Clearfield, Inc. 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 contract manufacturing services for certain OEM customers. This unaudited report covers the three months ended December 31, 2017, the first quarter of fiscal 2018, compared with the three months ended December 31, 2016.
Financial Performance and Position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $16.867 million | $18.266 million | Down 8% |
| Gross profit | $7.108 million | $7.209 million | Down 1% |
| Gross margin | 42.1% | 39.5% | Up 2.6 percentage points |
| Income from operations | $644 thousand | $1.191 million | Down 46% |
| Net income | $943 thousand | $877 thousand | Up 8% |
| Diluted EPS | $0.07 | $0.06 | Increased |
| Cash flow from operations | $2.005 million | $(605) thousand | Improved by $2.610 million |
- Sales to broadband service providers and commercial data networks were $16.020 million, compared with $17.020 million. Build-to-print and OEM sales were $847 thousand, compared with $1.246 million.
- International sales were $1.369 million, or 8% of total sales, compared with $1.586 million, or 9%.
- Gross margin improved primarily because optical-component sales, which generally carry higher margins, represented a larger proportion of revenue.
- Selling, general and administrative expense increased 7% to $6.464 million, primarily due to $612 thousand of higher legal expenses and $201 thousand of higher compensation costs.
- At December 31, 2017, cash and cash equivalents were $20.453 million, short-term investments were $5.385 million, and long-term investments were $20.357 million. Total cash, cash equivalents and short-term investments were $25.838 million.
- Total liabilities were $3.087 million, and the company reported no long-term debt obligations.
- Total shareholders’ equity was $66.083 million. Accounts receivable were $5.571 million and inventories were $8.140 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined $1.399 million, primarily because of lower deployments by Traditional Carrier and Tier 1 customers, a $225 thousand reduction in an Alternative Carrier customer’s ongoing builds, and lower international demand.
- Cost of sales declined 12%, more than the decline in revenue, supporting the higher gross margin.
- Operating income fell $547 thousand because the gross-profit reduction and higher SG&A outweighed the margin improvement.
- Net income increased despite lower operating income because the company recorded a $203 thousand income-tax benefit in Q1 FY2018 versus $367 thousand of tax expense in Q1 FY2017.
- The tax benefit included a one-time $384 thousand benefit from revaluation of the net deferred tax liability following the Tax Cut and Jobs Act.
- Operating cash flow improved primarily from lower accounts receivable and inventory balances, partly offset by payments of prior-year bonus accruals.
- Capital expenditures and purchases of intangible assets declined to $230 thousand from $529 thousand. Net cash used for investments declined to $219 thousand from $5.510 million.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management stated that existing cash, short-term investments and operating cash flow should be sufficient to meet working-capital and investment requirements beyond the next 12 months. Planned uses of cash include organic growth, potential strategic transactions and the company’s share-repurchase program.
- Customer purchasing is based on purchase orders, limiting the company’s ability to predict future orders and trends. Two customers represented 22% and 12% of Q1 FY2018 sales and 15% and 14% of accounts receivable at December 31, 2017.
- CommScope Technologies filed a patent-infringement lawsuit involving certain Clearfield products. CommScope seeks injunctive relief and unspecified compensatory and enhanced damages, interest, costs and attorneys’ fees. Clearfield denies infringement and is pursuing inter partes reviews of three patents. Trial was scheduled for approximately August 1, 2019.
- Management states that litigation is inherently uncertain and could result in substantial defense costs, management distraction, adverse settlement terms, damages or injunctive relief.
- The company’s risk factors were unchanged from those disclosed in its fiscal 2017 Form 10-K.
- Clearfield adopted inventory guidance under ASU 2015-11 with no financial-statement effect. It was evaluating the effect and transition method for the revenue-recognition standard in ASC 606 and the impact of the lease standard, ASU 2016-02.
- The company had approximately $7.159 million remaining under its $12.0 million share-repurchase authorization at December 31, 2017.
Important Facts for Investors to Verify
- Assess whether the decline in Traditional Carrier, Tier 1, Alternative Carrier and international demand is temporary or reflects a broader slowdown.
- Separate recurring profitability from the $384 thousand one-time tax benefit and the lower post-Tax Reform Act tax rate.
- Monitor legal fees, developments in the CommScope litigation and any potential financial or operating impact.
- Evaluate customer concentration and the effect of purchase-order-driven demand on revenue visibility.
- Confirm adoption conclusions and financial-statement impacts for ASC 606 and the lease standard as disclosed in subsequent filings.
- Track cash deployment, capital expenditures, strategic transactions and future share repurchases.