Third quarter 2020 results substantially
improved from second quarter 2020 although still impacted by the
COVID-19 pandemic; Company reports consolidated third quarter 2020
sales from continuing operations of $12.1 million, gross profit of
$5.2 million and operating income of $0.3 million
Strong balance sheet with cash, cash
equivalents, and liquid investments of $21.0 million and working
capital of $28.5 million at September 30, 2020
Growth strategy focuses on investments in
intelligent edge solutions and services, new partnerships and
acquisitions
Communications Systems, Inc. (NASDAQ: JCS) (“CSI” or the
“Company”), a global IoT intelligent edge products and services
company, today announced financial results for the third quarter
(“Q3”) ended September 30, 2020, including a discussion of results
of operations by our new segments or product types.
CSI’s Chief Executive Officer Roger H.D. Lacey noted, “Since the
beginning of the year we made significant progress towards our goal
of becoming a growing and profitable intelligent edge product
solutions and services company. Specifically, we:
- Made several organizational changes across our segments
to align internal resources and processes with our products and
services by creating synergies between these segments.
- Invested in new technologies aiming to develop
easy-to-use / easy-to-integrate applications and services that
address demand from critical infrastructure initiatives, including
security and surveillance, intelligent transportation, smart
buildings, and smart cities.
- Acquired Ecessa, a company that designs and distributes
SD-WAN (software-defined wide area networking) solutions for
businesses; this acquisition created greater sales opportunities to
expand our services platform and offers cost synergies by
complementing our existing portfolio of products and services.
- Completed a minority investment in Quortus, a UK based
company that creates agile and feature-rich private wireless
networks for enterprises across a wide variety of vertical sectors
including education, healthcare, retail and utilities. Through this
investment, coupled with prior investments in cryptographic
capabilities with Spyrus and an ongoing initiative to expand our
efforts into Artificial Intelligence (“AI”) opportunities, we are
now able to provide our clients a wider range of innovative
solutions.
Our goal is to (1) make services an increasing proportion of
revenue that would be recurring, highly predictable and higher
margin and (2) expand our client base both by building an ecosystem
of strategic partnerships and through additional acquisitions 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. Following the completion of our two-year
transformation phase, we are now ready to embark on a Company-wide
re-branding phase.”
Mr. Lacey continued, “Our overall sales performance in Q3 2020
was affected by lower North America sales due to the COVID-19
pandemic. Unused commercial space and reduced retail activity has
temporarily slowed growth in building automation, security and
parking management applications. This decline was partially offset
by strong Federal sales, higher international sales in areas where
our clients experienced initial recovery from the pandemic and a
restart of projects at our large Services & Support segment
education customer.”
Mr. Lacey added, “While we continue to be adversely impacted by
the COVID-19 pandemic, we have taken proactive steps to manage,
respond and quickly adjust to this challenging new operating and
economic environment. While part of our workforce continues to
operate remotely and our on-site employees are working in an
appropriate socially distant environment, the safety of our
employees remains our priority. At the end of Q2 2020, in light of
the uncertainty due to the effects of the continuing COVID-19
pandemic, we implemented cost-reduction measures, including
short-term furloughs, that will result in more than $500,000 cost
reductions for the second half of 2020. Because of strong customer
orders, those employees furloughed during Q3 have returned to
work.
“We ended Q3 2020 in a strong financial position, with working
capital of $28.5 million, no debt and a cash, cash equivalents, and
liquid investments balance of $21.0 million; this strong financial
position gave us the flexibility to quickly and successfully handle
challenges related to the COVID-19 pandemic, but most importantly
we are well capitalized to 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 and execute our mid- and
long-term growth strategy.”
