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EX-31.1 - EXHIBIT 31.1 - CSP INC /MA/cspi-2016331xex311.htm
EX-31.2 - EXHIBIT 31.2 - CSP INC /MA/cspi-2016331xex312.htm
EX-32.1 - EXHIBIT 32.1 - CSP INC /MA/cspi-2016331xex321.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, 2016
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.)

175 Cabot Street - Suite 210
Lowell, Massachusetts 01854
(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, 2016, the registrant had 3,800,601 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,
2016
 
September 30,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,020

 
$
11,181

Accounts receivable, net of allowances of $307 and $331
21,690

 
18,468

Unbilled accounts receivable
1,090

 
1,420

Inventories, net
4,807

 
5,749

Refundable income taxes

 
43

Deferred income taxes
1,337

 
1,337

Other current assets
2,210

 
1,884

Total current assets
41,154

 
40,082

Property, equipment and improvements, net
1,631

 
1,564

 
 
 
 
Other assets:
 

 
 

Intangibles, net
351

 
416

Deferred income taxes
1,678

 
1,687

Cash surrender value of life insurance
3,276

 
3,064

Other assets
158

 
183

Total other assets
5,463

 
5,350

Total assets
$
48,248

 
$
46,996

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
15,415

 
$
13,776

Deferred revenue
2,192

 
2,931

Pension and retirement plans
721

 
675

Income taxes payable
281

 

Total current liabilities
18,609

 
17,382

Pension and retirement plans
9,700

 
10,009

Other long term liabilities
18

 
15

Total liabilities
28,327

 
27,406

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,801 and 3,688 shares, respectively
38

 
37

Additional paid-in capital
12,503

 
12,249

Retained earnings
15,642

 
15,689

Accumulated other comprehensive loss
(8,262
)
 
(8,385
)
Total shareholders’ equity
19,921

 
19,590

Total liabilities and shareholders’ equity
$
48,248

 
$
46,996


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,
2016
 
March 31,
2015
 
March 31,
2016
 
March 31,
2015
Sales:
 
 
 
 
 
 
 
Product
$
20,972

 
$
14,195

 
$
37,975

 
$
29,848

Services
6,167

 
4,682

 
12,840

 
9,459

Total sales
27,139

 
18,877

 
50,815

 
39,307

 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
Product
17,054

 
11,380

 
31,290

 
24,513

Services
3,752

 
3,454

 
8,002

 
6,796

Total cost of sales
20,806

 
14,834

 
39,292

 
31,309

 
 
 
 
 
 
 
 
Gross profit
6,333

 
4,043

 
11,523

 
7,998

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Engineering and development
790

 
826

 
1,589

 
1,679

Selling, general and administrative
4,665

 
3,856

 
8,713

 
7,879

Total operating expenses
5,455

 
4,682

 
10,302

 
9,558

 
 
 
 
 
 
 
 
Operating income (loss)
878

 
(639
)
 
1,221

 
(1,560
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Foreign exchange loss
(103
)
 
(108
)
 
(63
)
 
(129
)
Other expense, net
(14
)
 
(21
)
 
(26
)
 
(33
)
Total other expense
(117
)
 
(129
)
 
(89
)
 
(162
)
Income (loss) before income taxes
761

 
(768
)
 
1,132

 
(1,722
)
Income tax expense (benefit)
258

 
(93
)
 
346

 
(610
)
Net income (loss)
$
503

 
$
(675
)
 
$
786

 
$
(1,112
)
Net income (loss) attributable to common stockholders
$
480

 
$
(649
)
 
$
756

 
$
(1,072
)
Net income (loss) per share – basic
$
0.13

 
$
(0.19
)
 
$
0.21

 
$
(0.31
)
Weighted average shares outstanding – basic
3,609

 
3,525

 
3,589

 
3,507

Net income (loss) per share – diluted
$
0.13

 
$
(0.19
)
 
