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EX-31.1 - EXHIBIT 31.1 - CSP INC /MA/cspi-2015630xex311.htm
EX-31.2 - EXHIBIT 31.2 - CSP INC /MA/cspi-2015630xex312.htm
EX-32.1 - EXHIBIT 32.1 - CSP INC /MA/cspi-2015630xex321.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
June 30, 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 August 12, 2015, the registrant had 3,673,589 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) 
 
June 30,
2015
 
September 30,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,446

 
$
16,448

Accounts receivable, net of allowances of $234 and $241
17,367

 
12,532

Inventories, net
6,646

 
6,446

Refundable income taxes
658

 
418

Deferred income taxes
1,178

 
1,230

Other current assets
2,741

 
2,372

Total current assets
39,036

 
39,446

Property, equipment and improvements, net
1,367

 
1,472

 
 
 
 
Other assets:
 

 
 

Intangibles, net
448

 
545

Deferred income taxes
1,819

 
1,892

Cash surrender value of life insurance
3,037

 
2,785

Other assets
275

 
167

Total other assets
5,579

 
5,389

Total assets
$
45,982

 
$
46,307

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
13,042

 
$
9,751

Deferred revenue
3,128

 
4,101

Pension and retirement plans
663

 
658

Income taxes payable

 
1

Total current liabilities
16,833

 
14,511

Pension and retirement plans
9,635

 
10,440

Other long term liabilities

 
69

Total liabilities
26,468

 
25,020

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,674 and 3,619 shares, respectively
37

 
36

Additional paid-in capital
12,047

 
11,658

Retained earnings
15,442

 
17,517

Accumulated other comprehensive loss
(8,012
)
 
(7,924
)
Total shareholders’ equity
19,514

 
21,287

Total liabilities and shareholders’ equity
$
45,982

 
$
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 nine months ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Sales:
 
 
 
 
 
 
 
Product
$
15,696

 
$
15,677

 
$
45,544

 
$
44,745

Services
6,591

 
6,959

 
16,050

 
20,126

Total sales
22,287

 
22,636

 
61,594

 
64,871

 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
Product
13,461

 
13,058

 
37,974

 
37,447

Services
3,560

 
3,474

 
10,356

 
11,705

Total cost of sales
17,021

 
16,532

 
48,330

 
49,152

 
 
 
 
 
 
 
 
Gross profit
5,266

 
6,104

 
13,264

 
15,719

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Engineering and development
626

 
945

 
2,305

 
2,372

Selling, general and administrative
3,945

 
4,192

 
11,824

 
12,169

Total operating expenses
4,571

 
5,137

 
14,129

 
14,541

 
 
 
 
 
 
 
 
Bargain purchase gain on acquisition, net of tax

 

 

 
462

 
 
 
 
 
 
 
 
Operating income (loss)
695

 
967

 
(865
)
 
1,640

 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Foreign exchange loss
(87
)
 
(67
)
 
(216
)
 
(120
)
Other expense, net
(26
)
 
(37
)
 
(59
)
 
(58
)
Total other expense
(113
)
 
(104
)
 
(275
)
 
(178
)
Income (loss) before income taxes
582

 
863

 
(1,140
)
 
1,462

Income tax expense (benefit)
333

 
(36
)
 
(277
)
 
50

Net income (loss)
$
249

 
$
899

 
$
(863
)
 
$
1,412

Net income (loss) attributable to common stockholders
$
240

 
$
863

 
$
(863
)
 
$
1,361

Net income (loss) per share – basic
$
0.07

 
$
0.25

 
$
(0.25
)
 
$
0.40

Weighted average shares outstanding – basic
3,540

 
3,451

 
3,522

 
3,442

Net income (loss) per share – diluted
$
0.07

 
$
0.25

 
$
(0.25
)
 
$
0.39

Weighted average shares outstanding – diluted
3,633

 
3,499

 
3,522

 
3,488

 
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 nine months ended
 
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
249

 
$
899

 
$
(863
)
 
$
1,412

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss) adjustments
 
29

 
(92
)
 
(88
)
 
62

Other comprehensive income (loss)
 
29

 
(92
)
 
(88
)
 
62

Total comprehensive income (loss)
 
$
278

 
$
807

 
$
(951
)
 
$
1,474


See accompanying notes to unaudited consolidated financial statements.


