Business context and reporting period
Entity discrepancy: The request identifies Sunation Energy, Inc., but the supplied 10-Q is for Communications Systems, Inc. (CSI), a Minnesota-based communications infrastructure and technology-services company. The summary below reflects the filing text, not Sunation Energy.
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. CSI reports four business units: Suttle, Transition Networks, JDL Technologies and Net2Edge.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Sales | $26.31 million, down 7% from $28.20 million | $50.98 million, up 7% from $47.74 million |
| Gross profit / margin | $7.38 million / 28.0%, versus $8.54 million / 30.3% | $14.15 million / 27.7%, versus $13.43 million / 28.1% |
| Operating loss | $2.67 million, versus $1.72 million | $1.39 million, versus $7.41 million |
| Net loss / diluted loss per share | $2.54 million / $0.29, versus $1.03 million / $0.12 | $5.01 million / $0.56, versus $5.19 million / $0.60 |
| Operating cash flow | Not separately provided for the quarter | Cash used of $2.50 million, versus $6.12 million |
At June 30, CSI reported $8.25 million in cash and cash equivalents and $10.06 million in investments, totaling approximately $18.31 million in cash, cash equivalents and investments. Working capital was $45.14 million. Current liabilities were $20.45 million, including $3.10 million drawn on a $10 million revolving credit line; $6.90 million remained available. The credit facility matures October 31, 2016, bears interest at LIBOR plus 1.5% (2.0% at June 30), is secured by company assets, and has $5 million of investments pledged. CSI reported compliance with its financial covenants. The mortgage was fully repaid in the first quarter.
Capital spending was $1.27 million for the first half. Cash dividends paid were $2.84 million, or $0.32 per share. The declared dividend was also $0.32 per share for the first half.
Material changes and segment results
- Second quarter: Suttle sales fell 5% and its operating loss widened to $2.56 million, with gross margin declining to 9.8% from 19.1%, mainly due to weaker international orders and manufacturing productivity issues during new product introductions. Transition Networks sales fell 13%; it shifted from $0.36 million operating income to a $0.36 million loss, amid international weakness, project delays, pricing pressure and new-product mix. JDL sales were nearly flat, but operating income rose to $0.91 million from $0.04 million, primarily on improved gross margin and sales mix. Net2Edge sales increased to $0.59 million, but it remained loss-making, with a $0.65 million operating loss.
- First half: JDL sales increased 61% to $8.96 million, supported by education projects and the Twisted Technologies acquisition; it reported $1.35 million operating income versus a $0.73 million loss. Suttle sales rose 3%, but its operating loss remained $4.00 million. Transition Networks sales declined 5%, and its operating loss widened to $1.82 million. Net2Edge sales more than doubled to $1.16 million, but it reported a $1.06 million operating loss.
- The first-half year-over-year operating-loss improvement includes a nonrecurring $4.15 million pension-related gain recorded after CSI settled its U.K. pension obligations. First-half results also included a $4.24 million foreign-currency translation loss recognized in earnings following the substantial liquidation of its Austin Taylor U.K. facility, and an $0.81 million gain primarily from selling that facility. These items materially affect comparisons.
- CSI realigned reporting in 2016 to present Net2Edge as a separate segment and reclassified 2015 segment information for comparability.
Outlook, commentary and risks
Management stated that, based on its financial and operating position and projected expenditures, it believed available funds were sufficient for anticipated operating and capital needs. The filing provides no quantified revenue, earnings or cash-flow guidance.
Risks identified include dependence on a small number of major service-provider customers at Suttle; pressure on legacy product sales and margins; Transition Networks’ exposure to international markets, product transitions and contract manufacturers; JDL’s fluctuating project and education-sector demand, including timing of government-funded programs; and Net2Edge’s need to grow revenue to cover costs. Management also noted challenges in operating the four business units efficiently and profitably.
Twisted Technologies’ acquisition consideration includes revenue-target-based contingent payments with no stated maximum; the estimated liability was $122,000 at June 30. The IRS notified CSI of an examination of its 2012 and 2013 federal returns; management did not expect a material effect. Management reported no known pending legal claims expected to materially affect the company. The revolving credit agreement’s October 31, 2016 maturity is a near-term financing item to monitor.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Communications Systems, Inc., not Sunation Energy, Inc.
- Review the credit facility’s maturity, renewal or refinancing status, borrowing availability, pledged investments and covenant requirements.
- Assess whether operating performance improves without relying on the pension settlement gain or asset-sale proceeds, and track the recurring performance of each segment.
- Monitor Suttle’s manufacturing productivity and margins, Transition Networks’ international demand, and Net2Edge’s progress toward profitability.
- Check subsequent disclosures on the IRS examination, contingent acquisition payments and warranty obligations.