Clearfield, Inc. 10-Q Summary: Period Ended March 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009, and the six-month period ended March 31, 2009. Clearfield, Inc. (formerly APA Enterprises, Inc.) operates as a smaller reporting company focusing on highly configurable telecommunications products, specifically cabling management for the Fiber-to-the-Home (FTTH) marketplace and custom cable assemblies for OEMs. The company consolidated its sole subsidiary, APA Cables & Networks, Inc., into the parent company in January 2008. The company changed its fiscal year-end from March 31 to September 30 in June 2007.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2009 |
|---|---|---|
| Revenues | $5,232,604 | $11,165,891 |
| Gross Profit | $1,818,152 | $3,832,360 |
| Gross Margin | 35% | 34% |
| Net Income | $131,049 | $348,536 |
| Net Income Per Share (Basic/Diluted) | $0.01 | $0.03 |
| Cash and Cash Equivalents | $3,133,588 | $3,133,588 (Ending Balance) |
| Total Investments (Short & Long Term) | $4,920,663 | $4,920,663 (Ending Balance) |
| Net Cash Provided by Operating Activities | N/A | $380,732 |
| Total Debt (Current Maturities) | $64,798 | $64,798 (Ending Balance) |
Material Changes vs. Prior Comparable Period
- Revenue: For the three months ended March 31, 2009, revenue decreased 4% to $5.23 million compared to $5.44 million in the prior year, attributed to the depressed economic climate. However, for the six-month period, revenue increased 10% to $11.17 million from $10.14 million, driven by the acceptance of the Fieldsmart product line.
- Profitability: Gross margin improved from 32% to 35% (quarterly) and 32% to 34% (six-month) due to process improvements and global sourcing. Operating income for the quarter increased 190% to $128,202 from $44,312.
- Interest Income: Interest income declined significantly (78% quarterly, 71% six-month) as the company moved excess cash from Auction Rate Securities (ARS) yielding ~5% into money markets and CDs yielding 0-3% following the ARS market freeze.
- Discontinued Operations: The prior year six-month period included $297,439 of income from discontinued operations (related to the sale of the Blaine facility), whereas the current period had none.
Guidance, Outlook, and Risks
Guidance: Management explicitly states it is unable to provide short-term guidance due to current economic conditions. While optimistic about the stability of the FTTH market, the company acknowledges it is not immune to broader economic declines.
Liquidity: The company holds approximately $6.2 million in cash and cash equivalents (including short-term investments). Management believes current resources are sufficient to meet working capital and investment requirements for the next 12 months, though future growth may require additional financing.
Risks and Contingencies:
- Customer Concentration: Two customers comprised 41% of total sales for the six months ended March 31, 2009. One customer accounted for 47% of accounts receivable.
- Goodwill Impairment: Management monitors market capitalization and operating results for triggering events. While no impairment was recorded, the company notes that if stock price does not respond to increased profits, an impairment could be triggered.
- Lease Default: The tenant of the Aberdeen, South Dakota facility defaulted on the lease in March 2009 and is in arrears; the company is working to resolve the matter.
- Related Party Transaction: A note receivable of approximately $455,000 (plus accrued interest) is held from the former CEO, Anil K. Jain, related to the sale of the India subsidiary. The holder is current on payments.
Investor Verification Checklist
- Verify the status of the defaulted lease at the Aberdeen facility and potential recovery of receivables.
- Confirm the payment status of the related-party note receivable from former CEO Anil K. Jain.
- Assess the impact of the 41% revenue concentration from two major customers on future stability.
- Monitor the company's ability to maintain gross margins as economic conditions fluctuate.
- Review the valuation allowance on deferred tax assets, as the company currently records a full allowance due to uncertainty in realization.