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EX-32.1 - EXHIBIT 32.1 - CSP INC /MA/cspi-2017630xex321.htm
EX-31.2 - EXHIBIT 31.2 - CSP INC /MA/cspi-2017630xex312.htm
EX-31.1 - EXHIBIT 31.1 - CSP INC /MA/cspi-2017630xex311.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, 2017
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) 954-5038
(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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
x
 
 
 
 
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
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 9, 2017, the registrant had 3,923,583 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,
2017
 
September 30,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
16,001

 
$
13,103

Accounts receivable, net of allowances of $248 and $240
20,307

 
18,997

Unbilled accounts receivable
832

 
567

Inventories, net
9,136

 
5,580

Deferred costs
2,215

 
635

Deferred income taxes
1,466

 
1,331

Other current assets
1,188

 
1,586

Total current assets
51,145

 
41,799

Property, equipment and improvements, net
1,547

 
1,680

 
 
 
 
Other assets:
 

 
 

Intangibles, net
197

 
287

Deferred costs
26

 
18

Deferred income taxes
1,741

 
1,723

Cash surrender value of life insurance
3,264

 
3,015

Other assets
187

 
185

Total other assets
5,415

 
5,228

Total assets
$
58,107

 
$
48,707

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
19,484

 
$
11,932

Deferred revenue
6,189

 
4,704

Pension and retirement plans
523

 
581

Income taxes payable
331

 
166

Total current liabilities
26,527

 
17,383

Pension and retirement plans
13,605

 
13,441

Other long term liabilities
28

 
228

Total liabilities
40,160

 
31,052

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,923 and 3,821 shares, respectively
40

 
39

Additional paid-in capital
13,440

 
12,924

Retained earnings
16,415

 
16,623

Accumulated other comprehensive loss
(11,948
)
 
(11,931
)
Total shareholders’ equity
17,947

 
17,655

Total liabilities and shareholders’ equity
$
58,107

 
$
48,707


See accompanying notes to unaudited consolidated financial statements.

3


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

 
For the three months ended
 
For the nine months ended
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Sales:
 
 
 
 
 
 
 
Product
$
23,512

 
$
20,345

 
$
56,834

 
$
58,320

Services
7,020

 
6,567

 
18,930

 
19,407

Total sales
30,532

 
26,912

 
75,764

 
77,727

 
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
Product
19,934

 
16,460

 
48,037

 
47,750

Services
3,797

 
3,247

 
10,779

 
11,249

Total cost of sales
23,731

 
19,707

 
58,816

 
58,999

 
 
 
 
 
 
 
 
Gross profit
6,801

 
7,205

 
16,948

 
18,728

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Engineering and development
578

 
779

 
1,747

 
2,368

Selling, general and administrative
5,163

 
4,573

 
13,621

 
13,286

Total operating expenses
5,741

 
5,352

 
15,368

 
15,654

 
 
 
 
 
 
 
 
Operating income
1,060

 
1,853

 
1,580

 
3,074

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Foreign exchange gain (loss)
(14
)
 
(55
)
 
68

 
(118
)
Other expense, net
(13
)
 
(21
)
 
(34
)
 
(47
)
Total other income (expense)
(27
)
 
(76
)
 
34

 
(165
)
Income before income taxes
1,033

 
1,777

 
1,614

 
2,909

Income tax expense
338

 
520

 
533

 
866

Net income
$
695

 
$
1,257

 
$
1,081

 
$
2,043

Net income attributable to common stockholders
$
664

 
$
1,198

 
$
1,035

 
$
1,959

Net income per share – basic
$
0.18

 
$
0.33

 
$
0.28

 
$
0.54

Weighted average shares outstanding – basic
3,744

 
3,618

 
3,713

 
3,599

Net income per share – diluted
$
0.17

 
$
0.32

 
$
0.27

 
$
0.52

Weighted average shares outstanding – diluted
3,819

 
3,743

 
3,811

 
3,733

 
See accompanying notes to unaudited consolidated financial statements.

