               7,725           16 %
Total costs and expenses                         42,024           99  %              45,298           97 %
Bargain purchase gain, net of tax                   462            1  %                   -            - %
Operating income                                    673            1  %               1,395            3 %
Other income (expense)                              (74 )          -  %                  34            - %
Income before income taxes                          599            1  %               1,429            3 %
Income tax expense                                   86            -  %                 574            1 %
Net income                               $          513            1  %     $           855            2 %

Sales

The following table details our sales by operating segment for the six months
ended March 31, 2014 and 2013:

                                                                                  % of
                                             HPPS         ITS         Total      Total
                                                  (Dollar amounts in thousands)
For the Six Months Ended March 31, 2014:
Product                                    $ 3,176     $ 25,892     $ 29,068       69 %
Services                                     2,348       10,819       13,167       31 %
Total                                      $ 5,524     $ 36,711     $ 42,235      100 %
% of Total                                      13 %         87 %        100 %



                                                                                  % of
                                             HPPS         ITS         Total      Total
For the Six Months Ended March 31, 2013:
Product                                    $ 2,590     $ 32,252     $ 34,842       75 %
Services                                     1,100       10,751       11,851       25 %
Total                                      $ 3,690     $ 43,003     $ 46,693      100 %
% of Total                                       8 %         92 %        100 %


                                                                          %
                          HPPS          ITS          Total       increase (decrease)
Increase (Decrease)
Product                 $   586     $ (6,360 )    $ (5,774 )             (17 )%
Services                  1,248           68         1,316                11  %
Total                   $ 1,834     $ (6,292 )    $ (4,458 )             (10 )%
% increase (decrease)        50 %        (15 )%        (10 )%

Total revenues decreased by approximately $4.5 million, or 10%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. Revenue in the HPPS segment increased for the current year six-month period versus the prior year six-month period by approximately $1.8 million, while revenues in the ITS segment decreased by approximately $6.3 million.

Product revenues decreased by approximately $5.8 million, or 17%, for the six months ended March 31, 2014 compared to the comparable period of the prior fiscal year. Product revenues in the ITS segment decreased by approximately $6.4 million while in the HPPS segment, product revenue increased by approximately $0.6 million for the six-month period ended March 31, 2014 versus the six month period ended March 31, 2013.

The increase in product revenues in the HPPS segment of approximately $0.6 million was due substantially to revenues from the acquisition of Myricom, Inc., which the Company acquired during the six months ended March 31, 2014. Myricom revenues for the period were approximately $2.5 million. Partially offsetting this increase, revenues from our Japanese defense customer, US defense customer and sales from the US PCDA division decreased by approximately $1.6 million, $0.2 million and $0.2 million, respectively.

In the US division of the ITS segment, product sales decreased by approximately $6.1 million, while product sales in the German and UK divisions of the segment increased by approximately $1.0 million, and $0.7 million, respectively.

In the US division's existing customer base, product sales in the IT Hosting vertical and the Education vertical decreased by approximately $4.7 million and $1.3 million, respectively. The decrease in the IT hosting vertical reflected decreased demand in this vertical. The decrease in the Education vertical reflected a non-recurring large project in the prior year.

In Germany, the $1.0 million decrease in product revenue was the result of decreased sales in the division's telecommunications and cable operator verticals of approximately $0.1 million and $1.2 million, respectively partially offset by favorable foreign exchange fluctuation and $0.2 million. In the UK, the increase in product sales of approximately $0.7 million is attributable to increased sales resources focused on increasing product sales in that region.

Service revenues increased by approximately $1.3 million, or 11%. This increase was made up of an increase in the HPPS segment of $1.2 million and an increase in the ITS segment of approximately $0.1 million. The increase in the HPPS segment service revenue was due to higher royalty income recorded in the six months ended March 31, 2014 which was approximately $1.9 million versus $0.8 million for the six months ended March 31, 2013.

The increase in service revenues in the ITS segment was due to an increase in the German division, where service revenue increased by approximately $0.9 million, partially offset by a decrease in service revenues of approximately $0.7 million in the US division. In Germany, the increase in service sales was made up of approximately $0.4 million from favorable foreign exchange, and increased service revenues in the division's telecommunications vertical of approximately $1.1 million. These increases were partially offset by decreased sales in the industrial and IT Services verticals of approximately $0.3 million and $0.2 million, respectively. The decrease in service revenue in the US division of the segment was primarily from lower professional service project revenue of approximately $0.3 million and lower third party maintenance revenue of approximately $0.3 million for the six months ended March 31, 2014 versus the six months ended March 31, 2013.

