UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from __________________ to ___________________
Commission File Number
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive office) |
(Zip Code) |
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(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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The |
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.
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company in Rule 12b-2 of the Exchange Act. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Accelerated filer ☐ | ||||
| Non-accelerated filer ☐ | Smaller reporting company |
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class: |
Outstanding as of January 29, 2024 |
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Common stock, par value $.01 |
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CLEARFIELD, INC.
FORM 10-Q
TABLE OF CONTENTS
CLEARFIELD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
December 31, |
September 30, |
|||||||
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Assets |
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Current Assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Short-term investments |
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Accounts receivables, net |
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Inventories, net |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Other Assets |
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Long-term investments |
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Goodwill |
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Intangible assets, net |
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Right-of-use lease assets |
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Deferred tax asset |
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Other |
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Total other assets |
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Total Assets |
$ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
|
Current Liabilities |
||||||||
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Current portion of lease liability |
$ | $ | ||||||
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Current maturities of long-term debt |
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Accounts payable |
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Accrued compensation |
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Accrued expenses |
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Factoring liability |
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Total current liabilities |
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Other Liabilities |
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Long-term portion of lease liability |
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Deferred tax liability |
||||||||
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Total liabilities |
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Shareholders’ Equity |
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Preferred stock, $ par value; |
||||||||
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Common stock, authorized |
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Additional paid-in capital |
||||||||
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Accumulated other comprehensive loss |
( |
) | ||||||
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Retained earnings |
||||||||
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Total shareholders’ equity |
||||||||
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Total Liabilities and Shareholders’ Equity |
$ | $ | ||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
Three Months Ended |
Three Months Ended |
|||||||
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December 31, |
December 31, |
|||||||
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2023 (Unaudited) |
2022 |
|||||||
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Net sales |
$ | $ | ||||||
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Cost of sales |
||||||||
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Gross profit |
||||||||
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Operating expenses |
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Selling, general and administrative |
||||||||
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Income from operations |
( |
) | ||||||
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Net investment income |
||||||||
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Interest expense |
( |
) | ( |
) | ||||
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Income before income taxes |
( |
) | ||||||
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Income tax expense |
( |
) | ||||||
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Net income |
$ | ( |
) | $ | ||||
|
Net income per share Basic |
$ | ( |
) | $ | ||||
|
Net income per share Diluted |
$ | ( |
) | $ | ||||
| Weighted average shares outstanding: | ||||||||
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Basic |
||||||||
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Diluted |
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS)
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Three Months Ended |
Three Months Ended |
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December 31, |
December 31, |
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2023 (Unaudited) |
2022 |
|||||||
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Comprehensive (loss) Income: |
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Net (loss) income |
$ | ( |
) | $ | ||||
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Other comprehensive income, net of tax |
||||||||
| Unrealized gain on available-for-sale investments | ||||||||
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Unrealized gain on foreign currency translation |
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Total other comprehensive income |
||||||||
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Total comprehensive (loss) income |
$ | ( |
) | $ | ||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN THOUSANDS)
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For three months ended December 31, 2023 |
Accumulated other |
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Common Stock |
Additional |
comprehensive |
Retained |
Total share- |
||||||||||||||||||||
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Shares |
Amount |
paid-in capital |
income (loss) |
earnings |
holders’ equity |
|||||||||||||||||||
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Balance as of September 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
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Stock-based compensation expense |
- | |||||||||||||||||||||||
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Issuance of common stock under employee stock purchase plan |
||||||||||||||||||||||||
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Issuance of common stock under equity compensation plans, net |
||||||||||||||||||||||||
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Repurchase of shares for payment of withholding taxes for vested restricted stock grants |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
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Repurchase of common stock |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
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Adoption of new accounting pronouncement |
- | - | - | - | ||||||||||||||||||||
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Other comprehensive income |
- | |||||||||||||||||||||||
| Net loss | ( |
) | ( |
) | ||||||||||||||||||||
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Balance at December 31, 2023 |
$ | $ | $ | $ | $ | |||||||||||||||||||
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For three months ended December 31, 2022 |
Accumulated other |
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Common Stock |
Additional |
comprehensive |
Retained |
Total share- |
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Shares |
Amount |
paid-in capital |
income (loss) |
earnings |
holders’ equity |
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Balance as of September 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
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Stock-based compensation expense |
- | |||||||||||||||||||||||
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Issuance of common stock under employee stock purchase plan |
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Issuance of common stock under equity compensation plans, net |
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Repurchase of shares for payment of withholding taxes for vested restricted stock grants |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
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Exercise of stock options, net of shares exchanged for payment |
( |
) | ( |
) | ||||||||||||||||||||
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Issuance of common stock, net |
