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JCS > SEC Filings for JCS > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for COMMUNICATIONS SYSTEMS INC

Form 10-Q for COMMUNICATIONS SYSTEMS INC


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Communications Systems, Inc. provides physical connectivity infrastructure and services for global deployments of broadband networks through the following business units:

Suttle manufactures and markets copper and fiber connectivity systems, enclosure systems, xDSL filters and splitters, and active technologies for voice, data and video communications under the Suttle brand in the United States and internationally;

Transition Networks manufactures network interface devices (NIDs), media converters, network interface cards (NICs), Ethernet switches, and other connectivity products that offer customers the ability to affordably integrate fiber optics into any data network; and

JDL Technologies provides technology solutions including virtualization, managed services, wired and wireless network design and implementation services, and converged infrastructure configuration and deployment.

The Company's second quarter consolidated sales increased 25% in 2013 to $31.9 million compared to $25.6 million in 2012. Consolidated operating income for the second quarter of 2013 increased to $2,567,000 compared to $1,358,000 in the 2012 second quarter. Second quarter 2013 net income increased to $1,639,000 compared to $972,000 in the second quarter of 2012.

Suttle continued its strong growth with 2013 second quarter revenue of $13.9 million, a 34% increase over the 2012 second quarter. The increased revenues were driven primarily by fulfillment of contracts for new Suttle products, enhanced network deployment by communication service providers, and increased demand for structured cabling products to support the increase in multi-unit dwelling construction. Domestically, Suttle benefitted from continued investment in product development for fiber optic and copper connectivity solutions as well as in-home active network products. Driven largely by DSL products, Suttle's international sales increased 30% to $1.5 million and accounted for 11% of Suttle total revenues. As a result of increased efficiencies associated with the higher sales level, Suttle's gross margin increased to 27.9% compared to 24.1% in the 2012 second quarter. Suttle continues to see strong sales opportunities in Latin America, South America, the Middle East and Canada, has added resources to take advantage of these long-term opportunities, and will continue to invest in these markets.

Transition Networks sales decreased 25% to $10.5 million, due primarily to the continued slowdown in government spending and a decline of legacy products, which resulted in a decrease in North American revenue from $10.6 million to $7.3 million. Although Transition Networks is focusing on new products in vertical markets, enterprise, Telco, and government, revenue from the introduction of these new products has not yet been sufficient to offset this decline. Transition Networks' international revenue decreased from $3.4 million to $3.1 million, due to decreased sales in Europe, Middle East and Africa markets and project timing in Asia and Latin America. Transition Networks gross margin dropped slightly to 54.2% compared to 55.6% in the 2012 second quarter. As announced in a May 15, 2013 press release, the Company is restructuring the Transition Networks general management and sales leadership to better align its business around strategic objectives and changes in the market.


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JDL Technologies' 2013 second quarter sales increased 544% to $7.6 million due to its South Florida education business. In the quarter, JDL Technologies recognized $4.0 million of revenue from its participation in the Miami-Dade County School District "Bringing Wireless to the Classroom" initiative and $3.2 million in revenue from its long-time client Broward County School District. JDL Technology's gross margin dollars increased 458% to $2 million driven by the revenue increase. Its gross margin percentage decreased to 26.1% from 30.2% in the 2012 second quarter, however, because a higher portion of its 2013 revenue was hardware -based rather than its more traditional value-added service. Although JDL continues to pursue opportunities outside the education business servicing the small and medium sized business with their networking needs, primarily managed services, migration to the cloud and virtualization, its 2013 revenue from this business remained relatively constant at $448,000.

Enterprise Resource Planning

On April 4, 2013, our Transition Networks business unit "went live" on a new Enterprise Resource Planning (ERP) system. This "go-live" was successful due to pre-planning and excellent education. Throughout the quarter, we continued the process of implementing our new ERP system within the remaining business units, which will significantly strengthen our long-term term performance by standardizing all CSI business units on a common platform. The ERP system will bring efficiencies in the cycle from product concept to product development to bringing products to market; it will enable us to lower manufacturing costs and better manage our supply chain; and it will give us many tools to provide improved customer service. Although implementing this new ERP system has been a significant investment, we expect to achieve substantial dividends in improved execution and enhanced service to our customers. Suttle will be the next business unit to go live, which we expect to occur in 2014.

Forward-looking statements

In this report and, from time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, the Company may make "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning possible or anticipated future financial performance, business activities, plans, pending claims, investigations or litigation which are typically preceded by the words "believes," "expects," "anticipates," "intends" or similar expressions. For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could cause actual performance, activities, anticipated results, outcomes or plans to differ significantly from those indicated in the forward-looking statements. These risks and uncertainties include, but are not limited to:

General Risks and Uncertainties:

our ability to manufacture and deliver our products to customers in the time frame these customers have specified;

the introduction of competitive products and technologies;

our ability to successfully control operating expenses in our business units;

the continuing worldwide financial downturn and sluggish economic conditions in certain market segments;

higher than expected expense related to new sales and marketing initiatives;


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unfavorable resolution of claims and litigation;

availability of adequate supplies of raw materials and components;

fuel prices; and

delays in new product introductions.

Suttle Risks and Uncertainties:

Our Suttle business unit's ability to continue to introduce and sell new products;

possible lower future sales to major telecom companies and other major customers;

the general health of the telecom sector; and

the continued recovery of the housing market in the United States.

Transition Networks Risks and Uncertainties:

our ability to stabilize the 2013 revenues and profitability of our Transition Networks business unit in light of continued uncertainty over federal government spending and the decline in Transition Networks legacy products;

our ability to introduce and sell new Transition Network products into new and existing markets at a level adequate to counter the decline from our traditional products and markets;

our ability to successfully and profitability integrate our acquisitions, including our July 2011 acquisition of Patapsco;

the success of the May 15, 2013 Transition Networks restructuring of our general management and sales leadership to better align its business around strategic directions changes in the market; and

our overall ability to implement a plan that returns Transition Networks to increased revenue and profitability to support the carrying value of its goodwill.

JDL Technologies Risks and Uncertainties:

the timing and availability of the federal and school district components of the funding of our M-DCPS project could affect the timing of JDL's delivery of services and its receipt of revenues under the project;

the fact the Company's margins from JDL's M-DCSD project are significantly lower than the margins from JDL's historical projects, which have included a significant value-added service component; and

JDL's ability to profitably expand outside its South Florida education market.


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In addition, the Company will discuss other factors from time to time in its filings with the Securities and Exchange Commission, including risk factors presented under Item 1A of the Company's most recently filed annual report on Form 10-K or quarterly reports on Form 10-Q.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Consolidated sales increased 25% in 2013 to $31,937,000 compared to $25,561,000 in 2012. Consolidated operating income in 2013 increased to $2,567,000 compared to $1,358,000 in the second quarter of 2012. Net income in 2013 increased to $1,639,000 compared to $972,000 in the second quarter of 2012.

Suttle

Suttle sales increased 34% in the second quarter of 2013 to $13,852,000 compared
to $10,348,000 in the same period of 2012 due to the fulfillment of contracts
for recently introduced Suttle products and increased sales tied to enhanced
network deployments by communications service providers. Sales by customer
groups in the second quarter of 2013 and 2012 were:


                        Suttle Sales by Customer Group
                            2013               2012
Telephone companies   $      10,630,000    $   7,735,000
Distributors                  1,580,000        1,391,000
International                 1,536,000        1,184,000
Other                           106,000           38,000
                      $      13,852,000    $  10,348,000

Suttle's sales by product groups in second quarter of 2013 and 2012 were:

                                Suttle Sales by Product Group
                                    2013              2012
Modular connecting products   $      3,549,000    $   3,242,000
DSL products                         2,369,000        1,707,000
Structured cabling products          6,372,000        4,203,000
Other products                       1,562,000        1,196,000
                              $     13,852,000    $  10,348,000

