UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022March 31, 2023
☐ 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)
(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 ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes No ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company 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 ☒ No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class: | Outstanding as of |
Common stock, par value $.01 |
|
CLEARFIELD, INC.
FORM 10-Q
TABLE OF CONTENTS
CLEARFIELD, INC.
FORM 10-QCONSOLIDATED BALANCE SHEETS
TABLE OF CONTENTS(IN THOUSANDS, EXCEPT SHARE DATA)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 CLEARFIELD, INC. CONSOLIDATED STATEMENTS OF EARNINGS UNAUDITED (IN THOUSANDS, EXCEPT SHARE DATA)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 CLEARFIELD, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME UNAUDITED (IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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CLEARFIELD, INC.
CONDENSED BALANCE SHEETSCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)THOUSANDS)
June 30, | September 30, | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 14,192 | $ | 13,216 | ||||
Short-term investments | 3,894 | 10,374 | ||||||
Accounts receivables, net | 31,594 | 19,438 | ||||||
Inventories, net | 69,341 | 27,524 | ||||||
Other current assets | 1,050 | 954 | ||||||
Total current assets | 120,071 | 71,506 | ||||||
Property, plant and equipment, net | 9,567 | 4,998 | ||||||
Other Assets | ||||||||
Long-term investments | 24,994 | 36,913 | ||||||
Goodwill | 4,709 | 4,709 | ||||||
Intangible assets, net | 4,691 | 4,696 | ||||||
Right of use lease assets | 12,715 | 2,305 | ||||||
Deferred tax asset | 647 | 365 | ||||||
Other | 553 | 420 | ||||||
Total other assets | 48,309 | 49,408 | ||||||
Total Assets | $ | 177,947 | $ | 125,912 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current Liabilities | ||||||||
Current portion of lease liability | $ | 2,774 | $ | 915 | ||||
Accounts payable | 16,243 | 9,215 | ||||||
Accrued compensation | 8,918 | 8,729 | ||||||
Accrued expenses | 2,758 | 1,613 | ||||||
Total current liabilities | 30,693 | 20,472 | ||||||
Other Liabilities | ||||||||
Long-term portion of lease liability | 10,480 | 1,615 | ||||||
Total liabilities | 41,173 | 22,087 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding | 0 | 0 | ||||||
Common stock, authorized 50,000,000, $.01 par value; 13,777,682 and 13,732,188 shares issued and outstanding as of June 30, 2022 and September 30, 2021 | 138 | 137 | ||||||
Additional paid-in capital | 59,784 | 58,246 | ||||||
Accumulated other comprehensive loss | (960 | ) | 0 | |||||
Retained earnings | 77,812 | 45,442 | ||||||
Total shareholders’ equity | 136,774 | 103,825 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 177,947 | $ | 125,912 |
For the three months ended March 31, 2023 | Accumulated other | |||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
Balance at December 31, 2022 | 15,218 | $ | 152 | $ | 185,404 | $ | (733 | ) | $ | 109,058 | $ | 293,881 | ||||||||||||
Stock-based compensation expense | - | - | 784 | - | - | 784 | ||||||||||||||||||
Issuance of common stock under equity compensation plans | 33 | 1 | - | - | - | 1 | ||||||||||||||||||
Exercise of stock options, net of shares exchanged for payment | 4 | - | (130 | ) | - | - | (130 | ) | ||||||||||||||||
Other comprehensive income | - | - | - | 499 | - | 499 | ||||||||||||||||||
Net income | - | - | - | - | 10,364 | 10,364 | ||||||||||||||||||
Balance at March 31, 2023 | 15,255 | $ | 153 | $ | 186,058 | $ | (234 | ) | $ | 119,422 | $ | 305,399 |
For the three months ended March 31, 2022 | Accumulated other | |||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
Balance at December 31, 2021 | 13,762 | $ | 138 | $ | 58,505 | $ | - | $ | 55,831 | $ | 114,474 | |||||||||||||
Stock-based compensation expense | - | - | 570 | - | - | 570 | ||||||||||||||||||
Restricted stock issuance, net of forfeitures | 6 | - | - | - | - | - | ||||||||||||||||||
Withholding related to exercise of stock options | 5 | - | (126 | ) | - | - | (126 | ) | ||||||||||||||||
Other comprehensive loss | - | - | - | (725 | ) | - | (725 | ) | ||||||||||||||||
Net income | - | - | - | - | 9,236 | 9,236 | ||||||||||||||||||
Balance at March 31, 2022 | 13,773 | $ | 138 | $ | 58,949 | $ | (725 | ) | $ | 65,067 | $ | 123,429 |
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSED STATEMENTS OF EARNINGS
UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net sales | $ | 71,250 | $ | 38,735 | $ | 175,854 | $ | 95,519 | ||||||||
Cost of sales | 41,943 | 21,598 | 100,411 | 54,071 | ||||||||||||
Gross profit | 29,307 | 17,137 | 75,443 | 41,448 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 12,721 | 9,435 | 33,877 | 25,581 | ||||||||||||
Income from operations | 16,586 | 7,702 | 41,566 | 15,867 | ||||||||||||
Net investment income | 43 | 121 | 284 | 378 | ||||||||||||
Income before income taxes | 16,629 | 7,823 | 41,850 | 16,245 | ||||||||||||
Income tax expense | 3,884 | 1,725 | 9,480 | 3,344 | ||||||||||||
Net income | $ | 12,745 | $ | 6,098 | $ | 32,370 | $ | 12,901 | ||||||||
Net income per share Basic | $ | 0.93 | $ | 0.44 | $ | 2.35 | $ | 0.94 | ||||||||
Net income per share Diluted | $ | 0.92 | $ | 0.44 | $ | 2.33 | $ | 0.94 | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 13,772,269 | 13,732,913 | 13,760,950 | 13,718,394 | ||||||||||||
Diluted | 13,899,698 | 13,812,510 | 13,900,019 | 13,762,897 |
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
(IN THOUSANDS)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net Income | $ | 12,745 | $ | 6,098 | $ | 32,370 | $ | 12,901 | ||||||||
Other comprehensive loss before income taxes: | ||||||||||||||||
Unrealized losses on available-for-sale adjustments | (309 | ) | 0 | (1,241 | ) | 0 | ||||||||||
Total other comprehensive loss before income taxes | (309 | ) | 0 | (1,241 | ) | 0 | ||||||||||
Income tax benefit | (74 | ) | 0 | (281 | ) | 0 | ||||||||||
Total other comprehensive loss | (235 | ) | 0 | (960 | ) | 0 | ||||||||||
Total comprehensive income | $ | 12,510 | $ | 6,098 | $ | 31,410 | $ | 12,901 |
SEE ACCOMPANYING NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY
UNAUDITED
(IN THOUSANDS)
For the three months ended June 30, 2022 | Accumulated other | |||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
Balance at March 31, 2022 | 13,773 | $ | 138 | $ | 58,949 | $ | (725 | ) | $ | 65,067 | $ | 123,429 | ||||||||||||
Stock-based compensation expense | - | 0 | 638 | 0 | 0 | 638 | ||||||||||||||||||
Restricted stock issuance, net of forfeitures | (3 | ) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
Issuance of common stock under employee stock purchase plan | 6 | 0 | 294 | 0 | 0 | 294 | ||||||||||||||||||
Withholding related to exercise of stock options | 2 | 0 | (97 | ) | 0 | 0 | (97 | ) | ||||||||||||||||
Other comprehensive loss | - | 0 | 0 | (235 | ) | 0 | (235 | ) | ||||||||||||||||
Net income | - | 0 | 0 | 0 | 12,745 | 12,745 | ||||||||||||||||||
Balance at June 30, 2022 | 13,778 | $ | 138 | $ | 59,784 | $ | (960 | ) | $ | 77,812 | $ | 136,774 |
For the three months ended June 30, 2021 | Accumulated other | |||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
Balance at March 31, 2021 | 13,733 | $ | 137 | $ | 57,794 | $ | 0 | $ | 31,917 | $ | 89,848 | |||||||||||||
Stock-based compensation expense | - | 0 | 343 | 0 | 0 | 343 | ||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 10 | 0 | 205 | 0 | 0 | 205 | ||||||||||||||||||
Net income | - | 0 | 0 | 0 | 6,098 | 6,098 | ||||||||||||||||||
Balance at June 30, 2021 | 13,743 | $ | 137 | $ | 58,342 | $ | 0 | $ | 38,015 | $ | 96,494 |
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
UNAUDITED
(IN THOUSANDS)
For the nine months ended June 30, 2022 | Accumulated other | |||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
