UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from __________________ to ___________________
Commission File Number
(Exact name of Registrant as specified in its charter)
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
(
(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 |
|
|
|
The |
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company in Rule 12b-2 of the Exchange Act.
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
|
Class: |
Outstanding as of August 4, 2023 |
|
Common stock, par value $.01 |
|
CLEARFIELD, INC.
FORM 10-Q
TABLE OF CONTENTS
CLEARFIELD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
June 30, |
September 30, |
|||||||
|
Assets |
||||||||
| Current Assets | ||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Short-term investments |
||||||||
|
Accounts receivables, net |
||||||||
|
Inventories, net |
||||||||
|
Other current assets |
||||||||
|
Total current assets |
||||||||
|
Property, plant and equipment, net |
||||||||
| Other Assets | ||||||||
|
Long-term investments |
||||||||
|
Goodwill |
||||||||
|
Intangible assets, net |
||||||||
|
Right-of-use lease assets |
||||||||
|
Deferred tax asset |
||||||||
|
Other |
||||||||
|
Total other assets |
||||||||
|
Total Assets |
$ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
|
Current portion of lease liability |
$ | $ | ||||||
|
Debt |
||||||||
|
Accounts payable |
||||||||
|
Accrued compensation |
||||||||
|
Accrued expenses |
||||||||
|
Factoring liability |
||||||||
|
Total current liabilities |
||||||||
| Other Liabilities | ||||||||
|
Long-term debt |
||||||||
|
Long-term portion of lease liability |
||||||||
|
Deferred tax liability |
||||||||
|
Total liabilities |
||||||||
| Shareholders’ Equity | ||||||||
|
Preferred stock, $ par value; |
||||||||
|
Common stock, authorized |
||||||||
|
Additional paid-in capital |
||||||||
|
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
|
Retained earnings |
||||||||
|
Total shareholders’ equity |
||||||||
|
Total Liabilities and Shareholders’ Equity |
$ | $ | ||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CLEARFIELD, INC. |
||||||||||||||||
|
CONSOLIDATED STATEMENTS OF EARNINGS |
||||||||||||||||
|
UNAUDITED |
||||||||||||||||
|
(IN THOUSANDS, EXCEPT SHARE DATA) |
||||||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
June 30, |
June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
|
Cost of sales |
42,210 | 41,943 | ||||||||||||||
|
Gross profit |
||||||||||||||||
| Operating expenses | ||||||||||||||||
|
Selling, general and administrative |
||||||||||||||||
|
Income from operations |
||||||||||||||||
|
Net investment income |
||||||||||||||||
|
Interest expense |
( |
) | ( |
) | ||||||||||||
|
Income before income taxes |
||||||||||||||||
|
Income tax expense |
||||||||||||||||
|
Net income |
$ | $ | $ | $ | ||||||||||||
|
Net income per share Basic |
$ | $ | $ | $ | ||||||||||||
|
Net income per share Diluted |
$ | $ | $ | $ | ||||||||||||
|
Weighted average shares outstanding: |
||||||||||||||||
|
Basic |
||||||||||||||||
|
Diluted |
||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CLEARFIELD, INC. |
||||||||||||||||
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
||||||||||||||||
|
(IN THOUSANDS) |
||||||||||||||||
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
June 30, |
June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Comprehensive Income: |
||||||||||||||||
|
Net income |
$ | $ | $ | $ | ||||||||||||
|
Other comprehensive income (loss), net of tax |
||||||||||||||||
|
Unrealized gain (loss) on available-for-sale investments |
( |
) | ( |
) | ||||||||||||
|
Unrealized gain (loss) on foreign currency translation |
( |
) | ||||||||||||||
|
Total other comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
|
Total comprehensive income |
$ | $ | $ | $ | ||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CLEARFIELD, INC. |
||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
|
(IN THOUSANDS) |
||||||||||||||||||||||||
|
For the three months ended June 30, 2023 |
Accumulated other |
|||||||||||||||||||||||
|
Common Stock |
Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
|
Shares |
Amount |
paid-in capital |
loss |
earnings |
holders’ equity |
|||||||||||||||||||
|
Balance at March 31, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Stock-based compensation expense |
- | |||||||||||||||||||||||
|
Issuance of common stock under equity compensation plans, net |
( |
) | - | - | - | - | - | |||||||||||||||||
|
Exercise of stock options, net of shares exchanged for payment |
( |
) | ( |
) | ||||||||||||||||||||
|
Employee stock purchase plan |
||||||||||||||||||||||||
|
Other comprehensive loss |
- | ( |
) | ( |
) | |||||||||||||||||||
|
Net income |
- | |||||||||||||||||||||||
|
Balance at June 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
For the three months ended June 30, 2022 |
Accumulated other | |||||||||||||||||||||||
|
Common Stock |
Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
|
Shares |
Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
|
Balance at March 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Stock-based compensation expense |
- | |||||||||||||||||||||||
|
Issuance of common stock under equity compensation plans, net |
( |
) | ||||||||||||||||||||||
|
Issuance of common stock under employee stock purchase plan |
||||||||||||||||||||||||
|
Exercise of stock options, net of shares exchanged for payment |
( |
) | ( |
) | ||||||||||||||||||||
|
Other comprehensive loss |
- | ( |
) | ( |
) | |||||||||||||||||||
|
Net income |
- | |||||||||||||||||||||||
|
Balance at June 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CLEARFIELD, INC. |
||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
|
(IN THOUSANDS) |
||||||||||||||||||||||||
|
For the nine months ended June 30, 2023 |
Accumulated other | |||||||||||||||||||||||
|
Common Stock |
Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
|
Shares |
Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
|
Balance as of September 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
Stock-based compensation expense |
- | |||||||||||||||||||||||
|
Issuance of common stock under equity compensation plans, net |
||||||||||||||||||||||||
|
Issuance of common stock under employee stock purchase plan |
||||||||||||||||||||||||
|
