Document And Entity Information
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Document And Entity Information
9 Months Ended
Sep. 30, 2014
Nov. 01, 2014
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2014  
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2014  
Entity Registrant Name COMMUNICATIONS SYSTEMS INC  
Entity Central Index Key 0000022701  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   8,653,382

Consolidated Balance Sheets
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Consolidated Balance Sheets (USD $)
Sep. 30, 2014
Dec. 31, 2013
CURRENT ASSETS:    
Cash and cash equivalents $ 16,330,933 $ 20,059,120
Investments 4,624,757 5,742,314
Trade accounts receivable, less allowance for doubtful accounts of $23,000 and $69,000, respectively 16,624,831 22,902,323
Inventories 31,078,862 29,111,656
Prepaid income taxes 937,366 1,381,502
Other current assets 839,365 716,784
Deferred income taxes 3,293,993 3,758,750
TOTAL CURRENT ASSETS 73,730,107 83,672,449
PROPERTY, PLANT AND EQUIPMENT, net 17,178,956 14,941,492
OTHER ASSETS:    
Investments 11,071,820 3,920,978
Funded pension assets 44,657 305,028
Other assets 551,050 692,794
TOTAL OTHER ASSETS 11,667,527 4,918,800
TOTAL ASSETS 102,576,590 103,532,741
CURRENT LIABILITIES:    
Current portion of long-term debt 515,370 489,706
Accounts payable 6,036,438 4,894,869
Accrued compensation and benefits 3,363,478 3,927,728
Accrued consideration   558,801
Other accrued liabilities 1,650,168 1,765,428
Dividends payable 1,433,115 1,436,318
TOTAL CURRENT LIABILITIES 12,998,569 13,072,850
LONG TERM LIABILITIES:    
Uncertain tax positions 319,067 400,846
Deferred income taxes 882,756 809,179
Long term debt - mortgage payable 238,024 627,823
TOTAL LONG-TERM LIABILITIES 1,439,847 1,837,848
COMMITMENTS AND CONTINGENCIES (Footnote 7)      
STOCKHOLDERS' EQUITY    
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued      
Common stock, par value $.05 per share; 30,000,000 shares authorized; 8,648,481 and 8,553,320 shares issued and outstanding, respectively 432,424 427,666
Additional paid-in capital 38,269,069 37,110,671
Retained earnings 50,121,569 51,323,718
Accumulated other comprehensive loss (684,888) (240,012)
TOTAL STOCKHOLDERS' EQUITY 88,138,174 88,622,043
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 102,576,590 $ 103,532,741

Consolidated Balance Sheets (Parenthetical)
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Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Consolidated Balance Sheets [Abstract]    
Trade accounts receivable, allowance for doubtful accounts $ 23 $ 69
Preferred stock, par value $ 1.00 $ 1.00
Preferred stock, shares authorized 3,000,000 3,000,000
Preferred stock, shares issued 0 0
Common stock, par value $ 0.05 $ 0.05
Common stock, shares authorized 30,000,000 30,000,000
Common stock, shares issued 8,648,481 8,553,320
Common stock, shares outstanding 8,648,481 8,553,320

