f10q_073112.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012

 
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 0-16106
 
Clearfield, Inc.
(Exact name of Registrant as specified in its charter)
 
Minnesota
41-1347235
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

5480 Nathan Lane North, Suite 120, Plymouth, Minnesota 55442
(Address of principal executive offices and zip code)

(763) 476-6866
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
[X] YES      [ ] NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
[X] YES      [ ] NO
 
Indicate by check mark whether the registrant is a “large accelerated filer,” an “accelerated filer,” a “non-accelerated filer” or a “smaller reporting company” (as defined in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer [ ]  Accelerated filer [ ]   Non-accelerated filer [ ]  Smaller Reporting Company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 YES [ ]      NO [X]
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class:
Outstanding at July 17, 2012
Common stock, par value $.01
12,460,845

 
 

 
CLEARFIELD, INC.
 FORM 10-Q
 TABLE OF CONTENTS
 
 

 
 

 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CLEARFIELD, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
   
June 30,
 2012
   
September 30,
 2011
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 5,980,743     $ 11,281,027  
Short-term investments
    5,837,000       1,849,000  
Accounts receivable, net
    4,092,673       3,228,864  
Inventories
    3,000,307       2,757,151  
Deferred taxes
    994,000       994,000  
Other current assets
    521,686       170,243  
Total Current Assets
    20,426,409       20,280,285  
                 
Property, plant and equipment, net
    934,954       986,031  
                 
Other Assets
               
Long-term investments
    4,806,000       2,707,000  
Goodwill
    2,570,511       2,570,511  
Deferred taxes –long term
    3,497,192       3,558,797  
Other
    229,779       199,467  
Total other assets
    11,103,482       9,035,775  
Total Assets
  $ 32,464,845     $ 30,302,091  
                 
Liabilities and Shareholders’ Equity
               
Current Liabilities
               
Accounts payable
    1,287,815       1,439,611  
Accrued compensation
    1,337,904       2,465,132  
Accrued expenses
    74,550       106,383  
Total Current Liabilities
    2,700,269       4,011,126  
Deferred rent
    45,019       61,794  
Total Liabilities
    2,745,288       4,072,920  
                 
Commitment and Contingencies
    -       -  
                 
Shareholders’ Equity
               
Preferred stock, $.01 par value; authorized 500 shares; no shares outstanding
               
Common stock, authorized 50,000,000, $.01 par value; 12,460,845 and 12,270,691, shares issued and outstanding at June 30, 2012 and September 30, 2011
    124,608       122,707  
Additional paid-in capital
    54,017,137       53,402,138  
Accumulated deficit
    (24,422,188 )     (27,295,674 )
Total Shareholders’ Equity
    29,719,557       26,229,171  
Total Liabilities and Shareholders’ Equity
  $ 32,464,845     $ 30,302,091  
 
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 
1

 
CLEARFIELD, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 10,793,755     $ 10,124,665     $ 27,071,053     $ 24,490,898  
                                 
Cost of sales
    6,236,984       5,805,914       16,000,571       14,312,455  
                                 
Gross profit
    4,556,771       4,318,751       11,070,482       10,178,443  
                                 
Operating expenses
                               
Selling, general and administrative
    2,774,253       3,032,036        8,119,742       7,859,654  
Income from operations
    1,782,518       1,286,715        2,950,740       2,318,789  
                                 
Other income
                               
Interest income
    23,878       26,604       77,423       83,065  
Other income
    -       10,000       -       25,500  
      23,878       36,604       77,423       108,565  
Income before income taxes
    1,806,396       1,323,319       3,028,163       2,427,354  
                                 
Income tax expense
    64,436       45,489       154,677       115,879  
                                 
Net income
  $ 1,741,960     $ 1,277,830     $ 2,873,486     $ 2,311,475  
                                 
Net income per share:
                               
Basic
  $ 0.14     $ 0.11     $ 0.23     $ 0.19  
Diluted
  $ 0.14     $ 0.10     $ 0.23     $ 0.18  
                                 
Weighted average shares outstanding:
                               
   Basic
    12,388,162       12,097,670       12,339,673       12,054,868  
   Diluted
    12,670,400       12,829,497       12,728,828       12,738,794  
 