5


CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the nine Months Ended June 30, 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

 

 

 
(863
)
 

 
(863
)
Other comprehensive loss

 

 

 

 
(88
)
 
(88
)
Stock-based compensation

 

 
285

 

 

 
285

Restricted stock issuance
40

 
1

 

 

 

 
1

Issuance of shares under employee stock purchase plan
15

 

 
104

 

 

 
104

Cash dividends on common stock ($0.33 per share)

 

 

 
(1,212
)
 

 
(1,212
)
Balance as of June 30, 2015
3,674

 
$
37

 
$
12,047

 
$
15,442

 
$
(8,012
)
 
$
19,514

 
See accompanying notes to unaudited consolidated financial statements.

6


CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
For the nine months ended
 
June 30,
2015
 
June 30,
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(863
)
 
$
1,412

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

 
 

Bargain purchase gain

 
(462
)
Depreciation and amortization
385

 
364

Amortization of intangibles
97

 
92

Loss on sale of fixed assets, net
54

 
2

Foreign exchange loss
216

 
120

Non-cash changes in accounts receivable
(4
)
 
(17
)
Non-cash changes in inventory
240

 
146

Stock-based compensation expense on stock options and restricted stock awards
285

 
260

Deferred income taxes
27

 
273

Increase in cash surrender value of life insurance
(59
)
 
(114
)
Changes in operating assets and liabilities:
 

 
 

Increase in accounts receivable
(5,439
)
 
(2,110
)
Increase in inventories
(497
)
 
(1,160
)
(Increase) decrease in refundable income taxes
(187
)
 
373

Increase in other current assets
(506
)
 
(485
)
Increase in other assets
(119
)
 

Increase in accounts payable and accrued expenses
3,691

 
425

Increase (decrease) in deferred revenue
(619
)
 
1,662

Decrease in pension and retirement plans liability
(58
)
 
(168
)
Decrease in income taxes payable
(72
)
 
(311
)
Increase in other long term liabilities
(69
)
 
(338
)
Net cash used in operating activities
(3,497
)
 
(36
)
Cash flows from investing activities:
 

 
 

Life insurance premiums paid
(193
)
 
(167
)
Proceeds from the sale of fixed assets

 
6

Cash paid to acquire business

 
(500
)
Purchases of property, equipment and improvements
(398
)
 
(370
)
Net cash used in investing activities
(591
)
 
(1,031
)
Cash flows from financing activities:
 

 
 

Dividends paid
(1,212
)
 
(1,148
)
Proceeds from issuance of shares under equity compensation plans
105

 
6

Net cash used in financing activities
(1,107
)
 
(1,142
)
Effects of exchange rate on cash
(807
)
 
40

Net decrease in cash and cash equivalents
(6,002
)
 
(2,169
)
Cash and cash equivalents, beginning of period
16,448

 
18,619

Cash and cash equivalents, end of period
$
10,446

 
$
16,450

Supplementary cash flow information:
 

 
 

Cash paid for income taxes
$
72

 
$
96

Cash paid for interest
$
85

 
$
85

 See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED JUNE 30, 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 and post-delivery support obligations 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 nine months ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
(Amounts in thousands except per share data)
Net income (loss)
$
249

 
$
899

 
$
(863
)
 
$
1,412

Less: net income attributable to nonvested common stock
9

 
36

 

 
51

Net income (loss) attributable to common stockholders
$
240

 
$
863

 
$
(863
)
 
$
1,361

 
 
 
 
 
 
 
 