Q3 2020 Financial and Operational
Highlights *
(in 000s)
Three
Months Ended September 30
Change
Nine
Months Ended September 30
Change
2020
2019
2020
2019
CONSOLIDATED SALES FROM CONTINUING
OPERATIONS
$ 12,110
$ 13,622
($1,512)
$ 30,900
$ 35,543
($4,643)
Electronics & Software
8,755
13,035
(4,280)
25,579
32,262
(6,683)
Services & Support
3,530
783
2,747
5,882
3,942
1,940
Intersegment elimination
(175)
(196)
21
(561)
(661)
100
GROSS PROFIT
$ 5,182
$ 6,285
($1,103)
$ 12,399
$ 15,152
($2,753)
Electronics & Software
4,009
6,282
(2,273)
10,834
14,370
(3,536)
Services & Support
1,340
180
1,160
2,090
1,299
791
Intersegment elimination
(167)
(177)
10
(525)
(517)
(8)
OPERATING INCOME (LOSS)
$ 306
$ 772
($466)
($2,564)
($1,179)
($1,385)
NET INCOME (LOSS)
$ 262
$ 1,738
($1,476)
($168)
$ 4,751
($4,919)
* All operating results 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 which we started in Q2 2020.
- Q3 2020 consolidated sales from continuing operations of $12.1
million decreased by 11% as compared to Q3 2019 mainly due to lower
sales from 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 Ecessa SD-WAN
product portfolio. Of note, our Q3 2020 consolidated sales from
continuing operations increased by $2.5 million as compared to
consolidated sales from continuing operations reported for Q2 2020.
This was primarily due to higher Services & Support revenue
with the restart of education projects.
- Q3 2020 consolidated gross profit decreased by 18% to $5.2
million as compared to the same period of 2019. Gross margin
declined to 42.8% in Q3 2020 due to lower margins in Electronics
& Software segment driven by product mix, while construction
and installation projects in Q3 2019 constituted a higher percent
of sales.
- Q3 2020 consolidated operating income from continuing
operations was $306,000 compared to $772,000 in Q3 2019.
- Q3 2020 net income was $262,000 compared to $1.7 million in Q3
2019.
Q3 2020 Segment Financial Overview by
Segment
Electronics & Software
Segment
(in 000s)
Three
Months Ended September 30
Nine
Months Ended September 30
2020
2019
2020
2019
Sales
$ 8,755
$ 13,035
$ 25,579
$ 32,262
Gross profit
4,009
6,282
10,834
14,370
Operating income
728
1,863
18
1,254
Electronics & Software sales decreased by 33% to $8,755,000
in Q3 2020 compared to $13,035,000 in the same period of 2019.
Q3 2020 sales in North America decreased by $3,807,000, or 33%,
from Q3 2019, primarily due to delayed project spending by
customers due to the COVID-19 pandemic in addition to $2.8 million
of sales for a major metropolitan smart city IoT project recorded
in Q3 2019, that did not reoccur in the current year. In addition,
delayed spending from a major Canadian telecommunications provider
on traditional media convertors and optical devices coupled with an
international sales decline, particularly in Western Europe,
reduced revenue by $473,000. However, prospects for our new
business direction remain strong and our CRM sales funnel suggests
continuing strength. Excluding the major IoT project we delivered
in 2019, sales during Q3 2020 of Intelligent edge solutions
(“IES”1) products were slightly above Q3 2019, despite the overall
decline in sales driven by the COVID-19 pandemic.
Gross profit for Q3 2020 decreased to $4,009,000 from $6,282,000
in the same quarter of 2019. Gross margin decreased to 45.8% in Q3
2020 from 48.2% in Q3 2019 as volume and favorable margin impacts
from the prior year major metropolitan smart city IoT project, did
not reoccur in 2020.
Selling, general and administrative (“SG&A”) expenses
decreased by 26% to $3,281,000, or 37.5% of sales, in Q3 2020
compared to $4,419,000, or 33.9% of sales, in Q3 2019 due to
reduced travel, marketing and personnel expenses, in part due to
steps taken by management in response to the COVID-19 pandemic.
Electronics & Software realized operating income of $728,000
in Q3 2020 compared to operating income of $1,863,000 in Q3 2019,
primarily due to lower sales and gross margin for the reasons
discussed above.
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 September 30
Nine
Months Ended September 30
2020
2019
2020
2019
Sales
$ 3,530
$ 783
$ 5,882
$ 3,942
Gross profit
1,340
180
2,090
1,299
Operating income (loss)
431
(169)
370
243
Services & Support sales increased by 351% to $3,530,000 in
Q3 2020 compared to $783,000 in same period of 2019.
Revenues from the education sector increased $2,249,000 or 3570%
in Q3 2020 as compared to Q3 2019 primarily due to the June 2020
commencement of projects that had been previously delayed due to
funding issues while the 2019 third quarter had very little project
revenue in this sector. Revenue from sales to small and
medium-sized commercial businesses (“SMBs”), which are primarily
healthcare and financial clients, increased by $515,000 or 98% in
Q3 2020 as compared to Q3 2019 due to the acquisition of Ecessa
effective May 14, 2020. Project and product revenue increased by
$2,481,000 or 1908% in Q3 2020 as compared to the same period of
2019 due primarily to the increase in the education sector.
Recurring and other services revenue for Q3 2020 increased by
$266,000 or 41% 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. Overall, Ecessa contributed
$535,000 in revenue during the quarter, of which $48,000 was in the
education sector and the balance in SMB recurring and other
services revenue.
Gross profit increased by 644% to $1,340,000 in Q3 2020 compared
to $180,000 in the same period of 2019. Gross margin increased to
38.0% in Q3 2020 compared to 23.0% in Q3 2019 due to the increase
in projects in the education sector. SG&A increased by 160% in
Q3 2020 to $909,000, or 25.8% of sales, compared to $349,000, or
44.6% of sales, in Q3 2019 due to SG&A expenses from Ecessa,
which were not included in the prior year.
Services & Support segment reported operating income of
$431,000 in Q3 2020 compared to an operating loss of $169,000 in
the same period of 2019 primarily due to increased education
revenue.
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 a gain of $2.1
million as of September 30, 2020. In connection with the
transaction, the Company has recorded $958,000 of restructuring
expenses in 2020, primarily consisting of severance and employee
benefits. 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
in Q4 2020.
Financial Condition
CSI’s balance sheet at September 30, 2020 included cash, cash
equivalents, and investments of $21.0 million, working capital of
$28.5 million, which decreased from the end of Q2 2020 as we moved
cash to longer term higher-yield investments, and stockholders’
equity of $47.2 million.
Form 10-Q
For further information, please see the Company’s Form 10-Q,
which will be filed on or about November 13, 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
Nine Months Ended
September 30, 2020
September 30, 2019
September 30, 2020
September 30, 2019
Sales
$
12,109,529
$
13,622,120
$
30,900,223
$
35,542,758
Gross profit
5,181,828
6,284,917
12,399,023
15,151,671
Operating income (loss) from continuing
operations
306,035
771,798
(2,563,913)
(1,178,912)
Operating income (loss) from continuing
operations before income taxes
562,635
860,234
(1,617,763)
(997,817)
Income tax expense (benefit)
8,952
(26,788)
4,049
(42,629)
Net income (loss) from continuing
operations
553,683
887,022
(1,621,812)
(955,188)
Net (loss) income from discontinued
operations, net of tax
(291,318)
850,837
1,453,289
5,706,338
Net income (loss)
$
262,365
$
1,737,859
$
(168,523)
$
4,751,150
Basic net income (loss) per share
$
0.03
$
0.19
$
(0.02)
$
0.51
Diluted net income (loss) per share
$
0.03
$
0.19
$
(0.02)
$
0.51
Cash dividends declared per share
$
0.00
$
0.02
$
0.04
$
0.06
Average basic shares outstanding
9,355,425
9,317,129
9,323,902
9,270,125
Average dilutive shares outstanding
9,444,986
9,368,171
9,323,902
9,278,803
Selected Balance Sheet Data
Unaudited
September 30, 2020
December
31, 2019
Total assets
$
55,716,995
$
59,150,712
Cash, cash equivalents &
investments
20,953,165
24,057,160
Working capital
28,474,560
38,051,766
Property, plant and equipment, net
7,302,577
8,238,089
Long-term liabilities
693,366
408,386
Stockholders’ equity
47,242,030
47,392,282
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201030005130/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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