NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015
Organization and Business
CSP Inc. was founded in 1968 and is based in Lowell, Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSP Inc. and its subsidiaries (collectively “we”, “us”, “our”,
“CSPI” or the “Company”) develop and market IT integration solutions and high-performance cluster computer systems. The Company operates in two segments, its High Performance Products (“HPP”) segment (formerly the “High Performance Products and Solutions” segment) and its Technology Solutions (“TS”) segment (formerly the "Information Technology Solutions" segment).
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in the annual consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been omitted.
Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited consolidated financial statements should be read in conjunction with the footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2016
.
Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to current period financial statement presentation with no effect on previously reported financial positions, results of operations or cash flows. The reclassification was to break out deferred costs separately from inventory on the balance sheet.
2. Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, including estimates and assumptions related to reserves for bad debt, reserves for inventory obsolescence, the impairment assessment of intangible assets, the calculation of estimated selling price and post-delivery support obligations used for revenue recognition, 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
|
|
December 31, 2016
|
|
December 31, 2015
|
|
(Amounts in thousands except per share data)
|
Net income (loss)
|
$
|
(43
|
)
|
|
$
|
283
|
|
Less: net income (loss) attributable to nonvested common stock
|
—
|
|
|
9
|
|
Net income (loss) attributable to common stockholders
|
$
|
(43
|
)
|
|
$
|
274
|
|
|
|
|
|
Weighted average total shares outstanding – basic
|
3,671
|
|
|
3,684
|
|
Less: weighted average non-vested shares outstanding
|
—
|
|
|
115
|
|
Weighted average number of common shares outstanding – basic
|
3,671
|
|
|
3,569
|
|
Potential common shares from non-vested stock awards and the assumed exercise of stock options
|
—
|
|
|
157
|
|
Weighted average common shares outstanding – diluted
|
3,671
|
|
|
3,726
|
|
|
|
|
|
Net income (loss) per share – basic
|
$
|
(0.01
|
)
|
|
$
|
0.08
|
|
Net income (loss) per share – diluted
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
All anti-dilutive securities, including certain stock options, are excluded from the diluted income (loss) per share computation. For the three months ended December 31, 2016 and 2015,
0
and
35,000
shares subject to stock options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive as their exercise price exceeded fair value. Additionally,
149,000
shares subject to non-vested restricted stock awards were excluded from the diluted income per share calculation as there was a net loss for the three months ended December 31, 2016 and their inclusion would have been anti-dilutive.
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
(Amounts in thousands)
|
Raw materials
|
$
|
1,472
|
|
|
$
|
1,658
|
|
Work-in-process
|
1,028
|
|
|
814
|
|
Finished goods
|
4,039
|
|
|
3,108
|
|
Total
|
$
|
6,539
|
|
|
$
|
5,580
|
|
Finished goods includes inventory that has been shipped, but for which all revenue recognition criteria has not been met, of approximately
$0.2 million
and
$0.1 million
as of
December 31, 2016
and
September 30, 2016
, respectively.
Total inventory balances in the table above are shown net of reserves for obsolescence of approximately
$3.1 million
and
$3.0 million
as of
December 31, 2016
and
September 30, 2016
, respectively.
Draft 5 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 deferred revenue.
6. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
|
(Amounts in thousands)
|
Cumulative effect of foreign currency translation
|
|
$
|
(2,669
|
)
|
|
$
|
(2,807
|
)
|
Cumulative unrealized loss on pension liability
|
|
(9,124
|
)
|
|
(9,124
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(11,793
|
)
|
|
$
|
(11,931
|
)
|
7.
Pension and Retirement Plans
The Company has defined benefit and defined contribution plans in the United Kingdom, Germany and the U.S. In the United Kingdom and Germany, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain current and former employees. The domestic supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. Domestically, the Company also provides for officer death benefits through post-retirement plans to certain officers. All of the Company’s defined benefit plans are closed to newly hired employees and have been for the
two
years ended
September 30, 2016
and 2015 and
for the three months ended December 31, 2016
.
The Company funds its pension plans in amounts sufficient to meet the requirements set forth in applicable employee benefits laws and local tax laws. Liabilities for amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets.
The Company's pension plan in the United Kingdom is the only plan with plan assets. The plan assets consist of an investment in a commingled fund which in turn comprises a diversified mix of assets including corporate equity securities, government securities and corporate debt securities.