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,

                                                                  $ Increase     % Increase
            March 31, 2014      %      March 31, 2013      %      (Decrease)     (Decrease)
                                     (Dollar amounts in thousands)
Americas   $        26,425     63 %   $        29,689     64 %   $    (3,264 )      (11 )%
Europe              14,819     35 %            14,673     31 %           146          1  %
Asia                   991      2 %             2,331      5 %        (1,340 )      (57 )%
Totals     $        42,235    100 %   $        46,693    100 %   $    (4,458 )      (10 )%

The decrease in Americas revenue for the six months ended March 31, 2014 versus the six months ended March 31, 2013 was primarily the result of an overall decrease in sales to the Americas in the ITS segment where combined product and service sales to US customers decreased by an aggregate $6.2 million, while in the HPPS segment, sales to US customers to the Americas increased by approximately $2.9 million, which was driven by Myricom sales to US customers of approximately $2.0 million and the royalty sales increase of approximately $1.1 million, partially offset by lower product sales in the HPPS segment to other US customers. The change in sales into Europe was from an increase of approximately $0.5 million from the HPPS segment, attributable to Myricom sales, partially offset by a decrease in sales from the European divisions of the ITS segment of approximately $0.3 million. The decrease in Asia sales was the result of lower sales in the HPPS segment to our customer which supplies the Japanese Department of Defense.


Cost of Sales and Gross Margins

The following table details our cost of sales and gross profit margins by
operating segment for the six months ended March 31, 2014 and 2013:

                                                                                          % of
                                           HPPS             ITS            Total          Total
                                                     (Dollar amounts in thousands)
For the Six Months Ended March 31,
2014:
Product                               $     1,919      $   22,303      $   24,222            74  %
Services                                       94           8,137           8,231            25  %
Amortization of inventory step-up and
intangibles                                   167               -             167             1  %
Total                                 $     2,180      $   30,440      $   32,620           100  %
% of Total                                      7  %           93  %          100  %
% of Sales                                     39  %           83  %           77  %
Gross Margins:
Product                                        40  %           14  %           17  %
Services                                       96  %           25  %           37  %
Total                                          61  %           17  %           23  %

For the Six Months Ended March 31,
2013:
Product                               $       979      $   27,921      $   28,900            79  %
Services                                      127           7,722           7,849            21  %
Amortization of inventory step-up and
intangibles                                     -               -               -             -  %
Total                                 $     1,106      $   35,643      $   36,749           100  %
% of Total                                      3  %           97  %          100  %
% of Sales                                     30  %           83  %           79  %
Gross Margins:
Product                                        62  %           13  %           17  %
Services                                       88  %           28  %           34  %
Total                                          70  %           17  %           21  %

Increase (decrease)
Product                               $       940      $   (5,618 )    $   (4,678 )         (16 )%
Services                                      (33 )    $      415             382             5  %
Amortization of inventory step-up and         167
intangibles                                            $        -             167             -  %
Total                                 $     1,074      $   (5,203 )    $   (4,129 )         (11 )%
% Increase (decrease)                          97  %          (15 )%          (11 )%
% of Sales                                      9  %            -  %           (2 )%
Gross Margins:
Product                                       (22 )%            1  %            -  %
Services                                        8  %           (3 )%            3  %
Total                                          (9 )%            -  %            2  %

Total cost of sales decreased by approximately $4.1 million, or 11% when comparing the six months ended March 31, 2014 versus the six months ended March 31, 2013. This decrease in cost of sales was due substantially to the decrease in sales as described in detail above, which decreased by 10%. The more favorable GPM of 23% for the six months ended March 31,


2014 versus 21% for 2013 was attributable to a greater proportion of HPPS segment revenue, 13% for the six months ended March 31, 2014 versus 8% for the six months ended March 31, 2013.

In the ITS segment, the overall GPM was 17% for both six month periods ended March 31, 2014 and March 31, 2013.

In the HPPS segment, the overall GPM decreased from 70% to 61% as shown in the table above. This was due to two primary factors; (i) amortization of inventory step-up valuation and intangibles expense associated with the Myricom acquisition negatively impacted the GPM in the segment by three percentage points (that is, without this expense, the GPM would have been 64% for the six months ended March 31, 2014), and (ii) the impact of the Myricom sales as part of the revenue mix for the six months ended March 31, 2014. The GPM on Myricom products was 41% whereas, in the legacy multicomputer business the GPM was 77% with the higher royalty revenue for the six months ended March 31, 2014 versus the six months ended March 31, 2013. The blended GPM of Myricom and legacy Multicomputer GPM resulted in the 61% GPM for the six months ended March 31, 2014.

Engineering and Development Expenses

The following table details our engineering and development expenses by
operating segment for the six months ended March 31, 2014 and 2013:

                                                For the six months ended,
                                                    % of                            % of
                                March 31, 2014      Total      March 31, 2013      Total       $ Increase      % Increase
                                                              (Dollar amounts in thousands)
By Operating Segment:
High Performance Products and
Solutions                      $      1,427          100 %   $            824        100 %   $        603          73 %
Information Technology
Solutions                                 -            -                    -          -                -           -
Total                          $      1,427          100 %   $            824        100 %   $        603          73 %

The increase shown in the table above was due primarily to engineering expenses of Myricom, which the Company acquired during the six months ended March 31, 2014. R&D expenses associated with the added headcount of Myricom were approximately $0.5M and Multicomputer R&D expenses increased by approximately $0.1M due to increased headcount and higher outside design service expenses.

