Document
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, 2018 |
| | or |
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 or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
175 Cabot Street - Suite 210, Lowell, MA | 01854 |
(Address of principle executive offices) | (Zip Code) |
| |
(978)-954-5038 |
(Registrant's telephone number, including area code) |
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. (Check one)
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| | | |
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 8, 2018, the registrant had 4,017,254 shares of common stock issued and outstanding.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CSP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
|
| | | | | | | |
| June 30, 2018 | | September 30, 2017 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 10,415 |
| | $ | 10,421 |
|
Accounts receivable, net of allowances of $123 and $120 | 13,059 |
| | 17,673 |
|
Unbilled accounts receivable | 1,404 |
| | 703 |
|
Inventories | 9,216 |
| | 5,567 |
|
Deferred costs | 32 |
| | 19 |
|
Refundable income taxes | 688 |
| | — |
|
Other current assets | 1,894 |
| | 1,076 |
|
Current assets held-for-sale | 16,263 |
| | 14,867 |
|
Total current assets | 52,971 |
| | 50,326 |
|
Property, equipment and improvements, net | 868 |
| | 919 |
|
| | | |
Other assets: | |
| | |
|
Intangibles, net | 78 |
| | 167 |
|
Deferred income taxes | 1,368 |
| | 1,963 |
|
Cash surrender value of life insurance | 3,608 |
| | 3,300 |
|
Other assets | 65 |
| | 65 |
|
Noncurrent assets held-for-sale | — |
| | 2,188 |
|
Total other assets | 5,119 |
| | 7,683 |
|
Total assets | $ | 58,958 |
| | $ | 58,928 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 15,130 |
| | $ | 14,895 |
|
Deferred revenue | 1,763 |
| | 938 |
|
Pension and retirement plans | 322 |
| | 325 |
|
Income taxes payable | 58 |
| | 138 |
|
Current liabilities held-for-sale | 16,516 |
| | 9,727 |
|
Total current liabilities | 33,789 |
| | 26,023 |
|
Pension and retirement plans | 6,505 |
| | 6,653 |
|
Income taxes payable | 561 |
| | — |
|
Other noncurrent liabilities | 37 |
| | 29 |
|
Noncurrent liabilities held-for-sale | — |
| | 5,222 |
|
Total liabilities | 40,892 |
| | 37,927 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Shareholders’ equity: | | | |
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 4,006 and 3,935 shares, respectively | 41 |
| | 40 |
|
Additional paid-in capital | 14,306 |
| | 13,717 |
|
Retained earnings | 14,297 |
| | 17,407 |
|
Accumulated other comprehensive loss | (10,578 | ) | | (10,163 | ) |
Total shareholders’ equity | 18,066 |
| | 21,001 |
|
Total liabilities and shareholders’ equity | $ | 58,958 |
| | $ | 58,928 |
|
See accompanying notes to unaudited consolidated financial statements.
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for per share data)
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| June 30, 2018 | | June 30, 2017 | | June 30, 2018 | | June 30, 2017 |
Sales: | | | | | | | |
Product | $ | 16,080 |
| | $ | 23,084 |
| | $ | 43,798 |
| | $ | 52,007 |
|
Services | 3,964 |
| | 3,345 |
| | 9,480 |
| | 8,127 |
|
Total sales | 20,044 |
| | 26,429 |
| | 53,278 |
| | 60,134 |
|
| | | | | | | |
Cost of sales: | | | | | | | |
Product | 13,527 |
| | 19,615 |
| | 36,473 |
| | 44,044 |
|
Services | 1,306 |
| | 664 |
| | 3,247 |
| | 1,729 |
|
Total cost of sales | 14,833 |
| | 20,279 |
| | 39,720 |
| | 45,773 |
|
| | | | | | | |
Gross profit | 5,211 |
| | 6,150 |
| | 13,558 |
| | 14,361 |
|
| | | | | | | |
Operating expenses: | | | | | | | |
Engineering and development | 895 |
| | 578 |
| | 2,352 |
| | 1,747 |
|
Selling, general and administrative | 4,094 |
| | 4,230 |
| | 11,682 |
| | 10,910 |
|
Total operating expenses | 4,989 |
| | 4,808 |
| | 14,034 |
| | 12,657 |
|
| | | | | | | |
Operating income (loss) | 222 |
| | 1,342 |
| | (476 | ) | | 1,704 |
|
| | | | | | | |
Other income (expense): | | | | | | | |
Foreign exchange gain (loss) | 420 |
| | (25 | ) | | 308 |
| | 27 |
|
Other income (expense), net | 38 |
| | 8 |
| | 105 |
| | 30 |
|
Total other income (expense) | 458 |
| | (17 | ) | | 413 |
| | 57 |
|
Income (loss) before income taxes | 680 |
| | 1,325 |
| | (63 | ) | | 1,761 |
|
Income tax expense | 249 |
| | 393 |
| | 1,225 |
| | 539 |
|
Net income (loss) from continuing operations | 431 |
| | 932 |
| | (1,288 | ) | | 1,222 |
|
Loss from discontinued operations, net of tax | (428 | ) | | (237 | ) | | (503 | ) | | (141 | ) |
Net income (loss) | 3 |
| | 695 |
| | (1,791 | ) | | 1,081 |
|
Net income (loss) attributable to common stockholders | $ | 3 |
| | $ | 664 |
| | $ | (1,791 | ) | | $ | 1,035 |
|
| | | | | | | |
Net income (loss) from continuing operations per share – basic | $ | 0.11 |
| | $ | 0.24 |
| | $ | (0.34 | ) | | $ | 0.32 |
|
Net loss from discontinued operations per share – basic | $ | (0.11 | ) | | $ | (0.06 | ) | | $ | (0.13 | ) | | $ | (0.04 | ) |
Weighted average shares outstanding – basic | 3,842 |
| | 3,744 |
| | 3,811 |
| | 3,713 |
|
| | | | | | | |
Net income (loss) from continuing operations per share – diluted | $ | 0.11 |
| | $ | 0.24 |
| | $ | (0.34 | ) | | $ | 0.31 |
|
Net loss from discontinued operations per share – diluted | $ | (0.11 | ) | | $ | (0.06 | ) | | $ | (0.13 | ) | | $ | (0.04 | ) |
Weighted average shares outstanding – diluted | 3,930 |
| | 3,819 |
| | 3,811 |
| | 3,811 |
|
See accompanying notes to unaudited consolidated financial statements.
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| | June 30, 2018 | | June 30, 2017 | | June 30, 2018 | | June 30, 2017 |
Net income (loss) | | $ | 3 |
| | $ | 695 |
| | $ | (1,791 | ) | | $ | 1,081 |
|
Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation loss adjustments | | (325 | ) | | (79 | ) | | (415 | ) | | (17 | ) |
Other comprehensive loss | | (325 | ) | | (79 | ) | | (415 | ) | | (17 | ) |
Total comprehensive income (loss) | | $ | (322 | ) | | $ | 616 |
| | $ | (2,206 | ) | | $ | 1,064 |
|
See accompanying notes to unaudited consolidated financial statements.
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the nine months ended June 30, 2018:
(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, 2017 | 3,935 |
| | $ | 40 |
| | $ | 13,717 |
| | $ | 17,407 |
| | $ | (10,163 | ) | | $ | 21,001 |
|
Net loss | — |
| | — |
| | — |
| | (1,791 | ) | | — |
| | (1,791 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (415 | ) | | (415 | ) |
Exercise of stock options | 5 |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
Stock-based compensation | — |
| | — |
| | 489 |
| | — |
| | — |
| | 489 |
|
Restricted stock cancellation | (13 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock issuance | 71 |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Issuance of shares under employee stock purchase plan | 8 |
| | — |
| | 78 |
| | — |
| | — |
| | 78 |
|
Cash dividends paid on common stock ($0.33 per share) | — |
| | — |
| | — |
| | (1,319 | ) | | — |
| | (1,319 | ) |
Balance as of June 30, 2018 | 4,006 |
| | $ | 41 |
| | $ | 14,306 |
| | $ | 14,297 |
| | $ | (10,578 | ) | | $ | 18,066 |
|
See accompanying notes to unaudited consolidated financial statements.
