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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to ___________________

 

Commission File Number 0-16106

 

Clearfield, Inc.

(Exact name of Registrant as specified in its charter)

 

Minnesota

41-1347235

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

7050 Winnetka Avenue North

Suite 100

Brooklyn Park, Minnesota

 

55428

(Address of principal executive office)

 

(Zip Code)

 

(763) 476-6866

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value

CLFD

The Nasdaq Stock Market

 

Indicate by check mark whether the registrant (1) has 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.

 

☒ Yes                      ☐ No

 

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).

 

Yes                      ☐ No

 

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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

1

 

Large accelerated filer

Non-accelerated filer ☐

Accelerated filer ☐

Smaller reporting company

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).

 

Yes                      ☒ No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class:

Outstanding as of July 26, 2024

Common stock, par value $.01

14,237,943

 

 

 

2

 

 

 

CLEARFIELD, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I.  FINANCIAL INFORMATION

4

ITEM 1.  FINANCIAL STATEMENTS

4

ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

ITEM 4.   CONTROLS AND PROCEDURES

31

PART II. OTHER INFORMATION

31

ITEM 1.  LEGAL PROCEEDINGS

31

ITEM 1A.  RISK FACTORS

31

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

32

ITEM 4. MINE SAFETY DISCLOSURES

32

ITEM 5. OTHER INFORMATION

32

ITEM 6. EXHIBITS

32

SIGNATURES

33

 

 

 

3

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

CLEARFIELD, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(IN THOUSANDS, EXCEPT SHARE DATA)

 
                 
   

June 30,
2024 (Unaudited)

   

September 30,
2023

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 25,624     $ 37,827  

Short-term investments

    98,195       130,286  

Accounts receivables, net

    27,636       28,392  

Inventories, net

    74,869       98,055  

Other current assets

    9,878       1,695  

Total current assets

    236,202       296,255  
                 

Property, plant and equipment, net

    21,487       21,527  
                 

Other Assets

               

Long-term investments

    24,180       6,343  

Goodwill

    6,553       6,528  

Intangible assets, net

    6,399       6,092  

Right-of-use lease assets

    15,938       13,861  

Deferred tax asset

    5,514       3,039  

Other

    1,822       1,872  

Total other assets

    60,406       37,735  

Total Assets

  $ 318,095     $ 355,517  
                 

Liabilities and Shareholders Equity

               

Current Liabilities

               

Current portion of lease liability

  $ 3,225     $ 3,737  

Current maturities of long-term debt

    -       2,112  

Accounts payable

    9,049       8,891  

Accrued compensation

    7,153       5,571  

Accrued expenses

    3,029       2,404  

Factoring liability

    5,714       6,289  

Total current liabilities

    28,170       29,004  
                 

Other Liabilities

               

Long-term debt, net of current maturities

    2,142       -  

Long-term portion of lease liability

    13,142       10,629  

Deferred tax liability

    67       721  

Total liabilities

    43,521       40,354  
                 

Shareholders’ Equity

               

Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding

    -       -  

Common stock, authorized 50,000,000, $.01 par value; 14,238,693 and 15,254,725 shares issued and outstanding as of June 30, 2024 and September 30, 2023, respectively

    142       153  

Additional paid-in capital

    158,627       188,218  

Accumulated other comprehensive income (loss)

    15       (544 )

Retained earnings

    115,790       127,336  

Total shareholders’ equity

    274,574       315,163  

Total Liabilities and Shareholders’ Equity

  $ 318,095     $ 355,517  

 

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4

 

 

CLEARFIELD, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

 

(UNAUDITED)

 

(IN THOUSANDS, EXCEPT SHARE DATA)

 
                                 
   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2024

   

2023

   

2024

   

2023

 
                                 

Net sales

  $ 48,793     $ 61,284     $ 119,933     $ 219,035  
                                 

Cost of sales

    38,101       42,210       101,712       145,750  
                                 

Gross profit

    10,692       19,074       18,221       73,285  
                                 

Operating expenses

                               

Selling, general and administrative

    12,998       13,449       38,430       37,714  

(Loss) Income from operations

    (2,306 )     5,625       (20,209 )     35,571  
                                 

Net investment income

    1,735       1,630       5,653       3,328  

Interest expense

    (153 )     (195 )     (381 )     (551 )
                                 

(Loss) Income before income taxes

    (724 )     7,060       (14,937 )     38,348  
                                 

Income tax (benefit) expense

    (277 )     1,842       (3,311 )     8,511  

Net (loss) income

  $ (447 )   $ 5,218     $ (11,626 )   $ 29,837  
                                 

Net (loss) income per share Basic

    (0.04 )     0.33       (0.79 )     2.01  

Net (loss) income per share Diluted

  $ (0.04 )   $ 0.33     $ (0.79 )   $ 2.00  
                                 

Weighted average shares outstanding:

                               

Basic

    14,249,755       15,254,341       14,699,278       14,880,666  

Diluted

    14,249,755       15,254,341       14,699,278       14,929,405  

 

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

5

 

 

 

CLEARFIELD, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(UNAUDITED)

 

(IN THOUSANDS)

 
                                 
   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2024

   

2023

   

2024

   

2023

 
                                 

Comprehensive (loss) income:

                               

Net (loss) income

  $ (447 )   $ 5,218     $ (11,626 )   $ 29,837  

Other comprehensive (loss) income, net of tax

                               

Unrealized gain on available-for-sale investments

    31       15       275       352  

Unrealized (loss) gain on foreign currency translation

    (146 )     (49 )     283       1,278  

Total other comprehensive (loss) income

    (115 )     (34 )     559       1,630  
                                 

Total comprehensive (loss) income

  $ (562 )   $ 5,184     $ (11,067 )   $ 31,467  

 

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

6

 

 

CLEARFIELD, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

 

(UNAUDITED)

 

(IN THOUSANDS)

 
                                                 

For the three months ended June 30, 2024

                         

Accumulated other

                 
   

Common Stock

   

Additional

   

comprehensive

   

Retained

   

Total share-

 
   

Shares

   

Amount

   

paid-in capital

   

income (loss)

   

earnings

   

holders’ equity

 

Balance at March 31, 2024

    14,410     $ 144     $ 162,697     $ 130     $ 116,237     $ 279,208  

Stock-based compensation expense

    -       -       1,152       -       -       1,152  

Issuance of common stock under employee stock purchase plan

    14       -       336       -       -       336  

Repurchase of common stock

    (185 )     (2 )     (5,558 )     -       -       (5,560 )

Other comprehensive loss

    -       -       -       (115 )     -       (115 )
Net loss     -       -       -       -       (447 )     (447 )

Balance at June 30, 2024

    14,239     $ 142     $ 158,627     $ 15     $ 115,790     $ 274,574  

 

For the three months ended June 30, 2023

                         

Accumulated other

                 
   

Common Stock

   

Additional

   

comprehensive

   

Retained

   

Total share-

 
   

Shares

   

Amount

   

paid-in capital

   

income (loss)

   

earnings

   

holders’ equity

 

Balance at March 31, 2023

    15,255     $ 153     $ 186,058     $ (234 )   $ 119,422     $ 305,399  

Stock-based compensation expense

    -       -       1,059       -       -       1,059  

Issuance of common stock under equity compensation plans, net

    (1 )     -       -       -       -       -  

Exercise of stock options, net of shares exchanged for payment

    1       -       (20 )     -       -       (20 )

