Clearfield, Inc. 2020 Fiscal Q3 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 and provides Build-to-Print contract manufacturing services. The unaudited report covers the three and nine months ended June 30, 2020, Clearfield’s fiscal third quarter and first nine months of fiscal 2020.
Broadband service providers represented 97% of quarterly sales and 96% of nine-month sales. Build-to-Print represented 3% and 4%, respectively. The company operated manufacturing facilities in Minnesota and Tijuana, Mexico.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Net sales | $26.0 million | $21.9 million | $65.8 million | $61.1 million |
| Gross profit | $10.8 million | $8.4 million | $26.7 million | $23.4 million |
| Gross margin | 41.5% | 38.4% | 40.6% | 38.3% |
| Operating income | $3.6 million | $1.5 million | $4.7 million | $3.0 million |
| Net income | $3.0 million | $1.3 million | $4.2 million | $2.7 million |
| Diluted EPS | $0.22 | $0.10 | $0.31 | $0.20 |
| Cash flow from operations | Not separately provided | Not separately provided | $2.4 million | $8.9 million |
At June 30, 2020, cash and cash equivalents were $9.3 million, short-term investments were $11.1 million and long-term investments were $28.1 million, for total cash and investments of approximately $48.4 million. The company reported no long-term debt. Total liabilities were $11.2 million and shareholders’ equity was $79.6 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 19%, driven by higher Community Broadband, MSO and Tier 1 sales. International sales declined 47% to $0.9 million, partly because currency conditions made products temporarily cost-prohibitive.
- Nine-month sales increased 8%. Growth in Tier 1, MSO and Community Broadband sales was partly offset by lower international and Build-to-Print revenue.
- Quarterly gross margin increased 310 basis points, and nine-month gross margin increased 230 basis points. Management attributed the improvement to product mix, manufacturing efficiencies, greater use of the Mexico facility, supply-chain programs and lower tariff costs.
- Quarterly operating income increased approximately 132%, while nine-month operating income increased 56%.
- Quarterly and nine-month net income increased approximately 130% and 58%, respectively. The effective tax rate declined to 20.3% for the quarter and 20.2% for the nine-month period, compared with 25.9% and 24.1%, respectively, primarily due to research and development credits and the FDII deduction.
- Operating cash flow declined to $2.4 million from $8.9 million, primarily because inventory increased $5.9 million to support higher backlog, demand and COVID-19-related safety stock requirements.
- The company adopted the new lease standard effective October 1, 2019, recognizing approximately $2.4 million of right-of-use assets and $2.6 million of lease liabilities at adoption. The filing states that adoption did not materially affect earnings or cash flows.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management reported increased orders beginning in March 2020 as customers continued communications-network projects, but stated that visibility into the duration of those trends is limited. COVID-19 delayed or affected some 5G deployment plans and may affect future customer ordering patterns.
- Both manufacturing facilities remained operational during the quarter, but COVID-19 restrictions, staffing issues, border delays and supply-chain disruptions could reduce capacity, increase lead times and raise manufacturing and logistics costs.
- The company dual-sources components, but continued disruption remains a material risk. Contingency plans could increase manufacturing costs and impair order fulfillment.
- Two distributor customers represented 20% and 11% of quarterly and nine-month sales. The company has no agreements requiring these customers to purchase future products.
- Inventory increased approximately 65% from September 30, 2019, requiring monitoring for demand changes, obsolescence and working-capital pressure.
- Interest income is expected to decline because of lower prevailing interest rates.
- The company repurchased 41,796 shares for $0.4 million during the first nine months, but the board suspended the repurchase program in April 2020 to preserve capital flexibility. Approximately $5.0 million remained authorized for repurchases at June 30, 2020.
- Lease liabilities totaled $3.0 million at present value, with undiscounted future lease payments of $3.2 million.
- The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2020.
Facts Investors Should Verify
- Whether elevated broadband demand and customer backlog persist after COVID-19-related deployment and ordering changes.
- Whether the higher inventory balance converts into sales without significant excess or obsolete inventory charges.
- Customer concentration, distributor purchasing patterns and the absence of binding future-purchase commitments.
- Operating cash-flow conversion, particularly given the substantial inventory investment.
- COVID-19 exposure at the Tijuana facilities, cross-border logistics and component suppliers.
- The sustainability of the 40% plus gross-margin performance and the effect of tariffs, product mix and manufacturing location.
- The company’s formal future guidance, which is not provided in this filing.