CSP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
| | | | | | | |
| For the nine months ended |
| June 30, 2018 | | June 30, 2017 |
Cash flows provided by operating activities: | | | |
Net income (loss) | $ | (1,791 | ) | | $ | 1,081 |
|
Loss from discontinued operations, net of income tax benefit | (503 | ) | | (141 | ) |
Net income (loss) from continuing operations | (1,288 | ) | | 1,222 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 309 |
| | 271 |
|
Amortization of intangibles | 89 |
| | 90 |
|
Loss on sale of fixed assets, net | 4 |
| | 1 |
|
Foreign exchange gain | (308 | ) | | (27 | ) |
Non-cash changes in accounts receivable | 3 |
| | 9 |
|
Non-cash changes in inventories | 381 |
| | 165 |
|
Stock-based compensation expense on stock options and restricted stock awards | 489 |
| | 411 |
|
Deferred income taxes | 596 |
| | (136 | ) |
Increase in cash surrender value of life insurance | (158 | ) | | (99 | ) |
Changes in operating assets and liabilities: | |
| | |
|
(Increase) decrease in accounts receivable | 3,913 |
| | (798 | ) |
Decrease in life insurance receivable | — |
| | 413 |
|
Increase in inventories | (4,050 | ) | | (3,084 | ) |
Increase in deferred costs | (14 | ) | | (84 | ) |
Increase in refundable income taxes | (725 | ) | | (18 | ) |
Increase in other current assets | (783 | ) | | (155 | ) |
Increase in accounts payable and accrued expenses | 195 |
| | 6,335 |
|
(Increase) decrease in deferred revenue | 828 |
| | (28 | ) |
Decrease in pension and retirement plans liabilities | (80 | ) | | (70 | ) |
Increase in income taxes payable | 481 |
| | 276 |
|
Increase (decrease) in other long term liabilities | 7 |
| | (193 | ) |
Net cash provided by (used in) operating activities of continuing operations | (111 | ) | | 4,501 |
|
Net cash provided by (used in) operating activities of discontinued operations | 1,126 |
| | (120 | ) |
Net cash provided by operating activities | 1,015 |
| | 4,381 |
|
Cash flows used in investing activities: | |
| | |
|
Life insurance premiums paid | (150 | ) | | (150 | ) |
Purchases of property, equipment and improvements | (262 | ) | | (169 | ) |
Net cash used in investing activities of continuing operations | (412 | ) | | (319 | ) |
Net cash used in investing activities of discontinued operations | (154 | ) | | (104 | ) |
Net cash used in investing activities | (566 | ) | | (423 | ) |
Cash flows used in financing activities: | |
| | |
|
Dividends paid | (1,319 | ) | | (1,289 | ) |
Proceeds from issuance of shares under equity compensation plans | 100 |
| | 106 |
|
Net cash used in financing activities | (1,219 | ) | | (1,183 | ) |
Effects of exchange rate on cash | (165 | ) | | 123 |
|
Net increase (decrease) in cash and cash equivalents | (935 | ) | | 2,898 |
|
Cash and cash equivalents of continuing operations, beginning of period | 10,421 |
| | 7,537 |
|
Cash and cash equivalents of discontinued operations, beginning of period | 3,464 |
| | 5,566 |
|
Cash and cash equivalents, beginning of period | 13,885 |
| | 13,103 |
|
Cash and cash equivalents, end of period | 12,950 |
| | 16,001 |
|
Less: Cash and cash equivalents of discontinued operations at end of period | 2,535 |
| | 5,527 |
|
Cash and cash equivalents of continuing operations at end of period | $ | 10,415 |
| | $ | 10,474 |
|
Supplementary cash flow information: | |
| | |
|
Cash paid for income taxes | $ | 878 |
| | $ | 469 |
|
Cash paid for interest | $ | 72 |
| | $ | 75 |
|
See accompanying notes to unaudited consolidated financial statements.
CSP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2018 AND 2017
Organization and Business
CSP Inc. ("CSPI" or "the Company" or "we" or "our") was incorporated in 1968 and is based in Lowell, Massachusetts. CSPI and its subsidiaries develop and market IT integration solutions, advanced security and managed services, purpose built network adapters, and high-performance cluster computer systems to meet the diverse requirements of its commercial and defense customers worldwide. The Company operates in two segments, its High Performance Products (“HPP”) segment and its Technology Solutions (“TS”) 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, 2017.
During the third quarter ended June 30, 2018, CSPi's Board of Directors approved the sale of the Germany subsidiary of its TS segment. Accordingly, the Company's Germany division of the TS segment met the criteria for "Assets Held-for-Sale" in accordance with Accounting Standard Codification Topic 360 ("ASC 360") as of June 30, 2018. The Germany assets and liabilities are reflected as "held-for-sale" on the consolidated balance sheets in accordance with ASC 360, at June 30, 2018 and September 30, 2017. In addition, the results of operations for the Germany business have been presented as discontinued operations in accordance with ASC 205-20, Results of Operations-Discontinued Operations for all periods presented. The Company closed on the sale of the German subsidiary of its TS segment on July 31, 2018.
Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. Refer to Note 12 for additional information on discontinued operations.
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 (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.
Basic and diluted earnings per share computations for the Company’s reported net income (loss) attributable to common stockholders are as follows: |
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| June 30, 2018 | | June 30, 2017 | | June 30, 2018 | | June 30, 2017 |
| (Amounts in thousands except per share data) |
Income (loss) from continuing operations | $ | 431 |
| | $ | 932 |
| | $ | (1,288 | ) | | $ | 1,222 |
|
Loss from discontinued operations | (428 | ) | | (237 | ) | | (503 | ) | | (141 | ) |
Net income (loss) | 3 |
| | 695 |
| | (1,791 | ) | | 1,081 |
|
Less: net income attributable to nonvested common stock | — |
| | 31 |
| | — |
| | 46 |
|
Net income (loss) attributable to common stockholders | $ | 3 |
| | $ | 664 |
| | $ | (1,791 | ) | | $ | 1,035 |
|
| | | | | | | |
Weighted average total shares outstanding – basic | 4,006 |
| | 3,921 |
| | 3,811 |
| | 3,876 |
|
Less: weighted average non-vested shares outstanding | 164 |
| | 177 |
| | — |
| | 163 |
|
Weighted average number of common shares outstanding – basic | 3,842 |
| | 3,744 |
| | 3,811 |
| | 3,713 |
|
Potential common shares from non-vested stock awards and the assumed exercise of stock options | 88 |
| | 75 |
| | — |
| | 98 |
|
Weighted average common shares outstanding – diluted | 3,930 |
| | 3,819 |
| | 3,811 |
| | 3,811 |
|
| | | | | | | |
Net income (loss) from continuing operations per share – basic | $ | 0.11 |
| | $ | 0.24 |
| | $ | (0.34 | ) | | $ | 0.32 |
|
Net loss from discontinued operations per share – basic | $ | (0.11 | ) | | $ | (0.06 | ) | | $ | (0.13 | ) | | $ | (0.04 | ) |
Net income (loss) from continuing operations per share – diluted | $ | 0.11 |
| | $ | 0.24 |
| | $ | (0.34 | ) | | $ | 0.31 |
|
Net loss from discontinued operations per share – diluted | $ | (0.11 | ) | | $ | (0.06 | ) | | $ | (0.13 | ) | | $ | (0.04 | ) |
Non-vested restricted stock awards of 168,000 shares were excluded from the diluted loss per share calculation for the nine months ended June 30, 2018, as there was a net loss and their inclusion would have been anti-dilutive.
4. Inventories
Inventories consist of the following:
|
| | | | | | | |
| June 30, 2018 | | September 30, 2017 |
| (Amounts in thousands) |
Raw materials | $ | 953 |
| | $ | 1,334 |
|
Work-in-process | 375 |
| | 260 |
|
Finished goods | 7,888 |
| | 3,973 |
|
Total | $ | 9,216 |
| | $ | 5,567 |
|
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 $0.4 million as of June 30, 2018 and September 30, 2017, respectively.
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $3.2 million and $2.9 million as of June 30, 2018 and September 30, 2017, respectively.
Draft Preliminary & Tentative For Discussion Purposes Only
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, 2018 | | September 30, 2017 |
| | (Amounts in thousands) |
Cumulative effect of foreign currency translation | | $ | (3,629 | ) | | $ | (3,214 | ) |
Cumulative unrealized loss on pension liability | | (6,949 | ) | | (6,949 | ) |
Accumulated other comprehensive loss | | $ | (10,578 | ) | | $ | (10,163 | ) |
7. Income Taxes
Income tax expense for continuing operations was $249 thousand and $1.2 million for the three and nine months ended June 30, 2018, respectively, compared to income tax expense of $393 thousand and $539 thousand in the same periods of 2017. For the three and nine months ended June 30, 2018, changes in the effective tax rate from the prior period include lower level of earnings and the reduction in the U.S. tax rate from 35% to 24%. The U.S. tax rate will be 21% for periods after fiscal year 2018.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing law. The Company follows the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Tax Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements, but in no circumstances should the measurement period extend beyond one year from the enactment date.