$
0.20

 
$
(0.31
)
Weighted average shares outstanding – diluted
3,730

 
3,525

 
3,728

 
3,507

 
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,
2016
 
March 31,
2015
 
March 31,
2016
 
March 31,
2015
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
503

 
$
(675
)
 
$
786

 
$
(1,112
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss) adjustments
 
125

 
(229
)
 
123

 
(117
)
Other comprehensive income
 
125

 
(229
)
 
123

 
(117
)
Total comprehensive income (loss)
 
$
628

 
$
(904
)
 
$
909

 
$
(1,229
)

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, 2016:
(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, 2015
3,688

 
$
37

 
$
12,249

 
$
15,689

 
$
(8,385
)
 
$
19,590

Net Income

 

 

 
786

 

 
786

Other comprehensive income

 

 

 

 
123

 
123

Stock-based compensation

 

 
181

 

 

 
181

Restricted stock cancellation
(6
)
 

 

 

 

 

Restricted stock issuance
105

 
1

 

 

 

 
1

Issuance of shares under employee stock purchase plan
14

 

 
73

 

 

 
73

Cash dividends on common stock ($0.22 per share)

 

 

 
(833
)
 

 
(833
)
Balance as of March 31, 2016
3,801

 
$
38

 
$
12,503

 
$
15,642

 
$
(8,262
)
 
$
19,921

 
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,
2016
 
March 31,
2015
Cash flows provided by (used in) operating activities:
 
 
 
Net income (loss)
$
786

 
$
(1,112
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Depreciation and amortization
286

 
266

Amortization of intangibles
65

 
65

Foreign exchange (gain) loss
63

 
129

Non-cash changes in accounts receivable
136

 
37

Non-cash changes in inventory
226

 
38

Stock-based compensation expense on stock options and restricted stock awards
181

 
188

Deferred income taxes
23

 
(21
)
Increase in cash surrender value of life insurance
(50
)
 
(23
)
Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in accounts receivable
(3,008
)
 
(3,267
)
(Increase) decrease in inventories
699

 
(741
)
(Increase) decrease in refundable income taxes
44

 
(619
)
Increase in other current assets
(310
)
 
(296
)
(Increase) decrease in other assets
25

 
(59
)
Increase in accounts payable and accrued expenses
1,530

 
785

Decrease in deferred revenue
(715
)
 
(1,017
)
Decrease in pension and retirement plans liability
(164
)
 
(36
)
Increase in income taxes payable
268

 
6

Increase in other long term liabilities
4

 
3

Net cash provided by (used in) operating activities
89

 
(5,674
)
Cash flows used in investing activities:
 

 
 

Life insurance premiums paid
(161
)
 
(109
)
Purchases of property, equipment and improvements
(345
)
 
(223
)
Net cash used in investing activities
(506
)
 
(332
)
Cash flows provided by (used in) financing activities:
 

 
 

Dividends paid
(833
)
 
(808
)
Proceeds from issuance of shares under equity compensation plans
73

 
105

Net cash used in financing activities
(760
)
 
(703
)
Effects of exchange rate on cash
16

 
(717
)
Net decrease in cash and cash equivalents
(1,161
)
 
(7,426
)
Cash and cash equivalents, beginning of period
11,181

 
16,448

Cash and cash equivalents, end of period
$
10,020

 
$
9,022

Supplementary cash flow information:
 

 
 

Cash paid for income taxes
$
28

 
$
52

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
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2016 AND 2015

 
Organization and Business
 
CSP Inc. was founded in 1968 and is based in Lowell, 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, 2015.
 
