CSP INC /MA/ - FORM 10-Q - February 14, 2013

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - CSP INC /MA/	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - CSP INC /MA/	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CSP INC /MA/	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - CSP INC /MA/	ex32-1.htm

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

______________________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the Quarterly Period Ended December 31, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to .

Commission File Number 0-10843

______________________

CSP Inc.

(Exact name of Registrant as specified in its Charter)

______________________

Massachusetts	04-2441294
(State of incorporation)	(I.R.S. Employer Identification No.)

43 Manning Road

Billerica, Massachusetts 01821-3901

(978) 663-7598

(Address and telephone number of principal executive offices)

______________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of February 11, 2013, the registrant had 3,442,842 shares of common stock issued and outstanding.

INDEX

		Page

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets (unaudited) as of December 31, 2012 and September 30, 2012	3

	Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2012 and 2011	4

	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended December 31, 2012 and 2011	5

	Consolidated Statement of Shareholders’ Equity (unaudited) for the three months ended December 31, 2012	6

	Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2012 and 2011	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 4.	Controls and Procedures	20

PART II. OTHER INFORMATION		21

Item 6.	Exhibits	21

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CSP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except par value)

	December 31, 2012			September 30, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	17,715		$	20,493
Accounts receivable, net of allowances of $195 and $243		16,438			12,145
Officer life insurance settlement receivable		—			2,172
Inventories		5,710			6,276
Refundable income taxes		108			121
Deferred income taxes		1,339			1,284
Other current assets		3,188			2,215
Total current assets		44,498			44,706
Property, equipment and improvements, net		1,036			991

Other assets:
Intangibles, net		472			492
Deferred income taxes		2,376			2,373
Cash surrender value of life insurance		2,208			2,181
Other assets		224			323
Total other assets		5,280			5,369
Total assets	$	50,814		$	51,066

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	13,832		$	13,574
Deferred revenue		3,729			3,693
Pension and retirement plans		723			717
Income taxes payable		51			184
Total current liabilities		18,335			18,168
Pension and retirement plans		9,489			9,431
Other long term liabilities		437			426
Total liabilities		28,261			28,025

Commitments and contingencies

Shareholders’ equity:
Common stock, $.01 par value per share; authorized, 7,500 shares; issued and outstanding 3,443 and 3,399 shares, respectively		34			34
Additional paid-in capital		10,905			10,875
Retained earnings		18,170			18,744
Accumulated other comprehensive loss		(6,556	)		(6,612	)
Total shareholders’ equity		22,553			23,041
Total liabilities and shareholders’ equity	$	50,814		$	51,066

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
	December 31, 2012		December 31, 2011
Sales:
Product	$	15,305	$	15,154
Services		5,565		5,939
Total sales		20,870		21,093

Cost of sales:
Product		13,224		12,766
Services		3,469		3,504
Total cost of sales		16,693		16,270

Gross profit		4,177		4,823

Operating expenses:
Engineering and development		444		383
Selling, general and administrative		3,560		3,676
Total operating expenses		4,004		4,059
Operating income		173		764

Other income (expense):
Foreign exchange gain (loss)		13		(16	)
Other income (expense), net		46		(18	)
Total other income (expense), net		59		(34	)
Income before income taxes		232		730
Income tax expense		117		269
Net income	$	115	$	461
Net income attributable to common stockholders	$	113	$	454
Net income per share – basic	$	0.03	$	0.14
Weighted average shares outstanding – basic		3,363		3,357
Net income per share – diluted	$	0.03	$	0.13
Weighted average shares outstanding – diluted		3,407		3,395

See accompanying notes to unaudited consolidated financial statements.

CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

	For the three months ended
	December 31, 2012		December 31, 2011

Net income	$	115	$	461
Other comprehensive income (loss):
Foreign currency translation gain (loss) adjustments		56		(114	)
Other comprehensive income (loss)		56		(114	)
Total comprehensive income	$	171	$	347

See accompanying notes to unaudited consolidated financial statements.

CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Three Months Ended December 31, 2012:

(Amounts in thousands)

	Shares		Amount		Additional Paid-in Capital		Retained Earnings			Accumulated other comprehensive loss			Total Shareholders’ Equity
Balance as of September 30, 2012		3,399	$	34	$	10,875	$	18,744		$	(6,612	)	$	23,041
Net income		—		—		—		115			—			115
Other comprehensive income:		—		—		—		—			56			56
Stock-based compensation		—		—		2		—			—			2
Restricted stock issuance		44		—		28		—			—			28
Cash dividends on common stock ($0.20 per share)		—		—		—		(689	)		—			(689	)
Balance as of December 31, 2012		3,443	$	34	$	10,905	$	18,170		$	(6,556	)	$	22,553

See accompanying notes to unaudited consolidated financial statements.

CSP INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	For the three months ended
	December 31, 2012			December 31, 2011
Cash flows from operating activities:
Net income	$	115		$	461
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		102			89
Amortization of intangibles		21			21
Gain on sale of fixed assets, net		(17	)		—
Foreign exchange (gain) loss		(13	)		16
Non-cash changes in accounts receivable		(49	)		9
Stock-based compensation expense on stock options and restricted stock awards		30			37
Deferred income taxes		(42	)		65
Increase in cash surrender value of life insurance		(26	)		(27	)
Changes in operating assets and liabilities:
Increase in accounts receivable		(4,101	)		(4,397	)
Decrease in officer life insurance receivable		2,172			—
Decrease in inventories		573			1,734
Decrease in refundable income taxes		16			23
Increase in other current assets		(691	)		(811	)
(Increase) decrease in other assets		(135	)		16
Increase in accounts payable and accrued expenses		150			695
Increase (decrease) in deferred revenue		(28	)		1,047
Decrease in pension and retirement plans liability		(66	)		(27	)
Increase (decrease) in income taxes payable		(134	)		99
Increase in other long term liabilities		10			7
Net cash used in operating activities		(2,113	)		(943	)

Cash flows from investing activities:
Life insurance premiums paid		(2	)		(80	)
Proceeds from the sale of fixed assets		17			—
Purchases of property, equipment and improvements		(135	)		(85	)
Net cash used in investing activities		(120	)		(165	)

Cash flows from financing activities:
Dividends paid		(689	)		—
Purchase of common stock		—			(58	)
Net cash used in financing activities		(689	)		(58	)
Effects of exchange rate on cash		144			(71	)
Net decrease in cash and cash equivalents		(2,778	)		(1,237	)
Cash and cash equivalents, beginning of period		20,493			15,874
Cash and cash equivalents, end of period	$	17,715		$	14,637

Supplementary cash flow information:
Cash paid for income taxes	$	303		$	99
Cash paid for interest	$	85		$	85

See accompanying notes to unaudited consolidated financial statements.

CSP INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

Organization and Business

CSP Inc. was founded in 1968 and is based in Billerica, Massachusetts. To meet the diverse requirements of its industrial, commercial and defense customers worldwide, CSP Inc. and its subsidiaries (collectively “CSPI” or the “Company”) develop and market IT integration solutions and high-performance cluster computer systems. The Company operates in two segments, its Systems segment and its Service and System Integration 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 financial statements, which are prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted. Accordingly, the Company believes that although the disclosures are adequate to make the information presented not misleading, the unaudited 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, 2012.

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. Actual results may differ from those estimates under different assumptions or conditions.

3. Earnings Per Share of Common Stock

Basic net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the maximum dilution that would have resulted from the assumed exercise and share repurchase related to dilutive stock options and is computed by dividing net income by the assumed weighted average number of common shares outstanding.

We are required to present earnings per share, or EPS, utilizing the two class method because we had outstanding, non-vested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, which are considered participating securities.