The provisions above are estimates, and accordingly, changes to these estimates will be recorded in subsequent periods as more information and guidance becomes available.
8. Pension and Retirement Plans
The Company's continuing operations has defined benefit and defined contribution plans in the United Kingdom and in the U.S. The Company's discontinued operations has a defined benefit and defined contribution plan in Germany. As indicated in Note 1, during the third quarter ended June 30, 2018, CSPi's Board of Directors approved the sale of the Germany subsidiary of its TS segment. In the United Kingdom, 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 U.S. 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. The Company also provides for officer death benefits through post-retirement plans to certain officers of the Company in the U.S. 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.
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, |
| 2018 | | 2017 |
| Foreign | | U.S. | | Total | | Foreign | | U.S. | | Total |
| (Amounts in thousands) |
Pension: | | | | | | | | | | | |
Interest cost | $ | 93 |
| | $ | 7 |
| | $ | 100 |
| | $ | 81 |
| | $ | 11 |
| | $ | 92 |
|
Expected return on plan assets | (77 | ) | | — |
| | (77 | ) | | (68 | ) | | — |
| | (68 | ) |
Amortization of: | |
| | |
| | |
| | |
| | |
| | |
|
Amortization of net gain (loss) | 45 |
| | (1 | ) | | 44 |
| | 52 |
| | (1 | ) | | 51 |
|
Net periodic benefit cost from continuing operations | 61 |
| | 6 |
| | 67 |
| | 65 |
| | 10 |
| | 75 |
|
Net periodic benefit cost from discontinued operations | 52 |
| | — |
| | 52 |
| | 68 |
| | — |
| | 68 |
|
Net periodic benefit cost | $ | 113 |
| | $ | 6 |
| | $ | 119 |
| | $ | 133 |
| | $ | 10 |
| | $ | 143 |
|
| | | | | | | | | | | |
Post Retirement: | |
| | |
| | |
| | |
| | |
| | |
|
Service cost | $ | — |
| | $ | 10 |
| | $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | 10 |
|
Interest cost | — |
| | 12 |
| | 12 |
| | — |
| | 10 |
| | 10 |
|
Amortization of net gain (loss) | — |
| | (4 | ) | | (4 | ) | | — |
| | 4 |
| | 4 |
|
Net periodic cost | $ | — |
| | $ | 18 |
| | $ | 18 |
| | $ | — |
| | $ | 24 |
| | $ | 24 |
|
| | | | | | | | | | | |
| For the Nine Months Ended June 30, |
| 2018 | | 2017 |
| Foreign | | U.S. | | Total | | Foreign | | U.S. | | Total |
| (Amounts in thousands) |
Pension: | | | | | | | | | | | |
Interest cost | $ | 280 |
| | $ | 20 |
| | $ | 300 |
| | $ | 237 |
| | $ | 32 |
| | $ | 269 |
|
Expected return on plan assets | (231 | ) | | — |
| | (231 | ) | | (198 | ) | | — |
| | (198 | ) |
Amortization of: | | | | | |
| | | | | | |
|
Amortization of net gain (loss) | 133 |
| | (1 | ) | | 132 |
| | 153 |
| | (3 | ) | | 150 |
|
Net periodic benefit cost from continuing operations | 182 |
| | 19 |
| | 201 |
| | 192 |
| | 29 |
| | 221 |
|
Net periodic benefit cost from discontinued operations | 158 |
| | — |
| | 158 |
| | 200 |
| | — |
| | 200 |
|
Net periodic benefit cost | $ | 340 |
| | $ | 19 |
| | $ | 359 |
| | $ | 392 |
| | $ | 29 |
| | $ | 421 |
|
| | | | | | | | | | | |
Post Retirement: | |
| | |
| | |
| | |
| | |
| | |
|
Service cost | $ | — |
| | $ | 32 |
| | $ | 32 |
| | $ | — |
| | $ | 29 |
| | $ | 29 |
|
Interest cost | — |
| | 35 |
| | 35 |
| | — |
| | 33 |
| | 33 |
|
Amortization of net gain (loss) | — |
| | (14 | ) | | (14 | ) | | — |
| | 11 |
| | 11 |
|
Net periodic cost | $ | — |
| | $ | 53 |
| | $ | 53 |
| | $ | — |
| | $ | 73 |
| | $ | 73 |
|
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, 2018 | | September 30, 2017 |
| 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 | $ | 46 |
| | $ | 46 |
| | $ | — |
| | $ | — |
| | $ | 62 |
| | $ | 62 |
| | $ | — |
| | $ | — |
|
Pooled funds | 8,257 |
| | 8,257 |
| | — |
| | — |
| | 8,177 |
| | 8,177 |
| | — |
| | — |
|
Total plan assets | $ | 8,303 |
| | $ | 8,303 |
| | $ | — |
| | $ | — |
| | $ | 8,239 |
| | $ | 8,239 |
| | $ | — |
| | $ | — |
|
| |
| | |
| | |
| | |
| | | | | | | | |
9. Segment Information
The following tables present certain operating segment information for the three and nine months ended June 30, 2018 and June 30, 2017.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Technology Solutions Segment | | |
For the three months ended June 30, | | High Performance Products Segment | | United Kingdom | | U.S. | | Total | | Consolidated Total |
| | (Amounts in thousands) |
2018 | | | | | | | | | | |
Sales: | | | | | | | | | | |
Product | | $ | 1,665 |
| | $ | 1,978 |
| | $ | 12,437 |
| | $ | 14,415 |
| | $ | 16,080 |
|
Service | | 1,422 |
| | 232 |
| | 2,310 |
| | 2,542 |
| | 3,964 |
|
Total sales | | 3,087 |
| | 2,210 |
| | 14,747 |
| | 16,957 |
| | 20,044 |
|
Income (loss) from operations | | (43 | ) | | 14 |
| | 251 |
| | 265 |
| | 222 |
|
Assets from continuing operations | | 15,018 |
| | 4,769 |
| | 22,908 |
| | 27,677 |
| | 42,695 |
|
Assets held-for-sale | | — |
| | — |
| | — |
| | — |
| | 16,263 |
|
Total assets | | 15,018 |
| | 4,769 |
| | 22,908 |
| | 27,677 |
| | 58,958 |
|
Capital expenditures | | 34 |
| | — |
| | 52 |
| | 52 |
| | 86 |
|
Depreciation and amortization | | 75 |
| | 1 |
| | 71 |
| | 72 |
| | 147 |
|
| | | | | | | | | | |
2017 | | | | | | | | | | |
Sales: | | | | | | | | | | |
Product | | $ | 1,635 |
| | $ | 1,748 |
| | $ | 19,701 |
| | $ | 21,449 |
| | $ | 23,084 |
|
Service | | 1,680 |
| | 252 |
| | 1,413 |
| | 1,665 |
| | 3,345 |
|
Total sales | | 3,315 |
| | 2,000 |
| | 21,114 |
| | 23,114 |
| | 26,429 |
|
Income from operations | | 388 |
| | 58 |
| | 896 |
| | 954 |
| | 1,342 |
|
Assets from continuing operations | | 17,277 |
| | 2,078 |
| | 22,243 |
| | 24,321 |
| | 41,598 |
|
Assets held-for-sale | | — |
| | — |
| | — |
| | — |
| | 16,509 |
|
Total assets | | 17,277 |
| | 2,078 |
| | 22,243 |
| | 24,321 |
| | 58,107 |
|
Capital expenditures | | 32 |
| | — |
| | 46 |
| | 46 |
| | 78 |
|
Depreciation and amortization | | 58 |
| | 2 |
| | 63 |
| | 65 |
| | 123 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Technology Solutions Segment | | |
For the nine months ended June 30, | | High Performance Products Segment | | United Kingdom | | U.S. | | Total | | Consolidated Total |
| | (Amounts in thousands) |
2018 | | | | | | | | | | |
Sales: | | | | | | | | | | |
Product | | $ | 4,752 |
| | $ | 5,276 |
| | $ | 33,770 |
| | $ | 39,046 |
| | $ | 43,798 |
|
Service | | 2,600 |
| | 512 |
| | 6,368 |
| | 6,880 |
| | 9,480 |
|
Total sales | | 7,352 |
| | 5,788 |
| | 40,138 |
| | 45,926 |
| | 53,278 |
|
Income (loss) from operations | | (1,482 | ) | | (77 | ) | | 1,083 |
| | 1,006 |
| | (476 | ) |
Assets from continuing operations | | 15,018 |
| | 4,769 |
| | 22,908 |
| | 27,677 |
| | 42,695 |
|
Assets held-for-sale | | — |
| | — |
| | — |
| | — |
| | 16,263 |
|
Total assets | | 15,018 |
| | 4,769 |
| | 22,908 |
| | 27,677 |
| | 58,958 |
|
Capital expenditures | | 80 |
| | — |
| | 182 |
| | 182 |
| | 262 |
|
Depreciation and amortization | | 188 |
| | 3 |
| | 207 |
| | 210 |
| | 398 |
|
| | | | | | | | | | |
2017 | | | | | | | | | | |
Sales: | | | | | | | | | | |
Product | | $ | 5,155 |
| | $ | 4,611 |
| | $ | 42,241 |
| | $ | 46,852 |
| | $ | 52,007 |
|
Service | | 4,331 |
| | 565 |
| | 3,231 |
| | 3,796 |
| | 8,127 |
|
Total sales | | 9,486 |
| | 5,176 |
| | 45,472 |
| | 50,648 |
| | 60,134 |
|
Income (loss) from operations | | 802 |
| | (183 | ) | | 1,085 |
| | 902 |
| | 1,704 |
|
Assets from continuing operations | | 17,277 |
| | 2,078 |
| | 22,243 |
| | 24,321 |
| | 41,598 |
|
Assets held-for-sale | | — |
| | — |
| | — |
| | — |
| | 16,509 |
|
Total assets | | 17,277 |
| | 2,078 |
| | 22,243 |
| | 24,321 |
| | 58,107 |
|
Capital expenditures | | 90 |
| | — |
| | 79 |
| | 79 |
| | 169 |
|
Depreciation and amortization | | 168 |
| | 7 |
| | 186 |
| | 193 |
| | 361 |
|
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 from continuing operations for the three and nine months ended June 30, 2018, and 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | | For the nine months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | Customer Revenues | | % of Total Revenues | | Customer Revenues | | % of Total Revenues | | Customer Revenues | | % of Total Revenues | | Customer Revenues | | % of Total Revenues |
