CLFD.. $2.06
Stock is getting slamed on tax selling by the MOMO's that ran it to $6.41.. Great story here.. hank
From the 10K..
" Net income from continuing operations for 2009 was $3,785,000 or $0.32 per share for basic and $0.31 for diluted compared to $1,217,000 or $0.10 per both basic and diluted share in 2008. There were no discontinued operations for 2009. Net income from discontinued operations for 2008 was $297,000 or $0.03 per basic and diluted share.
The Company’s net income was $3,785,000 or $0.32 per share for basic and $0.31 per diluted share for the year 2009 compared to of $1,514,000 or $0.13 per share for both basic and diluted share for the year 2008. This is a net change of $2,271,000 or an increase of 150% over the prior year, primarily due to the non-cash income tax benefit realized from the reversal of the valuation allowance on our net deferred tax assets.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Statements made in this Annual Report on Form 10-K, in the Company’s other SEC filings, in press releases and in oral statements, that are not statements of historical fact are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “believes,” “expects,” “anticipates,” “seeks” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The risks and uncertainties that could cause actual results to differ materially and adversely from the forward-looking statements include those risks described in Part I, Item 1A. “Risk Factors.”
Overview of Business: The Company focuses on highly configurable products for telecommunications customers, primarily related to cabling management requirements of the FTTP marketplace and the design, manufacture, distribution, and marketing of a variety of fiber optics and copper components to the data communication and telecommunication industries. The Companies primary manufactured products include standard and custom fiber optic cable assemblies, copper cable assemblies, OSP cabinets, value–added fiber optics frames, panels and modules.
Critical Accounting Policies: In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenues, income or loss from operations and net income or loss, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as these policies affect the reported amounts of revenues, expenses and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include:
· Stock option accounting;
· Accounting for income taxes; and
· Valuation and evaluating impairment of long-lived assets and goodwill.
Stock-Based Compensation We measure and recognize compensation expense for all stock-based payments at fair value over the requisite service period. We use the Black-Scholes option pricing model to determine the weighted average fair value of director and employee stock options. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.
The expected terms of the options and employee stock purchase plan rights are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and expected future volatility of the Company’s stock. The Company has not historically issued any dividends and does not expect to in the future. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. If factors change we may employ different assumptions in the calculation of compensation expense.
Income Taxes We account for income taxes in accordance with Financial Accounting Standards Board ASC 740, under which, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.
In accounting for uncertainty in income taxes we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
The Company had U.S. federal and state net operating loss (NOL) carry forwards of approximately $31,684,000 and $23,573,000, respectively, which expire in fiscal years 2019 to 2027. The Company has recently completed an Internal Revenue Code Section 382 analysis of the loss carry-forwards and has determined that all of the company’s loss carry-forwards are utilizable and not restricted under Section 382.
At September 30, 2008, all of the Company’s net deferred tax assets, which consisted primarily of net operating losses, were offset with a valuation allowance, which amounted to approximately $13.1 million. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that these deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not or unknown, we must establish a valuation allowance.
During the fourth quarter of fiscal year 2009, the Company reversed a portion of its valuation allowance in consideration of all available positive and negative evidence, including our historical operating results, current financial condition, and potential future taxable income. Our future potential taxable income was evaluated based primarily on anticipated operating results for fiscal years 2010 through 2012. We determined that projecting operating results beyond 2012 involves substantial uncertainty and we discounted forecasts beyond 2010 as a basis to support our deferred tax assets. The reduction in the valuation allowance in the fourth quarter resulted in a non-cash income tax benefit of approximately $2.5 million. At September 30, 2009 the Company continues to record a valuation allowance of approximately $9.3 million against its remaining deferred tax assets. We will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors. If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation allowance is reduced. If the valuation allowance is increased, we would record additional income tax expense.
During the fiscal year ended September 30, 2009, the Company recorded a deferred income tax expense of $65,120 for the book and income tax basis difference in goodwill on acquisitions. This deferred income tax expense was netted against the deferred tax benefit resulting from the reduction in the valuation allowance.
The Company files income tax returns in the U.S. Federal jurisdiction, and various state jurisdictions. Based on its evaluation, the Company has concluded that it has no significant unrecognized tax benefits. With limited exceptions, the Company is no longer subject to U.S. federal and state income tax examinations for fiscal years ending prior 1993. In 2007 the Company changed its fiscal year to September 30.
Impairment of long-lived assets and goodwill The Company records the excess of purchase cost over the fair value of net tangible assets of acquired companies as goodwill or other identifiable intangible assets. In the last quarter of each year, or as an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company completes the impairment testing of goodwill primarily utilizing a discounted cash flow method.
