Clearfield, Inc. annual report, FY2011

Clearfield, Inc. Form 10-K Summary

Reporting period: Fiscal year ended September 30, 2011, with quarterly information including the fourth quarter ended September 30, 2011. Clearfield manufactures fiber management, connectivity, optical component, and outside-plant enclosure products for broadband, FTTP, business, cell-site, and OEM markets. The company operates as one reportable segment.

Financial Performance and Position

Metric	FY 2011	FY 2010	Change
Revenue	$35.19 million	$24.37 million	+44%
Gross profit	$14.66 million	$9.14 million	+60%
Gross margin	41.7%	37.5%	+420 bps
Operating income	$3.72 million	$1.12 million	+231%
Net income	$6.17 million	$1.18 million	+422%
Diluted EPS	$0.48	$0.09	Improved
Cash from operations	$5.30 million	$0.63 million	+ $4.67 million

Revenue mix: Commercial data networks and broadband providers represented 87% of FY 2011 revenue, or $30.63 million; non-telecommunications contract manufacturing represented 13%, or $4.56 million.
Fourth quarter: Revenue was $10.70 million, gross profit was $4.48 million, and net income was $3.86 million. Fourth-quarter results included a significant non-cash income tax benefit.
Operating expenses: SG&A increased 36.5% to $10.94 million, primarily due to compensation, additional sales and marketing personnel, travel, market development, and higher stock-based compensation.
Liquidity: Cash and cash equivalents plus short-term investments totaled $13.13 million at September 30, 2011, compared with $7.05 million a year earlier. Including long-term investments, total cash and investments were $15.84 million.
Debt: The company reported no long-term debt at September 30, 2011. Total liabilities were $4.07 million and shareholders’ equity was $26.23 million.
Working capital: Inventory increased to $2.76 million from $1.51 million, reflecting higher stocking levels for expected demand. Accounts payable and accrued compensation also increased.
Capital allocation: Capital expenditures were $746,000. Proceeds from the sale of the Aberdeen, South Dakota facility contributed approximately $660,000. Management reported no material FY 2012 capital expenditure commitments.

Material Changes Versus the Prior Period

Revenue growth reflected stronger demand from existing customers, new accounts, broader distribution and private-label channels, and early-stage deployments associated with the American Recovery and Reinvestment Act.
Gross margin expanded due to lower purchased-product costs, favorable product mix, manufacturing efficiencies, and improved absorption of factory overhead.
Operating cash flow increased substantially, although inventory investment rose by $1.24 million.
Net income benefited from a $2.48 million release of deferred tax asset valuation allowance. The resulting approximately $2.5 million non-cash tax benefit materially increased reported earnings.
The company sold its Aberdeen facility and land in June 2011, recognizing a gain of approximately $37,000 in the third quarter.
Backlog increased to $3.81 million at September 30, 2011 from $2.68 million. Orders generally ship within three months.
Common shares outstanding increased to 12.27 million from 12.02 million, primarily from employee stock option exercises and the employee stock purchase plan.

Outlook, Risks, and Unusual Items

Management believes available cash, investments, and operating cash flow are sufficient for working capital and investment needs for the next 12 months. Future acquisitions or growth could require additional equity or debt financing, which may not be available on acceptable terms.
Demand is exposed to broadband deployment cycles, customer budgets, project timing, seasonal trends, and the uncertain timing of ARRA-funded projects.
Fiber-optic cable shortages and supplier lead times delayed some customer projects and could constrain future shipments and revenue recognition.
Power & Telephone Supply Company represented approximately 21% of FY 2011 revenue and 20% of FY 2010 revenue. Customer concentration creates material exposure to the loss or reduction of this relationship.
Several critical components and outsourced manufacturing services are sourced from single or limited suppliers, creating risks of delays, higher costs, quality issues, and lower margins.
Competition includes substantially larger telecommunications equipment suppliers, which may have greater purchasing power, engineering resources, and pricing flexibility.
The company faces technology obsolescence, product acceptance, intellectual property, product liability, customer consolidation, key-person, economic, and stock-price volatility risks.
The remaining deferred tax valuation allowance was approximately $6.0 million at September 30, 2011. Future changes in expected taxable income could result in additional tax benefits or tax expense.
No goodwill or long-lived asset impairment was recorded in FY 2011 or FY 2010. The company’s annual goodwill test produced no change in goodwill.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company qualified for the applicable smaller-reporting-company exemption.

Important Facts to Verify

Whether revenue growth and the $3.81 million backlog converted into sustained shipments after FY 2011, particularly as ARRA-related projects and fiber-cable constraints evolved.
The durability of the 41.7% gross margin amid competition, component costs, supplier concentration, and changes in product mix.
The extent to which FY 2011 net income and EPS were influenced by the one-time, non-cash $2.48 million deferred tax valuation allowance release.
Future realizability of the remaining deferred tax assets and the potential for additional valuation allowance releases or reversals.
Customer concentration, especially Power & Telephone Supply Company’s contribution to sales and accounts receivable.
Inventory growth, accrued compensation, and other working-capital requirements relative to operating cash flow.
Potential financing needs if Clearfield pursues acquisitions or accelerates organic expansion.
The effect of new fair-value, comprehensive-income, and goodwill-impairment accounting standards beginning in FY 2012; management expected no material impact from the first two and was evaluating the third.