Sales to the major telephone companies increased 37% in 2013 due to the fulfillment of new product contracts and increased sales tied to enhanced network deployments. Sales to these customers accounted for 77% of Suttle's sales in the second quarter of 2013 compared to 75% of sales in 2012. Sales to distributors increased 14% in 2013 due to stronger demand for structured cabling products to support the increase in multi-dwelling unit construction. This customer segment accounted for 11% and 13% of sales in the second quarters of 2013 and 2012, respectively. International sales increased 30% and accounted for 11% of Suttle's second quarter 2013 sales, due to the ordering cycle of a major customer.


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Modular connecting products sales increased 9% and sales of structured cabling products increased 52% due to an increase in new multi-dwelling unit construction in the U.S. housing market and an increase in sales tied to enhanced network deployments. Sales of DSL products increased 39% due to the order cycle of major customers.

Suttle's gross margin increased 55% in the second quarter of 2013 to $3,862,000 compared to $2,497,000 in the same period of 2012. Gross margin as a percentage of sales increased to 28% in 2013 from 24% in 2012 as a result of increased efficiencies associated with higher sales levels. Selling, general and administrative expenses increased 18% to $2,609,000 in the second quarter of 2013 compared to $2,205,000 in the same period in 2012 due to continued investment into new product development and market expansion initiatives. Suttle's operating income was $1,253,000 in the second quarter of 2013 compared to $292,000 in 2012.

Transition Networks

Transition Networks sales decreased 25% to $10,462,000 in the second quarter of
2013 compared to $14,030,000 in 2012 due primarily to the continued slowdown in
government spending and a decline of legacy products. Transition Networks
organizes its sales force by vertical markets and segments its customers
geographically. Second quarter sales by region are presented in the following
table:


                                          Transition Networks Sales by Region
                                              2013                   2012
North America                          $         7,332,000    $        10,614,000
Europe, Middle East, Africa ("EMEA")             1,257,000              1,328,000
Rest of World                                    1,873,000              2,088,000
                                       $        10,462,000    $        14,030,000

The following table summarizes Transition Networks' 2013 and 2012 second quarter sales by its major product groups:

Transition Networks Sales by Product Group

                             2013                      2012
Media converters    $            8,042,000    $            9,284,000
Ethernet switches                1,368,000                 1,228,000
Ethernet adapters                  796,000                   336,000
Other products                     256,000                 3,182,000
                    $           10,462,000    $           14,030,000

Sales in North America decreased 31% or $3,282,000 due to lower than anticipated demand from the federal government and traditional media converter markets. International sales decreased $286,000, or 8%, due to slightly lower sales in EMEA and project delays with customers in Latin America and Asia.

Gross margin on second quarter Transition Networks' sales decreased 27% to $5,675,000 in 2013 from $7,801,000 in 2012. Gross margin as a percentage of sales decreased to 54% in 2013 from 56% in 2012 due to product mix. Selling, general and administrative expenses decreased 9% to $5,063,000 in 2013 compared to $5,570,000 in 2012 due to cost control measures and restructuring activities in the second quarter. Operating income decreased to $612,000 in 2013 compared to $2,232,000 in 2012.


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JDL Technologies, Inc.

JDL Technologies, Inc. sales increased 544% to $7,623,000 in the second quarter
of 2013 compared to $1,184,000 in 2012.

JDL's revenues by customer group were as follows:


                                  JDL Revenue by Customer Group
                                     2013                2012
Broward County FL schools      $      3,205,000    $        701,000
Miami Dade County FL schools          3,970,000                   -
All other                               448,000             483,000
                               $      7,623,000    $      1,184,000

Revenues earned in Broward County, Florida increased $2,504,000 or 357% in the second quarter of 2013 as compared to the 2012 second quarter due to the E-Rate 15 initiative, which was significantly larger than the prior year's initiative. Revenues earned in Miami Dade County are related to the district's "Bringing Wireless to the Classroom" initiative for which the district was granted federal funding under the E-Rate program to expand wireless connectivity for students and staff. This project will continue throughout 2013. All other revenues decreased $35,000 due to a restructuring of the commercial sales team.