Weighted average total shares outstanding – basic
3,674

 
3,593

 
3,522

 
3,572

Less: weighted average non-vested shares outstanding
134

 
142

 

 
130

Weighted average number of common shares outstanding – basic
3,540

 
3,451

 
3,522

 
3,442

Potential common shares from non-vested stock awards and the assumed exercise of stock options
93

 
48

 

 
46

Weighted average common shares outstanding – diluted
3,633

 
3,499

 
3,522

 
3,488

 
 
 
 
 
 
 
 
Net income (loss) per share – basic
$
0.07

 
$
0.25

 
$
(0.25
)
 
$
0.40

Net income (loss) per share – diluted
$
0.07

 
$
0.25

 
$
(0.25
)
 
$
0.39

 
All anti-dilutive securities, including certain stock options, are excluded from the diluted income (loss) per share computation. For the three months ended June, 2015 and 2014, 12,000 and 58,000 options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive as their exercise price exceeded fair value. For the nine months ended June, 2015 and 2014, 28,000 and 52,000 options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive as their exercise price exceeded fair value. Additionally, 130,000 non-vested restricted stock awards were excluded from the diluted income per share calculation as there was a net loss for the nine months ended June 30, 2015 and their inclusion would have been anti-dilutive.






9

Draft 5                        Preliminary & Tentative        For Discussion Purposes Only

4.    Inventories

Inventories consist of the following:
 
June 30, 2015
 
September 30, 2014
 
(Amounts in thousands)
Raw materials
$
2,079

 
$
2,377

Work-in-process
812

 
229

Finished goods
3,755

 
3,840

Total
$
6,646

 
$
6,446

 
Finished goods includes inventory of approximately $0.1 million and $0.4 million as of June 30, 2015 and September 30, 2014, respectively, that has been shipped, but for which all revenue recognition criteria have not been met
 
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $3.9 million and $4.7 million as of June 30, 2015 and September 30, 2014.
 

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

 
 
June 30, 2015
 
September 30, 2014
 
 
(Amounts in thousands)
Cumulative effect of foreign currency translation
 
$
(2,583
)
 
$
(2,495
)
Cumulative unrealized loss on pension liability
 
(5,429
)
 
(5,429
)
Accumulated other comprehensive loss
 
$
(8,012
)
 
$
(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 nine months ended June 30, 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 June 30,
 
2015
 
2014
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
13

 
$

 
$
13

 
$
10

 
$

 
$
10

Interest cost
157

 
13

 
170

 
196

 
17

 
213

Expected return on plan assets
(105
)
 

 
(105
)
 
(120
)
 

 
(120
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service gain

 

 

 

 

 

Amortization of net gain
49

 
(1
)
 
48

 
24

 
(3
)
 
21

Net periodic benefit cost
$
114

 
$
12

 
$
126

 
$
110

 
$
14

 
$
124

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
9

 
$
9

 
$

 
$
3

 
$
3

Interest cost

 
11

 
11

 

 
10

 
10

Amortization of net gain

 
(13
)
 
(13
)
 

 
(35
)
 
(35
)
Net periodic cost (benefit)
$

 
$
7

 
$
7

 
$

 
$
(22
)
 
$
(22
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30,
 
2015
 
2014
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
42

 
$

 
$
42

 
$
34

 
$

 
$
34

Interest cost
476

 
39

 
515

 
579

 
51

 
630

Expected return on plan assets
(317
)
 

 
(317
)
 
(352
)
 

 
(352
)
Amortization of:
 
 
 
 
 

 
 
 
 
 
 

Prior service gain

 

 

 

 

 

Amortization of net gain
151

 
(2
)
 
149

 
70

 
(7
)
 
63

Net periodic benefit cost
$
352

 
$
37

 
$
389

 
$
331

 
$
44

 
$
375

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
26

 
$
26

 
$

 
$
8

 
$
8

Interest cost

 
33

 
33

 