Consolidated Statements Of Income And Comprehensive Income
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Consolidated Statements Of Income And Comprehensive Income (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Consolidated Statements Of Income And Comprehensive Income [Abstract]        
Sales $ 33,433,924 $ 44,616,873 $ 91,841,307 $ 104,006,206
Costs and expenses:        
Cost of sales 21,421,424 30,993,686 58,747,022 69,078,776
Selling, general and administrative expenses 9,354,599 9,468,972 28,044,957 27,835,588
Impairment loss   5,849,853   5,849,853
Restructuring expense     237,838  
Total costs and expenses 30,776,023 46,312,511 87,029,817 102,764,217
Operating income (loss) 2,657,901 (1,695,638) 4,811,490 1,241,989
Other income and (expenses):        
Investment and other income 62,843 (72) 96,867 122,070
Gain/(loss) on sale of assets 30,331 (33,388) (105,799) (78,065)
Interest and other expense (17,467) (26,644) (58,513) (82,487)
Other income (expense), net 75,707 (60,104) (67,445) (38,482)
Income (loss) from operations before income taxes 2,733,608 (1,755,742) 4,744,045 1,203,507
Income tax expense 1,038,707 280,191 1,752,243 1,358,525
Net income (loss) 1,694,901 (2,035,933) 2,991,802 (155,018)
Other comprehensive (loss) income, net of tax:        
Additional minimum pension liability adjustments (76,971) 179,450 (255,761) (26,624)
Unrealized gain/(loss) on available-for-sale securities (31,999) 12,193 (46,609) (18,353)
Foreign currency translation adjustment (225,050) 197,918 (142,506) (141,754)
Total other comprehensive (loss) income (334,020) 389,561 (444,876) (186,731)
Comprehensive income (loss) $ 1,360,881 $ (1,646,372) $ 2,546,926 $ (341,749)
Basic net income (loss) per share: $ 0.20 $ (0.24) $ 0.35 $ (0.02)
Diluted net income (loss) per share: $ 0.20 $ (0.24) $ 0.35 $ (0.02)
Weighted Average Basic Shares Outstanding 8,641,853 8,547,563 8,609,835 8,524,045
Weighted Average Dilutive Shares Outstanding 8,663,142 8,550,227 8,631,985 8,531,017
Dividends declared per share $ 0.16 $ 0.16 $ 0.48 $ 0.48

Consolidated Statement Of Changes In Stockholders' Equity
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Consolidated Statement Of Changes In Stockholders' Equity (USD $)
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Loss [Member]
Total
BALANCE at Dec. 31, 2013 $ 427,666 $ 37,110,671 $ 51,323,718 $ (240,012) $ 88,622,043
BALANCE, Shares at Dec. 31, 2013 8,553,320        
Net income     2,991,802   2,991,802
Issuance of common stock under Employee Stock Purchase Plan 492 119,330     119,822
Issuance of common stock under Employee Stock Purchase Plan, Shares 9,846        
Issuance of common stock to Employee Stock Ownership Plan 1,626 360,647     362,273
Issuance of common stock to Employee Stock Ownership Plan, Shares 32,520        
Issuance of common stock under Non-Employee Stock Option Plan 600 98,760     99,360
Issuance of common stock under Non-Employee Stock Option Plan, Shares 12,000        
Issuance of common stock under Executive Stock Plan 2,110 0     2,110
Issuance of common stock under Executive Stock Plan, Shares 42,201        
Tax benefit from stock based payments   67,194     67,194
Share-based compensation   518,682     518,682
Purchase of common stock (70) (6,215) (10,390)   (16,675)
Purchase of common stock, Shares (1,406)        
Shareholder dividends     (4,183,561)   (4,183,561)
Other comprehensive loss       (444,876) (444,876)
BALANCE at Sep. 30, 2014 $ 432,424 $ 38,269,069 $ 50,121,569 $ (684,888) $ 88,138,174
BALANCE, Shares at Sep. 30, 2014 8,648,481        

