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EXCEL - IDEA: XBRL DOCUMENT - CSP INC /MA/Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - CSP INC /MA/cspi-2015331xex321.htm
EX-31.1 - EXHIBIT 31.1 - CSP INC /MA/cspi-2015331xex311.htm
EX-31.2 - EXHIBIT 31.2 - CSP INC /MA/cspi-2015331xex312.htm
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q 
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended
March 31, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .

Commission File Number 0-10843

 
CSP Inc.
(Exact name of Registrant as specified in its Charter)
 

Massachusetts
04-2441294
(State of incorporation)
(I.R.S. Employer Identification No.)

43 Manning Road
Billerica, Massachusetts 01821-3901
(978) 663-7598
(Address and telephone number of principal executive offices)
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of May 13, 2015, the registrant had 3,675,120 shares of common stock issued and outstanding.

1


INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value) 
 
March 31,
2015
 
September 30,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,022

 
$
16,448

Accounts receivable, net of allowances of $271 and $241
14,643

 
12,532

Inventories, net
7,031

 
6,446

Refundable income taxes
1,010

 
418

Deferred income taxes
1,226

 
1,230

Other current assets
2,456

 
2,372

Total current assets
35,388

 
39,446

Property, equipment and improvements, net
1,341

 
1,472

 
 
 
 
Other assets:
 

 
 

Intangibles, net
480

 
545

Deferred income taxes
1,792

 
1,892

Cash surrender value of life insurance
2,917

 
2,785

Other assets
209

 
167

Total other assets
5,398

 
5,389

Total assets
$
42,127

 
$
46,307

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
9,873

 
$
9,751

Deferred revenue
2,682

 
4,101

Pension and retirement plans
644

 
658

Income taxes payable

 
1

Total current liabilities
13,199

 
14,511

Pension and retirement plans
9,312

 
10,440

Other long term liabilities
72

 
69

Total liabilities
22,583

 
25,020

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,675 and 3,619 shares, respectively
37

 
36

Additional paid-in capital
11,951

 
11,658

Retained earnings
15,597

 
17,517

Accumulated other comprehensive loss
(8,041
)
 
(7,924
)
Total shareholders’ equity
19,544

 
21,287

Total liabilities and shareholders’ equity
$
42,127

 
$
46,307

See accompanying notes to unaudited consolidated financial statements.

3


CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)

 
For the three months ended
 
For the six months ended
 
March 31,
2015
 
March 31,
2014
 
March 31,
2015
 
March 31,
2014
Sales:
 
 
 
 
 
 
 
Product
$
14,195

 
$
14,319

 
$
29,848

 
$
29,068

Services
4,682

 
6,584

 
9,459

 
13,167

Total sales
18,877

 
20,903

 
39,307

 
42,235

 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
Product
11,380

 
11,668

 
24,513

 
24,389

Services
3,454

 
4,153

 
6,796

 
8,231

Total cost of sales
14,834

 
15,821

 
31,309

 
32,620

 
 
 
 
 
 
 
 
Gross profit
4,043

 
5,082

 
7,998

 
9,615

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Engineering and development
826

 
792

 
1,679

 
1,427

Selling, general and administrative
3,856

 
3,957

 
7,879

 
7,977

Total operating expenses
4,682

 
4,749

 
9,558

 
9,404

 
 
 
 
 
 
 
 
Bargain purchase gain on acquisition, net of tax

 

 

 
462

 
 
 
 
 
 
 
 
Operating income (loss)
(639
)
 
333

 
(1,560
)
 
673

 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Foreign exchange loss
(108
)
 
(27
)
 
(129
)
 
(53
)
Other expense, net
(21
)
 
(21
)
 
(33
)
 
(21
)
Total other expense
(129
)
 
(48
)
 
(162
)
 
(74
)
Income (loss) before income taxes
(768
)
 
285

 
(1,722
)
 
599

Income tax expense (benefit)
(93
)
 
118

 
(610
)
 
86

Net income (loss)
$
(675
)
 
$
167

 
$
(1,112
)
 
$
513

Net income (loss) attributable to common stockholders
$
(649
)
 
$
161

 
$
(1,072
)
 
$
495

Net income (loss) per share – basic
$
(0.19
)
 
$
0.05

 
$
(0.31
)
 
$
0.14

Weighted average shares outstanding – basic
3,525

 
3,446

 
3,507

 
3,439

Net income (loss) per share – diluted
$
(0.19
)
 
$
0.05

 
$
(0.31
)
 
$
0.14

Weighted average shares outstanding – diluted
3,525

 
3,493

 
3,507

 
3,484

 
See accompanying notes to unaudited consolidated financial statements.

