Clearfield, Inc. quarterly report, Q3 FY2015

Clearfield, Inc. Form 10-Q Summary

Reporting period: Quarter and nine months ended June 30, 2015; fiscal third quarter. The filing was signed July 29, 2015. Clearfield manufactures and sells fiber-management and enclosure products supporting fiber-to-the-home, wireless cell backhaul, distributed antennas, broadband providers, utilities, OEMs, and commercial networks.

Financial performance and condition

Metric	Q3 FY2015	Q3 FY2014	9M FY2015	9M FY2014
Net sales	$18.196 million	$14.363 million	$44.553 million	$43.724 million
Gross profit	$7.797 million	$6.043 million	$18.293 million	$18.702 million
Gross margin	42.8%	42.1%	41.1%	42.8%
Income from operations	$2.951 million	$1.858 million	$5.032 million	$6.846 million
Net income	$1.953 million	$1.175 million	$3.311 million	$4.383 million
Diluted EPS	$0.14	$0.08	$0.24	$0.32
Operating cash flow	Not separately provided	Not separately provided	$4.341 million	$11.739 million

Q3 sales increased approximately 27%, driven by higher sales to commercial data networks, broadband providers, build-to-print and OEM customers, international sales, and an ongoing CLEC build.
Q3 operating margin was approximately 16.2%, compared with 12.9% in the prior-year quarter. Nine-month operating margin was approximately 11.3%, compared with 15.7% in the prior-year period.
Q3 net margin was approximately 10.7%, compared with 8.2% in Q3 FY2014. Nine-month net margin was approximately 7.4%, compared with 10.0% in the prior-year period.
Cash, cash equivalents and short-term investments totaled $25.106 million at June 30, 2015. Including long-term investments, total cash and investments were $32.828 million, compared with $33.125 million at September 30, 2014.
The company reported no debt and stated that existing liquidity and operating cash flow should fund working-capital and capital-resource needs for the next 12 months.
Cash flow was reduced by increases in accounts receivable of $2.359 million and inventory of $1.344 million. Days sales outstanding increased to 37 days from September 30, 2014.
Capital expenditures and intangible-asset purchases were $4.028 million for the nine months, including $3.027 million for the new facility’s leasehold improvements and office equipment.

Material changes versus prior comparable periods

Q3 revenue rose $3.833 million, or approximately 27%, while nine-month revenue increased $0.829 million, or approximately 2%.
Nine-month revenue was affected by an $8.785 million slowdown in an ongoing CLEC build, substantially offset by $9.676 million of growth from other commercial data network, OEM, build-to-print and broadband customers.
Q3 gross margin improved to 42.8%, but nine-month gross margin declined to 41.1% because of Mexico manufacturing start-up costs, lower factory-overhead absorption, and product mix.
Nine-month SG&A increased 12% to $13.261 million, reflecting higher personnel and compensation costs, $137,000 of one-time facility-move costs, increased stock compensation, and higher depreciation.
Nine-month operating income declined 27% and net income declined 24%, primarily because of lower gross profit and higher SG&A.
Operating cash flow declined $7.398 million year over year, primarily because the prior-year period benefited from favorable working-capital changes while the current period absorbed increases in receivables and inventory.
The company repurchased $849,000 of common stock during the nine months and had approximately $7.151 million remaining under its $8.000 million authorization at June 30, 2015.

Outlook, commentary, risks and unusual items

Management stated that it cannot forecast future sales reliably because revenue depends on purchase orders submitted from time to time.
Management expects to fund operations through working capital, cash, cash flow from operations, receivables and inventory, and intends to use available resources for organic growth, potential strategic transactions and share repurchases.
International sales represented 7% of Q3 revenue and 9% of nine-month revenue.
Customer concentration remained material: Customer B represented 29% of Q3 sales and 27% of nine-month sales; Customer C represented 17% of accounts receivable at June 30, 2015.
Management identified revenue recognition, stock compensation, deferred-tax valuation allowances, uncertain tax positions, and goodwill and long-lived-asset impairment as critical accounting areas. No significant changes in estimates affected the quarter.
No goodwill impairment triggers were identified during the nine months. The company maintained an approximately $848,000 valuation allowance related to state net operating loss carryforwards.
The effective tax rate was 34.4% for Q3 and 35.2% for the nine-month period, compared with 37.6% and 36.6%, respectively, in the prior-year periods.
Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls as of June 30, 2015.
The company expects to adopt the new revenue-recognition standard at the beginning of fiscal 2019; the filing does not provide a quantified expected impact.

Investor verification points

Verify whether the Q3 sales acceleration is sustained and whether the CLEC-build slowdown continues to affect subsequent periods.
Monitor gross-margin recovery, particularly the effects of Mexico manufacturing operations, facility costs, production volumes and product mix.
Assess receivables collection and inventory growth, including the increase to 37 days sales outstanding.
Review customer concentration and the 17% accounts-receivable exposure to Customer C.
Track capital spending, liquidity, share repurchases and the remaining repurchase authorization.
Evaluate the effect of higher compensation, stock-based compensation, depreciation and facility-related expenses on operating leverage.
Confirm the eventual implementation impact of ASC 606 and the continued recoverability of deferred tax assets and other long-lived assets.