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Communications Systems, Inc. Reports Fourth Quarter And Full Year 2017 Financial ResultsMINNETONKA, Minn., April 2, 2018 /PRNewswire/ -- Communications Systems, Inc. (NASDAQ: JCS) ("CSI" or the "Company"), a global provider of connectivity infrastructure and services for deployments of broadband networks, today announced financial results for the fourth quarter ("Q4") and full year ended December 31, 2017, including a discussion of results of operations by segment. Full Year 2017 Summary
CSI's Chief Executive Officer Roger H.D. Lacey commented, "Our 2017 results were disappointing and were driven largely by continuing difficulties in our Suttle business. Management actions were taken with the closure of the Costa Rica facility, inventory write downs, and suspension of certain technical agreements. By the end of the 4th quarter, the Suttle business had nearly completed its "rightsizing" and is now beginning to refocus on the residential growth markets. "We made progress during 2017 in the rest of our portfolio. First, Transition Networks continued its string of six straight profitable quarters. Transition Networks' 2017 new product revenue1 was $13 million, an increase of $3 million over last year. JDL Technologies had achieved eight consecutive quarters of positive operating income before experiencing a loss in Q2 driven by the goodwill impairment and in Q4 due to the anticipated cyclical reduction in the education business. Net2Edge ended the year with a loss but with a completed line of new exciting products and new orders in hand from a significant customer. In summary, although we are about six months behind our original targets, we are now structured for recovery. Importantly, our balance sheet continues to remain strong and gives us the resources to complete our business transformation." 1 "New product revenue" represents sales from new products introduced within the last three years. Fourth Quarter 2017 Summary
Q4 2017 Segment Financial Overview Transition Networks
Transition Networks' Q4 2017 sales decreased 1% to $10.7 million from $10.8 million in Q4 2016 driven by lower international sales, partially offset by higher North American sales. Operating income increased quarter over quarter due to improved margins and lower selling costs. Calendar 2017 sales decreased 6.2% to $38.5 million from $41.1 million in 2016, due to slower federal and international sales and substantial disruptions in our supply chain due to change in vendors. While media converters saw a 15% decline, sales of Ethernet switches increased by 11% due to new product releases. Operating income increased by over $1.0 million due to $1.7 million lower SG&A, $0.9 million favorable impact of product mix and lower production variances, partially offset by $1.6 million unfavorable margin impact on lower sales. Mr. Lacey noted, "While 2017 was another profitable year for Transition Networks, product delays by one of our contract manufacturers resulted in delays in shipping some customer orders. We have taken corrective actions and expanded our supply chain options to address this issue and are now positioned for another strong year. New products launches, including expanded applications for PoE (Power-over-Ethernet) are presenting us with real growth opportunities. Our Federal business was weak in 2017 and we expect improvement here as well." Suttle
Suttle's Q4 2017 sales decreased 13% to $7.5 million, from $8.7 million in Q4 2016, primarily due to lower distribution sales and loss of a custom product for a large telecommunications customer, partially offset by favorable impact of pricing changes at large customers. Sales to the major communication service providers declined 12% to $6.6 million in Q4 2017 from $7.5 million in Q4 2016, and comprised 88% of total segment revenues. The Q4 2017 operating loss of $1.1 million compares to $2.1 million in Q4 2016. Calendar 2017 sales decreased 23% to $32.4 million, from $42.1 million in 2016, primarily due to continuing pricing pressures from major telecommunications customers, volume declines in legacy products, and a shift in purchasing decisions from Tier 1 telecom suppliers to installers. Suttle's gross margin decreased 63% to $1.4 million in 2017 compared to $3.9 million in 2016. Gross margin as a percentage of sales decreased to 4% in 2017 compared to 9% in 2016 primarily due to the $417,000 write off in 2017 of prepaid royalties under a product development agreement and $2.8 million year-over-year increase to the inventory reserves, driven by Suttle's decision to discontinue certain legacy products. The margin impact of excess and obsolete inventory adjustments was $4.2 million in 2017 (13.0% of sales) compared to $1.4 million (3.4% of sales) in 2016. Operating expenses decreased $1.3 million, including $3.6 million lower expense primarily due to reduced research and development expenditures as multiple development projects were concluded and ongoing expense control measures, partially offset by restructuring costs of $2.3 million to close Suttle's Costa Rica facility. Suttle's operating loss was $9.8 million Q4 2017, compared to $8.6 million Q4 2016. Mr. Lacey noted, "The key to Suttle's turnaround will be execution of our recovery plan, margin improvement driven by more effective manufacturing operations, and emerging new business revenue from cable television and residential opportunities, which remain crucial to a turnaround. JDL Technologies
JDL Technologies' Q4 2017 sales decreased 77% to $0.7 million from $3.1 million in Q4 2016, due to the timing of projects in the educational sector. JDL incurred an operating loss of $529,000 in the 2017 fourth quarter compared to operating income of $120,000 in the 2016 fourth quarter, due to impact of lower sales, partially offset by lower SG&A expense. Calendar 2017 sales decreased 28% to $11.2 million compared to $15.5 million in 2016. Revenues earned from the education sector decreased $3.1 million, or 28%, in 2017 due to a decrease in the number of network-related projects completed during the year. SG&A expenses decreased 36% in 2017 to $2.1 million, or 19% of sales, compared to $3.3 million in 2016, or 21% of sales, due to cost saving measures taken over the year. JDL reported an operating loss of $0.8 million in 2017 compared to operating income of $1.9 million in 2016, driven primarily by the $1.5 million goodwill impairment recognized in the second quarter of 2017. There was no impairment charge in 2016. Mr. Lacey commented, "Timing of projects in our education customer's five-year cycle of installation and upgrade contract, along with slower growth in our commercial business, has required adjustments in our cost structure, which are now in place. While we expect 2018 to be a slower year for education revenue, we continue to believe good opportunities exist to grow our health care and financial managed services opportunities." Net2Edge
Net2Edge's sales decreased for the quarter and year due to delays in customer testing of new products and delays in producing finished product. For the calendar year, sales decreased 42% to $1.1 million in 2017 compared to $1.9 million in 2016 due to declines in legacy product sales and delays in the release of new products. SG&A expenses remained flat at $3.1 million in 2017 compared to $3.1 million in 2016. Net2Edge's operating loss of $2.6 million in 2017 compared to a loss of $2.2 million in 2016, and included a $154,000 impairment loss related to intangible assets during the 2017 second quarter. Mr. Lacey concluded, "Net2Edge is one of our best prospects for high growth. We are now positioned well for growth in 2018 and while it also comes with higher risk, our product offerings respond to business needs few competitors choose to participate in." Financial Condition Form 10-K For further information, please see the Company's Form 10-K, which will be filed on or about April 6, 2018. About Communications Systems Forward-Looking Statements Contacts: Roger H. D. Lacey
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