Basic and diluted earnings per share computations for the Company’s reported net income attributable to common stockholders are as follows:


	For the three months ended
	December 31, 2012		December 31, 2011
	(Amounts in thousands except per share data)
Net income	$	115	$	461
Less: Net income attributable to nonvested common stock		2		7
Net income attributable to common stockholders	$	113	$	454

Weighted average total shares outstanding – basic		3,426		3,410
Less: weighted average non-vested shares outstanding		63		53
Weighted average number of common shares outstanding – basic		3,363		3,357
Potential common shares from non-vested stock awards and the assumed exercise of stock options		44		38
Weighted average common shares outstanding – diluted		3,407		3,395

Net income per share – basic	$	0.03	$	0.14
Net income per share – diluted	$	0.03	$	0.13

All anti-dilutive securities, including certain stock options, are excluded from the diluted income per share computation. For the three months ended December 31, 2012 and 2011, 197,000 and 205,000 options, respectively, were excluded from the diluted income per share calculation because their inclusion would have been anti-dilutive.

4. Inventories

Inventories consist of the following:

	December 31, 2012		September 30, 2012
	(Amounts in thousands)
Raw materials	$	942	$	941
Work-in-process		1,318		1,407
Finished goods		3,450		3,928
Total	$	5,710	$	6,276

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 $1.4 million as of December 31, 2012 and September 30, 2012, respectively.

Total inventory balances in the table above are shown net of reserves for obsolescence of approximately $4.5 million and $4.4 million as of December 31, 2012 and September 30, 2012, respectively.

5. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive loss are as follows:

	December 31, 2012			September 30, 2012
	(Amounts in thousands)
Cumulative effect of foreign currency translation	$	(2,217	)	$	(2,273	)
Additional minimum pension liability		(4,339	)		(4,339	)
Accumulated other comprehensive loss	$	(6,556	)	$	(6,612	)

6. Pension and Retirement Plans

The Company has defined benefit and defined contribution plans in the United Kingdom, Germany and the U.S. In the United Kingdom and Germany, the Company provides defined benefit pension plans and defined contribution plans for the majority of its employees. In the U.S., the Company provides benefits through supplemental retirement plans to certain current and former employees. The domestic supplemental retirement plans have life insurance policies which are not plan assets but were purchased by the Company as a vehicle to fund the costs of the plan. Domestically, the Company also provides for officer death benefits through post-retirement plans to certain officers. All of the Company’s defined benefit plans are closed to newly hired employees and have been for the two years ended September 30, 2012 and for the three months ended December 31, 2012.

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.

Our 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,
	2012									2011
	Foreign			U.S.			Total			Foreign			U.S.		Total
	(Amounts in thousands)
Pension:
Service cost	$	15		$	—		$	15		$	16		$	3	$	19
Interest cost		173			16			189			179			21		200
Expected return on plan assets		(104	)		—			(104	)		(104	)		—		(104	)
Amortization of:
Prior service gain		—			—			—			—			—		—
Amortization of net gain		36			6			42			22			7		29
Net periodic benefit cost	$	120		$	22		$	142		$	113		$	31	$	144

Post Retirement:
Service cost	$	—		$	—		$	—		$	—		$	—	$	—
Interest cost		—			9			9			—			18		18
Amortization of net gain		—			(46	)		(46	)		—			17		17
Net periodic benefit cost	$	—		$	(37	)	$	(37	)	$	—		$	35	$	35

7. Segment Information

The following table presents certain operating segment information.

				Service and System Integration Segment
For the Three Months Ended December 31,	Systems Segment			Germany			United Kingdom		U.S.		Total		Consolidated Total
	(Amounts in thousands)
2012
Sales:
Product	$	96		$	2,064		$	154	$	12,991	$	15,209	$	15,305
Service		957			3,204			302		1,102		4,608		5,565
Total sales		1,053			5,268			456		14,093		19,817		20,870
Profit (loss) from operations		(373	)		(147	)		—		693		546		173
Assets		16,914			13,527			3,524		16,849		33,900		50,814
Capital expenditures		41			55			3		36		94		135
Depreciation and amortization		37			42			5		39		86		123

