Filing and reporting period
The supplied filing is Communications Systems, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter and six months ended June 30, 2011, filed August 10, 2011. This does not match the request metadata identifying Sunation Energy, Inc.; verify the company and filing before relying on this summary.
Financial performance and condition
- Second quarter: Sales were $45.43 million, up 48% year over year. Gross profit was $18.46 million (40.6% of sales), operating income $7.25 million (16.0%), and net income $4.08 million. Diluted EPS was $0.48 versus $0.29.
- First six months: Sales were $76.45 million, up 35%. Gross profit was $31.78 million (41.6% of sales), operating income $11.39 million (14.9%), and net income $6.64 million. Diluted EPS was $0.78 versus $0.45.
- Cash flow: Operating activities used $4.02 million in the first half, versus $1.37 million provided in the prior-year period, primarily reflecting a $14.68 million increase in receivables and a $2.21 million increase in inventory. Investing activities provided $0.41 million; financing activities used $2.57 million.
- Liquidity and debt: Cash and cash equivalents were $10.61 million and investments totaled $24.89 million at June 30, or $35.50 million combined. Current assets were $93.87 million and current liabilities $16.38 million. Mortgage debt was approximately $2.21 million; there were no credit-line borrowings. The $10 million credit line was due to expire September 30, 2011.
- Dividends: The company paid $0.30 per share in the first half, compared with $0.28 in the prior-year period.
Material changes and notable items
- Transition Networks’ second-quarter sales rose 89%, primarily due to $19.4 million of revenue from a one-time network-upgrade project for a Fortune 500 customer. Its gross margin percentage fell to 45% from 54%, partly because of volume discounts.
- Suttle sales declined 9% in the quarter amid weakness in modular connecting and DSL products. Lower gross margin, rising input costs and product mix contributed to an operating loss; the segment also recorded a $1.27 million goodwill impairment after reduced profitability forecasts and project delays.
- JDL Technologies’ first-half sales rose 58%, largely reflecting the timing of Broward County, Florida school-contract funding. Austin Taylor’s first-half sales increased 6%.
- On July 27, 2011, after quarter-end, the company acquired UK-based Patapsco Designs Limited for £2.8 million (approximately $4.6 million), including deferred and performance-contingent consideration.
Outlook, risks and contingencies
No formal financial guidance is provided in the supplied filing text. Management expected to substantially complete the Fortune 500 customer’s upgrade orders in the third quarter of 2011. At June 30, the company reported $8.5 million of back orders from that customer and disclosed an additional $4.7 million order received in July. The filing warns that quarterly results may fluctuate with the timing and frequency of large orders.
Other stated risks include declining legacy telecom markets, competition, delayed product launches or customer projects, dependence on major customers, economic and government-spending conditions, raw-material availability, acquisition integration and profitability, and litigation. Management stated that available funds were sufficient for anticipated operating and capital needs. It reported no known pending legal matters expected to materially affect financial position or results. The company’s disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm that this Communications Systems, Inc. filing—not a Sunation Energy, Inc. filing—is the intended document.
- Assess the repeatability of the large, one-time customer project and the timing of remaining orders and revenue.
- Monitor receivables, inventory and operating cash flow, given the first-half cash use associated with the project.
- Review Suttle’s deteriorating outlook, impairment, legacy-market exposure and whether new-technology delays persist.
- Verify the acquisition’s final consideration, performance conditions and subsequent integration results, and the status of the credit line that was due to expire in September 2011.