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CSP INC /MA/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
The discussion below contains certain forward-looking statements related to,
among others, but not limited to, statements concerning future revenues and
future business plans. In addition, forward-looking statements include
statements in which we use words such as "expect," "believe," "anticipate,"
"intend," or similar expressions. Although we believe the expectations reflected
in such forward-looking statements are based on reasonable assumptions, we
cannot assure you that these expectations will prove to have been correct,
and actual results may vary from those contained in such forward-looking
statements.
Markets for our products and services are characterized by rapidly changing
technology, new product introductions and short product life cycles. These
changes can adversely affect our business and operating results. Our success
will depend on our ability to enhance our existing products and services and to
develop and introduce, on a timely and cost effective basis, new products that
keep pace with technological developments and address increasing customer
requirements. The inability to meet these demands could adversely affect our
business and operating results.
13
--------------------------------------------------------------------------------Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate our estimates,
including those related to uncollectible receivables, inventory valuation,
income taxes, deferred compensation and retirement plans, estimated selling
prices used for revenue recognition and contingencies. We base our estimates on
historical performance and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. A description of our
critical accounting policies is contained in our Annual Report on Form 10-K for
the fiscal year ended September 30, 2012 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 December 31, 2012 Results of Operations
Highlights include:
• Revenue decreased by approximately $0.2 million, or 1%, to $20.9 million for
the three months ended December 31, 2012 versus $21.1 million for the three
months ended December 31, 2011.
• For the three months ended December 31, 2012, we had an operating profit of
approximately $0.2 million versus an operating profit of approximately $0.8
million for the three months ended December 31, 2011, for a decrease of
approximately $0.6 million.
• For the three months ended December 31, 2012, net income was approximately
$0.1 million versus net income of approximately $0.5 million for the three
months ended December 31, 2011, for a decrease of approximately $0.4 million.
The following table details our results of operations in dollars and as a
percentage of sales for the three months ended December 31, 2012 and 2011:
% %
December 31, 2012 of sales December 31, 2011 of sales
(Dollar amounts in thousands)
Sales $ 20,870 100 % $ 21,093 100 %
Costs and expenses:
Cost of sales 16,693 80 % 16,270 77 %
Engineering and development 444 2 % 383 2 %
Selling, general and administrative 3,560 17 % 3,676 18 %
Total costs and expenses 20,697 99 % 20,329 97 %
Operating income 173 1 % 764 3 %
Other income (expense) 59 - (34 ) -
Income before income taxes 232 1 % 730 3 %
Income tax expense 117 - 269 1 %
Net income $ 115 1 % $ 461 2 %
Sales
The following table details our sales by operating segment for the three months
ended December 31, 2012 and 2011:
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Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
For the Three Months Ended
December 31, 2012:
Product $ 96 $ 15,209 $ 15,305 73 %
Services 957 4,608 5,565 27 %
Total $ 1,053 $ 19,817 $ 20,870 100 %
% of Total 5 % 95 % 100 %
Service and
System % of
Systems Integration Total Total
For the Three Months Ended
December 31, 2011:
Product $ 1,239 $ 13,915 $ 15,154 72 %
Services 1,107 4,832 5,939 28 %
Total $ 2,346 $ 18,747 $ 21,093 100 %
% of Total 11 % 89 % 100 %
Service and
System %
Systems Integration Total increase (decrease)
Increase (Decrease)
Product $ (1,143 ) $ 1,294 $ 151 1 %
Services (150 ) (224 ) (374 ) (6 )%
Total $ (1,293 ) $ 1,070 $ (223 ) (1 )%
% increase (decrease) (55 )% 6 % (1 )%
As shown above, total revenues decreased by approximately $0.2 million, or 1%,
for the three months ended December 31, 2012 compared to the three months ended
December 31, 2011. Revenue in the Systems segment decreased for the current year
three month period versus the prior year three month period by approximately
$1.3 million, while revenues in the Service and System Integration segment
increased by approximately $1.1 million.
Product revenues increased by approximately $0.2 million, or 1%, for the three
months ended December 31, 2012 compared to the comparable period of the prior
fiscal year. Product revenues in the Service and System Integration segment
increased by approximately $1.3 million while in the Systems segment product
revenue decreased by approximately $1.1 million for the three month period ended
December 31, 2012 versus the three month period ended December 31, 2011.
In the US division of the Service and System Integration segment, product sales
increased by approximately $3.3 million, offset by decreases in sales in this
segment's German division of approximately $1.8 million and in the UK division
of approximately $0.2 million.
In the US division, the increase was primarily a result of sales to newly
acquired customers, which totaled approximately $3.0 million for the three
months ended December 31, 2012, while sales to existing customers increased by
approximately $0.3 million.
In Germany, the $1.8 million decrease in product revenue included an unfavorable
foreign currency impact of approximately $0.1 million, therefore on a volume
basis in constant dollars the increase was approximately $1.7 million. This
sales volume decrease was driven by decreased sales to the division's largest
customer, a large UK-based wireless carrier, of approximately $1.5 million. The
decrease in product sales in the UK division was the result of weaker demand
from our UK customer base in the current-year quarter versus the prior year
quarter.