Issuance of common stock under equity compensation plans, net

    8       -       312       -       -       312  

Other comprehensive loss

    -       -       -       (34 )     -       (34 )

Net income

    -       -       -       -       5,218       5,218  

Balance at June 30, 2023

    15,263     $ 153     $ 187,409     $ (268 )   $ 124,640     $ 311,934  

 

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

7

 

CLEARFIELD, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

 

(UNAUDITED)

 

(IN THOUSANDS)

 
                                                 
                                                 

For the nine months ended June 30, 2024

                         

Accumulated other

                 
   

Common Stock

   

Additional

   

comprehensive

   

Retained

   

Total share-

 
   

Shares

   

Amount

   

paid-in capital

   

income (loss)

   

earnings

   

holders’ equity

 

Balance as of September 30, 2023

    15,255     $ 153     $ 188,218     $ (544 )   $ 127,336     $ 315,163  

Stock-based compensation expense

    -       -       3,436       -       -       3,436  

Issuance of common stock under employee stock purchase plan

    24       -       586       -       -       586  

Issuance of common stock under equity compensation plans, net

    133       1       (1 )     -       -       -  

Repurchase of shares for payment of withholding taxes for vested restricted stock grants

    (9 )     -       (240 )     -       -       (240 )

Exercise of stock options, net of shares exchanged for payment

    1       -       (9 )     -       -       (9 )

Repurchase of common stock

    (1,164 )     (12 )     (33,362 )     -       -       (33,374 )

Adoption of new accounting pronouncement

    -       -       -       -       79       79  

Other comprehensive income

    -       -       -       559       -       559  

Net loss

    -       -       -       -       (11,626 )     (11,626 )

Balance at June 30, 2024

    14,239     $ 142     $ 158,627     $ 15     $ 115,790     $ 274,574  

 

For the nine months ended June 30, 2023

                         

Accumulated other

                 
   

Common Stock

   

Additional

   

comprehensive

   

Retained

   

Total share-

 
   

Shares

   

Amount

   

paid-in capital

   

income (loss)

   

earnings

   

holders’ equity

 

Balance as of September 30, 2022

    13,818     $ 138     $ 54,539     $ (1,898 )   $ 94,803     $ 147,582  

Stock-based compensation expense

    -       -       2,504       -       -       2,504  

Issuance of common stock under employee stock purchase plan

    50       -       954       -       -       954  

Issuance of common stock under equity compensation plans, net

    13       1       611       -       -       612  

Exercise of stock options, net of shares exchanged for payment

    11       -       (493 )     -       -       (493 )

Repurchase of shares for payment of withholding taxes for stock grants

    (10 )     -       (954 )     -       -       (954 )

Issuance of common stock, net

    1,380       14       130,248       -       -       130,262  

Other comprehensive income

    -       -       -       1,630       -       1,630  

Net income

    -       -       -       -       29,837       29,837  

Balance at June 30, 2023

    15,263     $ 153     $ 187,409     $ (268 )   $ 124,640     $ 311,934  

 

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

8

 

 

CLEARFIELD, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)

 

(IN THOUSANDS)

 
   

Nine Months

   

Nine Months

 
   

Ended

   

Ended

 
   

June 30,

   

June 30,

 
   

2024

   

2023

 

Cash flows from operating activities

               

Net (loss) income

  $ (11,626 )   $ 29,837  

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    5,481       4,411  

Amortization of discount on investments

    (3,304 )     (2,429 )

Deferred taxes

    (3,523 )     -  

Stock-based compensation

    3,437       2,504  

Changes in operating assets and liabilities, net of acquired amounts:

               

Accounts receivable

    946       24,519  

Inventories, net

    23,440       (21,510 )

Other assets

    (8,030 )     (3,525 )

Accounts payable and accrued expenses

    1,643       (20,326 )

Net cash provided by operating activities

    8,464       13,481  
                 

Cash flows from investing activities

               

Purchases of property, plant and equipment, and intangible assets

    (5,608 )     (6,529 )

Purchases of investments

    (124,137 )     (210,923 )

Proceeds from maturities of investments

    142,067       105,077  

Net cash provided by (used in) investing activities

    12,322       (112,375 )
                 

Cash flows from financing activities

               

Issuance of long-term debt

    2,142       -  

Repayment of long-term debt

    (2,142 )     (16,700 )

Proceeds from issuance of common stock under employee stock purchase plan

    586       612  

Repurchase of shares for payment of withholding taxes for stock grants

    (240 )     (954 )

Tax withholding and proceeds related to exercise of stock options

    (9 )     (493 )

Issuance of stock under equity compensation plans

    -       954  

Net proceeds from issuance of common stock

    -       130,262  

Repurchase of common stock

    (33,374 )     -  

Net cash (used in) provided by financing activities

    (33,037 )     113,681  
                 

Effect of exchange rates on cash

    48       (52 )

(Decrease) increase in cash and cash equivalents

    (12,203 )     14,735  

Cash and cash equivalents, beginning of period

    37,827       16,650  

Cash and cash equivalents, end of period

  $ 25,624     $ 31,385  
                 

Supplemental disclosures for cash flow information

               

Cash paid for income taxes

  $ 165     $ 12,589  

Cash paid for interest expense

  $ 302     $ 360  

Right of use assets obtained through lease liabilities

  $ 4,614     $ 3,776  

Non-cash financing activities

               

Cashless exercise of stock options

  $ 19     $ 566  

 

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9

 

 

NOTES TO CONDENSED 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) condensed consolidated balance sheet as of September 30, 2023, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of and for the three and nine months ended June 30, 2024 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 condensed 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 condensed 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 condensed 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 condensed 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.

 

New Accounting Pronouncements Not Yet Adopted

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 is intended to enhance financial reporting by requiring incremental disclosures for significant segment expenses on an annual and interim basis by public entities required to report segment information in accordance with Accounting Standards Codification Topic 280. The amendments in ASU 2023-07 are to be applied retrospectively to all periods presented in the financial statements and early adoption is permitted. This standard will be applicable to the Company for the 2025 annual period and quarterly periods thereafter. The Company is evaluating its disclosure approach for ASU 2023-07 and anticipates adopting the standard for the year ended September 30, 2025 and filings thereafter.

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The new guidance is expected to improve income tax disclosures primarily related to the rate reconciliation and income taxes paid information by requiring 1) consistent categories and greater disaggregation of information in the rate reconciliation and 2) income taxes paid disaggregated by jurisdiction. The guidance is effective on a prospective basis, although retrospective application and early adoption is permitted. The Company is evaluating its disclosure approach for ASU 2023-09 and anticipates adopting the standard for the annual period starting October 1, 2025.

 

10

 

In March 2024, the SEC adopted rules under SEC Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors, which requires the disclosure of material Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics in annual reports and registration statements. For large-accelerated filers and accelerated filers, disclosure requirements will begin phasing in for fiscal years beginning on or after January 1, 2025, and January 1, 2026, respectively, subject to legal challenges and the SEC’s voluntary stay of the disclosure requirements. The Company is currently evaluating the impact these rules will have on its consolidated financial statements and related disclosures.