Consolidated Statements Of Cash Flows
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Consolidated Statements Of Cash Flows (USD $)
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income (loss) $ 2,991,802 $ (155,018)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation and amortization 1,756,792 1,627,804
Share based compensation 518,682 7,763
Deferred taxes 538,335 (693,619)
Impairment loss   5,849,853
Change in fair value of acquisition-related contingent consideration   (352,462)
Loss on sale of assets 105,799 78,065
Excess tax benefit from share-based payments (67,194) (13,562)
Changes in assets and liabilities:    
Trade receivables 6,279,960 (22,042,463)
Inventories (1,979,772) 5,187,881
Prepaid income taxes 443,330 2,126,683
Other assets (69,651) 106,675
Accounts payable 1,061,120 (4,243,547)
Accrued compensation and benefits (201,385) 560,605
Other accrued liabilities (106,111) 161,650
Income taxes payable (14,585) (38,272)
Other (86,662)  
Net cash provided by (used in) operating activities 11,170,460 (11,831,964)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Capital expenditures (3,987,901) (1,977,058)
Purchases of investments (11,059,893) (2,824,848)
Proceeds from the sale of fixed assets 48,299 56,394
Proceeds from the sale of investments 4,980,000 9,794,000
Net cash (used in) provided by investing activities (10,019,495) 5,048,488
CASH FLOWS FROM FINANCING ACTIVITIES:    
Cash dividends paid (4,186,764) (2,730,265)
Mortgage principal payments (364,135) (340,161)
Proceeds from issuance of common stock 221,292 247,178
Excess tax benefit from share-based payments 67,194 13,562
Payment of contingent consideration related to acquisition (565,647) (161,060)
Purchase of common stock (16,675)  
Net cash used in financing activities (4,844,735) (2,970,746)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (34,417) (11,612)
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,728,187) (9,765,834)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,059,120 17,869,712
CASH AND CASH EQUIVALENTS AT END OF PERIOD 16,330,933 8,103,878
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:    
Income taxes paid (refunded) 752,787 (85,297)
Interest paid 58,513 79,293
Dividends declared not paid 1,433,115 1,367,724
Capital expenditures in accounts payable $ 83,102  

Summary Of Significant Accounting Policies
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Summary Of Significant Accounting Policies
9 Months Ended
Sep. 30, 2014
Summary Of Significant Accounting Policies [Abstract]  
Summary Of Significant Accounting Policies

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Communications Systems, Inc. (herein collectively called “CSI” or the “Company”) is a Minnesota corporation organized in 1969 that operates primarily as a holding company conducting its business through three business units having operations in the United States, Costa Rica, and the United Kingdom. Through its Suttle business unit, the Company is principally engaged in the manufacture and sale of copper and fiber connectivity systems, enclosure systems, and active technologies for voice, data and video communications. Through its Transition Networks business unit, the Company is engaged in the manufacture of network interface devices, media converters, network interface cards, Ethernet switches and other connectivity products that offer the ability to affordably integrate the benefits of fiber optics into any data network.  Through its JDL Technologies business unit, the Company provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, HIPAA-compliant IT services, and converged infrastructure configuration and deployment.

 

Financial Statement Presentation

 

The condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity as of September 30, 2014 and the related condensed consolidated statements of income and comprehensive income, and the condensed consolidated statements of cash flows for the periods ended September 30, 2014 and 2013 have been prepared by Company management.  In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2014 and 2013 and for the periods then ended have been made.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted.  We recommend these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2013 Annual Report to Shareholders on Form 10-K.  The results of operations for the periods ended September 30, 2014 are not necessarily indicative of operating results for the entire year.

 

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period.  The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements.  Actual results could differ from those estimates.

 

Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, appropriately represent, in all material respects, the current status of accounting policies, and are incorporated herein by reference.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The standard is effective for our reporting year beginning January 1, 2017 and early adoption is not permitted. We are currently evaluating the impact, if any, this new accounting pronouncement will have on our financial statements.

 

Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive income, net of tax, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

 

2014

 

 

2013

Foreign currency translation

 

$

(2,180,000)

 

$

(2,038,000)

Unrealized (loss)/gain on available-for-sale investments

 

 

(45,000)

 

 

2,000 

Pension liability adjustment

 

 

1,540,000 

 

 

1,796,000 

 

 

$

(685,000)

 

$

(240,000)

 


Cash Equivalents And Investments
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Cash Equivalents And Investments
9 Months Ended
Sep. 30, 2014
Cash Equivalents And Investments [Abstract]  
Cash Equivalents And Investments

NOTE 2 – CASH EQUIVALENTS AND INVESTMENTS

 

The following tables show the Company’s cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short and long term investments as of September 30, 2014 and December 31, 2013:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Fair Value

 

Cash Equivalents

 