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The decrease in product revenues in the Systems segment of approximately $1.1
million was due to a decrease in sales to our Japanese defense department
customer of approximately $0.7 million, and a decrease of $0.4 million in sales
of parts, components and spares to existing US defense department customers.
As shown in the table above, service revenues decreased by approximately $0.4
million, or 6%. This decrease was made up of an decrease in the Systems segment
of $0.2 million and an decrease in the Service and System Integration segment of
approximately $0.2 million. The decrease in the Systems segment service revenue
was due to lower royalty income recorded in the three months ended December 31,
2012 which was approximately $0.8 million versus $1.0 million for the three
months ended December 31, 2011. The decrease in service revenues in the Service
and System Integration segment was due to a decrease in the German division,
where service revenue decreased by approximately $0.4 million, offset by an
increase in service revenues of approximately $0.2 million in the US
division. In Germany, there was an unfavorable currency fluctuation impact to
service revenues of approximately $0.1 million, therefore services sales volume
in constant dollars decreased by approximately $0.3 million. This decrease in
sales volume was driven by decreased service revenues to the German division's
largest customer, a UK-based wireless carrier. The increase in service revenue
in the US division of the segment was from higher third party maintenance
revenue for the quarter ended December 31, 2012 versus the quarter ended
December 31, 2011.
Our sales by geographic area, based on the location to which the products were
shipped or services rendered, are as follows:
For the three months ended,
December December $ Increase % Increase
31, 2012 % 31, 2011 % (Decrease) (Decrease)
(Dollar amounts in thousands)
Americas $ 14,942 72 % $ 11,814 56 % $ 3,128 26 %
Europe 5,743 27 % 8,448 40 % (2,705 ) (32 )%
Asia 185 1 % 831 4 % (646 ) (78 )%
Totals $ 20,870 100 % $ 21,093 100 % $ (223 ) (1 )%
The increase in Americas revenue for the three months ended December 31, 2012
versus the three months ended December 31, 2011 was primarily the result of the
fluctuations described above in the Systems segment where combined product and
service sales to US customers decreased by an aggregate $0.6 million while in
the US division of the Service and System Integration segment, sales to
customers in the Americas were greater by approximately $3.8 million.
The decrease in sales in Europe was primarily the result of the lower sales
described above from the German and UK divisions of the Service and System
Integration segment, which made up $2.4 million of the decrease, while Europe
sales from the US division of the Service and System Integration segment
decreased by approximately $0.3 million. The decrease in Asia sales was the
result of the decrease in sales to our existing customer that supplies a large
Japanese defense program (see discussion above).
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--------------------------------------------------------------------------------Cost of Sales and Gross Margins
The following table details our cost of sales and gross profit margins by
operating segment for the three months ended December 31, 2012 and 2011:
Service and
System % of
Systems Integration Total Total
(Dollar amounts in thousands)
For the Three Months Ended
December 31, 2012:
Product $ 17 $ 13,207 $ 13,224 79 %
Services 87 3,382 3,469 21 %
Total $ 104 $ 16,589 $ 16,693 100 %
% of Total 1 % 99 % 100 %
% of Sales 10 % 84 % 80 %
Gross Margins:
Product 82 % 13 % 14 %
Services 91 % 27 % 38 %
Total 90 % 16 % 20 %
For the Three Months Ended
December 31, 2011:
Product $ 829 $ 11,937 $ 12,766 78 %
Services 55 3,449 3,504 22 %
Total $ 884 $ 15,386 $ 16,270 100 %
% of Total 5 % 95 % 100 %
% of Sales 38 % 82 % 77 %
Gross Margins:
Product 33 % 14 % 16 %
Services 95 % 29 % 41 %
Total 62 % 18 % 23 %
Increase (decrease)
Product $ (812 ) $ 1,270 $ 458 4 %
Services 32 (67 ) (35 ) (1 )%
Total $ (780 ) $ 1,203 $ 423 3 %
% Increase (decrease) (88 )% 8 % 3 %
% of Sales (28 )% 2 % 3 %
Gross Margins:
Product 49 % (1 )% (2 )%
Services (4 )% (2 )% (3 )%
Total 28 % (2 )% (3 )%
Total cost of sales increased by approximately $0.4 million when comparing the
three months ended December 31, 2012 versus the three months ended December 31,
2011. This increase in cost of sales of 3% overall was despite the decrease in
sales of 1% overall as described previously. The resulting lower gross profit
margin ("GPM") of 20% for the three months ended December 31, 2012 versus 23%
for 2011 was due to several factors which are discussed below.