 
32

 
32

Amortization of net gain

 
(38
)
 
(38
)
 

 
(107
)
 
(107
)
Net periodic cost (benefit)
$

 
$
21

 
$
21

 
$

 
$
(67
)
 
$
(67
)






11


The fair value of the assets held by the UK pension plan by asset category are as follows:

 
Fair Values as of
 
June 30, 2015
 
September 30, 2014
 
Fair Value Measurements Using Inputs Considered as
 
Fair Value Measurements Using Inputs Considered as
Asset Category
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(Thousands)
Cash on deposit
$
332

 
$
332

 
$

 
$

 
$
352

 
$
352

 
$

 
$

Pooled Funds
9,528

 

 
9,528

 

 
9,742

 

 
9,742

 

Total Plan Assets
$
9,860

 
$
332

 
$
9,528

 
$

 
$
10,094

 
$
352

 
$
9,742

 
$

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 










12


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


 
 
 
 
Technology Solutions Segment
 
 
For the three Months Ended June 30,
 
High Performance Products Segment
 
Germany
 
United
Kingdom
 
U.S.
 
Total
 
Consolidated
Total
 
 
(Amounts in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
1,844

 
$
1,289

 
$
601

 
$
11,962

 
$
13,852

 
$
15,696

Service
 
2,085

 
3,535

 
377

 
594

 
4,506

 
6,591

Total sales
 
3,929

 
4,824

 
978

 
12,556

 
18,358

 
22,287

Income (loss) from operations
 
871

 
196

 
(558
)
 
186

 
(176
)
 
695

Assets
 
16,034

 
12,854

 
2,955

 
14,139

 
29,948

 
45,982

Capital expenditures
 
4

 
30

 

 
142

 
172

 
176

Depreciation and amortization
 
56

 
39

 
10

 
46

 
95

 
151

 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 

 
 

 
 

 
 

 
 

 
 

Sales:
 
 

 
 

 
 

 
 

 
 

 
 

Product
 
$
2,697

 
$
3,323

 
$
368

 
$
9,289

 
$
12,980

 
$
15,677

Service
 
2,137

 
3,546

 
402

 
874

 
4,822

 
6,959

Total sales
 
4,834

 
6,869

 
770

 
10,163

 
17,802

 
22,636

Income (loss) from operations
 
998

 
44

 
(20
)
 
(55
)
 
(31
)
 
967

Assets
 
15,932

 
15,271

 
3,595

 
14,941

 
33,807

 
49,739

Capital expenditures
 
57

 
17

 

 
1

 
18

 
75

Depreciation and amortization
 
53

 
46

 
4

 
48

 
98

 
151




13


 
 
 
 
Technology Solutions Segment
 
 
For the nine Months Ended June 30,
 
High Performance Products Segment
 
Germany
 
United
Kingdom
 
U.S.
 
Total
 
Consolidated
Total
 
 
(Amounts in thousands)
2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
6,823

 
$
5,229

 
$
3,062

 
$
30,430

 
$
38,721

 
$
45,544

Service
 
2,445

 
10,753

 
873

 
1,979

 
13,605

 
16,050

Total sales
 
9,268

 
15,982

 
3,935

 
32,409

 
52,326

 
61,594

Income (loss) from operations
 
(633
)
 
445

 
(583
)
 
(94
)
 
(232
)
 
(865
)
Assets
 
16,034

 
12,854

 
2,955

 
14,139

 
29,948

 
45,982

Capital expenditures
 
50

 
205

 
1

 
142

 
348

 
398

Depreciation and amortization
 
187

 
130

 
27

 
138

 
295

 
482

 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 

 
 

 
 

 
 

 
 

 
 

Sales:
 
 

 
 

 
 

 
 

 
 

 
 