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Other comprehensive income |
- | |||||||||||||||||||||||
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Net income |
- | $ | $ | $ | $ | $ | ||||||||||||||||||
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Balance at December 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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Three Months |
Three Months |
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Ended |
Ended |
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December 31, |
December 31, |
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2023 |
2022 |
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Cash flows from operating activities |
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Net (loss) income |
$ | ( |
) | $ | ||||
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
||||||||
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Gain on sale of property, plant, and equipment |
( |
) | ||||||
|
Amortization of discount on investments |
( |
) | ( |
) | ||||
|
Deferred taxes |
( |
) | ( |
) | ||||
|
Stock-based compensation |
||||||||
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Changes in operating assets and liabilities, net of acquired amounts: |
||||||||
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Accounts receivable |
( |
) | ||||||
|
Inventories, net |
( |
) | ||||||
|
Other assets |
( |
) | ||||||
|
Accounts payable and accrued expenses |
( |
) | ( |
) | ||||
|
Net cash provided by operating activities |
||||||||
|
Cash flows from investing activities |
||||||||
|
Purchases of property, plant and equipment and intangible assets |
( |
) | ( |
) | ||||
|
Purchases of investments |
( |
) | ( |
) | ||||
|
Proceeds from maturities of investments |
||||||||
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Net cash provided by (used in) investing activities |
( |
) | ||||||
|
Cash flows from financing activities |
||||||||
|
Repayment of long-term debt |
( |
) | ||||||
|
Proceeds from issuance of common stock under employee stock purchase plan |
||||||||
|
Repurchase of shares for payment of withholding taxes |
( |
) | ( |
) | ||||
|
for stock grants |
||||||||
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Tax withholding and proceeds related to exercise of stock options |
( |
) | ||||||
|
Issuance of stock under equity compensation plans |
||||||||
|
Net proceeds from issuance of common stock |
||||||||
|
Repurchase of common stock |
( |
) | ||||||
|
Net cash (used in) provided by financing activities |
( |
) | ||||||
|
Effect of exchange rates on cash |
||||||||
|
(Decrease) increase in cash and cash equivalents |
( |
) | ||||||
|
Cash and cash equivalents, beginning of year |
||||||||
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Cash and cash equivalents, end of year |
$ | $ | ||||||
|
Supplemental disclosures for cash flow information |
||||||||
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Cash paid during the year for income taxes |
$ | $ | ||||||
|
Cash paid for interest |
$ | $ | ||||||
|
Non-cash financing activities |
||||||||
|
Cashless exercise of stock options |
$ | $ | ||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company,” and “Clearfield,” refer to Clearfield, Inc. and subsidiaries.
Basis of Presentation
The accompanying (a) consolidated balance sheet as of September 30, 2023, which has been derived from audited financial statements, and (b) unaudited interim consolidated financial statements as of and for the three months ended December 31, 2023 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. In the opinion of management, the consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, 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, seasonality, and other factors. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023.
In preparation of the Company’s consolidated 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Clearfield, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Recently Adopted Accounting Pronouncements
On October 1, 2023, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the initial guidance: ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, and ASU No. 2020-02 (collectively, Topic 326). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses (CECL). The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost, which are primarily trade accounts receivable for the Company. Results for reporting periods beginning after October 1, 2023, are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The impact of adopting Topic 326 as of October 1, 2023, was not material to the consolidated financial statements.
Note 2. Net Income (Loss) Per Share
Basic net income (loss) per common share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income (loss) 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.
The following is a reconciliation of the numerator and denominator of the net income (loss) per common share computations for the three months ended December 31, 2023, and 2022:
|
Three Months Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Net (loss) income |
$ | ( |
) | $ | ||||
|
Weighted average common shares |
||||||||
|
Dilutive potential common shares |
||||||||
|
Weighted average dilutive common shares outstanding |
||||||||
| Net (loss) income per common share: | ||||||||
|
Basic |
$ | ) | $ | |||||
|
Diluted |
$ | ) | $ | |||||
Note 3. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The following table presents the Company’s cash and cash equivalents balances:
|
(In thousands) |
December 31, 2023 |
September 30, 2023 |
||||||
|
Cash and cash equivalents: |
||||||||
|
Cash including money market accounts |
$ | $ | ||||||
|
Money market funds |
||||||||
|
Total cash and cash equivalents |
$ | $ | ||||||
Note 4. Investments
The Company invests in certificates of deposit that are fully insured by the Federal Deposit Insurance Corporation ("FDIC") and United States Treasury securities with terms of not more than five years, as well as money market funds. The Company’s investment portfolio is classified as available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income (loss), net of tax. Realized gains and losses on available-for-sale securities are recognized upon sale and are included in net investment income in the consolidated statement of earnings.
As of December 31, 2023, available-for-sale investments consisted of the following:
|
December 31, 2023 |
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(In thousands) |
Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
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Short-Term |
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|
U.S. Treasury securities |
$ | $ | $ | $ | ||||||||||||
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Certificates of deposit |
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Investment securities – short-term |
$ | $ | $ | $ | ||||||||||||
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Long-Term |
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U.S Treasury securities |
$ | $ | $ | $ | ||||||||||||
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Certificates of deposit |
||||||||||||||||
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Investment securities – long-term |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2023, available-for-sale investments consist of the following:
|
September 30, 2023 |
||||||||||||||||
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(In thousands) |
Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
|
Short-Term |
||||||||||||||||
|
U.S treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Investment securities – short-term |
$ | $ | $ | $ | ||||||||||||
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Long-Term |
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U.S treasury securities |
$ | $ | $ | $ | ||||||||||||
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Certificates of deposit |
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Investment securities – long-term |
$ | $ | $ | $ | ||||||||||||
As of December 31, 2023, investments in debt securities in an unrealized loss position were as follows:
|
In Unrealized Loss Position For Less Than 12 Months |
In Unrealized Loss Position For Greater Than 12 Months |
|||||||||||||||
|
(In thousands) |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||
|
U.S treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Investment securities |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2023, investments in debt securities in an unrealized loss position were as follows:
|
In Unrealized Loss Position For Less Than 12 Months |
In Unrealized Loss Position For Greater Than 12 Months |
|||||||||||||||
|
(In thousands) |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||
|
U.S treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Investment securities |
$ | $ | $ | $ | ||||||||||||
As of December 31, 2023, there were
Note 5. Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the market price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of U.S. treasury securities and certificates of deposit based on valuations provided by an external pricing service, which obtains them from a variety of industry standard data providers.