Exercise of stock options, net of shares exchanged for payment |
( |
) | ( |
) | ||||||||||||||||||||
|
Repurchase of shares for payment of withholding taxes for stock grants |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Issuance of common stock, net | ||||||||||||||||||||||||
|
Other comprehensive income |
- | |||||||||||||||||||||||
|
Net income |
- | |||||||||||||||||||||||
|
Balance at June 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
|
For the nine months ended June 30, 2022 |
Accumulated other | |||||||||||||||||||||||
|
Common Stock |
Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
|
Shares |
Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
|
Balance as of September 30, 2021 |
$ | $ | $ | $ | $ | |||||||||||||||||||
|
Stock-based compensation expense |
- | |||||||||||||||||||||||
|
Issuance of common stock under equity compensation plans, net |
||||||||||||||||||||||||
|
Issuance of common stock under employee stock purchase plan |
||||||||||||||||||||||||
|
Exercise of stock options, net of shares exchanged for payment |
( |
) | ( |
) | ||||||||||||||||||||
|
Repurchase of shares for payment of withholding taxes for vested restricted stock grants |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Other comprehensive loss |
- | ( |
) | ( |
) | |||||||||||||||||||
|
Net income |
- | |||||||||||||||||||||||
|
Balance at June 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CLEARFIELD, INC. |
||||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
||||||||
|
(UNAUDITED) |
||||||||
|
(IN THOUSANDS) |
||||||||
|
Nine Months |
Nine Months |
|||||||
|
Ended |
Ended |
|||||||
|
June 30, |
June 30, |
|||||||
|
2023 |
2022 |
|||||||
|
Cash flows from operating activities |
||||||||
|
Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
|
Depreciation and amortization |
||||||||
|
Amortization of discount on investments |
( |
) | ( |
) | ||||
|
Stock-based compensation |
||||||||
| Changes in operating assets and liabilities, net of acquired amounts: | ||||||||
|
Accounts receivable, net |
( |
) | ||||||
|
Inventories, net |
( |
) | ( |
) | ||||
|
Other assets |
( |
) | ( |
) | ||||
|
Accounts payable and accrued expenses |
( |
) | ||||||
|
Net cash provided by (used in) operating activities |
( |
) | ||||||
|
Cash flows from investing activities |
||||||||
|
Purchases of property, plant and equipment, and intangible assets |
( |
) | ( |
) | ||||
|
Purchases of investments |
( |
) | ( |
) | ||||
|
Proceeds from sales and maturities of investments |
||||||||
|
Net cash provided by (used in) investing activities |
( |
) | ||||||
|
Cash flows from financing activities |
||||||||
|
Repayment of long-term debt |
( |
) | ||||||
|
Proceeds from issuance of common stock under employee stock purchase plan |
||||||||
|
Repurchase of shares for payment of withholding taxes for stock grants |
( |
) | ( |
) | ||||
|
Withholding related to exercise of stock options |
( |
) | ( |
) | ||||
|
Issuance of stock under equity compensation plans |
||||||||
|
Net proceeds from issuance of common stock |
||||||||
|
Net cash provided by (used in) financing activities |
( |
) | ||||||
|
Effect of exchange rates on cash |
( |
) | ||||||
|
Increase in cash and cash equivalents |
||||||||
|
Cash and cash equivalents, beginning of year |
||||||||
|
Cash and cash equivalents, end of period |
$ | $ | ||||||
|
Supplemental disclosures for cash flow information |
||||||||
|
Cash paid for income taxes |
$ | $ | ||||||
|
Cash paid for interest expense |
$ | $ | ||||||
|
Non-cash financing activities |
||||||||
|
Cashless exercise of stock options |
$ | $ | ||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company,” and “Clearfield,” refer to Clearfield, Inc. and subsidiaries.
Basis of Presentation
The accompanying (a) consolidated balance sheet as of September 30, 2022, which has been derived from audited financial statements, and (b) unaudited interim consolidated financial statements as of and for the three and nine months ended June 30, 2023 have been prepared by Clearfield in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period, due to variability in customer purchasing patterns, seasonality and other factors. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2022.
In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Clearfield, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2024, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
Note 2. Net Income Per Share
Basic net income per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income divided by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options, when dilutive.
The following is a reconciliation of the numerator and denominator of the net income per common share computations for the three and nine months ended June 30, 2023, and 2022:
|
Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||||||
|
(In thousands, except for share data) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
|
Net income |
$ | $ | $ | $ | ||||||||||||
|
Weighted average common shares |
||||||||||||||||
|
Dilutive potential common shares |
||||||||||||||||
|
Weighted average dilutive common shares outstanding |
||||||||||||||||
| Net income per common share: | ||||||||||||||||
|
Basic |
$ | $ | $ | $ | ||||||||||||
|
Diluted |
$ | $ | $ | $ | ||||||||||||
Note 3. Cash and Cash Equivalents
We classify investments with original maturities of 90 days or less as cash equivalents. The following table presents the Company’s cash and cash equivalents balances:
|
(In thousands) |
June 30, 2023 |
September 30, 2022 |
||||||
|
Cash and cash equivalents: |
||||||||
|
Cash including money market accounts |
$ | $ | ||||||
|
Money market funds |
||||||||
|
Total cash and cash equivalents |
$ | $ | ||||||
Note 4. Investments
The Company invests in certificates of deposit (“CDs”) in amounts that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and United States (“U.S.”) Treasury securities with terms of not more than five years, as well as money market funds. Historically, the Company’s investment portfolio had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and reclassified its investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income, net of tax. Realized gains and losses on available-for-sale securities are recognized upon sale and are included in net investment income in the consolidated statement of earnings.
