UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 20172023
[ ]TRANSITION☐ 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 offices and zip code)
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) 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a “largelarge accelerated filer,” an “acceleratedaccelerated filer,” a “non-accelerated filer”non-accelerated filer, a smaller reporting company or a “smaller reporting company” (as definedan emerging growth company in Rule 12b-2 of the Exchange Act).Act. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||
| Non-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 |
Common stock, par value $.01 | 14,706,671 |
CLEARFIELD, INC.
FORM 10-Q
TABLE OF CONTENTS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
CLEARFIELD, INC.
CONDENSEDCONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
| (Unaudited) December 31, 2017 | (Audited) September 30, 2017 | December 31, | September 30, | |||||||||||||
| Assets | ||||||||||||||||
| Current Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 20,453,030 | $ | 18,536,111 | $ | 34,484 | $ | 37,827 | ||||||||
| Short-term investments | 5,385,150 | 5,937,150 | 128,352 | 130,286 | ||||||||||||
| Accounts receivables, net | 5,570,721 | 7,237,641 | 17,363 | 28,392 | ||||||||||||
| Inventories | 8,140,384 | 8,453,567 | ||||||||||||||
Inventories, net | 94,613 | 98,055 | ||||||||||||||
| Other current assets | 939,326 | 978,933 | 1,806 | 1,695 | ||||||||||||
| Total current assets | 40,488,611 | 41,143,402 | 276,618 | 296,255 | ||||||||||||
| Property, plant and equipment, net | 5,201,901 | 5,434,172 | 22,870 | 21,527 | ||||||||||||
| Other Assets | ||||||||||||||||
| Long-term investments | 20,357,000 | 19,816,000 | 6,505 | 6,343 | ||||||||||||
| Goodwill | 2,570,511 | 2,570,511 | 6,615 | 6,528 | ||||||||||||
Intangible assets, net | 5,982 | 6,092 | ||||||||||||||
Right-of-use lease assets | 13,297 | 13,861 | ||||||||||||||
Deferred tax asset | 2,754 | 3,039 | ||||||||||||||
| Other | 552,331 | 529,952 | 988 | 1,872 | ||||||||||||
| Total other assets | 23,479,842 | 22,916,463 | 36,141 | 37,735 | ||||||||||||
| Total Assets | $ | 69,170,354 | $ | 69,494,037 | $ | 335,629 | $ | 355,517 | ||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||||
| Current Liabilities | ||||||||||||||||
Current portion of lease liability | $ | 3,811 | $ | 3,737 | ||||||||||||
Current maturities of long-term debt | 2,214 | 2,112 | ||||||||||||||
| Accounts payable | 1,205,223 | 1,739,791 | 7,368 | 8,891 | ||||||||||||
| Accrued compensation | 1,443,883 | 2,410,026 | 5,279 | 5,571 | ||||||||||||
| Accrued expenses | 98,569 | 93,304 | 2,750 | 2,404 | ||||||||||||
Factoring liability | 3,532 | 6,289 | ||||||||||||||
| Total current liabilities | 2,747,675 | 4,243,121 | 24,954 | 29,004 | ||||||||||||
| Other Liabilities | ||||||||||||||||
| Deferred taxes | 60,076 | 444,076 | ||||||||||||||
| Deferred rent | 279,642 | 281,720 | ||||||||||||||
| Total other liabilities | 339,718 | 725,796 | ||||||||||||||
| Total Liabilities | 3,087,393 | 4,968,917 | ||||||||||||||
| Commitments and Contingencies | ||||||||||||||||
Long-term portion of lease liability | 9,973 | 10,629 | ||||||||||||||
Deferred tax liability | 607 | 721 | ||||||||||||||
Total liabilities | 35,534 | 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; 13,824,191 and 13,812,821, shares issued and outstanding at December 31, 2017 and September 30, 2017 | 138,242 | 138,128 | ||||||||||||||
Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding | - | - | ||||||||||||||
Common stock, authorized 50,000,000, $.01 par value; 14,939,671 and 15,254,725 shares issued and outstanding as of December 31, 2023 and Septembe 30, 2023, respectively | 149 | 153 | ||||||||||||||
| Additional paid-in capital | 56,021,457 | 55,406,888 | 177,322 | 188,218 | ||||||||||||
Accumulated other comprehensive loss | 476 | (544 | ) | |||||||||||||
| Retained earnings | 9,923,262 | 8,980,104 | 122,148 | 127,336 | ||||||||||||
| Total Shareholders’ Equity | 66,082,961 | 64,525,120 | ||||||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 69,170,354 | $ | 69,494,037 | ||||||||||||
Total shareholders’ equity | 300,095 | 315,163 | ||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 335,629 | $ | 355,517 | ||||||||||||
SEE ACCOMPANYING NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED(IN THOUSANDS, EXCEPT SHARE DATA)
| Three Months Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net sales | $ | 16,866,884 | $ | 18,266,162 | ||||
| Cost of sales | 9,758,477 | 11,057,442 | ||||||
| Gross profit | 7,108,407 | 7,208,720 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative | 6,463,971 | 6,017,524 | ||||||
| Income from operations | 644,436 | 1,191,196 | ||||||
| Interest income | 95,722 | 52,734 | ||||||
| Income before income taxes | 740,158 | 1,243,930 | ||||||
| Income tax (benefit) expense | (203,000 | ) | 367,000 | |||||
| Net income | $ | 943,158 | $ | 876,930 | ||||
| Net income per share: | ||||||||
| Basic | $ | 0.07 | $ | 0.06 | ||||
| Diluted | $ | 0.07 | $ | 0.06 | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 13,443,945 | 13,567,484 | ||||||
| Diluted | 13,476,417 | 13,790,793 | ||||||
Three Months Ended | Three Months Ended | |||||||
December 31, | December 31, | |||||||
2023 (Unaudited) | 2022 | |||||||
Net sales | $ | 34,230 | $ | 85,942 | ||||
Cost of sales | 29,533 | 55,293 | ||||||
Gross profit | 4,697 | 30,649 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 12,859 | 12,759 | ||||||
Income from operations | (8,162 | ) | 17,890 | |||||
Net investment income | 2,069 | 303 | ||||||
Interest expense | (126 | ) | (243 | ) | ||||
Income before income taxes | (6,219 | ) | 17,950 | |||||
Income tax expense | (951 | ) | 3,695 | |||||
Net income | $ | (5,268 | ) | $ | 14,255 | |||
Net income per share Basic | $ | (0.35 | ) | $ | 1.01 | |||
Net income per share Diluted | $ | (0.35 | ) | $ | 1.00 | |||
| Weighted average shares outstanding: | ||||||||
Basic | 15,212,945 | 14,165,550 | ||||||
Diluted | 15,212,945 | 14,284,847 | ||||||
SEE ACCOMPANYING NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE (LOSS) INCOME
UNAUDITED(IN THOUSANDS)
| Three Months Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 943,158 | $ | 876,930 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 436,198 | 388,625 | ||||||
| Deferred taxes | (384,000 | ) | - | |||||
| Loss on disposal of assets | 1,594 | - | ||||||
| Stock based compensation | 483,287 | 593,746 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,666,920 | 548,293 | ||||||
| Inventories | 313,183 | (341,490 | ) | |||||
| Other assets | 41,706 | 228,259 | ||||||
| Accounts payable, accrued expenses and deferred rent | (1,497,524 | ) | (2,899,667 | ) | ||||
| Net cash provided by (used in) operating activities | 2,004,522 | (605,304 | ) | |||||
| Cash flows from investing activities | ||||||||
| Purchases of property, plant and equipment and intangible assets | (229,999 | ) | (529,302 | ) | ||||
| Purchases of investments | (2,466,000 | ) | (7,440,000 | ) | ||||
| Proceeds from maturities of investments | 2,477,000 | 2,459,000 | ||||||
| Net cash used in investing activities | (218,999 | ) | (5,510,302 | ) | ||||
| Cash flows from financing activities | ||||||||
| Repurchases of common stock | (10,850 | ) | - | |||||
| Proceeds from issuance of common stock under employee stock purchase plan | 148,259 | 169,500 | ||||||
| Proceeds from issuance of common stock upon exercise of stock options | 3,249 | 17 | ||||||
| Tax withholding related to vesting of restricted stock grants | (9,262 | ) | (10,326 | ) | ||||
| Net cash provided by financing activities | 131,396 | 159,191 | ||||||
| Increase (decrease) in cash and cash equivalents | 1,916,919 | (5,956,415 | ) | |||||
| Cash and cash equivalents, beginning of period | 18,536,111 | 28,014,321 | ||||||
| Cash and cash equivalents, end of period | $ | 20,453,030 | $ | 22,057,906 | ||||
| Supplemental disclosures for cash flow information | ||||||||
| Cash paid during the year for income taxes | $ | 2,500 | $ | 12,250 | ||||
| Non-cash financing activities | ||||||||
| Cashless exercise of stock options | $ | 5,782 | $ | 32,984 | ||||
Three Months Ended | Three Months Ended | |||||||
December 31, | December 31, | |||||||
2023 (Unaudited) | 2022 | |||||||
Comprehensive (loss) Income: | ||||||||
Net (loss) income | $ | (5,268 | ) | $ | 14,255 | |||
Other comprehensive income, net of tax | ||||||||
| Unrealized gain on available-for-sale investments | 291 | 141 | ||||||
Unrealized gain on foreign currency translation | 729 | 1,024 | ||||||
Total other comprehensive income | 1,020 | 1,165 | ||||||
Total comprehensive (loss) income | $ | (4,248 | ) | $ | 15,420 | |||