Product
 
$
5,873

 
$
8,176

 
$
1,351

 
$
29,345

 
$
38,872

 
$
44,745

Service
 
4,485

 
12,220

 
1,034

 
2,387

 
15,641

 
20,126

Total sales
 
10,358

 
20,396

 
2,385

 
31,732

 
54,513

 
64,871

Income (loss) from operations
 
1,253

 
257

 
(19
)
 
149

 
387

 
1,640

Assets
 
15,932

 
15,271

 
3,595

 
14,941

 
33,807

 
49,739

Capital expenditures
 
159

 
118

 
45

 
48

 
211

 
370

Depreciation and amortization
 
159

 
141

 
12

 
144

 
297

 
456



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 nine months ended June 30, 2015, and 2014.

 
 
For the three Months Ended June 30,
 
For the nine Months Ended June 30,
 
 
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
 
$
4.4

 
20
%
 
$
3.7

 
17
%
 
$
9.1

 
15
%
 
$
11.8

 
18
%
Customer B
 
$
2.9

 
13
%
 
$
3.6

 
16
%
 
$
9.5

 
15
%
 
$
12.5

 
19
%

In addition, accounts receivable from Customer A totaled approximately $3.6 million or 21% and Customer B and $4.1 million or 24% of total consolidated accounts receivable as of June 30, 2015. Accounts receivable from Customer B totaled approximately $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 these customers as of June 30, 2015. No other customer accounted for 10% or more of total consolidated accounts receivable as of June 30, 2015 or September 30, 2014.

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


14

Draft 5                        Preliminary & Tentative        For Discussion Purposes Only

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.

On May 13, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on June 10, 2015 to shareholders of record as of May 29, 2015, the record date.

On August 12, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which will be paid on September 11, 2015 to shareholders of record as of August 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.

15


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 nine months ended June 30, 2015 and the eight month period beginning on November 4, 2013 and ending on June 30, 2014 are included in the Company’s consolidated statements of operations for the three and nine months ended June 30, 2015 and 2014, respectively.

16


11.    Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014 ‑09, Revenue from Contracts with Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  This ASU clarifies the principles for recognizing revenue by, among other things, removing inconsistencies in revenue requirements, improving comparability of revenue recognition practices across entities and industries and providing improved disclosure requirements. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017; however, early adoption at the original effective date is still permitted.  We are currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.
 
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which excludes investments measured at net asset value, as a practical expedient for fair value, from the fair value hierarchy. This ASU is effective for interim and annual reporting periods beginning after December 15, 2015, and requires retrospective application, with early adoption permitted. The implementation of this ASU is not expected to have a material impact to the disclosures in our consolidated financial statements.

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 but not limited to, among others, 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,” “project”, “estimate” “should” “could,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “would” and similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, the forward-looking statements are subject to significant risks and uncertainties, and thus 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. We discuss many of these risks and uncertainties in Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2014. Factors that may cause such variances include, but are not limited to, our dependence on a small number of customers for a significant portion of our revenue, our high dependence on contracts with the U.S. federal government, our reliance in certain circumstances on single sources for supply of key product components, and intense competition in the market segments in which we operate. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this document. Except as required by law, we do not undertake any obligation to publicly update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this filing and in our Annual Report on Form 10-K for the year ended September 30, 2014
 
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.
 

17


Results of Operations

Explanatory note

As of March 31, 2015 we renamed the segment that was formerly known as the High Performance Products and Solutions segment to the High Performance Products ("HPP") segment. As of the same date, we 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 June 30, 2015


     Our revenue decreased by approximately $0.3 million, or 2%, to $22.3 million for the three months ended June 30, 2015 versus $22.6 million for the three months ended June 30, 2014. The decrease in revenue is the result of decreases of $2.0 million and $0.9 million in the German TS segment and the US HPP segment, respectively, which were largely offset by TS segment increases of $2.4 million and $0.2 million in the US and UK, respectively. Approximately $1.4 million of the revenue decrease in the TS segment for the three months ended June 30, 2015 is attributed to the decline in the currency exchange rate for the Euro and the British Pound as compared to the US dollar.