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 six months ended
 
March 31, 2016
 
March 31, 2015
 
March 31, 2016
 
March 31, 2015
 
(Amounts in thousands except per share data)
Net income (loss)
$
503

 
$
(675
)
 
$
786

 
$
(1,112
)
Less: net income (loss) attributable to nonvested common stock
23

 
(26
)
 
30

 
(40
)
Net income (loss) attributable to common stockholders
$
480

 
$
(649
)
 
$
756

 
$
(1,072
)
 
 
 
 
 
 
 
 
Weighted average total shares outstanding – basic
3,782

 
3,662

 
3,732

 
3,637

Less: weighted average non-vested shares outstanding
173

 
137

 
143

 
130

Weighted average number of common shares outstanding – basic
3,609

 
3,525

 
3,589

 
3,507

Potential common shares from non-vested stock awards and the assumed exercise of stock options
121

 

 
139

 

Weighted average common shares outstanding – diluted
3,730

 
3,525

 
3,728

 
3,507

 
 
 
 
 
 
 
 
Net income (loss) per share – basic
$
0.13

 
$
(0.19
)
 
$
0.21

 
$
(0.31
)
Net income (loss) per share – diluted
$
0.13

 
$
(0.19
)
 
$
0.20

 
$
(0.31
)
 

All anti-dilutive securities, including certain stock options, are excluded from the diluted income (loss) per share computation. For the six months ended March 31, 2016 and 2015, 33,000 and 35,000 shares subject to stock 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 shares subject to non-vested restricted stock awards were excluded from the diluted income per share calculation as there was a net loss for the six months ended March 31, 2015 and their inclusion would have been anti-dilutive. For the three months ended March 31, 2016 and 2015, 30,000 and 35,000 shares subject to stock 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, 137,000 shares subject to non-vested restricted stock awards were excluded from the diluted income per share calculation as there was a net loss for the three months ended March 31, 2015 and their inclusion would have been anti-dilutive.





4.    Inventories

Inventories consist of the following:
 
March 31, 2016
 
September 30, 2015
 
(Amounts in thousands)
Raw materials
$
1,618

 
$
1,788

Work-in-process
530

 
387

Finished goods
2,659

 
3,574

Total
$
4,807

 
$
5,749


9

Draft 5                        Preliminary & Tentative        For Discussion Purposes Only

 
Finished goods includes inventory of approximately $0.3 million and $0.1 million as of March 31, 2016 and September 30, 2015, respectively, that have 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 $4.3 million and $4.1 million as of March 31, 2016 and September 30, 2015, respectively.
 

5.    Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss are as follows:
 
 
March 31, 2016
 
September 30, 2015
 
 
(Amounts in thousands)
Cumulative effect of foreign currency translation
 
$
(2,702
)
 
$
(2,825
)
Cumulative unrealized loss on pension liability
 
(5,560
)
 
(5,560
)
Accumulated other comprehensive loss
 
$
(8,262
)
 
$
(8,385
)


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, 2015 and 2014 and for the six months ended March 31, 2016.

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.
 
    

10


The components of net periodic benefit costs related to the U.S. and international plans are as follows:
 
 
For the Three Months Ended March 31,
 
2016
 
2015
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
9

 
$

 
$
9

 
$
13

 
$

 
$
13

Interest cost
146

 
11

 
157

 
155

 
13

 
168

Expected return on plan assets
(92
)
 

 
(92
)
 
(104
)
 

 
(104
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service gain

 

 

 

 

 

Amortization of net gain
44

 
(1
)
 
43

 
49

 
(1
)
 
48

Net periodic benefit cost
$
107

 
$
10

 
$
117

 
$
113

 
$
12

 
$
125

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
7

 
$
7

 
$

 
$
9

 
$
9

Interest cost

 
11

 
11

 

 
11

 
11

Amortization of net gain

 
(20
)
 
(20
)
 

 
(13
)
 
(13
)
Net periodic cost (benefit)
$

 
$
(2
)
 
$
(2
)
 
$

 
$
7

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended March 31,
 
2016
 
2015
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
18

 
$

 
$
18

 
$
28

 
$

 
$
28

Interest cost
297

 
22

 
319

 
320

 
26

 
346

Expected return on plan assets
(190
)
 

 
(190
)
 
(212
)
 

 
(212
)
Amortization of:
 
 
 
 
 

 
 
 
 
 
 

Prior service gain

 

 

 

 

 

Amortization of net gain
89

 
(2
)
 
87

 
102

 
(2
)
 