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 
2

 
CLEARFIELD, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
   
Nine Months Ended June 30
 
   
2012
   
2011
 
Cash flows from operating activities
           
Net income
  $ 2,873,486     $ 2,311,475  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    299,614       266,419  
Deferred taxes
    61,605       61,605  
Loss on disposal of assets
    21,081       (44,352 )
Stock based compensation
    326,651       208,557  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (863,809 )     (394,606 )
Inventories
    (241,547 )     (685,263 )
Prepaid expenses and other
    (351,443 )     (125,338 )
Accounts payable and accrued expenses
    (1,332,165 )     1,471,856  
  Net cash provided by operating activities
    793,473       3,070,353  
                 
Cash flows from investing activities
               
Purchases of property and equipment and intangible assets
    (297,006 )     (577,919 )
Proceeds from sale of assets
    -       660,292  
Purchases of investments
    (8,661,000 )     (1,395,659 )
Proceeds from maturities of investments
    2,574,000       1,039,690  
  Net cash used in investing activities
    (6,384,006 )     (273,596 )
                 
Cash flows from financing activities
               
Proceeds from issuance of common stock under employee stock purchase plan
    142,542       87,667  
Proceeds from issuance of common stock upon exercise of stock options
    147,707       58,944  
  Net cash provided by financing activities
    290,249       146,611  
                 
Increase (decrease) in cash and cash equivalents
    (5,300,284 )     2,943,368  
                 
Cash and cash equivalents, beginning of period
    11,281,027       5,285,719  
                 
Cash and cash equivalents, end of period
  $ 5,980,743     $ 8,229,087  
 
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS

 
3

 
NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation
 
The accompanying condensed financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission.  Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted.  However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period, due to variability in customer purchasing patterns and seasonal, operating and other factors. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2011.
 
In preparation of the Company’s financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Note 2.  Net Income Per Share
 
Basic net income per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income divided by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options, when dilutive.
 
   
Three Months Ended June 30
   
Nine Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
Net income per common share — basic:
                       
Net income
  $ 1,741,960     $ 1,277,830     $ 2,873,486     $ 2,311,475  
Weighted average shares outstanding—  basic
    12,388,162       12,097,670       12,339,673       12,054,868  
Net income per common share
  $ 0.14     $ 0.11     $ 0.23     $ 0.19  
                                 
Net income per common share — diluted:
                               
Net income
  $ 1,741,960     $ 1,277,830     $ 2,873,486     $ 2,311,475  
Weighted average shares outstanding
    12,388,162       12,097,670       12,339,673       12,054,868  
Dilutive impact of common stock equivalent outstanding
    282,238       731,827       389,155       683,926  
Weighted average shares outstanding— diluted
    12,670,400       12,829,497       12,728,828       12,738,794  
Net income per common share — diluted
  $ 0.14     $ 0.10     $ 0.23     $ 0.18  
 
 
4

 
Note  3.  Cash, Cash Equivalents and Investments

The Company currently invests its excess cash in money market accounts and bank certificates of deposit (CDs) with a term of not more than three years. CDs with original maturities of more than three months are reported as held-to-maturity investments and are carried at amortized cost. The maturity dates of the Company’s CDs at June 30, 2012 and September 30, 2011 are as follows:
 
   
June 30, 2012
   
September 30, 2011
 
Less than one year
  $ 5,837,000     $ 1,849,000  
1-3 years
    4,806,000       2,707,000  
Total
  $ 10,643,000     $ 4,556,000  

Note 4.  Stock Based Compensation

The Company recorded $326,651 of compensation expense related to current and past option grants, restricted stock grants and the Company’s Employee Stock Purchase Plan for the nine month period ended June 30, 2012.  The Company recorded $208,557 of compensation expense related to current and past equity awards for the nine month period ended June 30, 2011.  This expense is included in selling, general and administrative expense.  There was no tax benefit from recording this non-cash expense.  As of June 30, 2012, $869,306 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a weighted average period of approximately 3.2 years.
 
We used the Black-Scholes option pricing model to determine the weighted average fair value of options during the nine months ended June 30, 2012 and June 30, 2011. The weighted-average fair values at the grant date for options issued during the nine months ended June 30, 2012 and 2011 were $4.12 and $3.29, respectively. This fair value was estimated at grant date using the weighted-average assumptions listed below.
 
