Clearfield, Inc. — Form 10-Q Summary
Business context and reporting period
Clearfield designs, manufactures and distributes fiber-optic management, protection and delivery products for broadband service providers, and provides build-to-print cable assembly services. The filing covers the three and six months ended March 31, 2020, Clearfield’s fiscal second quarter and first half of fiscal 2020. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $20.4 million | $19.1 million | $39.8 million | $39.2 million |
| Gross profit | $8.2 million | $7.0 million | $15.9 million | $15.0 million |
| Gross margin | 39.9% | 36.8% | 39.9% | 38.2% |
| Income from operations | $0.7 million | $0.3 million | $1.1 million | $1.5 million |
| Net income | $0.7 million | $0.4 million | $1.2 million | $1.4 million |
| Diluted EPS | $0.05 | $0.02 | $0.09 | $0.10 |
- Second-quarter sales increased approximately 7%, driven primarily by higher Tier 1 and MSO sales. Broadband service providers represented 96% of quarterly sales; build-to-print customers represented 4%.
- Six-month sales increased approximately 2%, while operating income declined 24% because selling, general and administrative expense grew faster than gross profit.
- SG&A increased 10% in the quarter and 9% year to date, primarily due to additional personnel, product certification testing and sales commissions. These increases were partly offset by lower stock-based compensation and the absence of the prior-year customer bankruptcy-related bad debt expense.
- Interest income was $218,000 in the quarter and $441,000 year to date. Management expects interest income to decline because of lower prevailing interest rates.
- Net cash provided by operating activities was $2.3 million for the six months ended March 31, 2020, compared with $8.5 million in the prior-year period. Inventory increased $2.7 million to support backlog and additional COVID-19-related safety stock.
- Investing activities used $3.5 million of cash, including $19.1 million of investment purchases, $16.7 million of investment maturities and $1.2 million of capital and intangible asset purchases.
- At March 31, 2020, cash and cash equivalents were $8.6 million, short-term investments were $14.7 million and long-term investments were $25.1 million. Cash, cash equivalents and short-term investments totaled $23.3 million.
- The company reported no long-term debt. Lease liabilities totaled $3.2 million, including current and long-term portions, following adoption of the new lease accounting standard.
- Total assets were $87.2 million and shareholders’ equity was $76.2 million at March 31, 2020.
Material changes versus the prior comparable period
- Quarterly revenue rose $1.3 million, or approximately 7%, to $20.4 million. Tier 1 and MSO sales increased $1.5 million and $1.1 million, respectively, while international sales declined $1.0 million and build-to-print sales declined $0.5 million.
- Quarterly gross profit increased 16% to $8.2 million, and gross margin expanded 310 basis points to 39.9%. Management attributed the improvement to higher volume, improved manufacturing costs, supply-chain initiatives and lower tariffs.
- Quarterly operating income increased approximately 142% to $0.7 million, while first-half operating income declined $0.3 million to $1.1 million.
- First-half gross margin improved 170 basis points to 39.9%; tariff costs declined to $161,000 from $559,000.
- First-half net income declined 9% to $1.2 million, and diluted EPS declined to $0.09 from $0.10.
- Cash from operations declined substantially because the prior-year period benefited from larger reductions in accounts receivable and inventory, while the current period included increased inventory investment.
- Clearfield adopted ASC 842 lease accounting on October 1, 2019, recognizing an approximately $2.4 million right-of-use asset and approximately $2.6 million lease liability. The adoption did not materially affect cash flows or operating results.
Guidance, outlook, risks and unusual items
- Management provided no formal quantitative revenue or earnings guidance in the filing.
- Clearfield’s U.S. operations were classified as critical-sector work, and both its Minnesota and Tijuana facilities remained operational at the filing date. Corporate employees in Minnesota transitioned to remote work, while production personnel operated under enhanced health and safety measures.
- COVID-19 created significant uncertainty regarding manufacturing continuity, supply-chain availability, border restrictions, transportation costs, customer ordering patterns and the ability to fulfill backlog. Management stated that March orders increased as customers continued 5G and other communications-network projects, but visibility into the duration of this trend was limited.
- Potential disruptions in Mexico, at the U.S.-Mexico border or across the supply chain could cause delayed deliveries, reduced revenue, higher manufacturing costs and lower profitability. Restricted access to customers could also pressure future sales.
- Management believes available cash, investments and operating cash flow will fund working capital and investment needs for more than 12 months, but expects COVID-19 could negatively affect future cash flow and increase operating costs.
- The board suspended the share repurchase program because of COVID-19-related uncertainty and the desire to preserve capital flexibility. The company repurchased 41,796 shares for $429,000 during the six months; approximately $5.0 million remained authorized at March 31, 2020.
- On April 11, 2020, after the reporting period, Clearfield received a $3.7 million Paycheck Protection Program loan and repaid it in full on April 30, 2020 following uncertainty regarding government guidance.
- One customer represented 21% of quarterly sales. Three customers represented 32% of accounts receivable at March 31, 2020. Customer purchases are generally made through periodic purchase orders without future purchase commitments.
- The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors other than COVID-19, and effective disclosure controls as of March 31, 2020.
Important facts for investors to verify
- Whether COVID-19, border restrictions or supply-chain disruption affected subsequent-quarter production, deliveries, backlog conversion and gross margin.
- The sustainability of increased Tier 1 and MSO demand and the extent to which international and build-to-print weakness continues.
- Whether higher inventory levels convert to revenue or create excess or obsolete inventory risk.
- The effect of lower interest rates on investment income and total liquidity returns.
- The status of the suspended share repurchase authorization and management’s capital allocation priorities.
- The accounting and cash-flow effects, if any, of the PPP loan receipt and full repayment after quarter-end.
- Customer concentration, distributor exposure and the absence of binding customer purchase commitments.