Short-Term Investments

 

Long-Term Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market funds

$

6,002,989 

 

$

 -

 

$

 -

 

$

6,002,989 

 

$

6,002,989 

 

$

 

 

$

 

Subtotal

 

6,002,989 

 

 

 -

 

 

 -

 

 

6,002,989 

 

 

6,002,989 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

6,208,172 

 

 

1,106 

 

 

(16,419)

 

 

6,192,859 

 

 

 -

 

 

1,923,144 

 

 

4,269,715 

Corporate Notes/Bonds

 

9,517,010 

 

 

11,028 

 

 

(24,320)

 

 

9,503,718 

 

 

 -

 

 

2,701,613 

 

 

6,802,105 

Subtotal

 

15,725,182 

 

 

12,134 

 

 

(40,739)

 

 

15,696,577 

 

 

 -

 

 

4,624,757 

 

 

11,071,820 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

21,728,171 

 

$

12,134 

 

$

(40,739)

 

$

21,699,566 

 

$

6,002,989 

 

$

4,624,757 

 

$

11,071,820 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Fair Value

 

Cash Equivalents

 

Short-Term Investments

 

Long-Term Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market funds

$

5,751,965 

 

$

 -

 

$

 -

 

$

5,751,965 

 

$

5,751,965 

 

$

 

 

$

 

Subtotal

 

5,751,965 

 

 

 -

 

 

 -

 

 

5,751,965 

 

 

5,751,965 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

4,024,031 

 

 

687 

 

 

(4,992)

 

 

4,019,726 

 

 

239,904 

 

 

2,582,502 

 

 

1,197,320 

Corporate Notes/Bonds

 

5,861,162 

 

 

22,830 

 

 

(522)

 

 

5,883,470 

 

 

 -

 

 

3,159,812 

 

 

2,723,658 

Subtotal

 

9,885,193 

 

 

23,517 

 

 

(5,514)

 

 

9,903,196 

 

 

239,904 

 

 

5,742,314 

 

 

3,920,978 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

15,637,158 

 

$

23,517 

 

$

(5,514)

 

$

15,655,161 

 

$

5,991,869 

 

$

5,742,314 

 

$

3,920,978 

 

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects these recoveries to occur prior to the contractual maturities.  All unrealized losses as of September 30, 2014 were in a continuous unrealized loss position for less than twelve months and are not deemed to be other than temporarily impaired as of September 30, 2014.

The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of September 30, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Estimated Market Value

 

 

 

 

 

Due within one year

 

$  

4,617,044 

 

$

4,624,757 

Due after one year through five years

 

 

11,108,138 

 

 

11,071,820 

 

 

15,725,182 

 

$

15,696,577 

 

The Company did not recognize any gross realized gains, and gross realized losses were immaterial, during the nine-month periods ending September 30, 2014 and 2013, respectively. If the Company had realized gains or losses, they would be included within investment and other income in the accompanying consolidated results of operations.


Stock-Based Compensation
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Stock-Based Compensation
9 Months Ended
Sep. 30, 2014
Stock-Based Compensation [Abstract]  
Stock-Based Compensation

NOTE 3 - STOCK-BASED COMPENSATION

 

Employee Stock Purchase Plan

 

Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 90% of the price at the end of each current quarterly plan term.  The most recent term ended September 30, 2014.  The ESPP is considered compensatory under current Internal Revenue Service rules.  At September 30, 2014, after giving effect to the shares issued as of that date, 25,741 shares remain available for purchase under the ESPP.

 

2011 Executive Incentive Compensation Plan

 

On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”).  The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash.  Up to 1,000,000 shares of our common stock may be issued pursuant to awards under the 2011 Incentive Plan. 

 

During 2014, stock options covering 317,722 shares were awarded to key executive employees and directors, which options expire seven years from the date of award and vest 25% each year beginning one year after the date of award.  The Company also granted deferred stock awards of 43,824 shares to key employees during 2014 under the Company’s long-term incentive plan that vest over three years with the first vesting period at March 28, 2015

 

At September 30, 2014, 46,643 shares have been issued under the 2011 Incentive Plan, 692,972 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 260,385 shares are eligible for grant under future awards.

