Clearfield, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
Business Context and Reporting Period
Clearfield designs, manufactures, and distributes fiber-optic management, protection, and delivery products for broadband service providers. Its primary markets are community broadband providers, multiple-system operators, national carriers, and international customers. The company also provides contract manufacturing for legacy original-equipment-manufacturer customers.
The filing covers the three and nine months ended June 30, 2021, compared with the corresponding periods ended June 30, 2020. The fiscal third quarter was filed on July 23, 2021. Approximately 98% of nine-month sales came from broadband service providers and 2% from legacy customers.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $38.7 million | $26.0 million | $95.5 million | $65.8 million |
| Gross profit | $17.1 million | $10.8 million | $41.4 million | $26.7 million |
| Gross margin | 44.2% | 41.5% | 43.4% | 40.6% |
| Operating income | $7.7 million | $3.6 million | $15.9 million | $4.7 million |
| Operating margin | Approximately 19.9% | Approximately 13.8% | Approximately 16.6% | Approximately 7.2% |
| Net income | $6.1 million | $3.0 million | $12.9 million | $4.2 million |
| Diluted EPS | $0.44 | $0.22 | $0.94 | $0.31 |
- Third-quarter sales increased 49%; nine-month sales increased 45%.
- Third-quarter operating income increased approximately 115%; nine-month operating income increased 237%.
- Gross-margin expansion reflected favorable product mix, cost-reduction efforts, greater use of Mexican manufacturing facilities, and higher production volumes.
- SG&A increased 31% in the third quarter and 16% for the nine-month period, primarily because of higher headcount, wages, performance compensation, and stock-based compensation.
- Net cash provided by operating activities was $8.1 million for the nine months ended June 30, 2021, compared with $2.4 million in the prior-year period.
- Cash and cash equivalents were $21.3 million at June 30, 2021. Short-term investments were $10.9 million and long-term investments were $26.7 million, for total cash and investments of approximately $58.9 million.
- The company reported no long-term debt. Lease liabilities totaled $2.8 million, including current and long-term portions.
- Accounts receivable increased to $16.2 million and inventories increased to $21.0 million from $10.5 million and $14.4 million, respectively, at September 30, 2020.
- Days sales outstanding increased five days to 38 days from September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Broadband service provider sales increased to $38.1 million in the third quarter from $25.3 million. Community broadband, international, and MSO sales drove the increase, while Tier 1 sales declined.
- International sales increased to $2.9 million in the third quarter from $0.9 million and represented 8% of total sales versus 3% in the prior-year quarter.
- Legacy sales were relatively stable in the third quarter but declined to $2.0 million for the nine-month period from $2.7 million.
- Higher demand reflected accelerated customer purchasing and broadband deployment schedules associated with work-from-anywhere requirements and COVID-19-related connectivity demand.
- Inventory increased by $6.6 million and accounts receivable increased by $5.9 million during the nine-month period, reflecting higher demand, safety-stock actions, shipment timing, and supply-chain uncertainty.
- Stock-based compensation increased to $966,000 for the nine-month period from $542,000. Unrecognized compensation expense was $2.9 million at June 30, 2021.
- The company issued shares through its employee stock purchase plan and equity awards but did not repurchase shares during the nine-month period. Approximately $5.0 million remained available under the repurchase authorization, which had been suspended in April 2020.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide a clear numeric revenue or earnings forecast. Management stated that available cash, investments, and operating cash flow should fund working capital and investment requirements beyond the next 12 months.
- Management expects to use liquidity for organic growth, potential strategic transactions, and mitigation of COVID-19, supply-chain, logistics, and fulfillment risks.
- Component lead times had extended to approximately 8 to 10 weeks for certain product categories. Management expected to work toward historic lead times of 4 to 6 weeks during calendar 2021.
- Risks include material shortages, transportation delays, border restrictions affecting Mexico operations, longer customer lead times, delayed deliveries, higher operating costs, changing customer purchasing patterns, and continued COVID-19 effects.
- Revenue predictability is limited because customers generally purchase through purchase orders without commitments to future purchases. The two largest customers represented 30% of third-quarter sales and 31% of nine-month sales; neither was contractually obligated to purchase future products.
- Customer concentration also affected receivables: three customers represented 38% of accounts receivable at June 30, 2021.
- One Tier 1 customer reduced consumer-market fiber-to-the-home capital spending, and the pandemic delayed introduction and training for new technologies in the Tier 1 market.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, no goodwill or intangible-asset impairment triggers, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether elevated broadband demand and customer acceleration remain durable after COVID-19-related deployment effects normalize.
- Whether supply-chain constraints, inventory growth, and 8-to-10-week component lead times improve without impairing margins or delaying shipments.
- Collections and customer credit exposure, given the increase in receivables, 38-day days sales outstanding, and concentration among major customers.
- The sustainability of gross-margin gains from product mix, Mexico manufacturing, cost reductions, and operating leverage.
- The effect of declining Tier 1 spending and lower interest rates on future revenue and non-operating income.
- The status of the suspended share-repurchase program and the company’s intended use of its approximately $58.9 million of cash and investments.
- Future dilution and expense from outstanding options, restricted stock, employee purchases, and the remaining $2.9 million of unrecognized stock-based compensation.