Clearfield, Inc. Fiscal 2017 Form 10-K Summary
Business context and reporting period
Clearfield manufactures and sells fiber management, connectivity, optical component, enclosure, cable assembly and fiber-delivery products serving broadband, telecommunications, wireless, cable, utility, enterprise, data center and military markets. The company operates as one reportable segment, with manufacturing in Minnesota and Mexico and sales primarily in the United States.
This Form 10-K covers the fiscal year ended September 30, 2017. Fiscal fourth-quarter results are presented for the quarter ended September 30, 2017 and compared with the quarter ended September 30, 2016.
Key financial metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $73.95 million | $75.29 million | Down 2% |
| Gross profit | $30.26 million | $32.87 million | Down 8% |
| Gross margin | 40.9% | 43.7% | Down 280 basis points |
| Income from operations | $5.31 million | $10.73 million | Down 50% |
| Operating margin | Approximately 7.2% | Approximately 14.3% | Down approximately 710 basis points |
| Net income | $3.85 million | $8.01 million | Down 52% |
| Diluted earnings per share | $0.28 | $0.59 | Down $0.31 |
| Cash flow from operations | $6.30 million | $11.55 million | Down 45% |
- Fiscal 2017 net sales consisted of approximately 95% from commercial data networks and broadband service providers and 5% from build-to-print/OEM manufacturing.
- International sales increased to $6.05 million, or 8% of sales, from $4.02 million, or 5%, in fiscal 2016.
- Cash and cash equivalents were $18.54 million, short-term investments were $5.94 million and long-term investments were $19.82 million at September 30, 2017. Total cash and investments were approximately $44.29 million.
- The company had no long-term debt. Total liabilities were $4.97 million and shareholders’ equity was $64.53 million.
- Capital expenditures and patent additions totaled approximately $2.02 million. Investing activities used $11.54 million, principally because of purchases of certificates of deposit.
- Fiscal 2017 financing activities used $4.24 million, including $3.65 million for share repurchases and $953,000 for employee tax withholding.
- Backlog was $3.98 million at September 30, 2017, compared with $4.57 million at September 30, 2016.
Material changes versus comparable periods
- Sales declined by $1.34 million, primarily because ongoing builds for an Alternative Carrier customer decreased by $4.73 million. This was partly offset by $2.02 million of higher international sales and $1.37 million of increased sales to other broadband, Tier 1, commercial data network and OEM customers.
- Gross margin declined because Tier 1 customers represented a greater share of sales and optical-component integration, which generally carries higher margins, represented a lower share of sales.
- SG&A increased 13% to $24.95 million. Drivers included higher compensation and sales and marketing costs, increased product development costs, $928,000 of additional legal expense, $831,000 of higher stock compensation expense and a $644,000 impairment charge related to a cancelled ERP software implementation.
- Cash from operations declined due partly to lower earnings and a $3.06 million decrease in accounts payable and accrued expenses, primarily reflecting lower performance compensation accruals.
- The company’s federal net operating loss carryforwards were fully utilized in fiscal 2016. Cash taxes paid increased to $1.47 million in fiscal 2017 from $1.13 million in fiscal 2016, and management expects the loss of the federal NOL benefit to increase cash tax requirements.
- During the fourth quarter of fiscal 2017, net sales were $18.42 million, gross profit was $7.68 million, operating income was $1.52 million and net income was $1.26 million. Compared with the fourth quarter of fiscal 2016, sales declined from $21.05 million, operating income from $3.15 million and net income from $2.67 million.
Outlook, commentary, risks and unusual items
Management states that existing cash, short-term investments and operating cash flow should be sufficient to meet working-capital and investment requirements beyond the next 12 months. Planned uses of cash include organic growth, potential strategic transactions, information technology and manufacturing investments, and the share repurchase program. No formal revenue or earnings guidance is provided in the filing.
- Customer demand is project-based and received largely through purchase orders without future purchase commitments. Two distributors represented approximately 20% and 15% of fiscal 2017 sales; one represented 19% of accounts receivable.
- Sales are seasonal, typically weaker in the first and second fiscal quarters and stronger in the third and fourth quarters.
- Competition includes substantially larger companies that may have lower procurement costs and greater engineering, manufacturing and financial resources.
- Critical components and outsourced labor are obtained from some single- or limited-source suppliers, creating supply, cost, quality and delivery risks.
- CommScope Technologies filed a patent-infringement lawsuit on January 31, 2017 involving thirteen patents and several Clearfield products. CommScope seeks injunctive relief and unspecified damages. Clearfield denies infringement and has challenged the validity of two patents through inter partes review proceedings. Trial was scheduled for approximately August 1, 2019. The ultimate outcome and potential financial exposure are uncertain.
- The company cancelled an ERP software implementation and recorded a $643,604 impairment charge. Management continues to expect investments in computer hardware and software, while identifying implementation and system-transition risks.
- The company reversed approximately $163,000 of its state NOL valuation allowance in fiscal 2017. A remaining valuation allowance of $159,000 relates to state NOLs not expected to be utilized.
- The board increased the share repurchase authorization to $12 million. Approximately $7.17 million remained available at September 30, 2017.
- Future accounting changes include revenue recognition, lease accounting and goodwill impairment standards; the filing states that the company was evaluating their effects, except that no material impact was expected from the inventory standard.
Investor verification checklist
- Verify whether revenue growth from Traditional Carrier, Tier 1, international and other customers can offset the decline in Alternative Carrier activity.
- Monitor gross-margin recovery, particularly customer mix and the proportion of higher-margin optical-component products.
- Assess the effect of fully utilized federal NOLs on future cash taxes and free cash flow.
- Review cash conversion, working-capital movements and the allocation of approximately $44.29 million in cash and investments.
- Track the CommScope patent litigation, including potential injunctions, damages, settlement costs and product-related consequences.
- Evaluate customer concentration, distributor receivable exposure and the absence of binding purchase commitments.
- Assess execution and spending related to ERP and other information-technology initiatives.
- Review the sustainability of share repurchases relative to operating cash flow and planned capital expenditures.