The Company’s investments are categorized according to the three-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one of the following levels:
Level 1- Quoted prices in active markets for identical assets or liabilities.
Level 2- Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3- Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those with fair value measurements that are determined using pricing models, discounted cash flow valuation or similar techniques, as well as significant management judgment or estimation.
The following provides information regarding fair value measurements for the Company’s investment securities as of December 31, 2023, according to the three-level fair value hierarchy:
|
Fair Value Measurements as of December 31, 2023 |
||||||||||||||||
|
(In thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
|
Cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | $ | $ | $ | ||||||||||||
|
Total cash equivalents |
$ | $ | $ | $ | ||||||||||||
|
Investment securities: |
||||||||||||||||
|
Certificates of deposit |
$ | $ | $ | $ | ||||||||||||
|
U.S. Treasury securities |
||||||||||||||||
|
Total investment securities |
$ | $ | $ | $ | ||||||||||||
The following provides information regarding fair value measurements for the Company’s investment securities as of September 30, 2023, according to the three-level fair value hierarchy:
|
Fair Value Measurements as of September 30, 2023 |
||||||||||||||||
|
(In thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
|
Cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | $ | $ | $ | ||||||||||||
|
Total cash equivalents |
$ | $ | $ | $ | ||||||||||||
|
Investment securities: |
||||||||||||||||
|
Certificates of deposit |
$ | $ | $ | $ | ||||||||||||
|
U.S. Treasury securities |
||||||||||||||||
|
Total investment securities |
$ | $ | $ | $ | ||||||||||||
During the three months ended December 31, 2023, and the year ended September 30, 2023, the Company owned
Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets, and right-of-use assets for operating leases are subject to non-recurring fair value measurements if they are deemed impaired. The Company had no re-measurements of non-financial assets to fair value in the three months ended December 31, 2023, and the year ended September 30, 2023.
Note 6. Other Comprehensive Income (Loss)
Changes in components of other comprehensive income (loss), net of tax, are as follows:
|
(In thousands) |
Available-for-Sale Securities |
Foreign Currency Translation |
Accumulated Other Comprehensive Loss |
|||||||||
|
Balances at September 30, 2023 |
$ | ( |
) | $ | $ | ( |
) | |||||
|
Other comprehensive income for the three months ended December 31, 2023 |
||||||||||||
|
Balances at December 31, 2023 |
$ | ( |
) | $ | $ | |||||||
Note 7. Stock-Based Compensation
The Company recorded $
Stock Options
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. During the three months ended December 31, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of
The fair value of stock option awards during the three months ended December 31, 2023, was estimated as of the respective grant dates using the assumptions listed below:
|
Three months ended December 31, 2023 |
||||
|
Dividend yield |
% | |||
|
Expected volatility |
% | |||
|
Risk-free interest rate |
% | |||
|
Expected life (years) |
|
|||
|
Vesting period (years) |
|
|||
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 as of the grant date on zero-coupon U.S. governmental bonds with a remaining life similar to the expected option term.
Options are granted with exercise prices at fair market values determined on the date of grant and vesting normally occurs over a to -year period. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares.
The following is a summary of stock option activity during the three months ended December 31, 2023:
|
Number of options |
Weighted average exercise price |
|||||||
|
Outstanding as of September 30, 2023 |
$ | |||||||
|
Granted |
||||||||
|
Exercised |
||||||||
|
Forfeited or expired |
( |
) | ||||||
|
Outstanding as of December 31, 2023 |
$ | |||||||
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of December 31, 2023, the weighted average remaining contractual term for all outstanding and exercisable stock options was
Restricted Stock
During the three months ended December 31, 2023, the Company granted employees restricted stock awards totaling
Restricted stock transactions during the three months ended December 31, 2023, are summarized as follows:
|
Number of shares |
Weighted average grant date fair value |
|||||||
|
Unvested shares as of September 30, 2023 |
$ | |||||||
|
Granted |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Unvested as of December 31, 2023 |
$ | |||||||
Performance Stock
During the three months ended December 31, 2023, the Company granted 47,745 performance stock units which entitles the participant to receive the same number of shares of the Company’s common stock, upon achievement of a fiscal year 2024 performance goal. The Company has determined the fair value per underlying share of the performance stock unit awards to be $26.18 as of the grant date.
Compensation expense for the performance stock units is measured using the fair value of our common stock at the grant date. As of December 31, 2023, the Company believes it is probable that these performance stock unit awards will vest and compensation expense has been recognized ratably over the performance period based on our estimated achievement of the established performance criteria. The Company did not issue any performance stock units in the three months ended December 31, 2022.
Bonus Stock
The Company did not issue any bonus stock in the three months ended December 31, 2023. During the three months ended December 31, 2022, the Company granted employees an aggregate of
Employee Stock Purchase Plan
The Company’s 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 those participating employees the ability to 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
Note 8. Revenue
Revenue Recognition
Net sales include products and shipping and handling charges. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with substantially all revenue recognized at the point in time the customer obtains control of the products. The Company recognizes revenue, including shipping and handling charges, at the time the products are delivered to or picked up by the customer. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Disaggregation of Revenue
The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales outside the United States are principally to customers in Europe, the Caribbean, Canada, Central and South America.