| (Dollar amounts in millions) |
Customer A | | $ | 1.6 |
| | 8 | % | | $ | 8.2 |
| | 31 | % | | $ | 5.5 |
| | 10 | % | | $ | 14.8 |
| | 25 | % |
Customer B | | $ | 1.0 |
| | 5 | % | | $ | 3.0 |
| | 11 | % | | $ | 2.2 |
| | 4 | % | | $ | 4.5 |
| | 7 | % |
In addition, accounts receivable from Customer A totaled approximately $1.5 million, or 11%, and approximately $2.4 million, or 14%, of total consolidated accounts receivable as of June 30, 2018 and September 30, 2017, respectively. Accounts receivable from Customer B was less than 10% as of June 30, 2018 and September 30, 2017. One additional customer,
Customer C, accounted for accounts receivable of 10% or more as of June 30, 2018, but did not account for revenue of 10% or more for the three and nine months ended June 30, 2018 and June 30, 2017. Accounts receivable from Customer C totaled approximately $1.6 million, or 13%, of consolidated accounts receivable as of June 30, 2018. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with these customers as of June 30, 2018. No other customers accounted for 10% or more of total consolidated accounts receivable as of June 30, 2018.
10. Dividends
On December 19, 2017, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on January 16, 2018 to shareholders of record as of December 29, 2017, the record date.
On February 12, 2018, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on March 16, 2018 to shareholders of record as of February 28, 2018, the record date.
On May 9, 2018, the Company's board of directors declared a cash dividend of $0.11 per share which was paid on June 15, 2018 to shareholders of record as of May 31, 2018, the record date.
11. New accounting standards not adopted as of June 30, 2018
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on October 1, 2018, and it does not plan to early adopt this ASU. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. We are utilizing a bottom-up approach to analyze the standard's impact on our contract portfolio, comparing our historical accounting policies and practices, and identifying potential differences from applying the requirements of the new standard to our contracts. While this assessment continues, we have not yet completed our determination of the impacts of the standard or the effect of these impacts on our consolidated financial statements. The Company has selected the modified retrospective approach as its transition method. Because the new standard will impact our business processes, systems and controls, we are developing a comprehensive change management project plan to guide the implementation.
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 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), an amendment of the FASB Accounting Standards Codification. This ASU requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for the Company on October 1, 2019. The standard mandates a modified retrospective transition method for all entities and early adoption is permitted. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
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 August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, an amendment of the FASB Accounting Standards Codification. This ASU will reduce diversity in practice for classifying cash payments and receipts in the statement of cash flows for a number of common transactions. It will also clarify when identifiable cash flows should be separated versus classified based on their predominant source or use. This ASU is effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is evaluating the effect that ASU 2016-15 will have on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, an amendment of the FASB Accounting Standards Codification. This ASU requires the seller and buyer to recognize at the transaction date the current and deferred income tax consequences of intercompany asset transfers (except transfers of inventory). Under current GAAP, the seller and buyer defer the consolidated tax consequences of an intercompany asset transfer from the period of the transfer to a future period when the asset is transferred out of the consolidated group, or otherwise affects consolidated earnings. This standard will cause volatility in companies’ effective tax rates, particularly for those that transfer intangible assets to foreign subsidiaries. For public entities, the new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. An entity may early adopt the standard but only at the beginning of an annual period for which it has not issued or made available for issuance financial statements (interim or annual). The Company is evaluating the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.
In January 2017, FASB issued ASU No. 2017-01, “Business Combinations Clarifying the Definition of a Business" (Topic 805) (“ASU No. 2017-01”). ASU 2017-01 provides a framework to use in determining when a set of assets and activities is a business. ASU 2017-01 provides more consistency in applying the business combination guidance, reduces the costs of application, and makes the definition of a business more operable. ASU 2017-01 is effective for interim and annual periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the impact ASU 2017-01 will have on the Company’s results of operations, financial position and disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, an amendment of the FASB Accounting Standards Codification. This ASU requires employers that sponsor defined benefit pension and/or other post-retirement benefit plans to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Employers are required to present the other components of net benefit costs in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component of net periodic pension cost will be eligible for asset capitalization. For public entities, the new standard is effective for annual periods beginning after December 15, 2017, including interim periods within that annual period. 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. This ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The Company is evaluating the effect that ASU 2017-07 will have on its consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allow a reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings for stranded tax effects resulting from the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts at the date of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which works to improve on certain aspects of ASU No. 2016-02 identified by stakeholders as problematic or difficult to implement, including the adoption method. Currently, entities are required to adopt this ASU using a modified retrospective transition method. Under that transition method, an entity initially applies this ASU at the beginning of the earliest period presented in its financial statements. ASU No. 2018-11 provides another adoption method, which allows entities to initially apply ASU No. 2016-02 at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.
12. Assets held-for-sale and discontinued operations
As discussed in Note 1, on June 27, 2018, CSPi entered into an agreement to sell its Germany operations (Modcomp GmbH, Technology Solutions) to Reply AG, a German stock corporation ("Reply AG") and an affiliate of European IT service provider and media conglomerate Reply SpA (MTA, STAR: REY) (the "Reply Group") for €10.0 million in cash, subject to certain closing and post-closing adjustments. Accordingly, CSPi GmbH, met the criteria for "Assets Held-for-Sale" in accordance with Accounting Standard Codification 360 ("ASC 360") as of June 30, 2018. Pursuant to the terms of a Share Purchase and Assignment Agreement, Reply AG will acquire all of the outstanding stock of Modcomp GmbH, CSPi’s German subsidiary, which includes all of the assets and liabilities of such entity. The Germany assets and liabilities are reflected as "held-for-sale" on the consolidated balance sheets in accordance with ASC 360, at June 30, 2018 and September 30, 2017. In addition, the results of operations for the Germany business have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented.