2011
Sales:
Product	$	1,239		$	3,851		$	353	$	9,711	$	13,915	$	15,154
Service		1,107			3,587			316		929		4,832		5,939
Total sales		2,346			7,438			669		10,640		18,747		21,093
Profit from operations		12			275			26		451		752		764
Assets		13,214			16,212			3,727		11,660		31,599		44,813
Capital expenditures		29			26			19		11		56		85
Depreciation and amortization		23			39			7		41		87		110

Profit (loss) from operations consists of sales less cost of sales, engineering and development, selling, general and administrative expenses but is not affected by either non-operating charges/income or by income taxes. 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 month periods ended December 31, 2012, and 2011.

	For the three months ended
	December 31, 2012					December 31, 2011
	Amount		% of Revenues			Amount		% of Revenues

Customer A	$	5.1		24	%	$	5.2		25	%
Customer B	$	2.6		12	%	$	4.5		21	%

8. Fair Value Measures

Assets and Liabilities measured at fair value on a recurring basis are as follows:

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance		Gain or (loss)
	As of December 31, 2012
	(Amounts in thousands)
Assets:
Money Market funds	$	3,499	$	—	$	—	$	3,499	$	—
Total assets measured at fair value	$	3,499	$	—	$	—	$	3,499	$	—


	As of September 30, 2012
	(Amounts in thousands)
Assets:
Money Market funds	$	3,498	$	—	$	—	$	3,498	$	—
Total assets measured at fair value	$	3,498	$	—	$	—	$	3,498	$	—

These assets are included in cash and cash equivalents in the accompanying consolidated balance sheets. All other monetary assets and liabilities are short-term in nature and approximate their fair value. The Company did not have any transfers between Level 1, Level 2 or Level 3 measurements.

The Company had no liabilities measured at fair value as of December 31, 2012 or September 30, 2012. The Company had no assets or liabilities measured at fair value on a non recurring basis as of December 31, 2012 or September 30, 2012.

9. Dividend

On December 10, 2012, our board of directors declared a cash dividend of $0.20 per share which was paid on December 28, 2012 to stockholders of record as of December 20, 2012, the record date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The discussion below contains certain forward-looking statements related 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.

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:

	Systems			Service and System Integration			Total			% of 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	%

	Systems			Service and System Integration			Total			% of 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	%

	Systems			Service and System 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.

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 31, 2012		%			December 31, 2011		%			$ Increase (Decrease)			% Increase (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).

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:

	Systems			Service and System Integration			Total			% of 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.

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,
	December 31, 2012		% of Total			December 31, 2011		% of 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,
	December 31, 2012		% of Total			December 31, 2011		% of Total			$ Increase (Decrease)			% Increase (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:

	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.

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 December 31, 2012. 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 Securities Exchange Act of 1934, as amended, or 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 our 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 December 31, 2012, the Company’s chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls over Financial Reporting

During the period covered by this report, there were no changes in our internal controls 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
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*		Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2012 and September 30, 2012, (b) our Consolidated Statements of Operations for the Three Months Ended December 31, 2012 and 2011, (c) our Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 and 2011, (d) our Consolidated Statement of Shareholders’ Equity for the Three Months Ended December 31, 2012, (e) our Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 and 2011 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.

Date: February 14, 2013	By:	/s/ Victor Dellovo
		Victor Dellovo
		Chief Executive Officer,
		President and Director

Date: February 14, 2013	By:	/s/ Gary W. Levine
		Gary W. Levine
		Chief Financial Officer

Exhibit Index

Number		Description
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*		Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2012 and September 30, 2012, (b) our Consolidated Statements of Operations for the Three Months Ended December 31, 2012 and 2011, (c) our Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 and 2011, (d) our Consolidated Statement of Shareholders’ Equity for the Three Months Ended December 31, 2012, (e) our Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 and 2011 and (f) the Notes to such Consolidated Financial Statements.

________________________

*Filed Herewith

CSP INC /MA/ - FORM 10-Q - February 14, 2013

Attached files

CSP INC /MA/ Reports