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CLFD > SEC Filings for CLFD > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for CLEARFIELD, INC.

Form 10-Q for CLEARFIELD, INC.


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company's expected future business and financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend," "estimate," "will," "should," "could" and other words and terms of similar meaning, typically identify these forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual results could differ from those projected in any forward-looking statements because of the factors identified in and incorporated by reference from Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year ended September 30, 2012, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward-looking statements included herein are made as the date of this Quarterly Report on Form 10-Q and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion and analysis of our financial condition and results of operations as of and for the three months ended June 30, 2013 and 2012 should be read in conjunction with the financial statements and related notes in Item 1 of this report and our Annual Report on Form 10-K for the year ended September 30, 2012.


OVERVIEW

General

Clearfield, Inc. manufactures, markets, and sells an end-to-end fiber management and enclosure platform that consolidates, distributes and protects fiber as it moves from the inside plant to the outside plant and all the way to the home, business and cell site (FTTx). While continuing to penetrate the wireline requirements for FTTx builds, Clearfield is actively engaged in the expansion of wireless services through the deployments of its technologies for cell backhaul and distributed antennas wireless services.

The Company has successfully established itself as a value-added supplier to its target market of broadband service providers, including independent local exchange carriers (telephone), multiple service operators (or MSO's) (cable), wireless service providers, municipal-owned utilities, as well as commercial and industrial original equipment manufacturers ("OEMs"). Clearfield has continued to expand its product offerings and broaden its customer base during the last five years.

The Company has historically focused on the un-served or under-served rural communities who receive their voice, video and data services from independent telephone companies. By aligning its in-house engineering and technical knowledge alongside its customers, the Company has been able to develop, customize and enhance products from design through production. Final build and assembly of the Company's products is completed at Clearfield's plant in Plymouth, Minnesota with manufacturing support from a network of domestic and global manufacturing partners. Clearfield specializes in producing these products on both a quick-turn and scheduled delivery basis. The Company deploys a hybrid sales model with some sales made directly to the customer, some made through two-tier distribution (channel) partners, and some sales through original equipment suppliers (OEM's) who private label their products.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2013 VS. THREE MONTHS ENDED JUNE 30, 2012

Revenues for the third fiscal quarter of 2013 ended June 30, 2013 were $13,535,000, an increase of approximately 25% or $2,741,000 from revenue of $10,794,000 for the third fiscal quarter of fiscal 2012. Revenues to broadband service providers and commercial data networks customers were $12,090,000 in the fiscal 2013 third quarter, versus $9,523,000 in the same period of fiscal 2012. Revenues to build-to-print and OEM customers were $1,445,000 in the fiscal 2013 third quarter versus $1,271,000 in the same period of fiscal 2012. Revenue growth in fiscal 2013 was experienced from existing clients as well as from the development of accounts in traditional and new territories across the telco industry, including international territories. Project based business accelerated with multiple large orders from several customers. Revenues were positively affected by increased demand in inside and outside plant deployment of fiber. In addition, increases were driven in part by new product offerings in the access network that drives fiber closer to the home, business and cell tower (FTTx). Operating results for the third quarter of fiscal year 2013 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns, seasonality of the business, and operating and other factors.

Cost of sales for the third quarter of fiscal 2013 was $7,906,000, an increase of $1,669,000, or 27%, from $6,237,000 in the comparable period of fiscal 2012. Gross margin was 41.6% in the fiscal 2013 third quarter, down from 42.2% for the fiscal 2012 third quarter. Gross profit increased $1,072,000, or 23%, to $5,629,000 for the three months ended June 30, 2013 from $4,557,000 in the comparable period in fiscal 2012. The increase in gross profit and cost of goods in the third quarter of fiscal 2013 is primarily a result of increased sales volume, along with a higher percentage of sales associated with optical component technologies.

Selling, general and administrative expenses increased $1,059,000, or 38%, to $3,833,000 in the fiscal 2013 third quarter from $2,774,000 for the fiscal 2012 third quarter. The increases in the fiscal 2013 quarter include higher compensation and incentive expenses in the amount of $800,000 due to higher revenues, an increase in product development costs of $50,000, and an increase in equity compensation expense of $80,000 due to a higher number of equity awards outstanding in the three months ended June 30, 2013 versus June 30, 2012.