Summarized Discontinued Operations Financial Information
The following table provides a reconciliation of the carrying amounts of major classes of assets and liabilities which are included in assets and liabilities held for sale in the accompanying consolidated balance sheets for each of the periods presented:
|
| | | | | | | | | |
| | | June 30, 2018 | | September 30, 2017 |
| | | (Amounts in thousands) |
Currents assets: | | | |
| Cash and cash equivalents | $ | 2,535 |
| | $ | 3,464 |
|
| Accounts receivable, net | 7,936 |
| | 9,957 |
|
| Unbilled accounts receivable | 553 |
| | 69 |
|
| Inventories, net | 446 |
| | 404 |
|
| Deferred costs | 2,978 |
| | 910 |
|
| Deferred income taxes | 854 |
| | — |
|
| Other current assets | 373 |
| | 63 |
|
| Property, equipment and improvements, net | 588 |
| | — |
|
| | Total current assets held-for-sale | $ | 16,263 |
| | $ | 14,867 |
|
| | | | | |
Property, equipment and improvements, net | $ | — |
| | $ | 589 |
|
Deferred costs | — |
| | 609 |
|
Deferred income taxes | — |
| | 864 |
|
Other noncurrent assets, net | — |
| | 126 |
|
| | Total noncurrent assets held-for-sale | $ | — |
| | $ | 2,188 |
|
| | | | | |
Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 4,667 |
| | $ | 3,950 |
|
| Deferred revenue | 6,409 |
| | 5,264 |
|
| Pension and retirement plans | 5,319 |
| | 209 |
|
| Other current liabilities | 121 |
| | 304 |
|
| | Total current liabilities held-for-sale | $ | 16,516 |
| | $ | 9,727 |
|
| | | | | |
Pension and retirement plans | $ | — |
| | $ | 5,165 |
|
Other noncurrent liabilities | — |
| | 57 |
|
| | Total noncurrent liabilities held-for-sale | $ | — |
| | $ | 5,222 |
|
The following table summarizes the results of discontinued operations for the three and nine months ended June 30, 2018, and June 30, 2017.
|
| | | | | | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| June 30, 2018 | | June 30, 2017 | | June 30, 2018 | | June 30, 2017 |
| (Amounts in thousands) |
Sales | $ | 5,681 |
| | $ | 4,103 |
| | $ | 16,428 |
| | $ | 15,630 |
|
Cost of sales | 5,150 |
| | 3,452 |
| | 14,180 |
| | 13,043 |
|
Gross profit | 531 |
| | 651 |
| | 2,248 |
| | 2,587 |
|
Selling, general and administrative expenses | 922 |
| | 933 |
| | 2,656 |
| | 2,711 |
|
Operating loss | (391 | ) | | (282 | ) | | (408 | ) | | (124 | ) |
Other expenses | (36 | ) | | (10 | ) | | (95 | ) | | (23 | ) |
Loss before income taxes | (427 | ) | | (292 | ) | | (503 | ) | | (147 | ) |
Income tax expense (benefit) | 1 |
| | (55 | ) | | — |
| | (6 | ) |
Loss from discontinued operations, net of tax | $ | (428 | ) | | $ | (237 | ) | | $ | (503 | ) | | $ | (141 | ) |
13. Subsequent Events
On July 31, 2018, CSPi announced the completion of its sale of all of the stock of Modcomp GmbH, to Reply AG, pursuant to the terms of a Share Purchase and Assignment Agreement dated June 27, 2018. CSPI GmbH, through itself and its wholly owned subsidiaries, provided managed security services to customers primarily in Germany.
Upon the closing of the Share Purchase Agreement, Reply AG paid to CSPI total cash at closing of approximately €12,343,000, which consists of the original purchase price of €10,000,000 plus an adjustment at closing for Net Cash (as defined in the Share Purchase Agreement) of approximately €2,343,000.
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, 2017. 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, intense competition in the market segments in which we operate, the recent sale of our German operations in our TS segment, and the recent changes in the U.S. Tax laws which are still under review by us. 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, 2017.
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, 2017 in the “Critical Accounting Policies” section contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Discontinued Operations
During the third quarter ended June 30, 2018, CSPi's Board of Directors approved the sale of the Germany subsidiary of its TS segment. The Germany assets and liabilities are reflected as "held-for-sale" on the consolidated balance sheets in accordance with ASC 360, at June 30, 2018 and September 30, 2017. In addition, the results of operations for the Germany business have been presented as discontinued operations for all periods presented. The Company closed on the sale of the German subsidiary of its TS segment on July 31, 2018.
Results of Continuing Operations
Overview of the three months ended June 30, 2018
Our revenues decreased by approximately $6.4 million, or 24%, to $20.0 million for the three months ended June 30, 2018 as compared to $26.4 million for the three months ended June 30, 2017. The decrease in revenue is the result of a decrease of $6.2 million in our TS segment, combined with a $0.2 million decrease in our HPP segment. Our gross margin percentage increased to 26% of revenues for the three months ended June 30, 2018 from 23% for the three months ended June 30, 2017. Operating income decreased by approximately $1.1 million from operating income of $1.3 million for the three months ended June 30, 2017 to operating income of $222 thousand for the three months ended June 30, 2018, primarily as a result of a $939 thousand decrease in gross profit combined with an increase of $181 thousand in operating expenses. The increase in operating expenses was primarily the result of higher compensation costs with an increase in the number of engineers and outside consultants for the development of the new Aria security products in the HPP segment. Our income tax expense decreased by approximately $144 thousand to $249 thousand for the three months ended June 30, 2018 as compared to an income tax expense of $393 thousand for the three months ended June 30, 2017. The decrease to the income tax expense was primarily due to the decrease in operating income.
The following table details our results of operations in dollars and as a percentage of sales for the three months ended:
|
| | | | | | | | | | | | | | |
| | June 30, 2018 | | % of sales | | June 30, 2017 | | % of sales |
| | (Dollar amounts in thousands) |
Sales | | $ | 20,044 |
| | 100 | % | | $ | 26,429 |
| | 100 | % |
Costs and expenses: | | |
| | |
| | |
| | |
|
Cost of sales | | 14,833 |
| | 74 | % | | 20,279 |
| | 77 | % |
Engineering and development | | 895 |
| | 5 | % | | 578 |
| | 2 | % |
Selling, general and administrative | | 4,094 |
| | 20 | % | | 4,230 |
| | 16 | % |
Total costs and expenses | | 19,822 |
| | 99 | % | | 25,087 |
| | 95 | % |
Operating income | | 222 |
| | 1 | % | | 1,342 |
| | 5 | % |
Other income (expense) | | 458 |
| | 2 | % | | (17 | ) | | — | % |
Income before income taxes | | 680 |
| | 3 | % | | 1,325 |
| | 5 | % |
Income tax expense | | 249 |
| | 1 | % | | 393 |
| | 1 | % |
Net income from continuing operations | | 431 |
| | 2 | % | | 932 |
| | 4 | % |
Net loss from discontinued operations | | (428 | ) | | (2 | )% | | (237 | ) | | (1 | )% |
Net income | | $ | 3 |
| | — | % | | $ | 695 |
| | 3 | % |
Revenues
Our revenues decreased by approximately $6.4 million to $20.0 million for the three months ended June 30, 2018 as compared to $26.4 million of revenues for the three months ended June 30, 2017. TS segment revenues decreased by $6.2 million, and HPP segment revenues decreased by $0.2 million.
HPP segment revenue change was as follows for the three months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | | | | | Increase (Decrease) |
| | 2018 | | 2017 | | $ | | % |
| | (Dollar amounts in thousands) | | |
Products | | $ | 1,665 |
| | $ | 1,635 |
| | $ | 30 |
| | 2 | % |
Services | | 1,422 |
| | 1,680 |
| | (258 | ) | | (15 | )% |
Total | | $ | 3,087 |
| | $ | 3,315 |
| | $ | (228 | ) | | (7 | )% |
The HPP product revenues of $1.7 million were relatively unchanged for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, increasing by $30 thousand from $1.6 million. The decrease in HPP services revenues of $258 thousand is primarily attributed to a $382 thousand decrease in royalties on high-speed processing boards related to the E2D program shipped for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017.
TS segment revenue change was as follows for the three months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | | | | | Increase (decrease) |
| | 2018 | | 2017 | | $ | | % |
| | (Dollar amounts in thousands) | | |
Products | | $ | 14,415 |
| | $ | 21,449 |
| | $ | (7,034 | ) | | (33 | )% |
Services | | 2,542 |
| | 1,665 |
| | 877 |
| | 53 | % |
Total | | $ | 16,957 |
| | $ | 23,114 |
| | $ | (6,157 | ) | | (27 | )% |
The decrease in TS segment product revenues of $7.0 million during the period was primarily the result of a decrease in product revenues of $7.2 million in our U.S. division, partially offset by an increase of $0.2 million in our U.K. division. The $7.2 million decrease in the U.S. division was primarily the result of product sales to a major customer in the prior year
that were not repeated in the current year. The $0.2 million increase in the U.K. division product revenues was primarily the result of increased product shipments to two customers. The decrease in TS segment product revenues was partially offset by an increase in TS segment service revenues of $0.9 million during the period. The increase in TS segment service revenues for the period ended June 30, 2018 as compared to the prior fiscal year three month period was due primarily to an increase of $0.9 million in our U.S. division. The $0.9 million increase in the U.S. division service revenues was substantially the result of a $0.8 million increase in internal services and a $0.3 million increase in managed service contracts, partially offset by a decrease in third party maintenance revenues of $0.2 million.