The components of net periodic benefit costs related to the U.S. and international plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
2016
|
|
2015
|
|
Foreign
|
|
U.S.
|
|
Total
|
|
Foreign
|
|
U.S.
|
|
Total
|
|
(Amounts in thousands)
|
Pension:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Interest cost
|
93
|
|
|
11
|
|
|
104
|
|
|
151
|
|
|
11
|
|
|
162
|
|
Expected return on plan assets
|
(65
|
)
|
|
—
|
|
|
(65
|
)
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service gain
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net gain
|
91
|
|
|
(1
|
)
|
|
90
|
|
|
45
|
|
|
(1
|
)
|
|
44
|
|
Net periodic benefit cost
|
$
|
129
|
|
|
$
|
10
|
|
|
$
|
139
|
|
|
$
|
108
|
|
|
$
|
10
|
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Retirement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Interest cost
|
—
|
|
|
10
|
|
|
10
|
|
|
—
|
|
|
11
|
|
|
11
|
|
Amortization of net gain (loss)
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
(21
|
)
|
|
(21
|
)
|
Net periodic cost (benefit)
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
The fair value of the assets held by the U.K. pension plan by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values as of
|
|
December 31, 2016
|
|
September 30, 2016
|
|
Fair Value Measurements Using Inputs Considered as
|
|
Fair Value Measurements Using Inputs Considered as
|
Asset Category
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Amounts in thousands)
|
Cash on deposit
|
$
|
76
|
|
|
$
|
76
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
86
|
|
|
$
|
86
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Pooled funds
|
7,087
|
|
|
—
|
|
|
7,087
|
|
|
—
|
|
|
7,543
|
|
|
—
|
|
|
7,543
|
|
|
—
|
|
Total plan assets
|
$
|
7,163
|
|
|
$
|
76
|
|
|
$
|
7,087
|
|
|
$
|
—
|
|
|
$
|
7,629
|
|
|
$
|
86
|
|
|
$
|
7,543
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Segment Information
The following table presents certain operating segment information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology Solutions Segment
|
|
|
For the three months ended December 31,
|
|
High Performance Products Segment
|
|
Germany
|
|
United
Kingdom
|
|
U.S.
|
|
Total
|
|
Consolidated
Total
|
|
|
(Amounts in thousands)
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,527
|
|
|
$
|
2,080
|
|
|
$
|
701
|
|
|
$
|
10,330
|
|
|
$
|
13,111
|
|
|
$
|
14,638
|
|
Service
|
|
1,224
|
|
|
3,059
|
|
|
104
|
|
|
891
|
|
|
4,054
|
|
|
5,278
|
|
Total sales
|
|
2,751
|
|
|
5,139
|
|
|
805
|
|
|
11,221
|
|
|
17,165
|
|
|
19,916
|
|
Income (loss) from operations
|
|
46
|
|
|
(102
|
)
|
|
(206
|
)
|
|
160
|
|
|
(148
|
)
|
|
(102
|
)
|
Assets
|
|
17,766
|
|
|
15,532
|
|
|
2,873
|
|
|
14,531
|
|
|
32,936
|
|
|
50,702
|
|
Capital expenditures
|
|
17
|
|
|
44
|
|
|
—
|
|
|
11
|
|
|
55
|
|
|
72
|
|
Depreciation and amortization
|
|
55
|
|
|
38
|
|
|
3
|
|
|
61
|
|
|
102
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,950
|
|
|
$
|
1,902
|
|
|
$
|
1,993
|
|
|
$
|
11,158
|
|
|
$
|
15,053
|
|
|
$
|
17,003
|
|
Service
|
|
867
|
|
|
4,772
|
|
|
190
|
|
|
844
|
|
|
5,806
|
|
|
6,673
|
|
Total sales
|
|
2,817
|
|
|
6,674
|
|
|
2,183
|
|
|
12,002
|
|
|
20,859
|
|
|
23,676
|
|
Income (loss) from operations
|
|
(423
|
)
|
|
463
|
|
|
(47
|
)
|
|
350
|
|
|
766
|
|
|
343
|
|
Assets
|
|
16,099
|
|
|
12,977
|
|
|
2,810
|
|
|
13,231
|
|
|
29,018
|
|
|
45,117
|
|
Capital expenditures
|
|
148
|
|
|
67
|
|
|
2
|
|
|
(28
|
)
|
|
41
|
|
|
189
|
|
Depreciation and amortization
|
|
57
|
|
|
40
|
|
|
5
|
|
|
59
|
|
|
104
|
|
|
161
|
|
Income (loss) from operations consists of sales less cost of sales, engineering and development expenses, and selling, general and administrative expenses but is not affected by either other income/expense or by income taxes expense/benefit. Non-operating charges/income consists principally of investment income and interest expense. All intercompany transactions have been eliminated.
