Filing identity and reporting period
Important discrepancy: The supplied filing is Communications Systems, Inc. and subsidiaries’ Form 10-Q for the quarter ended September 30, 2019—not a filing for Sunation Energy, Inc. The summary below reflects the filing text provided.
Communications Systems operated four business units: Transition Networks, Suttle, JDL Technologies and Net2Edge, focused on connectivity products and technology services. The filing reports Q3 and year-to-date results through September 30, 2019, compared with the same 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $18.223 million | $15.292 million | $50.346 million | $47.104 million |
| Gross profit | $7.738 million | $5.241 million | $19.873 million | $14.404 million |
| Operating income (loss) | $1.629 million | ($1.602 million) | $1.545 million | ($6.298 million) |
| Net income (loss) | $1.738 million | ($1.545 million) | $4.751 million | ($6.046 million) |
| Diluted EPS | $0.19 | ($0.17) | $0.51 | ($0.66) |
- Gross margin was approximately 42.5% in Q3 2019 versus 34.3% in Q3 2018, and 39.5% for the first nine months versus 30.6%.
- Q3 sales rose 19%; nine-month sales rose 7%. Improvement in operating results reflected stronger gross profit and lower overall SG&A year to date.
- Nine-month net income included a $2.967 million gain on the April 2019 sale of Suttle’s FutureLink Fiber business line. The sale gain was not recurring operating revenue.
- Nine-month operating cash flow was $5.809 million, compared with $4.966 million used in the first nine months of 2018. Investing activities used $0.926 million; financing activities used $0.598 million.
Balance sheet, liquidity and debt
- At September 30, 2019, cash and cash equivalents were $14.622 million, restricted cash $0.677 million, and investments $5.503 million. Management reported $20.802 million in combined cash, cash equivalents, restricted cash and investments.
- Working capital was $36.894 million, up from $30.695 million at December 31, 2018. Current assets were $47.989 million and current liabilities $11.095 million.
- The company had no borrowings on its $15 million secured Wells Fargo credit line. Availability under the borrowing base was $7.018 million; the facility expires August 12, 2021. The company reported compliance with its $10 million minimum-liquidity covenant.
- Stockholders’ equity was $46.256 million. The filing reports no material outstanding or pending legal claims known to management.
Material changes and segment results
- Transition Networks: Q3 sales increased 35% to $12.483 million, largely from Ethernet switches and adapters tied to a metropolitan smart-city/IoT project and smaller security projects. Q3 operating income was $2.232 million. Management said the major project should be substantially complete by year-end 2019.
- Suttle: Q3 sales declined 7% to $4.651 million, but operating results improved to $0.565 million income from an $0.840 million loss. The FutureLink Fiber sale and reduced legacy-product demand weighed on revenue; cost reductions, pricing and lower inventory adjustments supported margins.
- JDL Technologies: Q3 sales fell 9% to $0.783 million and the segment recorded a $0.169 million operating loss. Education revenue was affected by funding delays at a major customer. Nine-month sales rose 59%, and the segment moved to $0.243 million operating income.
- Net2Edge: Q3 sales increased 51% to $0.611 million; its operating loss narrowed to $0.370 million. It remained loss-making for the first nine months, with a $1.405 million operating loss.
- In April, the company sold FutureLink Fiber for $5 million cash, with $0.5 million deferred in escrow pending criteria. Suttle provided transition manufacturing services through September 30, 2019.
- The company adopted lease accounting in January 2019, recording $0.396 million of right-of-use assets and $0.375 million of operating lease liabilities at quarter-end. The filing says adoption did not materially affect results.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management said available funds and its current operating position were sufficient for anticipated operating and capital needs.
- Management expected Suttle sales and operating income to continue declining after the FutureLink sale and said it was exploring options for the remaining business.
- Key risks include dependence on major telecommunications customers and government-funded education projects; execution and timing of the smart-city project; product development and profitability at Net2Edge; inventory obsolescence and supply constraints; and the ability of the business units to operate profitably.
- A proposed $10 million sale of the Minnetonka headquarters remained subject to closing conditions; the company then expected a possible closing in the second half of 2020. The filing identified completion of this sale as uncertain.
- The company began a $2 million share repurchase program in August 2019, running through the end of 2020. It repurchased 38,465 shares during Q3 for about $194,000; approximately $1.806 million remained authorized.
- Management identified cybersecurity disruption and foreign operating losses/tax valuation uncertainty among risks. It reported disclosure controls as effective and no material quarterly change in internal control over financial reporting, apart from implementation work related to lease accounting.
Most important facts to verify
- Confirm the issuer: the supplied text names Communications Systems, Inc. (Nasdaq: JCS), not Sunation Energy, Inc.
- Assess how much of the reported earnings improvement is sustainable after excluding the $2.967 million FutureLink sale gain.
- Track completion and revenue contribution of the metropolitan smart-city project, and the expected post-project impact on Transition Networks.
- Monitor Suttle’s performance and management’s options for the remaining business, along with customer concentration and demand trends.
- Verify available borrowing capacity and compliance with the liquidity covenant, given the $7.018 million borrowing-base availability and $10 million minimum-liquidity requirement.
- Check whether the headquarters sale closes on the anticipated timetable and whether the escrowed FutureLink proceeds are released.