4


CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)

 
 
For the three months ended
 
For the six months ended
 
 
March 31,
2015
 
March 31,
2014
 
March 31,
2015
 
March 31,
2014
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(675
)
 
$
167

 
$
(1,112
)
 
$
513

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss) adjustments
 
(229
)
 
4

 
(117
)
 
154

Other comprehensive income (loss)
 
(229
)
 
4

 
(117
)
 
154

Total comprehensive income (loss)
 
$
(904
)
 
$
171

 
$
(1,229
)
 
$
667


See accompanying notes to unaudited consolidated financial statements.


5


CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the six Months Ended March 31, 2015:
(Amounts in thousands, except per share data)
 
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
other
comprehensive
loss
 
Total
Shareholders’
Equity
Balance as of September 30, 2014
3,619

 
$
36

 
$
11,658

 
$
17,517

 
$
(7,924
)
 
$
21,287

Net loss

 

 

 
(1,112
)
 

 
(1,112
)
Other comprehensive loss

 

 

 

 
(117
)
 
(117
)
Stock-based compensation

 

 
188

 

 

 
188

Restricted stock issuance
41

 
1

 

 

 

 
1

Issuance of shares under employee stock purchase plan
15

 

 
105

 

 

 
105

Cash dividends on common stock ($0.22 per share)

 

 

 
(808
)
 

 
(808
)
Balance as of March 31, 2015
3,675

 
$
37

 
$
11,951

 
$
15,597

 
$
(8,041
)
 
$
19,544

 
See accompanying notes to unaudited consolidated financial statements.

6


CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
For the six months ended
 
March 31,
2015
 
March 31,
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,112
)
 
$
513

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Bargain purchase gain

 
(462
)
Depreciation and amortization
266

 
245

Amortization of intangibles
65

 
60

Loss on sale of fixed assets, net

 
2

Foreign exchange loss
129

 
53

Non-cash changes in accounts receivable
37

 
67

Non-cash changes in inventory
38

 
140

Stock-based compensation expense on stock options and restricted stock awards
188

 
159

Deferred income taxes
(21
)
 
21

Increase in cash surrender value of life insurance
(23
)
 
(84
)
Changes in operating assets and liabilities:
 

 
 

Increase in accounts receivable
(3,267
)
 
(8,763
)
Increase in inventories
(741
)
 
(764
)
(Increase) decrease in refundable income taxes
(619
)
 
476

Increase in other current assets
(296
)
 
(503
)
Increase in other assets
(59
)
 

Increase in accounts payable and accrued expenses
785

 
2,676

Increase (decrease) in deferred revenue
(1,017
)
 
2,445

Decrease in pension and retirement plans liability
(36
)
 
(120
)
Increase (decrease) in income taxes payable
6

 
(486
)
Increase in other long term liabilities
3

 
19

Net cash used in operating activities
(5,674
)
 
(4,306
)
Cash flows from investing activities:
 

 
 

Life insurance premiums paid
(109
)
 
(80
)
Proceeds from the sale of fixed assets

 
6

Cash paid to acquire business

 
(500
)
Purchases of property, equipment and improvements
(223
)
 
(295
)
Net cash used in investing activities
(332
)
 
(869
)
Cash flows from financing activities:
 

 
 

Dividends paid
(808
)
 
(752
)
Proceeds from issuance of shares under equity compensation plans
105

 
6

Net cash used in financing activities
(703
)
 
(746
)
Effects of exchange rate on cash
(717
)
 
162

Net decrease in cash and cash equivalents
(7,426
)
 
(5,759
)
Cash and cash equivalents, beginning of period
16,448

 
18,619

Cash and cash equivalents, end of period
$
9,022

 
$
12,860

Supplementary cash flow information:
 

 
 