100

Net periodic benefit cost
$
214

 
$
20

 
$
234

 
$
238

 
$
24

 
$
262

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
14

 
$
14

 
$

 
$
17

 
$
17

Interest cost

 
21

 
21

 

 
22

 
22

Amortization of net gain

 
(40
)
 
(40
)
 

 
(25
)
 
(25
)
Net periodic cost (benefit)
$

 
$
(5
)
 
$
(5
)
 
$

 
$
14

 
$
14



    

11


The fair value of the assets held by the U.K. pension plan by asset category are as follows:
 
Fair Values as of
 
March 31, 2016
 
September 30, 2015
 
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
 
(Amounts in thousands)
Cash on deposit
$
227

 
$
227

 
$

 
$

 
$
324

 
$
324

 
$

 
$

Pooled Funds
8,547

 

 
8,547

 

 
8,977

 

 
8,977

 

Total Plan Assets
$
8,774

 
$
227

 
$
8,547

 
$

 
$
9,301

 
$
324

 
$
8,977

 
$

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 


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)
2016
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
2,861

 
$
1,389

 
$
1,352

 
$
15,370

 
$
18,111

 
$
20,972

Service
 
597

 
4,027

 
262

 
1,281

 
5,570

 
6,167

Total sales
 
3,458

 
5,416

 
1,614

 
16,651

 
23,681

 
27,139

Income (loss) from operations
 
(501
)
 
718

 
(1
)
 
662

 
1,379

 
878

Assets
 
15,353

 
12,311

 
2,791

 
17,793

 
32,895

 
48,248

Capital expenditures
 
17

 
52

 
31

 
55

 
138

 
155

Depreciation and amortization
 
60

 
42

 
33

 
56

 
131

 
191

 
 
 
 
 
 
 
 
 
 
 
 
 
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

Income (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



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)
2016
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
4,811

 
$
3,291

 
$
3,345

 
$
26,528

 
$
33,164

 
$
37,975

Service
 
1,464

 
8,799

 
452

 
2,125

 
11,376

 
12,840

Total sales
 
6,275

 
12,090

 
3,797

 
28,653

 
44,540

 
50,815

Income (loss) from operations
 
(924
)
 
1,181

 
(48
)
 
1,012

 
2,145

 
1,221

Assets
 
15,353

 
12,311

 
2,791

 
17,793

 
32,895

 
48,248

Capital expenditures
 
165

 
119

 
33

 
28

 
180

 
345

Depreciation and amortization
 
117

 
82

 
38

 
114

 
234

 
351

 
 
 
 
 
 
 
 
 
 
 
 
 
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


Income (loss) from operations consists of sales less cost of sales, engineering and development expenses, and 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, 2016, and 2015.

 
 
For the three months ended March 31,
 
For the six months ended March 31,
 
 
2016
 
2015
 
2016
 
2015
 
 
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
 
$
5.6

 
20
%
 
$
2.4

 
13
%
 
$
8.4

 
17
%
 
$
4.7

 
12
%
Customer B
 
$
3.8

 
14
%
 
$
3.7

 
20
%
 
$
7.6

 
15
%
 
$
6.6

 
17
%

In addition, accounts receivable from Customer A totaled approximately $3.9 million, or 17%, and approximately $1.1 million, or 6%, of total consolidated accounts receivable as of March 31, 2016 and September 30, 2015, respectively. Accounts receivable from Customer B totaled approximately $5.1 million or 33%, and approximately $7.9 million, or 39%, of total consolidated accounts receivable as of March 31, 2016 and September 30, 2015, respectively. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with these customers as of March 31, 2016. No other customers accounted for 10% or more of total consolidated accounts receivable as of March 31, 2016 or September 30, 2015.


13

Draft 5                        Preliminary & Tentative        For Discussion Purposes Only


8.    Dividends

On February 16, 2016, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on March 11, 2016 to shareholders of record as of February 26, 2016, the record date.
    
On December 23, 2015, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on January 11, 2016 to shareholders of record as of December 31, 2015, the record date.