As of June 30, 2023, available-for-sale investments consisted of the following:
|
June 30, 2023 |
||||||||||||||||
|
(In thousands) |
Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
| Short-Term | ||||||||||||||||
|
U.S. Treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Total investment securities – short-term |
$ | $ | $ | $ | ||||||||||||
| Long-Term | ||||||||||||||||
|
U.S Treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Total investment securities – long-term |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2022, available-for-sale investments consisted of the following:
|
September 30, 2022 |
||||||||||||||||
|
(In thousands) |
Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
|
Short-Term |
||||||||||||||||
|
Certificates of deposit |
$ | $ | $ | $ | ||||||||||||
|
Total investment securities – short-term |
$ | $ | $ | $ | ||||||||||||
|
Long-Term |
||||||||||||||||
|
U.S Treasury securities |
||||||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Total investment securities – long-term |
$ | $ | $ | $ | ||||||||||||
As of June 30, 2023, investments in debt securities in an unrealized loss position were as follows:
|
In Unrealized Loss Position For Less Than 12 Months |
In Unrealized Loss Position For Greater Than 12 Months |
|||||||||||||||
|
(In thousands) |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||
|
U.S Treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Total investment securities |
$ | $ | $ | $ | ||||||||||||
As of June 30, 2023, there were
As of September 30, 2022, investments in debt securities in an unrealized loss position were as follows:
|
In Unrealized Loss Position For Less Than 12 Months |
In Unrealized Loss Position For Greater Than 12 Months |
|||||||||||||||
|
(In thousands) |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||
|
U.S Treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Certificates of deposit |
||||||||||||||||
|
Total investment securities |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2022, there were 62 securities in an unrealized loss position which was due to the securities paying lower interest rates than the market. As of September 30, 2022, there were no securities which were other than temporarily impaired as the Company intended to hold these securities until their value recovered and there was negligible credit risk due to the nature of the securities which were backed by the FDIC and US federal government.
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 that obtains the valuations 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, 2023, according to the three-level fair value hierarchy:
|
Fair Value Measurements at June 30, 2023 |
||||||||||||||||
|
(In thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
| Cash equivalents: | ||||||||||||||||
|
Money market funds |
$ | $ | $ | $ | ||||||||||||
|
Total cash equivalents |
$ | $ | $ | $ | ||||||||||||
| Investment securities: | ||||||||||||||||
|
Certificates of deposit |
$ | $ | $ | $ | ||||||||||||
|
U.S Treasury securities |
||||||||||||||||
|
Total investment securities |
$ | $ | $ | $ | ||||||||||||
The following provides information regarding fair value measurements for the Company’s investment securities as of September 30, 2022, according to the three-level fair value hierarchy:
|
Fair Value Measurements at September 30, 2022 |
||||||||||||||||
|
(In thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
|
Cash equivalents: |
||||||||||||||||
|
Money market funds |
$ | $ | $ | $ | ||||||||||||
|
Total cash equivalents |
$ | $ | $ | $ | ||||||||||||
|
Investment securities: |
||||||||||||||||
|
Certificates of deposit |
$ | $ | $ | $ | ||||||||||||
|
U.S Treasury securities |
||||||||||||||||
|
Total investment securities |
$ | $ | $ | $ | ||||||||||||
As of June 30, 2023, and September 30, 2022, and for the periods then ended, the Company owned
Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets, and right-of-use assets for operating leases are subject to non-recurring fair value measurements if they are deemed impaired. The Company had no re-measurements of non-financial assets to fair value in the nine months ended June 30, 2023, and 2022.
Note 6. Other Comprehensive Income (Loss)
Changes in components of accumulated other comprehensive income (loss), net of tax, are as follows:
|
(In thousands) |
Unrealized Gain (Loss) on Available-for-Sale Securities |
Foreign Currency Translation Gain (Loss) |
Accumulated Other Comprehensive Gain (Loss) |
|||||||||
|
Balances at September 30, 2022 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
|
Other comprehensive income for the three months ended December 31, 2022 |
||||||||||||
|
Balances at December 31, 2022 |
$ | ( |
) | $ | $ | ( |
) | |||||
|
Other comprehensive income for the three months ended March 31, 2023 |
||||||||||||
|
Balances at March 31, 2023 |
$ | ( |
) | $ | $ | ( |
) | |||||
|
Other comprehensive income (loss) for the three months ended June 30, 2023 |
( |
) | ( |
) | ||||||||
|
Balances at June 30, 2023 |
$ | ( |
) | $ | $ | ( |
) | |||||
Note 7. Stock-Based Compensation
On February 23, 2023, the Company’s shareholders approved the Clearfield, Inc. 2022 Stock Compensation Plan (the “2022 Plan”). The 2022 Plan became effective on the date of shareholder approval, and no further awards may be made under the Clearfield, Inc. Amended and Restated 2007 Stock Compensation Plan (the “Prior Plan”) following the effective date of the 2022 Plan. The total number of shares of stock reserved and available for distribution under the 2022 Plan upon approval was
The Company recorded $
Stock Options
The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the nine months ended June 30, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of
The fair value of stock option awards during the nine months ended June 30, 2023, was estimated as of the respective grant dates using the assumptions listed below:
|
Nine months ended June 30, 2023 |
||||
|
Dividend yield |
% | |||
|
Expected volatility |
% | |||
|
Risk-free interest rate |
% | |||
|
Expected life in years |
||||
|
Vesting period in years |
||||
The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected life represents the period of time that options are expected to be outstanding after their grant date. The risk-free interest rate reflects the interest rate as of the grant date on zero-coupon U.S. governmental bonds with a remaining life similar to the expected option term.
Options are granted with exercise prices at fair market values determined on the date of grant and vesting normally occurs over a to -year period. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares.
The following is a summary of stock option activity during the nine months ended June 30, 2023:
|
Number of options |
Weighted average exercise price |
|||||||
|
Outstanding as of September 30, 2022 |
$ | |||||||
|
Granted |
||||||||
|
Exercised |
( |
) | ||||||
|
Forfeited or Expired |
( |
) | ||||||
|
Outstanding as of June 30, 2023 |
$ | |||||||
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of June 30, 2023, the weighted average remaining contractual term for all outstanding and exercisable stock options was
Restricted Stock
The Company’s 2022 Stock Compensation Plan permits the Compensation Committee of the Board of Directors to grant stock-based awards, including stock options and restricted stock, to key employees and non-employee directors. The Company has made restricted stock grants that vest over to years.