Determining market values using a discounted cash flow method requires the Company to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates. The Company's judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information. While the Company believes that the estimates and assumptions underlying the valuation methodology are reasonable, different estimates and assumptions could result in a different outcome. The Company generally develops these forecasts based on recent sales data for existing products, planned timing of new product launches, and estimated expansion of the Fiber-To-The-Premise market.
If the carrying amount of a reporting unit exceeds its fair value, the Company measures the possible goodwill impairment loss based on an allocation of the estimate of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill. This test for the period ended September 30, 2009 resulted in no change to goodwill from the prior period.
The Company evaluates the recoverability of its long-lived assets when events or circumstances indicate an impairment may have occurred and when the net book value of such assets exceeds the future undiscounted cash flow attributed to such assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that that the carrying value may not be recoverable. No impairment of long-lived assets has occurred during the years ended September 30, 2009 or September 30, 2008, respectively.
Results of Operations
Year ended September 30, 2009 compared to year ended September 30, 2008
Revenues for the fiscal year ended 2009 increased 6% to $24,944,000 from revenue of $23,494,000 in 2008. This increase is attributable to the acceptance of the Company’s products, the introduction and acceptance of the FieldSmart™ fiber management product line and engineering-led design services within the FTTH market.
Revenue to broadband service providers and commercial data networks amounted to $21,390,000 or 86% of revenue compared to $18,359,000 or 78% of revenue in 2008. Sales to non-telecommunication companies, consisting primarily of copper cable assemblies produced to customer design specifications, were 14% of revenue or $3,555,000 compared to $5,134,000 or 22% of revenue in 2008.
Gross margin increased from 33.4% in 2008 to 35.6% in 2009 resulting in a gross profit of $8,871,000 in 2009 as compared to $7,852,000 in 2008, an increase of $1,019,000 or 13%. The 2.2% increase in gross margin is attributable to product mix, the introduction of the FieldSmart management product line, and the results of on-going programs to reduce the cost of products through a combination of new product introduction, process improvement, global sourcing of components and supply chain partnerships with non U.S. manufacturing organizations.
Selling, general and administrative expense increased 12% or $805,000 from $6,855,000 for 2008 to $7,660,000 for 2009. This increase reflects a significant investment in sales, marketing, product management, product engineering and performance-based compensation that we believe contributed to increased sales and profitability.
Income from operations for 2009 was $1,211,000 compared to $997,000 for 2008, an improvement of $214,000. This change is attributable to increased revenue and increased gross margin.
Interest income in 2009 continued its decline from 2008 by $143,000 to $125,000 in fiscal year 2009 from $268,000 in fiscal year 2008. This decline is attributable to continued declining interest rates from the prior year as the Company invested in FDIC backed bank certificates of deposit in 2009 as opposed to auction rate securities in 2008.
Interest expense decreased from $11,000 in 2008 to $6,000 in 2009. The interest is attributable to financing associated with the enterprise information system installed during 2007 and 2008.
Other income increased from $55,000 in 2008 to $82,000 in 2009. This consists of lease income on the Company’s Aberdeen, South Dakota facility. In March 2009, the tenant defaulted on the lease by failure to pay rent. We terminated the lease with our tenant as of April 2009. As a consequence of the lease termination we recorded as income the amount of $43,000 previously recorded as an accrual, which would have resulted in a reduced sale price to the tenant, per the lease agreement. We are currently leasing the facility on a month-to-month basis with the same tenant.
Income tax benefit for 2009 is $2,372,000 which reflects the recognition of a deferred tax asset (DTA). The DTA is $2,464,000 and is offset by tax amortization of goodwill of $65,000, which is deferred, tax expense for federal alternative minimum tax of approximately $20,000 and various state taxes in the amount of $7,000. Income taxes for 2008 include tax amortization of goodwill of $89,203, which is deferred and tax expense for federal alternative minimum tax and various state taxes in the amount of $3,800. Net income from continuing operations for 2009 was $3,785,000 or $0.32 per share for basic and $0.31 for diluted compared to $1,217,000 or $0.10 per both basic and diluted share in 2008. There were no discontinued operations for 2009. Net income from discontinued operations for 2008 was $297,000 or $0.03 per basic and diluted share.
The Company’s net income was $3,785,000 or $0.32 per share for basic and $0.31 per diluted share for the year 2009 compared to of $1,514,000 or $0.13 per share for both basic and diluted share for the year 2008. This is a net change of $2,271,000 or an increase of 150% over the prior year, primarily due to the non-cash income tax benefit realized from the reversal of the valuation allowance on our net deferred tax assets.
Liquidity and Capital Resources
As of September 30, 2009, our principal source of liquidity was our cash and cash equivalents and short-term investments. Those sources total $6,840,000, compared to $4,334,000 at September 30, 2008. Our cash is invested in money market accounts. We have no long-term debt obligations at September 30, 2009.