 

 

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 and nine months ended June 30, 2024, and 2023:

 

   

Three Months Ended June 30,

   

Nine months Ended June 30,

 

(In thousands, except for share data)

 

2024

   

2023

   

2024

   

2023

 

Net (loss) income

  $ (447 )   $ 5,218     $ (11,626 )   $ 29,837  

Weighted average common shares

    14,249,755       15,254,341       14,699,278       14,880,666  

Dilutive potential common shares

    -       -       -       48,739  

Weighted average dilutive common shares outstanding

    14,249,755       15,254,341       14,699,278       14,929,405  

Net (loss) income per common share:

                               

Basic

  $ (0.04 )   $ 0.33     $ (0.79 )   $ 2.01  

Diluted

  $ (0.04 )   $ 0.33     $ (0.79 )   $ 2.00  

  

 

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)

 

June 30,

2024

   

September 30,

2023

 

Cash and cash equivalents:

               

Cash, including money market accounts

  $ 10,380     $ 11,360  

Money market funds

    15,244       26,467  

Total cash and cash equivalents

  $ 25,624     $ 37,827  

 

 

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 condensed consolidated statement of earnings.

 

11

 

As of June 30, 2024, available-for-sale investments consisted of the following:

 

   

June 30, 2024

 

(In thousands)

 

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Short-Term

                               

U.S. Treasury securities

  $ 98,105     $ -     $ (155 )   $ 97,950  

Certificates of deposit

    247       -       (2 )     245  

Investment securities – short-term

  $ 98,352     $ -     $ (157 )   $ 98,195  

Long-Term

                               

U.S Treasury securities

  $ 24,283     $ 8     $ (341 )   $ 23,950  

Certificates of deposit

    248       -       (18 )     230  

Investment securities – long-term

  $ 24,531     $ 8     $ (359 )   $ 24,180  

 

As of September 30, 2023, available-for-sale investments consist of the following:

 

   

September 30, 2023

 

(In thousands)

 

Amortized Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Short-Term

                               

U.S treasury securities

  $ 122,534     $ -     $ (143 )   $ 122,391  

Certificates of deposit

    8,014       -       (119 )     7,895  

Investment securities – short-term

  $ 130,548     $ -     $ (262 )   $ 130,286  

Long-Term

                               

U.S treasury securities

  $ 6,719     $ -     $ (596 )   $ 6,123  

Certificates of deposit

    248       -       (28 )     220  

Investment securities – long-term

  $ 6,967     $ -     $ (624 )   $ 6,343  

 

As of June 30, 2024, 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

  $ 96,508     $ (105 )   $ 6,350     $ (391 )

Certificates of deposit

    -       -       475       (20 )

Investment securities

  $ 96,508     $ (105 )   $ 6,825     $ (411 )

 

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

  $ 112,908     $ (131 )   $ 15,606     $ (608 )

Certificates of deposit

    245       -       7,870       (147 )

Investment securities

  $ 113,153     $ (131 )   $ 23,476     $ (755 )

 

As of June 30, 2024, there were 10 securities in an unrealized loss position which is due to the market paying a higher interest rate than the coupon rate on these securities. As of September 30, 2023, there were 42 securities in an unrealized loss position which is due to the securities paying lower interest rates than the market. As of June 30, 2024, and September 30, 2023, there are no securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there is negligible credit risk due to the nature of the securities which are backed by the FDIC and the U.S. federal government.

 

12

 

 

 

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 June 30, 2024, according to the three-level fair value hierarchy:

 

   

Fair Value Measurements as of June 30, 2024

 

(In thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Cash equivalents:

                               

Money market funds

  $ 15,244     $ 15,244     $ -     $ -  

Total cash equivalents

  $ 15,244     $ 15,244     $ -     $ -  

Investment securities:

                               

Certificates of deposit

  $ 475     $ -     $ 475     $ -  

U.S. Treasury securities

    121,900       -       121,900       -  

Total investment securities

  $ 122,375     $ -     $ 122,375     $ -  

 

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

  $ 26,467     $ 26,467     $ -     $ -  

Total cash equivalents

  $ 26,467     $ 26,467     $ -     $ -  

Investment securities:

                               

Certificates of deposit

  $ 8,115     $ -     $ 8,115     $ -  

U.S. Treasury securities

    128,514       -       128,514       -  

Total investment securities

  $ 136,629     $ -     $ 136,629     $ -  

 

13

 

During the three and nine months ended June 30, 2024, and the year ended September 30, 2023, the Company owned no Level 3 securities and there were no transfers within the fair value level hierarchy.

 

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 or nine months ended June 30, 2024, 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 Income (Loss)

 

 

Balances at September 30, 2023

  $ (682 )   $ 138     $ (544 )

Other comprehensive income for the three months ended December 31, 2023

    291       729       1,020  

Balances at December 31, 2023

  $ (391 )   $ 867     $ 476  

Other comprehensive (loss) for the three months ended March 31, 2024

    (45 )     (301 )     (346 )

Balances at March 31, 2024

  $ (436 )   $ 566     $ 130  

Other comprehensive (loss) for the three months ended June 30, 2024

    31       (146 )     (115 )

Balances at June 30, 2024

  $ (405 )   $ 420     $ 15  

 

 

Note 7. Stock-Based Compensation

 

The Company recorded $1,152,000 and $3,437,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, performance stock units, and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and nine months ended June 30, 2024. For the three months ended June 30, 2024, $1,099,000 of this expense is included in selling, general and administrative expense, and $53,000 is included in cost of sales. For the nine months ended June 30, 2024, $3,280,000 of this expense is included in selling, general and administrative expense, and $157,000 is included in cost of sales.

 

The Company recorded $1,059,000 and $2,504,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, and the ESPP for the three and nine months ended June 30, 2023. For the three months ended June 30, 2023, $1,016,000 of this expense is included in selling, general and administrative expense, and $43,000 is included in cost of sales. For the nine months ended June 30, 2023, $2,377,000 of this expense is included in selling, general and administrative expense, and $126,000 is included in cost of sales.

 

As of June 30, 2024, $6,213,000 of total unrecognized compensation expense related to non-vested restricted stock awards and stock options is expected to be recognized over a period of approximately 2.4 years.

 

Stock Options

 

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted.  During the nine months ended June 30, 2024, the Company granted employees non-qualified stock options to purchase an aggregate of 118,706 shares of common stock with a weighted average contractual term of five years, a weighted average vesting term of approximately 3 years, and a weighted average exercise price of $26.84 per share. During the nine months ended June 30, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of 40,266 shares of common stock with a weighted average contractual term of five years, a weighted average three-year vesting term, and a weighted average exercise price of $64.38 per share.

 

14

 

The fair value of stock option awards during the nine months ended June 30, 2024, was estimated as of the respective grant dates using the assumptions listed below:

 

 

Nine months ended

June 30, 2024

Dividend yield

0.00%

Expected volatility

61.66%

Risk-free interest rate

4.55%

Expected life (years)

3.5

Vesting period (years)

3

 

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 three to five-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 nine months ended June 30, 2024:

 

   

Number of options

   

Weighted average exercise price

 

Outstanding as of September 30, 2023

    254,124     $ 37.04  

Granted

    118,706       26.84  

Exercised

    (1,501 )     12.40  

Forfeited or expired

    (4,345 )     38.13  

Outstanding as of June 30, 2024

    366,984     $ 33.83  

 

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of June 30, 2024, the weighted average remaining contractual term for all outstanding and exercisable stock options was 1.76 years and their aggregate intrinsic value was $2,473,000.