The following table lists customers from which the Company derived revenues in excess of
10%
of total revenues for the
three months ended
December 31, 2016
, and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended December 31,
|
|
|
2016
|
|
2015
|
|
|
Customer Revenues
|
|
% of Total
Revenues
|
|
Customer Revenues
|
|
% of Total
Revenues
|
|
|
(dollars in millions)
|
Customer A
|
|
$
|
2.9
|
|
|
14
|
%
|
|
$
|
2.9
|
|
|
12
|
%
|
Customer B
|
|
$
|
2.1
|
|
|
11
|
%
|
|
$
|
3.8
|
|
|
16
|
%
|
In addition, accounts receivable from Customer A totaled approximately
$1.7 million
, or
10%
, and approximately
$3.0 million
, or
15%
, of total consolidated accounts receivable as of December 31, 2016 and September 30, 2016, respectively. Accounts receivable from Customer B totaled approximately
$2.8 million
, or
17%
, and approximately
$2.5 million
, or
13%
, of
total consolidated accounts receivable as of December 31, 2016 and September 30, 2016, respectively. We believe that the Company is not exposed to any significant credit risk with respect to the accounts receivable with these customers as of
December 31, 2016
. No other customers accounted for
10%
or more of total consolidated accounts receivable as of
December 31, 2016
or September 30, 2016.
9.
Dividends
On January 12, 2017, the Company's board of directors declared a cash dividend of
$0.11
per share which was paid on February 8, 2017 to shareholders of record as of January 27, 2017, the record date.
10. Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014 ‑09
, Revenue from Contracts with Customers
, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU clarifies the principles for recognizing revenue by, among other things, removing inconsistencies in revenue requirements, improving comparability of revenue recognition practices across entities and industries and providing improved disclosure requirements. In August 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017; however, early adoption at the original effective date is still permitted. While the Company has begun its assessment of the new standard, it has not yet selected a transition method nor has it determined the effect the standard will have on its ongoing financial reporting.
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent)
, which excludes investments measured at net asset value, as a practical expedient for
fair value, from the fair value hierarchy. This ASU is effective for interim and annual reporting periods beginning after
December 15, 2015, and required retrospective application, with early adoption permitted. The implementation of this ASU has not had a material impact on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Contribution Pension Plans (Topic 962),
Health and Welfare Benefits Plans (Topic 965)
, which requires fully benefit-responsive investment contracts to be measured at
contract value. Those Topics also require an adjustment to reconcile contract value to fair value, when these measures differ,
on the face of the plan financial statements. Fair value is measured using the requirements in Topic 820, Fair Value
Measurement. This ASU was effective for fiscal years beginning after December 15, 2015, and required retrospective application, with early adoption permitted. The implementation of this ASU has not had a material impact on our consolidated
financial statements.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330) Simplifying the Measurement of Inventory
, which requires entities to measure inventory at the lower of cost or net realizable value, except for inventory measured using last-in, first-out (LIFO) or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017 and requires prospective application, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company has not yet assessed the potential impact of implementing this ASU on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes,
which require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Topic apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Topic. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The implementation of this guidance is not expected to have a material impact to the disclosures on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This updated Topic 842 affects any entity that enters into a lease (as that term is defined in this Update), with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The amendments in this
Topic are effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company has not yet assessed the potential impact of implementing this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08
(Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
to clarify the implementation guidance on principal versus agent considerations. The amendments in this update provides additional guidance on indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer and does not change the core principle of previously issued guidance. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09
(Topic 718), Compensation - Stock Compensation, Improvements to Employee Share-Based Payment Accounting
to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Additionally, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04
(Topic 350), Intangibles - Goodwill and Other (Simplifying the Test for Goodwill Impairment)
to simplify the subsequent measurement of goodwill. The amendments in this update provides for the elimination of Step 2, which requires an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) including those procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update defines an impairment loss as the excess of the carrying amount of the intangible assets to the fair value of a reporting unit. The amendments in this Topic are effective for financial statements issued for annual periods beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company does not expect the implementation of this ASU to have a material impact on our consolidated financial statements.