Income from operations for the quarter ended June 30, 2013 was $1,796,000 compared to income from operations of $1,783,000 for the comparable quarter of fiscal 2012, an increase of $13,000, or approximately 1%. This increase is attributable to higher revenue and gross profit in the fiscal 2013 quarter versus the 2012 quarter.

Interest income for the quarter ended June 30, 2013 was $22,000 compared to $24,000 for the comparable quarter for fiscal 2012. Interest rates have continued to decline resulting in lower returns. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts.

We recorded a provision for income taxes of $671,000 and $64,000 for the three months ended June 30, 2013 and 2012, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The increase in tax expense of $607,000 from the third quarter for fiscal 2012 is primarily due to deferred tax expense resulting from the reversal of a portion of the deferred tax asset valuation allowance in the third quarter of fiscal 2012.

The Company's net income for the three months ended June 30, 2013 was $1,147,000 or $0.09 per basic and diluted share. The Company's net income for the three months ended June 30, 2012 was $1,741,000, or $0.14 per basic and diluted share.

NINE MONTHS ENDED JUNE 30, 2013 VS. NINE MONTHS ENDED JUNE 30, 2012

Revenues for the nine months ended June 30, 2013 were $34,314,000, an increase of 27% or approximately $7,243,000 from revenue of $27,071,000 for the first nine months of fiscal 2012. Revenues to broadband service providers and commercial data networks customers were $30,574,000 for the first nine months of the fiscal 2013 third quarter, versus $23,306,000 in the same period of fiscal 2012. Revenues to build-to-print and OEM customers were $3,740,000 in the first nine months of fiscal 2013 versus $3,765,000 in the same period of fiscal 2012. Revenues in the nine months ended fiscal 2012 were negatively affected by new government funding regulations affecting the broadband service provider industry enacted in the second quarter of that period. Revenue growth year over year was experienced from existing clients as well as from the development of accounts in traditional and new territories across the telco industry, including new international territories. Project based business accelerated with multiple large orders from several customers. In addition to revenues from inside and outside plant deployment of fiber, increases were driven in part by new product offerings in the access network that drives fiber closer to the home, business and cell tower (FTTx). Operating results for the first three quarters of fiscal 2013 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns, seasonality of the business, and operating and other factors.

Cost of sales for the nine months ended June 30, 2013 was $20,546,000, an increase of $4,545,000, or 28%, from $16,001,000 in the comparable period. Gross margin was 40.1% for the first nine months of fiscal 2013, down from 40.9% for the comparable nine months in fiscal 2012. Gross profit increased $2,698,000, or 24%, to $13,769,000 for the nine months ended June 30, 2013 from $2,698,000 in the comparable period in fiscal 2012. The increase in gross profit and cost of goods is primarily a result of increased sales volume.

Selling, general and administrative expenses increased 25%, or $2,018,000, from $8,120,000 for the first nine months of fiscal 2012 to $10,137,000 for the first nine months of fiscal 2013. This increase is primarily composed of $1,190,000 in higher commission and performance compensation accruals associated with higher revenue increase in sales personnel. Equity compensation expense increased $244,000 due to a higher number of equity awards outstanding, product development costs increased $160,000, and trade show expenses increased $83,000 in the nine months ended June 30, 2013 versus June 30, 2012.

Income from operations for the nine months ended June 30, 2013 was $3,631,000 compared to income of $2,950,000 for the first nine months of fiscal 2012, an increase of $681,000, or 23%. This increase is attributable to increased revenue and gross profit.

Interest income for the nine months ended June 30, 2013 was $70,000 compared to $77,000 for the comparable period for fiscal 2012. Interest rates have continued to decline resulting in lower returns. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts.


We recorded a provision for income taxes of $1,464,000 and $155,000 for the nine months ended June 30, 2013 and 2012, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The increase in tax expense of $1,309,000 from the first nine months of fiscal 2012 is primarily due to deferred tax benefit resulting from the reversal of a portion of the deferred tax asset valuation allowance in the first nine months of fiscal 2012.