Cash paid for income taxes
$
52

 
$
63

Cash paid for interest
$
85

 
$
85

Non-cash acquisition of assets
$

 
$
1,214

 See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED MARCH 31, 2015 AND 2014

 
Organization and Business
 
CSP Inc. was founded in 1968 and is based in Billerica, Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSP Inc. and its subsidiaries (collectively “we”, “us”, “our”,
“CSPI” or the “Company”) develop and market IT integration solutions and high-performance cluster computer systems. The Company operates in two segments, its High Performance Products (“HPP”) segment (formerly the “High Performance Products and Solutions” segment) and its Technology Solutions (“TS”) segment (formerly the Information Technology Solutions segment).
 
1.    Basis of Presentation
 
The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been omitted.

Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited consolidated financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
 
2.    Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, including estimates and assumptions related to reserves for bad debt, reserves for inventory obsolescence, the impairment assessment of intangible assets, the calculation of estimated selling price used for revenue recognition and the calculation of income tax liabilities. Actual results may differ from those estimates under different assumptions or conditions.
 
3.    Earnings Per Share of Common Stock
 
Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income (loss) by the assumed weighted average number of common shares outstanding.
 
We are required to present earnings per share, or EPS, utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.
 

8


Basic and diluted earnings per share computations for the Company’s reported net income (loss) attributable to common stockholders are as follows:

 
For the three months ended
 
For the six months ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
 
(Amounts in thousands except per share data)
Net income (loss)
$
(675
)
 
$
167

 
$
(1,112
)
 
$
513

Less: net income (loss) attributable to nonvested common stock
(26
)
 
6

 
(40
)
 
18

Net income (loss) attributable to common stockholders
$
(649
)
 
$
161

 
$
(1,072
)
 
$
495

 
 
 
 
 
 
 
 
Weighted average total shares outstanding – basic
3,662

 
3,580

 
3,637

 
3,562

Less: weighted average non-vested shares outstanding
137

 
134

 
130

 
123

Weighted average number of common shares outstanding – basic
3,525

 
3,446

 
3,507

 
3,439

Potential common shares from non-vested stock awards and the assumed exercise of stock options

 
47

 

 
45

Weighted average common shares outstanding – diluted
3,525

 
3,493

 
3,507

 
3,484

 
 
 
 
 
 
 
 
Net income (loss) per share – basic
$
(0.19
)
 
$
0.05

 
$
(0.31
)
 
$
0.14

Net income (loss) per share – diluted
$
(0.19
)
 
$
0.05

 
$
(0.31
)
 
$
0.14

 
All anti-dilutive securities, including certain stock options, are excluded from the diluted income (loss) per share computation. The calculation of diluted loss per share for the three and six months ended March 31, 2015 excludes 35,000 stock options and the calculation of basic net income per share for the three and six months ended March 31, 2014 excludes 49,000 stock options with an exercise price in excess of fair value, because in each case the inclusion of those shares in the calculation would have been anti-dilutive.



9

Draft 5                        Preliminary & Tentative        For Discussion Purposes Only

4.    Inventories

Inventories consist of the following:
 
March 31, 2015
 
September 30, 2014
 
(Amounts in thousands)
Raw materials
$
2,191

 
$
2,377

Work-in-process
634

 
229

Finished goods
4,206

 
3,840

Total
$
7,031

 
$
6,446

 
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria have not been met, of approximately $0.1 million and $0.4 million as of March 31, 2015 and September 30, 2014, respectively.
 
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.6 million and $4.7 million as of March 31, 2015 and September 30, 2014.
 

5.    Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss are as follows:

 
 
March 31, 2015
 
September 30, 2014
 
 
(Amounts in thousands)
Cumulative effect of foreign currency translation
 
$
(2,612
)
 
$
(2,495
)
Cumulative unrealized loss on pension liability
 
(5,429
)
 
(5,429
)
Accumulated other comprehensive loss
 
$
(8,041
)
 
$
(7,924
)


6.    Pension and Retirement Plans
 
The Company has defined benefit and defined contribution plans in the United Kingdom, Germany and the U.S. In the United Kingdom and Germany, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain current and former employees. The domestic supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. Domestically, the Company also provides for officer death benefits through post-retirement plans to certain officers.  All of the Company’s defined benefit plans are closed to newly hired employees and have been for the two years ended September 30, 2014 and 2013 and for the six months ended March 31, 2015.