9.    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 August 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 on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefits Plans (Topic 965), which requires fully benefit-responsive investment contracts to be measured at contract value. Those Topics also require an adjustment to reconcile contract value to fair value, when these measures differ,
on the face of the plan financial statements. Fair value is measured using the requirements in Topic 820, Fair Value Measurement. This ASU is effective for fiscal years 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 on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost and net realizable value, except for inventory measured using last-in, first-out (LIFO) or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017 and requires prospective application, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company has not yet assessed the potential impact of implementing this ASU on our consolidated financial statements.
 
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes, which require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Topic apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Topic. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The implementation of this guidance is not expected to have a material impact to the disclosures on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This updated, Topic 842, affects any entity that enters into a lease (as that term is defined in this Update), with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods

14


within those annual periods. The Company has not yet assessed the potential impact of implementing this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08 (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to clarify the implementation guidance on principal versus agent considerations. The amendments in this update provides additional guidance on indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer and does not change the core principle of previously issued guidance. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09 (Topic 718), Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Additionally, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has not yet assessed the potential impact of implementing this ASU on the disclosures on our consolidated financial statements.





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 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, 2015. 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, 2015.
 
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, as well as 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, 2015 in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 

Results of Operations

Overview of the three months ended March 31, 2016

     Our revenue increased by approximately $8.3 million, or 44%, to $27.1 million for the three months ended March 31, 2016 as compared to $18.9 million for the three months ended March 31, 2015. The increase in revenue is the result of increases of $7.5 million and $0.8 million in our TS and HPP segments, respectively. Our gross profit margin percentage increased overall from 21% of revenues for the three months ended March 31, 2015 to 23% for the three months ended March 31, 2016. The 2% increase in our gross margin percentage is attributed to gross margin increases in our HPP and TS segments. The increase in our HPP segment gross margin percentage is primarily the result of an increase in service revenues as a percentage of total HPP revenues for the comparative periods in 2016 and 2015. The increase in our TS segment gross margin percentage is due to higher margins on service revenues delivered by our German division. Operating income increased by $1.5 million to $0.9 million for the three month period ended March 31, 2016 as compared to an operating loss of $0.6 million for the three month period ended March 31, 2015 as a result of a higher gross profit, which was partially offset by $0.8 million of higher operating expenses.


16



The following table details our results of operations in dollars and as a percentage of sales for the three months ended:
 
 
 
March 31, 2016
 
%
of sales
 
March 31, 2015
 
%
of sales
 
 
(Dollar amounts in thousands)
Sales
 
$
27,139

 
100
 %
 
$
18,877

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales
 
20,806

 
77
 %
 
14,834

 
79
 %
Engineering and development
 
790

 
3
 %
 
826

 
4
 %
Selling, general and administrative
 
4,665

 
17
 %
 
3,856

 
20
 %
Total costs and expenses
 
26,261

 
97
 %
 
19,516

 
103
 %
Operating income (loss)
 
878

 
3
 %
 
(639
)
 
(3
)%
Other income (expense)
 
(117
)
 
 %
 
(129
)
 
(1
)%
Income (loss) before income taxes
 
761

 
3
 %
 
(768
)
 
(4
)%
Income tax expense (benefit)
 
258

 
1
 %
 
(93
)
 
 %
Net income (loss)
 
$
503

 
2
 %
 
$
(675
)
 
(4
)%


Revenues

     Our revenues increased by approximately $8.3 million to $27.1 million for the three months ended March 31, 2016 as compared to $18.9 million of revenues for the three months ended March 31, 2015. The TS segment revenue increased by $7.5 million and the HPP segment revenue increased by $0.8 million.

