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, with additional Build-to-Print contract manufacturing services. The filing covers the unaudited three months ended December 31, 2019, Clearfield’s first quarter of fiscal 2020, compared with the three months ended December 31, 2018.
- Broadband Service Providers represented 94% of sales; Build-to-Print customers represented 6%.
- International sales were $1.1 million, or 6% of total sales, versus $1.6 million, or 8%, in the prior-year quarter.
- Three customers accounted for 41% of quarterly sales, compared with 32% in the prior-year period. Customer purchases are made through purchase orders without minimum purchase commitments.
Financial Performance and Liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $19.4 million | $20.1 million | Down 4% |
| Gross profit | $7.7 million | $7.9 million | Down 3% |
| Gross margin | 39.9% | 39.6% | Up 0.3 percentage points |
| Income from operations | $0.4 million | $1.2 million | Down approximately 66% |
| Operating margin | Approximately 2.1% | Approximately 5.8% | Down approximately 3.7 points |
| Net income | $0.5 million | $1.0 million | Down 50% |
| Diluted EPS | $0.04 | $0.08 | Down $0.04 |
| Net cash from operating activities | $(0.1) million | $6.8 million | Down $6.9 million |
- SG&A increased 8% to $7.3 million, primarily due to higher compensation costs and external sales commissions and agent fees. The increase was partly offset by lower stock-based compensation expense.
- Interest income increased to $223,000 from $135,000 because of higher investment balances and rates.
- The effective tax rate decreased to 19.7% from 22.7%, primarily due to increased research and development credits and other permanent differences.
- Cash and cash equivalents were $10.6 million at December 31, 2019. Short-term investments were $14.5 million and long-term investments were $21.7 million, for total cash and investments of approximately $46.8 million.
- The company reported no long-term debt. Adoption of the new lease standard resulted in a $2.2 million right-of-use asset and $2.5 million of lease liabilities at quarter-end.
- Net cash used in operations reflected increased inventory of $1.6 million and reduced accounts payable and accrued expenses of $1.8 million, partly offset by a $2.1 million reduction in accounts receivable.
- Investing activities provided $0.4 million, including $4.4 million of investment maturities, offset by $3.2 million of investment purchases and $0.8 million of property, equipment and intangible-asset purchases.
Material Changes Versus the Prior Comparable Period
- Sales declined $711,000, primarily because of lower Community Broadband and international sales, including reduced demand for the active cabinet product line. Higher Tier 1 and MSO sales partly offset the decline.
- Gross margin improved modestly because of product mix, but lower volume reduced gross profit.
- Operating profit declined substantially as SG&A rose faster than gross profit.
- Net income and diluted EPS each declined by approximately one-half.
- Operating cash flow shifted from $6.8 million of cash provided to $0.1 million of cash used, mainly because of working-capital changes and timing of payments.
- Inventory increased to $10.6 million from $9.0 million at September 30, 2019, while net accounts receivable decreased to $7.0 million from $9.1 million.
- Clearfield adopted ASC 842, the new lease accounting standard, effective October 1, 2019. Management stated that adoption did not materially affect cash flows or results of operations.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific revenue, earnings or margin guidance. Management stated that existing cash, investments and expected operating cash flow should be sufficient to meet working-capital and investment requirements beyond the next 12 months. Available cash is intended for organic growth, potential strategic transactions and execution of the board-authorized share repurchase program.
- Future order levels are difficult to predict because revenue is generated primarily through purchase orders submitted from time to time, without contractual purchase commitments from major customers.
- Customer concentration increased: three distributors represented 41% of quarterly sales, and two customers represented 25% of accounts receivable at December 31, 2019.
- Results are subject to customer purchasing patterns, seasonality, product mix, inventory levels and execution of the company’s growth initiatives.
- Management identified revenue recognition, stock-based compensation, inventory valuation, long-lived assets, finite-lived intangibles and goodwill as critical accounting areas requiring judgment.
- No goodwill or intangible-asset impairment triggers were identified during the quarter.
- The company reported no material pending legal proceedings and no material changes to the risk factors disclosed in its fiscal 2019 Form 10-K.
- Stock-based compensation expense was $241,000 in the quarter, and $2.7 million of unrecognized compensation expense remained at December 31, 2019.
Important Facts for Investors to Verify
- Whether the decline in Community Broadband and international sales, particularly active cabinet demand, persists in subsequent quarters.
- Whether higher SG&A investments generate sufficient revenue growth to restore operating leverage.
- Inventory growth, working-capital conversion and the sustainability of operating cash flow.
- Revenue concentration among distributors and the absence of long-term purchase commitments.
- Utilization of the company’s substantial cash and investment balances, including any share repurchases or strategic transactions.
- The effect of lease liabilities and the company’s approximately $2.5 million present value of operating lease obligations.
- Future tax rates, including the effect of research and development credits and other permanent differences.