Business Context and Reporting Period
Clearfield, Inc. designs, manufactures and distributes fiber protection, fiber management and fiber delivery solutions for broadband service providers, wireless operators, cable companies, utilities, enterprises, data centers and military markets. It also provides build-to-print copper and fiber cable assemblies for original equipment manufacturers.
This unaudited Form 10-Q covers the three and six months ended March 31, 2019, representing Clearfield’s fiscal second quarter and first six months of fiscal 2019. The comparable periods ended March 31, 2018. The filing was signed May 1, 2019.
Key Financial Metrics
| Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Six months ended March 31, 2019 | Six months ended March 31, 2018 |
|---|---|---|---|---|
| Net sales | $19.084 million | $16.831 million | $39.174 million | $33.698 million |
| Gross profit | $7.025 million | $6.780 million | $14.972 million | $13.888 million |
| Gross margin | 36.8% | 40.3% | 38.2% | 41.2% |
| Income from operations | $0.297 million | $(0.526) million | $1.468 million | $0.119 million |
| Net income | $0.368 million | $(0.305) million | $1.378 million | $0.638 million |
| Diluted EPS | $0.02 | $(0.02) | $0.10 | $0.05 |
| Cash flow from operations | Not separately provided | Not separately provided | $8.473 million | $2.263 million |
At March 31, 2019, cash and cash equivalents were $7.906 million, short-term investments were $17.048 million, and long-term investments were $18.574 million. Cash plus short-term investments totaled $24.954 million, compared with $17.478 million at September 30, 2018. Total cash and investments were approximately $43.528 million. The Company reported no long-term debt obligations.
Total assets were $76.669 million and shareholders’ equity was $71.494 million at March 31, 2019. Accounts receivable were $8.988 million, inventories were $8.274 million, and current liabilities were $4.811 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased approximately 13%, driven by higher sales to an OEM following the February 2018 acquisition of the active cabinet product line, increased Latin American demand, and higher build-to-print sales.
- Six-month sales increased 16%. Broadband service providers represented 94% of sales, while build-to-print customers represented 6%. International sales increased to 9% of six-month sales from 6%.
- Gross margin declined because the acquired active cabinet products carry lower margins and represented a higher percentage of sales. Second-quarter gross profit was also reduced by approximately $330,000 of tariff costs.
- Second-quarter selling, general and administrative expense declined 8%, primarily because legal expense fell following the prior-year settlement of a patent infringement lawsuit. Savings were partly offset by higher compensation costs and a $210,000 bad-debt expense related to a customer bankruptcy.
- The Company returned to operating profitability in the second quarter and reported net income, compared with an operating loss and net loss in the prior-year quarter.
- Six-month operating cash flow increased to $8.473 million from $2.263 million, principally because of lower accounts receivable and inventory balances, in addition to net income and non-cash expenses.
- Cash and investments increased despite $9.254 million of net investing cash outflows, primarily reflecting purchases of securities and $552,000 of capital equipment and intangible assets. The prior-year period included the $10.350 million cash acquisition of the powered cabinet product line.
- The Company adopted Topic 606 revenue recognition guidance using the modified retrospective method. Management reported no material impact on operations, cash flows or financial position.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects existing cash, short-term investments and operating cash flow to meet working capital and investment requirements for more than the next 12 months. Available resources are intended for organic growth, potential strategic transactions and the share repurchase program.
- Future order visibility is limited because sales are primarily based on purchase orders submitted from time to time, and results may vary with customer purchasing patterns and seasonality.
- Customer concentration remains material. In the quarter, Customers A and B represented 17% and 10% of sales; in the six-month period, Customers A and C represented 18% and 11%. Customer B represented 13% of accounts receivable at March 31, 2019.
- Tariffs, supply-chain integration of the acquired active cabinet line and the product mix may continue to pressure gross margins.
- The Company recorded a $210,000 bad-debt expense related to a customer bankruptcy and increased its allowance for doubtful accounts to $289,085 from $79,085 at September 30, 2018.
- The Company had authority to repurchase approximately $5.4 million of additional common stock at March 31, 2019, but made no repurchases during the six months ended March 31, 2019.
- There were no pending legal proceedings expected to have a material adverse effect, and management reported no material changes to previously disclosed risk factors.
- The Company was evaluating the new lease standard, which it expected to materially increase reported assets and liabilities upon adoption; the filing did not quantify the impact.
- Stock-based compensation expense was $1.102 million for the six months, with $2.965 million of unrecognized expense expected to be recognized over approximately 5.4 years.
Important Facts for Investors to Verify
- Whether revenue growth from the acquired active cabinet line and international markets can continue without further gross-margin deterioration.
- The magnitude and persistence of tariff costs and other supply-chain pressures.
- Customer concentration, the customer bankruptcy and the adequacy of the allowance for doubtful accounts.
- Whether operating cash flow remains strong after the favorable working-capital effects from reduced receivables and inventory.
- The timing and balance-sheet impact of lease-standard adoption.
- Use of the remaining share repurchase authorization and the Company’s allocation of substantial cash and investment balances.
- Any changes in the previously disclosed risk factors, major customer relationships, or potential impairment indicators.