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN THOUSANDS)
For three months ended December 31, 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, 2023 | 15,254 | $ | 153 | $ | 188,218 | $ | (544 | ) | $ | 127,336 | $ | 315,163 | ||||||||||||
Stock-based compensation expense | - | - | 1,271 | - | - | 1,271 | ||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 10 | - | 250 | - | - | 250 | ||||||||||||||||||
Issuance of common stock under equity compensation plans, net | 120 | - | - | - | - | - | ||||||||||||||||||
Repurchase of shares for payment of withholding taxes for vested restricted stock grants | (9 | ) | - | (236 | ) | - | - | (236 | ) | |||||||||||||||
Repurchase of common stock | (436 | ) | (4 | ) | (12,181 | ) | - | - | (12,185 | ) | ||||||||||||||
Adoption of new accounting pronouncement | - | - | - | - | 80 | 80 | ||||||||||||||||||
Other comprehensive income | - | - | - | 1,020 | - | 1,020 | ||||||||||||||||||
| Net loss | - | - | - | - | (5,268 | ) | (5,268 | ) | ||||||||||||||||
Balance at December 31, 2023 | 14,939 | $ | 149 | $ | 177,322 | $ | 476 | $ | 122,148 | $ | 300,095 | |||||||||||||
For three months ended December 31, 2022 | 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 | 13,819 | $ | 138 | $ | 54,539 | $ | (1,898 | ) | $ | 94,803 | $ | 147,582 | ||||||||||||
Stock-based compensation expense | - | - | 660 | - | - | 660 | ||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 5 | - | 299 | - | - | 299 | ||||||||||||||||||
Issuance of common stock under equity compensation plans, net | 18 | - | 954 | - | - | 954 | ||||||||||||||||||
Repurchase of shares for payment of withholding taxes for vested restricted stock grants | (10 | ) | - | (954 | ) | - | - | (954 | ) | |||||||||||||||
Exercise of stock options, net of shares exchanged for payment | 6 | - | (342 | ) | - | - | (342 | ) | ||||||||||||||||
Issuance of common stock, net | 1,380 | 14 | 130,248 | - | - | 130,262 | ||||||||||||||||||
Other comprehensive income | - | - | - | 1,165 | - | 1,165 | ||||||||||||||||||
Net income | - | $ | - | $ | - | $ | - | $ | 14,255 | $ | 14,255 | |||||||||||||
Balance at December 31, 2022 | 15,218 | $ | 152 | $ | 185,404 | $ | (733 | ) | $ | 109,058 | $ | 293,881 | ||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months | Three Months | |||||||
Ended | Ended | |||||||
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Cash flows from operating activities | ||||||||
Net (loss) income | $ | (5,268 | ) | $ | 14,255 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 1,695 | 1,353 | ||||||
Gain on sale of property, plant, and equipment | (44 | ) | - | |||||
Amortization of discount on investments | (1,160 | ) | (218 | ) | ||||
Deferred taxes | (320 | ) | (80 | ) | ||||
Stock-based compensation | 1,271 | 660 | ||||||
Changes in operating assets and liabilities, net of acquired amounts: | ||||||||
Accounts receivable | 11,750 | (549 | ) | |||||
Inventories, net | 4,169 | (6,505 | ) | |||||
Other assets | 815 | (176 | ) | |||||
Accounts payable and accrued expenses | (5,081 | ) | (7,637 | ) | ||||
Net cash provided by operating activities | 7,827 | 1,103 | ||||||
Cash flows from investing activities | ||||||||
Purchases of property, plant and equipment and intangible assets | (2,412 | ) | (2,213 | ) | ||||
Purchases of investments | (47,748 | ) | (98,881 | ) | ||||
Proceeds from maturities of investments | 51,068 | - | ||||||
Net cash provided by (used in) investing activities | 908 | (101,094 | ) | |||||
Cash flows from financing activities | ||||||||
Repayment of long-term debt | - | (16,700 | ) | |||||
Proceeds from issuance of common stock under employee stock purchase plan | 250 | 299 | ||||||
Repurchase of shares for payment of withholding taxes | (236 | ) | (954 | ) | ||||
for stock grants | ||||||||
Tax withholding and proceeds related to exercise of stock options | - | (342 | ) | |||||
Issuance of stock under equity compensation plans | - | 954 | ||||||
Net proceeds from issuance of common stock | - | 130,262 | ||||||
Repurchase of common stock | (12,185 | ) | - | |||||
Net cash (used in) provided by financing activities | (12,171 | ) | 113,519 | |||||
Effect of exchange rates on cash | 93 | 135 | ||||||
(Decrease) increase in cash and cash equivalents | (3,343 | ) | 13,663 | |||||
Cash and cash equivalents, beginning of year | 37,827 | 16,650 | ||||||
Cash and cash equivalents, end of year | $ | 34,484 | $ | 30,313 | ||||
Supplemental disclosures for cash flow information | ||||||||
Cash paid during the year for income taxes | $ | 61 | $ | - | ||||
Cash paid for interest | $ | 86 | $ | 205 | ||||
Non-cash financing activities | ||||||||
Cashless exercise of stock options | $ | - | $ | 431 | ||||
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) condensedconsolidated balance sheet as of September 30, 2017,2023, which has been derived from audited financial statements, and (b) unaudited interim condensedconsolidated financial statements as of and for the three months ended December 31, 20172023 have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to these rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, inIn 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, and results of operations, and cash flows of the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the full year or for any other interim period, due to variability in customer purchasing patterns, and seasonal, operatingseasonality, and other factors. These condensedconsolidated 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, 2017.2023.
In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Clearfield, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Recently Adopted Accounting Pronouncements
On October 1, 2023, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the initial guidance: ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, and ASU No. 2020-02 (collectively, Topic 326). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses (CECL). The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost, which are primarily trade accounts receivable for the Company. Results for reporting periods beginning after October 1, 2023, are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The impact of adopting Topic 326 as of October 1, 2023, was not material to the consolidated financial statements.
Note 2. Net Income (Loss) Per Share
Basic net income (loss) per common share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income (loss) divided by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options, and restricted stock awards, when dilutive.
The following is a reconciliation of the numerator and denominator of the net income (loss) per common share computations for the three months ended December 31, 20172023, and 2016:2022:
Three Months Ended December 31, | ||||||||
2023 | 2022 | |||||||
Net (loss) income | $ | (5,268,000 | ) | $ | 14,255,000 | |||
Weighted average common shares | 15,212,945 | 14,165,550 | ||||||
Dilutive potential common shares | - | 119,297 | ||||||
Weighted average dilutive common shares outstanding | 15,212,945 | 14,284,847 | ||||||
| Net (loss) income per common share: | ||||||||
Basic | $ | (0.35 | ) | $ | 1.01 | |||
Diluted | $ | (0.35 | ) | $ | 1.00 | |||
| Three Months Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net income | $ | 943,158 | $ | 876,930 | ||||
| Weighted average common shares | 13,443,945 | 13,567,484 | ||||||
| Dilutive potential common shares | 32,472 | 223,309 | ||||||
| Weighted average dilutive common shares outstanding | 13,476,417 | 13,790,793 | ||||||
| Net income per common share: | ||||||||
| Basic | $ | 0.07 | $ | 0.06 | ||||
| Diluted | $ | 0.07 | $ | 0.06 | ||||
Note 3. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The following table presents the Company’s cash and cash equivalents balances:
(In thousands) | December 31, 2023 | September 30, 2023 | ||||||
Cash and cash equivalents: | ||||||||
Cash including money market accounts | $ | 9,156 | $ | 11,360 | ||||
Money market funds | 25,328 | 26,467 | ||||||
Total cash and cash equivalents | $ | 34,484 | $ | 37,827 | ||||
Note 4. Investments
The Company currently invests its excess cash in money market accounts and bank certificates of deposit (CDs)that are fully insured by the Federal Deposit Insurance Corporation ("FDIC") and United States Treasury securities with a termterms of not more than five years. CDs with original maturitiesyears, 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 more than three monthstax. Realized gains and losses on available-for-sale securities are reported as held-to-maturity investmentsrecognized upon sale and are carried at amortized cost. Investments maturingincluded in lessnet investment income in the consolidated statement of earnings.