Our gross profit margin percentage decreased overall, from 27% of revenues for the three months ended June 30, 2014 to 24% for the three months ended June 30, 2015. The 3% decrease in our gross margin percentage is primarily attributed to losses in the UK to due to additional costs on fixed price contracts that we were unable to bill for additional revenue and lower margins on product revenues.

Operating income decreased by $0.3 million to $0.7 million for the three month period ended June 30, 2015 compared to the same period in 2014 as a result of a lower gross profit that was partially offset by reductions in operating expenses.


18


The following table details our results of operations in dollars and as a percentage of sales for the three months ended:
 
 
 
June 30, 2015
 
%
of sales
 
June 30, 2014
 
%
of sales
 
 
(Dollar amounts in thousands)
Sales
 
$
22,287

 
100
 %
 
$
22,636

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales
 
17,021

 
76
 %
 
16,532

 
73
 %
Engineering and development
 
626

 
3
 %
 
945

 
4
 %
Selling, general and administrative
 
3,945

 
18
 %
 
4,192

 
19
 %
Total costs and expenses
 
21,592

 
97
 %
 
21,669

 
96
 %
Operating income
 
695

 
3
 %
 
967

 
4
 %
Other expense
 
(113
)
 
(1
)%
 
(104
)
 
 %
Income before income taxes
 
582

 
2
 %
 
863

 
4
 %
Income tax expense (benefit)
 
333

 
2
 %
 
(36
)
 
 %
Net income
 
$
249

 
 %
 
$
899

 
4
 %


Revenues

     Our revenues decreased by $0.3 million to $22.3 million for the three months ended June 30, 2015 as compared to $22.6 million of revenues for the same period in fiscal year 2014. The revenue decrease was comprised of a $0.9 million decrease in HPP segment revenues, partially offset by a $0.6 million increase in TS segment revenues.


HPP segment revenue change by product line was as follows for the three months ended:
($ in thousands)
 
 
 
 
 
Decrease
 
 
2015
 
2014
 
$
 
%
Products
 
$
1,844

 
$
2,697

 
$
(853
)
 
(32
)%
Services
 
2,085

 
2,137

 
(52
)
 
(2
)%
Total
 
$
3,929

 
$
4,834

 
$
(905
)
 
(19
)%

The decrease in HPP revenues, for the third quarter of 2015 compared to the same period in fiscal year 2014, is attributed to the timing of shipments to overseas defense contractors and a decrease in the Myricom product line revenue.


TS segment revenue change by product line was as follows for the three months ended:
($ in thousands)
 
 
 
 
 
Increase (decrease)
 
 
2015
 
2014
 
$
 
%
Products
 
$
13,852

 
$
12,980

 
$
872

 
7
 %
Services
 
4,506

 
4,822

 
(316
)
 
(7
)%
Total
 
$
18,358

 
$
17,802

 
$
556

 
3
 %

The $0.6 million increase in TS revenues for the third quarter of 2015 compared to the same period in 2014, was the result of increases in both our US and UK divisions of $2.4 million and $0.2 million, respectively, partially offset by $2.0 million decrease in our German division. Revenues during the third quarter of 2015 in our German and UK divisions were approximately $1.2 million and $0.2 million less than they otherwise respectively would have been because of the decline in the currency exchange rate for the Euro and the British Pound as compared to the US dollar. We consider the non-currency exchange rate related revenue decrease in our German division, and the increase in our US division revenues to be a result of the timing of orders rather than a change in market conditions.