The Company's net income for the first nine months of fiscal 2013 ended June 30, 2013 was $2,237,000, or $0.18 per basic and $0.17 per diluted share. The Company's net income for the first nine months of fiscal 2012 ended June 30, 2012 was $2,873,000 or $0.23 per basic share and diluted share.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2013, our principal source of liquidity was our cash, cash equivalents and short-term investments. Those sources total $14,906,000 at June 30, 2013 compared to $14,785,000 at September 30, 2012. Our excess cash is invested mainly in certificates of deposit backed by the FDIC and money market accounts. The majority of our funds are insured by the FDIC. Investments considered long-term are $5,641,000 at June 30, 2013, compared to $4,572,000 at September 30, 2012. We believe the combined balances of short-term cash and investments along with long-term investments provide a more accurate indication of our available liquidity. At June 30, 2013, Clearfield had no debt along with $20,547,000 in cash, cash equivalents and investments, compared to $19,357,000 at September 30, 2012.

The Company expects to fund operations with its working capital, which is the combination of existing cash and cash equivalents and cash flow from operations, accounts receivable and inventory. The Company intends to use its cash assets primarily for its continued organic growth. Additionally, the Company may use some available cash for potential future strategic initiatives or alliances. We believe our cash and cash equivalents at June 30, 2013, along with cash flow from future operations, will be sufficient to fund our working capital and capital resources needs for the next 12 months.

Operating Activities

Net cash provided by operating activities totaled $1,786,000 for the nine months ended June 30, 2013. This was primarily due to net income of $2,237,000, non-cash expenses for depreciation and amortization of $361,000, deferred taxes of $1,350,000, loss on asset disposals of $11,000, and stock based compensation of $571,000, offset by changes in operating assets and liabilities using cash. Changes in operating assets and liabilities using cash include increases in inventory of $1,995,000, other current assets of $55,000, and accounts receivable of $2,026,000. The increase in inventory reflects higher stocking levels for existing products due to higher demand, and for new product offerings including Clearview Blue and the recently announced FieldShield. Quarterly accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms within the quarter. Changes using cash also include an increase in accounts payable and accrued expenses in the amount of $1,330,000, primarily related to increased inventory purchases.

Net cash generated from operating activities totaled $793,000 for the nine months ended June 30, 2012. This was primarily due to net income of $2,873,000, and non-cash expenses for depreciation and amortization of $300,000, deferred taxes of $62,000, loss on asset disposals of $21,000, and stock based compensation of $327,000. Changes in operating assets and liabilities using cash include increases in inventory of $242,000, other current assets of $351,000, and accounts receivable of $864,000. Changes using cash also include a decrease in accounts payable and accrued expenses in the amount of $1,332,000, primarily reflecting fiscal 2011 accrued bonus compensation accruals paid in the first quarter of fiscal 2012.

Investing Activities

We invest our excess cash in money market accounts and bank CDs in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIC on these investments. During the nine months ended June 30, 2013 we used cash to purchase $7,063,000 of FDIC-backed securities and received $7,062,000 on CDs that matured. Purchases of patent fees and capital equipment, mainly information technology and manufacturing equipment, consumed $692,000 of cash.


During the nine month period ended June 30, 2012 we used cash to purchase $8,661,000 of FDIC-backed securities and received $2,574,000 on CDs that matured. Purchases of patent fees and capital equipment, mainly information technology equipment and vehicles, consumed $297,000 of cash.

Financing Activities

For the nine months ended June 30, 2013 we received $136,000 from employees' participation and purchase of stock through our ESPP. We received $15,000 from the issuance of stock as a result of employees exercising options, and used $56,000 to pay for taxes as a result of employee's exercises of options using share withholding.

For the nine month period ended June 30, 2012 we received $143,000 from employees' participation and purchase of stock through our ESPP and $148,000 from the issuance of stock as a result of employees exercising options.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company's accounting policies. The accounting policies considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, stock-based compensation, deferred tax asset valuation allowances, accruals for uncertain tax positions, and impairment of goodwill and long-lived assets.

These accounting policies are described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the year ended September 30, 2012. Management made no changes to the Company's critical accounting policies during the quarter ended June 30, 2013.

In applying its critical accounting policies, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the quarter ended June 30, 2013.

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