The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.
 
The Company's pension plan in the United Kingdom is the only plan with plan assets. The plan assets consist of an investment in a commingled fund which in turn comprises a diversified mix of assets including corporate equity securities, government securities and corporate debt securities.
 
The components of net periodic benefit costs related to the U.S. and international plans are as follows:
 

10



 
For the Three Months Ended March 31,
 
2015
 
2014
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
13

 
$

 
$
13

 
$
12

 
$

 
$
12

Interest cost
155

 
13

 
168

 
193

 
17

 
210

Expected return on plan assets
(104
)
 

 
(104
)
 
(117
)
 

 
(117
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service gain

 

 

 

 

 

Amortization of net gain
49

 
(1
)
 
48

 
23

 
(2
)
 
21

Net periodic benefit cost
$
113

 
$
12

 
$
125

 
$
111

 
$
15

 
$
126

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
9

 
$
9

 
$

 
$
2

 
$
2

Interest cost

 
11

 
11

 

 
11

 
11

Amortization of net gain

 
(13
)
 
(13
)
 

 
(36
)
 
(36
)
Net periodic cost (benefit)
$

 
$
7

 
$
7

 
$

 
$
(23
)
 
$
(23
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended March 31,
 
2015
 
2014
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
28

 
$

 
$
28

 
$
23

 
$

 
$
23

Interest cost
320

 
26

 
346

 
383

 
34

 
417

Expected return on plan assets
(212
)
 

 
(212
)
 
(232
)
 

 
(232
)
Amortization of:
 
 
 
 
 

 
 
 
 
 
 

Prior service gain

 

 

 

 

 

Amortization of net gain
102

 
(2
)
 
100

 
46

 
(4
)
 
42

Net periodic benefit cost
$
238

 
$
24

 
$
262

 
$
220

 
$
30

 
$
250

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
17

 
$
17

 
$

 
$
5

 
$
5

Interest cost

 
22

 
22

 

 
22

 
22

Amortization of net gain

 
(25
)
 
(25
)
 

 
(72
)
 
(72
)
Net periodic cost (benefit)
$

 
$
14

 
$
14

 
$

 
$
(45
)
 
$
(45
)



11


7.    Segment Information
 
The following table presents certain operating segment information.


 
 
 
 
Technology Solutions Segment
 
 
For the three Months Ended March 31,
 
High Performance Products Segment
 
Germany
 
United
Kingdom
 
U.S.
 
Total
 
Consolidated
Total
 
 
(Amounts in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
2,527

 
$
1,796

 
$
891

 
$
8,981

 
$
11,668

 
$
14,195

Service
 
130

 
3,690

 
213

 
649

 
4,552

 
4,682

Total sales
 
2,657

 
5,486

 
1,104

 
9,630

 
16,220

 
18,877

Loss from operations
 
(647
)
 
170

 
(93
)
 
(69
)
 
8

 
(639
)
Assets
 
15,595

 
12,555

 
3,118

 
10,859

 
26,532

 
42,127

Capital expenditures
 
25

 
95

 

 

 
95

 
120

Depreciation and amortization
 
60

 
44

 
10

 
45

 
99

 
159

 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 

 
 

 
 

 
 

 
 

 
 

Sales:
 
 

 
 

 
 

 
 

 
 

 
 

Product
 
$
2,170

 
$
3,452

 
$
336

 
$
8,361

 
$
12,149

 
$
14,319

Service
 
1,065

 
4,486

 
304

 
729

 
5,519

 
6,584

Total sales
 
3,235

 
7,938

 
640

 
9,090

 
17,668

 
20,903

Income (loss) from operations
 
113

 
294

 
(30
)
 
(44
)
 
220

 
333

Assets
 
15,644

 
20,882

 
2,726

 
13,438

 
37,046

 
52,690

Capital expenditures
 
41

 
14

 
22

 
32

 
68

 
109

Depreciation and amortization
 
54

 
49

 
4

 
46

 
99

 
153




12


 
 
 
 
Technology Solutions Segment
 
 
For the six Months Ended March 31,
 
High Performance Products Segment
 
Germany
 
United
Kingdom
 
U.S.
 