Revenues related to the following geographic areas were as follows for the three months ended:
|
Three Months Ended December 31, |
||||||||
|
(In thousands) |
2023 |
2022 |
||||||
|
United States |
$ | $ | ||||||
|
All other countries |
||||||||
|
Total Net Sales |
$ | $ | ||||||
The Company sells its products to the Broadband Service Provider marketplace. In addition, the Company provides Legacy services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification.
The percentages of our sales by markets were as follows for the three months ended:
|
Three Months Ended December 31, |
||||||||
|
2023 |
2022 |
|||||||
|
Broadband service providers |
% | % | ||||||
|
Other customers |
% | % | ||||||
|
Total Net Sales |
% | % | ||||||
Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, also referred to as Tier 2 and Tier 3 customers; National Carriers, which includes large national and global wireline and wireless providers, also referred to as Tier 1 customers; Large Regional Service Providers with a national footprint; multiple system operators (“MSO’s”), which include cable television companies; and international customers.
Accounts Receivable
Credit is extended based on the evaluation of a customer’s financial condition, and collateral is generally not required. Accounts that are outstanding longer than the contractual payment terms are considered past due. On October 1, 2023, the Company adopted the cumulative expected credit loss model (“CECL”). Upon adoption of the CECL, the Company measures the allowance for credit losses using an expected credit loss model, which uses a lifetime expected credit loss allowance for all accounts receivable. To measure the expected credit losses, accounts receivable are grouped based on shared credit risk characteristics and the days past due. In calculating an allowance for credit losses, the Company uses its historical experience, external indicators, and forward-looking information to calculate expected credit losses using an aging method. The Company assesses impairment of accounts receivable on a collective basis as they possess shared credit risk characteristics which have been grouped based on the days past due. The expected loss rates are based on the Company’s historical credit losses experience. The historical loss rates are adjusted to reflect current and forward-looking information. As of December 31, 2023, the Company’s allowance for credit losses was $
As of September 30, 2023, prior to the adoption of CECL, the Company’s allowance for doubtful accounts was $
See Note 9 “Major Customer Concentration” for further information regarding accounts receivable and net sales.
Note 9. Major Customer Concentration
For the three months ended December 31, 2023, the Company had customers that comprised % and % of the Company’s net sales, respectively. Both customers are distributors. For the three months ended December 31, 2022, customer comprised % of the Company’s net sales. This customer is a distributor.
As of December 31, 2023, two customers account for % and % of accounts receivable, respectively. These customers are distributors. As of September 30, 2023, customers account for %, %, and % of accounts receivable. These customers are distributors.
Note 10. Inventories
Inventories consist of finished goods, raw materials, and work-in-process and are stated at average cost, subject to the lower of cost or net realizable value. Certain components of the Company’s inventory classified as raw materials or finished goods can be used as a component to manufacture products or can be sold directly to the customer. Inventory is valued using material costs, labor charges, and allocated factory overhead charges and consists of the following:
|
(In thousands) |
December 31, 2023 |
September 30, 2023 |
||||||
|
Raw materials |
$ | $ | ||||||
|
Work-in-process |
||||||||
|
Finished goods |
||||||||
|
Inventories, gross |
||||||||
|
Inventory reserve |
( |
) | ( |
) | ||||
|
Inventories, net |
$ | $ | ||||||
Inventory reserves are established for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on the Company’s usage and inventory age, relative to historical experience.
Note 11. Goodwill and Intangibles
The Company tests Goodwill for impairment annually at fiscal year-end, or more frequently when events or changes in circumstances indicate that the asset might be impaired. The Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The result of the analysis performed as of September 30, 2023, did indicate an impairment of goodwill. During the three months ended December 31, 2023, 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
In addition, the Company has various finite lived intangible assets, most of which were acquired as a result of the acquisition of the active cabinet product line from Calix, Inc. during fiscal year 2018 and the acquisition of Nestor Cables in fiscal 2022. The Company analyzes its intangible assets for impairment annually or at interim periods when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2023, did indicate an impairment of our intangible assets. During the three months ended December 31, 2023, there were no triggering events that indicate potential impairment exists.
Note 12. Segment Reporting
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based in part on the reporting and review process used by the Company’s Chief Executive Officer.
The Company has reportable segments: (1) Clearfield; and (2) Nestor Cables. Clearfield’s Finnish holding company, Clearfield Finland Oy, purchased Nestor Cables Oy, including its Estonian subsidiary, Nestor Cables Baltics OÜ, on July 26, 2022. These entities comprise the Nestor Cables Segment.