Operating Activities
Net cash generated from operations for the twelve months ended September 30, 2009 totaled $2,091,000. This was primarily due to our net income of $3,785,000, depreciation of $434,000, stock based compensation of $115,000 and a decrease in inventories of $935,000. This was offset by non-cash charges for net deferred taxes of $2,390,000, an increase in accounts receivable of $190,000 and reduction in accounts payable of $637,000.
Net cash generated from operations for the twelve months ended September 30, 2008 totaled $2,024,000. This was primarily due to our net income of $1,514,000 and depreciation of $498,000, deferred taxes of $89,000, stock based compensation of $129,000 and an increase in accounts payable of $687,000. This was offset by non-cash charges for the lease termination of $362,000 and an increase in inventories and accounts receivable of $493,000 and $115,000, respectively.
Investing Activities
For the twelve months ended September 30, 2009, we purchased $181,000 of manufacturing and IT equipment and software. During the same period we purchased $6,503,000 of FDIC backed certificates of deposit and sold approximately $4,962,000 securities most of which were available-for-sale securities. The net result is a net increase in cash from investing activities of $1,722,000. The Company intends to continue to invest in the necessary and appropriate manufacturing equipment to help maintain a competitive position in manufacturing capability.
For the twelve months ended September 30, 2008, we purchased $1,904,000 of property plant and equipment. Of that amount, approximately $1,500,000 was for the purchase of the Blaine Facility (see Note C) which was subsequently sold. During this same period we made a significant investment in our IT structure and manufacturing equipment totaling $404,000. The proceeds from the sale of assets amounted to $1,452,000 of which the Blaine building was the major portion at $1,450,000. During the same period we purchased $3,675,000 and sold $3,200,000 of available for sale securities. The net result is a net increase in cash from investing activities of $927,000.
Financing Activities
For the twelve months ended September 30, 2009 we used $62,000 to make scheduled debt principal payments principally associated with the financing of our IT systems. We received $91,000 from the issuance of stock from the exercise of employee stock options. The net cash received from financing activities totaled $29,000.
For the twelve months ended September 30, 2008 we used $68,000 to make scheduled debt principal payments principally associated with the financing of our IT systems.
The Company believes that its current cash and cash equivalents and cash flow from operations will be sufficient to meet its working capital and investment requirements for the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth, as well as potential future strategic transactions. However, future growth organically or through acquisition, may require the Company to raise capital through additional equity or debt financing. There can be no assurance that any such financing would be available on commercially acceptable terms.
Recent Accounting Pronouncements:
In June 2009, the Financial Accounting Standards Board (FASB) issued new standards on generally accepted accounting principles as codified in Accounting Standards Codification (ASC) 105-10. The new standard stipulates the FASB ASC is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The new standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We have adopted this standard and the adoption did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued new standards on fair value measurements as codified in ASC 820-10. This standard establishes a framework for measuring fair value in generally accepted accounting principles clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurement. This standard emphasizes that fair value is a market-based measurement, as opposed to a transaction-specific measurement. We adopted this standard at the beginning of fiscal 2009 for financial assets and liabilities and the adoption did not have a material impact on our consolidated financial statements. We will adopt this standard at the beginning of fiscal 2010 for non-financial assets and liabilities and do not expect it to have a material effect on our financial statements.
In April 2009, the FASB issued new standards on financial instruments as codified in ASC 825-10, which requires disclosures about fair value of financial instruments in financial statements for interim reporting periods and in annual financial statements of publicly-traded companies. The new standard also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. The new standard is effective for interim and annual periods ending after June 15, 2009. We adopted this standard in 2009. The adoption of this standard did not have a material impact on our consolidated financial statements.
In May 2009, the FASB issued new standards on subsequent events as codified in ASC 855-10. The new standard establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued. More specifically, the new standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. The new standard is effective for fiscal years and interim periods ending after June 15, 2009. We adopted this standard during 2009. The adoption of this standard did not have a material impact on our consolidated financial statements. We have evaluated subsequent events through December 18, 2009, the date this report on Form 10-K was filed with the U.S. Securities and Exchange Commission. We made no significant changes to our consolidated financial statements as a result of our subsequent events evaluation.
In June 2009, the FASB issued new standards on variable interest entities (VIE), as codified in 810-10, which requires an entity to perform a qualitative analysis to determine whether the enterprise’s variable interest gives it a controlling financial interest in a VIE. This analysis identifies a primary beneficiary of a VIE as the entity that has both of the following characteristics: i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and ii) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE. The Company is required to complete ongoing reassessments of the primary beneficiary of a VIE and will be required by the Company effective October 1, 2010. The Company does not expect it to have a material effect on its financial statements.
