Clearfield, Inc. 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
Clearfield designs, manufactures and distributes fiber-optic management, protection and delivery products for communications networks, including products serving broadband carriers, wireless operators, cable companies, utilities, enterprises, data centers and military customers. The company also provides contract manufacturing services. The filing covers the three and six months ended March 31, 2018, Clearfield’s fiscal second quarter and first half, respectively. Results are unaudited.
Financial Performance and Position
| Metric | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | Six Months Ended March 31, 2017 |
|---|---|---|---|---|
| Net sales | $16.831 million | $17.652 million | $33.698 million | $35.918 million |
| Gross profit | $6.780 million | $7.443 million | $13.888 million | $14.652 million |
| Gross margin | 40.3% | 42.2% | 41.2% | 40.8% |
| Operating income (loss) | $(0.526) million | $1.281 million | $0.119 million | $2.472 million |
| Net income (loss) | $(0.305) million | $0.908 million | $0.638 million | $1.784 million |
| Diluted EPS | $(0.02) | $0.07 | $0.05 | $0.13 |
- Six-month operating cash flow was $2.263 million, compared with $(0.012) million in the prior-year period.
- Cash and cash equivalents were $9.141 million at March 31, 2018, compared with $18.536 million at September 30, 2017.
- Short-term investments were $6.285 million and long-term investments were $20.180 million, for total cash, cash equivalents and investments of approximately $35.606 million.
- The company had no long-term debt. Total liabilities were $4.271 million and shareholders’ equity was $66.053 million at March 31, 2018.
- Inventory increased to $10.879 million from $8.454 million at September 30, 2017, partly reflecting inventory acquired with the powered-cabinet product line.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 5%, primarily because international sales fell $1.022 million due to lower demand and an Alternative Carrier customer’s ongoing builds declined by $0.680 million. Domestic sales increases partially offset these declines.
- First-half sales declined 6%, including a $1.239 million decrease in international sales and a $0.890 million decrease related to an Alternative Carrier customer. Tier 1 customer deployments also declined.
- Second-quarter gross margin declined to 40.3% from 42.2%, primarily because a lower proportion of sales involved optical components, which generally carry higher margins. First-half gross margin increased modestly to 41.2% from 40.8% because of a lower mix of Tier 1 sales, which generally carry lower margins.
- Second-quarter selling, general and administrative expense increased 19% to $7.306 million. The increase primarily reflected higher legal expenses, including an $850,000 patent-litigation settlement payment, and higher compensation costs.
- First-half SG&A increased 13% to $13.770 million, driven principally by patent-litigation costs, the settlement payment and additional sales and engineering personnel.
- The company completed its acquisition of Calix’s Telcordia-certified outdoor powered-cabinet product portfolio on February 20, 2018 for $10.350 million in cash. The preliminary purchase price allocation included $2.138 million of goodwill and $5.373 million of identified intangible assets. Acquisition-date fair values remained subject to finalization.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management stated that purchase orders are received from time to time, limiting the company’s ability to predict future orders and trends. The filing does not provide quantitative revenue or earnings guidance.
- Management expects existing cash, investments and operating cash flow to meet working-capital and investment requirements beyond the next 12 months. Available cash is intended for organic growth, strategic transactions and share repurchases.
- The company committed to purchase at least $3.5 million of inventory and subcontractor purchase orders related to the Calix acquisition, expected to be fulfilled in the normal course of business.
- CommScope patent litigation was settled. Clearfield paid $850,000 on March 30, 2018, the parties dismissed the litigation, and Clearfield withdrew related inter partes reviews. The company moved to new designs for contested products.
- The company is subject to an IRS examination for fiscal 2016. Management does not expect material changes in unrecognized tax positions over the next 12 months.
- The six-month tax benefit of $0.304 million included a one-time $0.384 million benefit from revaluing deferred tax liabilities following the Tax Reform Act. The six-month effective tax rate was negative 91.1%.
- Two customers accounted for at least 10% of sales: Customer A represented 25% of second-quarter sales and 24% of first-half sales; Customer B represented 16% and 14%, respectively. Customer concentration creates potential revenue and receivables risk.
- Management was assessing the impact and transition method for the new revenue-recognition standard, ASC 606. The company was also evaluating the future impact of the new lease standard.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether demand recovers in international markets and from Alternative Carrier and Tier 1 customers.
- The final purchase-price allocation, operating contribution and integration progress of the Calix powered-cabinet acquisition.
- The sustainability of gross margins given product and customer mix changes.
- The extent to which elevated legal, sales and engineering expenses normalize after the patent settlement and expansion initiatives.
- The company’s customer concentration, including the effect of any changes in orders or payment timing.
- The remaining $6.934 million share-repurchase authorization and its effect on cash balances and shares outstanding.
- The outcome of the IRS fiscal 2016 examination and any future effects of tax-law implementation or deferred-tax estimates.