Clearfield, Inc. Fiscal 2013 Form 10-K Summary
Business Context and Reporting Period
Clearfield manufactures fiber management, connectivity, optical component, enclosure, cable assembly and fiber-delivery products for broadband service providers, including FTTP, business, cell-site, cable and municipal networks. The company sells directly, through distributors and to OEMs for private-label products. It operates as one reportable segment and had 179 full-time employees at September 30, 2013.
This annual report covers the fiscal year ended September 30, 2013. The filing also provides unaudited quarterly results, including the fourth quarter ended September 30, 2013.
Financial Performance and Key Metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $53.353 million | $37.474 million | Up 42% |
| Gross profit | $21.990 million | $15.286 million | Up 44% |
| Gross margin | 41.2% | 40.8% | Up 0.4 percentage points |
| Income from operations | $7.445 million | $4.275 million | Up 74% |
| Net income | $4.734 million | $7.701 million | Down 39% |
| Diluted EPS | $0.36 | $0.60 | Down $0.24 |
| Cash flow from operations | $4.339 million | $3.826 million | Up $0.513 million |
FY2013 sales growth reflected increased purchases from existing customers, new telecommunications accounts, cable providers, non-traditional providers and international customers, principally in Canada and the Caribbean/Central America. Broadband and commercial data-network sales represented 90% of revenue, or $48.048 million, compared with 87% in FY2012. Build-to-print OEM sales represented 10%, or $5.305 million.
Fourth-quarter FY2013 net sales were $19.039 million, gross profit was $8.221 million, operating income was $3.813 million and net income was $2.496 million, or $0.19 diluted EPS. Fourth-quarter sales increased from $10.403 million in the comparable FY2012 quarter. Fourth-quarter FY2012 net income included a $3.518 million non-cash deferred-tax valuation-allowance release.
Operating expenses increased 32% to $14.545 million, primarily due to higher commissions and performance compensation tied to sales growth, increased equity compensation and higher product-development costs. Interest income declined slightly to $92,000 from $102,000.
Liquidity, Capital Resources and Balance Sheet
- Cash, cash equivalents and short-term investments totaled $15.800 million at September 30, 2013, compared with $14.785 million at September 30, 2012.
- Including long-term investments, total cash and investments were $22.570 million, compared with $19.357 million in the prior year.
- The company had no long-term debt at either year-end.
- Cash flow from operations was $4.339 million. Accounts receivable increased $4.815 million and inventory increased $2.655 million, reflecting higher sales and stocking levels.
- Investing activities used $114,000, including $1.018 million of property and equipment purchases and $18,853 of patent additions, partially offset by net investment sales.
- Financing activities used $95,000, primarily because $298,000 was used for employee tax withholding related to equity awards.
- Management stated that available cash, investments and operating cash flow should meet working-capital and investment requirements beyond the next 12 months. No material FY2014 capital-expenditure commitments were reported.
Total assets increased to $46.413 million from $37.740 million. Shareholders’ equity increased to $40.078 million from $34.686 million. Current liabilities increased to $6.314 million from $3.017 million, primarily due to higher accounts payable and accrued compensation.
Material Changes, Outlook and Unusual Items
- Revenue growth accelerated materially, supported by broader customer penetration and expanded product offerings, including Clearview Blue and FieldShield.
- Backlog increased to $8.638 million at September 30, 2013 from $2.647 million one year earlier. Orders are generally shipped within three months.
- Net income declined despite higher operating income because FY2012 benefited from a $3.518 million non-cash release of deferred-tax valuation allowance. FY2013 included $2.803 million of income-tax expense.
- The company retained approximately $14.3 million of federal and $19.9 million of state NOL carryforwards. The remaining valuation allowance was approximately $975,000, primarily related to state NOLs not expected to be utilized.
- Goodwill and other long-lived assets passed the company’s impairment assessments; no impairment charges were recorded in FY2013 or FY2012.
- Management expects seasonal weakness in the first and second fiscal quarters and stronger sales in the third and fourth quarters.
- The company intends to use available resources for organic growth and potentially strategic transactions, but future acquisitions or expansion could require additional equity or debt financing.
Principal Risks and Contingencies
- Customer concentration is significant: Customers A and B represented approximately 23% and 19% of FY2013 sales, respectively, and Customer A represented approximately 57% of year-end accounts receivable.
- Demand may be affected by the transition from the Universal Service Fund to the Connect America Fund, customer project timing, telecommunications spending, customer consolidation and the completion of broadband stimulus projects.
- The company faces larger competitors with greater financial, purchasing, engineering and marketing resources, creating potential pricing and margin pressure.
- Some critical components and outsourced labor are sourced from single or limited suppliers, creating risks of shortages, delays, higher costs and quality issues.
- Results may fluctuate substantially because of project-based demand, long sales cycles, customer budgets, product mix, manufacturing capacity and inventory requirements.
- Additional inventory write-downs, deferred-tax valuation changes or impairment charges could materially affect future results.
- International expansion exposes the company to currency, trade, regulatory, tax, political and collection risks.
- The company reported no pending legal proceedings expected to have a material adverse effect. Its amended Plymouth facility lease expires February 28, 2015, with remaining minimum payments of $472,654 as of September 30, 2013.
Important Facts for Investors to Verify
- Whether the unusually high FY2013 and fourth-quarter growth, backlog and customer demand are sustained after the completion of stimulus-related projects and seasonal peaks.
- The collectability and concentration of accounts receivable, particularly the balance attributable to Customer A.
- Inventory turnover and potential obsolescence following the 89% increase in inventory to $5.627 million.
- The future realization of federal and state NOL carryforwards and the potential impact of changes to the remaining valuation allowance.
- Exposure to single-source suppliers, competitive pricing pressure and product-development requirements.
- Future funding needs if the company pursues acquisitions or faster expansion; no long-term debt was outstanding at year-end.
- Potential dilution from outstanding options and other equity awards, including 863,519 outstanding options at September 30, 2013.