Filing identity and reporting period
The supplied filing is Communications Systems, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter and nine months ended September 30, 2016—not a filing for Sunation Energy, Inc. The company describes four business units: Suttle, Transition Networks, JDL Technologies and Net2Edge.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $25.62 million | $32.25 million | $76.59 million | $79.99 million |
| Gross profit / margin | $6.69 million / 26.1% | $10.42 million / 32.3% | $20.84 million / 27.2% | $23.85 million / 29.8% |
| Operating income (loss) | $(1.18) million | $0.43 million | $(2.57) million | $(6.98) million |
| Net income (loss) | $(1.26) million | $1.28 million | $(6.27) million | $(3.91) million |
| Diluted earnings (loss) per share | $(0.14) | $0.15 | $(0.71) | $(0.45) |
At September 30, 2016, cash and cash equivalents were $3.23 million and investments were $9.54 million. Current assets were $57.26 million, current liabilities $12.53 million, and working capital $44.73 million. The company reported no line-of-credit borrowings and no mortgage debt; it had $13.04 million available under its borrowing-base calculation and reported total liquidity of $25.81 million against a $10 million minimum covenant. Stockholders’ equity was $63.76 million.
For the first nine months, operating cash flow was negative $2.94 million, investing cash flow positive $1.10 million, and financing cash flow negative $4.64 million. Cash and cash equivalents declined by $6.58 million to $3.23 million. Dividends paid were $4.27 million; dividends declared were $0.36 per share for the period.
Changes and business-unit results
- Q3 sales fell 21% year over year, with lower revenue at Suttle and JDL Technologies. The company moved from operating and net income to losses.
- Suttle Q3 sales fell 31%; gross margin declined to 3.3% from 20.5%, reflecting lower volumes, manufacturing productivity issues with new products and obsolete-inventory write-offs. Management cited international DSL order timing and a disrupted major domestic customer order cycle.
- Transition Networks Q3 sales were down 1%, while operating income rose to $1.62 million from $0.90 million, supported by lower SG&A and improved gross margin percentage.
- JDL Technologies Q3 sales declined 32%, primarily from lower education-sector revenue; operating income was $0.45 million versus $0.92 million.
- Net2Edge, reported separately from January 2016, had Q3 sales of $0.28 million, down 49%, and an operating loss of $0.69 million.
- Nine-month sales declined 4%. Operating loss improved from the prior year, but nine-month net loss increased. JDL sales and operating income improved year over year; Suttle’s operating loss widened.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance is provided. Management stated it believed available funds would meet anticipated operating and capital expenditure needs.
- Nine-month results include a $4.15 million pension-liability adjustment gain recognized in operating income after settlement of the U.K. pension plan. The company also recorded a $4.24 million foreign-currency translation loss in income following substantial liquidation of its Austin Taylor U.K. facility; it reported proceeds from the facility sale.
- Disclosed risks include Suttle’s reliance on a small number of communications-service-provider customers and margin pressure; product-transition and international-market challenges at Transition Networks; fluctuating education-sector demand and execution risks at JDL; and Net2Edge’s need to grow revenue to cover costs.
- The company said it was in compliance with credit covenants. An IRS examination of its 2012 and 2013 federal returns was ongoing; management did not expect a resulting settlement or payment to materially affect results. Management reported effective disclosure controls. A new JDL ERP system was implemented during the quarter, with related controls to be evaluated in future periods.
Most important facts to verify
- Confirm the intended issuer: the provided source is Communications Systems, Inc., not Sunation Energy, Inc.
- Assess whether Suttle’s sharp gross-margin decline, inventory write-offs and customer/order-cycle exposure persist.
- Review cash burn and the sustainability of dividend payments given negative operating cash flow and the decline in cash balances.
- Track the effects of the Austin Taylor facility liquidation, pension settlement and currency-related losses, distinguishing these items from ongoing operating performance.
- Reconcile cash-flow figures: the cash-flow statement reports operating cash used of $2.94 million, while MD&A states approximately $2.89 million.
- Monitor the IRS examination, credit-facility availability and covenant compliance, and the ERP-related internal-control evaluation.