 

Restricted Stock

 

During the nine months ended June 30, 2024, the Company granted employees restricted stock awards totaling 137,928 shares of common stock, with a vesting term of approximately three years and a fair value of $26.65 per share based on the stock price on the grant date. During the nine months ended June 30, 2023, the Company granted employees restricted stock awards totaling 34,674 shares of common stock, with a vesting term of approximately three years and a fair value of $72.26 per share.

 

During the nine months ended June 30, 2023, the Company granted the non-employee directors restricted stock awards totaling 6,818 shares of common stock, with a vesting term of approximately one year and a fair value of $61.56 per share.

 

15

 

Restricted stock transactions during the nine months ended June 30, 2024, are summarized as follows:

 

   

Number of shares

   

Weighted average grant date fair value

 

Unvested shares as of September 30, 2023

    90,575     $ 49.92  

Granted

    137,928       26.53  

Vested

    (37,569 )     54.35  

Forfeited

    (4,887 )     29.08  

Unvested as of June 30, 2024

    186,047     $ 31.07  

 

Performance Stock

 

During the nine months ended June 30, 2024, 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 June 30, 2024, the Company does not believe it is probable that these performance stock unit awards will vest based on achievement of established performance criteria, and previously recognized compensation expense related to these awards has been reversed to $0. The Company did not issue any performance stock units in the nine months ended June 30, 2023.

 

Bonus Stock

 

The Company did not issue any bonus stock in the nine months ended June 30, 2024. During the nine months ended June 30, 2023, the Company granted employees an aggregate of 9,144 shares of stock as a discretionary bonus for fiscal 2022 performance. The bonus stock consisted of common stock with no vesting period or restrictions. The fair value on the date of issuance was $104.36 per share.

 

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 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phase that ended on December 31, 2023, employees purchased 10,104 shares at a price of $24.72 per share. For the phase that ended on June 30, 2024, employees purchased 13,598 shares at a price of $24.72 per share After the employee purchase on June 30, 2024, 144,548 shares of common stock were available for future purchase under the ESPP.

 

 

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.

 

16

 

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 and nine months ended:

 

   

Three Months Ended June 30,

   

Nine months Ended June 30,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 

United States

  $ 32,300     $ 47,098     $ 86,823     $ 181,508  

All other countries

    16,493       14,186       33,110       37,527  

Total Net Sales

  $ 48,793     $ 61,284     $ 119,933     $ 219,035  

 

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 and nine months ended:

 

   

Three Months Ended June 30,

   

Nine months Ended June 30,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 

Broadband service providers

    94 %     97 %     94 %     96 %

Other customers

    6 %     3 %     6 %     4 %

Total Net Sales

    100 %     100 %     100 %     100 %

 

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 June 30, 2024, the Company’s allowance for credit losses was $0.

 

As of September 30, 2023, prior to the adoption of CECL, the Company’s allowance for doubtful accounts was $79,000. Upon the adoption of CECL, the prior allowance for doubtful accounts was recorded as a benefit to beginning retained earnings.

 

See Note 9 “Major Customer Concentration” for further information regarding accounts receivable and net sales.

 

17

 

 

Note 9. Major Customer Concentration

 

For the three months ended June 30, 2024, the Company had one customer that comprised 15% of the Company’s net sales. The customer is a distributor. For the nine months ended June 30, 2024, the Company had one customer that comprised 11% of the Company’s net sales. The customer is a distributor.

 

For the three months ended June 30, 2023, the Company had one customer that comprised 17% of the Company’s net sales. The customer is a distributor. For the nine months ended June 30, 2023, the Company had one customer that comprised 16% of the Company’s net sales. The customer is a distributor.

 

As of June 30, 2024, three customers accounted for 19%, 12% and 11% of accounts receivable, respectively. These customers are all distributors. As of September 30, 2023, three customers accounted for 16%, 13%, and 11% of accounts receivable, respectively. These customers are also 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)

 

June 30,

2024

   

September 30,

2023

 

Raw materials

  $ 59,968     $ 73,657  

Work-in-process

    3.206       1,462  

Finished goods

    27,399       29,696  

Inventories, gross

    90,573       104,815  

Inventory reserve

    (15,704 )     (6,760 )

Inventories, net

  $ 74,869     $ 98,055  

 

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 not indicate an impairment of goodwill. During the nine months ended June 30, 2024, 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 20 years. As of June 30, 2024, the Company has 56 patents granted and multiple pending applications both inside and outside the United States.

 

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 year 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 not indicate an impairment of our intangible assets. During the nine months ended June 30, 2024, there were no triggering events that indicate potential impairment exists.

 

18

 

The changes in the carrying amount of goodwill by reportable segment for the nine months ended June 30, 2024 were as follows.

 

(In thousands)

 

Clearfield, Inc.

   

Nestor Cables

   

Total

 

Balance as of September 30, 2023

  $ 4,708     $ 1,820     $ 6,528  

Currency translation effect on foreign goodwill balances

    -       25       25  

Balance as of June 30, 2024

  $ 4,708     $ 1,845     $ 6,553  

 

The components of other intangible assets were as follows:

 

   

June 30, 2024

 

(In thousands)

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Book Value Amount

 

Customer relationships

  $ 4,837     $ 1,816     $ 3,021  

Certifications

    584       367       217  

Trademarks

    1,286       700       586  

Patents

    1,172       205       967  

Developed technology

    293       1       292  

Other

    6       6       -  

Software

    3,910       2,594       1,316  

Totals

  $ 12,088     $ 5,689     $ 6,399  

 

   

September 30, 2023

 

(In thousands)

 

Gross Carrying Amount

   

Accumulated Amortization

   

Net Book Value Amount

 

Customer relationships

  $ 4,894     $ 1,582     $ 3,312  

Certifications

    584       267       317  

Trademarks

    1,333       700       633  

Patents

    1,119       165       954  

Developed technology

    311       22       289  

Other

    6       6       -  

Software

    2,613       2,026       587  

Totals

  $ 10,860     $ 4,768     $ 6,092  

 

Amortization expense related to these assets was $427,000 and $280,000 for the three months ended June 30, 2024, and June 30, 2023, respectively. Amortization expense related to these assets was $1,089,000 and $836,000 for the nine months ended June 30, 2024, and June 30, 2023, respectively. Estimated future amortization expense for identifiable intangibles during the next five years is as follows:

 

(In thousands)

 

Estimated amortization expense

 

FY 2024 (remaining)

  $ 440  

FY 2025

    1,326  

FY 2026

    746  

FY 2027

    547  

FY 2028

    460  

Thereafter

    2,880  

Total

  $ 6,399  

 

19

 

 

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 two 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 two reportable segments for the three and nine months ended June 30, 2024 and 2023:

 

   

Three months ended June 30, 2024

 
   

Clearfield

   

Nestor Cables

   

Eliminations

   

Consolidated

 

(in thousands)

                               

Revenue from external customers

  $ 33,670     $ 15,123     $ -     $ 48,793  

Revenue from internal customers (Clearfield, Inc.)