The following table summarizes the amounts between the reportable segments for the three months ended December 31, 2023:
|
Three months ended December 31, 2023 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Revenue from external customers |
$ | $ | $ | $ | ||||||||||||
|
Revenue from internal customers (Clearfield, Inc.) |
( |
) | ||||||||||||||
|
Net investment income |
( |
) | ||||||||||||||
|
Interest expense |
( |
) | ||||||||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Stock based compensation |
||||||||||||||||
|
Income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
|
Net loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Capital expenditures |
||||||||||||||||
The following table summarizes the amounts between the two reportable segments for the three months ended December 31, 2022:
|
Three months ended December 31, 2022 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Revenue from external customers |
$ | $ | $ | $ | ||||||||||||
|
Revenue from internal customers (Clearfield, Inc.) |
( |
) | ||||||||||||||
|
Net investment income |
||||||||||||||||
|
Interest expense |
||||||||||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Stock based compensation |
||||||||||||||||
|
Income taxes |
( |
) | ||||||||||||||
|
Net income (loss) |
( |
) | ( |
) | ||||||||||||
|
Capital expenditures |
||||||||||||||||
The following table summarizes the amounts between the two reportable segments as of December 31, 2023, and December 31, 2022:
|
December 31, 2023 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Goodwill |
$ | $ | $ | $ | ||||||||||||
|
Total assets |
$ | $ | $ | ( |
) | $ | ||||||||||
|
December 30, 2022 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Goodwill |
$ | $ | $ | $ | ||||||||||||
|
Total assets |
$ | $ | $ | ( |
) | $ | ||||||||||
Note 13. Financing Receivables
Nestor Cables factors certain of its accounts receivable, with recourse provisions that are accounted for as a secured borrowing. Nestor Cables has a total factoring liability of $
Note 14. Income Taxes
For the three months ended December 31, 2023, the Company recorded an income tax benefit of $
For the three months ended December 31, 2022, the Company recorded income tax expense of $
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 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 and determined that as of December 31, 2023, and September 30, 2023 a valuation allowance against the deferred tax assets is not required. The Company will continue to assess the need for a valuation allowance based on changes in assumptions of estimated future income and other factors in future periods.
As of December 31, 2023, the Company does 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.
Note 15. Leases
The Company leases an
The Company indirectly leases an approximately
The Company leases a
Nestor Cables leases an approximately
Nestor Cables leases an approximately 49,000 square foot manufacturing facility in Tabasalu, Estonia, which is utilized for the operations of Nestor Cables Baltics. Additionally, the lease grants Nestor Cables the option to lease an expansion facility that is to be constructed no later than December 2024. The expansion facility will be constructed on the same premises as the existing facility. Nestor exercised the option to lease the expansion and the lease term of the existing facility became
The lease calls for monthly rental payments of approximately €
Right-of-use lease assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods the Company is reasonably certain to exercise. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants. Operating lease expense included within cost of goods sold and selling, general and administrative expense was as follows for the three months ended:
|
Operating lease expense within: |
Three Months Ended December 31, |
|||||||
| (in thousands) |
2023 |
2022 |
||||||
|
Cost of sales |
$ | $ | ||||||
|
Selling, general and administrative |
||||||||
|
Total lease expense |
$ | $ | ||||||
Future maturities of lease liabilities were as follows as of December 31, 2023 (in thousands):
|
FY2024(Remaining) |
$ | |||
|
FY2025 |
||||
|
FY2026 |
||||
|
FY2027 |
||||
|
FY2028 |
||||
|
Thereafter |
||||
|
Total lease payments |
||||
|
Less: Interest |
( |
) | ||
|
Present value of lease liabilities |
$ |
The weighted average term and weighted average discount rate for the Company’s leases as of December 31, 2023, were
Note 16. Debt
In April 2022, the Company entered into a loan agreement and a security agreement with a bank that provides the Company with a $
During March 2021, Nestor Cables entered into a loan agreement, providing a $
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, 2023 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, 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 the Company’s financial condition and results of operations as of and for the three months ended December 31, 2023, and 2022 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, 2023.
OVERVIEW
General
Clearfield, Inc., together with its subsidiaries, is referred to in this report as “we,” “us,” “our,” and the “Company.” We design, manufacture, and distribute fiber protection, fiber management, and fiber delivery solutions to enable rapid and cost-effective fiber-fed deployment throughout the broadband service provider space primarily across North America. Our “fiber to anywhere” platform serves the unique requirements of Community Broadband customers (Tier 2 and 3 telco carriers, utilities, municipalities, and alternative carriers), Multiple System Operators (cable television), Large Regional Service Providers (ILEC operating a multi-state network with more than 500,000 subscribers), National Carriers (wireline/wireless national telco carriers (Tier 1)), and International customers (primarily Europe, Canada, Mexico, and Caribbean Markets).
We are engaged in global operations. Our operations currently comprise of two reportable segments: the Clearfield Operating Segment (referred to herein as “Clearfield”), and the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”), which we established following our acquisition of Nestor Cables on July 26, 2022. Prior to July 26, 2022, we had a single reportable segment structure.
Clearfield Operating Segment
Clearfield is focused on providing fiber management, fiber protection, and fiber delivery products that accelerate the turn-up of fiber-based networks in residential homes, businesses, and network infrastructure in the wireline and wireless access network. We offer a broad portfolio of fiber products that allow service providers to build fiber networks faster, meet service delivery demands, and align build costs with take rates.
Clearfield’s products allow its customers to connect twice as many homes in their Fiber to the Home (“FTTH”) builds by using fewer resources in less time. Our products speed up the time to revenue for our service provider customers in Multiple Dwelling Units (“MDUs”) and Multiple Tenant Units (“MTUs”) by reducing the amount of labor and materials needed to provide gigabit service. Our products help make business services more profitable through faster building access, easier reconfiguration, and quicker services turn-up. Finally, Clearfield is removing barriers to wireless 4G/5G deployments in backhaul from the tower to the cloud and fiber fronthaul from the tower to the antenna at the cell site through better fiber management, test access, and fiber protection.
Substantially all of the final build and assembly is completed at Clearfield’s plants in Brooklyn Park, Minnesota and Tijuana, Mexico, 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.