As of December 31, 2023, available-for-sale investments consisted of the following:
December 31, 2023 | ||||||||||||||||
(In thousands) | Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Short-Term | ||||||||||||||||
U.S. Treasury securities | $ | 123,932 | $ | 30 | $ | 13 | $ | 123,949 | ||||||||
Certificates of deposit | 4,446 | - | 43 | 4,403 | ||||||||||||
Investment securities – short-term | $ | 128,378 | $ | 30 | $ | 56 | $ | 128,352 | ||||||||
Long-Term | ||||||||||||||||
U.S Treasury securities | $ | 6,728 | $ | - | $ | 448 | $ | 6,280 | ||||||||
Certificates of deposit | 248 | - | 23 | 225 | ||||||||||||
Investment securities – long-term | $ | 6,976 | $ | - | $ | 471 | $ | 6,505 | ||||||||
As of September 30, 2023, available-for-sale investments consist of the following:
September 30, 2023 | ||||||||||||||||
(In thousands) | 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 December 31, 2023, investments in debt securities in an unrealized loss position were as follows:
In Unrealized Loss Position For Less Than 12 Months | In Unrealized Loss Position For Greater Than 12 Months | |||||||||||||||
(In thousands) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||
U.S treasury securities | $ | 38,207 | $ | 50 | $ | 6,280 | $ | 444 | ||||||||
Certificates of deposit | 245 | - | 4,384 | 65 | ||||||||||||
Investment securities | $ | 38,452 | $ | 50 | $ | 10,664 | $ | 509 | ||||||||
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 December 31, 2023, there were 25 securities in an unrealized loss position which is due to the market paying a higher interest rate than one yearthe 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 December 31, 2023 and September 30, 2023, there are classifiedno securities which are other than temporarily impaired as short term investmentsthe 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 U.S. federal government.
Note 5. Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the balance sheet,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 maturingare categorized according to the three-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one year or greater are classified as long term investments on the balance sheet. The maturity dates 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 CDsinvestment securities as of December 31, 2017 and2023, according to the three-level fair value hierarchy:
Fair Value Measurements as of December 31, 2023 | ||||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 25,328 | $ | 25,328 | $ | - | $ | - | ||||||||
Total cash equivalents | $ | 25,328 | $ | 25,328 | $ | - | $ | - | ||||||||
Investment securities: | ||||||||||||||||
Certificates of deposit | $ | 130,229 | $ | - | $ | 130,229 | $ | - | ||||||||
U.S. Treasury securities | 4,628 | - | 4,628 | - | ||||||||||||
Total investment securities | $ | 134,857 | $ | - | $ | 134,857 | $ | - | ||||||||
The following provides information regarding fair value measurements for the Company’s investment securities as of September 30, 20172023, 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 | $ | - | ||||||||
During the three months ended December 31, 2023, 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 months ended December 31, 2023, and the year ended September 30, 2023.
Note 6. Other Comprehensive Income (Loss)
Changes in components of other comprehensive income (loss), net of tax, are as follows:
(In thousands) | Available-for-Sale Securities | Foreign Currency Translation | Accumulated Other Comprehensive Loss | |||||||||
Balances at September 30, 2023 | $ | (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 | |||||
| December 31, 2017 | September 30, 2017 | |||||||
| Less than one year | $ | 5,385,150 | $ | 5,937,150 | ||||
| 1-5 years | 20,357,000 | 19,816,000 | ||||||
| Total | $ | 25,742,150 | $ | 25,753,150 | ||||
4
Note 4. Stock Based7. Stock-Based Compensation
The Company recorded $483,287$1,271,000 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 months ended December 31, 20172023. For the three months ended December 31, 2023, $1,227,000 of which $441,257this expense is included in selling, general and administrative expense, and $42,030$44,000 is included in cost of sales. The Company recorded $593,746$660,000 of compensation expense related to current and past equity awardsrestricted stock grants, non-qualified stock options, and the Company’s ESPP for the three months ended December 31, 20162022. For the three months ended December 31, 2022, $625,000 of which $539,046 wasthis expense is included in selling, general and administrative expense, and $54,700 was$35,000 is included in cost of sales. As of December 31, 2017, $4,431,9522023, $8,668,000 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 6.82.9 years.
There were noStock Options
The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. During the three months ended December 31, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of 111,299 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 $26.18 per share. During the three months ending December 31, 2022, the Company granted employees non-qualified stock options to purchase an aggregate of 15,020 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 $104.36 per share.
The fair value of stock option awards during the three months ended December 31, 20172023, was estimated as of the respective grant dates using the assumptions listed below:
Three months ended December 31, 2023 | ||||
Dividend yield | 0.00 | % | ||
Expected volatility | 61.71 | % | ||
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 December 31, 2016. 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 three months ended December 31, 2017:2023:
Number of options | Weighted average exercise price | |||||||
Outstanding as of September 30, 2023 | 254,124 | $ | 37.04 | |||||
Granted | 111,299 | 26.18 | ||||||
Exercised | - | - | ||||||
Forfeited or expired | (1,731 | ) | 41.64 | |||||
Outstanding as of December 31, 2023 | 363,692 | $ | 33.69 | |||||
Number of options | Weighted average exercise price | |||||||
| Outstanding as of September 30, 2017 | 38,950 | $ | 2.79 | |||||
| Granted | - | - | ||||||
| Exercised | (3,500 | ) | 2.58 | |||||
| Cancelled or Forfeited | - | - | ||||||
| Outstanding as of December 31, 2017 | 35,450 | $ | 2.81 | |||||
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of December 31, 2017,2023, the weighted average remaining contractual term for all outstanding and exercisable stock options was 2.52.14 years and their aggregate intrinsic value was $334,810. $1,258,000.
Restricted Stock
During the three months ended December 31, 2017,2023, the Company received proceedsgranted employees restricted stock awards totaling 121,884 shares of $3,249 fromcommon stock, with a vesting term of approximately three years and a fair value of $26.18 per share based on the exercise of stock options.price on the grant date. During the three months ended December 31, 2016, exercised stock options totaled 10,000 shares, resulting in $17 of proceeds to2022, the Company.
Restricted Stock
The Company’s 2007 Stock Compensation Plan permits its Compensation Committee to grant stock-based awards, including stock options and restricted stock, to keyCompany granted employees and non-employee directors. The Company has made restricted stock grants that vest over one to ten years.
There were no restricted stock awards granted during thetotaling 8,686 shares of common stock, with a vesting term of approximately three months ended December 31, 2017years and December 31, 2016. a fair value of $104.36 per share.
Restricted stock transactions during the three months ended December 31, 20172023, are summarized as follows:
Number of shares | Weighted average grant date fair value | Number of shares | Weighted average grant date fair value | |||||||||||||
| Unvested shares as of September 30, 2017 | 370,530 | $ | 15.24 | |||||||||||||
Unvested shares as of September 30, 2023 | 90,575 | $ | 49.92 | |||||||||||||
| Granted | - | - | 121,884 | 26.18 | ||||||||||||
| Vested | (2,000 | ) | 13.59 | (30,422 | ) | 52.67 | ||||||||||
| Forfeited | (4,376 | ) | 15.46 | (2,017 | ) | 35.26 | ||||||||||
| Unvested as of December 31, 2017 | 364,154 | $ | 15.25 | |||||||||||||
Unvested as of December 31, 2023 | 180,020 | $ | 32.32 | |||||||||||||
Performance Stock
During the three months ended December 31, 2023, the Company granted 47,745 performance stock units which entitles the participant to receive the same number of shares of the Company’s common stock, upon achievement of a fiscal year 2024 performance goal. The Company has determined the fair value per underlying share of the performance stock unit awards to be $26.18 as of the grant date.