Balance as of September 30, 2021 | 13,732 | $ | 137 | $ | 58,246 | $ | 0 | $ | 45,442 | $ | 103,825 | |||||||||||||
Stock-based compensation expense | - | 0 | 1,647 | 0 | 0 | 1,647 | ||||||||||||||||||
Restricted stock issuance, net of forfeitures | 27 | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 13 | 0 | 544 | 0 | 0 | 544 | ||||||||||||||||||
Withholding related to exercise of stock options | 10 | 0 | (379 | ) | 0 | 0 | (379 | ) | ||||||||||||||||
Repurchase of shares for payment of withholding taxes for vested restricted stock grants | (4 | ) | 0 | (274 | ) | 0 | 0 | (274 | ) | |||||||||||||||
Other Comprehensive Loss | - | 0 | 0 | (960 | ) | 0 | (960 | ) | ||||||||||||||||
Net income | - | 0 | 0 | 0 | 32,370 | 32,370 | ||||||||||||||||||
Balance at June 30, 2022 | 13,778 | $ | 138 | $ | 59,784 | $ | (960 | ) | $ | 77,812 | $ | 136,774 |
For the six months ended March 31, 2023 | Accumulated other | |||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | ||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||
Balance as of September 30, 2022 | 13,819 | $ | 138 | $ | 54,539 | $ | (1,898 | ) | $ | 94,803 | $ | 147,582 | ||||||||||||
Stock-based compensation expense | - | - | 1,444 | - | - | 1,444 | ||||||||||||||||||
Issuance of common stock under equity compensation plans | 51 | 1 | 954 | - | - | 954 | ||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 5 | - | 299 | - | - | 299 | ||||||||||||||||||
Exercise of stock options, net of shares exchanged for payment | 10 | - | (471 | ) | - | - | (471 | ) | ||||||||||||||||
Repurchase of shares for payment of withholding taxes for vested restricted stock grants | (10 | ) | - | (954 | ) | - | - | (954 | ) | |||||||||||||||
Issuance of common stock, net | 1,380 | 14 | 130,248 | - | - | 130,262 | ||||||||||||||||||
Other comprehensive income | - | - | - | 1,665 | - | 1,665 | ||||||||||||||||||
Net income | - | - | - | - | 24,619 | 24,619 | ||||||||||||||||||
Balance at March 31, 2022 | 15,255 | $ | 153 | $ | 186,058 | $ | (234 | ) | $ | 119,422 | $ | 305,399 |
For the nine months ended June 30, 2021 | Accumulated other | |||||||||||||||||||||||||||||||||||||||||||||||
For the six months ended March 31, 2022 | Accumulated other | |||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | comprehensive | Retained | Total share- | Common Stock | Additional | comprehensive | Retained | Total share- | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | paid-in capital | loss | earnings | holders’ equity | Shares | Amount | paid-in capital | loss | earnings | holders’ equity | |||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2020 | 13,650 | $ | 137 | $ | 57,503 | $ | 0 | $ | 25,114 | $ | 82,754 | |||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2021 | 13,732 | $ | 137 | $ | 58,246 | $ | - | $ | 45,441 | $ | 103,824 | |||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | - | 0 | 966 | 0 | 0 | 966 | - | - | 1,010 | - | - | 1,010 | ||||||||||||||||||||||||||||||||||||
Restricted stock issuance, net of forfeitures | 37 | 0 | 0 | 0 | 0 | 0 | 30 | 1 | - | - | - | 1 | ||||||||||||||||||||||||||||||||||||
Employee stock purchase plan | 24 | 0 | 383 | 0 | 0 | 383 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | 8 | - | 249 | - | - | 249 | ||||||||||||||||||||||||||||||||||||||||||
Withholding related to exercise of stock options | 34 | 0 | (456 | ) | 0 | 0 | (456 | ) | 7 | - | (282 | ) | - | - | (282 | ) | ||||||||||||||||||||||||||||||||
Repurchase of shares for payment of withholding taxes for vested restricted stock grants | (2 | ) | 0 | (54 | ) | 0 | 0 | (54 | ) | (4 | ) | - | (274 | ) | - | - | (274 | ) | ||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | (725 | ) | - | (725 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income | - | 0 | 0 | 0 | 12,901 | 12,901 | - | - | - | - | 19,626 | 19,626 | ||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 13,743 | $ | 137 | $ | 58,342 | $ | 0 | $ | 38,015 | $ | 96,494 | |||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 13,773 | $ | 138 | $ | 58,949 | $ | (725 | ) | $ | 65,067 | $ | 123,429 |
SEE ACCOMPANYING NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
CLEARFIELD, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED(UNAUDITED)
(IN THOUSANDS)
Six Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
Nine Months Ended June 30, | March 31, | March 31, | ||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 32,370 | $ | 12,901 | $ | 24,619 | $ | 19,626 | ||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation and amortization | 2,174 | 1,725 | 2,822 | 1,362 | ||||||||||||
Change in allowance for doubtful accounts | 0 | 210 | ||||||||||||||
Amortization of discount on investments | (1,139 | ) | (21 | ) | ||||||||||||
Deferred taxes | (35 | ) | - | |||||||||||||
Stock-based compensation | 1,647 | 966 | 1,444 | 1,010 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Changes in operating assets and liabilities, net of acquired amounts: | ||||||||||||||||
Accounts receivable | (12,156 | ) | (5,896 | ) | 16,353 | (2,398 | ) | |||||||||
Inventories, net | (41,816 | ) | (6,571 | ) | (17,243 | ) | (33,394 | ) | ||||||||
Other assets | (185 | ) | (261 | ) | (2,407 | ) | (811 | ) | ||||||||
Accounts payable and accrued expenses | 8,677 | 5,043 | (14,273 | ) | 3,344 | |||||||||||
Net cash (used in) provided by operating activities | (9,289 | ) | 8,117 | |||||||||||||
Net cash provided by (used in) operating activities | 10,141 | (11,282 | ) | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchases of property, plant and equipment and intangible assets | (6,764 | ) | (1,275 | ) | ||||||||||||
Purchases of property, plant and equipment, and intangible assets | (4,797 | ) | (4,842 | ) | ||||||||||||
Purchases of investments | (248 | ) | (11,904 | ) | (99,126 | ) | (248 | ) | ||||||||
Proceeds from sales and maturities of investments | 17,386 | 10,044 | 100,743 | 17,386 | ||||||||||||
Net cash provided by (used in) investing activities | 10,374 | (3,135 | ) | (3,180 | ) | 12,296 | ||||||||||
Cash flows from financing activities | ||||||||||||||||
Repayment of long-term debt | (16,700 | ) | - | |||||||||||||
Proceeds from issuance of common stock under employee stock purchase plan | 544 | 383 | 299 | 249 | ||||||||||||
Repurchase of shares for payment of withholding taxes for vested restricted stock grants | (274 | ) | (54 | ) | ||||||||||||
Repurchase of shares for payment of withholding taxes for stock grants | (954 | ) | (274 | ) | ||||||||||||
Withholding related to exercise of stock options | (379 | ) | (456 | ) | (471 | ) | (282 | ) | ||||||||
Net cash used in financing activities | (109 | ) | (127 | ) | ||||||||||||
Issuance of stock under equity compensation plans | 954 | - | ||||||||||||||
Net proceeds from issuance of common stock | 130,262 | - | ||||||||||||||
Net cash provided by (used in) financing activities | 113,390 | (307 | ) | |||||||||||||
Effect of exchange rates on cash | 80 | - | ||||||||||||||
Increase in cash and cash equivalents | 976 | 4,855 | 120,431 | 707 | ||||||||||||
Cash and cash equivalents, beginning of period | 13,216 | 16,450 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 14,192 | $ | 21,305 | ||||||||||||
Cash and cash equivalents, beginning of year | 16,650 | 13,216 | ||||||||||||||
Cash and cash equivalents, end of year | $ | 137,081 | $ | 13,923 | ||||||||||||
Supplemental disclosures for cash flow information | ||||||||||||||||
Cash paid during the year for income taxes | $ | 9,913 | $ | 3,560 | ||||||||||||
Cash paid for income taxes | $ | 10,211 | $ | 6,934 | ||||||||||||
Cash paid for interest expense | $ | 266 | $ | - | ||||||||||||
Non-cash financing activities | ||||||||||||||||
Cashless exercise of stock options | $ | 276 | $ | 1,269 | $ | 510 | $ | 210 |
SEE ACCOMPANYING NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Unless the context otherwise requires, for purposes of the Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company,” and “Clearfield,” refer to Clearfield, Inc.
