Business context and reporting period
Issuer mismatch: The supplied filing is Communications Systems, Inc. (Nasdaq: JCS), not Sunation Energy, Inc. It is a Form 10-Q for the quarter ended June 30, 2019, covering the three- and six-month periods ended that date. The company operated in connectivity products and IT services through Transition Networks, Suttle, JDL Technologies and Net2Edge.
Financial performance and condition
- Q2 revenue: $15.4 million, up 2% year over year. Gross profit was $5.7 million and gross margin 37.1%, versus $4.0 million and 26.5% in Q2 2018. Operating loss narrowed to $264,000 from $2.7 million.
- Q2 earnings: Net income was $2.8 million, or $0.30 per diluted share, versus a $2.6 million net loss, or $0.29 loss per share. Results included a $3.0 million gain on the FutureLink Fiber sale; excluding this unusual gain, the company still reported an operating loss.
- First-half revenue and earnings: Revenue was $32.1 million, up 1%. Gross profit was $12.1 million (37.8% margin), versus $9.2 million (28.8%) a year earlier. Operating loss improved to $83,000 from $4.7 million; net income was $3.0 million, or $0.33 per share, compared with a $4.5 million net loss, or $0.50 loss per share.
- Cash flow: First-half operating cash flow was $2.4 million, compared with $2.5 million used in the prior-year period. Investing activities provided $657,000, principally reflecting FutureLink sale proceeds, partly offset by investment purchases. Financing activities used $324,000, including $371,000 of dividends paid.
- Liquidity and debt: At June 30, cash and cash equivalents were $13.2 million, restricted cash $626,000, and short-term investments $4.0 million. Management reported total cash, cash equivalents, restricted cash and investments of $17.8 million, working capital of $35.1 million, and no borrowings on its credit line. The $15 million secured revolving facility had $7.4 million available under the borrowing-base calculation and matures August 2021. The company reported compliance with its $10 million minimum-liquidity covenant.
- Balance sheet: Total assets were $54.1 million and stockholders’ equity $44.8 million. No material long-term borrowing balance was reported; operating lease liabilities totaled $408,000.
Material changes versus the prior comparable period
- Transition Networks’ Q2 sales increased 17% to $9.2 million, led by North America and Ethernet switches and adapters; operating income was $368,000. Suttle sales fell 19% to $4.7 million, but it returned to Q2 operating income of $529,000 from a $1.4 million loss, reflecting improved margins and lower expenses. JDL sales rose 4% to $951,000 but remained loss-making; Net2Edge sales rose 17% to $796,000 and its operating loss narrowed to $507,000.
- For the first half, Suttle sales declined 20% to $10.3 million, while JDL sales increased 95% to $3.2 million and Net2Edge increased 47% to $1.2 million. Transition Networks sales increased 6% to $18.1 million.
- The company sold Suttle’s FutureLink Fiber business line on April 5, 2019 for $5.0 million cash, with $500,000 held in escrow. It recorded a $3.0 million gain and agreed to continue manufacturing related products through September 30, 2019 under a transition-services agreement.
- Dividends declared were $0.02 per share in Q2 and $0.04 for the first half, down from $0.04 and $0.08, respectively, in 2018.
Outlook, risks and unusual items
The filing provides no specific financial guidance. Management said available funds were sufficient for anticipated operating and capital expenditure needs. It expected Suttle’s sales and operating income to continue declining after the FutureLink disposition and said it was exploring options for the remainder of that business. A proposed $10 million sale of the Minnetonka headquarters remained subject to closing conditions; the company then expected a possible closing in the second half of 2020.
Risks highlighted include the ability of business units to operate profitably; customer concentration and spending volatility at Suttle; product development, supply and inventory risks at Transition Networks; delayed education funding and profitability challenges at JDL; and Net2Edge’s ability to scale new products and achieve profitability. The filing also notes cybersecurity exposure, foreign-currency effects, warranty-estimate uncertainty and tax examinations. Management reported disclosure controls were effective. Adoption of lease accounting in 2019 resulted in recognition of right-of-use assets and lease liabilities and was not considered to have a material financial-statement impact.
Important facts for investors to verify
- Confirm the intended issuer: the supplied document is Communications Systems, Inc., not Sunation Energy, Inc.
- Assess earnings excluding the $3.0 million FutureLink sale gain and the sustainability of operating improvements, particularly at Suttle and JDL.
- Monitor Suttle’s post-sale revenue, transition-services obligations and management’s plans for the remaining business.
- Verify the status and conditions of the proposed headquarters sale, as well as credit-line availability and covenant headroom.
- Review the complete filing and subsequent company disclosures for segment trends, customer concentration, the DOT contract and other risks; the reported results are not necessarily indicative of full-year performance.