JDL gross margin increased 458% to $1,991,000 in the second quarter of 2013 compared to $357,000 in the same period in 2012. Gross margin as a percentage of sales decreased to 26% in 2013 from 30% in 2012 reflecting the fact that a significant portion of its 2013 revenue was hardware-based, rather than its more traditional value-added service. Selling, general and administrative expenses increased 11% in 2013 to $587,000 compared to $529,000 in 2012 due to the expansion of the sales and administration teams in support of the growth in the education market. JDL reported operating income of $1,404,000 in the second quarter of 2013 compared to an operating loss of $172,000 in the same period of 2012.

Other

The Company's income before income taxes increased to $2,578,000 in 2013 compared to $1,445,000 in 2012. The Company's effective income tax rate was 36% in 2013 and 33% in 2012. This effective rate differs from the standard rate of 35% due to state income taxes, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges, and the effect of operations conducted in lower foreign tax rate jurisdictions.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Consolidated sales increased 19% in 2013 to $59,389,000 compared to $49,805,000 in 2012. Consolidated operating income in 2013 increased to $2,938,000 compared to $1,488,000 in the first six months of 2012. Net income in 2013 increased to $1,881,000 compared to $1,027,000 in the first six months of 2012.


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Suttle

Suttle sales increased 26% in the first six months of 2013 to $26,265,000
compared to $20,925,000 in the same period of 2012 due to the fulfillment of
contracts for recently introduced Suttle products and increased sales tied to
enhanced network deployments by communications service providers. Sales by
customer groups in the first six months of 2013 and 2012 were:


                        Suttle Sales by Customer Group
                            2013               2012
Telephone companies   $      20,025,000    $  15,185,000
Distributors                  3,157,000        2,819,000
International                 2,849,000        2,695,000
Other                           234,000          226,000
                      $      26,265,000    $  20,925,000

Suttle's sales by product groups in first six months of 2013 and 2012 were:

                                Suttle Sales by Product Group
                                    2013              2012
Modular connecting products   $      6,899,000    $   6,477,000
DSL products                         4,508,000        3,612,000
Structured cabling products         12,076,000        8,243,000
Other products                       2,782,000        2,593,000
                              $     26,265,000    $  20,925,000

Sales to the major telephone companies increased 32% in 2013 due to the fulfillment of new product contracts and increased sales tied to enhanced network deployments. Sales to these customers accounted for 76% of Suttle's sales in the first six months of 2013 compared to 73% of sales in 2012. Sales to distributors increased 12% in 2013 due to stronger demand for structured cabling products to support the increase in multi-dwelling unit construction. This customer segment accounted for 12% and 13% of sales in the first six months of 2013 and 2012, respectively. International sales increased 6% and accounted for 11% of Suttle's 2013 sales, due to the ordering cycle of a major customer.

Modular connecting products sales increased 7% and sales of structured cabling products increased 47% due to an increase in new multi-dwelling unit construction in the U.S. housing market and an increase in sales tied to enhanced network deployments. Sales of DSL products increased 25% due to the order cycle of major customers.

Suttle's gross margin increased 33% in the first six months of 2013 to $7,178,000 compared to $5,398,000 in the same period of 2012. Gross margin as a percentage of sales increased slightly to 27% in 2013 from 26% in 2012. Selling, general and administrative expenses increased 9% to $4,967,000 in the first six months of 2013 compared to $4,574,000 in the same period in 2012 due to continued investment into new product development and market expansion initiatives. Suttle's operating income was $2,211,000 in the first six months of 2013 compared to $825,000 in 2012.