Basis of Presentation
The accompanying (a) condensedconsolidated balance sheet as of September 30, 2021, 2022, which has been derived from audited financial statements, and (b) unaudited interim condensedconsolidated financial statements as of and for the three and ninesix months ended June 30, 2022 March 31, 2023 have been prepared by Clearfield Inc. (the “Company”) inRin 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, 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-K10-K for the year ended September 30, 2021.2022.
In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Clearfield, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13,2016-13, Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-192018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13.2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2023,2024, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-132016-13 on its consolidated financial statements.
Note 2. Net Income Per Share
Basic net income per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the reporting period. Diluted EPS equals net income divided by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock equivalents, such as stock options, when dilutive.
The following is a reconciliation of the numerator and denominator of the net income per common share computations for the three and ninesix months ended June 30, 2022 March 31, 2023 and 2021:2022:
Three Months Ended June 30, | Nine Months Ended June 30, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
(In thousands, except for share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
(In thousands, except for share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
Net income | $ | 12,745 | $ | 6,098 | $ | 32,370 | $ | 12,901 | $ | 10,364 | $ | 9,236 | $ | 24,619 | $ | 19,626 | ||||||||||||||||
Weighted average common shares | 13,772,269 | 13,732,913 | 13,760,950 | 13,718,394 | 15,233,848 | 13,767,341 | 14,693,829 | 13,755,291 | ||||||||||||||||||||||||
Dilutive potential common shares | 127,429 | 79,597 | 139,069 | 44,503 | 26,921 | 135,495 | 73,109 | 144,889 | ||||||||||||||||||||||||
Weighted average dilutive common shares outstanding | 13,899,698 | 13,812,510 | 13,900,019 | 13,762,897 | 15,260,769 | 13,902,836 | 14,766,938 | 13,900,180 | ||||||||||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.93 | $ | 0.44 | $ | 2.35 | $ | 0.94 | $ | 0.67 | $ | 0.67 | $ | 1.68 | $ | 1.43 | ||||||||||||||||
Diluted | $ | 0.92 | $ | 0.44 | $ | 2.33 | $ | 0.94 | $ | 0.67 | $ | 0.66 | $ | 1.67 | $ | 1.41 |
Note 3. Cash and Cash Equivalents
We classify investments with original maturities of 90 days or less as cash equivalents. The following table presents the Company’s cash and cash equivalents balances:
(In thousands) | March 31, 2023 | September 30, 2022 | ||||||
Cash and cash equivalents: | ||||||||
Cash including money market accounts | $ | 4,985 | $ | 16,635 | ||||
Money market funds | 18,212 | 15 | ||||||
U.S. Treasury securities | 113,884 | - | ||||||
Total cash and cash equivalents | $ | 137,081 | $ | 16,650 |
Note 4. Investments
The Company invests in certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and United States (“U.S.”) Treasury securities with terms of not more than five years, as well as U.S. Treasury and money market securities.funds. Historically, the Company’s investment portfolio had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and has reclassified its investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income, net of tax. Realized gains and losses on available-for-sale securities are recognized upon sale and are included in net investment income in the consolidated statement of earnings.
At June 30, 2022, March 31, 2023, available-for-sale investments consistconsisted of the following:
June 30, 2022 | March 31, 2023 | |||||||||||||||||||||||||||||||
(In thousands) | Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||
Short-Term | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 9,496 | $ | - | $ | 259 | $ | 9,237 | ||||||||||||||||||||||||
Certificates of deposit | 3,962 | 1 | 69 | 3,894 | 10,995 | - | 248 | 10,747 | ||||||||||||||||||||||||
Investment securities – short-term | $ | 3,962 | $ | 1 | $ | 69 | $ | 3,894 | $ | 20,491 | $ | - | $ | 507 | $ | 19,984 | ||||||||||||||||
Long-Term | ||||||||||||||||||||||||||||||||
U.S treasury securities | $ | 16,167 | $ | 0 | $ | 825 | $ | 15,342 | ||||||||||||||||||||||||
U.S Treasury securities | $ | 6,702 | $ | - | $ | 539 | $ | 6,163 | ||||||||||||||||||||||||
Certificates of deposit | 10,000 | 1 | 348 | 9,652 | 2,469 | 1 | 105 | 2,364 | ||||||||||||||||||||||||
Investment securities – long-term | $ | 26,167 | $ | 1 | $ | 1,173 | $ | 24,994 | $ | 9,171 | $ | 1 | $ | 644 | $ | 8,527 |
At June 30, 2022, As of March 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 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 | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||
U.S treasury securities | $ | 15,342 | $ | 825 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
U.S Treasury securities | $ | - | $ | - | $ | 15,433 | $ | 798 | ||||||||||||||||||||||||
Certificates of deposit | 9,637 | 267 | 3,569 | 151 | 2,017 | 43 | 10,849 | 310 | ||||||||||||||||||||||||
Investment securities | $ | 24,979 | $ | 1,092 | $ | 3,569 | $ | 151 | $ | 2,017 | $ | 43 | $ | 26,282 | $ | 1,108 |
As of June 30, 2022, March 31, 2023, there were 6059 securities in an unrealized loss position which is due to the securitiesmarket paying lowera higher interest ratesrate than the market.coupon rate on these securities. As of June 30, 2022, March 31, 2023, there are 0no securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there is negligible credit risk due to the nature of the securities which are backed by the FDIC and USU.S. federal government.
Note 4.5. Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the market price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of U.S. treasury securities and certificates of deposit based on valuations provided by an external pricing service whothat obtains themthe valuations from a variety of industry standard data providers.
The Company’s investments are categorized according to the three-levelthree-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one of the following levels:
Level 1-1- Quoted prices in active markets for identical assets or liabilities.
Level 2 -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 -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 ourthe Company’s investment securities as of June 30, 2022 March 31, 2023, according to the three-levelthree-level fair value hierarchy:
Fair Value Measurements at June 30, 2022 | Fair Value Measurements at March 31, 2023 | |||||||||||||||||||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||||||
U.S Treasury securities | $ | 113,884 | $ | - | $ | 113,884 | $ | - | ||||||||||||||||||||||||
Money market funds | 18,212 | 18,212 | - | |||||||||||||||||||||||||||||
Total cash equivalents | $ | 132,096 | $ | 18,212 | $ | 113,884 | $ | - | ||||||||||||||||||||||||
Investment securities: | ||||||||||||||||||||||||||||||||
U.S treasury securities | $ | 15,342 | $ | 0 | $ | 15,342 | $ | 0 | ||||||||||||||||||||||||
Certificates of deposit | 13,546 | 0 | 13,546 | 0 | 13,111 | - | 13,111 | - | ||||||||||||||||||||||||
U.S Treasury securities | 15,400 | - | 15,400 | - | ||||||||||||||||||||||||||||
Total investment securities | $ | 28,888 | $ | 0 | $ | 28,888 | $ | 0 | $ | 28,511 | $ | - | $ | 28,511 | $ | - |
During the ninesix months ended June 30, 2022 March 31, 2023 and the year ended September 30, 2021, we2022, the Company owned 0no 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. WeThe Company had no re-measurements of non-financial assets to fair value in the three or ninesix months ended JuneMarch 31, 2023 and the year ended September 30, 2022.
Note 5.6. Other Comprehensive LossIncome (Loss)
Changes in components of other comprehensive loss, and taxes related to itemsnet of other comprehensive income (loss)tax, are as follows:
Three Months Ended June 30, 2022 | ||||||||||||
(In thousands) | Before Tax | Tax Effect | Net of Tax Amount | |||||||||
Unrealized losses on available-for-sale securities | $ | (309 | ) | $ | (74 | ) | $ | (235 | ) | |||
Other comprehensive loss | $ | (309 | ) | $ | (74 | ) | $ | (235 | ) |
Nine Months Ended June 30, 2022 | ||||||||||||
(In thousands) | Before Tax | Tax Effect | Net of Tax Amount | |||||||||
Unrealized losses on available-for-sale securities | $ | (1,241 | ) | $ | (281 | ) | $ | (960 | ) | |||
Other comprehensive loss | $ | (1,241 | ) | $ | (281 | ) | $ | (960 | ) |
At June 30, 2022 components of accumulated other comprehensive loss is as follows:
(In thousands) | Available-for-Sale Securities | Accumulated Other Comprehensive Loss | ||||||
Balances at September 30, 2021 | $ | 0 | $ | 0 | ||||
Other comprehensive loss for the nine months ended June 30, 2022 | (960 | ) | (960 | ) | ||||
Balances at June 30, 2022 | $ | (960 | ) | $ | (960 | ) |
(In thousands) | Unrealized Gain/ (Loss) on Available-for-Sale Securities | Foreign Currency Translation Gain/(Loss) | Accumulated Other Comprehensive Loss | |||||||||
Balances at September 30, 2022 | $ | (1,224 | ) | (674 | ) | (1,898 | ) | |||||
Other comprehensive income for the three months ended December 31, 2022 | 141 | 1,024 | 1,165 | |||||||||
Balances at December 31, 2022 | $ | (1,083 | ) | 350 | (733 | ) | ||||||
Other comprehensive income for the three months ended March 31, 2023 | 197 | 302 | 499 | |||||||||
Balances at March 31, 2023 | $ | (886 | ) | 652 | (234 | ) |
Note 6.7. Stock-Based Compensation
On February 23, 2023, the Company’s shareholders approved the Clearfield, Inc. 2022 Stock Compensation Plan (the “2022 Plan”). The 2022 Plan became effective on the date of shareholder approval, and no further awards may be made under the Clearfield, Inc. Amended and Restated 2007 Stock Compensation Plan (the “Prior Plan”) following the effective date of the 2022 Plan. The total number of shares of stock reserved and available for distribution under the 2022 Plan is 1,461,461 shares, which includes the number of shares remaining for grant and delivery under the Prior Plan, plus any shares subject to outstanding awards under the Prior Plan as of the effective date of the 2022 Plan that were forfeited, cancelled or settled for cash.
The Company recorded $638,000$784,000 and $1,647,000$1,444,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, and the Company’s Employee Stock Purchase Plan (“ESPP”) for the three and ninesix months ended June 30, 2022, respectively.March 31, 2023. For the three months ended June 30, 2022, $606,000March 31, 2023, $736,000 of this expense is included in selling, general and administrative expense, and $32,000$48,000 is included in cost of sales. For the ninesix months ended June 30, 2022, $1,552,000March 31, 2023, $1,361,000 of this expense is included in selling, general and administrative expense, and $95,000$83,000 is included in cost of sales. The Company recorded $343,055$570,000 and $966,290$1,010,000 of compensation expense related to current and past restricted stock grants, non-qualified stock options, and the Company’s ESPP for the three and ninesix months ended June 30, 2021, respectively.March 31, 2022. For the three months ended June 30, 2021, $328,710March 31, 2022, $538,000 of this expense is included in selling, general and administrative expense, and $14,345 is included in cost of sales. For the nine months ended June 30, 2021, $923,256 of this expense is included in selling, general and administrative expense, and $43,034$32,000 is included in cost of sales. As of June 30, 2022, $4,020,000March 31, 2023, $6,681,000 of total unrecognized compensation expense related to non-vested restricted stock awards and stock options is expected to be recognized over a period of approximately 2.42.6 years.
Stock Options
The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the ninesix months ended June 30, 2022, March 31, 2023, the Company granted employees non-qualified stock options to purchase an aggregate of 62,73019,084 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 $66.48.$95.06 per share. During the ninesix months ended June 30, 2021, ending March 31, 2022, the Company granted employees non-qualified stock options to purchase an aggregate of 105,08962,730 shares of common stock with a weighted average contractual term of five years, a weighted average three-yearthree-year vesting term, and a weighted average exercise price of $23.74$66.48 per share.
The fair value of stock option awards during the ninesix months ended June 30, 2022 March 31, 2023 was estimated as of the respective grant dates using the assumptions listed below:
| ||||
Dividend yield | 0 | % | ||
Expected volatility | % | |||
Risk-free interest rate | % | |||
Expected life | 3.5 | |||
Vesting period | 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-couponzero-coupon U.S. governmental bonds with a remaining life similar to the expected option term.
Options are granted with exercise prices at fair market values determined on the date of grant and vesting normally occurs over a three to five-year period. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares.
The following is a summary of stock option activity during the ninesix months ended June 30, 2022:March 31, 2023:
Number of options | Weighted average exercise price | Number of options | Weighted average exercise price | |||||||||||||
Outstanding as of September 30, 2021 | 301,514 | $ | 16.25 | |||||||||||||
Outstanding as of September 30, 2022 | 236,509 | $ | 31.30 | |||||||||||||
Granted | 62,730 | 66.48 | 19,084 | 95.06 | ||||||||||||
Exercised | (20,169 | ) | 13.70 | (18,709 | ) | 27.24 | ||||||||||
Forfeited or Expired | (2,084 | ) | 19.94 | - | - | |||||||||||
Outstanding as of June 30, 2022 | 341,991 | $ | 25.59 | |||||||||||||
Outstanding as of March 31, 2023 | 236,884 | $ | 36.76 |
The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. As of June 30, 2022, March 31, 2023, the weighted average remaining contractual term for all outstanding and exercisable stock options was 1.912.78 years and their aggregate intrinsic value was $6,824,000.$2,177,000.
Restricted Stock
The Company’s 20072022 Stock Compensation Plan permits itsthe Compensation Committee of the Board of Directors to grant stock-based awards, including stock options and restricted stock, to key employees and non-employee directors. The Company has made restricted stock grants that vest over one to ten years.
During the ninesix months ended June 30,March 31, 2023, the Company granted employees restricted stock awards totaling 34,674 shares of common stock, with a vesting term of approximately three years and a fair value of $72.26 per share. During the six months ended March 31, 2023, the Company granted the non-employee directors restricted stock awards totaling 6,818 shares of common stock, with a vesting term of approximately 1 year and a fair value of $61.56 per share.
During the six months ended March 31, 2022, the Company granted newly elected non-employee directors restricted stock awards totaling 318 and 2,758 shares of common stock, with a vesting term of approximately one year and a fair value of $62.77 and $63.35 per share, respectively. During the ninesix months ended June 30,March 31, 2022, the Company granted non-employees restricted stock awards totaling 3,118 shares of common stock, with a vesting term of approximately one year and a fair value of $64.11 per share. During the ninesix months ended June 30,March 31, 2022, the Company also granted employees restricted stock awards totaling 23,318 shares of common stock, with a vesting term of approximately three years and a fair value of $66.48 per share.
During the nine months ended June 30, 2021, the Company granted non-employee directors elected at the Company’s 2021 Annual Meeting of Shareholders restricted stock awards totaling 2,120 shares of common stock, with a vesting term of approximately one year and a fair value of $32.41 per share. During the nine months ended June 30, 2021, the Company also granted employees restricted stock awards totaling 37,687 shares of common stock, with a vesting term of approximately three years and a fair value of $23.74 per share.
Restricted stock transactions during the ninesix months ended June 30, 2022 March 31, 2023 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, 2021 | 108,839 | $ | 17.14 | |||||||||||||
Unvested shares as of September 30, 2022 | 98,508 | 31.51 | ||||||||||||||
Granted | 29,512 | 65.90 | 41,492 | 70.50 | ||||||||||||
Vested | (14,384 | ) | 25.02 | (25,759 | ) | 46.25 | ||||||||||
Forfeited | (2,749 | ) | 16.84 | - | ||||||||||||
Unvested as of June 30, 2022 | 121,218 | $ | 28.08 | |||||||||||||
Unvested as of March 31, 2023 | 114,241 | 27.83 |
Bonus Stock
During the six months ended March 31, 2023, the Company granted employees an aggregate of 9,144 shares of stock as a discretionary bonus for fiscal 2022 performance. The bonus stock consisted of common stock with no vesting period or restrictions. The fair value on the date of issuance was $104.36 per share.
Employee Stock Purchase Plan
The Company’s ESPP allows participating employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the ESPP provide those participating employees the ability to purchase the Company’s common stock on a voluntary after-tax basis. Employees may purchase the Company’s common stock at a price that is no less than the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period or phase. The ESPP is carried out in six-monthsix-month phases, with phases beginning on January 1 and July 1 of each calendar year. For the phase that ended on June 30, 2022 and December 31, 2021, 2022, employees purchased 5,605 and 7,6785,585 shares at a price of $52.66 and $32.43$53.52 per share, respectively.share. After the employee purchase on June 30,December 31, 2022, 181,590176,005 shares of common stock were available for future purchase under the ESPP.
Note 7.8. Revenue
Revenue Recognition
Net sales include products and shipping and handling charges. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the applicable sales contract. The Company recognizes revenue by transferring the promised products to the customer, with substantially all revenue recognized at the point in time the customer obtains control of the products. The Company recognizes revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of the Company’s sales contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
Disaggregation of Revenue
The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales outside the United States are principally to countries in Europe, the Caribbean, Canada, Central America and South America.
Revenues related to the following geographic areas were as follows for the three and ninesix months ended:
Three Months Ended June 30, | Nine Months Ended June 30, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
(In thousands) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
United States | $ | 68,788 | $ | 35,810 | $ | 170,010 | $ | 89,586 | $ | 58,671 | $ | 52,045 | $ | 134,409 | $ | 101,163 | ||||||||||||||||
All other countries | 2,462 | 2,925 | 5,844 | 5,933 | 13,138 | 1,450 | 23,342 | 3,441 | ||||||||||||||||||||||||
Total Net Sales | $ | 71,250 | $ | 38,735 | $ | 175,854 | $ | 95,519 | $ | 71,809 | $ | 53,495 | $ | 157,751 | $ | 104,604 |
The Company manufactures and sells a proprietary product linelines designed for the Broadband Service Provider marketplace. In addition, the Company’s Legacy business provides build-to-print services for original equipment manufacturers requiring copper and fiber cable assemblies built to their specification.specifications.
The percentages of ourthe Company’s sales by markets were as follows for the three and ninesix months ended:
Three Months Ended June 30, | Nine Months Ended June 30, | Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Broadband service providers | 99 | % | 98 | % | 99 | % | 98 | % | 96 | % | 99 | % | 97 | % | 99 | % | ||||||||||||||||
Legacy customers | 1 | % | 2 | % | 1 | % | 2 | % | ||||||||||||||||||||||||
Other customers | 4 | % | 1 | % | 3 | % | 1 | % | ||||||||||||||||||||||||
Total Net Sales | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative carriers, multiple system operators (“MSO’s,MSO’s” or Cable“Cable TV”), which are also referred to as Tier 2 and Tier 3 customers; National Carriers, which includes large national and global wireline and wireless providers, also referred to as Tier 1’s; Large Regional Service Providers, which are independent local exchange carriers (ILECs) with footprints of 500,000 subscribers and Internationalabove; and international customers. Other customers include sales of copper cable, build-to-print copper assemblies and other contract manufacturing.
Accounts Receivable
Credit is extended based on the evaluation of a customer’s financial condition, and collateral is generally not required. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company writes off accounts receivable when they become uncollectible; payments subsequently received on such receivables are credited to the allowance for doubtful accounts. As of both JuneMarch 31, 2023 and September 30, 2022, and September 30, 2021, the balance in the allowance for doubtful accounts was $79,000.
See Note 9 “Major Customer Concentration” for further information regarding accounts receivable and net sales.
Note 8. Inventories
Inventories consist of the following as of:
(In thousands) | June 30, 2022 | September 30, 2021 | ||||||
Raw materials | $ | 58,456 | $ | 23,072 | ||||
Work-in-process | 6,437 | 2,482 | ||||||
Finished goods | 6,131 | 3,361 | ||||||
Inventories, gross | 71,023 | 28,915 | ||||||
Inventory reserve | (1,683 | ) | (1,391 | ) | ||||
Inventories, net | $ | 69,341 | $ | 27,524 |
Note 9. Major Customer Concentration
For the three months ended June 30, 2022, CustomersMarch 31, 2023, Customer A and B comprised 18% and 11%17% of the Company’s net sales, respectively. Customers A and B are distributors.sales. For the ninesix months ended June 30, 2022, March 31, 2023, Customer A comprised 15%16% of the Company’s net sales. Customer A is a distributor.
For the three months ended June 30, 2021, March 31, 2022, Customers A and CB comprised 18%14% and 12%13% of the Company’s net sales, respectively. Customer A is a distributor and Customer B is a regional broadband service provider. For the ninesix months ended June 30, 2021, March 31, 2022, Customers A, B, and C comprised 20%13%, 12% and 11% of the Company’s net sales, respectively. Both of these customers were distributors.Customer A is a distributor and Customers B and C are regional broadband service providers. These major customers, like our other customers, purchase our products from time to time through purchase orders, and the Company does not have any agreements that obligate these major customers to purchase products from us in the future.
As of June 30, 2022, Customers A and DMarch 31, 2023, no customer comprised 13% and 11%10% or more of the Company’s accounts receivable. As of September 30, 2022, Customer D comprised 11% of accounts receivable. Customers D is a National Carrier. As of September 30, 2021, Customer E was 16% of accounts receivable. Customer E is a regional broadband service provider.distributor.
Note 10. Inventories
Inventories consist of the following as of:
(In thousands) | March 31, 2023 | September 30, 2022 | ||||||
Raw materials | $ | 79,564 | $ | 69,142 | ||||
Work-in-process | 5,298 | 4,592 | ||||||
Finished goods | 20,271 | 10,803 | ||||||
Inventories, gross | 105,133 | 84,537 | ||||||
Inventory reserve | (4,295 | ) | (2,329 | ) | ||||
Inventories, net | $ | 100,838 | $ | 82,208 |
Note 11. Goodwill and Intangibles
The Company analyzes its goodwill for impairment annually or at an interim period when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2021 2022, did not indicate an impairment of goodwill. During the ninesix months ended June 30, 2022, March 31, 2023, there were no triggering events that indicate potential impairment exists.
The Company capitalizes legal costs incurred to obtain patents. Once accepted by either the U.S. Patent Office or the equivalent office of a foreign country, these legal costs are amortized using the straight-line method over the remaining estimated lives, not exceeding 20 years. As of June 30, 2022, March 31, 2023, the Company has 3141 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 2018.2018 and the acquisition of Nestor Cables in fiscal year 2022. The Company analyzes its intangible assets for impairment annually or at interim periods when events occur or changes in circumstances indicate potential impairment. The result of the analysis performed as of September 30, 2021 2022, did not indicate an impairment of ourthe Company’s intangible assets. During the ninesix months ended June 30, 2022, March 31, 2023, there were 0no triggering events that indicate potential impairment exists.
Note 12. Segment Reporting
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
Upon closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
For the second quarter of fiscal 2023, the Company has two reportable segments: (1) Clearfield; and (2) Nestor Cables. Clearfield’s Finnish holding company, Clearfield Finland Ltd., purchased Nestor Cables Ltd, including its Estonian subsidiary, Nestor Cables Baltics Ltd., on July 26, 2022. These entities comprise the Nestor Cables Segment. Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure.
Financial results for the reportable segments are prepared on a basis consistent with the internal disaggregation of financial information to assist the CODM in making internal operating decisions. For consolidated reporting, the Company eliminates transactions between reportable segments.
The following table summarizes the amounts between the two reportable segments for the three and six months ended March 31, 2023:
Three months ended March 31, 2023 | ||||||||||||||||
(In thousands) | Clearfield | Nestor Cables | Eliminations | Consolidated | ||||||||||||
Revenue from external customers | $ | 60,451 | $ | 11,358 | $ | - | $ | 71,809 | ||||||||
Revenue from internal customers (Clearfield, Inc.) | - | 1,737 | (1,737 | ) | - | |||||||||||
Net investment income | 1,394 | 1 | - | 1,395 | ||||||||||||
Interest expense | - | 112 | - | 112 | ||||||||||||
Depreciation and amortization | 1,099 | 359 | - | 1,458 | ||||||||||||
Stock based compensation | 784 | - | - | 784 | ||||||||||||
Income taxes | 2,873 | 101 | - | 2,974 | ||||||||||||
Net income (loss) | 10,395 | 402 | (433 | ) | 10,364 | |||||||||||
Capital expenditures | 2,481 | 98 | - | 2,579 |
Six months ended March 31, 2023 | ||||||||||||||||
(In thousands) | Clearfield | Nestor Cables | Eliminations | Consolidated | ||||||||||||
Revenue from external customers | $ | 138,806 | $ | 18,945 | $ | - | $ | 157,751 | ||||||||
Revenue from internal customers (Clearfield, Inc.) | - | 2,923 | (2,923 | ) | - | |||||||||||
Net investment income | 1,694 | 4 | - | 1,698 | ||||||||||||
Interest expense | 170 | 186 | - | 356 | ||||||||||||
Depreciation and amortization | 2,110 | 712 | - | 2,822 | ||||||||||||
Stock based compensation | 1,444 | - | - | 1,444 | ||||||||||||
Income taxes | 6,646 | 23 | - | 6,669 | ||||||||||||
Net income (loss) | 25,113 | 92 | (586 | ) | 24,619 | |||||||||||
Capital expenditures | 4,490 | 308 | - | 4,798 |
The following table summarizes the amounts between the two reportable segments as of March 31, 2023 and September 30, 2022:
March 31, 2023 | ||||||||||||||||
(In thousands) | Clearfield | Nestor Cables | Eliminations | Consolidated | ||||||||||||
Goodwill | $ | 4,709 | $ | 1,878 | $ | - | $ | 6,587 | ||||||||
Total assets | 332,906 | 43,135 | (18,646 | ) | 357,395 |
September 30, 2022 | ||||||||||||||||
(In thousands) | Clearfield | Nestor Cables | Eliminations | Consolidated | ||||||||||||
Goodwill | $ | 4,709 | $ | 1,693 | $ | - | $ | 6,402 | ||||||||
Total assets | 214,785 | 31,023 | (16,680 | ) | 229,128 |
Note 11.13. 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 $8,475,000 as of March 31, 2023. Nestor Cables 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 ($13.6 million as of March 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 Cables’ 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 March 31, 2023, was 3.48%. These agreements are indefinite with a termination notice period ranging from zero to one month.
Note 14. Income Taxes
For the three and ninesix months ended June 30, 2022, March 31, 2023, the Company recorded income tax expense of $3,884,000$2,974,000 and $9,480,000,$6,669,000 reflecting an effective tax rate of 23.4%22.3% and 22.7%21.3%, respectively. The difference between the effective tax rate and the statutory tax rate for the three and ninesix months ended June 30, 2022 March 31, 2023 was primarily related to excess tax benefits from non-qualified stock option exercises and vesting of restricted stock, Section 162(m)162(m) compensation deduction limitations, nondeductible acquisition costs, foreign derived intangibles income (FDII) deduction, (FDII), and research and development credits.
For the three and ninesix months ended June 30, 2021, March 31, 2022, the Company recorded income tax expense of $1,725,000$2,816,000 and $3,344,000,$5,596,000, reflecting an effective tax rate of 22.1%23.4% and 20.6%22.2%, respectively. The differencesdifference between the effective tax rate and the statutory tax rate for the three and ninesix months ended June 30, 2021 wereMarch 31, 2022 was primarily related
to excess tax benefits from non-qualifiedrestricted stock options exercisedvesting during the period, research and development credits, andSection 162(m) compensation deduction limitations, other nondeductible expenses, foreign derived intangibles income deduction, (FDII).and research and development 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 and determined that as of JuneMarch 31, 2023 and September 30, 2022, and September 30, 2021 a valuation allowance against the deferred tax assets is not required. The Company will continue to assess the need for a valuation allowance based on changes in assumptions of estimated future income and other factors in future periods.
As of June 30, 2022, March 31, 2023, the Company does not have any unrecognized tax benefits. It is the Company’s practice to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not expect any material changes in its unrecognized tax positions over the next 12 months.
Note 12.15. Leases
The Company leases an 85,000 square foot facility at 7050 Winnetka Avenue North,in 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.
In July 2021, the Company entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico.Mexico that operates as a Maquiladora. The lease term is for 7seven years, of which 5five years are mandatory, commencing in March 2022. The lease contains written options to renew for two additional consecutive periods of 5five 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.
On November 19, 2021, the Company signed a lease for a 105,000 square foot warehouse in Brooklyn Park, Minnesota. The lease term is five years commencing in March 2022 and ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option.
Nestor Cables leases an approximately 25,000 square foot manufacturing facility in Oulu, Finland, which is utilized for the operations of Nestor Cables. The original lease term ended on October 31, 2022, but auto renews indefinitely until terminated with two years written notice. It is not reasonably certain that Nestor Cables will not exercise the termination option. The lease commenced incalls for monthly rental payments of approximately $40,000. Rent is increased each year on January 1st based upon the second quarter of fiscal 2022.cost-of-living index published by the Finnish government.
Right-of-use lease assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods the Company is reasonably certain to exercise. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense included within cost of goods sold and selling, general and administrative expense was as follows for the three and nine months ended:
Operating lease expense within: | Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
Operating lease expense within: (in thousands) | Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Cost of sales | $ | 797 | $ | 242 | $ | 1,521 | $ | 748 | $ | 995 | $ | 439 | $ | 1,958 | $ | 724 | ||||||||||||||||
Selling, general and administrative | 54 | 51 | 166 | 162 | 63 | 57 | 119 | 112 | ||||||||||||||||||||||||
Total lease expense | $ | 851 | $ | 293 | $ | 1,687 | $ | 910 | $ | 1,058 | $ | 496 | $ | 2,077 | $ | 836 |
Future maturities of lease liabilities were as follows as of June 30, 2022 (inMarch 31, 2023 (in thousands):
FY2022 (Remaining) | $ | 778 | ||||||
FY2023 | 3,158 | |||||||
FY2023(Remaining) | $ | 2,067 | ||||||
FY2024 | 3,233 | 3,890 | ||||||
FY2025 | 2,997 | 3,063 | ||||||
FY2026 | 2,844 | 2,870 | ||||||
FY2027 | 1,196 | |||||||
Thereafter | 1,196 | - | ||||||
Total lease payments | 14,206 | 13,086 | ||||||
Less: Interest | (951 | ) | (610 | ) | ||||
Present value of lease liabilities | $ | 13,255 | $ | 12,476 |
The weighted average term and weighted average discount rate for the Company’s leases as of June 30, 2022 March 31, 2023 were 4.473.79 years and 3.23%, respectively, compared to 4.71 years and 3.05%, respectively, compared to 3.09 years and 3.41%, respectively, as of June 30, 2021. March 31, 2022. For the three and ninesix months ended June 30, 2022, March 31, 2023, the operating cash outflows from the Company’s leases was $617,000were $950,000 and $1,167,000,$1,907,000, respectively, compared to $243,000$238,000 and $723,000$550,000, respectively, for the three and ninesix months ended June 30, 2021.March 31, 2022.
Note 13. Line of Credit16. Debt
On April 27, 2022, the Company entered into a loan agreement and a security agreement with Bremer Bank, National Association,a bank that provides the Company with a $40 million$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-monthone-month term Secured Overnight Financing Rate (“SOFR”) plus 1.85%, but not less than 1.80% per annum. As of September 30, 2022, the Company had outstanding debt of $16,700,000 against its line of credit. During the quarter ended December 31, 2022, the Company paid the outstanding balance of the revolving line of credit. As of March 31, 2023, the outstanding balance on the revolving line of credit was zero and the interest rate was 6.52%. The loan agreement and the security agreement containscontain customary affirmative and negative covenants and requirements relating to the Company and its operations, including a requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year then ended and maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing twelve (12) (12) month period. Debt service coverage ratio is the ratio of Cash Available for Debt Service to Debt Service, each as defined in the loan agreement. Debt and Cash Flow are also as defined in the loan agreement for the purposes of the debt to cash flow ratio covenant. As of June 30, 2022, March 31, 2023, the Company had no outstanding balance on the line of credit and was in compliance with all covenants. See Note 14. Subsequent Events..
Note 14. Subsequent EventsThe line of credit is collateralized by the assets of the Clearfield segment.
On July 26, 2022, the Company completed the acquisition ofDuring March 2021, Nestor Cables Oy (“Nestor”), a leading developer and manufacturer of fiber optic cable solutions located in Finland, upon the terms and conditions contained in a Share Sale and Purchase Agreement 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 May 17, 2022. March 31, 2024. The total purchase priceloan is fully secured by a Finnish government guarantee. If used for any purposes other than stockpiling, the lender has the right to terminate the agreement and the acquisition date fair valueentire outstanding balance will become due. As of the consideration transferred for the shares totaled €7.9 millionMarch 31, 2023, Nestor Cables was in addition to €7.6 million related to the repaymentcompliance with all covenants. The interest expense associated with this loan has been presented net of certain of Nestor’s debt. The purchase price was funded from a draw of $16.7 million undergovernment payments on the Company’s revolving lineconsolidated statement of credit. The Company is in the process of finalizing the purchase accounting under ASC 805- Business Combinations.earnings.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events and typically address the Company’s expected future business and financial performance. Words such as “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically identify these forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual results could differ from those projected in any forward-looking statements because of the factors identified in and incorporated by reference from Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended September 30, 20212022 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q, as well as in other filings we make with the Securities and Exchange Commission, which should be considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements included herein are made as the date of this Quarterly Report on Form 10-Q and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.
The following discussion and analysis of the Company’s financial condition and results of operations as of and for the three and ninesix months ended June 30,March 31, 2023 and 2022 and 2021 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, 2021.2022.
OVERVIEW
General
Clearfield, Inc. (“Clearfield” or, together with its subsidiaries, is referred to in this report as “we,” “us,” “our,” and the “Company”) designs, manufactures,“Company.” We design, manufacture, and distributesdistribute 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 and Europe. Our “fiber to the anywhere” platform serves the unique requirements of leading Broadband Service Providers in the United States (“U.S.”), which include Community Broadband, MSO’s, Large Regional Service Providers, and National Carriers, while also serving the broadband needs of the International markets, primarily countries in Europe, the Caribbean, Canada, and Central and South America. These customers are collectively included in Broadband Service Providers. The Company also provides contract manufacturing services for its Legacy customers which include original equipment manufacturers (OEM) requiring copper and fiber cable assemblies built to their specifications.
We are engaged in global operations. Our operations are currently comprised of two reportable segments: the Clearfield Operating Segment (referred to herein as “Clearfield”) and, since July 26, 2022, the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”). Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure.
On July 26, 2022, the Company acquired Nestor Cables Ltd, a leading developer and manufacturer of fiber optic cable solutions located in Finland. The purchase of Nestor Cables is expected to provide the Company with the ability to vertically integrate the supply of fiber optic cables and help meet customer demand for its products. Nestor Cables’ technical expertise is expected to extend the supply of the Company’s FieldShield products into the North American market to reduce cost and complexity of transportation.