 

 

Stock Option Plan for Directors

 

Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the “Director Plan”).  Under the Director Plan nonqualified stock options to acquire shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings.  Options granted under the Director Plan expire 10 years from date of grant.   

 

No options were granted under the Director Plan in 2013 or 2014.  The Director Plan was amended as of May 19, 2011 to prohibit option grants in 2011 and future years.

 

1992 Stock Plan

 

Under the Company’s 1992 Stock Plan (“the Stock Plan”), shares of common stock may be issued pursuant to stock options, restricted stock or deferred stock grants to officers and key employees.  Exercise prices of stock options under the Stock Plan cannot be less than fair market value of the stock on the date of grant.  Rules and conditions governing awards of stock options, restricted stock and deferred stock are determined by the Compensation Committee of the Board of Directors, subject to certain limitations in the Stock PlanWhen seeking approval of the 2011 Incentive Plan at the 2011 Annual Meeting of Shareholders, the Company committed to amending the Stock Plan to prohibit the issuance of future equity awards if such approval was given. Effective August 11, 2011, the amendment to prohibit future stock options or other equity awards was approved by the Board.

 

At September 30, 2014, after reserving for stock options and deferred stock awards granted in prior years and adjusting for forfeitures and issuances during the year, there were 22,008 shares reserved for issuance under the Stock Plan. The Company has not awarded stock options or deferred stock under this plan in 2013 or 2014.

 

Changes in Stock Options Outstanding

 

The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan, the Director Plan and Stock Plan over the period December 31, 2013 to September 30, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

Weighted average

 

 

 

exercise price

 

remaining

 

Options

 

per share

 

contractual term

Outstanding – December 31, 2013

309,439 

 

$

 

11.66 

 

4.13 

Awarded

317,722 

 

 

 

12.30 

 

 

Exercised

(12,000)

 

 

 

8.28 

 

 

Forfeited

(74,757)

 

 

 

13.05 

 

 

Outstanding – September 30, 2014

540,404 

 

 

 

11.90 

 

5.38 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2014

214,233 

 

$

 

11.91 

 

3.33 

Expected to vest September 30, 2014

540,404 

 

 

 

11.90 

 

5.38 

 

The aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at September 30, 2014 was $133,000.  The intrinsic value of all options exercised during the nine months ended September 30, 2014 was $40,000. Net cash proceeds from the exercise of all stock options were $99,000 and $110,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

Changes in Deferred Stock Outstanding

 

The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period December 31, 2013 to September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

Outstanding – December 31, 2013

 

 

200,140 

 

$

11.47 

Granted

 

 

48,824 

 

 

12.52 

Vested

 

 

(15,254)

 

 

14.10 

Forfeited

 

 

(9,353)

 

 

10.91 

Outstanding – September 30, 2014

 

 

224,357 

 

 

11.55 

 

Changes in Restricted Stock Units Outstanding

 

The following table summarizes the changes in the number of restricted stock units under the 2011 Incentive Plan over the period December 31, 2013 to September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

Outstanding – December 31, 2013

 

 

53,193 

 

$

10.44 

Granted

 

 

13,973 

 

 

11.98 

Vested

 

 

26,947 

 

 

10.85 

Forfeited

 

 

 -

 

 

 -

Outstanding – September 30, 2014

 

 

94,113 

 

 

10.70 

 

Compensation Expense

 

Share-based compensation expense recognized for the nine-month period ended September 30, 2014 was $519,000 before income taxes and $337,000 after income taxes. Share-based compensation expense recognized for the nine-month period ended September 30,  2013 was $8,000 before income taxes and $5,000 after income taxes.  Unrecognized compensation expense for the Company’s plans was $1,093,000 at September 30, 2014 and is expected to be recognized over a weighted-average period of 2.4 years.  Excess tax benefits from the exercise of stock options and issuance of stock included in financing cash flows for the nine month periods ended September 30, 2014 and 2013 were $67,000 and $14,000, respectively. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.


