Clearfield, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Clearfield designs, manufactures and distributes fiber-optic management, protection and delivery products for communications networks, and provides build-to-print copper and fiber cable assemblies for OEM customers. The filing covers the unaudited three and nine months ended June 30, 2019, Clearfield’s fiscal third quarter and first nine months of fiscal 2019. The company’s fiscal year ends September 30.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Net sales | $21.9 million | $21.5 million | $61.1 million | $55.2 million |
| Gross profit | $8.4 million | $8.5 million | $23.4 million | $22.4 million |
| Gross margin | 38.4% | 39.5% | 38.3% | 40.6% |
| Income from operations | $1.5 million | $2.4 million | $3.0 million | $2.5 million |
| Net income | $1.3 million | $1.8 million | $2.7 million | $2.4 million |
| Diluted EPS | $0.10 | $0.13 | $0.20 | $0.18 |
- Third-quarter sales increased approximately 2%, while first-nine-month sales increased approximately 11% year over year.
- Third-quarter operating margin was approximately 7.0%, compared with 11.2% in the prior-year quarter. First-nine-month operating margin was approximately 4.9%, compared with 4.6% in the prior-year period.
- Third-quarter net margin was approximately 5.9%, compared with 8.2% in the prior-year quarter. First-nine-month net margin was approximately 4.4%, compared with 4.3% in the prior-year period.
- Cash provided by operating activities was $8.9 million for the first nine months, compared with $4.3 million in the prior-year period.
- At June 30, 2019, cash and cash equivalents were $6.0 million, short-term investments were $14.6 million, and long-term investments were $22.5 million. Total cash, cash equivalents and investments were approximately $43.2 million.
- Total current assets were $40.3 million versus $41.1 million at September 30, 2018; current liabilities were $4.1 million versus $5.0 million.
- The company reported no long-term debt. Shareholders’ equity was $73.0 million at June 30, 2019, compared with $68.9 million at September 30, 2018.
Material changes versus the prior comparable period
- Third-quarter sales growth was primarily driven by a $1.0 million increase in Tier 1 customer sales, partially offset by lower OEM, international and broadband service provider sales.
- First-nine-month growth was primarily attributable to $3.8 million of additional sales to an OEM manufacturer following the February 2018 acquisition of the Calix powered cabinet product line, a $1.2 million increase in international sales and a $0.5 million increase in build-to-print sales.
- Gross margin declined due to tariff costs and product mix in the third quarter, and due primarily to integration and increased sales of the acquired powered cabinet products during the first nine months.
- Third-quarter selling, general and administrative expense increased 13% to $6.9 million, driven primarily by higher compensation, personnel-related costs, performance incentives, sales commissions and agent fees. This reduced quarterly operating income by approximately 36%.
- First-nine-month operating income increased 19% despite higher expenses, partly because the prior-year period included an $850,000 patent litigation settlement and higher related legal costs.
- Interest income increased to $0.5 million for the first nine months, reflecting higher rates earned on investments.
- The first-nine-month effective tax rate increased to 24.1% from 16.2%, primarily because the prior-year period included a one-time $384,000 benefit from revaluation of deferred tax liabilities.
- Days sales outstanding improved to 39 days from 52 days at September 30, 2018. Net accounts receivable declined to $9.3 million from $12.8 million, and inventories declined to $9.4 million from $10.1 million.
Guidance, outlook, risks and unusual items
- The filing does not provide specific revenue or earnings guidance. Management states that existing cash, short-term investments and operating cash flow should be sufficient to meet working capital and investment requirements for beyond the next 12 months.
- Management expects to use available resources for organic growth, potential strategic transactions and the share repurchase program. Approximately $5.4 million remained available under the repurchase authorization at June 30, 2019; no shares were repurchased during the first nine months of fiscal 2019.
- Customer orders are based on purchase orders submitted from time to time, limiting the company’s ability to predict future orders and trends. Customer concentration is significant: Customers A and B represented 19% and 12% of third-quarter sales, respectively; Customers A, B and C represented 18%, 10% and 11% of first-nine-month sales.
- Tariffs, product mix, demand fluctuations, customer concentration, international operations, integration of the acquired powered cabinet line and dependence on broadband infrastructure spending may affect future results.
- The company has no pending legal proceedings expected to have a material adverse effect. The filing states that there were no material changes to previously disclosed risk factors.
- Clearfield adopted ASC 606 effective October 1, 2018 using the modified retrospective method; management reported no material impact on results, cash flows or financial position.
- The company expects adoption of the new lease standard effective October 1, 2019 to materially increase reported assets and liabilities, although the filing does not quantify the impact.
- As of June 30, 2019, the company reported no goodwill impairment indicators, no unrecognized tax benefits and effective disclosure controls. Stock-based compensation expense was $1.5 million for the first nine months, with $2.6 million of unrecognized compensation expense remaining.
Investor verification items
- Verify whether tariff costs and the lower-margin powered cabinet product mix continue to pressure gross margin.
- Monitor quarterly order trends, particularly from the two largest customers and Tier 1 customers.
- Assess the sustainability of operating cash flow after considering investment purchases, capital expenditures and working-capital movements.
- Review the impact of the October 1, 2019 lease-accounting adoption on assets, liabilities and leverage measures.
- Reconcile the tax-rate comparison by separating recurring tax effects from the prior-year one-time deferred-tax benefit.
- Evaluate customer concentration and the potential effect of changes in broadband infrastructure spending, international demand and OEM activity.