4


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

 
 
For the three months ended
 
For the nine months ended
 
 
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
 
 
 
 
 
 
 
 
 
Net income
 
$
695

 
$
1,257

 
$
1,081

 
$
2,043

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation gain adjustments
 
(79
)
 
21

 
(17
)
 
144

Other comprehensive income (loss)
 
(79
)
 
21

 
(17
)
 
144

Total comprehensive income
 
$
616

 
$
1,278

 
$
1,064

 
$
2,187


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, 2017:
(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, 2016
3,821

 
$
39

 
$
12,924

 
$
16,623

 
$
(11,931
)
 
$
17,655

Net income

 

 

 
1,081

 

 
1,081

Other comprehensive income

 

 

 

 
(17
)
 
(17
)
Exercise of stock options
5

 

 
15

 

 

 
15

Stock-based compensation

 

 
411

 

 

 
411

Restricted stock cancellation
(8
)
 

 

 

 

 

Restricted stock issuance
94

 
1

 

 

 

 
1

Issuance of shares under employee stock purchase plan
11

 

 
90

 

 

 
90

Cash dividends on common stock ($0.33 per share)

 

 

 
(1,289
)
 

 
(1,289
)
Balance as of June 30, 2017
3,923

 
$
40

 
$
13,440

 
$
16,415

 
$
(11,948
)
 
$
17,947

 
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,
2017
 
June 30,
2016
Cash flows provided by operating activities:
 
 
 
Net income
$
1,081

 
$
2,043

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
408

 
445

Amortization of intangibles
90

 
97

Loss on sale of fixed assets, net
6

 
23

Foreign exchange gain (loss)
(68
)
 
118

Non-cash changes in accounts receivable
39

 
103

Non-cash changes in inventories
165

 
431

Stock-based compensation expense on stock options and restricted stock awards
411

 
300

Deferred income taxes
(136
)
 
(22
)
Increase in cash surrender value of life insurance
(99
)
 
(78
)
Changes in operating assets and liabilities:
 

 
 

Increase in accounts receivable
(1,509
)
 
(1,017
)
Decrease in life insurance receivable
413

 

Increase in inventories
(3,702
)
 
(500
)
(Increase) decrease in deferred costs
(1,495
)
 
438

Decrease in refundable income taxes

 
43

Increase in other current assets
(19
)
 
(686
)
Decrease in other assets

 
71

Increase (decrease) in accounts payable and accrued expenses
7,489

 
(708
)
Increase in deferred revenue
1,345

 
707

Decrease in pension and retirement plans liabilities
(14
)
 
(124
)
Increase in income taxes payable
169

 
840

Increase (decrease) in other long term liabilities
(193
)
 
6

Net cash provided by operating activities
4,381

 
2,530

Cash flows used in investing activities:
 

 
 

Life insurance premiums paid
(150
)
 
(161
)
Purchases of property, equipment and improvements
(273
)
 
(486
)
Net cash used in investing activities
(423
)
 
(647
)
Cash flows used in financing activities:
 

 
 

Dividends paid
(1,289
)
 
(1,250
)
Proceeds from issuance of shares under equity compensation plans
106

 
72

Net cash used in financing activities
(1,183
)
 
(1,178
)
Effects of exchange rate on cash
123

 
(296
)
Net increase in cash and cash equivalents
2,898

 
409

Cash and cash equivalents, beginning of period
13,103

 
11,181

Cash and cash equivalents, end of period
$
16,001

 
$
11,590

Supplementary cash flow information:
 

 
 

Cash paid for income taxes
$
469

 
$
37

Cash paid for interest
$
75

 
$
85


 See accompanying notes to unaudited consolidated financial statements.

7


CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2017 AND 2016

 
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, 2016.

Reclassifications

Certain reclassifications have been made to prior year financial statements to conform to current period financial statement presentation with no effect on previously reported financial positions, results of operations or cash flows. The reclassification was to break out deferred costs separately from inventory on the balance sheet.
  