Compensation expense for the performance stock units is measured using the fair value of our common stock at the grant date. As of December 31, 2023, the Company believes it is probable that these performance stock unit awards will vest and compensation expense has been recognized ratably over the performance period based on our estimated achievement of the established performance criteria. The Company did not issue any performance stock units in the three months ended December 31, 2022.
Bonus Stock
The Company did not issue any bonus stock in the three months ended December 31, 2023. During the three months ended December 31, 2022, the Company granted employees an aggregate of 9,144 shares of stock as a discretionary bonus to pay the incentive compensation earned 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
Clearfield, Inc.’sThe 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 thatthose participating employees maythe 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 monthsix-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phasesphase that ended on December 31, 2017 and December 31, 2016,2023, employees purchased 14,242 and 11,14410,104 shares at a price of $10.41 and $15.21$24.72 per share, respectively.share. After the employee purchase on December 31, 2017, 103,0132023, 158,147 shares of common stock were available for future purchase under the ESPP.
Note 8. Revenue
Revenue Recognition
Note 5.
Net sales include products and shipping and handling charges. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with substantially all revenue recognized at the point in time the customer obtains control of the products. The Company recognizes revenue, including shipping and handling charges, at the time the products are delivered to or picked up by the customer. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Disaggregation of Revenue
The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales outside the United States are principally to customers in Europe, the Caribbean, Canada, Central and South America.
Revenues related to the following geographic areas were as follows for the three months ended:
Three Months Ended December 31, | ||||||||
(In thousands) | 2023 | 2022 | ||||||
United States | $ | 27,561 | $ | 75,737 | ||||
All other countries | 6,669 | 10,205 | ||||||
Total Net Sales | $ | 34,230 | $ | 85,942 | ||||
The Company sells its products to the Broadband Service Provider marketplace. In addition, the Company provides Legacy services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification.
The percentages of our sales by markets were as follows for the three months ended:
Three Months Ended December 31, | ||||||||
2023 | 2022 | |||||||
Broadband service providers | 93 | % | 97 | % | ||||
Other customers | 7 | % | 3 | % | ||||
Total Net Sales | 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. TheOn October 1, 2023, the Company writes off accounts receivable when they become uncollectible; payments subsequently received on such receivables are credited toadopted the cumulative expected credit loss model (“CECL”). Upon adoption of the CECL, the Company measures the allowance for doubtful accounts.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 both December 31, 2017 and2023, the Company’s allowance for credit losses was $0.
As of September 30, 2017,2023, prior to the balance inadoption of CECL, the Company’s allowance for doubtful accounts was $79,085.$79,000. Upon the adoption of CECL, the prior allowance for doubtful accounts was recorded as a benefit to beginning retained earnings.
See Note 7,9 “Major Customer Concentration” for further information regarding accounts receivable and net sales.
Note 6. Inventories
Inventories consist of the following as of:
December 31, 2017 | September 30, 2017 | |||||||
| Raw materials | $ | 6,012,095 | $ | 5,991,863 | ||||
| Work-in-progress | 431,495 | 724,248 | ||||||
| Finished goods | 1,696,794 | 1,737,456 | ||||||
| Inventories | $ | 8,140,384 | $ | 8,453,567 | ||||
During the quarter ended December 31, 2017, the Company adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330) Related to Simplifying the Measurement of Inventory which applies to all inventory except inventory that is measured using last-in, first-out or the retail inventory method. This adoption had no effect on the financial statements and was applied prospectively. Therefore, prior periods were not retrospectively adjusted.
Note 7.9. Major Customer Concentration
The following table summarizes customers comprising 10% or more of net sales forFor the three months ended December 31, 20172023, the Company had two customers that comprised 19% and16% of the Company’s net sales, respectively. Both customers are distributors. For the three months ended December 31, 2016:2022, one customer comprised 15% of the Company’s net sales. This customer is a distributor.
| Three Months Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Customer A | 22% | 28% | ||||||
| Customer B | 12% | 14% | ||||||
As of December 31, 2017, Customers A2023, two customers account for 23% and B accounted for 15% and 14%18% of accounts receivable, respectively. These customers are distributors. As of September 30, 2017, Customer B accounted2023, three customers account for 19%16%, 13%, and 11% of accounts receivable. Customers A and BThese customers are both distributors.
Note 10. Inventories
Inventories consist of finished goods, raw materials, and work-in-process and are stated at average cost, subject to the lower of cost or net realizable value. Certain components of the Company’s inventory classified as raw materials or finished goods can be used as a component to manufacture products or can be sold directly to the customer. Inventory is valued using material costs, labor charges, and allocated factory overhead charges and consists of the following:
(In thousands) | December 31, 2023 | September 30, 2023 | ||||||
Raw materials | $ | 68,755 | $ | 73,657 | ||||
Work-in-process | 2,752 | 1,462 | ||||||
Finished goods | 33,033 | 29,696 | ||||||
Inventories, gross | 104,540 | 104,815 | ||||||
Inventory reserve | (9,927 | ) | (6,760 | ) | ||||
Inventories, net | $ | 94,613 | $ | 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 8.11. Goodwill and PatentsIntangibles
The Company analyzes its goodwilltests Goodwill for impairment annually at fiscal year-end, or at an interim periodmore frequently when events occur or changes in circumstances indicate potential impairment.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 in the fourth quarter endedas of September 30, 20172023, did not indicate an impairment of goodwill. During the quarterthree months ended December 31, 2017,2023, there were no triggering events that indicate potential impairment exists.
The Company capitalizes legal costs incurred to obtain patents. Once accepted by either the U.S. Patent Office or the equivalent office of a foreign country, these legal costs are amortized using the straight-line method over the remaining estimated lives, not exceeding 20 years. As of December 31, 2017,2023, the Company has 1248 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 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 three months ended December 31, 2023, there were no triggering events that indicate potential impairment exists.
Note 12. Segment Reporting
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based in part on the reporting and review process used by the Company’s Chief Executive Officer.
The Company has 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 months ended December 31, 2023:
Three months ended December 31, 2023 | ||||||||||||||||
Clearfield | Nestor Cables | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Revenue from external customers | $ | 28,101 | $ | 6,129 | $ | - | $ | 34,230 | ||||||||
Revenue from internal customers (Clearfield, Inc.) | - | 883 | (883 | ) | - | |||||||||||
Net investment income | 2,127 | 2 | (60 | ) | 2,069 | |||||||||||
Interest expense | - | 184 | (58 | ) | 126 | |||||||||||
Depreciation and amortization | 1,340 | 355 | - | 1,695 | ||||||||||||
Stock based compensation | 1,222 | 49 | - | 1,271 | ||||||||||||
Income taxes | (583 | ) | (368 | ) | - | (951 | ) | |||||||||
Net loss | (3,383 | ) | (1,759 | ) | (126 | ) | (5,268 | ) | ||||||||
Capital expenditures | 1,227 | 1,125 | - | 2,352 | ||||||||||||
The following table summarizes the amounts between the two reportable segments for the three months ended December 31, 2022:
Three months ended December 31, 2022 | ||||||||||||||||
Clearfield | Nestor Cables | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Revenue from external customers | $ | 78,355 | $ | 7,587 | $ | - | $ | 85,942 | ||||||||
Revenue from internal customers (Clearfield, Inc.) | - | 1,186 | (1,186 | ) | - | |||||||||||
Net investment income | 301 | 2 | - | 303 | ||||||||||||
Interest expense | 170 | 73 | - | 243 | ||||||||||||
Depreciation and amortization | 1,009 | 344 | - | 1,353 | ||||||||||||
Stock based compensation | 660 | - | - | 660 | ||||||||||||
Income taxes | 3,773 | (78 | ) | - | 3,695 | |||||||||||
Net income (loss) | 14,718 | (310 | ) | (153 | ) | 14,255 | ||||||||||
Capital expenditures | 1,787 | 198 | - | 1,984 | ||||||||||||
The following table summarizes the amounts between the two reportable segments as of December 31, 2023, and December 31, 2022:
December 31, 2023 | ||||||||||||||||
Clearfield | Nestor Cables | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Goodwill | $ | 4,709 | $ | 1,906 | $ | - | $ | 6,615 | ||||||||
Total assets | $ | 320,089 | $ | 39,713 | $ | (24,173 | ) | $ | 335,629 | |||||||
December 30, 2022 | ||||||||||||||||
Clearfield | Nestor Cables | Eliminations | Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
Goodwill | $ | 4,709 | $ | 1,839 | $ | - | $ | 6,545 | ||||||||
Total assets | $ | 344,465 | $ | 34,692 | $ | (17,360 | ) | $ | 351,797 | |||||||
Note 9.13. 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 $3,532,000 as of December 31, 2023. 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 ($13.8 million as of December 31, 2023). 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 December 31, 2023, was 5.21%. These agreements are indefinite with a termination notice period ranging from zero to one month.