   
Nine months ended
June 30, 2012
   
Nine months ended
June 30, 2011
 
Dividend yield
    0 %     0 %
Expected volatility
    82.25 %     79.17 %
Average risk-free interest rate
    1.14 %     2.04 %
Expected life
 
6 years
   
6 years
 
Vesting period
 
1 year
   
1-3 year
 
 
The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected life represents the period of time that options are expected to be outstanding after their grant date. The risk-free interest rate reflects the interest rate at grant date on zero-coupon U.S. governmental bonds having a remaining life similar to the expected option term.
 
During the nine month period ended June 30, 2012, the Company granted non-employee directors non-qualified stock options to purchase an aggregate of 12,000 shares of common stock with a contractual term of 6 years, a vesting term of one year, an exercise price of $5.91 and a fair value of $4.12 per share. During the nine month period ended June 30, 2011, the Company granted key employees incentive stock options and granted non-employee directors non-qualified stock options to purchase an aggregate of 17,500 shares of common stock with contractual terms of 6 years, vesting terms between one and three years and a weighted average exercise price of $4.67 with a fair value of $3.29 per share.
 
During the nine month period ended June 30, 2012, exercised stock options totaled 168,148 shares, resulting in $147,707 of proceeds to the Company. During the nine month period ended June 30, 2011, exercised stock options totaled 74,251 shares, resulting in $58,944 of proceeds to the Company.
 
Employee Stock Purchase Plan
 
Clearfield, Inc.’s Employee Stock Purchase Plan (ESPP) allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the ESPP provide that participating employees may purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phases that ended on June 30, 2012 and December 31, 2011, employees purchased 17,662 and 11,267 shares at a price of $4.09 and $6.24 per share, respectively. After the employee purchase on June 30, 2012, 238,842 shares of common stock were available for future purchase under the ESPP.
 
 
5

 
Note 5.  Inventories

Inventories consist of the following as of:
 
   
June 30, 2012
   
September 30, 2011
 
Raw materials
  $ 2,278,483     $ 2,158,647  
Work-in-progress
    344,586       304,793  
Finished goods
    377,238       293,711  
    $ 3,000,307     $ 2,757,151  
 
Note 6.  Major Customer Concentration
 
One customer, Power & Telephone Supply Company (Power & Tel), who serves as a reseller of the Company’s product to a range of Tier 2 and Tier 3 Telco carriers as well as cable service operators, comprised approximately 22% and 21% of total sales for the nine month periods ended June 30, 2012 and 2011, respectively.

At June 30, 2012, one customer accounted for 15% of accounts receivable.  At June 30, 2011, two customers accounted for 23% of accounts receivable. Power & Tel accounted for 12% and Graybar, also a reseller, accounted for 11%. Power & Tel and Graybar purchase our product through a standard form of purchase order.

Note 7.  Asset held for sale
 
During the second quarter of fiscal 2011, the Company received and accepted a purchase offer for its facility and land in Aberdeen, South Dakota. The Company had not occupied the facility since fiscal year 2006. In June, 2011, the Company completed the sale of the facility and land in the amount of $725,000. The final proceeds to the Company after transaction costs were $660,000. We recorded a gain on the sale of these assets of approximately $37,000 in the third quarter of fiscal 2011.
 
Note 8.  Goodwill and Patents
 
The Company analyzes its goodwill for impairment annually or at an interim period when events occur or changes in circumstances indicate potential impairment.  The result of the analysis performed in the fourth fiscal quarter ended September 30, 2011 did not indicate an impairment of goodwill.  During the quarter ended June 30, 2012, there were no triggering events that indicate potential impairment exists.

The Company capitalizes legal costs incurred to obtain patents. Once accepted by either the U.S. Patent Office or the equivalent office of a foreign country, these legal costs are amortized using the straight-line method over the remaining estimated lives, not exceeding 17 years. The Company currently has patents pending with the U.S. Patent Office and in foreign countries.
 