Our revenues by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the three months ended June 30, 2018 and June 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | Decrease |
| | 2018 | | % | | 2017 | | % | | $ | | % |
| | (Dollar amounts in thousands) |
Americas | | $ | 16,586 |
| | 83 | % | | $ | 21,663 |
| | 82 | % | | $ | (5,077 | ) | | (23 | )% |
Europe | | 3,310 |
| | 16 | % | | 3,737 |
| | 14 | % | | (427 | ) | | (11 | )% |
Asia | | 148 |
| | 1 | % | | 1,029 |
| | 4 | % | | (881 | ) | | (86 | )% |
Totals | | $ | 20,044 |
| | 100 | % | | $ | 26,429 |
| | 100 | % | | $ | (6,385 | ) | | (24 | )% |
The $5.1 million decrease in revenue to the Americas and the $0.9 million decrease in revenue to Asia is primarily the result of decreased sales by our TS segment U.S. division. The $0.4 million decrease in revenue to Europe is primarily the result of decreased sales by our TS segment U.S division of $1.2 million, partially offset by increased sales by our TS segment U.K. division of $0.7 million to a U.S. division multi-national customer.
Gross Margins
Our gross margin ("GM") decreased by $0.9 million to $5.2 million for the three months ended June 30, 2018 as compared to a gross margin of approximately $6.1 million for the three months ended June 30, 2017. The GM as a percentage of revenue increased to 26% for the three months ended June 30, 2018, from 23% for the three months ended June 30, 2017.
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Decrease |
| | GM$ | GM% | | GM$ | GM% | | GM$ | | GM% |
| | (Dollar amounts in thousands) |
HPP | | $ | 2,116 |
| 69 | % | | $ | 2,411 |
| 73 | % | | $ | (295 | ) | | (4 | )% |
TS | | 3,095 |
| 18 | % | | 3,739 |
| 16 | % | | (644 | ) | | 2 | % |
Total | | $ | 5,211 |
| 26 | % | | $ | 6,150 |
| 23 | % | | $ | (939 | ) | | 3 | % |
The impact of product mix within our HPP segment on gross margin for the period was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Decrease |
| | GM$ | GM% | | GM$ | GM% | | GM$ | | GM% |
| | (Dollar amounts in thousands) |
Products | | $ | 740 |
| 44 | % | | $ | 749 |
| 46 | % | | $ | (9 | ) | | (2 | )% |
Services | | 1,376 |
| 97 | % | | 1,662 |
| 99 | % | | (286 | ) | | (2 | )% |
Total | | $ | 2,116 |
| 69 | % | | $ | 2,411 |
| 73 | % | | $ | (295 | ) | | (4 | )% |
The overall HPP segment gross margin as a percentage of sales decreased to 69% for the three months ended June 30, 2018 from 73% for the three months ended June 30, 2017. The 4% decrease in gross margin as a percentage of sales in the HPP segment was primarily attributed to a decrease in high margin royalty revenues and a reduction in higher margin multicomputer products within the overall product mix.
The impact of product mix within our TS segment on gross margin for the three months ended June 30, 2018 and 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Increase (Decrease) |
| | GM$ | GM% | | GM$ | GM% | | GM$ | | GM% |
| | (Dollar amounts in thousands) |
Products | | $ | 1,813 |
| 13 | % | | $ | 2,720 |
| 13 | % | | $ | (907 | ) | | — | % |
Services | | 1,282 |
| 50 | % | | 1,019 |
| 61 | % | | 263 |
| | (11 | )% |
Total | | $ | 3,095 |
| 18 | % | | $ | 3,739 |
| 16 | % | | $ | (644 | ) | | 2 | % |
The overall TS segment gross margin as a percentage of sales increased to 18% for the three month period ended June 30, 2018 from 16% for the three month period ended June 30, 2017. The overall TS segment gross margin as a percentage of sales increase was primarily due to increased higher margin service revenues combined with decreased lower margin product revenues by our TS segment U.S. division.
Operating Expenses
Engineering and Development Expenses
The engineering and development expenses incurred by our HPP segment were $0.9 million and $0.6 million for the three months ended June 30, 2018 and 2017, respectively. The current period expenses were primarily for product engineering expenses incurred in connection with the development of the new ARIA security products. The increased engineering and development expenses for the three month period ended June 30, 2018 as compared to the three month period ended June 30, 2017 is primarily attributed to an increase in engineering headcount related expenses combined with increased consulting costs.
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, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, | | | | |
| 2018 | | % of Total | | 2017 | | % of Total | | $ Increase (Decrease) | | % Increase (Decrease) |
| (Dollar amounts in thousands) |
By Operating Segment: | | | | | | | | | | | |
HPP segment | $ | 1,264 |
| | 31 | % | | $ | 1,445 |
| | 34 | % | | $ | (181 | ) | | (13 | )% |
TS segment | 2,830 |
| | 69 | % | | 2,785 |
| | 66 | % | | 45 |
| | 2 | % |
Total | $ | 4,094 |
| | 100 | % | | $ | 4,230 |
| | 100 | % | | $ | (136 | ) | | (3 | )% |
SG&A expenses decreased slightly by $0.1 million, or 3%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. The decrease in SG&A expenses was primarily due to a reduction in the HPP segment SG&A expenses attributed to decreases in variable compensation, which was partially offset by an increase in TS segment SG&A expenses resulting from increased audit fees and headcount related expenses in our U.K. division.
Other Income/Expenses
The following table details other income (expense) for the three months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | |
| For the three months ended, | | |
| June 30, 2018 | | June 30, 2017 | | Increase (Decrease) |
| (Amounts in thousands) |
Interest expense | $ | (24 | ) | | $ | (18 | ) | | $ | (6 | ) |
Interest income | 4 |
| | 2 |
| | 2 |
|
Foreign exchange gain (loss) | 421 |
| | (25 | ) | | 446 |
|
Other income, net | 57 |
| | 24 |
| | 33 |
|
Total other income, net | $ | 458 |
| | $ | (17 | ) | | $ | 475 |
|
The net change to other income (expenses) of $475 thousand for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, was primarily driven by the net change of approximately $446 thousand in the foreign exchange gain (loss) on foreign currency holdings in the current period as compared to the prior year period, partially offset by changes in other income of $33 thousand.
Income Taxes
Our provision for income tax was a tax expense of $249 thousand for the three months ended June 30, 2018 as compared to a tax expense of $393 thousand for the three months ended June 30, 2017. The tax rate for the quarter increased to 36.6% due to tax expense in the U.K. for the large gain in foreign exchange, the adjustments of tax accounts for annual tax returns filed in the quarter, and reversal of tax benefit from the prior period.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (H.R.1) (the “Tax Act”) was enacted into law. In accordance with ASC 740, Income Taxes, the Company is required to recognize the effect of the Tax Act in the period of enactment, which was in the Company’s first quarter of fiscal 2018 that ended on December 31, 2017. The many changes in the Tax Act include a permanent reduction in the maximum federal corporate income tax rate from 35% to 21% effective as of January 1, 2018. The statutory federal income tax rate applicable for the Company's fiscal year ending September 30, 2018 is expected to be 24.3% based on a fiscal year blended rate calculation.
Results of Discontinued Operations
The following table is a summary of the operating results of the Germany division of our TS segment which have been reflected as discontinued operations. See Note 12 for additional information.
|
| | | | | | |
| For the three months ended |
| June 30, 2018 |
| June 30, 2017 |
|
| (Amounts in thousands) |
Revenues | $ | 5,681 |
| $ | 4,103 |
|
Loss from discontinued operations, net of tax | $ | (428 | ) | $ | (237 | ) |
Overview of the nine months ended June 30, 2018
Our revenues decreased by approximately $6.9 million, or 11%, to $53.3 million for the nine months ended June 30, 2018 as compared to $60.1 million for the nine months ended June 30, 2017. The decrease in overall revenue for the nine month period ended June 30, 2018 as compared to prior fiscal year nine month period was substantially the result of an approximately $2.1 million decrease in our HPP segment revenue combined with a decrease of approximately $4.7 million in our TS segment. The HPP segment revenue was primarily impacted by lower royalties recognized of approximately $1.9 million on high-speed processing boards during the nine months ended June 30, 2018 as compared to $3.7 million of royalty revenues for the nine month period ended June 30, 2017. The TS segment revenue was primarily impacted by reduced product sales to a major customer of our U.S. division in the prior year that were not repeated in the current year. Our overall gross margin percentage increased from 24% of revenues for the nine months ended June 30, 2017, to 25% for the nine months ended June 30, 2018. Our operating income decreased by approximately $2.2 million resulting in an operating loss of $0.5 million for the nine month period ended June 30, 2018 as compared to operating income of $1.7 million for the nine months ended June 30, 2017, primarily as a result of decreased gross profit related to the decreased revenues, increased selling and marketing expenses and increased engineering expenses. Our income tax expense increased by approximately $686 thousand to an income tax expense of $1.2 million for the nine months ended June 30, 2018 as compared to an income tax expense of $539 thousand for the nine months ended June 30, 2017. The increase to the income tax expense was primarily due to the Tax Cuts and Jobs Act which was enacted on December 22, 2017.