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In the Service and System Integration segment, the overall GPM was 16% for the
three months ended December 31, 2012 versus 18% for the prior year three month
period. Product GPM in the segment decreased from 14% for the three months ended
December 31, 2011, to 13% for the three months ended December 31, 2012, while
the segment's service GPM decreased from 29% to 27% . The product GPM decrease
was due to a less favorable product mix in the current year three month period
versus the prior year. Prior year product sales included more networking and
data security products as opposed to sales of servers and other lower margin
products in the current year three month period particularly in the German
division. The decrease in service GPM in the Service and System Integration
segment from 29% for the three month period ended December 31, 2011 to 27% for
the three months ended December 31, 2012 was due primarily to lower utilization
of in-house service engineers in providing billable services in Germany
In the Systems segment, the overall GPM increased from 62% to 90% as shown in
the table above. This was because in the current year three month period,
royalty revenue, which carries a 100% GPM, made up a much greater percentage of
total Systems segment revenue (71%), versus the prior year three month period
royalty revenue which was 41% of total System segment revenue.
Engineering and Development Expenses
The following table details our engineering and development expenses by
operating segment for the three months ended December 31, 2012 and 2011:
For the three months ended,
% of % of
December 31, 2012 Total December 31, 2011 Total $ Increase % Increase
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 444 100 % $ 383 100 % $ 61 16 %
Service and System
Integration - - - - - -
Total $ 444 100 % $ 383 100 % $ 61 16 %
The $0.1 million increase in engineering and development expenses displayed
above was due to higher engineering consulting expenditures in connection with
the development of the next generation of products in the Systems segment.
Selling, General and Administrative
The following table details our selling, general and administrative ("SG&A")
expense by operating segment for the three months ended December 31, 2012 and
2011:
For the three months ended,
% of % of $ Increase % Increase
December 31, 2012 Total December 31, 2011 Total (Decrease) (Decrease)
(Dollar amounts in thousands)
By Operating Segment:
Systems $ 878 25 % $ 1,052 29 % $ (174 ) (17 )%
Service and System
Integration 2,682 75 % 2,624 71 % 58 2 %
Total $ 3,560 100 % $ 3,676 100 % $ (116 ) (3 )%
The decrease in SG&A expense in the Systems segment was primarily the result of
decreased bonus and commission expense owing to the less favorable
revenue, gross profit and overall operating results for the three months ended
December 31, 2012 versus the comparable period in the prior year. In the Service
and System Integration segment, SG&A expense increased due to higher marketing
expense and pension expense in the UK division of the segment.
Other Income/Expenses
The following table details our other income (expense) for the three months
ended December 31, 2012 and 2011:
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For the three months ended,
December 31, 2012 December 31, 2011 Increase
(Amounts in thousands)
Interest expense $ (21 ) $ (21 ) $ -
Interest income 13 5 8
Foreign exchange gain (loss) 13 (15 ) 28
Gain on sale of fixed assets 17 - 17
Other income (expense), net 37 (3 ) 40
Total other income (expense), net $ 59 $ (34 ) $ 93
Other income (expense), net, for the three month periods ended December 31, 2012
and 2011was not significant nor was the change from the prior year three month
period to that of the current year.
Income Taxes
Income Tax Provision
The Company recorded income tax expense of approximately $0.1 million for the
quarter ended December 31, 2012, reflecting an effective income tax rate of 50%
for the period compared to income tax expense of approximately $0.3 million for
the quarter ended December 31, 2011, which reflected an effective tax rate of
37%. The higher effective tax rate for the quarter ended December 31, 2012 was
due to accrued interest and penalties calculated on the liability for uncertain
tax positions.
In assessing the realizability of deferred tax assets, we considered our taxable
future earnings and the expected timing of the reversal of temporary
differences. Accordingly, we have recorded a valuation allowance which reduces
the gross deferred tax asset to an amount that we believe will more likely than
not be realized. We maintained a substantial valuation allowance against our
United Kingdom deferred tax assets as we have experienced cumulative losses and
do not have any indication that the operation will be profitable in the future
to an extent that will allow us to utilize much of our net operating loss
carryforwards. To the extent that actual experience deviates from our
assumptions, our projections would be affected and hence our assessment of
realizability of our deferred tax assets may change.
Liquidity and Capital Resources
Our primary source of liquidity is our cash and cash equivalents, which
decreased by approximately $2.8 million to $17.7 million as of December 31, 2012
from $20.5 million as of September 30, 2012. At December 31, 2012, cash
equivalents consisted of money market funds which totaled $3.5 million.
Significant uses of cash for the three months ended December 31, 2012 included
an increase in accounts receivable of approximately $4.1 million, payment of
dividends of approximately $0.7 million and an increase in other assets of
approximately $0.7 million. Significant sources of cash included the collection
of officer's life insurance receivable of approximately $2.2 million and
reduction in inventories of approximately $0.6 million.
Cash held by our foreign subsidiaries located in Germany and the United Kingdom
totaled approximately $6.1 million as of December 31, 2012 and $9.8 million as
of September 30, 2012. This cash is included in our total cash and cash
equivalents reported above. We consider this cash to be permanently reinvested
into these foreign locations because repatriating it would result in unfavorable
tax consequences. Consequently, it is not available for activities that would
require it to be repatriated to the U.S.
If cash generated from operations is insufficient to satisfy working capital
requirements, we may need to access funds through bank loans 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 development or enhancement
of products, take advantage of future opportunities, respond to competition or
continue to effectively operate our business.
Based on our current plans and business conditions, 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 the
foreseeable future.
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