    -       389       (389 )     -  

Net investment income

    1,799       -       (64 )     1,735  

Interest expense

    -       213       (60 )     153  

Depreciation and amortization

    1,535       375       -       1,910  

Stock based compensation

    1,080       72       -       1,152  

Income tax benefit

    (249 )     (28 )     -       (277 )

Net income (loss)

    (478 )     (164 )     195       (447 )

Capital expenditures

    1,115       106       -       1,221  

 

   

Nine months ended June 30, 2024

 
   

Clearfield

   

Nestor Cables

   

Eliminations

   

Consolidated

 

(in thousands)

                               

Revenue from external customers

  $ 89,371     $ 30,562     $ -     $ 119,933  

Revenue from internal customers (Clearfield, Inc.)

    -       1,490       (1,490 )     -  

Net investment income

    5,832       -       (179 )     5,653  

Interest expense

    -       558       (177 )     381  

Depreciation and amortization

    4,383       1,098       -       5,481  

Stock based compensation

    3,242       195       -       3,437  

Income tax benefit

    (2,657 )     (654 )     -       (3,311 )

Net loss

    (8,862 )     (2,836 )     72       (11,626 )

Capital expenditures

    4,207       1,401       -       5,608  

 

   

Three months ended June 30, 2023

 
   

Clearfield

   

Nestor Cables

   

Eliminations

   

Consolidated

 

(in thousands)

                               

Revenue from external customers

  $ 47,856     $ 13,428     $ -     $ 61,284  

Revenue from internal customers (Clearfield, Inc.)

    -       1,869       (1,869 )     -  

Net investment income

    1,685       1       (56 )     1,630  

Interest expense

    -       252       (56 )     195  

Depreciation and amortization

    1,208       371       -       1,579  

Stock based compensation

    1,041       18       -       1,059  

Income taxes

    1,659       183       -       1,842  

Net income (loss)

    5,150       781       (713 )     5,218  

Capital expenditures

    1,472       258       -       1,729  

 

20

 

   

Nine months ended June 30, 2023

 
   

Clearfield

   

Nestor Cables

   

Eliminations

   

Consolidated

 

(in thousands)

                               

Revenue from external customers

  $ 186,662     $ 32,373     $ -     $ 219,035  

Revenue from internal customers (Clearfield, Inc.)

    -       4,792       (4,792 )     -  

Net investment income

    3,379       5       (56 )     3,328  

Interest expense

    170       437       (56 )     551  

Depreciation and amortization

    3,316       1,096       -       4,411  

Stock based compensation

    2,486       18       -       2,504  

Income taxes

    8,305       206       -       8,511  

Net income (loss)

    30,263       873       (1,299 )     29,837  

Capital expenditures

    5,961       570       -       6,531  

 

The following table summarizes the amounts between the two reportable segments as of June 30, 2024, and as of September 30, 2023:

 

   

June 30, 2024

 
   

Clearfield

   

Nestor Cables

   

Eliminations

   

Consolidated

 

(in thousands)

                               

Goodwill

  $ 4,709     $ 1,844     $ -     $ 6,553  

Total assets

  $ 298,982     $ 42,727     $ (23,614 )   $ 318,095  

 

   

September 30, 2023

 

(in thousands)

 

Clearfield

   

Nestor Cables

   

Eliminations

   

Consolidated

 

Goodwill

  $ 4,709     $ 1,819     $ -     $ 6,528  

Total assets

  $ 335,412     $ 43,550     $ (23,445 )   $ 355,517  

 

 

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 $5,714,000 as of June 30, 2024. Nestor receives cash for 80% of the receivable balance from the bank initially and the remaining 20% when the invoice is paid up to a limit of €12.5 million ($13.4 million as of June 30, 2024). Due to the conditions mentioned above, these transactions do not qualify as a sale and are thus accounted for as secured borrowing. The contractual interest rate on Nestor’s factoring arrangements is the 3-month Euribor rate plus a range of 0.75% to 1.3%. The average interest rate for the three months ended June 30, 2024, was 5.19%. The average interest rate for the nine months ended June 30, 2024, was 7.81%. These agreements are indefinite with a termination notice period ranging from zero to one month.

 

 

Note 14. Income Taxes

 

For the three and nine months ended June 30, 2024, the Company recorded an income tax benefit of $277,000 and $3,311,000, respectively, reflecting an effective tax rate of 38.2% and 22.1%, respectively. The difference between the effective tax rate and the statutory tax rate for the three months ended June 30, 2024, was primarily due to the higher percentage impact of discrete events during the quarter due to the lower level of pre-tax book loss during the period.. The difference between the effective tax rate and the statutory tax rate for the nine months ended June 30, 2024, was primarily due to discrete events during the period, including excess tax shortfall from vesting of restricted stock.

 

For the three and nine months ended June 30, 2023, the Company recorded income tax expense of $1,842,000 and $8,511,000, respectively, reflecting an effective tax rate of 26.1% and 22.2%, respectively. The difference between the effective tax rate and the statutory tax rate for the three and nine months ended June 30, 2023, was primarily related to excess tax benefits from non-qualified stock option exercises and vesting of restricted stock, Section 162(m) compensation deduction limitations, foreign derived intangibles income (FDII) deduction, and research and development credits.

 

21

 

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 June 30, 2024, 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 June 30, 2024, the Company does not have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.

 

 

Note 15. Leases

 

The Company leases an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing, and warehouse space. The original lease term was ten years and two months, ending on February 28, 2025, with a renewal option. In April 2024, the Company exercised the renewal option, which extended the lease term three additional years to end on February 29, 2028. The exercise of the renewal option added a right of use asset and corresponding lease liability of $1,337,000 upon lease commencement.

 

The Company indirectly leases an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico that operates as a maquiladora. In April 2024 the Company terminated the lease for this manufacturing facility and signed a new lease for the same facility. The new lease has a term of seven years, of which five years are mandatory. The lease contains two options to extend the term of the lease for additional periods of five years each. The lease calls for monthly base rental payments of approximately $169,000, increasing 2% annually. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option. The termination of the original facility lease resulted in a decreased right of use asset and corresponding lease liability of $5,610,000, offset by the addition of the right of use asset and lease liability of the new facility lease for $8,637,000 upon lease termination and commencement, respectively.

 

The Company leases a 105,000 square foot warehouse in Brooklyn Park, Minnesota. The lease term commenced in March 2022 and is five years ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option.

 

Nestor Cables leases an approximately 25,000 square foot manufacturing facility in Oulu, Finland, which is utilized for the operations of Nestor Cables. The original lease term ended on October 31, 2022, but auto renews indefinitely until terminated with two years written notice. It is not reasonably certain that the Company will not exercise the termination option. The lease calls for monthly rental payments of approximately €40,000. Rent is increased each year on January 1st based upon the cost-of-living index published by the Finnish government.

 

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 facility and the lease term of the existing facility will be 10 years commencing December 2024.

 

The lease calls for monthly rental payments of approximately €20,400 until April 2024 and €25,000 afterwards. Rent is increased each year on May 1st based upon the cost-of-living index published by the Estonian government and capped at 5%.

 

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 and nine months ended:

 

22

 

Operating lease expense within:

 

Three Months Ended June 30,

   

Nine months Ended June 30,

 
(in thousands)  

2024

   

2023

   

2024

   

2023

 

Cost of sales

  $ 1,081     $ 1,029     $ 3,193     $ 2,991  

Selling, general and administrative

    80       63       229       182  

Total lease expense

  $ 1,161     $ 1,092     $ 3,422     $ 3,173  

 

Future maturities of lease liabilities were as follows as of June 30, 2024 (in thousands):

 

FY2024(Remaining)

  $ 1,065  

FY2025

    4,282  

FY2026

    4,218  

FY2027

    3,436  

FY2028

    3,029  

Thereafter

    3,835  

Total lease payments

    19,865  

Less: Interest

    (3,497 )

Present value of lease liabilities

  $ 16,367  

 

The weighted average term and weighted average discount rate for the Company’s leases as of June 30, 2024, were 5.35 years and 6.61%, respectively, compared to 5.10 years and 3.58%, respectively, as of June 30, 2023. For the three and nine months ended June 30, 2024, the operating cash outflows from the Company’s leases was $1,058,000 and $3,150,000, respectively, compared to $1,012,000 and $2,910,000, respectively, for the three and nine months ended June 30, 2023.

 

 

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 $40,000,000 revolving line of credit that is secured by certain of the Company’s U.S. assets. The line of credit matures on April 27, 2025, and borrowed amounts will bear interest at a variable rate of the CME Group one-month term Secured Overnight Financing Rate (“SOFR”) plus 1.85%, but not less than 1.80% per annum. As of June 30, 2024, the outstanding balance on the revolving line of credit was zero and the interest rate was 7.81%. The loan agreement and the security agreement contains customary affirmative and negative covenants and requirements relating to the Company and its operations, including a requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year then ended and maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing twelve (12) month period. Debt service coverage ratio is the ratio of Cash Available for Debt Service to Debt Service, each as defined in the loan agreement. Debt and Cash Flow are also as defined in the loan agreement for the purposes of the debt to cash flow ratio covenant. As of June 30, 2024, the Company was not in compliance with the debt to cash flow ratio covenant and has subsequently received a covenant waiver from the bank. The line of credit is collateralized by Clearfield, Inc.’s assets of $298,982,000 as of June 30, 2024.

 

On August 5, 2024, the Company entered into an Amendment No. 1 to Loan Agreement that amends its Loan Agreement dated April 27, 2022 with Bremer Bank, National Association (the “Lender”). The amendment, among other things, (i) eliminates the requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year then ended and that the Company maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing 12 month period; (ii) adds a requirement that the Company maintain accounts with the Lender with a minimum aggregate liquidity of unrestricted and unencumbered cash and cash equivalents at all times of not less than the outstanding principal balance of the Company’s revolving credit promissory note payable to the Lender; and (iii) waives the Company’s compliance with the debt to cash flow ratio for the fiscal quarter ended June 30, 2024. As of the date of the amendment, there was not an outstanding principal balance on the Company’s revolving credit promissory note with the Lender.

 

During March 2021, Nestor Cables entered into a loan agreement, providing a €2 million senior loan with a term of three years. The Finland Government pays the interest, capped at 5% with the interest to be paid by the Finnish Government when the loan is used as intended and is repayable with a 2% additional interest penalty if there is a violation of the terms. The loan expired on March 31, 2024. A new loan was issued under the same program with consistent terms as detailed above and is due on March 31, 2026. The repayment and issuance of these loans occurred in April 2024. The loan is fully secured by a Finnish government guarantee. If used for any purposes other than intended, the lender has the right to terminate the agreement and the entire outstanding balance will become due. As of June 30, 2024, Nestor Cables was in compliance with all covenants.

 

 

23

 

 

ITEM 2. MANAGEMENTS 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 Companys expected future business and financial performance. Words such as “may, plan, expect, aim, believe, project, target, anticipate, intend, estimate, will, should, could, outlook, continue 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, Managements 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 and nine months ended June 30, 2024, and 2023 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.

 

24

 

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 JUNE 30, 2024, VS. THREE MONTHS ENDED JUNE 30, 2023

 

Net sales for the third quarter of fiscal 2024 ended June 30, 2024, were $48,793,000, a decrease of approximately 20%, or $12,491,000, from net sales of $61,284,000 for the third quarter of fiscal 2023. Net sales to Broadband Service Providers were $46,028,000 in the third quarter of fiscal 2024 versus $59,731,000 in the same period of fiscal 2023. Net sales to Legacy customers were $820,000 in the third quarter of 2024 versus $1,553,000 in the same period of fiscal 2023. In addition, the Company recorded $16,493,000 in international sales for the third quarter of 2024 versus $14,186,000 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 34% and 23% of total net sales for the third quarter of 2024 and 2023, respectively.

 

The decrease in net sales for the quarter ended June 30, 2024, of $12,491,000 compared to the quarter ended June 30, 2023, was primarily driven by decreased sales to Large Regional customers of $12,092,000, or 76%, and MSO customers of $3,637,000, or 39%, partially offset by increased sales to International customers of $2,307,000, or 16%. The decrease in sales in the Large Regional Service Provider customer and MSO customer markets for the quarter ended June 30, 2024, as compared to the quarter ended June 30, 2023, is due to lower demand as customers digest existing products previously purchased during the period of long lead time supply chain created by the pandemic. The increase in sales to International customers was driven by increased sales by the Nestor Cables segment during the current quarter.

 

Order backlog as of June 30, 2024 was $32,582,000, a decrease of 31% compared to $47,179,000 as of March 31, 2024, and a decrease of $74,704,000 or 56%, from June 30, 2023. The year-over-year decrease was also due to the lull in demand as customers digest previously purchased products.

 

Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers 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, including the digestion of customer’s excess inventory. 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 third quarter of 2024 was $38,101,000, a decrease of $4,109,000, or 10%, from $42,210,000 in the comparable period of fiscal 2023. Gross profit percent was 21.9% of net sales in the third quarter of 2024, a decrease from 31.1% of net sales for the third quarter of 2023. Gross profit decreased $8,382,000, or 44%, to $10,692,000 for the three months ended June 30, 2024, from $19,074,000 in the comparable period in fiscal 2023. The Company’s gross profit was negatively impacted by an increase in inventory reserves of $1,154,000 during the three months ended June 30, 2024. While gross margin was down from the year ago quarter, it showed a significant improvement from the previous quarter due to improved production capacity and lower excess inventory charges due to better utilization from higher revenue in the quarter.

 

25

 

Selling, general and administrative expenses decreased $450,000, or 3%, to $12,999,000 in the third quarter of 2024 from $13,449,000 for the third quarter of 2023.

 

Loss from operations for the quarter ended June 30, 2024, was $2,307,000 compared to income from operations of $5,625,000 for the comparable quarter of fiscal 2023, a decrease of approximately 141%. The decrease is the result of decreased net sales and gross profit margin as explained above.

 

Net investment income for the quarter ended June 30, 2024, was $1,735,000 compared to $1,630,000 for the comparable quarter for fiscal 2023. The increase in interest income is due to higher interest rates earned during the three months ended June 30, 2024, as compared to the prior year quarter.

 

Interest expense for the quarter ended June 30, 2024, remained relatively consistent at $153,000, compared to $195,000 for the comparable period of fiscal 2023. Interest expense incurred during these periods is related to factoring liabilities in the Nestor segment.