Note 14. Income Taxes
For the three months ended December 31, 2017,2023, the Company recorded aan income tax benefit for income taxes of $203,000,$951,000, reflecting an effective tax rate of negative 27.4%15.3%. The Tax Cut and Jobs Act of 2017 (the “Tax Reform Act”) was enacted on December 22, 2017. The Tax Reform Act reduced certain federal corporate income tax rates effective January 1, 2018 and changed certain other provisions. The effective tax rate for the quarter ended December 31, 2017 is a blended rate reflecting the anticipated benefit of three quarters of federal tax rate reductions for fiscal 2018. Our first quarter tax benefit reflects a lower tax rate and a one-time benefit of $384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased the income tax provision for the quarter ended December 31, 2017 and reduced long-term deferred tax liabilities as of December 31, 2017. The final impact of the Tax Reform Act may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions the Company may take as a result of the Tax Reform Act. Additionally, differences between the effective tax rate and the statutory tax rate are related to nondeductible meals and entertainment, favorable domestic manufacturing deduction and research and development credits.
As of December 31, 2017 and September 30, 2017, the Company had a remaining valuation allowance of approximately $191,000 and $159,000, respectively, related to state net operating loss carry forwards the Company does not expect to utilize. As a result of recording the impact of the Tax Reform Act on its deferred assets and liabilities, the Company recorded an increase in its valuation allowance against state net operating losses carried forward of approximately $32,000 in the quarter ended December 31, 2017. Based on the Company’s analysis and review of long-term forecasts and all available evidence, the Company determined that there should be no further change in the valuation allowance for the quarter ended December 31, 2017.
For the three months ended December 31, 2016, the Company recorded a provision for income taxes of $367,000, reflecting an effective tax rate of 29.5%. The primary difference between the effective tax rate and the statutory tax rate for the three months ended December 31, 2023, was primarily related to nondeductible mealsexcess tax shortfall from vesting of restricted stock, and entertainment, favorable domestic manufacturingresearch and development credits.
For the three months ended December 31, 2022, the Company recorded income tax expense of $3,695,000, reflecting an effective tax rate of 20.6%. The difference between the effective tax rate and the statutory tax rate for the three months ended December 31, 2022, was primarily related to excess tax benefits from non-qualified stock option exercises and vesting of restricted stock, foreign derived intangibles income (FDII) deduction, and research and development credits, expenses related to equity award compensation and favorable discrete items for the quarter from tax benefits related to stock-based compensation awards.credits.
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.recoverability and determined that as of December 31, 2023, and September 30, 2023 a valuation allowance against the deferred tax assets is not required. The Company will continue to assess the need for a valuation allowance based on changes in assumptions of estimated future income and other factors in future periods.
As of December 31, 2017, we do 2023, the Company does not have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognizedunrecognized 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 lease term is ten years and two months, ending on February 28, 2025, and is renewable. The renewal options have not been included within the lease term because it is not reasonably certain that the Company will exercise either option.
Note 10. Accounting Pronouncements
The Company indirectly leases an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico that operates as a Maquiladora. The lease term commenced in March 2022 and is seven years, of which five years are mandatory2. The lease contains written options to renew for two additional consecutive periods of five years each. The lease calls for monthly rental payments of $162,000, 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.
Recent Accounting PronouncementsThe 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.
In May 2014,Nestor Cables leases an approximately 25,000 square foot manufacturing facility in Oulu, Finland, which is utilized for the Financial Accounting Standards Board (the “FASB”) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, Revenue from Contractsoperations of Nestor Cables. The original lease term ended on October 31, 2022, but auto renews indefinitely until terminated with Customers.two years written notice. It is not reasonably certain that the Company will not exercise the termination option. The new sectionlease 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 replace Section 605, “Revenue Recognition”be constructed on the same premises as the existing facility. Nestor exercised the option to lease the expansion and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of muchthe lease term of the rest of the world, as well as to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is planning to complete an assessment of its revenue streams during the second and third quarters of fiscal 2018 to determine the impact that this standard will have on its business practices, financial condition, results of operations and disclosures. The updated guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The updated guidance requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company anticipates there will be expanded financial statement disclosures in order to comply with the updated guidance. The Company has not yet decided on the transition method upon adoption, but plans to select a transition method during the middle of fiscal 2018.existing facility became 10 years.
In February 2016,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 FASB issued ASU 2016-02, Leases, which requires lessees to present right-of-usecost-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 balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginningpresent value of the earliest comparative period inremaining lease payments over the financial statements and is effective for fiscal years beginning after December 15, 2018, including interimlease term which includes renewal periods within those fiscal years. Early adoption is permitted. Thethe Company is evaluatingreasonably 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 impact the adoption of this ASU will have on our financial statements.three months ended:
Operating lease expense within: | Three Months Ended December 31, | |||||||
| (in thousands) | 2023 | 2022 | ||||||
Cost of sales | $ | 1,057 | $ | 1,368 | ||||
Selling, general and administrative | 77 | 203 | ||||||
Total lease expense | $ | 1,134 | $ | 1,571 | ||||
Future maturities of lease liabilities were as follows as of December 31, 2023 (in thousands):
FY2024(Remaining) | $ | 2,967 | ||
FY2025 | 3,965 | |||
FY2026 | 3,261 | |||
FY2027 | 1,590 | |||
FY2028 | 402 | |||
Thereafter | 2,932 | |||
Total lease payments | 15,117 | |||
Less: Interest | (1,334 | ) | ||
Present value of lease liabilities | $ | 13,784 |
In January 2017, the FASB issued ASU 2017-04 which offers amended guidance to simplify the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective
The weighted average term and weighted average discount rate for the Company’s interimleases as of December 31, 2023, were 4.94 years and annual periods beginning after January3.79%, respectively, compared to 3.79 years and 3.22%, respectively, as of December 31, 2022. For the three months ended December 31, 2023, the operating cash outflows from the Company’s leases was $1,042,000 compared to $946,000 for the three months ended December 31, 2022.
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 December 31, 2023, the outstanding balance on the revolving line of credit was zero and the interest rate was 7.19%. 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 2020,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 December 31, 2023, the Company was in compliance with early adoption permittedall covenants. The line of credit is collateralized by Clearfield, Inc.’s assets of $320,089,000 as of December 31, 2023.
During March 2021, Nestor Cables entered into a loan agreement, providing a $2 million senior loan with a term of three years. The Finland National Emergency Supply Agency (“NESA”) pays the interest, capped at 5% with the interest to be paid by NESA when the loan is used for stockpiling purposes and is repayable with a 2% additional interest penalty if there is a violation of the terms. The loan is due on March 31, 2024. The loan is fully secured by a Finnish government guarantee. If used for any impairment tests performed after January 1, 2017.purposes other than stockpiling, the lender has the right to terminate the agreement and the entire outstanding balance will become due. As of December 31, 2023, Nestor Cables was in compliance with all covenants. The Company does not believeinterest expense associated with this loan has been presented net of government payments on the adoptionCompany’s consolidated statement of this ASU will have a material impact on our financial statements.
earnings.
ITEM 2. MANAGEMENT’SMANAGEMENT’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”“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’sCompany’s expected future business and financial performance. Words such as “plan, “plan,” “expect,“expect,” “aim,“aim,” “believe,“believe,” “project,“project,” “target,“target,” “anticipate,“anticipate,” “intend,“intend,” “estimate,“estimate,” “will,“will,” “should,“should,” “could”“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 PartI, Item 1A, “Risk“Risk Factors,” of our Annual Report on Form 10-K for the year ended September 30, 2017,2023 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 PartI, Item 2, “Management’s“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 ourthe Company’s financial condition and results of operations as of and for the three months ended December 31, 20172023, and 20162022 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, 2017.2023.