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, the calculation of liabilities related to deferred compensation and retirement plans 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 per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income 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 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 attributable to common stockholders are as follows:

 
For the three months ended
 
For the nine months ended
 
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
 
(Amounts in thousands except per share data)
Net income
$
695

 
$
1,257

 
$
1,081

 
$
2,043

Less: net income attributable to nonvested common stock
31

 
59

 
46

 
84

Net income attributable to common stockholders
$
664

 
$
1,198

 
$
1,035

 
$
1,959

 
 
 
 
 
 
 
 
Weighted average total shares outstanding – basic
3,921

 
3,797

 
3,876

 
3,754

Less: weighted average non-vested shares outstanding
177

 
179

 
163

 
155

Weighted average number of common shares outstanding – basic
3,744

 
3,618

 
3,713

 
3,599

Potential common shares from non-vested stock awards and the assumed exercise of stock options
75

 
125

 
98

 
134

Weighted average common shares outstanding – diluted
3,819

 
3,743

 
3,811

 
3,733

 
 
 
 
 
 
 
 
Net income per share – basic
$
0.18

 
$
0.33

 
$
0.28

 
$
0.54

Net income per share – diluted
$
0.17

 
$
0.32

 
$
0.27

 
$
0.52

 
All anti-dilutive securities, including certain stock options, are excluded from the diluted income per share computation. For the three and nine months ended June 30, 2017, there were no shares subject to stock options 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 three and nine months ended June 30, 2016, 30,000 and 31,000 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.


4.    Inventories

Inventories consist of the following:
 
June 30, 2017
 
September 30, 2016
 
(Amounts in thousands)
Raw materials
$
1,498

 
$
1,658

Work-in-process
748

 
814

Finished goods
6,890

 
3,108

Total
$
9,136

 
$
5,580

 
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not been met, of approximately $0.4 million and $0.1 million as of June 30, 2017 and September 30, 2016, respectively.
 
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $3.1 million and $3.0 million as of June 30, 2017 and September 30, 2016, respectively.
 

9


5.    Deferred Costs

Deferred costs represent costs of labor, third party maintenance and support contracts, and outside consultants related to transactions where the revenue recognition criteria has not been met.


6.    Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss are as follows:
 
 
June 30, 2017
 
September 30, 2016
 
 
(Amounts in thousands)
Cumulative effect of foreign currency translation
 
$
(2,824
)
 
$
(2,807
)
Cumulative unrealized loss on pension liability
 
(9,124
)
 
(9,124
)
Accumulated other comprehensive loss
 
$
(11,948
)
 
$
(11,931
)


7.    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 some of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain 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 since September 2009.

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 June 30,
 
2017
 
2016
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
10

 
$

 
$
10

 
$
9

 
$

 
$
9

Interest cost
97

 
11

 
108

 
146

 
11

 
157

Expected return on plan assets
(68
)
 

 
(68
)
 
(92
)
 

 
(92
)
Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service gain

 

 

 

 

 

Amortization of net gain (loss)
94

 
(1
)
 
93

 
44

 
(1
)
 
43

Net periodic benefit cost
$
133

 
$
10

 
$
143

 
$
107

 
$
10

 
$
117

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
10

 
$
10

 
$

 
$
7

 
$
7

Interest cost

 
10

 
10

 

 
11

 
11

Amortization of net gain (loss)

 
4

 
4

 

 
(21
)
 
(21
)
Net periodic cost (benefit)
$

 
$
24

 
$
24

 
$

 
$
(3
)
 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30,
 
2017
 
2016
 
Foreign
 
U.S.
 
Total
 
Foreign
 
U.S.
 
Total
 
(Amounts in thousands)
Pension:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
29

 
$

 
$
29

 
$
27

 
$

 
$
27

Interest cost
285

 
32

 
317

 
442

 
32

 
474

Expected return on plan assets
(198
)
 

 
(198
)
 
(281
)
 

 
(281
)
Amortization of:
 
 
 
 
 

 
 
 
 
 
 

Prior service gain

 

 

 

 

 

Amortization of net gain (loss)
276

 
(3
)
 
273

 
134

 
(3
)
 
131

Net periodic benefit cost
$
392

 
$
29

 
$
421

 
$
322

 
$
29

 
$
351

 
 