 

The Company recorded an income tax benefit of $277,000 and an income tax expense of $1,842,000 for the three months ended June 30, 2024, and 2023, 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 $2,119,000 in the third quarter of fiscal 2024 from the third quarter of fiscal 2023 is primarily due to decreased income from operations. The income tax expense rate for the third quarter of fiscal 2024 increased to 38.2% from 26.1% recorded in the third quarter of fiscal 2023 due to the higher percentage impact of discrete items due to a low level of pre-tax book loss in the third quarter.

 

The Company’s net loss for the three months ended June 30, 2024, was $447,000, or $0.04 per basic and diluted share. The Company’s net income for the three months ended June 30, 2023, was $5,218,000, or $0.33 per basic and diluted share. The decrease in basic and diluted earnings per share for the three months ended June 30, 2024, as compared to June 30, 2023, was due to lower net income as a result of decreased net sales and gross profit margin and increased selling, general and administrative expenses as detailed above.

 

 

NINE MONTHS ENDED JUNE 30, 2024 VS. NINE MONTHS ENDED JUNE 30, 2023

 

Net sales for the nine months ended June 30, 2024, were $119,933,000, a decrease of approximately 45%, or $99,102,000, from net sales of $219,035,000 for the nine months ended June 30, 2023. Net sales to Broadband Service Providers were $112,203,000 in the nine months ended June 30, 2024, versus $211,231,000 in the same period of fiscal 2023. Among this group, the Company recorded $33,110,000 in international sales for the nine months ended June 30, 2024, versus $37,527,000 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. Accordingly, international sales represented 28% and 17% of total net sales for the nine months ended June 30, 2024, and June 30, 2023, respectively. Net sales to Legacy customers were $2,310,000 in the nine months ended June 30, 2024, versus $7,804,000 in the same period of fiscal 2023.

 

The decrease in net sales for the nine months ended June 30, 2024, of $99,102,000 compared to the nine months ended June 30, 2023, was primarily driven by decreased sales to Community Broadband Service Providers of $41,244,000, or 46%, Large Regional customers of $28,511,000, or 66%, MSO customers of $24,289,000, or 60%, and International customers of $4,417,000, or 12%. The decrease in sales across these markets for the quarter ended June 30, 2024, as compared to the quarter ended June 30, 2023, is mainly due to lower demand as customers digest existing products previously purchased during the period of long lead time supply chain created by the pandemic.

 

Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers 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 global supply chain issues, customer deployment schedules and factors affecting customer ordering patterns including the digestion of customer’s excess inventory. 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.

 

26

 

Cost of sales for the nine months ended June 30, 2024, was $101,712,000, a decrease of $44,038,000, or 30%, from $145,750,000 in the comparable period of fiscal 2023. Gross profit percent was 15.2% of net sales for the nine months ended June 30, 2024, a decrease from 33.5% of net sales for the nine months ended June 30, 2023. Gross profit decreased $55,064,000, or 75%, to $18,221,000 for the nine months ended June 30, 2024, from $73,285,000 in the comparable period in fiscal 2023. Gross profit margin was negatively affected by unabsorbed overhead in our manufacturing facilities due to lower levels of demand. The Company’s gross profit was also negatively impacted by an increase in inventory reserves of $8,944,000 during the nine months ended June 30, 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.

 

Selling, general and administrative expenses increased $724,000, or 2%, to $38,430,000 in the nine months ended June 30, 2024, from $37,714,000 for the comparable period of fiscal 2023.

 

Loss from operations for the nine months ended June 30, 2024, was $20,210,000 compared to income from operations of $35,571,000 for the comparable quarter of fiscal 2023, a decrease of 157%. The decrease is the result of decreased net sales and gross profit margin and increased selling, general and administrative expenses explained above.

 

Net investment income for the nine months ended June 30, 2024, was $5,653,000 compared to $3,328,000 for the comparable quarter for fiscal 2023. The increase in interest income is due to higher interest rates earned and a higher average investments balance in the nine months ended June 30, 2024. The higher investments balance is a result of the Company’s capital raise of $130,262,000 completed late in the first fiscal quarter of 2023.

 

Interest expense for the nine months ended June 30, 2024, was $381,000 compared to $551,000 for the comparable quarter of fiscal 2023. The decrease was due to repayment of the Company’s line of credit in December 2022, which had been previously drawn on for the acquisition of Nestor Cables, following the Company’s secondary offering completed in December 2023.

 

The Company recorded an income tax benefit of $3,311,000 and an income tax expense of $8,511,000 for the nine months ended June 30, 2024, and 2023, 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 $11,822,000 in the third quarter of fiscal 2024 from the third quarter of fiscal 2023 is primarily due to decreased income from operations. The income tax expense rate for the nine months ended June 30, 2024, and 2023 remained unchanged at 22.2%.

 

The Company’s net loss for the nine months ended June 30, 2024, was $11,626,000, or $0.79 per basic share and per diluted share. The Company’s net income for the nine months ended June 30, 2023, was $29,837,000, or $2.01 per basic share or $2.00 per diluted share. The decrease in basic and diluted earnings per share for the nine months ended June 30, 2024, as compared to June 30, 2023, was due to lower net income as a result of lower sales, lower gross profit margin and higher selling, general and administrative expenses as detailed above.

 

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 three months ended June 30, 2024, and 2023, net sales from the Clearfield segment comprised 69% and 78% of the Company’s total net sales, respectively. For the nine months ended June 30, 2024, and 2023, net sales from the Clearfield segment compromised 75% and 85% of the Company’s total net sales, respectively.

 

27

 

 

Nestor Cables Segment  The Nestor Cables segment designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment. For the three months ended June 30, 2024, and 2023, net sales from the Nestor Cables segment comprised 31% and 22% of the Company’s total net sales, respectively. For the nine months ended June 30, 2024, and 2023, net sales from the Nestor Cables segment compromised 25% and 15% of the Company’s total net sales, respectively.

 

Clearfield Segment

 

The following table provides net sales and net income for the Clearfield segment for the three and nine months ended:

 

   

Three Months Ended June 30,

   

Nine months Ended June 30,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 

Segment net external sales

  $ 33,670     $ 47,856     $ 89,371     $ 186,662  

Segment net (loss) income

  $ (196 )   $ 5,150     $ (8,464 )   $ 30,263  

 

Net sales in the Clearfield segment decreased 30%, or $14,186,000, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. Net sales in the Clearfield segment decreased 52%, or $97,291,000, for the nine months ended June 30, 2024, as compared to the nine months ended June 30, 2023, 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 during the period of long lead time supply chain created by the pandemic.

 

Net income (loss) in the Clearfield segment for the three months ended June 30, 2024, decreased 109%, or $5,627,000, as compared to the three months ended June 30, 2023. Net income (loss) in the Clearfield segment for the nine months ended June 30, 2024, decreased 129%, or $39,125,000, as compared to the nine months ended June 30, 2023, 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 and increased reserves for excess inventory.

 

Nestor Cables Segment

 

The following table provides net sales and net income for the Nestor Cables segment for the three and nine months ended:

 

   

Three Months Ended June 30,

   

Nine months Ended June 30,

 

(In thousands)

 

2024

   

2023

   

2024

   

2023

 

Segment net external sales

  $ 15,123     $ 13,428     $ 30,562     $ 32,373  

Segment net (loss) income

  $ (252 )   $ 68     $ (3,162 )   $ (426 )

 

Net sales in the Nestor Cables segment increased 13%, or $1,695,000, for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, excluding sales to the Clearfield Segment. Net sales in the Nestor Cables segment decreased 6%, or $1,810,000 for the nine months ended June 30, 2024, as compared to the nine months ended June 30, 2023, excluding sales to the Clearfield Segment.