OVERVIEW
General
Clearfield, Inc. designs, manufactures, together with its subsidiaries, is referred to in this report as “we,” “us,” “our,” and distributesthe “Company.” We design, manufacture, and distribute fiber opticprotection, fiber management, protection and fiber delivery products for communications networks.solutions to enable rapid and cost-effective fiber-fed deployment throughout the broadband service provider space primarily across North America. Our “fiber to the anywhere” platform serves the unique requirements of leading incumbent local exchange carriers (Traditional Carriers, within the TierCommunity Broadband customers (Tier 2 and Tier 3 broadband markets)telco carriers, utilities, municipalities, and alternative carriers), including largeMultiple 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 and global telecom providerstelco carriers (Tier 1)), wireless operators, MSO/cable TV companies, utility/municipality, enterprise, data center and military markets, while also serving the broadband needs of the competitive local exchange carriers (Alternative Carriers). The Company also provides contract manufacturing services for original equipment manufacturers (OEM) requiring copperInternational customers (primarily Europe, Canada, Mexico, and fiber cable assemblies built to their specifications. Caribbean Markets).
The Company has historicallyWe 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 un-served or under-served rural communities who receive their voice, videoturn-up of fiber-based networks in residential homes, businesses, and data services from independent telephone companies. By aligning its in-house engineeringnetwork infrastructure in the wireline and technical knowledge alongsidewireless 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 Company has been ableHome (“FTTH”) builds by using fewer resources in less time. Our products speed up the time to develop, customizerevenue for our service provider customers in Multiple Dwelling Units (“MDUs”) and enhanceMultiple 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 designthe tower to the cloud and fiber fronthaul from the tower to the antenna at the cell site through production. Finalbetter fiber management, test access, and fiber protection.
Substantially all of the final build and assembly of the Company’s products 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. The Company deploys
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 hybrid sales model with some sales madesupplier 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 the customer, some made through two-tier distribution (channel) partners,end users. Nestor Cables is subject to Finnish government regulation, and some sales through original equipment suppliers who private label their products.Nestor Cables Baltics is subject to Estonian government regulation.
RESULTS OF OPERATIONS
Three months ended DecemberTHREE MONTHS ENDED DECEMBER 31, 2017 vS. three months ended December2023, VS. THREE MONTHS ENDED DECEMBER 31, 20162022
Net sales for the first quarter of fiscal 20182024 ended December 31, 20172023, were $16,867,000,$34,230,000, a decrease of approximately 8%60%, or $1,399,000,$51,712,000, from net sales of $18,266,000$85,942,000 for the first quarter of fiscal 2017.2023. Net sales to broadband service providers and commercial data networks customersBroadband Service Providers were $16,020,000$31,915,000 in the first quarter of fiscal 20182024 versus $17,020,000$83,626,000 in the same period of fiscal 2017. Among this group,2023. Net sales to other customers were $2,376,000 in the first quarter of 2024 versus $2,315,000 in the same period of fiscal 2023. In addition, the Company recorded $1,369,000$6,669,000 in international sales for the first quarter of fiscal 20182024 versus $1,586,000$10,204,000 in the same period of fiscal 2017. Net sales to build-to-print and OEM customers were $847,000 in the first quarter of fiscal 2018 versus $1,246,000 in the same period of fiscal 2017.2023. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, internationalInternational sales represented 8%19% and 9%12% of total net sales for the first quartersquarter of fiscal 20182024 and 2017,2023, respectively.
The decrease in net sales for the quarter ended December 31, 20172023, of $1,399,000$51,712,000 compared to the quarter ended December 31, 2016 is2022, was primarily attributable to a decrease of $957,000 in netdriven by decreased sales to our customer baseCommunity Broadband Service Providers of commercial data network providers, build-to-print$24,589,000 or 67%, MSO customers of $15,581,000 or 75%, Large Regional customers of $6,873,000 or 47%, and OEM manufacturers, and broadband service providers, outsideInternational customers of the Alternative Carrier group and international sales noted below, when compared to the same period of fiscal 2017.$3,535,000 or 35%. The decline was due to decreased deployments by the Company’s Traditional Carrier and Tier 1 customers. Net sales were also negatively affected by a decrease in the ongoing builds of an Alternative Carrier customer of $225,000 insales across these markets for the quarter ended December 31, 2017. Also, international sales decreased $217,000 during2023, as compared to the same periodquarter ended December 31, 2022, is due to a lull in demand as customers digest previously purchased products.
Order backlog for the first quarter of 2024 was $43,451,000, a decrease of 24% compared to $57,285,000 as of September 30, 2023, and a decrease of $92,818,000, or 68%, from December 31, 2022. The sequential decrease was also due to the lull in demand. demand as customers digest previously purchased products as well as winter seasonality.
Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, thetime, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by customer deployment schedules and factors affecting customer ordering patterns. The Company’s ability to recognize revenue in the future for customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for the first quarter of fiscal 20182024 was $9,758,000,$29,533,000, a decrease of $1,299,000,$25,760,000, or 12%47%, from $11,057,000$55,293,000 in the comparable period of fiscal 2017.2023. Gross profit percent was 42.1%13.7% of net sales in the fiscal 2018 first quarter upof 2024, a decrease from 39.5%35.7% of net sales for the fiscal 2017 first quarter.quarter of 2023. Gross profit decreased $101,000,$25,952,000 or 1%84.7%, to $7,108,000$4,696,000 for the quarterthree months ended December 31, 20172023, from $7,209,000$30,649,000 in the comparable period in fiscal 2017. 2023. The decreaseCompany continues to realign capacity to current market conditions. Gross profit margin was negatively affected by unabsorbed overhead in our manufacturing facilities due to lower levels of demand and winter seasonality. The Company’s gross profit was also negatively impacted by an increase in inventory reserves of $3,376,000 during the first quarter of fiscal 2018 was2024. Inventory reserves are primarily due to decreased volumeexcess inventory due to the lull in demand while customers draw down their existing products previously purchased during the increase inperiod of long lead time supply chain created by the pandemic. The Company expects to operate at these gross profit percentpercentage levels for the quarter was due to a higher percentage of sales associatedseveral quarters with the integration of optical components within our product line, which typically have higher margins.improving margins realized as revenue levels increase, and ongoing cost reduction measures are realized.
Selling, general and administrative expenses increased $446,000,remained relatively consistent, increasing $100,000 or 7%1%, to $6,464,000 in the fiscal 2018 first quarter from $6,018,000 for the fiscal 2017 first quarter. The increase$12,859,000 in the first quarter of fiscal 2018 consists primarily2024 from $12,759,000 for the first quarter of an increase of $612,000 in legal expenses, mainly due to litigation of a patent infringement lawsuit, and an increase of $201,000 in compensation costs due primarily to additional sales and engineering personnel, somewhat offset by decreases of $98,000 in stock compensation expense and $426,000 in performance compensation accruals when compared to the fiscal 2017 first quarter.2023.
IncomeLoss from operations for the quarter ended December 31, 20172023, was $644,000$8,162,000 compared to income from operations of $1,191,000$17,890,000 for the comparable quarter of fiscal 2017,2023, a decrease of approximately 46%146%. ThisThe decrease is attributable tothe result of decreased net sales and gross profit and increased selling, general and administrative expenses.margin.
InterestNet investment income for the quarter ended December 31, 20172023, was $96,000$2,069,000 compared to $53,000$303,000 for the comparable quarter for fiscal 2017.2023. The increase in interest income is due mainly to a higher average investments balance and higher interest rates earned on itsearned. The higher investments balance is a result of the Company’s capital raise of approximately $130,000,000 completed in the first fiscal 2018. The Company invests its excess cash primarily in FDIC-backed bank certificatesquarter of deposit and money market accounts.2023.
We recorded a benefit for income taxes of $203,000 and a provision for income taxes of $367,000
Interest expense for the quartersquarter ended December 31, 20172023, was $126,000, compared to $243,000 for the comparable period of fiscal 2023. The decrease was due to repayment of the Company’s line of credit which was drawn on for the acquisition of Nestor Cables in the prior period, following the Company’s secondary offering.