Nestor Cables Operating Segment
As of July 26, 2022, Clearfield through its Finnish subsidiary, Clearfield Finland Oy, acquired Nestor Cables Oy. Nestor Cables is based in Oulu, Finland, with operations in Keila, Estonia through its wholly owned subsidiary, Nestor Cables Baltics OÜ. Nestor Cables manufactures fiber optic and copper telecommunication cables and equipment which it distributes to telecommunication operators, network owners, electric companies, building contractors, and industrial companies. Prior to our acquisition, Nestor Cables had been a supplier to Clearfield for over a decade and that relationship continued following the closing of the acquisition. Nestor has two types of production processes, the process of making cable in its Finland facility and the finished assembly portion of its business performed in Estonia. Nestor Cables’ customer base includes telecom operators, network owners, contractors, industries and wholesalers. Products are sold via distributors and directly to end users. Nestor Cables is subject to Finnish government regulation, and Nestor Cables Baltics is subject to Estonian government regulation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2023, VS. THREE MONTHS ENDED DECEMBER 31, 2022
Net sales for the first quarter of fiscal 2024 ended December 31, 2023, were $34,230,000, a decrease of approximately 60%, or $51,712,000, from net sales of $85,942,000 for the first quarter of fiscal 2023. Net sales to Broadband Service Providers were $31,915,000 in the first quarter of fiscal 2024 versus $83,626,000 in the same period of fiscal 2023. Net sales to other customers were $2,376,000 in the first quarter of 2024 versus $2,315,000 in the same period of fiscal 2023. In addition, the Company recorded $6,669,000 in international sales for the first quarter of 2024 versus $10,204,000 in the same period of fiscal 2023. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. International sales represented 19% and 12% of total net sales for the first quarter of 2024 and 2023, respectively.
The decrease in net sales for the quarter ended December 31, 2023, of $51,712,000 compared to the quarter ended December 31, 2022, was primarily driven by decreased sales to Community Broadband Service Providers of $24,589,000 or 67%, MSO customers of $15,581,000 or 75%, Large Regional customers of $6,873,000 or 47%, and International customers of $3,535,000 or 35%. The decrease in sales across these markets for the quarter ended December 31, 2023, as compared to the quarter ended December 31, 2022, is due to a lull in demand as customers digest previously purchased products.
Order backlog for the first quarter of 2024 was $43,451,000, a decrease of 24% compared to $57,285,000 as of September 30, 2023, and a decrease of $92,818,000, or 68%, from December 31, 2022. The sequential decrease was also due to the lull in demand as customers digest previously purchased products as well as winter seasonality.
Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by customer deployment schedules and factors affecting customer ordering patterns. The Company’s ability to recognize revenue in the future for customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for the first quarter of 2024 was $29,533,000, a decrease of $25,760,000, or 47%, from $55,293,000 in the comparable period of fiscal 2023. Gross profit percent was 13.7% of net sales in the first quarter of 2024, a decrease from 35.7% of net sales for the first quarter of 2023. Gross profit decreased $25,952,000 or 84.7%, to $4,696,000 for the three months ended December 31, 2023, from $30,649,000 in the comparable period in fiscal 2023. The Company continues to realign capacity to current market conditions. Gross profit margin was negatively affected by unabsorbed overhead in our manufacturing facilities due to lower levels of demand and winter seasonality. The Company’s gross profit was also negatively impacted by an increase in inventory reserves of $3,376,000 during the first quarter of fiscal 2024. Inventory reserves are primarily due to excess inventory due to the lull in demand while customers draw down their existing products previously purchased during the period of long lead time supply chain created by the pandemic. The Company expects to operate at these gross profit percentage levels for several quarters with improving margins realized as revenue levels increase, and ongoing cost reduction measures are realized.
Selling, general and administrative expenses remained relatively consistent, increasing $100,000 or 1%, to $12,859,000 in the first quarter of 2024 from $12,759,000 for the first quarter of 2023.
Loss from operations for the quarter ended December 31, 2023, was $8,162,000 compared to income from operations of $17,890,000 for the comparable quarter of fiscal 2023, a decrease of approximately 146%. The decrease is the result of decreased net sales and gross profit margin.
Net investment income for the quarter ended December 31, 2023, was $2,069,000 compared to $303,000 for the comparable quarter for fiscal 2023. The increase in interest income is due to a higher average investments balance and higher interest rates earned. The higher investments balance is a result of the Company’s capital raise of approximately $130,000,000 completed in the first fiscal quarter of 2023.
Interest expense for the quarter ended December 31, 2023, was $126,000, compared to $243,000 for the comparable period of fiscal 2023. The decrease was due to repayment of the Company’s line of credit which was drawn on for the acquisition of Nestor Cables in the prior period, following the Company’s secondary offering.
We recorded an income tax benefit of $951,000 and an income tax expense of $3,695,000 for the three months ended December 31, 2023, and 2022, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decrease in tax expense of $4,646,000 in the first quarter of fiscal 2024 from the first quarter of fiscal 2023 is primarily due to decreased income from operations. The income tax expense rate for the first quarter of fiscal 2024 decreased to 15.3% from 20.6% recorded in the first quarter of fiscal 2023 due to decreased pretax book income and increased permanent nondeductible items and discrete events during the quarter, including excess tax shortfall from vesting of restricted stock, and research and development credits.
