Communications Systems, Inc. Reports Second Quarter 2017 Financial Results

MINNETONKA, Minn., Aug. 15, 2017

Second Quarter 2017 Summary

• Q2 2017 consolidated sales were $22.1 million, compared to $26.3 million in Q2 2016, lower primarily due to a decrease in sales to Suttle's major communications customers.
• CSI recognized $1.6 million in impairment charges during the 2017 Q2, with $1.46 million related to Goodwill at JDL Technologies and $155,000 related to intangible assets at Net2Edge as the overall fair value of the Company's assets was considered less than the recorded book value. In making the impairment determination the Company analyzed consolidated book value of the Company comparing it to the current market capitalization and also analyzed the fair value of its four operating segments taking into consideration several quarters of losses. The Company determined it was appropriate to take the $1.6 million impairment charge for its Goodwill and intangible assets.
• Operating loss was $4.1 million in Q2 2017 compared to $2.7 million in Q2 2016. The 2017 operating loss was primarily driven by the $1.6 million impairment charge discussed above and operating losses at Suttle, including $1.1 million of restructuring costs associated with the ongoing closing of its Costa Rica facility as it moves these operations to Minnesota and $700,000 in excess and obsolete inventory write offs and adjustments primarily related to its legacy products. In the 2016 Q2, the Company had no impairment or restructuring costs and Suttle's excess and obsolete inventory adjustment was $161,000.
• Transition Networks again achieved year-over-year improvement in operating income, moving to operating income of $361,000 in the current quarter after a loss of $360,000 in Q2 2016.
• JDL Technologies incurred an operating loss of $1.1 million in Q2 2017 compared to operating income of $906,000 last year, with Q2 2017 results lower primarily due to the $1.45 million impairment of goodwill.
• CSI's Q2 2017 net loss was $4.1 million, or $(0.46) per diluted share, compared to a net loss of $2.5 million, or $(0.29) per diluted share, in Q2 2016. Due to the uncertainty on the timing of our return to profitability, we have applied a tax valuation allowance to the 2017 tax provision and have not recorded a tax benefit for the operating loss.
• CSI's balance sheet at June 30, 2017 included improved cash, cash equivalents and investments of $20.6 million primarily due to effective supply chain initiatives. Working capital was $41.5 million compared to $44.0 million at December 2016, which included $16.2 million cash, cash equivalents and investments.

CSI's Chief Executive Officer Roger H.D. Lacey commented, "In Q2 2017 impairment and restructuring charges obscured the progress the Company made in its improvement initiatives.  Transition Networks has now achieved four consecutive quarters of operating income.  Its new product¹ sales grew by 9% over prior year and 8% over previous quarter to $2.8 million, or approximately 29% of Transition Networks' sales for the quarter.  Federal government sales were soft due to timing of key committed projects which we expect later in the year.  However, optical device sales were strong for the quarter and we continue to be excited about Transition Networks' Power over Ethernet offerings and their business potential.

"Suttle continues to be our biggest challenge.  We have repositioned the Suttle sales force to address the evolving marketplace where purchasing decisions for many of Suttle's products have moved from Tier 1 suppliers to general and electrical contractors.  Closure of Suttle's Costa Rica facility was extended a month to respond to specific customer product demands and final shutdown activities will be completed in the third quarter.  Meanwhile a restructuring of Suttle's Hector manufacturing plant on a 21^st century lean principal is underway and this is expected to substantially improve costs and margins over the next year.

"JDL had a strong quarter compared to plan and excluding the impairment charge, has achieved nine consecutive profitable quarters.  Its Cloud service transformation offering is now gaining traction. 

"The Net2Edge business venture released five new products in the quarter with three on proof-of-concept trials in global telecommunications companies.  Despite some product delays due to outside contractors, we remain positive about this opportunity.