HPP segment revenue change by product line was as follows for the three months ended March 31, 2016 and 2015:
 
 
 
 
 
 
Increase
 
 
2016
 
2015
 
$
 
%
 
 
(Dollar amounts in thousands)
 
 
Products
 
$
2,861

 
$
2,527

 
$
334

 
13
%
Services
 
597

 
130

 
467

 
359
%
Total
 
$
3,458

 
$
2,657

 
$
801

 
30
%

The increase in HPP service revenues is primarily attributed to recognizing approximately $0.5 million of royalties related to the equivalent number of high-speed processing boards used in one half aircraft during the three months ended March 31, 2016 as compared to less than $0.1 million of royalty revenues for the three month period ended March 31, 2015. The increase in product revenues is primarily attributed to higher Myricom product line sales for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. We expect to recognize royalty revenue related to the equivalent number of high-speed processing boards used in four planes during the third and fourth quarters of fiscal year 2016.

TS segment revenue change by product line was as follows for the three months ended March 31, 2016 and 2015:
 
 
 
 
 
 
Increase
 
 
2016
 
2015
 
$
 
%
 
 
(Dollar amounts in thousands)
 
 
Products
 
$
18,111

 
$
11,668

 
$
6,443

 
55
%
Services
 
5,570

 
4,552

 
1,018

 
22
%
Total
 
$
23,681

 
$
16,220

 
$
7,461

 
46
%

The $7.5 million increase in TS segment revenues during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, was the result of increases of $7.0 million and $0.5 million, in our divisions located in the U.S. and the U.K., respectively. Our German division recognized an increase in service revenues of $0.3 million that was

17


offset by a decrease in product revenues of $0.4 million. Product revenues increased as a result of $6.4 million and $0.5 million in our U.S. and U.K. divisions, respectively, partially offset a by a $0.4 million decrease in product revenue at our German division. Our services revenues increased at our U.S. and German divisions by $0.6 million and $0.3 million, respectively.

      Our revenues by geographic area based on the customer location to which the products were shipped or services rendered was as follows for the three months ended March 31, 2016 and March 31, 2015:
 
 
 
 
Increase (decrease)
 
 
2016
 
%
 
2015
 
%
 
$
 
%
 
 
(Dollar amounts in thousands)
Americas
 
$
18,886

 
70
%
 
$
11,547

 
61
%
 
$
7,339

 
64
 %
Europe
 
6,509

 
24
%
 
6,673

 
35
%
 
(164
)
 
(2
)%
Asia
 
1,744

 
6
%
 
657

 
4
%
 
1,087

 
165
 %
Totals
 
$
27,139

 
100
%
 
$
18,877

 
100
%
 
$
8,262

 
44
 %


Gross Margins

     Our gross margin ("GM") increased by $2.3 million, or 2% of revenues, to $6.3 million for the three months ended March 31, 2016 as compared to a gross margin of $4.0 million for the three months ended March 31, 2015 as follows:
 
 
 
2016
 
2015
 
Increase
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
HPP
 
$
1,898

55
%
 
$
1,267

48
%
 
$
631

 
7
%
TS
 
4,435

19
%
 
2,776

17
%
 
1,659

 
2
%
Total
 
$
6,333

23
%
 
$
4,043

21
%
 
$
2,290

 
2
%
    
    
The impact of product mix within our HPP segment on gross margin for the three months ended March 31, 2016 and 2015 was as follows:
 
 
 
2016
 
2015
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
Product
 
$
1,358

47
%
 
$
1,147

45
%
 
$
211

 
2
 %
Services
 
540

90
%
 
120

92
%
 
420

 
(2
)%
Total
 
$
1,898

55
%
 
$
1,267

48
%
 
$
631

 
7
 %

The overall HPP segment gross margin as a percentage of sales increased to 55% for the three month period ended March 31, 2016 as compared to 48% for the three month period ended March 31, 2015. The 7% increase in gross margin as a percentage of sales for product sales in the HPP segment was primarily attributed to a favorable mix of higher margin service revenues in the HPP segment during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.