The Company’s net loss for the three months ended December 31, 2023, was $5,268,000, or $0.35 per basic and diluted share. The Company’s net income for the three months ended December 31, 2022, was $14,255,000, or $1.01 per basic share or $1.00 per diluted share. The decrease in basic and diluted earnings per share for the three months ended December 31, 2023, as compared to December 31, 2022, was due to lower net income, partially offset by the higher number of diluted shares for the first quarter of fiscal 2024 of 15,212,945 as compared to 14,284,847 for the first quarter of fiscal 2023.
Reportable Segments
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
Reportable segments are as follows:
|
● |
Clearfield Segment – The Clearfield segment designs, manufactures, and sells fiber management, protection, and delivery solutions. For the first quarter of fiscal year 2024, net sales from the Clearfield segment comprised 82% of the Company’s total net sales. |
|
● |
Nestor Cables Segment – The Nestor Cables segment designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment. For the first quarter of fiscal year 2024, net sales from the Nestor Cables segment comprised 18% of the Company’s total net sales. |
Clearfield Segment
The following table provides net sales and net income for the Clearfield segment for the three months ended:
|
(In thousands) |
December 31, 2023 |
December 31, 2022 |
||||||
|
Segment net sales |
$ | 28,101 | $ | 78,355 | ||||
|
Segment net (loss) income |
(3,383 | ) | 14,718 | |||||
Net sales in the Clearfield segment decreased 64%, or $50,254,000, for the quarter ended December 31, 2023, as compared to the quarter ended December 31, 2022, resulting from decreased sales to its Community Broadband, MSO/Cable TV, and Large Regional customers as these customers work to digest inventory that was purchased previously.
Net income in the Clearfield segment for the quarter ended December 31, 2023, decreased 123%, or $18,101,000, as compared to the quarter ended December 31, 2022, driven by the changes in sales outlined above, as well as lower gross profit margin which was negatively affected by the buildup in capacity that was not utilized.
Nestor Cables Segment
The following table provides net sales and net income for the Nestor Cables segment for the three months:
|
(In thousands) |
December 31, 2023 |
December 31, 2022 |
||||||
|
Segment net external sales |
$ | 6,129 | $ | 7,587 | ||||
|
Segment net loss |
$ | (1,975 | ) | $ | (310 | ) | ||
Net sales in the Nestor Cables segment decreased 19%, or $1,458,000, for the quarter ended December 31, 2023, as compared to the quarter ended December 31, 2022, excluding sales to the Clearfield Segment.
Net loss in the Nestor Cables segment for the quarter ended December 31, 2023, increased 537%, or $1,665,000, as compared to the quarter ended December 31, 2022.
Liquidity and Capital Resources
As of December 31, 2023, our principal source of liquidity was our cash, cash equivalents, and short-term investments. Those sources total $162,836,000 as of December 31, 2023, compared to $168,113,000 as of September 30, 2023. Additionally, we have a line of credit for $40 million that has no outstanding borrowing as of December 31, 2023. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities, and money market funds. Investments considered long-term were $6,505,000 as of December 31, 2023, compared to $6,343,000 as of September 30, 2023. We believe the combined balances of short-term cash and investments, long-term investments, along with our line of credit provide a more accurate indication of our available liquidity. As of December 31, 2023, our cash, cash equivalents, and short-term and long-term investments totaled $169,342,000, compared to $174,456,000 as of September 30, 2023.
We believe our existing cash equivalents, short-term investments, and line of credit facility along with cash flow from operations will be sufficient to meet our working capital and investment requirements beyond the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth, potential future strategic transactions, and the Company’s share repurchase program.
Operating Activities
Net cash provided by operating activities totaled $7,827,000 for the three months ended December 31, 2023. This consisted of a net loss of $5,268,000, non-cash expenses for depreciation and amortization of $1,695,000, stock-based compensation of $1,271,000 and amortization of discounts on investments of $1,160,000, in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities providing cash was a decrease in accounts receivable of $11,750,000, and a decrease in inventory of $4,169,000. The decrease in accounts receivable is due to the decrease in sales volume in the first quarter of fiscal 2024. Days sales outstanding, which measures how quickly receivables are collected, decreased 6 days to 47 days as of December 31, 2023, compared to 53 days from September 30, 2023. The decrease in inventory is due to decreased inventory purchases in the first quarter for fiscal 2024 as the Company utilizes inventory on hand to fulfill customer orders and achieve lower stocking levels to support the decreased sales order backlog, as well as higher excess inventory reserves. The primary change in operating assets and liabilities using cash was a decrease in accounts payable and accrued expenses of $5,081,000, due to the timing of payments to vendors and lower inventory purchases in the first quarter for fiscal 2024.
Net cash provided by operating activities totaled $1,103,000 for the three months ended December 31, 2022. This was primarily due to net income of $14,255,000, non-cash expenses for depreciation and amortization of $1,353,000, and stock-based compensation of $660,000 in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities using cash was a decrease in accounts payable and accrued expenses of $7,637,000 and an increase in inventory of $6,505,000. The decrease in accounts payable and accrued expenses is due to the timing of payments to vendors. The Company increased stocking levels of inventory during the quarter ending December 31, 2022, to support the Company’s sales order backlog, as well as provide for safety stock for anticipated demand considering current long lead times for components and transportation within the global supply chain. Days sales outstanding, which measures how quickly receivables are collected, increased 7 days to 59 days as of December 31, 2022, compared to 52 days from September 30, 2022.