Inventories
v0.0.0.0
Inventories
9 Months Ended
Sep. 30, 2014
Inventories [Abstract]  
Inventories

NOTE 4 - INVENTORIES

 

Inventories summarized below are priced at the lower of first-in, first-out cost or market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

December 31

 

 

2014

 

2013

Finished goods

 

$         

18,620,400 

 

$

18,733,636 

Raw and processed materials

 

 

12,458,462 

 

 

10,378,020 

 

 

$

31,078,862 

 

$

29,111,656 

 


Goodwill And Intangible Assets
v0.0.0.0
Goodwill And Intangible Assets
9 Months Ended
Sep. 30, 2014
Goodwill And Intangible Assets [Abstract]  
Goodwill And Intangible Assets

NOTE 5 –GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is required to be evaluated for impairment on an annual basis and between annual tests upon the occurrence of certain events or circumstances. A two-step process is performed to analyze whether or not goodwill has been impaired. Step one is to test for potential impairment, and requires that the fair value of the reporting unit be compared to its book value including goodwill. If the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, a second step must be performed. The second step is to measure the amount of impairment loss, if any, and requires that a hypothetical purchase price allocation be done to determine the implied fair value of goodwill. This fair value is then compared to the carrying value of goodwill. If the implied fair value is lower than the carrying value, an impairment adjustment must be recorded.

During the quarter ended September 30, 2013, due to the loss of key personnel and the continued decline in year-over-year revenues due primarily to continued slowdown in domestic government spending as well as a decline in sales of its legacy products, management concluded that these events and circumstances were indicators to require us to perform an interim goodwill impairment analysis of our Transition Networks reporting unit. This analysis included the determination of the reporting unit’s fair value primarily using discounted cash flows modeling. Based on the step one and step two analysis, considering Transition Networks’ reduced earnings and cash flow forecasts, the Company determined that Transition Networks’ goodwill was fully impaired and recorded a goodwill impairment for this segment of $5,850,000.

 

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

Gross Carrying Amount

Accumulated Amortization

Foreign Currency Translation

Net

 

 

 

 

 

 

Trademarks

 

81,785 
(36,707)
(591)
44,487 

Customer relationships

 

490,707 
(154,302)
(3,543)
332,862 

Technology

 

228,996 
(143,891)
(1,653)
83,452 

 

 

801,488 
(334,900)
(5,787)
460,801 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

Gross Carrying Amount

Accumulated Amortization

Foreign Currency Translation

Net

 

 

 

 

 

 

Trademarks

 

81,785 
(17,262)
(10,545)
53,978 

Customer relationships

 

490,707 
(72,500)
(43,105)
375,102 

Technology

 

228,996 
(67,667)
(42,066)
119,263 

 

 

801,488 
(157,429)
(95,716)
548,343 

 

Amortization expense on these identifiable intangible assets was $81,000 and $76,000 in 2014 and 2013, respectively. The amortization expense is included in selling, general and administrative expenses. At September 30, 2014, the estimated future amortization expense for definite-lived intangible assets for the remainder of 2014 and all of the following four fiscal years is as follows:

 

 

 

 

 

 

 

 

 

Year Ending December 31:

 

 

 

2014

 

$  

27,000 

2015

 

 

109,000 

2016

 

 

89,000 

2017

 

 

62,000 

2018

 

 

57,000 

 


Warranty
v0.0.0.0
Warranty
9 Months Ended
Sep. 30, 2014
Warranty [Abstract]  
Warranty

 

NOTE 6 – WARRANTY

 

We provide reserves for the estimated cost of product warranties at the time revenue is recognized.  We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures.  Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy.  The actual warranty expense could differ from the estimates made by the Company based on product performance.