    





18





The impact of product mix within our TS segment on gross margin for the three months ended March 31, 2016 and 2015 was as follows:
 
 
2016
 
2015
 
Increase
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
Product
 
$
2,560

14
%
 
$
1,668

14
%
 
$
892

 
%
Services
 
1,875

34
%
 
1,108

24
%
 
767

 
10
%
Total
 
$
4,435

19
%
 
$
2,776

17
%
 
$
1,659

 
2
%

     The gross margin as a percentage of sales for our TS segment product revenues was flat for the three months ended March 31, 2016 as compared to the prior year period and the increase in services margins as a percentage of sales is primarily attributed to our German division. The improvement in gross margins for our German division is attributed to a favorable mix of service projects and improved utilization of our internal engineering staff that delivers those services.

Engineering and Development Expenses
 
The engineering and development expenses incurred exclusively by our HPP segment were $0.8 million for the three months ended March 31, 2016 and 2015, respectively. The current year expenses are primarily for Myricom engineering expenses incurred in connection with the development of new Myricom products.
 
Selling, General and Administrative Expenses
 
The following table details our selling, general and administrative (“SG&A”) expense by operating segment for the three months ended March 31, 2016 and 2015:
 
 
For the three months ended March 31,
 
 
 
 
 
2016
 
% of
Total
 
2015
 
% of
Total
 
$ Increase
 
% Increase
 
(Dollar amounts in thousands)
By Operating Segment:
 
 
 
 
 
 
 
 
 
 
 
HPP segment
$
1,609

 
34
%
 
$
1,088

 
28
%
 
$
521

 
48
%
TS segment
3,056

 
66
%
 
2,768

 
72
%
 
288

 
10
%
Total
$
4,665

 
100
%
 
$
3,856

 
100
%
 
$
809

 
21
%
 
SG&A expenses increased by $0.8 million or 21% for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase in HPP segment expenses and TS segment expenses is primarily attributed to higher commissions on product revenues and other variable compensation expenses.



19


Other Income/Expenses
 
The following table details our other income (expense) for the three months ended March 31, 2016 and 2015:
 
For the three months ended,
 
 
 
March 31, 2016
 
March 31, 2015
 
Increase
 
(Amounts in thousands)
Interest expense
$
(21
)
 
$
(21
)
 
$

Interest income
1

 
1

 

Foreign exchange gain (loss)
(103
)
 
(108
)
 
5

Other expense, net
6

 
(1
)
 
7

Total other income (expense), net
$
(117
)
 
$
(129
)
 
$
12

 
Other income (expense) was flat for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015

Income Taxes

For the three months ended March 31, 2016, the Company recognized an income tax expense of $258,000, which is primarily due to increased profit in Germany of $546,000, and a profit in the U.S. of $83,000. There was a profit of $77,000 in the UK, but we had no tax expense for the quarter due to pension contributions. The Company's tax rate was 34% for the quarter ended March 31, 2016.



Overview of the six months ended March 31, 2016


Our revenue increased by approximately $11.5 million, or 29%, to $50.8 million for the six months ended March 31, 2016 as compared to $39.3 million for the six months ended March 31, 2015. Revenues increased by $10.6 million and $0.9 million in our TS and HPP segments, respectively. We recognized approximately $1.1 million of royalties related to the equivalent number of high-speed processing boards used in one and one half aircraft during the six months ended March 31, 2016 as compared $0.1 million of royalty revenues for the six month period ended March 31, 2015, and revenues in our TS segment increased by $10.6 million on increases of $8.3 million and $2.3 million in product and service revenues, respectively, in the six months ended March 31, 2016. Our gross profit margin percentage increased overall, from 20% of revenues for the six months ended March 31, 2015 to 23% for the six months ended March 31, 2016. Our operating income increased by approximately $2.8 million to $1.2 million for the six month period ended March 31, 2016 as compared to $1.6 million of operating loss for the six months ended March 31, 2015 as a result of a higher gross profit, which was partially offset by $0.7 million of higher operating expenses.

    

20


The following table details our results of operations in dollars and as a percentage of sales for the six months ended:
 
 
 
March 31, 2016
 
%
of sales
 
March 31, 2015
 
%
of sales
 
 
(Dollar amounts in thousands)
Sales
 
$
50,815

 
100
 %
 
$
39,307

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales