New reporting segments reflect focus on
intelligent edge solutions for the global IoT ecosystem and
services business; after the Ecessa acquisition, the Company is
seeking new acquisition opportunities in adjacent spaces
Second quarter results affected by COVID-19
shutdown: reports consolidated 2020 second quarter sales from
continuing operations of $9.6 million, gross profit of $3.5 million
and operating loss of $1.6 million
Balance sheet remains strong with cash, cash
equivalents, and investments of $24.8 million and working capital
of $34.0 million at June 30, 2020
Communications Systems, Inc. (NASDAQ: JCS) (“CSI” or the
“Company”), a global IoT intelligent edge products and services
company, today announced financial results for the second quarter
(“Q2”) ended June 30, 2020, including a discussion of results of
operations by product type.
As we have highlighted in prior press releases and at our 2020
annual shareholder meeting, we are pointing the company toward
growth markets with intelligent edge product solutions and
services. Internally we are also making organizational changes to
align resources and processes with our product and service
offerings rather than by legal entity. This will allow us to take
advantage of business process synergies across the Company. To this
end we are changing our segment reporting from entity-based to
product-based moving to Electronics &
Software and Services &
Support business segments. Initially the Electronics &
Software segment will include our Intelligent Edge Solutions (IES)
and Traditional products and therefore our Transition Networks and
Net2Edge entities. The Software & Services segment will include
our JDL Technologies IT managed services company as well as our
recently acquired Ecessa Corporation, which markets SD-WAN
solutions. In Q3 2020 we will continue our integration of processes
and have embarked on a company-wide re-branding project.
CSI’s Chief Executive Officer Roger H.D. Lacey noted, “In Q2
2020 we continued to execute our strategy of focusing on products
and services for the rapidly growing IoT ecosystem. This strategy
is designed to make services an increasing proportion of revenue
that would be recurring, highly predictable and higher margin,
along with expanding our client base both by building an ecosystem
of strategic partnerships and through acquisitions that can either
increase CSI’s technical capabilities or scale market share and
geographic reach. Our overall sales performance in Q2 2020 was
substantially affected by lower North America sales as the impact
of the COVID-19 pandemic moved into the United States. These
declines were partially offset by higher international sales in
areas where our clients experienced initial recovery from the
pandemic, a restart of projects at our large Services & Support
education customer and from the continued growth for intelligent
network edge products.”
Mr. Lacey continued, “While the long-term impact of the COVID-19
pandemic is unknown, most of our daily operations continue largely
uninterrupted thanks to early, proactive steps taken by our human
resources & IT departments and senior management team to
manage, respond and quickly adjust to this challenging new
operating and economic environment. Most of our workforce continues
to operate remotely or in an appropriate socially distant
environment and the safety of our employees remains our priority.
At the end of 2020 Q2, however, in light of the uncertainty due to
the effects of the continuing COVID-19 pandemic, we implemented
several cost reduction measures that we expect will result in more
than $500,000 of savings in the second half of 2020.
“Furthermore, due to our well-capitalized balance sheet, superb
technical capabilities, diversified product offerings, large
diverse client base, and partnerships, we believe CSI is well
positioned to manage through this challenging situation and most
importantly take advantage of opportunities that might arise from
growing demand for critical infrastructure services and products
such as security and surveillance, data protection and intelligent
transportation.
“We ended Q2 2020 in a strong financial position, with working
capital of $34.0 million, no debt and a cash, cash equivalents, and
investments balance of $24.8 million; this strong financial
position gives us the flexibility to react to potential challenges
related to the COVID-19 pandemic and most importantly execute our
mid- and long-term growth strategy. This includes identifying
attractive M&A opportunities that could substantially increase
CSI’s market share, geographic footprint, and client base or that
offer niche products and services and could be tucked-in to CSI’s
existing business segments.
To fund these opportunities and growth initiatives, our board of
directors made the decision to discontinue our quarterly dividend.
While we are well capitalized and are confident in our ability to
serve our customers, we believe it is prudent to maximize our
resources and liquidity as we invest in technology innovation and
attractive acquisition/merger opportunities. We believe that any
such investments would generate significant long-term value for our
investors.”
Mr. Lacey concluded, “Our vision is to become a leading supplier
of intelligent edge solutions for the global IoT ecosystem by:
- Developing easy-to-use / easy-to-integrate applications and
services for both domestic and international markets/clients and
capturing market share.
- Targeting disruptive solutions that address the growing demand
from critical infrastructure initiatives, including security and
surveillance, intelligent transportation, smart lighting, and smart
cities, based on IoT intelligent edge products and services for
governments and public and private corporations around the
globe.
- Creating an organizational structure that achieves world-class
productivity with cost-effective parameters driven by continuous
improvement of processes and increasingly focused on recurring
revenue models.
Presentation
Except as other expressly discussed in this press release, all
operating result for 2019 and 2020 only reflect the Company’s
continuing operations and exclude the discontinued operations of
the Company’s former Suttle business. Operating results for the
2019 periods have been reclassified to reflect the Company’s new
segment reporting.
Q2 2020 Summary
(in 000s)
Three
Months Ended June 30
Change
Six
Months Ended June 30
Change
2020
2019
2020
2019
CONSOLIDATED SALES FROM CONTINUING
OPERATIONS
$ 9,628
$ 10,705
($1,077)
$ 18,791
$ 21,921
($3,130)
Electronics & Software
8,287
9,936
(1,649)
16,823
19,227
(2,404)
Services & Support
1,525
951
574
2,352
3,160
(808)
Intersegment elimination
(184)
(182)
(2)
(384)
(466)
82
GROSS PROFIT
$ 3,480
$ 4,241
($761)
$ 7,217
$ 8,867
($1,650)
Electronics & Software
3,095
4,161
(1,066)
6,824
8,088
(1,264)
Services & Support
543
251
292
750
1,120
(370)
Intersegment elimination
(158)
(171)
13
(357)
(341)
(16)
OPERATING (LOSS)
$ (1,646)
$ (1,129)
($517)
$ (2,870)
$ (1,950)
($920)
NET (LOSS) INCOME
$ (1,936)
$ (2,773)
$837
$ (431)
$ 3,013
($3,444)
- Q2 2020 consolidated sales from continuing operations of $9.6
million decreased by 10% as compared to Q2 2019 mainly due to lower
sales form the Electronic & Software segment, partially offset
by higher sales at Services & Support segment due to the
restart of education projects and the addition of the SD-WAN
product portfolio.
- Q2 2020 consolidated gross profit decreased by 18% to $3.5
million as compared to the same period of 2019. Gross margin
declined to 36.1% in Q2 2020 due to lower margins in Electronics
& Software segment driven by certain low-margin Federal
sales.
- Q2 2020 consolidated operating loss from continuing operations
of $1.6 million included $394,000 of expense associated with the
Ecessa acquisition and $227,000 of expenses originally allocated to
Suttle that did not meet the criteria to be included in
discontinued operations.
- Q2 2020 loss from discontinued operations of $569,000 was
primarily severance as the transition services agreement winds
down.
Q2 2020 Segment Financial Overview by
Product Type
Electronics & Software
Segment
(in 000s)
Three
Months Ended June 30
Six
Months Ended June 30
2020
2019
2020
2019
Sales
$ 8,287
$ 9,936
$ 16,823
$ 19,227
Gross profit
3,095
4,161
6,824
8,088
Operating (loss) income
(543)
(139)
(711)
(608)
The Electronics & Software segment sales decreased 17% to
$8,287,000 in the second quarter of 2020 compared to $9,936,000 in
2019.
Sales in North America decreased $1,157,000, or 14%, primarily
due to a decline in sales to one major telecommunications customer
and overall delayed project spending by customers due to impacts of
the COVID-19 pandemic. International sales decreased $492,000, or
26%, primarily due to an overall drop in demand for traditional
products and delayed project spending by customers due to the
economic effects of the COVID-19 pandemic. Sales of Intelligent
edge solutions (“IES”1) products increased 2% or $60,000 due to
higher sales of security and surveillance products and sales to
Federal agencies. Traditional product sales decreased 24% or
$1,709,000 due mainly to a decline in media converter and optical
device orders from one major telecommunications customer.
Gross profit for Q2 2020 decreased to $3,095,000 as compared to
$4,161,000 in the same period of 2019. Gross margin decreased to
37.3% in Q2 2020 from 41.9% in Q2 2019 primarily due to a larger
sale of media converters at lower margins and overall lower pricing
on our optical devices. Selling, general and administrative
expenses decreased 15% to $3,638,000, or 43.9% of sales, in the
second quarter of 2020 compared to $4,300,000, or 43.3% of sales,
in Q2 2019 due to reduced travel, marketing and personnel
expenses.
Electronics & Software segment had an operating loss of
$543,000 in Q2 2020 compared to an operating loss of $139,000 in
the same period of 2019.
1 IES refers to connectivity and power solutions that provide
actionable intelligence at the edge of networks through Power over
Ethernet (PoE) products, software, and services.
Services & Support
Segment
(in 000s)
Three
Months Ended June 30
Six
Months Ended June 30
2020
2019
2020
2019
Sales
$ 1,525
$ 951
$ 2,352
$ 3,160
Gross profit
543
251
750
1,120
Operating (loss) income
60
(80)
(61)
413
The Services & Support segment sales increased 60% to
$1,525,000 in Q2 2020 compared to $951,000 in the same period of
2019.
Revenues from the education sector increased $331,000, or 112%,
in Q2 2020 as compared to the 2019 second quarter due primarily to
the commencement of projects that had been previously delayed due
to funding issues. Revenue from sales to small and medium-sized
commercial businesses (“SMBs”), which are primarily healthcare and
financial clients, increased $240,000 or 51% in Q2 2020 as compared
to the same period of 2019 due to new client acquisition in our
commercial services division as well as the acquisition of Ecessa
during the second quarter. Project and product revenue increased
$391,000, or 110%, in Q2 2020 as compared to Q2 2019 due primarily
to the increase in the education sector. Services and support
revenue increased $183,000 or 31% as compared to the same quarter
of the prior year due to new client acquisition within managed
services and the Company’s acquisition of Ecessa, which has service
and support revenue on its SD-WAN products. Ecessa operations,
which were acquired on May 14, 2020, accounted for $263,000 of the
Q2 2020 revenue increase.
Gross profit increased 116% to $543,000 in Q2 2020 compared to
$251,000 in the same period in 2019. Gross margin increased to
35.6% in Q2 2020 compared to 26.4% in Q2 2019 due to the
commencement of projects in the education sector during the second
quarter of 2020, while there was limited project revenue in the
prior year, causing lower margins. Selling, general and
administrative expenses increased 46% in Q2 2020 to $483,000, or
31.7% of sales, compared to $331,000, or 34.8% of sales, in Q2 2019
due to the acquisition of Ecessa and the inclusion of its general
and administrative costs that are not included in the prior
year.
Services & Support segment reported operating income of
$60,000 in Q2 2020 compared to an operating loss of $80,000 in the
same period of 2019.
Discontinued Operations –
Suttle
On March 11, 2020, the Company announced the sale of the
remainder of its Suttle business to Oldcastle Infrastructure in a
transaction structured as an asset sale that included inventory,
working capital, certain capital equipment, intellectual property,
and customer relationships. Gross proceeds of $8.2 million
including a working capital adjustment, resulted in an initial gain
on the sale of $2.2 million during the quarter ended March 31, 2020
and YTD gain of $2.0 million as of June 30, 2020. In connection
with the transaction, the Company has recorded $764,000 of
restructuring expenses in 2020, primarily consisting of severance
and employee benefits. The Company expects to record additional
severance and employee benefit costs in Q3 2020 as it completes its
obligations under a transition services agreement with the buyer.
The Company retained ownership of three buildings in Hector,
Minnesota, with two leased to Oldcastle Infrastructure, and also
retained ownership of injection molding equipment, warehouse
equipment and tools. The Company plans to sell the remaining assets
after the transition services agreement ends in September 2020.
Financial Condition
CSI’s balance sheet at June 30, 2020 included cash, cash
equivalents, and investments of $24.8 million, working capital of
$34.0 million, and stockholders’ equity of $47.0 million.
Form 10-Q
For further information, please see the Company’s Form 10-Q,
which will be filed on or about August 14, 2020.
About Communications
Systems
Communications Systems, Inc., an IoT intelligent edge products
and services company, provides connectivity infrastructure and
services for global deployments of broadband networks. Focusing on
innovative, cost-effective solutions, CSI provides customers the
ability to deliver, manage, and optimize their broadband network
services and architecture. From the integration of fiber optics in
any application and environment to efficient home voice and data
deployments to optimization of data and application access, CSI
provides tools for maximum utilization of the network from the edge
to the user. With partners and customers in over 50 countries, CSI
has built a reputation as a reliable global innovator focusing on
quality and customer service. CSI operates two business units:
Electronics & Software (primarily Transition Networks and
Net2Edge as reported in prior releases) and Services & Support
(primarily JDL Technologies and Ecessa Corporation). For more
information visit: commsysinc.com.
Forward-Looking
Statements
This press release includes certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995, including statements regarding future financial
performance, future growth and future acquisitions or partnerships.
These statements are based on Communications Systems’ current
expectations or beliefs and are subject to uncertainty and changes
in circumstances. Actual results may vary materially from those
expressed or implied by the statements here due to changes in
economic, business, competitive or regulatory factors, and other
risks and uncertainties affecting the operation of Communications
Systems’ business. These risks, uncertainties and contingencies are
presented in the Company’s Annual Report on Form 10-K and, from
time to time, in the Company’s other filings with the Securities
and Exchange Commission. The information set forth herein should be
read in light of these risks. Further, investors should keep in
mind that the Company’s financial results in any particular period
may not be indicative of future results. Communications Systems is
under no obligation to, and expressly disclaims any obligation to,
update or alter its forward-looking statements, whether as a result
of new information, future events, changes in assumptions or
otherwise.
Selected Income Statement Data
Unaudited
Three Months Ended
Six Months Ended
June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Sales
$
9,627,952
$
10,704,467
$
18,790,694
$
21,920,637
Gross profit
3,480,048
4,240,537
7,217,195
8,866,753
Operating loss from continuing
operations
(1,646,205)
(1,129,332)
(2,869,948)
(1,950,711)
Operating loss from continuing operations
before income taxes
(1,367,222)
(1,062,184)
(2,180,398)
(1,858,052)
Income tax benefit
(446)
(11,869)
(4,903)
(15,841)
Net loss from continuing operations
(1,366,776)
(1,050,315)
(2,175,495)
(1,842,211)
Net (loss) income from discontinued
operations, net of tax
(568,745)
3,823,493
1,744,607
4,855,502
Net (loss) income
$
(1,935,521)
$
2,773,178
$
(430,888)
$
3,013,291
Basic net income (loss) per share
$
(0.21)
$
0.30
$
(0.05)
$
0.33
Diluted net income (loss) per share
$
(0.21)
$
0.30
$
(0.05)
$
0.33
Cash dividends declared per share
$
0.02
$
0.02
$
0.04
$
0.04
Average basic shares outstanding
9,350,344
9,316,576
9,307,967
9,246,233
Average dilutive shares outstanding
9,350,344
9,319,106
9,307,967
9,246,233
Selected Balance Sheet Data
Unaudited
June 30,
2020
Dec. 31,
2019
Total assets
$ 57,350,863
$
59,150,712
Cash, cash equivalents &
investments
24,773,970
24,057,160
Working capital
33,990,697
38,051,766
Property, plant and equipment, net
7,903,542
8,238,089
Long-term liabilities
505,548
408,386
Stockholders’ equity
46,964,179
47,392,282
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200813005321/en/
Communications Systems, Inc. Mark D. Fandrich Chief
Financial Officer 952-582-6416 mark.fandrich@commsysinc.com Roger
H. D. Lacey Chief Executive Officer 952-996-1674 The Equity
Group Inc. Lena Cati Vice President 212-836-9611
lcati@equityny.com Devin Sullivan Senior Vice President
212-836-9608 dsullivan@equityny.com
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