19



  
Our revenues by geographic area based on the location to which the products were shipped or services rendered was as follows for the three months ended:
($ in thousands)
 
June 30,
 
Increase (decrease)
 
 
2015
 
%
 
2014
 
%
 
$
 
%
Americas
 
$
16,129

 
72
%
 
$
14,421

 
64
%
 
$
1,708

 
12
 %
Europe
 
6,032

 
27
%
 
7,728

 
34
%
 
(1,696
)
 
(22
)%
Asia
 
126

 
1
%
 
487

 
2
%
 
(361
)
 
(74
)%
Totals
 
$
22,287

 
100
%
 
$
22,636

 
100
%
 
$
(349
)
 
(2
)%



Gross Margins

     Our gross margin ("GM") decreased by $0.8 million or 3% of revenues to $5.3 million and as compared to a gross margin of $6.1 million for the three months ended June 30 as follows:
 
($ in thousands)
 
2015
 
2014
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
HPP
 
$
2,640

67
%
 
$
3,252

67
%
 
$
(612
)
 
 %
TS
 
2,626

14
%
 
2,852

16
%
 
(226
)
 
(2
)%
Total
 
$
5,266

24
%
 
$
6,104

27
%
 
$
(838
)
 
(3
)%
    
The impact of product mix within our HPP segment on gross margin for the three months ended was as follows:
 
($ in thousands)
 
2015
 
2014
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
Product
 
$
571

31
%
 
$
1,131

42
%
 
$
(560
)
 
(11
)%
Services
 
2,069

99
%
 
2,121

99
%
 
(52
)
 
 %
Total
 
$
2,640

67
%
 
$
3,252

67
%
 
$
(612
)
 
 %

The overall HPP segment gross margins as a percentage of sales was 67% for the three month periods ended June 30 2015 and 2014. The 11% decrease in product margins is primarily attributed to the acceleration of previously deferred costs. HPP service revenue primarily consists of high margin royalty payments.

The impact of product mix within our TS segment on gross margin for the three months ended June 30 was as follows :
($ in thousands)
 
2015
 
2014
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
Product
 
$
1,664

12
%
 
$
1,488

11
%
 
$
176

 
1
 %
Services
 
962

21
%
 
1,364

28
%
 
(402
)
 
(7
)%
Total
 
$
2,626

14
%
 
$
2,852

16
%
 
$
(226
)
 
(2
)%


     The TS segment gross margin declined as a percentage of sales for third quarter of 2015 as compared the same period in 2014, primarily because of losses in the UK due to additional costs on fixed price contracts that we were unable to bill for additional revenue and lower margins on product revenues.

Engineering and Development Expenses
 

20


The engineering and development expenses incurred exclusively by our HPP segment were $0.6 million and $0.9 million for the three months ended June 30, 2015 and 2014, respectively. The decrease in engineering and development expenses is attributed to a reduction of engineering labor and overhead not associated with the development of new Myricom products. The current year expenses are primarily for Myricom engineering expenses incurred in connection with the development of new products, which includes the release of our Myricom 10 Gigabyte Ethernet Adapters with DBL software following the third fiscal quarter 2015, on July 7, 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 June 30, 2015 and 2014:
 
 
For the three Months Ended June 30,
 
2015
 
% of
Total
 
2014
 
% of
Total
 
$ Decrease
 
% Decrease
 
(Dollar amounts in thousands)
By Operating Segment:
 
 
 
 
 
 
 
 
 
 
 
HPP segment
$
1,197

 
30
%
 
$
1,309

 
31
%
 
$
(112
)
 
(9
)%
TS segment
2,748

 
70
%
 
2,883

 
69
%
 
(135
)
 
(5
)%
Total
$
3,945

 
100
%
 
$
4,192

 
100
%
 
$
(247
)
 
(6
)%
 
The HPP segment SG&A expenses decrease of $0.1 million for the third quarter of 2015 as compared to the same period in 2014 is primarily attributed to lower incentive compensation costs. The TS segment SG&A expense decrease of $0.1 million is the result of lower compensation expenses and the currency exchange rate for the Euro and the British Pound as compared to the US dollar partially offset by increase variable marketing expenses.
 
Other Income/Expenses
 
The following table details our other income (expense) for the three months ended June 30, 2015 and 2014: