Filing identity and period
Important mismatch: The supplied filing is Communications Systems, Inc. and subsidiaries’ Form 10-Q for the quarter ended September 30, 2017—not a filing for Sunation Energy, Inc. The summary below reflects the filing text provided.
Communications Systems operated through Suttle, Transition Networks, JDL Technologies and Net2Edge, selling connectivity products and technology services. Results are unaudited; nine-month comparisons are for the periods ended September 30, 2017 and 2016.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $20.4 million | $25.6 million | $63.3 million | $76.6 million |
| Gross profit (margin) | $3.3 million (16.2%) | $6.7 million (26.1%) | $15.3 million (24.1%) | $20.8 million (27.2%) |
| Operating loss | $4.7 million | $1.2 million | $10.2 million | $2.6 million |
| Net loss | $4.5 million | $1.3 million | $10.1 million | $6.3 million |
| Loss per diluted share | $0.50 | $0.14 | $1.13 | $0.71 |
| Operating cash flow | Not separately stated for the quarter | $2.7 million provided | $2.9 million used |
Q3 sales fell 20%; nine-month sales fell 17%. Cash and cash equivalents were $17.1 million at September 30, 2017, with another $0.7 million in investments. Working capital was $38.2 million, down from $44.0 million at December 31, 2016. The company reported no credit-line borrowings; $11.2 million was available under its borrowing base. It reported $10.2 million of current liabilities and no long-term debt balance.
Nine-month investing cash flow provided $4.9 million, mainly reflecting investment-sale proceeds. Financing used $1.0 million, including $1.1 million of dividends paid. Dividends declared were $0.04 per share in Q3 and $0.12 per share for the nine-month period, versus $0.36 for the prior-year nine-month period.
Material changes and operating drivers
- Suttle: Q3 sales declined 28% and nine-month sales 26%, amid customer pricing pressure, declining legacy-product volumes and project delays. Q3 gross profit was negative $1.4 million. Inventory adjustments and write-offs were $2.6 million in Q3; the nine-month impact was $3.8 million. Suttle also recorded a $0.4 million prepaid-royalty write-off and $0.8 million of Q3 restructuring expense.
- Transition Networks: Q3 sales fell 21% and nine-month sales 8%, with federal spending delays and supply disruptions cited. Q3 operating income declined to $0.2 million from $1.6 million; nine-month operating income was $0.7 million versus a $0.2 million loss.
- JDL Technologies: Q3 sales rose 6%, but nine-month sales fell 15%. The company recorded a $1.5 million goodwill impairment in Q2; JDL had a nine-month operating loss of $0.3 million, compared with income of $1.8 million in 2016.
- Net2Edge: Sales declined 34% in Q3 and 50% for nine months. A $0.2 million customer-relationship intangible impairment was recorded in Q2; the nine-month operating loss was $1.9 million.
- Total nine-month restructuring expense was $2.3 million for the Costa Rica facility closure and related Suttle restructuring. Production was transferred to Minnesota, and the closure was completed in Q3. Management did not expect material restructuring costs in Q4.
Liquidity, outlook, risks and other matters
Management stated that available resources and projected operating position were sufficient for anticipated operating and capital needs. The Wells Fargo credit facility is $15 million, secured by company assets, expires August 2021 and bears interest at LIBOR plus 2.0%. The company said it complied with its financial covenants, including minimum liquidity of $10 million.
No numerical earnings or revenue guidance was provided. Principal risks identified include continued Suttle customer concentration, pricing pressure and legacy-product declines; successful manufacturing consolidation; Transition Networks’ product development and market demand; JDL’s exposure to education funding and project timing; and Net2Edge’s ability to launch products and reach profitability. The company also cited possible impacts from changing government expenditures.
The company was evaluating the new revenue-recognition standard, expected to adopt it using the modified retrospective method, and identified possible effects involving variable consideration, timing of service-contract revenue, third-party maintenance arrangements and balance-sheet contract accounts. It reported effective disclosure controls and said the ERP segregation-of-duties material weakness identified at year-end 2016 was remediated by September 30, 2017. The filing also describes a material weakness in goodwill-impairment testing and the resulting $1.5 million charge; the provided text does not clearly explain a separate remediation conclusion for that weakness.
Management reported no known pending legal matters expected to materially affect financial position or results. Warranty liability was $0.6 million. Certain money-market funds totaling $9.0 million were not FDIC-insured or government-guaranteed. The company noted that the investment could lose value.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Communications Systems, Inc., not Sunation Energy, Inc.
- Review whether Suttle’s sales, gross margin and inventory reserves stabilize after the Costa Rica closure and legacy-product actions.
- Assess the basis for the goodwill and intangible impairments, and the status of the goodwill-testing control weakness.
- Monitor liquidity against the $10 million covenant minimum and the borrowing-base availability under the credit facility.
- Check the eventual effects of the revenue-recognition standard and whether the company provided subsequent guidance or updated risk disclosures.