Clearfield, Inc. 2018 Form 10-K Summary
Business context and reporting period
Clearfield designs, manufactures and distributes fiber protection, fiber management and fiber delivery products for broadband service providers, wireless operators, cable companies, utilities, municipalities, enterprises, data centers and military customers. The company operates as one reportable segment, primarily in North America, with limited international sales.
This Form 10-K covers the fiscal year ended September 30, 2018. It includes fourth-quarter activity but does not provide a complete standalone fourth-quarter income statement.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $77.651 million | $73.948 million | +5% |
| Gross profit | $30.997 million | $30.264 million | +2% |
| Gross margin | 39.9% | 40.9% | -100 bps |
| Income from operations | $5.071 million | $5.312 million | -5% |
| Operating margin | 6.5% | 7.2% | Down |
| Net income | $4.275 million | $3.848 million | +11% |
| Diluted EPS | $0.32 | $0.28 | +14% |
| Cash flow from operations | $4.548 million | $6.298 million | -28% |
Revenue growth was driven principally by $5.913 million of sales from the active cabinet product line acquired from Calix in February 2018. This benefit was partly offset by a $1.383 million decline in an Alternative Carrier customer build and a $691,000 decline in international sales. Commercial data networks and broadband service providers represented 95% of sales; international sales were 7% of sales.
Gross margin declined because the acquired active cabinet products generally carry lower margins and required integration into Clearfield’s manufacturing processes. Selling, general and administrative expense increased 4% to $25.926 million, including higher compensation, depreciation and amortization, and $1.131 million of patent litigation and settlement expense.
At September 30, 2018, cash and cash equivalents were $8.548 million, short-term investments were $8.930 million and long-term investments were $17.974 million, for combined cash and investments of $35.452 million. The company reported no long-term debt. Total assets were $74.229 million and shareholders’ equity was $68.875 million.
Operating cash flow was reduced by a $5.584 million increase in accounts receivable; days sales outstanding increased to 52 days from 36 days. Investing cash use included the $10.350 million Calix acquisition and $1.190 million for capital equipment and patents. Financing cash use included $1.760 million of share repurchases. Approximately $5.409 million remained available under the $12 million repurchase authorization at year-end.
Material changes versus the prior comparable period
- Sales increased 5%, but gross margin declined from 40.9% to 39.9% and operating income declined 5%.
- Net income increased 11%, primarily reflecting lower income taxes following the Tax Cuts and Jobs Act, including a one-time $384,000 deferred-tax revaluation benefit.
- The company acquired Calix’s Telcordia-certified outdoor active cabinet portfolio for $10.350 million in cash. The acquisition added $2.138 million of goodwill and $5.482 million of net finite-lived intangible assets at year-end.
- The acquisition required a commitment to purchase at least $3.5 million of inventory and purchase orders from a subcontractor, expected to be fulfilled during fiscal 2019.
- Cash and cash investments declined from $44.289 million to $35.452 million, primarily reflecting acquisition spending, operating working-capital needs and capital expenditures.
- Backlog increased to $5.637 million from $3.984 million. Orders are generally expected to ship within three months.
- Two customers represented at least 10% of annual sales in each of fiscal 2018, 2017 and 2016. Three customers represented at least 10% of accounts receivable at September 30, 2018.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue, earnings or margin guidance. Management expects existing cash, short-term investments and operating cash flow to fund working-capital and investment requirements beyond the next 12 months. The company intends to prioritize organic growth, potential strategic transactions and share repurchases.
Management identified continued demand for fiber deployment, including FTTP, wireless small-cell, C-RAN and other broadband infrastructure applications. However, results may fluctuate materially because customers generally buy through project-based purchase orders, sales cycles can be lengthy, and deployments may be delayed, reduced or canceled.
- Competition includes substantially larger companies that may have lower procurement costs and greater engineering, financial and manufacturing resources.
- Single- or limited-source suppliers, component costs, manufacturing execution and inventory levels could affect delivery timing, costs and margins.
- Customer concentration and the absence of long-term purchase commitments create revenue and collection risk.
- Changes to U.S. broadband subsidy programs, including the transition from USF to CAF and future Remote Areas Fund actions, could affect customer capital spending.
- The company paid CommScope an $850,000 one-time settlement payment in March 2018 and jointly dismissed related patent litigation. Additional intellectual-property litigation remains a potential risk.
- The company recorded no goodwill or long-lived-asset impairment in fiscal 2018; fiscal 2017 included a $643,604 impairment charge related to a canceled ERP implementation.
- Operating lease commitments totaled $3.014 million at September 30, 2018. Adoption of the new lease standard, expected beginning October 1, 2019, is expected to materially increase reported assets and liabilities.
- The company expects adoption of the new revenue-recognition standard to require expanded disclosures but not materially affect results, cash flows or financial position.
Most important facts for investors to verify
- Whether active cabinet sales and integration can sustain growth without further erosion of gross margin.
- Customer concentration, distributor dependence, backlog conversion and the increase in accounts receivable days.
- Cash generation after acquisition spending, capital expenditures, inventory commitments and share repurchases.
- The durability of demand from Alternative Carriers, Tier 1 customers and international markets.
- Potential effects of broadband subsidy changes, supplier constraints, tariffs and competitive pricing pressure.
- Acquisition performance relative to the unaudited pro forma FY2018 figures of $80.959 million in sales, $5.555 million in operating income and $4.795 million in net income.
- Future amortization of acquired intangible assets, estimated at approximately $471,000 annually through fiscal 2022, and any potential goodwill impairment.