Total
 
Consolidated
Total
 
 
(Amounts in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
4,979

 
$
3,940

 
$
2,461

 
$
18,468

 
$
24,869

 
$
29,848

Service
 
360

 
7,218

 
496

 
1,385

 
9,099

 
9,459

Total sales
 
5,339

 
11,158

 
2,957

 
19,853

 
33,968

 
39,307

Income (loss) from operations
 
(1,504
)
 
249

 
(25
)
 
(280
)
 
(56
)
 
(1,560
)
Assets
 
15,595

 
12,555

 
3,118

 
10,859

 
26,532

 
42,127

Capital expenditures
 
46

 
176

 
1

 

 
177

 
223

Depreciation and amortization
 
131

 
91

 
17

 
92

 
200

 
331

 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 

 
 

 
 

 
 

 
 

 
 

Sales:
 
 

 
 

 
 

 
 

 
 

 
 

Product
 
$
3,176

 
$
4,853

 
$
983

 
$
20,056

 
$
25,892

 
$
29,068

Service
 
2,348

 
8,674

 
632

 
1,513

 
10,819

 
13,167

Total sales
 
5,524

 
13,527

 
1,615

 
21,569

 
36,711

 
42,235

Income from operations
 
255

 
213

 
1

 
204

 
418

 
673

Assets
 
15,644

 
20,882

 
2,726

 
13,438

 
37,046

 
52,690

Capital expenditures
 
102

 
101

 
45

 
47

 
193

 
295

Depreciation and amortization
 
106

 
95

 
8

 
96

 
199

 
305





Income (loss) from operations consists of sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by either other income/expense or by income taxes expense/benefit. Non-operating charges/income consists principally of investment income and interest expense.  All intercompany transactions have been eliminated.
 
The following table lists customers from which the Company derived revenues in excess of 10% of total revenues for the three and six months ended March 31, 2015, and 2014.

 
 
For the three Months Ended March 31,
 
For the six Months Ended March 31,
 
 
2015
 
2014
 
2015
 
2014
 
 
Customer Revenues
 
% of Total
Revenues
 
Customer Revenues
 
% of Total
Revenues
 
Customer Revenues
 
% of Total
Revenues
 
Customer Revenues
 
% of Total
Revenues
 
(dollars in millions)
Customer A
 
$
2.4

 
13
%
 
$
1.9

 
9
%
 
$
4.7

 
12
%
 
$
8.0

 
19
%
Customer B
 
$
3.7

 
20
%
 
$
5.6

 
27
%
 
$
6.6

 
17
%
 
$
8.9

 
21
%

In addition, accounts receivable from Customer B totaled approximately $4.5 million or 31% of total consolidated accounts receivable as of March 31, 2015 and $3.0 million or 20% of total consolidated accounts receivable as of September 30, 2014. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with this customer as of March 31, 2015. No other customer accounted for 10% or more of total consolidated accounts receivable as of March 31, 2015 or September 30, 2014.

13



8.    Fair Value Measures

Assets measured at fair value on a recurring basis are as follows:

 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Total
Balance
 
As of March 31, 2015
 
(Amounts in thousands)
Assets:
 
 
 
 
 
 
 
Money Market funds
$
507

 
$

 
$

 
$
507

Total assets measured at fair value
$
507

 
$

 
$

 
$
507

 
 
 
 
 
 
 
 

 
As of September 30, 2014
 
(Amounts in thousands)
Assets:
 

 
 

 
 

 
 

Money Market funds
$
1,006

 
$

 
$

 
$
1,006

Total assets measured at fair value
$
1,006

 
$

 
$

 
$
1,006


These assets are included in cash and cash equivalents in the accompanying consolidated balance sheets.  All other monetary assets and liabilities are short-term in nature and approximate their fair value. The Company did not have any transfers between Level 1, Level 2 or Level 3 measurements.

The Company had no liabilities measured at fair value as of March 31, 2015 or September 30, 2014. The Company had no assets or liabilities measured at fair value on a non recurring basis as of March 31, 2015 or September 30, 2014.

9.    Dividends

On December 16, 2014, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on January 8, 2015 to shareholders of record as of December 28, 2014, the record date.