Note 9.  Income Taxes
 
The Company recorded a provision for income taxes of approximately $65,000 and $46,000, for the three months ended June 30, 2012 and 2011, respectively.  The Company’s tax provision includes estimated current federal alternative minimum taxes and state franchise taxes, but is primarily related to deferred tax expense related to book and income tax basis difference in goodwill on prior asset acquisitions.  Our year-to-date net change in valuation allowance is $1,054,000.  This change consists of $1,116,000 of tax benefit as a result of a reduction in valuation allowance after considering current financial condition and potential future taxable income.  This reduction is partially offset by a $62,000 increase in valuation allowance from the current year AMT tax credit generated as its utilization does not meet the “more likely than not” criteria.

 
6

 
As of September 30, 2011 the Company had U.S. federal and state net operating loss (NOL) carry-forwards of approximately $27,239,000 and $22,245,000, respectively, which expire in fiscal years 2013 to 2028 if not utilized. In fiscal 2009, the Company completed an Internal Revenue Code Section 382 analysis of the loss carry-forwards and determined that all of its loss carry-forwards were utilizable and not restricted under Section 382.

Deferred taxes recognize the impact of temporary differences between the amounts of the assets and liabilities recorded for financial statement purposes and these amounts measured in accordance with tax laws. The Company’s realization of net operating loss carry-forward and other deferred tax temporary differences is contingent upon future taxable earnings. The Company reviewed its deferred tax asset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability.

During the fourth quarter of fiscal year 2011, the Company reversed a portion of its valuation allowance in consideration of all available positive and negative evidence, including its historical operating results, current financial condition, and potential future taxable income.  The reduction in the valuation allowance in the fourth quarter resulted in a non-cash income tax benefit of $2,481,000.  As of September 30, 2011, the Company had a remaining valuation allowance of approximately $6,042,000.

During the quarter ended September 30, 2011, the Company’s future taxable income was evaluated based primarily on anticipated operating results from fiscal years 2012 through 2014.  The Company determined that projecting operating results beyond 2014 involves substantial uncertainty and the Company discounted forecasts beyond 2014 as a basis to support its deferred tax assets.  Based upon the assessment of all available evidence, the Company reversed a portion of its valuation allowance for the quarter ended June 30, 2012 in an amount in which the tax benefit generated offsets the tax provision to be realized from current year estimated taxable income.  The Company will continue to assess the assumptions it uses to determine the amount of its valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future taxable income and other factors. If the valuation allowance is reduced, the Company would record an income tax benefit in the period in which that determination is made. If the valuation allowance is increased, we would record additional income tax expense. For the three months ended June 30, 2012 and 2011, the Company has reduced its valuation allowance by approximately $607,000 and $321,000 respectively. As of June 30, 2012 the Company had a valuation allowance of approximately $4,988,000.

As of June 30, 2012, we do not have any unrecognized tax benefits.  It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.
 
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, 2011, 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 and nine month periods ended June 30, 2012 and 2011 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, 2011.
 
 
7

 
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.  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 expanded its product offerings and broadened 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 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 JUNE 30, 2012 VS. THREE MONTHS ENDED JUNE 30, 2011
 
Revenues for the third fiscal quarter of 2012 ended June 30, 2012 were $10,794,000, an increase of $669,000, or approximately 7%, from revenue of $10,125,000, for the third fiscal quarter of 2011. Revenue gains in the third quarter of fiscal 2012 versus the prior year period were achieved through increased sales to telco’s, commercial data networks, and our build-to-print markets.  Revenue increases were across product lines, offset by lower revenues to systems integrators in the third quarter of fiscal 2012 versus the 2011 third quarter. Revenues derived from distributor arrangements were consistent with the prior year quarter. Revenues were positively affected in both periods by deployments associated with the American Recovery and Reinvestment Act (stimulus funds).  The market continues to experience challenges associated with long lead times for the supply of fiber cable. In addition, uncertainty regarding the effect of changes to the Universal Service Fund, a federal program to support the delivery of telecommunications services to rural and communities with high-cost delivery metrics, has influenced the buying patterns of Tier 3 Carriers. Operating results for the third quarter of fiscal year 2012 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns and seasonal, operating and other factors.

