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CLFD > SEC Filings for CLFD > Form 10-Q on 30-Jan-2014All Recent SEC Filings

Show all filings for CLEARFIELD, INC.

Form 10-Q for CLEARFIELD, INC.


30-Jan-2014

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, 2013, 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 December 31, 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, 2013.

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. While continuing to penetrate the wireline requirements for FTTH 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, or "telcos"), multiple service operators (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 who private label their products.


RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2013 VS. THREE MONTHS ENDED DECEMBER 31, 2012

Revenues for the three months ended December 31, 2013 were $16,148,000, an increase of approximately 57% or $5,883,000 from revenue of $10,265,000 for the first three months of fiscal 2013. Revenues to broadband service providers and commercial data networks customers were $15,077,000 in the fiscal 2014 first quarter, versus $8,912,000 in the same period of fiscal 2013. Revenues to build-to-print and OEM customers were $1,071,000 in the fiscal 2014 first quarter versus $1,353,000 in the same period of fiscal 2013. General softness in the U.S. telco market was more than offset by a large, ongoing build of a U.S. based existing customer. Also, international sales increased over 160% compared to the first quarter of fiscal 2013 to more than a million dollars. 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 first quarter of fiscal year 2014 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 three months ended December 31, 2013 was $9,210,000, an increase of $2,869,000, or 45%, from $6,341,000 in the comparable period. Gross margin was 43.0% in the fiscal 2014 first quarter, up from 38.2% for the comparable three months in fiscal 2012. Gross profit increased $3,014,000, or 77%, to $6,938,000 for the three months ended December 31, 2013 from $3,924,000 in the comparable period in fiscal 2013. The increase in gross profit and cost of sales in the first quarter of fiscal 2014 is primarily a result of increased sales volume, along with a higher percentage of sales associated with optical component technologies and newer, high margin products.

Selling, general and administrative expenses increased $826,000, or 27%, to $3,865,000 in the fiscal 2014 first quarter from $3,039,000 for the fiscal 2013 first quarter. The increase in the fiscal 2014 quarter includes higher compensation expenses in the amount of $606,000, due to additional personnel as well as higher performance compensation accruals associated with higher net sales in the three months ended December 31, 2013 versus December 31, 2012, and $71,000 in higher development expenses.

Income from operations for the three months ended December 31, 2013 was $3,073,000 compared to income from operations of $886,000 for the first three months of fiscal 2013, an increase of $2,187,000, or 247%. This increase is attributable to increased net sales and higher gross margin.

Interest income for the three months ended December 31, 2013 was $20,000 compared to $25,000 for the comparable quarter for fiscal 2013. 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 $1,110,000 and $366,000 for the three months ended December 31, 2013 and 2012, respectively. Due to net operating loss utilization, income tax expense primarily included a non-cash effect on the operating cash flow in the first quarters of both fiscal 2014 and 2013. 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 $744,000 from the first quarter of fiscal 2013 is primarily due to deferred tax expense resulting from higher profitability and related increase in net operating loss carry-forward utilization. Our provisions for income taxes include current federal alternative minimum tax expense, state income tax expense and deferred tax expense.

The Company's net income for the three months ended December 31, 2013 was $1,982,000, or $0.16 and $0.15 per basic and diluted share, respectively. The Company's net income for the three months ended December 31, 2012 was $545,000, or $0.04 per basic and diluted share.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2013, our principal source of liquidity was our cash, cash equivalents and short-term investments. Those sources total $21,074,000 at December 31, 2013 compared to $15,800,000 at September 30, 2013. 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 $8,246,000 at December 31, 2013, compared to $6,770,000 at September 30, 2013. 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 December 31, 2013, Clearfield had no debt along with $29,320,000 in cash, cash equivalents and investments, compared to $22,570,000 at September 30, 2013.


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 December 31, 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 $6,800,000 for the three months ended December 31, 2013. This was primarily due to net income of $1,982,000, non-cash expenses for depreciation and amortization of $152,000, deferred taxes of $1,028,000, and stock based compensation of $188,000, in addition to changes in operating assets and liabilities providing cash. Changes in operating assets and liabilities providing cash include decreases in accounts receivable and inventory of $5,553,000 and $500,000, respectively. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. The decrease in inventory reflects the fulfillment of orders that were in the Company's backlog as of September 30, 2013 and also represents a quarterly adjustment for seasonal demand along with changes in stocking levels for product development life cycles. Changes in working capital items using cash include a decrease in accounts payable and accrued expenses in the amount of $2,414,000, primarily reflecting fiscal 2013 accrued bonus compensation accruals paid in the first quarter of fiscal 2014, and a decrease in other assets of $189,000.

Net cash provided by operating activities totaled $56,000 for the three months ended December 31, 2012. This was primarily due to net income of $545,000, non-cash expenses for depreciation and amortization of $121,000, deferred taxes of $333,000, loss on asset disposals of $7,000, and stock based compensation of $186,000, offset by changes in operating assets and liabilities using cash. Changes in operating assets and liabilities using cash include increases in inventory of $654,000, other current assets of $44,000, and accounts receivable of $181,000. The increase in inventory reflects higher stocking levels for existing and for new product offerings including Clearview Blue. Changes using cash also include a decrease in accounts payable and accrued expenses in the amount of $257,000, primarily reflecting fiscal 2012 accrued bonus compensation accruals paid in the first quarter of fiscal 2013.

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 three months ended December 31, 2013, we used cash to purchase $2,606,000 of FDIC-backed securities and received $3,782,000 on CDs that matured. Purchases of capital equipment and patents, mainly information technology and manufacturing equipment, consumed $92,000 of cash.

During the three months ended December 31, 2012, we used cash to purchase $1,655,000 of FDIC-backed securities and received $2,145,000 on CDs that matured. Purchases of capital equipment and patents, mainly information technology and manufacturing equipment, consumed $154,000 of cash.

Financing Activities

For the three months ended December 31, 2013, we received $90,000 from employees' participation and purchase of stock through our ESPP. We received $25,000 from the issuance of stock as a result of employees exercising options, and used $73,000 to pay for taxes for employees who elected to tender shares to satisfy tax withholding obligations upon exercise of stock options.

For the three months ended December 31, 2012, we received $69,000 from employees' participation and purchase of stock through our ESPP. We received $8,000 from the issuance of stock as a result of employees exercising options, and used $10,000 to pay for taxes for employees who elected to tender shares to satisfy tax withholding obligations upon exercise of stock 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, 2013. Management made no changes to the Company's critical accounting policies during the quarter ended December 31, 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 December 31, 2013.

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