During the nine months ended June 30, 2023, the Company granted employees restricted stock awards totaling
During the nine months ended June 30, 2022, the Company granted newly elected non-employee directors restricted stock awards totaling
Restricted stock transactions during the nine months ended June 30, 2023, are summarized as follows:
|
Number of shares |
Weighted average grant date fair value |
|||||||
|
Unvested shares as of September 30, 2022 |
$ | |||||||
|
Granted |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Unvested as of June 30, 2023 |
$ | |||||||
Bonus Stock
During the nine months ended June 30, 2023, the Company granted employees an aggregate of
Employee Stock Purchase Plan
The Company’s ESPP allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. The terms of the ESPP provide those participating employees the ability to purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of
Note 8. Revenue
Revenue Recognition
Net sales include products and shipping and handling charges. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the applicable sales 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 for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of the Company’s sales contracts have a single performance obligation and are short-term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Disaggregation of Revenue
The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales outside the United States are principally to countries in Europe, the Caribbean, Canada, Central America 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) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
|
United States |
$ | $ | $ | $ | ||||||||||||
|
All other countries |
||||||||||||||||
|
Total Net Sales |
$ | $ | $ | $ | ||||||||||||
The Company manufactures and sells proprietary product lines designed for the Broadband Service Provider marketplace. In addition, the Company’s Legacy business provides build-to-print services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specifications.
The percentages of the Company’s sales by markets were as follows for the three and nine months ended:
|
Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Broadband service providers |
% | % | % | % | ||||||||||||
|
Other customers |
% | % | % | % | ||||||||||||
|
Total Net Sales |
% | % | % | % | ||||||||||||
Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, multiple system operators (“MSO’s” or “Cable TV”), which are 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’s; Large Regional Service Providers, which are independent local exchange carriers (ILECs) with footprints of 500,000 subscribers and above; and international customers. Other customers include sales of copper cable, build-to-print copper assemblies and other contract manufacturing.
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. The Company writes off accounts receivable when they become uncollectible; payments subsequently received on such receivables are credited to the allowance for doubtful accounts. As of both June 30, 2023, and September 30, 2022, the balance in the allowance for doubtful accounts was $
See Note 9 “Major Customer Concentration” for further information regarding accounts receivable and net sales.
Note 9. Major Customer Concentration
For the three months ended June 30, 2023, Customer A, a distributor, comprised
For the three months ended June 30, 2022, Customers A and B, both distributors, comprised
As of June 30, 2023, Customer C, a distributor, comprised 16% of the Company’s accounts receivable. As of September 30, 2022, Customer D, a distributor, comprised
Note 10. Inventories
Inventories consist of the following as of:
|
(In thousands) |
June 30, 2023 |
September 30, 2022 |
||||||
|
Raw materials |
$ | $ | ||||||
|
Work-in-process |
||||||||
|
Finished goods |
||||||||
|
Inventories, gross |
||||||||
|
Inventory reserve |
( |
) | ( |
) | ||||
|
Inventories, net |
$ | $ | ||||||
Note 11. Goodwill and Intangibles
The Company analyzes its goodwill for impairment annually or at an interim period when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2022, did indicate an impairment of goodwill. During the nine months ended June 30, 2023, there were no triggering events that indicate potential impairment exists.
The Company capitalizes legal costs incurred to obtain patents. Once accepted by either the U.S. Patent Office or the equivalent office of a foreign country, these legal costs are amortized using the straight-line method over the remaining estimated lives of the patents, not exceeding
In addition, the Company has various finite lived intangible assets, most of which were acquired as a result of the acquisition of the active cabinet product line from Calix, Inc. during fiscal year 2018 and the acquisition of Nestor Cables in fiscal 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, 2022, did indicate an impairment of the Company’s intangible assets. During the nine months ended June 30, 2023, there were no triggering events that indicate potential impairment exists.
Note 12. Segment Reporting
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
Upon closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
For the third quarter of fiscal 2023, the Company has reportable segments: (1) Clearfield; and (2) Nestor Cables. Clearfield’s Finnish holding company, Clearfield Finland Ltd., purchased Nestor Cables Ltd., including its Estonian subsidiary, Nestor Cables Baltics Ltd., on July 26, 2022. These entities comprise the Nestor Cables Segment. Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure.
Financial results for the reportable segments are prepared on a basis consistent with the internal disaggregation of financial information to assist the CODM in making internal operating decisions. For consolidated reporting, the Company eliminates transactions between reportable segments.
The following table summarizes the amounts between the reportable segments for the three and nine months ended June 30, 2023:
|
Three months ended June 30, 2023 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenue from external customers |
$ | $ | $ | $ | ||||||||||||
|
Revenue from internal customers (Clearfield, Inc.) |
( |
) | ||||||||||||||
|
Net investment income |
( |
) | ||||||||||||||
|
Interest expense |
( |
) | ||||||||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Stock based compensation |
||||||||||||||||
|
Income taxes |
||||||||||||||||
|
Net income (loss) |
( |
) | ||||||||||||||
|
Capital expenditures |
||||||||||||||||
|
Nine months ended June 30, 2023 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (In thousands) | ||||||||||||||||
|
Revenue from external customers |
$ | $ | $ | $ | ||||||||||||
|
Revenue from internal customers (Clearfield, Inc.) |
( |
) | ||||||||||||||
|
Net investment income |
( |
) | ||||||||||||||
|
Interest expense |
( |
) | ||||||||||||||
|
Depreciation and amortization |
||||||||||||||||
|
Stock based compensation |
||||||||||||||||
|
Income taxes |
||||||||||||||||
|
Net income (loss) |
( |
) | ||||||||||||||
|
Capital expenditures |
||||||||||||||||
The following table summarizes the amounts between the two reportable segments as of June 30, 2023, and September 30, 2022:
|
June 30, 2023 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (In thousands) | ||||||||||||||||
|
Goodwill |
$ | $ | $ | $ | ||||||||||||
|
Total assets |
$ | $ | $ | ( |
) | $ | ||||||||||
|
September 30, 2022 |
||||||||||||||||
|
Clearfield |
Nestor Cables |
Eliminations |
Consolidated |
|||||||||||||
| (In thousands) | ||||||||||||||||
|
Goodwill |
$ | $ | $ | $ | ||||||||||||
|
Total assets |
$ | $ | $ | ( |
) | $ | ||||||||||
Note 13. Financing Receivables
Nestor Cables factors certain of its accounts receivable, with recourse provisions that are accounted for as a secured borrowing. Nestor Cables has a total factoring liability of $
Note 14. Income Taxes
For the three and nine months ended June 30, 2023, the Company recorded income tax expense of $
For the three and nine months ended June 30, 2022, the Company recorded income tax expense of $
Deferred taxes recognize the impact of temporary differences between the amounts of the assets and liabilities recorded for financial statement purposes and these amounts measured in accordance with tax laws. The Company’s realization of deferred tax temporary differences is contingent upon future taxable earnings. The Company reviewed its deferred tax asset for expected utilization using a “more likely than not” criteria by assessing the available positive and negative factors surrounding its recoverability and determined that as of June 30, 2023, and September 30, 2022, 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, 2023, the Company does have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.