 

The following table presents the changes in the Company’s warranty liability for the nine-month periods ended September 30, 2014 and 2013, respectively, the majority of which relates to a five-year obligation to provide for potential future liabilities for network equipment sales.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

2013

Beginning balance

 

$

564,000 

 

$

590,000 

Amounts charged to expense

 

 

9,000 

 

 

185,000 

Actual warranty costs paid

 

 

(97,000)

 

 

(191,000)

Ending balance

 

$

476,000 

 

$

584,000 

 


Contingencies
v0.0.0.0
Contingencies
9 Months Ended
Sep. 30, 2014
Contingencies [Abstract]  
Contingencies

NOTE 7 – CONTINGENCIES

 

In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims. Company management is not aware of any outstanding or pending legal actions or claims that could materially affect the Company’s financial position or results of operations.


Income Taxes
v0.0.0.0
Income Taxes
9 Months Ended
Sep. 30, 2014
Income Taxes [Abstract]  
Income Taxes

NOTE 8 – INCOME TAXES

 

In the preparation of the Company’s consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be recovered from future taxable income.

  

At September 30, 2014 there was $239,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized.  The Company records interest and penalties related to income taxes as income tax expense in the Condensed Consolidated Statements of Income.

 

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years 2011-2013 remain open to examination by the Internal Revenue Service and the years 2010-2013 remain open to examination by various state tax departments. During the second quarter, the IRS completed an examination of our 2011 federal income tax return.  There were no material changes to the return as filed. The tax years from 2011-2013 remain open in Costa Rica.

 

The Company’s effective income tax rate was 36.9% for the first nine months of 2014. The effective tax rate differs from the federal tax rate of 35%  due to state income taxes, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges for uncertain income tax positions, and settlement of uncertain tax positions.  The foreign operating losses may ultimately be deductible in the countries in which they have occurred; however the Company has not recorded a deferred tax asset for these losses due to uncertainty regarding the eventual realization of the benefit.  The effect of the foreign operations was an overall rate increase of approximately 2.7% for the nine months ended September 30, 2014.  There were no additional uncertain tax positions identified in the first nine months of 2014.  The Company's effective income tax rate for the nine months ended September 30,  2013 was 112.9%, and differed from the federal tax rate due to state income taxes, return to provision adjustments, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges for uncertain income tax positions, the effect of operations conducted in lower foreign tax rate jurisdictions, the release of contingent consideration from the Company’s 2011 acquisition and goodwill impairment not deductible for income tax purposes.


Segment Information
v0.0.0.0
Segment Information
9 Months Ended
Sep. 30, 2014
Segment Information [Abstract]  
Segment Information

NOTE 9 – SEGMENT INFORMATION

 

Effective January 1, 2014, the Company realigned the financial reporting for its business units.  As a result of this realignment, all corporate general and administrative expenses that were previously categorized as “Other” are now included within the three business units as fully allocated costs. The Company classifies its businesses into three segments as follows:

 

·

Suttle manufactures and markets copper and fiber connectivity systems, enclosure systems, xDSL filters and splitters, and active technologies for voice, data and video communications;

·

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

·

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

 

Management has chosen to organize the enterprise and disclose reportable segments based on our products and services. There are no material inter-segment revenues. In order to conform to the 2014 presentation, the Company has reclassified the previously non-allocated corporate expenses within the business segments.

 

Information concerning the Company’s continuing operations in the various segments for the three and nine-month periods ended September 30, 2014 and 2013 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition

 

JDL

 

 

 

 

 

 

Suttle

 

Networks

 

Technologies

 

Other

 

Total

Three Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

Sales

$

19,938,286 

$

11,271,838 

$

2,223,800 

$

 -

$

33,433,924 

Cost of sales

 

13,470,968 

 

6,282,820 

 

1,667,636 

 

 -

 

21,421,424 

Gross profit

 

6,467,318 

 

4,989,018 

 

556,164 

 

 -

 

12,012,500 

Selling, general and

 

 

 

 

 

 

 

 

 

 

 administrative expenses

 

3,643,668