We recorded an income tax benefit of $951,000 and 2016,an income tax expense of $3,695,000 for the three months ended December 31, 2023, and 2022, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The decrease in tax expense of $570,000$4,646,000 in the first quarter of fiscal 2024 from the first quarter forof fiscal 20172023 is primarily due to the Tax Reform Act enacted on December 22, 2017 that resulted in a lower federal tax rate and a one-time benefit of $384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased the income tax provision.from operations. The decrease in the income tax expense rate to negative 27.4% for the first quarter of fiscal 20182024 decreased to 15.3% from 29.5%20.6% recorded in the first quarter of fiscal 2023 due to decreased pretax book income and increased permanent nondeductible items and discrete events during the quarter, including excess tax shortfall from vesting of restricted stock, and research and development credits.
The Company’s net loss for the three months ended December 31, 2023, was $5,268,000, or $0.35 per basic and diluted share. The Company’s net income for the three months ended December 31, 2022, was $14,255,000, or $1.01 per basic share or $1.00 per diluted share. The decrease in basic and diluted earnings per share for the three months ended December 31, 2023, as compared to December 31, 2022, was due to lower net income, partially offset by the higher number of diluted shares for the first quarter of fiscal 2017 is primarily due2024 of 15,212,945 as compared to 14,284,847 for the Tax Reform Act as described.first quarter of fiscal 2023.
Reportable Segments
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
Reportable segments are as follows:
● | Clearfield Segment – The Clearfield segment designs, manufactures, and sells fiber management, protection, and delivery solutions. For the first quarter of fiscal year 2024, net sales from the Clearfield segment comprised 82% of the Company’s total net sales. |
● | Nestor Cables Segment –The Nestor Cables segment designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment. For the first quarter of fiscal year 2024, net sales from the Nestor Cables segment comprised 18% of the Company’s total net sales. |
Clearfield Segment
The following table provides net sales and net income for the Clearfield segment for the three months ended:
(In thousands) | December 31, 2023 | December 31, 2022 | ||||||
Segment net sales | $ | 28,101 | $ | 78,355 | ||||
Segment net (loss) income | (3,383 | ) | 14,718 | |||||
Net sales in the Clearfield segment decreased 64%, or $50,254,000, for the quarter ended December 31, 20172023, as compared to the quarter ended December 31, 2022, resulting from decreased sales to its Community Broadband, MSO/Cable TV, and Large Regional customers as these customers work to digest inventory that was $943,000, or $0.07 per basic and diluted share. The Company’s netpurchased previously.
Net income in the Clearfield segment for the quarter ended December 31, 20162023, decreased 123%, or $18,101,000, as compared to the quarter ended December 31, 2022, driven by the changes in sales outlined above, as well as lower gross profit margin which was $877,000,negatively affected by the buildup in capacity that was not utilized.
Nestor Cables Segment
The following table provides net sales and net income for the Nestor Cables segment for the three months:
(In thousands) | December 31, 2023 | December 31, 2022 | ||||||
Segment net external sales | $ | 6,129 | $ | 7,587 | ||||
Segment net loss | $ | (1,975 | ) | $ | (310 | ) | ||
Net sales in the Nestor Cables segment decreased 19%, or $0.06 per basic and diluted share.$1,458,000, for the quarter ended December 31, 2023, as compared to the quarter ended December 31, 2022, excluding sales to the Clearfield Segment.
Net loss in the Nestor Cables segment for the quarter ended December 31, 2023, increased 537%, or $1,665,000, as compared to the quarter ended December 31, 2022.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
As of December 31, 2017,2023, our principal source of liquidity was our cash, cash equivalents, and short-term investments. Those sources total $25,838,000 at$162,836,000 as of December 31, 20172023, compared to $24,473,000 at$168,113,000 as of September 30, 2017.2023. Additionally, we have a line of credit for $40 million that has no outstanding borrowing as of December 31, 2023. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities, and money market accounts. Substantially all of our funds are insured by the FDIC.funds. Investments considered long-term were $20,357,000$6,505,000 as of December 31, 2017,2023, compared to $19,816,000$6,343,000 as of September 30, 2017.2023. We believe the combined balances of short-term cash and investments, long-term investments, along with long-term investmentsour line of credit provide a more accurate indication of our available liquidity. We had no long-term debt obligations atAs of December 31, 2017 or2023, our cash, cash equivalents, and short-term and long-term investments totaled $169,342,000, compared to $174,456,000 as of September 30, 2017.2023.
We believe our existing cash equivalents, and 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 for beyond the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth, and potential future strategic transactions, as well as execution ofand the Company’s share repurchase program adopted by our Board of Directors. The share repurchase program was originally adopted on November 13, 2014 with $8,000,000 authorized for common stock repurchases. On April 25, 2017, our Board of Directors increased the authorization to $12,000,000 of common stock.program.
Operating Activities
Net cash provided by operating activities totaled $2,005,000$7,827,000 for the three months ended December 31, 2017.2023. This was primarily due toconsisted of a net incomeloss of $943,000,$5,268,000, non-cash expenses for depreciation and amortization of $436,000, and stock based$1,695,000, stock-based compensation of $483,000, slightly offset by a non-cash benefit to deferred taxes$1,271,000 and amortization of $384,000 related to the newly enacted Tax Reform Act,discounts on investments of $1,160,000, in addition to changes in operating assets and liabilities providing and using cash. ChangesThe primary change in operating assets and liabilities providing cash include decreaseswas a decrease in accounts receivable of $11,750,000, and inventoriesa decrease in inventory of $1,667,000 and $313,000, respectively. Accounts$4,169,000. The decrease in accounts receivable balances can be influenced byis due to the timingdecrease in sales volume in the first quarter of shipments for customer projects and payment terms.fiscal 2024. Days sales outstanding, which measures how quickly receivables are collected, decreased six6 days to 3047 days as of December 31, 2023, compared to 53 days from September 30, 2017 to December 31, 2017.2023. The decrease in inventory represents an adjustmentis due to decreased inventory purchases in the first quarter for seasonal demand along with changesfiscal 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 stocking levels. Changes in working capital itemsoperating assets and liabilities using cash includewas a decrease in accounts payable and accrued expenses of $5,081,000, due to the timing of payments to vendors and deferred rent of $1,498,000 which primarily reflects fiscal 2017 accrued bonus compensation accruals paidlower inventory purchases in the first quarter offor fiscal 2018.2024.
Net cash used inprovided by operating activities totaled $605,000$1,103,000 for the three months ended December 31, 2016.2022. This was primarily due to net income of $877,000,$14,255,000, non-cash expenses for depreciation and amortization of $389,000,$1,353,000, and stock basedstock-based compensation of $594,000 offset by$660,000 in addition to changes in operating assets and liabilities providing and using cash. ChangesThe primary change in operating assets and liabilities providingusing cash include decreaseswas a decrease in accounts receivablepayable and other assetsaccrued expenses of $548,000$7,637,000 and $228,000, respectively. Accounts receivable balances can be influenced byan increase in inventory of $6,505,000. The decrease in accounts payable and accrued expenses is due to the timing of shipmentspayments to vendors. The Company increased stocking levels of inventory during the quarter ending December 31, 2022, to support the Company’s sales order backlog, as well as provide for customer projectssafety stock for anticipated demand considering current long lead times for components and payment terms.transportation within the global supply chain. Days sales outstanding, which measures how quickly receivables are collected, increased three7 days to 3859 days as of December 31, 2022, compared to 52 days from September 30, 2016 to December 31, 2016. The decrease in other assets primarily represents a decrease in the current income tax receivable. Changes in working capital items using cash include an increase in inventory of $341,000 and a decrease in accounts payable and accrued expenses of $2,900,000. The increase in inventory represents an adjustment for seasonal demand along with changes in stocking levels while the decrease in accounts payable and accrued expenses primarily reflects fiscal 2016 accrued bonus compensation accruals paid in the first quarter of fiscal 2017.2022.
Investing Activities
We invest our excess cash in money market accounts, U.S. Treasury securities, money market funds, and bank CDscertificates of deposit in denominations across numerous banks. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIC onand relative risk profile of these investments. During the three months ended December 31, 2017,2023, we received proceeds from the maturity of investment securities of $51,068,000 and used cash to purchase $2,466,000$47,748,000 of FDIC-backed securities and received $2,477,000 on CDs that matured.investment securities. Purchases of patentsproperty, plant, and capital equipment, mainly related to information technology and manufacturing equipment and intangible assets, consumed $230,000$2,412,000 of cash.cash during the three months ended December 31, 2023.