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, 2014 and 2013:

                                                For the six months ended,
                                                     % of                            % of
                                 March 31, 2014      Total      March 31, 2013      Total       $ Increase      % Increase
                                                              (Dollar amounts in thousands)
By Operating Segment:
High Performance Products and
Solutions                      $          2,124        27 %   $          1,984         26 %   $        140          7 %
Information Technology
Solutions                                 5,853        73 %              5,741         74 %            112          2 %
Total                          $          7,977       100 %   $          7,725        100 %   $        252          3 %

SG&A expenses increased in the HPPS segment due to expenses associated with Myricom which were approximately $0.4 million, partially offset by lower legal expenses which decreased by approximately $0.2 million due to a proxy matter in the prior year, which was non-recurring. The increase in the ITS segment was due primarily from higher expenses in German


division of the segment due to higher commissions expense of approximately $0.1 million due to higher revenue and gross profit in that division.

Other Income/Expenses

The following table details our other income (expense) for the six months ended
March 31, 2014 and 2013:

                                          For the six months ended,
                                     March 31, 2014       March 31, 2013     Decrease
                                                  (Amounts in thousands)
Interest expense                    $        (43 )       $          (43 )   $       -
Interest income                                3                     18           (15 )
Foreign exchange gain (loss)                 (53 )                    5           (58 )
Gain (loss) on sale of fixed assets           (2 )                   15           (17 )
Other income, net                             21                     39           (18 )
Total other income (expense), net   $        (74 )       $           34     $    (108 )

The unfavorable variance in the foreign exchange gain (loss) for the six month periods ended March 31, 2014 versus the comparable period of 2013 was due to losses on holding foreign currencies where those currencies weakened against the functional currencies in those countries, mainly holding US dollars in the UK.


Overview of the three months ended March 31, 2014 Results of Operations

Overview:

Revenue decreased by approximately $4.9 million, or 19.1%, to $20.9 million for the three months ended March 31, 2014 versus $25.8 million for the three months ended March 31, 2013. Our gross profit margin percentage for the three months ended March 31, 2014 was 24% compared to the gross profit margin percentage for the three months ended March 31, 2013 which was 22%. Operating income decreased to approximately $0.3 million for the three-month period ended March 31, 2014 versus $1.2 million for the three months ended March 31, 2013. This decrease in operating income was due to a decrease in gross profit of approximately $0.7 million due to the lower revenue, and an increase in operating expenses of approximately $0.2 million, due in large part to the operating expenses of Myricom. Net income was $0.2 million for the three-month period ended March 31, 2014 versus $0.7 million for the three months ended March 31, 2013.

The following table details our results of operations in dollars and as a percentage of sales for the three months ended March 31, 2014 and 2013:

                                                                  %                                  %
                                          March 31, 2014      of sales       March 31, 2013      of sales
                                                            (Dollar amounts in thousands)
Sales                                    $       20,903          100  %     $       25,823          100  %
Costs and expenses:
Cost of sales                                    15,821           76  %             20,056           78  %
Engineering and development                         792            4  %                380            1  %
Selling, general and administrative               3,957           19  %              4,165           16  %
Total costs and expenses                         20,570           99  %             24,601           95  %
Operating income                                    333            1  %              1,222            5  %
Other income expense                                (48 )          -  %                (25 )          -  %
Income before income taxes                          285            1  %              1,197            5  %
Income tax expense                                  118            -  %                457            2  %
Net income                               $          167            1  %     $          740            3  %

Sales

The following table details our sales by operating segment for the three months
ended March 31, 2014 and 2013
                                                                                    % of
                                               HPPS         ITS         Total      Total
                                                    (Dollar amounts in thousands)
For the Three Months Ended March 31, 2014:
Product                                      $ 2,170     $ 12,149     $ 14,319       69 %
Services                                       1,065        5,519        6,584       31 %
Total                                        $ 3,235     $ 17,668     $ 20,903      100 %
% of Total                                        15 %         85 %        100 %


                                                                                    % of
                                               HPPS         ITS         Total      Total
For the three Months Ended March 31, 2013:
Product                                      $ 2,494     $ 17,043     $ 19,537       76 %
Services                                         143        6,143        6,286       24 %
Total                                        $ 2,637     $ 23,186     $ 25,823      100 %
% of Total                                        10 %         90 %        100 %




                                                                         %
                          HPPS         ITS          Total       Increase (decrease)
Increase (Decrease)
Product                 $ (324 )   $ (4,894 )    $ (5,218 )             (27 )%
Services                   922         (624 )         298                 5  %
Total                   $  598     $ (5,518 )    $ (4,920 )             (19 )%
% Increase (decrease)       23 %        (24 )%        (19 )%

The decrease in sales shown and described above was due to several factors.

The decrease in product sales in the HPPS segment was driven by (i) lower sales volume of approximately $1.6 million to our Japanese Defense Department supplier customer (ii) lower sales of approximately $0.2 million to our US Defense department customers and (iii) decreased sales from the US PCDA division of approximately $0.2 million. Partially offsetting these decreases, Myricom sales were approximately $1.7 million.

The decrease in product sales in the ITS segment was driven by decreased sales . . .

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