Note 15. Leases
The Company leases an
In July 2021, the Company entered into an indirect lease arrangement for an approximately
On November 19, 2021, the Company signed a lease for a
Nestor Cables leases an approximately
On May 11, 2023, Nestor Cables signed a lease for an approximately
The Company evaluated the terms of the lease and concluded that Nestor Cables is reasonably certain that it will exercise the expansion option, therefore the lease term being applied by the Company under ASC842 is at least 60 months.
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 Finnish 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 months ended:
|
Operating lease expense within: (in thousands) |
Three Months Ended June 30, |
Nine Months Ended June 30, |
||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Cost of sales |
$ | $ | $ | $ | ||||||||||||
|
Selling, general and administrative |
||||||||||||||||
|
Total lease expense |
$ | $ | $ | $ | ||||||||||||
Future maturities of lease liabilities were as follows as of June 30, 2023 (in thousands):
|
FY2023(Remaining) |
$ | |||
|
FY2024 |
||||
|
FY2025 |
||||
|
FY2026 |
||||
|
FY2027 |
||||
|
Thereafter |
||||
|
Total lease payments |
||||
|
Less: Interest |
( |
) | ||
|
Present value of lease liabilities |
$ |
The weighted average term and weighted average discount rate for the Company’s leases as of June 30, 2023, were
Note 16. Debt
On April 27, 2022, the Company entered into a loan agreement and a security agreement with a bank that provides the Company with a $
During March 2021, Nestor Cables entered into a loan agreement, providing a $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company’s expected future business and financial performance. Words such as “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify these forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual results could differ from those projected in any forward-looking statements because of the factors identified in and incorporated by reference from Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended September 30, 2022 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included herein are made as the date of this Quarterly Report on Form 10-Q and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.
The following discussion and analysis of the Company’s financial condition and results of operations as of and for the three and nine months ended June 30, 2023 and 2022 should be read in conjunction with the financial statements and related notes in Item 1 of this report and our Annual Report on Form 10-K for the year ended September 30, 2022.
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 and Europe. Our “fiber to the anywhere” platform serves the unique requirements of leading Broadband Service Providers in the United States, which include Community Broadband, MSO’s, Large Regional Service Providers, and National Carriers, while also serving the broadband needs of the International markets, primarily countries in Europe, the Caribbean, Canada, and Central and South America. These customers are collectively included in Broadband Service Providers. The Company also provides contract manufacturing services for its Legacy customers which include original equipment manufacturers (OEM) requiring copper and fiber cable assemblies built to their specifications.
We are engaged in global operations. Our operations are currently comprised of two reportable segments: the Clearfield Operating Segment (referred to herein as “Clearfield”) and, since July 26, 2022, the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”). Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure.
On July 26, 2022, the Company acquired Nestor Cables Ltd., a leading developer and manufacturer of fiber optic cable solutions located in Finland. The purchase of Nestor Cables is expected to provide the Company with the ability to vertically integrate the supply of fiber optic cables and help meet customer demand for its products. Nestor Cables’ technical expertise is expected to extend the supply of the Company’s FieldShield products into the North American market to reduce cost and complexity of transportation.
Upon closing of the acquisition of Nestor Cables, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
Nestor Cables Operating Segment
As of July 26, 2022, Clearfield, Inc., through its Finnish subsidiary, Clearfield Finland Ltd., acquired Nestor Cables. Nestor Cables is based in Oulu, Finland, with operations in Estonia through its wholly owned subsidiary, Nestor Cables Baltics Ltd. 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 the acquisition, Nestor Cables had been a supplier to Clearfield for over a decade and that relationship continued following the closing of the acquisition. Nestor Cables 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.
Clearfield Operating Segment
Clearfield is focused on providing fiber management, fiber protection, and fiber delivery products that accelerate the turn-up of gigabit speed bandwidth to 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 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 small cell, Cloud Radio Access Network (“C-RAN”), and distributed antenna system (“DAS”) deployments through better fiber management, test access, and fiber protection. The Company has historically focused on the unserved or underserved rural communities that receive voice, video and data services from independent telephone companies. By aligning its in-house engineering and technical knowledge alongside its customers, the Company has been able to develop, customize and enhance products from design through production. Final build and assembly of the Company’s products is completed at Clearfield’s manufacturing facilities in Brooklyn Park, Minnesota, and the manufacturing facility in Tijuana, Mexico that operates as a Maquiladora, with manufacturing support from a network of domestic and global manufacturing partners. Clearfield specializes in producing these products on both a quick-turn and scheduled delivery basis. The Company deploys a hybrid sales model with some sales made directly to customers, some made through two-tier distribution (channel) partners, sales agents and manufacturing representatives, and some sales made through original equipment suppliers who private label their products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2023, VS. THREE MONTHS ENDED JUNE 30, 2022
Net sales for the third quarter of fiscal 2023 ended June 30, 2023, were $61,284,000, a decrease of approximately 14%, or $9,966,000, from net sales of $71,250,000 for the third quarter of fiscal 2022. Net sales to Broadband Service Providers were $59,731,000 in the third quarter of fiscal 2023 versus $70,667,000 in the same period of fiscal 2022. Among this group, the Company recorded $14,186,000 in international sales for the third quarter of fiscal 2023 versus $2,462,000 in the same period of fiscal 2022. Net sales to Legacy customers were $1,553,000 in the third quarter of fiscal 2023 versus $583,000 in the same period of fiscal 2022. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 23% and 3% of total net sales for the third quarter of fiscal 2023 and 2022, respectively. The increase in sales to international customers was primarily due to the acquisition of Nestor Cables as its sales are to European and other non-U.S. customers.