Cost of sales for the third quarter of fiscal 2012 was $6,237,000, an increase of $431,000, or 7% from $5,806,000 in the comparable period.  Gross margin was 42.2% in the third quarter of fiscal 2012, relatively unchanged from 42.7% for the third quarter of fiscal 2011. Gross profit increased to $4,557,000 in the third quarter of fiscal 2012, compared to $4,319,000 for the third fiscal quarter of 2012, an increase of 6% or $238,000. The increase in cost of goods and gross profit was primarily the result of increased sales in the third quarter of fiscal 2012 versus the 2011 third quarter. The Company continues to be committed to developing our channel distribution programs in step with our ongoing improvements in our manufacturing processes in order to facilitate future improvements in gross profit.

Selling, general and administrative expenses decreased 9%, or $258,000, to $2,774,000 in the third quarter of fiscal 2012 versus $3,032,000 for the third fiscal quarter of 2011. Selling expenses increased $170,000, mainly associated with an increase in sales personnel. Marketing expenses increased $33,000, mainly as a result of higher advertising and tradeshow costs within the period. Stock based compensation expense increased $19,000 in the third quarter of fiscal 2012 as a result of a higher number of employee stock options outstanding in the 2012 third quarter versus the 2011 third quarter. In addition, the fiscal 2011 period expenses were reduced by a $44,000 benefit from a gain on the sale of assets in the period. Offsetting these increases was a decrease in incentive compensation expense in the amount of $545,000 in the fiscal 2012 period versus the comparable period in fiscal 2011.

 
8

 
Income from operations for the third fiscal quarter of 2012 was $1,783,000 compared to income of $1,287,000 for the third fiscal quarter of 2011, an increase of $496,000 or 39%. This increase is attributable to the increase in gross margin and decreased selling, general and administrative expenses within the period.

Interest income for the quarter ended June 30, 2012 was $24,000 compared to $27,000 for the comparable period for fiscal 2011. 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.

Income tax expense was $64,000 and $45,000 for the quarters ended June 30, 2012 and 2011, respectively. Tax expense primarily relates to book and tax differences of goodwill totaling $21,000 and $21,000 respectively for each of the corresponding quarters. The balance of the income tax expense was for various states income and franchise taxes as well as alternative minimum tax (AMT).

The Company’s net income for the third quarter ended June 30, 2012 was $1,742,000, or $0.14 per basic and diluted share. For the third quarter of fiscal 2011 ended June 30, 2011 the Company reported net income of $1,278,000, or $0.11 per basic and $0.10 per diluted share.

NINE MONTHS ENDED JUNE 30, 2012 VS. NINE MONTHS ENDED JUNE 30, 2011
 
Revenues for the nine months ended June 30, 2012 were $27,071,000, an increase of approximately 11% or $2,580,000 from revenue of $24,491,000 for the first nine months of fiscal 2011. Revenue growth was experienced from existing clients as well as from the development of new accounts within the telco industry. The growth in revenue includes gains from within Tier 3 Carriers, as well as from an emerging presence associated with Tier 2 Carriers who have a national footprint. The increase in revenue includes the gains in product sales to engineering contractors providing Engineer, Furnish and Installation (EF&I) services to telco and cable broadband operators.  Revenues derived from distributor arrangements increased as additional distributors are now representing the Company as compared to the prior year. In addition, revenue gains were also gained in our build-to-print market. These revenue increases in the nine month period ended June 30, 2012 were offset by lower revenues to system integrators in the comparable nine month period in fiscal 2011. Revenues were positively affected by deployments associated with the American Recovery and Reinvestment Act (stimulus funds) in both periods.  Operating results for the first three quarters of fiscal year 2012 are not necessarily indicative of results to be expected for future quarters or the entire year, due to variability in customer purchasing patterns and seasonal, operating and other factors.

Cost of sales for the nine months ended June 30, 2012 was $16,001,000, an increase of $1,688,000, or 12%, from $14,312,000 in the comparable period.  Gross margin was 40.9% in fiscal 2012, relatively unchanged from 41.6% for the comparable nine month period in fiscal 2011. Gross profit increased $892,000, or 9%, to $11,070,000 for the nine months ended June 30, 2012 from $10,178,000 in the comparable period in fiscal 2011.  The year-over-year increase in gross profit is primarily a result of increased sales volume, mainly through additional sales distribution channels than prior year, along with improved manufacturing efficiencies and absorption of factory overhead associated with higher production volumes.