 
 
 
 
 
 
 
 
 
 
Post Retirement:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
29

 
$
29

 
$

 
$
20

 
$
20

Interest cost

 
33

 
33

 

 
32

 
32

Amortization of net gain (loss)

 
11

 
11

 

 
(60
)
 
(60
)
Net periodic cost (benefit)
$

 
$
73

 
$
73

 
$

 
$
(8
)
 
$
(8
)


    
    

11


The fair value of the assets held by the U.K. pension plan by asset category are as follows:
 
Fair Values as of
 
June 30, 2017
 
September 30, 2016
 
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
$
71

 
$
71

 
$

 
$

 
$
86

 
$
86

 
$

 
$

Pooled funds
7,817

 

 
7,817

 

 
7,543

 

 
7,543

 

Total plan assets
$
7,888

 
$
71

 
$
7,817

 
$

 
$
7,629

 
$
86

 
$
7,543

 
$

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 


8.    Segment Information

The following tables presents certain operating segment information for the three and nine months ended June 30, 2017 and June 30, 2016.

 
 
 
 
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)
2017
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
1,635

 
$
428

 
$
1,748

 
$
19,701

 
$
21,877

 
$
23,512

Service
 
1,680

 
3,675

 
252

 
1,413

 
5,340

 
7,020

Total sales
 
3,315

 
4,103

 
2,000

 
21,114

 
27,217

 
30,532

Income (loss) from operations
 
388

 
(282
)
 
58

 
896

 
672

 
1,060

Assets
 
17,277

 
16,509

 
2,078

 
22,243

 
40,830

 
58,107

Capital expenditures
 
32

 
17

 

 
46

 
63

 
95

Depreciation and amortization
 
58

 
46

 
2

 
63

 
111

 
169

 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
3,354

 
$
1,074

 
$
1,805

 
$
14,112

 
$
16,991

 
$
20,345

Service
 
2,248

 
2,892

 
325

 
1,102

 
4,319

 
6,567

Total sales
 
5,602

 
3,966

 
2,130

 
15,214

 
21,310

 
26,912

Income (loss) from operations
 
1,585

 
(139
)
 
(10
)
 
417

 
268

 
1,853

Assets
 
17,486

 
13,306

 
2,641

 
14,966

 
30,913

 
48,399

Capital expenditures
 
28

 
30

 
60

 
23

 
113

 
141

Depreciation and amortization
 
59

 
36

 
39

 
57

 
132

 
191

 
 
 
 
 
 
 
 
 
 
 
 
 

12


 
 
 
 
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)
2017
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
5,155

 
$
4,827

 
$
4,611

 
$
42,241

 
$
51,679

 
$
56,834

Service
 
4,331

 
10,803

 
565

 
3,231

 
14,599

 
18,930

Total sales
 
9,486

 
15,630

 
5,176

 
45,472

 
66,278

 
75,764

Income (loss) from operations
 
802

 
(124
)
 
(183
)
 
1,085

 
778

 
1,580

Assets
 
17,277

 
16,509

 
2,078

 
22,243

 
40,830

 
58,107

Capital expenditures
 
90

 
104

 

 
79

 
183

 
273

Depreciation and amortization
 
168

 
137

 
7

 
186

 
330

 
498

 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Product
 
$
8,165

 
$
4,365

 
$
5,150

 
$
40,640

 
$
50,155

 
$
58,320

Service
 
3,712

 
11,691

 
777

 
3,227

 
15,695

 
19,407

Total sales
 
11,877

 
16,056

 
5,927

 
43,867

 
65,850

 
77,727

Income (loss) from operations
 
661

 
1,042

 
(58
)
 
1,429

 
2,413

 
3,074

Assets
 
17,486

 
13,306

 
2,641

 
14,966

 
30,913

 
48,399

Capital expenditures
 
193

 
149

 
93

 
51

 
293

 
486

Depreciation and amortization
 
176

 
118

 
77

 
171

 
366

 
542


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 nine months ended June 30, 2017, and 2016.

