Filing summary
Identity and period: The supplied filing is Communications Systems, Inc. (NASDAQ: JCS), not Sunation Energy, Inc. It is a Form 10-K for the fiscal year ended December 31, 2011, with unaudited fourth-quarter results included. Verify the issuer and filing before relying on this summary.
Business context
Communications Systems sold telecommunications connectivity and networking equipment and IT services through Suttle, Transition Networks, JDL Technologies, and Austin Taylor. Transition Networks generated 64% of 2011 revenue; Suttle contributed 25%, JDL 9%, and Austin Taylor 2%.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $143.8 million | $120.1 million |
| Gross profit / margin | $58.9 million / 41.0% | $51.2 million / 42.6% |
| Operating income / margin | $17.5 million / 12.2% | $15.6 million / 13.0% |
| Net income | $9.8 million | $9.7 million |
| Diluted EPS | $1.15 | $1.15 |
| Operating cash flow | $14.1 million | $9.7 million |
Revenue rose 20% and operating income rose 12%, but net income was nearly flat as income tax expense increased to $7.8 million from $5.9 million; the effective tax rate was 44.4% versus 37.9%. Annual net margin was approximately 6.8%, compared with 8.1% in 2010.
At year-end, cash and cash equivalents were $22.5 million, current investments $18.6 million, and long-term investments $4.9 million. Current assets were $89.9 million against current liabilities of $15.4 million (current ratio approximately 5.8). Mortgage debt totaled $2.0 million; the $10 million revolving credit facility was undrawn. Total assets were $116.7 million and stockholders’ equity was $97.5 million.
Changes, outlook, and risks
- Transition Networks revenue increased 35% to $91.5 million, including $32.8 million from a one-time Fortune 500 network upgrade project, equal to 22.8% of consolidated revenue. Management did not expect this customer to exceed 5% of revenue in 2012.
- Suttle sales were essentially flat, but operating income fell to $1.1 million from $3.0 million, including a $1.3 million goodwill impairment. Suttle goodwill was fully impaired after weaker forecasts and project delays.
- JDL revenue declined 2%; substantially all its sales were to one South Florida school district. Its order and contract backlog was about $0.75 million at March 1, 2012, versus $6.24 million a year earlier, following completion of a major contract.
- Austin Taylor remained loss-making: operating loss widened to $1.46 million from $1.10 million. The company discontinued its metal-cabinet manufacturing operation at year-end and said it was implementing improvement measures.
- Fourth-quarter 2011 revenue was $25.3 million, versus $30.2 million in fourth-quarter 2010. The quarter recorded an operating loss of $0.36 million and net loss of $0.58 million, compared with operating income of $3.0 million and net income of $2.0 million in the prior-year quarter.
- The company acquired Patapsco Designs Limited in July 2011. Purchase price was approximately $5.1 million, including estimated contingent and deferred amounts; about $1.0 million of consideration remained accrued at year-end.
- No specific revenue or earnings guidance was provided. Management expected a 2012 effective tax rate of approximately 40%, anticipated sufficient resources for operations and capital needs, and described competitive pressure, technological change, customer concentration, project timing, and margin sustainability as significant risks.
- Cash dividends declared were $0.60 per share in 2011. Management reported no material pending litigation; the auditors issued unqualified opinions on the financial statements and internal controls. Patapsco was excluded from management’s internal-control assessment.
Important facts for investors to verify
- Confirm that Communications Systems, Inc. is the intended issuer; the request names Sunation Energy, Inc.
- Assess the 2012 revenue and earnings impact of the nonrecurring $32.8 million network-upgrade project and whether replacement business materialized.
- Review customer concentration and JDL’s ability to diversify after its large school-district contract ended.
- Track Suttle’s recovery after goodwill impairment and Austin Taylor’s restructuring and operating results.
- Reconcile reported cash, investments, working-capital movements, acquisition consideration, and subsequent results against later filings.