On February 11, 2015 the Company's board of directors declared a cash dividend of $0.11 per share which was paid on March 12, 2015 to shareholders of record as of February 26, 2015, the record date.

10.    Acquired Business

On November 4, 2013 the Company acquired substantially all of the assets of Myricom, Inc.  Myricom has been integrated into the High Performance Products segment.
Although Myricom was an established business prior to the acquisition, it had previously sold off a significant portion of its business and was faced with the likelihood of having to shut down operations if it could not find a buyer to purchase its remaining assets because the revenue that Myricom was able to generate from these remaining assets was not sufficient to operate the business profitably.  As a result, the Company recognized a bargain purchase gain.  The Company paid total cash consideration of approximately $0.5 million to acquire substantially all of the assets of Myricom and incurred approximately $0.1 million for the assumption of certain other liabilities.  The purchase of Myricom resulted in the recognition of a net after tax bargain purchase gain of approximately $0.5 million as shown below.

14


The purchase price was allocated as follows:
 
(Amounts in Thousands)
Inventory
$
1,030

Property & equipment
17

Intangibles
260

Gross assets acquired
1,307

Product warranty liability assumed
(93
)
Net assets acquired
1,214

Less: asset purchase price
500

Bargain purchase gain before tax
714

Deferred tax on bargain purchase gain
(252
)
Bargain purchase gain, net of tax effect
$
462

The results of operations of Myricom for the for the six months ended March 31, 2015 and the five month period beginning on November 4, 2013 and ending on March 31, 2014 are included in the Company’s consolidated statements of operations for the three and six months ended March 31, 2015 and 2014, respectively.

15


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, 2014 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, 2015, we have renamed our segments. We have renamed the segment that was formerly known as the High Performance Products and Solutions segment to the High Performance Products ("HPP") segment. We have also renamed the segment that was formerly known as the Information Technology Solutions segment to the Technology Solutions ("TS") segment.

Overview of the three months ended March 31, 2015

Overview:

     Our revenue decreased by approximately $2.0 million, or 10%, to $18.9 million for the three months ended March 31, 2015 versus $20.9 million for the three months ended March 31, 2014. The decrease in revenue is primarily attributed to $0.8 million of royalty revenue for one plane in the second quarter of 2014 as compared to no plane royalty revenue for the same period in 2015 and a $1.4 million decrease in TS segment revenues, partially offset by $0.2 million of additional HPP revenues. We expect to recognize royalty revenue on five planes during the last 6 months of fiscal year 2015.

Our gross profit margin percentage decreased overall, from 24% of revenues for the three months ended March 31, 2014 to 21% for the three months ended March 31, 2015. The 3% decrease in our gross margin percentage is attributed to not having $0.8 million of gross profit from plane royalty revenue the second quarter of 2015.

We incurred an operating loss of approximately $0.6 million for the three-month period ended March 31, 2015 as compared to $0.3 million of operating income for the three months ended March 31, 2014. The $1.0 million decrease in income from operations is attributed to the decline in gross profit for the period as operating expenses remained relatively flat for the comparative period.


16




17


The following table details our results of operations in dollars and as a percentage of sales for the three months ended March 31, 2015 and 2014:
 
 
 
March 31, 2015
 
%
of sales
 
March 31, 2014
 
%
of sales
 
 
(Dollar amounts in thousands)
Sales
 
$
18,877

 
100
 %
 
$
20,903

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales
 
14,834

 
79
 %
 
15,821

 
76
 %
Engineering and development
 
826

 
4
 %
 
792

 
4
 %
Selling, general and administrative
 
3,856

 
20
 %
 
3,957

 
19
 %
Total costs and expenses
 
19,516

 
103
 %
 
20,570

 
98
 %
Operating income (loss)
 
(639
)
 
(3
)%
 
333

 
2
 %
Other expense
 
(129
)
 
(1
)%
 
(48
)
 
 %
Income (loss) before income taxes
 
(768
)
 
(4
)%
 
285

 
2
 %
Income tax expense (benefit)
 
(93
)
 
 %
 
118

 
1
 %
Net income (loss)
 
$
(675
)
 
(4
)%
 
$
167

 
1
 %


Revenues

     Our revenues decreased by $2.0 million to $18.9 million for the three months ended March 31, 2015 as compared to $20.9 million of revenues for the same period in fiscal year 2014. The revenue decrease discussed above was comprised of a $0.6 million decrease in HPP segment revenues and a $1.4 million decrease in TS segment revenues.