 
 
For the three months ended June 30,
 
For the nine months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
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
 
$
8.2

 
27
%
 
$
3.6

 
13
%
 
$
14.8

 
20
%
 
$
12.0

 
15
%
Customer B
 
$
2.3

 
7
%
 
$
3.1

 
11
%
 
$
8.3

 
11
%
 
$
10.7

 
14
%
Customer C
 
$
1.8

 
6
%
 
$
2.8

 
10
%
 
$
4.1

 
5
%
 
$
4.5

 
6
%

In addition, accounts receivable from Customer A totaled approximately $3.7 million, or 18%, and approximately $3.0 million, or 15%, of total consolidated accounts receivable as of June 30, 2017 and September 30, 2016, respectively. Accounts receivable from Customer B totaled approximately $2.2 million, or 10%, and approximately $2.5 million, or 13%, of total consolidated accounts receivable as of June 30, 2017 and September 30, 2016, respectively. Accounts receivable from Customer C totaled approximately $0.5 million, or 2%, and approximately $0.4 million, or 2%, of total consolidated accounts receivable as of June 30, 2017 and September 30, 2016, respectively. We believe that the Company is not exposed to any

13


significant credit risk with respect to the accounts receivable with these customers as of June 30, 2017. No other customers accounted for 10% or more of total consolidated accounts receivable as of June 30, 2017 or September 30, 2016.


9.    Dividends
        
On January 12, 2017, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on February 8, 2017 to shareholders of record as of January 27, 2017, the record date.

On February 23, 2017, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on March 17, 2017 to shareholders of record as of March 3, 2017, the record date.

On May 24, 2017, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on June 15, 2017 to shareholders of record as of June 1, 2017, the record date.


10.    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.  While the Company has begun its assessment of the new standard, it has not yet selected a transition method nor has it determined the effect the standard will have on its ongoing financial reporting.
 
In August 2014, the FASB issued ASU No. 2014-15 (Subtopic 205-40), Presentation of Financial Statements-Going Concern (Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern) to provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The standard, which applies to annual and interim reporting periods for all entities, requires that management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and for annual periods and interim periods thereafter.  Early application is permitted.  The Company does not expect the implementation of this ASU 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 or 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 years 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 does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 (Topic 350), Intangibles - Goodwill and Other (Simplifying the Test for Goodwill Impairment) to simplify the subsequent measurement of goodwill. The amendments in this update provides for the elimination of Step 2, which required an entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) including those procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update define an impairment loss as the excess of the carrying amount of the intangible assets to the fair value of a reporting unit. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07 (Topic 715), Compensation - Retirement Benefits (Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost) to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring employers disaggregate the service cost component from the other components of net benefit cost. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2017, and early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09 (Topic 718), Compensation - Stock Compensation (Scope of Modification Accounting) to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718 in order to reduce both (1) the diversity in practice and (2) the cost and complexity of applying the guidance in Topic 718. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2017, and early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company does not expect the implementation of this ASU to have a material impact 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 including, but not limited to, among others, statements concerning future revenues and future business plans. 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 fiscal year ended September 30, 2016. 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 fiscal year ended September 30, 2016.
  
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, impairment assessment of intangibles, 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 we believe 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, 2016 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 June 30, 2017

     Our revenues increased by approximately $3.6 million, or 13%, to $30.5 million for the three months ended June 30, 2017 as compared to $26.9 million for the three months ended June 30, 2016. The increase in revenue is the result of an increase of $5.9 million in our TS segment, partially offset by a $2.3 million decrease in our HPP segment. Our gross margin percentage decreased overall, from 27% of revenues for the three months ended June 30, 2016, to 22% for the three months ended June 30, 2017 due in part to the shift in revenue to the TS segment, which operates at lower gross margins. Operating income decreased by $0.8 million to $1.1 million for the three month period ended June 30, 2017 as compared to $1.9 million for the three month period ended June 30, 2016 as a result of a $404 thousand decrease in gross profit combined with an increase of $389 thousand of higher operating expenses primarily related to higher operating costs in our German division of the TS segment, partially offset by lower engineering costs in the HPP segment.