The following table details our results of operations in dollars and as a percentage of sales for the nine months ended:
|
| | | | | | | | | | | | | | |
| | June 30, 2018 | | % of sales | | June 30, 2017 | | % of sales |
| | (Dollar amounts in thousands) |
Sales | | $ | 53,278 |
| | 100 | % | | $ | 60,134 |
| | 100 | % |
Costs and expenses: | | |
| | |
| | |
| | |
|
Cost of sales | | 39,720 |
| | 75 | % | | 45,773 |
| | 75 | % |
Engineering and development | | 2,352 |
| | 4 | % | | 1,747 |
| | 3 | % |
Selling, general and administrative | | 11,682 |
| | 22 | % | | 10,910 |
| | 18 | % |
Total costs and expenses | | 53,754 |
| | 101 | % | | 58,430 |
| | 96 | % |
Operating income (loss) | | (476 | ) | | (1 | )% | | 1,704 |
| | 4 | % |
Other income | | 413 |
| | 1 | % | | 57 |
| | — | % |
Income (loss) before income taxes | | (63 | ) | | — | % | | 1,761 |
| | 4 | % |
Income tax expense | | 1,225 |
| | 2 | % | | 539 |
| | 1 | % |
Net income (loss) from continuing operations | | (1,288 | ) | | (2 | )% | | 1,222 |
| | 3 | % |
Net loss from discontinued operations | | (503 | ) | | (1 | )% | | (141 | ) | | — | % |
Net Income (loss) | | $ | (1,791 | ) | | (3 | )% | | $ | 1,081 |
| | 3 | % |
Revenues
Our total revenues decreased by $6.9 million to $53.3 million for the nine months ended June 30, 2018 as compared $60.1 million of revenues for the nine months ended June 30, 2017.
HPP segment revenue was as follows for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | Decrease |
| | 2018 | | 2017 | | $ | | % |
| | (Dollar amounts in thousands) | | |
Products | | $ | 4,752 |
| | $ | 5,155 |
| | $ | (403 | ) | | (8 | )% |
Services | | 2,600 |
| | 4,331 |
| | (1,731 | ) | | (40 | )% |
Total | | $ | 7,352 |
| | $ | 9,486 |
| | $ | (2,134 | ) | | (22 | )% |
The decrease in HPP product revenues for the period of $0.4 million was primarily the result of a decrease of approximately $1.0 million in Multicomputer product line shipments, partially due to a large shipment in the prior fiscal year period, partially offset by an increase in Myricom product line shipments of $0.6 million for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017. The decrease in HPP services revenues of $1.7 million for the period was primarily the result of a decrease of approximately $1.8 million in royalty revenues on high-speed processing boards related to the E2D program during the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017.
TS segment revenue was as follows for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| | Increase (Decrease) |
| | 2018 | | 2017 | | $ | | % |
| | (Dollar amounts in thousands) | | |
Products | | $ | 39,046 |
| | $ | 46,852 |
| | $ | (7,806 | ) | | (17 | )% |
Services | | 6,880 |
| | 3,796 |
| | 3,084 |
| | 81 | % |
Total | | $ | 45,926 |
| | $ | 50,648 |
| | $ | (4,722 | ) | | (9 | )% |
The decrease in TS segment product revenues of $7.8 million during the period was primarily the result of a decrease in product revenues of $8.5 million in our U.S. division, partially offset by an increase in product revenues of $0.7 million in our U.K division. The $8.5 million decrease in the U.S. division product revenues was primarily the result of product sales to a major customer in the prior year that were not repeated in the current year. The increase in TS segment service revenues of $3.1 million during the period was primarily the result of an increase of $3.1 million in our U.S. division which was substantially due to $1.8 million of increased internal services, $0.8 million of increased managed service contract revenues and increased third party maintenance revenues of $0.5 million.
Our revenues by geographic area, which is based on the customer location to which the products were shipped or services rendered, were as follows for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended June 30, | | Decrease |
| | 2018 | | % | | 2017 | | % | | $ | | % |
| | (Dollar amounts in thousands) |
Americas | | $ | 45,026 |
| | 85 | % | | $ | 50,385 |
| | 84 | % | | $ | (5,359 | ) | | (11 | )% |
Europe | | 7,442 |
| | 14 | % | | 7,617 |
| | 13 | % | | (175 | ) | | (2 | )% |
Asia | | 810 |
| | 1 | % | | 2,132 |
| | 3 | % | | (1,322 | ) | | (62 | )% |
Totals | | $ | 53,278 |
| | 100 | % | | $ | 60,134 |
| | 100 | % | | $ | (6,856 | ) | | (11 | )% |
The $6.9 million decrease in total revenues is primarily attributed to a $4.8 million decrease by our TS segment combined with a $2.1 million decrease by our HPP segment. The $5.4 million decrease in the Americas revenues for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017 is primarily due to decreased revenues by our TS segment of approximately $4.1 million, combined with decreased sales by our HPP segment of approximately $1.3 million. The $1.3 million decrease in Asia is primarily the result of decreased product sales by our HPP segment to a major customer of approximately $1.0 million, combined with decreased sales by our TS segment of $0.3 million. The $0.2 million decrease in Europe revenue is primarily due to decreased sales by our TS segment.
Gross Margins
Our gross margin decreased by $0.8 million for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017 as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Increase (Decrease) |
| | (Dollar amounts in thousands) |
| | GM$ | GM% | | GM$ | GM% | | GM$ | | GM% |
HPP | | $ | 4,417 |
| 60 | % | | $ | 6,343 |
| 67 | % | | $ | (1,926 | ) | | (7 | )% |
TS | | 9,141 |
| 20 | % | | 8,018 |
| 16 | % | | 1,123 |
| | 4 | % |
Total | | $ | 13,558 |
| 25 | % | | $ | 14,361 |
| 24 | % | | $ | (803 | ) | | 1 | % |
The impact of product mix within our HPP segment on gross margin was as follows for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Decrease |
| | (Dollar amounts in thousands) |
| | GM$ | GM% | | GM$ | GM% | | GM$ | | GM% |
Products | | $ | 1,903 |
| 40 | % | | $ | 2,143 |
| 42 | % | | $ | (240 | ) | | (2 | )% |
Services | | 2,514 |
| 97 | % | | 4,200 |
| 97 | % | | (1,686 | ) | | — | % |
Total | | $ | 4,417 |
| 60 | % | | $ | 6,343 |
| 67 | % | | $ | (1,926 | ) | | (7 | )% |
The overall HPP segment gross margin as a percentage of sales decreased to 60% for the period from 67% in the same prior year period. The 7% decrease in gross margin as a percentage of sales in the HPP segment was primarily attributed to a decrease in Multicomputer high margin royalty revenues.
The impact of product mix within our TS segment on gross margin was as follows for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | Increase (Decrease) |
| | GM$ | GM% | | GM$ | GM% | | GM$ | | GM% |
| | (Dollar amounts in thousands) |
Products | | $ | 5,422 |
| 14 | % | | $ | 5,820 |
| 12 | % | | $ | (398 | ) | | 2 | % |
Services | | 3,719 |
| 54 | % | | 2,198 |
| 58 | % | | 1,521 |
| | (4 | )% |
Total | | $ | 9,141 |
| 20 | % | | $ | 8,018 |
| 16 | % | | $ | 1,123 |
| | 4 | % |
The gross margin as a percentage of sales for TS segment product revenues increased by 2% for the period primarily as a result of an increase in higher gross margin sales for our U.S. division. The 4% decrease of gross margin as a percentage of the TS segment services sales is the result of decreased service margins in our U.S. division.
Engineering and Development Expenses
Engineering and development expenses increased by $0.6 million to $2.4 million for the nine months ended June 30, 2018 as compared to $1.7 million for the nine months ended June 30, 2017. The current period expenses were primarily for product engineering expenses incurred in connection with the development of the new ARIA security products. The increased engineering and development expenses for the nine month period ended June 30, 2018 as compared to the nine month period ended June 30, 2017 is primarily attributed to an increase in engineering headcount and consulting related expenses.