 

Net loss in the Nestor Cables segment for the three months ended June 30, 2024, increased 55%, or $38,000, as compared to the three months ended June 30, 2023. Net loss in the Nestor Cables segment for the nine months ended June 30, 2024, increased 549%, or $2,338,000, as compared to the nine months ended June 30, 2023.

 

Liquidity and Capital Resources

 

As of June 30, 2024, our principal source of liquidity was our cash, cash equivalents, and short-term investments. These sources total $123,819,000 as of June 30, 2024, 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 June 30, 2024. 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 $24,180,000 as of June 30, 2024, 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 June 30, 2024, our cash, cash equivalents, and short-term and long-term investments totaled $147,999,000, compared to $174,456,000 as of September 30, 2023.

 

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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 $8,464,000 for the nine months ended June 30, 2024. This consisted of a net loss of $11,626,000, non-cash expenses for depreciation and amortization of $5,481,000, stock-based compensation of $3,437,000, amortization of discounts on investments of $3,304,000 and increased deferred income taxes of $3,523,000, 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 inventory of $23,440,000 and a decrease in accounts payable and accrued expenses of $1,643,000. The decrease in inventory is due to decreased inventory purchases during the nine months ending June 30, 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 an increase in other assets of $8,030,000, related to the increases in prepaid taxes and prepaid expenses.

 

Net cash provided by operating activities totaled $13,481,000 for the nine months ended June 30, 2023. This was primarily due to net income of $29,837,000, non-cash expenses for depreciation and amortization of $4,411,000, stock-based compensation of $2,504,000, and non-cash income related to amortization of discounts on investments of $2,429,000, 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 $20,326,000 and an increase in inventory of $21,510,000. 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 June 30, 2023, to support previously anticipated demand. The primary change in operating assets and liabilities providing cash was a decrease in accounts receivable of $24,519,000. Days sales outstanding, which measures how quickly receivables are collected, decreased 5 days to 47 days as of June 30, 2023, 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 nine months ended June 30, 2024, we received proceeds from the maturity of investment securities of $142,067,000 and used cash to purchase $124,137,000 of investment securities. Purchases of property, plant, and equipment, mainly related to manufacturing equipment and intangible assets, consumed $5,608,000 of cash during the nine months ended June 30, 2024.

 

During the nine months ended June 30, 2023, we received proceeds from maturities of investments of $105,077,000 and used cash to purchase $210,923,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $6,529,000 of cash during the nine months ended June 30, 2023.

 

Financing Activities

 

For the nine months ended June 30, 2024, we used cash to repurchase $33,374,000 of our common stock on the open market under our stock repurchase program, which includes U.S. Federal excise taxes. We received $586,000 from employees’ participation and purchase of stock through our ESPP, used $240,000 for payment of withholding taxes for vesting of restricted stock grants, and used $9,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exercises of stock options.

 

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For the nine months ended June 30, 2023, 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 $612,000 from employees’ participation and purchase of stock through our ESPP, we received $954,000 related to the issuance of stock as payment for incentive compensation previously earned, we used $493,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exercises of stock options and used $954,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We did not repurchase common stock under our share repurchase program in the nine months ended June 30, 2023.

 

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 June 30, 2024.

 

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 June 30, 2024.

 

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 June 30, 2024.

 

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 condensed 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 June 30, 2024, would have increased or decreased by approximately $164,000 and $544,000, or approximately 1%, for the three and nine months ended June 30, 2024, respectively. 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 condensed consolidated 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 condensed consolidated financial statements.

 

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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 June 30, 2024. 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 June 30, 2024, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.

 

ITEM 1A. RISK FACTORS

 

The most significant risk factors applicable to the Company are described in Part 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 June 30, 2024, 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 June 30, 2024, were as follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total
Number
of Shares
Purchased

   

Average
Price Paid
per Share

   

Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs

   

Approximate Dollar Value
of Shares that
May Yet Be Purchased
Under the Program (1)

 

April 1-30, 2024

    180,621     $ 29.70       180,621     $ 25,067,195  

May 1-31, 2024

    4,130     $ 34.93       4,130     $ 24,922,929  

June 1-30, 2024

    -       -       -     $ 24,922,929  

Total

    184,751     $ 29.81       184,751     $ 24,922,929  

 

(1) Effective April 30, 2024, the Company’s board of directors increased the share repurchase program to an aggregate of $65 million from the prior $40 million.

 

 

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

During the quarter ended June 30, 2024, 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).

 

On August 5, 2024, the Company entered into an Amendment No. 1 to Loan Agreement that amends its Loan Agreement dated April 27, 2022 with Bremer Bank, National Association (the “Lender”). The amendment, among other things, (i) eliminates the requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year then ended and that the Company maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing 12 month period; (ii) adds a requirement that the Company maintain accounts with the Lender with a minimum aggregate liquidity of unrestricted and unencumbered cash and cash equivalents at all times of not less than the outstanding principal balance of the Company’s revolving credit promissory note payable to the Lender; and (iii) waives the Company’s compliance with the debt to cash flow ratio for the fiscal quarter ended June 30, 2024. As of the date of the amendment, there was not an outstanding principal balance on the Company’s revolving credit promissory note with the Lender.

 

The foregoing summary of the amendment to the loan agreement does not purport to be complete and is subject to and qualified in its entirety by reference to the amendment to the loan agreement, which is attached hereto as Exhibit 10.2 and is incorporated herein by reference.

 

ITEM 6. EXHIBITS

 

3.1 – Restated Articles of Incorporation of APA Optics, Inc. (n/k/a Clearfield, Inc.) dated November 3, 1983, and Articles of Amendment dated December 9, 1983, July 30, 1987, March 22, 1989, September 14, 1994 and August 17, 2000. (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.)

 

3.1(a) – Articles of Amendment to Articles of Incorporation dated August 25, 2004. (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.)

 

3.2 – Amended and Restated Bylaws of Clearfield, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated February 25, 2016.)

 

10.1 – Lease Agreement dated April 4, 2024, by and among Prisma Shelter, S. de R.L. de C.V., Clearfield, Inc., and Banco Actinver, S.A., Institución de Banca Múltiple, Grupo Financiero Actinver, solely in its capacity as Trustee of Trust No. 3218. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 9, 2024.)

 

10.2 – Amendment No. 1 to Loan Agreement dated August 5, 2024 by and between Clearfield, Inc. and Bremer Bank, National Association.

 

31.1 – Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

 

31.2 – Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

 

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

 

101 – The following materials from Clearfield, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2024 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2024 and 2023; (ii) Condensed Consolidated Statements of Earnings for the three and nine months ended June 30, 2024 and 2023; (iii) Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended June 30, 2024 and 2023; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2024 and 2023; and (v) Notes to the Condensed Consolidated Financial Statements.

 

104 - Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

 

 

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SIGNATURES

 

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

 

  CLEARFIELD, INC.
   

August 6, 2024

 /s/ Cheryl Beranek

 

By: Cheryl Beranek

Its: President and Chief Executive Officer

 

(Principal Executive Officer)

   

August 6, 2024

/s/ Daniel Herzog

 

By: Daniel Herzog

Its: Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

 

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