    

16


The following table details our results of operations in dollars and as a percentage of sales for the three months ended:
 
 
 
June 30, 2017
 
%
of sales
 
June 30, 2016
 
%
of sales
 
 
(Dollar amounts in thousands)
Total sales
 
$
30,532

 
100
 %
 
$
26,912

 
100
 %
Costs and expenses:
 
 

 
 

 
 

 
 

Cost of sales
 
23,731

 
78
 %
 
19,707

 
73
 %
Engineering and development
 
578

 
2
 %
 
779

 
3
 %
Selling, general and administrative
 
5,163

 
17
 %
 
4,573

 
17
 %
Total costs and expenses
 
29,472

 
97
 %
 
25,059

 
93
 %
Operating income
 
1,060

 
3
 %
 
1,853

 
7
 %
Other expense
 
(27
)
 
 %
 
(76
)
 
 %
Income before income taxes
 
1,033

 
3
 %
 
1,777

 
7
 %
Income tax expense
 
338

 
1
 %
 
520

 
2
 %
Net income
 
$
695

 
2
 %
 
$
1,257

 
5
 %


Revenues

     Our revenues increased by approximately $3.6 million to $30.5 million for the three months ended June 30, 2017 as compared to $26.9 million of revenues for the three months ended June 30, 2016. The TS segment revenues increase of $5.9 million was partially offset by a $2.3 million decrease in our HPP segment.

HPP segment revenue change was as follows for the three months ended June 30, 2017 and 2016:
 
 
 
 
 
 
Decrease
 
 
2017
 
2016
 
$
 
%
 
 
(Dollar amounts in thousands)
 
 
Products
 
$
1,635

 
$
3,354

 
$
(1,719
)
 
(51
)%
Services
 
1,680

 
2,248

 
(568
)
 
(25
)%
Total
 
$
3,315

 
$
5,602

 
$
(2,287
)
 
(41
)%

The decrease in HPP product revenues is primarily attributed to lower Multicomputer product shipments and parts sales for the period. The decrease in HPP services revenues is primarily attributed to a decrease in royalties on high-speed processing boards related to the E2D program shipped for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016.

TS segment revenue change was as follows for the three months ended June 30, 2017 and 2016:
 
 
 
 
 
 
Increase
 
 
2017
 
2016
 
$
 
%
 
 
(Dollar amounts in thousands)
 
 
Products
 
$
21,877

 
$
16,991

 
$
4,886

 
29
%
Services
 
5,340

 
4,319

 
1,021

 
24
%
Total
 
$
27,217

 
$
21,310

 
$
5,907

 
28
%

The $5.9 million increase in TS segment total revenues during the period was primarily the result of an increase in product and service revenues of $5.9 million in our U.S. division. Overall product revenues increased by $4.9 million as a result of a $5.6 million increase in our U.S. division attributed to the timing of orders from two major customers, partially offset by a $0.6 million and a $0.1 million decrease in our Germany and U.K. divisions, respectively. The $1.0 million increase in TS segment service revenues during the period was primarily the result of increases of $0.8 million and $0.3 million in service revenues of our German and U.S. divisions, respectively.

17



      Our revenues by geographic area based on the customer location to which the products were shipped or services rendered were as follows for the three months ended June 30, 2017 and June 30, 2016:
 
 
 
 
Increase
 
 
2017
 
%
 
2016
 
%
 
$
 
%
 
 
(Dollar amounts in thousands)
Americas
 
$
21,663

 
71
%
 
$
19,689

 
73
%
 
$
1,974

 
10
%
Europe
 
7,839

 
26
%
 
6,464

 
24
%
 
1,375

 
21
%
Asia
 
1,030

 
3
%
 
759

 
3
%
 
271

 
36
%
Totals
 
$
30,532

 
100
%
 
$
26,912

 
100
%
 
$
3,620

 
13
%

The $3.6 million increase in revenues is primarily attributed to our TS segment. The $2.0 million increase in revenue from the Americas is primarily the result of increased sales to a major customer of the U.S. division and the $1.4 million increase in Europe is primarily the result of increased sales to a U.S division customer.