Selling, General and Administrative Expenses
The following table details our SG&A expense by operating segment for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| For the nine months ended June 30, | | | | |
| 2018 | | % of Total | | 2017 | | % of Total | | $ Increase (Decrease) | | % Increase (Decrease) |
| (Dollar amounts in thousands) |
By Operating Segment: | | | | | | | | | | | |
HPP segment | $ | 3,547 |
| | 30 | % | | $ | 3,794 |
| | 35 | % | | $ | (247 | ) | | (7 | )% |
TS segment | 8,135 |
| | 70 | % | | 7,116 |
| | 65 | % | | 1,019 |
| | 14 | % |
Total | $ | 11,682 |
| | 100 | % | | $ | 10,910 |
| | 100 | % | | $ | 772 |
| | 7 | % |
SG&A expenses increased by $0.8 million, or 7%, for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017. The $1.0 million, or 14%, increase in TS segment expenses is primarily attributed to increases in variable compensation in our U.S. division as a result of increased margins and increases for sales and engineering hires in our U.S. division. The $0.2 million, or 7%, decrease in HPP segment expenses is primarily attributed to decreases in variable compensation and outside consulting costs.
Other Income/Expenses
The following table details other income (expense) for the nine months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | |
| For the nine months ended, | | |
| June 30, 2018 | | June 30, 2017 | | Increase (Decrease) |
| (Amounts in thousands) |
Interest expense | $ | (60 | ) | | $ | (55 | ) | | $ | (5 | ) |
Interest income | 12 |
| | 8 |
| | 4 |
|
Foreign exchange gain (loss) | 308 |
| | 27 |
| | 281 |
|
Other income, net | 153 |
| | 77 |
| | 76 |
|
Total other income (expense), net | $ | 413 |
| | $ | 57 |
| | $ | 356 |
|
The increase to other income (expenses) for the nine months ended June 30, 2018 as compared to the nine months ended June 30, 2017 was primarily driven by the net change of approximately $0.3 million in the foreign exchange gain (loss) on foreign currency holdings in the current period as compared to the corresponding prior year period.
Income Taxes
For the nine months ended June 30, 2018, the Company recognized an income tax expense of $1.2 million, which was primarily due to $1.1 million recorded in the first quarter for the Tax Act. The Tax Act required the Company to revalue its U.S. deferred tax assets and liabilities to the new rate in the Company's first quarter of 2018. The Company has recorded a provisional estimate for a one-time tax expense of $490 thousand, for the remeasurement of deferred tax assets and liabilities. The Tax Act also requires a mandatory deemed repatriation of undistributed foreign earnings and profits, at the rate of either 15.5% for cash or 8% for non-liquid assets. The Company has included a provisional estimate in the amount of $649 thousand related to the one-time deemed repatriation transition tax on unrepatriated foreign earnings. As noted, these expenses were recorded discretely in the three months ended December 31, 2017. The income tax provision for the current period is not comparable to the same period of the prior year due to the impact of the Tax Act, changes in pretax income over many jurisdictions, and the impact of discrete items. Generally, fluctuations in the effective tax rate are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, other special items, and other discrete tax items, which may have unique tax implications depending on the nature of the item.
Results of Discontinued Operations
The following table is a summary of the operating results of the Germany division of our TS segment which have been reflected as discontinued operations. See Note 12 for additional information.
|
| | | | | | | |
| For the nine months ended |
| June 30, 2018 |
| | June 30, 2017 |
|
| (Amounts in thousands) |
Revenues | $ | 16,428 |
| | $ | 15,630 |
|
Loss from discontinued operations, net of tax | $ | (503 | ) | | $ | (141 | ) |
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which was unchanged at $10.4 million as of June 30, 2018 and September 30, 2017.
Significant sources of cash for the nine months ended June 30, 2018 included a decrease in accounts receivable of $3.9 million, an increase of $1.1 million from our discontinued operations, and an increase in deferred revenues of $0.8 million.
Significant uses of cash for the nine months ended June 30, 2018 included an increase in inventories of $4.1 million, a net loss of $1.8 million, and dividends paid of $1.3 million.
Cash held by our foreign subsidiary in the United Kingdom totaled approximately $1.2 million as of June 30, 2018 as compared to $1.1 million as of September 30, 2017. This cash is included in our total cash and cash equivalents reported above.
On July 31, 2018, CSPi announced the completion of the Company's sale of all of the stock of Modcomp GmbH, to Reply AG, an affiliate of Reply SpA, pursuant to the terms of a Share Purchase and Assignment Agreement dated June 27, 2018, and received approximately €12,343,000 in cash (see Note 13).
If cash generated from operations is insufficient to satisfy working capital requirements, we may need to access funds through lines of credit, the equity markets, or other means. There is no assurance that we will be able to raise any such capital on terms acceptable to us, on a timely basis or at all. If we are unable to secure additional financing, we may not be able to complete the development or enhancement of our products, take advantage of future opportunities, respond to competition or continue to effectively operate our business.
Based on our current plans, business conditions and cash received from the sale of our German operations (see Note 13), management believes that the Company’s available cash and cash equivalents, the cash generated from operations and availability on our lines of credit will be sufficient to provide for the Company’s working capital and capital expenditure requirements for at least the next twelve months from the date of filing this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2018. Our Chief Executive Officer, our Chief Financial Officer and other members of our senior management team supervised and participated in this evaluation. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective, due to the fact that we are not yet able to conclude that the material weakness described below in this Item 4 has been remediated by the changes we made in response to that material weakness.
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the period ended September 30, 2017, our management identified a material weakness as of such date. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be able to be prevented or detected in a timely basis. The identified material weakness is in connection with our controls over the revenue recognition process at our foreign subsidiaries, specifically whether revenue recognition criteria have been satisfied prior to recognizing revenue and the failure to sufficiently assess gross versus net revenue indicators to certain revenue transactions. We determined that controls over the revenue recognition process were not operating effectively and the resulting control gap amounted to a material weakness in our controls over financial reporting.
During the periods following our initial identification of the material weakness referred to above, management assessed various alternatives to remediate this material weakness and we implemented changes to our system of internal controls, which included the implementation of enhanced internal auditing procedures, whereby revenue transactions are subjected to an additional review process at the corporate level to ensure the correct accounting methodology is applied to all revenue transactions. During the three months ended June 30, 2018, management continued to take actions to improve accounting operations in our European divisions and also announced a transaction to sell our Germany subsidiary. Although we have implemented such changes to our internal controls over financial reporting as described above, at this time, we cannot conclude that the material weakness has been remediated and we will continue to evaluate personnel changes and upgrade systems and processes throughout fiscal year 2018 as necessary.
Changes in Internal Control over Financial Reporting.
During the three months ended June 30, 2018, management implemented process improvements in order to improve operations in our European division in connection with the identified material weakness noted above. During the three months ended June 30, 2018, there were no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
|
| | |
Number | | Description |
2.1 | | Share Purchase Agreement dated June 27, 2018 by and between CSP LTD, as Seller, and Reply AG, as Purchaser, and Modcomp, Inc. as Guarantor (Incorporated by reference to Exhibit 2.01 of CSP's Current Report on Form 8-K dated June 27, 2018). |
| | |
| | Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Executive Officer |
| | |
| | Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Financial Officer |
| | |
| | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
101* | | Interactive Data Files regarding (a) our Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017, (b) our Consolidated Statements of Income for the three and nine months ended June 30, 2018 and 2017, (c) our Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2018 and 2017, (d) our Consolidated Statement of Shareholders’ Equity for the nine months ended June 30, 2018, (e) our Consolidated Statements of Cash Flows for the nine months ended June 30, 2018 and 2017 and (f) the Notes to such Consolidated Financial Statements. |
*Filed Herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| CSP INC. |
| | |
August 14, 2018 | By: | /s/ Victor Dellovo |
| | Victor Dellovo |
| | Chief Executive Officer, |
| | President and Director |
| | |
August 14, 2018 | By: | /s/ Gary W. Levine |
| | Gary W. Levine |
| | Chief Financial Officer |
Exhibit Index
|
| | |
Number | | Description |
2.1 | | Share Purchase Agreement dated June 27, 2018 by and between CSP LTD, as Seller, and Reply AG, as Purchaser, and Modcomp, Inc. as Guarantor (Incorporated by reference to Exhibit 2.01 of CSP's Current Report on Form 8-K dated June 27, 2018). |
| | |
| | Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Executive Officer |
| | |
| | Rule 13(a)-14(a) / 15d-14(a) Certification of Chief Financial Officer |
| | |
| | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
101* | | Interactive Data Files regarding (a) our Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017, (b) our Consolidated Statements of Income for the three and nine months ended June 30, 2018 and 2017, (c) our Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2018 and 2017, (d) our Consolidated Statement of Shareholders’ Equity for the nine months ended June 30, 2018 (e) our Consolidated Statements of Cash Flows for the nine months ended June 30, 2018 and 2017 and (f) the Notes to such Consolidated Financial Statements. |
*Filed Herewith