Selling, general and administrative expenses increased 3%, or $260,000, to $8,120,000 in the fiscal 2012 period from $7,860,000 for the first nine months of fiscal 2011 period. This increase is primarily composed of $658,000 in higher selling expenses, mainly associated with an increase in sales personnel. Marketing expenses increased $212,000 as a result of higher advertising and tradeshow costs within the period. Stock based compensation expense increased $118,000 in the fiscal 2012 period as a result of a higher amount of employee stock options outstanding in the nine month period ended June 30, 2012 quarter versus 2011. Offsetting these increases was a decrease of $709,000 in incentive compensation in the nine month period ending June 30, 2012 versus the comparable period in fiscal 2011.

Income from operations for the nine months ended June 30, 2012 was $2,951,000 compared to income of $2,319,000 for the first nine months of fiscal 2011, an improvement of $632,000, or 27%. This improvement is attributable to increased revenue and gross margin.

 
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Interest income for the nine months ended June 30, 2012 was $77,000 compared to $83,000 for the comparable period for fiscal 2011. 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.

Income tax expense was $155,000 and $116,000 for the first nine months ended June 30, 2012 and 2011, respectively. Tax expense primarily relates to book and tax differences of goodwill totaling $62,000 and $62,000, respectively, for each of the corresponding nine month periods. The balance of the income tax expense was for various states income and franchise taxes as well as alternative minimum tax (AMT).

The Company’s net income for the nine month period ended June 30, 2012 was $2,873,000, or $0.23 per basic and $0.23 per diluted share. The Company’s net income for the nine month period ended June 30, 2011 was $2,311,000, or $0.19 per basic share and $0.18 per diluted share.


LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 2012, our principal source of liquidity was our cash and cash equivalents and short-term investments. Those sources total $11,818,000 at June 30, 2012 compared to $13,130,000 at September 30, 2011.  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 $4,806,000 at June 30, 2012, compared to $2,707,000 at September 30, 2011.  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, 2012, Clearfield had no debt along with $16,624,000 in cash and equivalents and investments, up $787,000 from $15,837,000 at September 30, 2011.
 
The Company expects to fund operations with its working capital, which is the combination of existing cash and cash equivalent 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, 2012, 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 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.
 
Net cash generated from operating activities totaled $3,070,000 for the nine months ended June 30, 2011. This was primarily due to net income of $2,311,000, and non-cash expenses for depreciation of $266,000, deferred taxes of $62,000, gain on disposal of assets of $44,000, and stock based compensation of $209,000.  Changes in operating assets and liabilities using cash were increases in inventory of $685,000, other current assets of $125,000, and accounts receivable of $395,000. Changes in operating assets and liabilities providing cash were an increase in accounts payable and accrued expenses of $1,472,000.
 
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 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 capital equipment and patents, mainly information technology equipment and vehicles, consumed $297,000 of cash.
 
 
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During the nine month period ended June 30, 2011 we utilized cash to purchase $1,396,000 of securities and received $1,040,000 on CDs that have matured.  Purchases of capital equipment and information technology equipment consumed $578,000 of cash during the nine month period ended June 30, 2011. We also received proceeds from the sale of assets in the amount of $660,000 for the sale of our Aberdeen, SD facility.
 
Financing Activities
 
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.
 
For the nine month period ended June 30, 2011 we received $88,000 from employees’ participation and purchase of stock through our ESPP and received $59,000 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, 2011.  Management made no changes to the Company’s critical accounting policies during the quarter ended June 30, 2012.
 
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, 2012.
 
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report these disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes  to the Company’s internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, that occurred during the quarter ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
The Company is exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of business.  Although the outcome of any such legal action cannot be predicted, management believes that there are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.

ITEM 1A.  RISK FACTORS

The most significant risk factors applicable to the Company are described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2011. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act
 
Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

Exhibit 32.1 – Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CLEARFIELD, INC.


July 31, 2012
 
 /s/ Cheryl P. Beranek
   
By: Cheryl P. Beranek
Its:  President and Chief Executive Officer
   
(Principal Executive Officer)
     
July 31, 2012
 
/s/ Daniel Herzog
   
By:  Daniel Herzog
Its:  Chief Financial Officer
   
(Principal Financial and Accounting Officer)