Gross Margins

     Our gross margin ("GM") decreased by $0.4 million to $6.8 million for the three months ended June 30, 2017 as compared to a gross margin of $7.2 million for the three months ended June 30, 2016. The GM as a percentage of revenue decreased from 27% for the three months ended June 30, 2016 to 22% for the three months ended June 30, 2017 as follows:
 
 
 
2017
 
2016
 
Increase (decrease)
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
HPP
 
$
2,411

73
%
 
$
3,885

69
%
 
$
(1,474
)
 
4
 %
TS
 
4,390

16
%
 
3,320

16
%
 
1,070

 
 %
Total
 
$
6,801

22
%
 
$
7,205

27
%
 
$
(404
)
 
(5
)%
    
    
The impact of product mix within our HPP segment on gross margin for the period was as follows:
 
 
 
2017
 
2016
 
Decrease
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
Products
 
$
749

46
%
 
$
1,650

49
%
 
$
(901
)
 
(3
)%
Services
 
1,662

99
%
 
2,235

99
%
 
(573
)
 
 %
Total
 
$
2,411

73
%
 
$
3,885

69
%
 
$
(1,474
)
 
4
 %

The overall HPP segment gross margin as a percentage of sales increased to 73% for the period . The 4% increase in gross margin as a percentage of sales in the HPP segment was primarily attributed to a favorable mix of high margin Multicomputer royalty revenues and less inventory write-offs during the period.



18


The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2017 and 2016 was as follows:
 
 
2017
 
2016
 
Increase
 
 
GM$
GM%
 
GM$
GM%
 
GM$
 
GM%
 
 
(Dollar amounts in thousands)
Products
 
$
2,829

13
%
 
$
2,235

13
%
 
$
594

 
%
Services
 
1,561

29
%
 
1,085

25
%
 
476

 
4
%
Total
 
$
4,390

16
%
 
$
3,320

16
%
 
$
1,070

 
%

     The overall TS segment gross margin as a percentage of sales was unchanged at 16% for the period. The 4% increase in service margins as a percentage of TS segment revenues is primarily attributed to having improved margins in our German and U.S. divisions.

Operating Expenses

Engineering and Development Expenses
 
The engineering and development expenses incurred by our HPP segment were $0.6 million and $0.8 million for the three months ended June 30, 2017 and 2016, respectively. The current period expenses are primarily for Myricom product engineering expenses incurred in connection with the development of new Myricom security products. The lower engineering and development expenses for the three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016 is primarily attributed to a reduction in outside consulting expenditures.
 
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 June 30, 2017 and 2016:
 
 
For the three months ended June 30,
 
 
 
 
 
2017
 
% of
Total
 
2016
 
% of
Total
 
$ Increase (decrease)
 
% Increase (decrease)
 
(Dollar amounts in thousands)
By Operating Segment:
 
 
 
 
 
 
 
 
 
 
 
HPP segment
$
1,445

 
28
%
 
$
1,521

 
33
%
 
$
(76
)
 
(5
)%
TS segment
3,718

 
72
%
 
3,052

 
67
%
 
666

 
22
 %
Total
$
5,163

 
100
%
 
$
4,573

 
100
%
 
$
590

 
13
 %
 
SG&A expenses increased by $0.6 million, or 13%, for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. The decrease in HPP segment SG&A expenses is primarily attributed to decreases in variable compensation costs. The increase in the TS segment SG&A expenses is primarily attributed to increases in variable compensation in our U.S. operations combined with increases in recruiting and severance costs in our German operations.


19


Other Income/Expenses
 
The following table details our other income (expense) for the three months ended June 30, 2017 and 2016:
 
For the three months ended,
 
 
 
June 30, 2017
 
June 30, 2016
 
Increase
 
(Amounts in thousands)
Interest expense
$
(18
)
 
$
(22
)
 
$
4

Interest income
2

 
1

 
1

Foreign exchange loss
(14
)
 
(55
)
 
41

Other income, net
3

 

 
3

Total other expense, net
$
(27
)
 
$
(76