Investing Activities
We invest our excess cash in money market accounts, U.S. Treasury securities, money market funds, and bank certificates of deposit in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate and relative risk profile of these investments. During the three months ended December 31, 2023, we received proceeds from the maturity of investment securities of $51,068,000 and used cash to purchase $47,748,000 of investment securities. Purchases of property, plant, and equipment, mainly related to manufacturing equipment and intangible assets, consumed $2,412,000 of cash during the three months ended December 31, 2023.
During the three months ended December 31, 2022, we used cash to purchase $98,881,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $2,213,000 of cash during the three months ended December 31, 2022.
Financing Activities
For the three months ended December 31, 2023, we used cash to repurchase $12,185,000 of our common stock on the open market under our stock repurchase program. We received $250,000 from employees’ participation and purchase of stock through our ESPP and used $236,000 for payment of withholding taxes for vesting of restricted stock grants.
For the three months ended December 31, 2022, we received $130,262,000 of net proceeds through the issuance of common stock. We used $16,700,000 to pay down the principal on our line of credit, which was originally drawn in the fourth quarter of fiscal 2022 to fund the acquisition of Nestor Cables. We received $299,000 from employees’ participation and purchase of stock through our ESPP, we received $954,000 related to issuance of stock as payment for incentive compensation previously earned, we used $342,000 related to share withholding for exercise and taxes associated with the issuance of common stock upon cashless exercise of stock options and used $954,000 for payment of withholding taxes for stock grants. We did not repurchase common stock under our share repurchase program in the three months ended December 31, 2022.
CRITICAL ACCOUNTING ESTIMATES
Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting estimates. The accounting estimates 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 the fair value of investments, stock-based compensation, and valuation of inventory, long-lived assets, finite lived intangible assets and goodwill.
These accounting estimates 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, 2023. Management made no changes to the Company’s critical accounting estimates during the quarter ended December 31, 2023.
In applying its critical accounting estimates, 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, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Clearfield is exposed to market risk due to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, and commodity prices. Changes in those factors could impact the Company’s results of operations and financial condition. For a discussion of sensitivity analysis related to these types of market risks, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended September 30, 2023. There have been no material changes in information that would have been provided in the context of Item 3 for the quarter ended December 31, 2023.
The Company currently invests its excess cash in bank certificates of deposit that are fully insured by the Federal Deposit Insurance Corporation and United States Treasury securities with terms of not more than five years, as well as money market funds. The fair value of these investments fluctuates subject to changes in market interest rates.
Foreign Exchange Rates
The Company uses the U.S. dollar as its reporting currency. The functional currency of Nestor Cables is the Euro. The changing relationships of the U.S. dollar to the Euro could have a material impact on our financial results. Fluctuations in the Euro to U.S. dollar exchange rate impacts our consolidated balance sheets, as well as sales, cost of sales, and net income. If the Euro had appreciated or depreciated by 10%, relative to the U.S. Dollar, our operating expenses for the three months ended December 31, 2023, would have increased, or decreased by approximately $220,000 or approximately 2%. We do not hedge against foreign currency fluctuations. As such, fluctuations in foreign currency exchange rates could have a material impact on the Company’s financial statements.
Inflation
Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our profitability. We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials such as fiber cable and other components, which has outpaced our ability to reduce the cost structure and manufacturability or increase prices. We do not hedge commodity prices. Accordingly, inflation impacts our profitability, including cost of sales and operating expenses and may have a material impact on the Company’s consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2023. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s 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 December 31, 2023, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
The most significant risk factors applicable to the Company are described in Part II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2023. There have been no material changes from the risk factors previously disclosed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company repurchased shares of stock associated with exercise and satisfaction of employee tax withholding requirements on vesting or exercise of equity awards under the Company’s Stock Compensation Plans for the three months ended December 31, 2023, as well as the repurchase of shares on the open market under the Company’s stock repurchase program. Accordingly, the Company’s purchases of equity securities for the three months ended December 31, 2023, were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
|
Period |
Total |
Average |
Total Number of |
Approximate Dollar Value |
||||||||||||
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October 1-31, 2023 |
- | - | - | $ | 14,980,671 | |||||||||||
|
November 1-30, 2023 |
115,025 | $ | 26.75 | 106,000 | 30,140,356 | |||||||||||
|
December 1-31, 2023 |
330,000 | 27.97 | 330,000 | 20,909,578 | ||||||||||||
|
Total |
445,025 | $ | 27.69 | 436,000 | $ | 20,909,578 | ||||||||||
(1) Effective November 7, 2023, the Company’s board of directors increased the share repurchase program to an aggregate of $40 million from the prior $22 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
During the quarter ended December 31, 2023, none of our directors or officers informed us of the adoption, modification or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408(a).
101 – The following materials from Clearfield, Inc.’s Quarterly Report on Form 10-Q for the period ended December 31, 2023 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2023 and December 31, 2022; (ii) Consolidated Statements of Earnings for the three months ended December 31, 2023 and 2022; (iii) Consolidated Statements of Shareholders’ Equity for the three months ended December 31, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2023 and 2022; and (v) Notes to the Consolidated Financial Statements.
104 - Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
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.
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February 5, 2024 |
/s/ Cheryl Beranek |
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By: Cheryl Beranek Its: President and Chief Executive Officer |
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(Principal Executive Officer) |
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February 5, 2024 |
/s/ Daniel Herzog |
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By: Daniel Herzog Its: Chief Financial Officer |
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(Principal Financial and Accounting Officer) |