HPP segment revenue change by product line for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
 
 
 
 
 
 
Increase (decrease)
 
 
2015
 
2014
 
$
 
%
Products
 
$
2,527

 
$
2,170

 
$
357

 
16
 %
Services
 
130

 
1,065

 
(935
)
 
(88
)%
Total
 
$
2,657

 
$
3,235

 
$
(578
)
 
(18
)%

The decrease in HPP revenues, for the second quarter of 2015 compared to the same period in fiscal year 2014, is attributed to $0.8 million of plane royalty revenue related to one plane in the second quarter of 2014 compared to no plane royalty revenues in the same period in 2015 which was partially offset by an increase in product revenues related to Myricom products and defense sector sales. We expect to recognize royalty revenue on five planes during the last six months of 2015.


TS segment revenue change by product line for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
 
 
 
 
 
 
(Decrease)
 
 
2015
 
2014
 
$
 
%
Products
 
$
11,668

 
$
12,149

 
$
(481
)
 
(4
)%
Services
 
4,552

 
5,519

 
(967
)
 
(18
)%
Total
 
$
16,220

 
$
17,668

 
$
(1,448
)
 
(8
)%

The decrease in TS revenues, for the second quarter of 2015 compared to the same period in 2014, was the result of a $2.5 million decrease in our German division, partially offset by $0.5 million increases in both our US and UK divisions,

18


respectively. The decrease in our German division revenue is primarily attributed to the impact of the decline in the Euro as compared to the US dollar and the timing of orders for the second quarter of 2015 compared to the same period in 2014.

  
Our revenues by geographic area for the three months ended March 31, 2015 and 2014 based on the location to which the products were shipped or services rendered was as follows (in thousands):
 
 
For the three Months Ended March 31,
 
(Decrease)
 
 
2015
 
%
 
2014
 
%
 
$
 
%
Americas
 
$
11,547

 
61
%
 
$
11,981

 
58
%
 
$
(434
)
 
(4
)%
Europe
 
6,673

 
35
%
 
8,225

 
39
%
 
(1,552
)
 
(19
)%
Asia
 
657

 
4
%
 
697

 
3
%
 
(40
)
 
(6
)%
Totals
 
$
18,877

 
100
%
 
$
20,903

 
100
%
 
$
(2,026
)
 
(10
)%



Gross Margins

     Our gross margin ("GM") for the three months ended March 31, 2015 decreased by $1.0 million or 3% of revenues to $4.0 million and as compared to a gross margin of $5.1 million for the three months ended March 31, 2014 as follows (in thousands):
 
 
 
2015
 
2014
 
(Decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
HPP
 
$
1,267

48
%
 
$
1,996

62
%
 
$
(729
)
 
(14
)%
TS
 
2,776

17
%
 
3,086

17
%
 
(310
)
 
 %
Total
 
$
4,043

21
%
 
$
5,082

24
%
 
$
(1,039
)
 
(3
)%
    
The impact of product mix within our HPP segment for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
 
HPP Segment
 
2015
 
2014
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
Product
 
$
1,147

45
%
 
$
978

45
%
 
$
169

 
 %
Services
 
120

92
%
 
1,018

96
%
 
(898
)
 
(4
)%
Total
 
$
1,267

48
%
 
$
1,996

62
%
 
$
(729
)
 
(14
)%

The decrease in our HPP segment gross margins is primarily attributed to the impact of $0.8 million of royalty revenue related to one plane at approximately 100% gross margin in the second quarter of fiscal year 2014 as compared to no plane royalty revenue in the second quarter of fiscal year 2015.

The impact of product mix within our TS segment on gross margin for the three months ended March 31, 2015 and 2014 was as follows (in thousands):
TS Segment
 
2015
 
2014
 
(Decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
Product
 
1,668

14
%
 
$
1,673

14
%
 
$
(5
)
 
 %
Services
 
1,108

24
%
 
1,413

26
%
 
(305
)
 
(2
)%
Total
 
$
2,776

17
%
 
$
3,086

17
%
 
$
(310
)
 
 %


     The decrease in our TS segment gross margin of $0.3 million is attributed to decreased service revenue generated by our German division for second quarter of 2015 as compared the same period in 2014.