During the three months ended December 31, 2016,2022, we used cash to purchase $7,440,000$98,881,000 of FDIC-backed securities and received $2,459,000 on CDs that matured.investment securities. Purchases of patentsproperty, plant and capital equipment, mainly related to information technology and manufacturing equipment and intangible assets, consumed $529,000$2,213,000 of cash.
Financing Activitiescash during the three months ended December 31, 2022.
Financing Activities
For the three months ended December 31, 2017,2023, we used cash to repurchase $12,185,000 of our common stock on the open market under our stock repurchase program. We received $148,000$250,000 from employees’ participation and purchase of stock through our ESPP and used $9,000 to pay$236,000 for payment of withholding taxes as a result of employees’ exercises of stock options andfor vesting of restricted shares using share withholding. Additionally, we used $11,000 to repurchase our common stock in the three months ended December 31, 2017. As of December 31, 2017, we had authority to purchase approximately $7,159,000 in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017.grants.
For the three months ended December 31, 2016,2022, we received $170,000$130,262,000 of net proceeds through the issuance of common stock. We used $16,700,000 to pay down the principal on our line of credit, which was originally drawn in the fourth quarter of fiscal 2022 to fund the acquisition of Nestor Cables. We received $299,000 from employees’ participation and purchase of stock through our ESPP, we received $954,000 related to issuance of stock as payment for incentive compensation previously earned, we used $342,000 related to share withholding for exercise and used $10,000 to pay for taxes as a resultassociated with the issuance of employees’ exercisescommon stock upon cashless exercise of stock options and vestingused $954,000 for payment of restricted shares usingwithholding taxes for stock grants. We did not repurchase common stock under our share withholding.repurchase program in the three months ended December 31, 2022.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting policies.estimates. The accounting policiesestimates considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective, and complex judgments include revenue recognition, stock basedthe fair value of investments, stock-based compensation, deferred tax assetand valuation allowances, accruals for uncertain tax positions,of inventory, long-lived assets, finite lived intangible assets and impairment of goodwill and long-lived assets.goodwill.
These accounting policiesestimates 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, 2017.2023. Management made no changes to the Company’s critical accounting policiesestimates during the quarter ended December 31, 2017.2023.
In applying its critical accounting policies,estimates, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the quarter ended December 31, 2017.2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.Clearfield is exposed to market risk due to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, and commodity prices. Changes in those factors could impact the Company’s results of operations and financial condition. For a discussion of sensitivity analysis related to these types of market risks, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended September 30, 2023. There have been no material changes in information that would have been provided in the context of Item 3 for the quarter ended December 31, 2023.
The Company currently invests its excess cash in bank certificates of deposit that are fully insured by the Federal Deposit Insurance Corporation and United States Treasury securities with terms of not more than five years, as well as money market funds. The fair value of these investments fluctuates subject to changes in market interest rates.
Foreign Exchange Rates
The Company uses the U.S. dollar as its reporting currency. The functional currency of Nestor Cables is the Euro. The changing relationships of the U.S. dollar to the Euro could have a material impact on our financial results. Fluctuations in the Euro to U.S. dollar exchange rate impacts our consolidated balance sheets, as well as sales, cost of sales, and net income. If the Euro had appreciated or depreciated by 10%, relative to the U.S. Dollar, our operating expenses for the three months ended December 31, 2023, would have increased, or decreased by approximately $220,000 or approximately 2%. We do not hedge against foreign currency fluctuations. As such, fluctuations in foreign currency exchange rates could have a material impact on the Company’s financial statements.
Inflation
Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our profitability. We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials such as fiber cable and other components, which has outpaced our ability to reduce the cost structure and manufacturability or increase prices. We do not hedge commodity prices. Accordingly, inflation impacts our profitability, including cost of sales and operating expenses and may have a material impact on the Company’s consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2017.2023. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, that occurred during the quarter ended December 31, 20172023, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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On January 31, 2017, CommScope Technologies LLC (“CommScope”) filedThere are no pending legal proceedings against or involving the Company for which the outcome is likely to have a Complaint against Clearfield, Inc. in the United States District Court for the Districtmaterial adverse effect upon its financial position or results of Minnesota. The Complaint asserts infringement of thirteen CommScope patents by certain Clearfield products, including our FieldSmart® PON Cabinets, WaveSmart® Ruggedized Splitters, Clearview® Blue and Clearview® Classic Cassettes, FieldShield® Deployment Reel System, SmartRoute® Panel, FieldShield® Multiport SmarTerminal and FieldShield® Hardened Connectors. The asserted CommScope patents are U.S. Patent Nos. 7,233,731; 8,811,791; 7,198,409; 7,809,233; 9,201,206; 7,809,234; 7,816,602; 8,263,861; 8,705,929; 8,938,147; RE42,258; 7,397,997 and 9,122,021. CommScope’s Complaint seeks an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorneys’ fees.operations.
On April 24, 2017, we filed an Answer to CommScope’s Complaint denying all claims of infringement and asserting affirmative defenses on the grounds of non-infringement, invalidity and unenforceability, among others. Trial is scheduled for on or about August 1, 2019.
In the quarter ended December 31, 2017, we instituted three separate proceedings with the U.S. Patent and Trademark Office for inter partes reviews to challenge the validity of three of the CommScope patents. CommScope has filed preliminary responses to two of these proceedings. The parties are currently engaged in discovery.
We intend to vigorously defend this lawsuit and believe that none of our products violate any valid intellectual property of CommScope. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In addition, this litigation may negatively affect our business, results of operations and financial condition due to the likely substantial cost of defense and potential diversion of the attention of company management away from operational activities.
In addition to the matter described above, we are exposed to a number of asserted and unasserted legal claims encountered in the ordinary course of business. Although the outcome of any such legal action cannot be predicted, we do not believe that any of these other claims or potential claims will be material to our business, results of operations or financial condition.
The most significant risk factors applicable to the Company are described in Part I,II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2017.2023. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.disclosed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In the three months ending December 31, 2017, theThe Company repurchased shares of stock associated with exercise and satisfaction of employee tax withholding requirements on vesting or exercise of equity awards under the Company’s Stock Compensation Plans for the three months ended December 31, 2023, as well as the repurchase of shares on the open market under the Company’s stock repurchase program. Accordingly, the Company’s purchases of equity securities for the three months ended December 31, 2023, were as follows:
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
| Period | Total 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) | ||||||||||||
| October 1-31, 2017 | 98 | $ | 13.23 | — | $ | 7,169,768 | ||||||||||
| November 1-30, 2017 | 573 | 13.90 | — | 7,169,768 | ||||||||||||
| December 1-31, 2017 | 900 | 12.06 | 900 | 7,158,917 | ||||||||||||
| Total | 1,571 | $ | 12.80 | 900 | $ | 7,158,917 | ||||||||||
ISSUER PURCHASES OF EQUITY SECURITIES
Period | Total | Average | Total Number of | Approximate Dollar Value | ||||||||||||
October 1-31, 2023 | - | - | - | $ | 14,980,671 | |||||||||||
November 1-30, 2023 | 115,025 | $ | 26.75 | 106,000 | 30,140,356 | |||||||||||
December 1-31, 2023 | 330,000 | 27.97 | 330,000 | 20,909,578 | ||||||||||||
Total | 445,025 | $ | 27.69 | 436,000 | $ | 20,909,578 | ||||||||||
In(1) Effective November 7, 2023, the three months ending December 31, 2017,Company’s board of directors increased the Company repurchased a totalshare repurchase program to an aggregate of 671 shares in connection with payment of taxes upon vesting of restricted stock previously issued to employees.$40 million from the prior $22 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.During the quarter ended December 31, 2023, none of our directors or officers informed us of the adoption, modification or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408(a).
101 – The following materials from Clearfield, Inc.’s Quarterly Report on Form 10-Q for the period ended December 31, 2023 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2023 and December 31, 2022; (ii) Consolidated Statements of Earnings for the three months ended December 31, 2023 and 2022; (iii) Consolidated Statements of Shareholders’ Equity for the three months ended December 31, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2023 and 2022; and (v) Notes to the Consolidated Financial Statements.
104 - Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
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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.
February 5, 2024 | /s/ Cheryl Beranek | ||
By: Cheryl Beranek | |||
| Its: President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
February 5, 2024 | /s/ Daniel Herzog | ||
By: Daniel Herzog Its: Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
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