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Transition Networks

Transition Networks sales decreased 21% to $21,275,000 in the first six months
of 2013 compared to $26,968,000 in 2012 due primarily to the continued slowdown
in government spending and a decline of legacy products. Transition Networks
organizes its sales force by vertical markets and segments its customers
geographically. First six months sales by region are presented in the following
table:


                                          Transition Networks Sales by Region
                                              2013                   2012
North America                          $        14,032,000    $        19,942,000
Europe, Middle East, Africa ("EMEA")             2,753,000              3,056,000
Rest of World                                    4,490,000              3,970,000
                                       $        21,275,000    $        26,968,000

The following table summarizes Transition Networks' 2013 and 2012 first six months sales by its major product groups:

Transition Networks Sales by Product Group

                             2013                      2012
Media converters    $           15,504,000    $           17,968,000
Ethernet switches                2,435,000                 2,447,000
Ethernet adapters                1,525,000                 1,543,000
Other products                   1,811,000                 5,010,000
                    $           21,275,000    $           26,968,000

Sales in North America decreased 30% or $5,910,000 due to lower than anticipated demand from the federal government and traditional media converter markets. International sales increased $217,000, or 3%, due to higher demand for telecommunication products, specifically within the Rest of World region.

Gross margin on Transition Networks' sales during the first six months decreased 22% to $11,396,000 in 2013 from $14,611,000 in 2012. Gross margin as a percentage of sales remained stable at 54% in both 2013 and 2012. Selling, general and administrative expenses decreased 6% to $10,558,000 in 2013 compared to $11,192,000 in 2012 due to cost control measures and restructuring activities. Operating income decreased to $838,000 in 2013 compared to $3,419,000 in 2012.

JDL Technologies, Inc.

JDL Technologies, Inc. sales increased 520% to $11,850,000 in the first six
months of 2013 compared to $1,913,000 in 2012.

JDL's revenues by customer group were as follows:


                                 JDL Revenue by Customer Group
                                     2013               2012
Broward County FL schools      $       3,901,000    $  1,182,000
Miami Dade County FL schools           7,138,000               -
All other                                811,000         731,000
                               $      11,850,000    $  1,913,000

Revenues earned in Broward County, Florida increased $2,719,000 or 230% in the first six months of 2013 as compared to the 2012 first six months due to the E-Rate 15 initiative, which was significantly larger than the prior year's initiative. Revenues earned in Miami Dade County are related to the district's "Bringing Wireless to the Classroom" initiative for which the district was granted federal funding under the E-Rate program to expand wireless connectivity for students and staff. This project will continue throughout 2013. All other revenues increased $80,000 due to JDL's concentrated effort in the commercial markets.


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JDL gross margin increased 359% to $2,731,000 in the first six months of 2013 compared to $595,000 in the same period in 2012. Gross margin as a percentage of sales decreased to 23% in 2013 from 31% in 2012 reflecting the fact that a significant portion of its 2013 revenue was hardware-based, rather than its more traditional value-added service. Selling, general and administrative expenses increased 3% in 2013 to $1,146,000 compared to $1,114,000 in 2012. JDL reported operating income of $1,585,000 in the first six months of 2013 compared to an operating loss of $519,000 in the same period of 2012.

Other

The Company's income before income taxes increased to $2,959,000 in 2013 compared to $1,539,000 in 2012. The Company's effective income tax rate was 36% in 2013 and 33% in 2012. This effective rate differs from the standard rate of 35% due to state income taxes, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges, and the effect of operations conducted in lower foreign tax rate jurisdictions.

Liquidity and Capital Resources

As of June 30, 2013, the Company had approximately $23,770,000 in cash, cash equivalents and investments. Of this amount, $3,365,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash which is fully insured through the FDIC. The Company also had $12,239,000 in investments consisting of certificates of deposit and corporate notes and bonds that are traded on the open market and are classified as available-for-sale at June 30, 2013.

The Company had working capital of $69,597,000, consisting of current assets of approximately $83,405,000 and current liabilities of $13,808,000 at June 30, 2013 compared to working capital of $70,677,000, consisting of current assets of $85,918,000 and current liabilities of $15,241,000 at December 31, 2012. . . .

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