The decrease in net sales for the quarter ended June 30, 2023, of $9,966,000 compared to the quarter ended June 30, 2022, was driven primarily by decreased sales to Community Broadband Service Providers and National Carrier customers of $18,565,000 and $1,469,000, respectively. The increase in sales to international customers was primarily driven by the acquisition of Nestor Cables, which accounted for $13,428,000 of international sales. The decrease in sales to Community Broadband and National Carrier customers was due to a lull in demand as customers digest previously purchased products.
Order backlog as of June 30, 2023, was $74,704,000, a decrease of 31% compared to $107,586,000 as of March 31, 2023, and a decrease of $81,958,000, or 52%, from June 30, 2022.
Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by global supply chain issues, customer deployment schedules and factors affecting customer ordering patterns. The Company’s ability to recognize revenue in the future for customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for the third quarter of fiscal 2023 was $42,210,000, an increase of $267,000, or 1%, from $41,943,000 in the comparable period of fiscal 2022. Gross profit percent was 31.1% of net sales in the third quarter of fiscal 2023, a decrease from 41.1% of net sales for the third quarter of fiscal 2022. Gross profit decreased $10,233,000, or 35%, to $19,074,000 for the three months ended June 30, 2023, from $29,307,000 in the comparable period in fiscal 2022. Gross profit margin was negatively affected by excess production capacity that was not utilized. The Company continues to realign capacity to current market conditions. Gross profit was also affected by lower gross profit realized in our Nestor Cables cable manufacturing business which was acquired in July 2022 and was not included in the comparable period of fiscal 2022. The Company expects to operate at these gross profit percentage levels for several quarters with improving margins realized as revenue levels increase and cost reduction measures are realized.
Selling, general and administrative expenses increased $728,000, or 6%, to $13,449,000 in the third quarter fiscal 2023 from $12,721,000 for the fiscal 2022 third quarter. This increase is the result of the addition of $1,890,000 of operating expenses of the Nestor Cables business acquired in July 2022, as well as increased Clearfield employee compensation and stock-based compensation, offset by decreased performance-based compensation accruals.
Income from operations for the quarter ended June 30, 2023, decreased $10,961,000 or 66% to $5,625,000 from $16,586,000 for the comparable quarter of fiscal 2022. The decrease is the result of decreased net sales and gross profit margin.
Net investment income for the quarter ended June 30, 2023, was $1,630,000 compared to $43,000 for the comparable quarter for fiscal 2022. Net investment income for the quarter ended June 30, 2023, and June 30, 2022, is comprised of interest income. The increase in interest income is due to higher interest rates earned on a higher investments balance, during the third quarter of fiscal 2023. The higher investments balance is a result of the Company’s capital raise of approximately $130,262,000 completed in the first fiscal quarter of 2023. We expect interest income to remain at these levels through the remainder of the fiscal year, subject to changes in market interest rates and changes in the average investment balance.
Interest expense for the quarter ended June 30, 2023, was $195,000. The increase was due to debt held by Nestor Cables. The Company did not have any interest expense during the third quarter of fiscal 2022.
We recorded a provision for income taxes of $1,842,000 and $3,884,000 for the three months ended June 30, 2023, and 2022, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decrease in tax expense of $2,042,000 from the third quarter for fiscal 2022 is primarily due to decreased income from operations, partially offset by the increase in the effective tax rate. The income tax expense rate for the third quarter of fiscal 2023 increased to 26.1% from 23.4% recorded in the third quarter of fiscal 2022, due primarily to increased state income tax expense.
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 Company’s net income for the three months ended June 30, 2022, was $12,745,000, or $0.93 per basic share or $0.92 per diluted share. The decrease in basic and diluted earnings per share for the three months ended June 30, 2023, as compared to June 30, 2022 was due to lower net sales and resulting decreased net income, as well as the additional shares issued during the first quarter of fiscal 2023.
NINE MONTHS ENDED JUNE 30, 2023 VS. NINE MONTHS ENDED JUNE 30, 2022
Net sales for the nine months ended June 30, 2023, were $219,035,000, an increase of approximately 25%, or $43,181,000, from net sales of $175,854,000 for the nine months ended June 30, 2022. Net sales to Broadband Service Providers were $211,231,000 in the nine months ended June 30, 2023, versus $173,907,000 in the same period of fiscal 2022. Among this group, the Company recorded $37,527,000 in international sales for the nine months ended June 30, 2023, versus $5,844,000 in the same period of fiscal 2022. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 17% and 3% of total net sales for the nine months ended June 30, 2023, and June 30, 2022, respectively. Net sales to Legacy customers were $7,804,000 in the nine months ended June 30, 2023, versus $1,947,000 in the same period of fiscal 2022.
The increase in net sales for the nine months ended June 30, 2023, of $43,181,000 compared to the nine months ended June 30, 2022, was driven primarily by increased sales to International and MSO customers of $31,556,000 and $13,593,000, respectively. The increase in sales to International customers was primarily driven by the acquisition of Nestor Cables, which accounted for $32,373,000 of international sales during the nine months ended June 30, 2023. The increase in sales to MSO customers was due to increased demand for fiber connectivity products and the need for high-speed broadband since the pandemic.
Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by global supply chain issues, customer deployment schedules and factors affecting customer ordering patterns. The Company’s ability to recognize revenue in the future for customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for the nine months ended June 30, 2023, was $145,750,000, an increase of $45,338,000, or 45%, from $100,411,000 in the comparable period of fiscal 2022. Gross profit percent was 33.5% of net sales for the nine months ended June 30, 2023, a decrease from 42.9% of net sales for the nine months ended June 30, 2022. Gross profit decreased $2,157,000, or 3%, to $73,285,000 for the nine months ended June 30, 2023, from $75,443,000 in the comparable period in fiscal 2022. The Company continues to realign capacity to current market conditions. Gross profit margin was negatively affected by the buildup in capacity in the Company’s Clearfield segment that was not utilized. Gross profit was also affected by lower gross profit realized in our Nestor Cables cable manufacturing business which was acquired in July 2022 and was not included in the comparable period of fiscal 2022. The Company expects to operate at these gross profit percentage levels for several quarters with improving margins realized as revenue levels increase and cost reduction measures are realized.
Selling, general and administrative expenses increased $3,837,000, or 11%, to $37,714,000 in the nine months ended June 30, 2023, from $33,877,000 for the comparable period of fiscal 2022. The increase in expense for the nine months ended June 30, 2023 consisted primarily of the additional operating expenses of $4,527,000 from the Nestor Cables business acquired in July 2022, increased Clearfield employee compensation, stock based compensation and travel and entertainment expenses, partially offset by decreased performance-based compensation accruals.
Income from operations for the nine months ended June 30, 2023, was $35,571,000 compared to $41,566,000 for the comparable quarter of fiscal 2022, a decrease of approximately 14%. This decrease is attributable to lower gross profit margin percentage and increased selling, general and administrative expenses, partially offset by increased net sales.
Net investment income for the nine months ended June 30, 2023, was $3,328,000 compared to $284,000 for the comparable quarter for fiscal 2022. 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, 2023. The higher investments balance is a result of the Company’s capital raise of approximately $130,262,000 completed in the first fiscal quarter of 2023. We expect interest income to remain at the levels experienced during the three months ended June 30, 2023, through the remainder of the fiscal year, subject to changes in market interest rates and changes in the average investments balance.
Interest expense for the nine months ended June 30, 2023, was $551,000. The Company did not have any interest expense during the comparable period of fiscal 2022. The increase in interest expense was due to $170,000 in interest on Clearfield’s line of credit which was repaid in the first quarter of fiscal 2023, and $381,000 in interest expense on debt held by Nestor Cables.
The Company recorded a provision for income taxes of $8,511,000 and $9,480,000 for the nine months ended June 30, 2023, and June 30, 2022, respectively. The Company records its quarterly provision for income taxes based on its estimated annual effective tax rate for the year. The decrease in tax expense of $969,000 from the nine months ended June 30, 2022, is primarily due to decreased income from operations as a result of lower gross margins. The income tax expense rate for the nine months ended June 30, 2023, of 22.2% was relatively consistent with the income tax expense rate of 22.7% for the comparable period of fiscal 2022.
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 Company’s net income for the nine months ended June 30, 2022, was $32,370,000, or $2.35 per basic share or $2.33 per diluted share. The decrease in basic and diluted earnings per share for the nine months ended June 30, 2023, as compared to June 30, 2022, was due to lower gross margins and resulting decreased net income as well as the additional shares issued during the first quarter of fiscal 2023.
Reportable Segments
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
On July 26, 2022, Clearfield, Inc., through its newly created Finnish subsidiary, Clearfield Finland Ltd., acquired all of the equity of Nestor Cables Ltd., which has a wholly-owned Estonian subsidiary, Nestor Cables Baltics Ltd. Following the closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Prior to July 26, 2022, the Company was considered to be in a single reporting segment and operating unit structure. Based upon the Company’s assessment following the acquisition of Nestor Cables, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
For the three and nine months ended June 30, 2023, the Company has two reportable segments: (1) Clearfield; and (2) Nestor Cables. The entities that comprise the Nestor Cables segment are Clearfield Finland Ltd., Nestor Cables Ltd. and Nestor Cables Baltics Ltd.
Reportable segments are as follows:
|
● |
Clearfield Segment – The Clearfield segment designs, manufactures and sells fiber management, protection, and delivery solutions. |
|
● |
Nestor Cables Segment – The Nestor Cables segment designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment. |
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) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
|
Segment net sales |
$ | 47,856 | $ | 71,250 | $ | 186,662 | $ | 175,854 | ||||||||
|
Segment net income |
$ | 5,150 | $ | 12,745 | $ | 30,263 | $ | 32,370 | ||||||||
Net sales in the Clearfield segment decreased 33%, or $23,394,000 for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Net sales in the Clearfield segment increased 6%, or $10,808,000, for the nine months ended June 30, 2023, as compared to the nine months ended June 30, 2022. The decrease in net sales for the three months ended June 30, 2023 was driven by decreased sales to the Company’s Community Broadband customers. The decreased sales to Community Broadband customers was due to continuing slower inventory consumption from these customers who had accumulated excess inventory positions during the COVID-19 pandemic.
Net income in the Clearfield segment for the three months ended June 30, 2023, decreased 60%, or $7,595,000, as compared to the three months ended June 30, 2022. Net income in the Clearfield segment for the nine months ended June 30, 2023, decreased 7%, or $2,107,000, as compared to the nine months ended June 30, 2022. The decrease in net income was driven by the decrease in sales outlined above and by lower gross profit margin due to buildup in capacity that was not utilized.
Nestor Cables Segment
The following table provides net sales and net income for the Nestor Cables segment for the three and nine months ended:
|
Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||||||
|
(In thousands) |
2023 |
2022 |
2023 |
2022 |
||||||||||||
|
Segment net sales |
$ | 13,428 | $ | - | $ | 32,373 | $ | - | ||||||||
|
Segment net income |
$ | 781 | $ | - | $ | 873 | $ | - | ||||||||
Nestor Cables was acquired on July 26, 2022. Prior to the acquisition, the Company operated as one reporting segment.