19




Engineering and Development Expenses
 
The engineering and development expenses incurred exclusively by our HPP segment was $0.8 million for the three months ended March 31, 2015 and March 31, 2014, respectively. The current year expenses are primarily for Myricom engineering expenses incurred in connection with the development of new products expected to be released in the second half of fiscal year 2015.
 
Selling, General and Administrative
 
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended March 31, 2015 and 2014:
 
 
For the three Months Ended March 31,
 
 
 
 
 
2015
 
% of
Total
 
2014
 
% of
Total
 
$ (Decrease)
 
% (Decrease)
 
(Dollar amounts in thousands)
By Operating Segment:
 
 
 
 
 
 
 
 
 
 
 
HPP segment
1,088

 
28
%
 
$
1,091

 
28
%
 
$
(3
)
 
 %
TS segment
2,768

 
72
%
 
2,866

 
72
%
 
(98
)
 
(3
)%
Total
$
3,856

 
100
%
 
$
3,957

 
100
%
 
$
(101
)
 
(3
)%
 
The HPP segment SG&A expenses were relatively flat for the second quarter of 2015 as compared to the same period in 2014 and the TS segment SG&A expenses decreased slightly for the same comparative period primarily attributed to lower variable sales and marketing cost in our German division.
 
Other Income/Expenses
 
The following table details our other income (expense) for the three months ended March 31, 2015 and 2014:
 
For the three months ended,
 
 
 
March 31, 2015
 
March 31, 2014
 
Decrease
 
(Amounts in thousands)
Interest expense
$
(21
)
 
$
(21
)
 
$

Interest income
1

 
1

 

Foreign exchange loss
(108
)
 
(27
)
 
(81
)
Other expense, net
(1
)
 
(1
)
 

Total other income (expense), net
$
(129
)
 
$
(48
)
 
$
(81
)
 
The increase in the foreign exchange loss for the three month periods ended March 31, 2015 versus the comparable period of 2014 was due to losses on foreign currency holdings where those currencies weakened against the functional currencies in those countries.



Income Taxes

For the three months ended March 31, 2015, the Company recognized an income tax benefit of $93 thousand of which is primarily related to the loss in the US operation of $705 thousand. There was no tax benefit recorded on the loss in the UK because the company has recorded a valuation allowance which reduces the gross deferred tax asset to an amount which we believe will more likely than not be realized.

20





Overview of the six months ended March 31, 2015


Revenue decreased by approximately $2.9 million, or 7%, to $39.3 million for the six months ended March 31, 2015 versus $42.2 million for the six months ended March 31, 2014.

Our gross profit margin percentage decreased overall, from 23% of revenues for the six months ended March 31, 2014 to 20% for the six months ended March 31, 2015. The 3% decrease in the gross profit margin is primarily attributed to our HPP segment not having $1.8 million of 100% gross margin royalty revenue related to three planes in the first six months of fiscal year 2015 as we did in the comparable period in fiscal year 2014. We expect to recognize royalty revenue on five planes during the last 6 months of fiscal year 2015.

We incurred an operating loss of approximately $1.6 million for the six-month period ended March 31, 2015 compared to $0.7 million of operating income for the six months ended March 31, 2014. The $2.3 million decrease in income from operations is primarily attributed to the $1.6 million decrease in gross profit (described above), the recognition of a $0.5 million bargain purchase gain related to our Myricom acquisition in the first quarter of fiscal year 2014 and approximately $0.3 million in additional engineering expenditures related to bringing the next generation of Myricom product to market partially offset by $0.1 million of lower sales and marketing expenses.

The following table details our results of operations in dollars and as a percentage of sales for the six months ended March 31, 2015 and 2014:
 
 
 
March 31, 2015
 
%
of sales
 
March 31, 2014
 
%
of sales
 
 
(Dollar amounts in thousands)
Sales
 
$
39,307

 
100
 %
 
$
42,235

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales
 
31,309

 
80