Clearfield, Inc. 2019 Q1 Form 10-Q Summary
Business context and reporting period
Clearfield designs, manufactures and distributes fiber protection, management and delivery solutions for broadband service providers, including traditional and alternative carriers, wireless operators, cable companies, utilities, enterprises, data centers and military customers. It also provides build-to-print copper and fiber cable assemblies for original equipment manufacturers. The filing covers the unaudited three months ended December 31, 2018, Clearfield’s first quarter of fiscal 2019, compared with the three months ended December 31, 2017.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $20.089 million | $16.867 million | Up 19% |
| Gross profit | $7.947 million | $7.108 million | Up 12% |
| Gross margin | 39.6% | 42.1% | Down 2.5 percentage points |
| Income from operations | $1.171 million | $0.644 million | Up approximately 82% |
| Operating margin | 5.8% | 3.8% | Improved |
| Net income | $1.010 million | $0.943 million | Up 7% |
| Diluted EPS | $0.08 | $0.07 | Increased |
| Net cash from operations | $6.826 million | $2.005 million | Up $4.821 million |
Net margin was approximately 5.0% in Q1 FY2019 versus 5.6% in the prior-year quarter. Selling, general and administrative expense increased 5% to $6.776 million, primarily from additional sales and engineering personnel and higher depreciation and amortization, partly offset by lower legal expense.
At December 31, 2018, Clearfield had $15.358 million of cash and cash equivalents, $8.490 million of short-term investments and $18.292 million of long-term investments. Total cash, cash equivalents and short-term investments were $23.849 million, compared with $17.478 million at September 30, 2018. The company reported no long-term debt. Total liabilities were $4.921 million and shareholders’ equity was $70.563 million.
Material changes versus the prior comparable period
- Sales increased by $3.222 million, primarily because sales to an OEM manufacturer rose $2.732 million following the February 2018 acquisition of the active cabinet product line. Build-to-print sales increased by $442,000.
- Broadband service provider sales increased to approximately $18.800 million from $16.020 million. Build-to-print sales increased to approximately $1.289 million from $847,000.
- International sales were approximately 8% of total sales in both periods. Broadband service providers represented 94% of sales in Q1 FY2019, while build-to-print customers represented 6%.
- Gross margin declined because the acquired active cabinet products were integrated into manufacturing and represented a larger proportion of sales; management identified these products as having lower gross margins.
- Operating income improved substantially from higher gross profit and lower legal expense, including a $624,000 reduction in legal expense related primarily to the settlement of a patent infringement lawsuit in fiscal 2018.
- Income tax expense was $296,000, compared with a $203,000 tax benefit in the prior-year quarter. The prior-year benefit included a one-time $384,000 favorable deferred-tax revaluation effect from the Tax Reform Act.
- Operating cash flow benefited from a $4.654 million decrease in accounts receivable and a $424,000 decrease in inventory. Days sales outstanding declined to 37 days from 52 days at September 30, 2018.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that purchase orders are received from time to time, limiting the company’s ability to predict future orders and trends. Management expects existing cash, short-term investments and operating cash flow to fund working capital and investment requirements beyond the next 12 months.
Management intends to use available cash for organic growth, potential strategic transactions and the company’s share repurchase program. Approximately $5.409 million remained available under the $12.000 million repurchase authorization; 545 shares were repurchased during the quarter in connection with taxes on restricted-stock vesting.
Clearfield adopted ASC Topic 606 on October 1, 2018 using the modified retrospective method. The adoption had no material effect on operations, cash flows or financial position. The company was evaluating the future impact of the new lease standard, ASU 2016-02. No goodwill impairment indicators were identified during the quarter.
Key risks include customer concentration, reliance on purchase orders and broadband service provider demand, integration and margin risks associated with the acquired active cabinet line, manufacturing and supply-chain execution, and the other risks described in the fiscal 2018 Form 10-K. The filing states that there were no material changes to previously disclosed risk factors and no pending legal proceedings expected to have a material adverse effect.
Investor verification checklist
- Verify the sustainability of sales growth from the acquired active cabinet line and the related effect on gross margins.
- Assess customer concentration: two customers represented at least 10% of quarterly sales, and two represented at least 10% of accounts receivable at December 31, 2018.
- Reconcile the strong operating cash flow with the timing of collections, inventory reductions and accrued compensation payments.
- Monitor the effect of the 22.7% effective tax rate versus the prior-year one-time tax benefit.
- Review future lease-accounting effects under ASU 2016-02 and any changes in goodwill or patent impairment indicators.
- Confirm available repurchase authorization, strategic cash uses and the company’s stated liquidity sufficiency.