Net sales in the Nestor Cables segment for the three and nine months ended June 30, 2023, were $13,428,000 and $32,373,000, respectively, excluding sales to the Clearfield Segment.
Net income in the Nestor Cables segment for the three and nine months ended June 30, 2023, was $781,000 and $873,000, respectively.
Liquidity and Capital Resources
As of June 30, 2023, our principal source of liquidity was our cash, cash equivalents, and short-term investments. Those sources total $162,111,000 as of June 30, 2023, compared to $22,452,000 as of September 30, 2022. Additionally, we have a line of credit for $40 million that has no outstanding borrowing as of June 30, 2023. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities, and money market funds. Investments considered long-term were $6,556,000 as of June 30, 2023, compared to $22,747,000 as of September 30, 2022. 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, 2023, our cash, cash equivalents, and short-term and long-term investments totaled $168,667,000, compared to $45,199,000 as of September 30, 2022.
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 including expanding production capacity and facilities, as well as inventory growth to meet previously anticipated customer demand, potential future strategic transactions, and the Company’s share repurchase program, as well as to mitigate the potential impacts on the Company’s business due to supply chain, logistics, and customer fulfillment risks.
Operating Activities
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.
Net cash used by operating activities totaled $9,289,000 for the nine months ended June 30, 2022. This was primarily due to net income of $32,370,000, non-cash expenses for depreciation and amortization of $2,205,000, and stock-based compensation of $1,647,000 in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities using cash was an increase in inventory of $41,816,000, and increases in accounts receivable of $12,156,000, partially offset by increases in accounts payable and accrued expenses of $8,677,000. The Company increased stocking levels of inventory during the quarter ended June 30, 2022, to support the Company’s increased sales order backlog, as well as provide for safety stock for anticipated demand considering then-current long lead times for components and transportation within the global supply chain. The increase in accounts receivable was due to increased sales in the quarter ended June 30, 2022 as well as timing of payments from customers. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding, which measures how quickly receivables are collected, stayed consistent at 40 days from September 30, 2021, to June 30, 2022. The increase in accounts payable and accrued expenses was due to the timing of payments to vendors and inventory growth.
Investing Activities
We invest our excess cash in money market funds, U.S. Treasury securities, and bank CDs not exceeding FDIC insured levels. We believe we obtain a competitive rate of return given the low credit risk on these investments. 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.
The Company invests in CDs in amounts that are fully insured by the FDIC and U.S. Treasury securities with terms of not more than five years, as well as money market funds. We believe we obtain a competitive rate of return given the economic climate and type of investment. During the nine months ended June 30, 2022, we received $17,386,000 on sales and maturities of investment securities and used cash to purchase $248,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $6,764,000 of cash during the nine months ended June 30, 2022.
Financing Activities
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 $611,000 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 $491,000 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.
For the nine months ended June 30, 2022, we received $544,000 from employees’ participation and purchase of stock through our ESPP, we used $379,000 related to share withholding for exercise and taxes associated with the issuance of common stock upon cashless exercise of stock options and used $274,000 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, 2022.
CRITICAL ACCOUNTING ESTIMATES
Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting estimates. The accounting estimates considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective and complex judgments include the fair value of investments, stock-based compensation, and valuation of inventory, long-lived assets, finite lived intangible assets and goodwill.
These accounting estimates are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended September 30, 2022. Management made no changes to the Company’s critical accounting estimates during the quarter ended June 30, 2023.
In applying its critical accounting estimates, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the quarter ended June 30, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently invests its excess cash in bank certificates of deposit that are fully insured by the Federal Deposit Insurance Corporation and United States Treasury securities with terms of not more than five years, as well as money market funds. The fair value of these investments fluctuates subject to changes in market interest rates.
Foreign Exchange Rates:
The Company uses the U.S. dollar as its reporting currency. The functional currency of Nestor Cables is the Euro. The changing relationships of the U.S. dollar to the Euro could have a material impact on our financial results. Fluctuations in the Euro to U.S. dollar exchange rate impacts our consolidated balance sheets, as well as sales, cost of sales, and net income. If the Euro had appreciated or depreciated by 10% relative to the U.S. Dollar, our operating expenses would have increased or decreased by approximately $190,000 and $455,000, or approximately 1%, for the three and nine months ended June 30, 2023, 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 financial statements.
Inflation:
Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our profitability. We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials such as fiber cable and other components, which has outpaced our ability to reduce the cost structure and manufacturability or increase prices. We do not hedge commodity prices. Accordingly, inflation impacts our profitability, including cost of sales and operating expenses, and may have a material impact on the Company’s consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2023. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, that occurred during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting except that the Company continues to integrate and improve the internal control over financial reporting environment of the Nestor Cables segment.
There are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.
The most significant risk factors applicable to the Company are described in Part II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2022. There have been no material changes from the risk factors previously disclosed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
During the quarter ended June 30, 2023, none of our directors or officers informed us of the adoption, modification or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408(a).
101–The following materials from Clearfield, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2023 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2023 and June 30, 2022; (ii) Consolidated Statements of Earnings for the three and nine months ended June 30, 2023 and 2022; (iii) Consolidated Statements of Shareholders’ Equity for the three and nine months ended June 30, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the nine months ended June 30, 2023 and 2022; and (v) Notes to the Consolidated Financial Statements.
104 - Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
CLEARFIELD, INC.
|
||
|
August 8, 2023 |
/s/ Cheryl Beranek |
|
|
By: Cheryl Beranek Its: President and Chief Executive Officer |
||
|
(Principal Executive Officer) |
||
|
August 8, 2023 |
/s/ Daniel Herzog |
|
|
By: Daniel Herzog Its: Chief Financial Officer |
||
|
(Principal Financial and Accounting Officer) |