Clearfield, Inc. Form 10-Q Summary
Business Context and Reporting Period
Clearfield designs, manufactures and distributes fiber-optic management, protection and delivery products for communications networks, and provides contract manufacturing services for OEM customers. The filing covers the fiscal second quarter and six months ended March 31, 2017. Comparative periods are the three and six months ended March 31, 2016.
Financial Results and Key Metrics
| Metric | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | Six Months Ended March 31, 2017 | Six Months Ended March 31, 2016 |
|---|---|---|---|---|
| Net sales | $17.652 million | $16.947 million | $35.918 million | $32.637 million |
| Gross profit | $7.443 million | $7.280 million | $14.652 million | $13.957 million |
| Gross margin | 42.2% | 43.0% | 40.8% | 42.8% |
| Income from operations | $1.281 million | $2.143 million | $2.472 million | $4.123 million |
| Net income | $0.908 million | $1.493 million | $1.784 million | $2.980 million |
| Diluted EPS | $0.07 | $0.11 | $0.13 | $0.22 |
For the six months, operating margin was approximately 6.9% and net margin was approximately 5.0%; the filing does not separately present these margins. Income tax expense was $433,000 for the quarter and $800,000 year to date, reflecting effective tax rates of 32.3% and 31.0%, respectively.
At March 31, 2017, cash and cash equivalents were $22.483 million, short-term investments were $5.813 million and long-term investments were $15.015 million. Cash, cash equivalents and short-term investments totaled $28.296 million, compared with $33.541 million at September 30, 2016. The company had no long-term debt. Total liabilities were $5.705 million and shareholders’ equity was $65.701 million.
Net cash used in operating activities was $12,000 for the six months ended March 31, 2017, compared with $3.030 million provided in the prior-year period. Investing activities used $5.658 million, including $1.065 million for property, equipment and intangible assets and net purchases of investments. Financing activities provided $138,000. Cash declined by $5.531 million to $22.483 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 4%, or $705,000. Six-month sales increased 10%, or $3.281 million.
- Sales to broadband service providers and commercial data networks increased to $16.623 million in the quarter and $33.651 million year to date. International sales increased to $1.787 million in the quarter and $3.373 million year to date.
- OEM and build-to-print sales declined to $1.029 million in the quarter and $2.267 million year to date.
- Sales benefited from higher deployments by Traditional Carrier and Tier 1 customers and increased international demand, but were reduced by lower ongoing builds for an Alternative Carrier customer.
- Gross margin declined 80 basis points in the quarter and 200 basis points year to date. Management attributed the decline to a greater mix of lower-margin Tier 1 sales and a lower proportion of higher-margin products incorporating optical components.
- Selling, general and administrative expense increased 20% in the quarter and 24% year to date, driven primarily by compensation, sales and marketing personnel, stock-based compensation, product development and legal expenses.
- Operating income declined approximately 40% in both the quarter and year-to-date periods, while net income declined 39% in the quarter and 40% year to date.
- Inventory increased to $9.971 million from $8.373 million at September 30, 2016. Days sales outstanding increased to 41 days from 35 days at September 30, 2016.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific financial guidance. Management expects existing cash, investments and operating cash flow to fund working capital and investment requirements for more than the next 12 months. Available cash is intended for organic growth, potential strategic transactions and share repurchases.
Management noted that customer orders are based on purchase orders submitted periodically, limiting predictability of future orders. Customer concentration is significant: three customers represented at least 10% of quarterly sales, and two customers represented 22% and 12% of accounts receivable at March 31, 2017. International sales represented 10% of quarterly sales and 9% of year-to-date sales.
CommScope filed a lawsuit on January 31, 2017 alleging infringement of 13 patents by certain Clearfield products. CommScope seeks injunctive relief and unspecified compensatory and enhanced damages, interest, costs and attorneys’ fees. Clearfield denied the allegations and asserted defenses. The company states that an adverse judgment, injunction or settlement could materially affect operations and financial condition, in addition to defense costs and management distraction.
On April 25, 2017, after the reporting date, the board increased the common-stock repurchase authorization from $8.0 million to $12.0 million. Approximately $6.768 million remained available at March 31, 2017 under the prior authorization. The filing reports no material changes to previously disclosed risk factors, no goodwill impairment indicators and effective disclosure controls.
Investor Verification Checklist
- Verify whether revenue growth from Tier 1, Traditional Carrier and international customers offsets the decline in Alternative Carrier activity and the lower-margin sales mix.
- Monitor gross-margin recovery and the effect of product and customer mix.
- Assess whether higher SG&A spending, stock compensation and legal costs continue to pressure operating margins.
- Review operating cash conversion, inventory growth, receivable collection trends and working-capital requirements.
- Track the CommScope patent litigation, including potential injunctions, damages, settlement costs or product effects.
- Evaluate customer concentration and the timing and variability of purchase orders.
- Confirm the impact of the expanded share-repurchase authorization on cash balances and share count.