Upon closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
Nestor Cables Operating Segment
As of July 26, 2022, Clearfield, through its Finnish subsidiary, Clearfield Finland Ltd, acquired Nestor Cables. Nestor Cables is based in Oulu, Finland, with operations in Keila, Estonia through its wholly-owned subsidiary, Nestor Cables Baltics Ltd. Nestor Cables manufactures fiber optic and copper telecommunication cables and equipment, which it distributes to telecommunication operators, network owners, electric companies, building contractors, and industrial companies. Prior to the acquisition, Nestor Cables had been a supplier to Clearfield for over a decade and that relationship continued following the closing of the acquisition. Nestor Cables has two types of production processes, the process of making cable in its Finland facility and the finished assembly portion of its business performed in Estonia. Nestor Cables’ customer base includes telecom operators, network owners, contractors, industries and wholesalers. Products are sold via distributors and directly to end users. Nestor Cables is subject to Finnish government regulation, and Nestor Cables Baltics is subject to Estonian government regulation.
Clearfield Operating Segment
Clearfield is focused on providing fiber management, fiber protection, and fiber delivery products that accelerate the turn-up of gigabit speed bandwidth to residential homes, businesses, and network infrastructure in the wireline and wireless access network. We offer a broad portfolio of fiber products that allow service providers to build fiber networks faster, meet service delivery demands, and align build costs with take rates.
Clearfield’s products allow its customers to connect homes in their Fiber to the Home (“FTTH”) builds by using fewer resources in less time. Our products speed up the time to revenue for our service provider customers in Multiple Dwelling Units (“MDUs”) and Multiple Tenant Units (“MTUs”) by reducing the amount of labor and materials needed to provide gigabit service. Our products help make business services more profitable through faster building access, easier reconfiguration and quicker services turn-up. Finally, Clearfield is removing barriers to wireless 4G/5G small cell, Cloud Radio Access Network (“C-RAN”), and distributed antenna system (“DAS”) deployments through better fiber management, test access, and fiber protection. The Company has historically focused on the unserved or underserved rural communities that receive voice, video and data services from independent telephone companies. By aligning its in-house engineering and technical knowledge alongside its customers, the Company has been able to develop, customize and enhance products from design through production. Final build and assembly of the Company’s products is completed at Clearfield’s manufacturing facilities in Brooklyn Park, Minnesota, and the manufacturing facility in Tijuana, Mexico that operates as a Maquiladora, with manufacturing support from a network of domestic and global manufacturing partners. Clearfield specializes in producing these products on both a quick-turn and scheduled delivery basis. The Company deploys a hybrid sales model with some sales made directly to customers, some made through two-tier distribution (channel) partners, sales agents and manufacturing representatives, and some sales made through original equipment suppliers who private label their products.
Under U.S. federal and state guidance in response to the COVID-19 pandemic, Clearfield’s operations are classified as part of the Cybersecurity and Infrastructure Security Agency (“CISA”) critical infrastructure sector and similar categorization in Minnesota. In March 2020, we transitioned our corporate employees at our Brooklyn Park headquarters to remote work arrangements and they currently continue primarily working remote. In accordance with the Centers for Disease Control and Prevention (“CDC”) and World Health Organization (“WHO”) guidelines, we implemented and have continued health and safety measures for the production staff that remain onsite at our Brooklyn Park facility. We have maintained our manufacturing capacity in Brooklyn Park with these personnel at near historic levels. Similarly, we have implemented the recommended health and safety measures for the production staff that remains onsite at our Tijuana, Mexico manufacturing facilities. Throughout the COVID-19 pandemic, the Company has closely monitored the operations and staffing levels at its Brooklyn Park facility and its manufacturing operations in Tijuana, Mexico.
Due to the risks to timely supply of materials to our facilities, we have taken multiple actions to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilities. Additionally, we made the decision to maximize the availability of all product lines at all of our plants by assuring that each location can manufacture across our broad product portfolio. These actions, combined with our historic practice of dual sourcing most of our components, has positioned us to meet our obligations to customers and to fulfill our sales order backlog. However, in the event of serious border restrictions or border delays, continuing or worsening component material shortages, supply chain transportation delays, or other serious disruption in our supply chain, we may experience diminished or temporarily suspended operations, longer lead times than typical for product deliveries, or temporarily suspended product deliveries, which would result in delayed or reduced revenue from the affected orders in production and higher operating costs. In addition, due to the unprecedented lead-times and challenges in the global supply chain, we are working with our customers to place longer lead-time purchase orders to ensure availability of components and materials from our supply chain. Based on current supply chain dynamics, lead times have stretched to 8 to 20 weeks or longer for certain product categories. The Company is working to manage lead times to more historic levels from receipt of purchase order. As part of our forward-looking capacity planning in order to meet the significant demand for our products, we’ve expanded our operations with two new facilities which came online in the second quarter of fiscal 2022. Our new manufacturing center in Mexico provides us with 318,000 square feet of capacity, and our new distribution center in Minnesota adds 105,000 square feet.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2022MARCH 31, 2023 VS. THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022
Net sales for the thirdsecond quarter of fiscal 20222023 ended June 30, 2022March 31, 2023 were $71,250,000,$71,809,000, an increase of approximately 84%34%, or $32,515,000,$18,314,000, from net sales of $38,735,000$53,495,000 for the thirdsecond quarter of fiscal 2021.2022. Net sales to Broadband Service Providers were $70,667,000$69,168,000 in the thirdsecond quarter of fiscal 20222023 versus $38,098,000$52,832,000 in the same period of fiscal 2021.2022. Among this group, the Company recorded $2,462,000$13,138,000 in international sales for the thirdsecond quarter of fiscal 20222023 versus $2,925,000$1,450,000 in the same period of fiscal 2021.2022. Net sales to Legacy customers were $583,000$593,000 in the thirdsecond quarter of fiscal 20222023 versus $637,000$662,000 in the same period of fiscal 2021.2022. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 3%18% and 8%3% of total net sales for the thirdsecond quarter of fiscal 2023 and 2022, respectively. The increase in sales to international customers was primarily due to the acquisition of Nestor Cables as its sales are to European and 2021, respectively.other non-U.S. customers.
The increase in net sales for the quarter ended June 30, 2022March 31, 2023 of $32,515,000$18,314,000 compared to the quarter ended June 30, 2021March 31, 2022 was driven primarily by increased sales to international customers, Community Broadband Service Providers, and MSO customers of $19,968,000.$11,676,000, $6,888,000, and $2,818,000, respectively. The increase in sales to theseinternational customers was primarily driven by the acquisition of Nestor Cables, which accounted for $11,358,000 of international sales. The increase in sales to Community Broadband and MSO customers was due to continuing increased demand for fiber connectivity products in response to COVID-19 driven by customers accelerating their purchasing decisions and deployment schedules of our fiber optic solutions and the need for high-speed broadband required insince the workpandemic.
Order backlog as of March 31, 2023 was $107,586,000, a decrease of 21% compared to $136,269,000 as of December 31, 2022, and a decrease of $27,920,000, or 21%, from anywhere environment.March 31, 2022. The decrease was due to the Company’s ability to fulfill customer orders more quickly and a return to pre-pandemic ordering patterns.
Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by global supply chain issues, and customer deployment schedules.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 thirdsecond quarter of fiscal 20222023 was $41,943,000,$48,246,000, an increase of $20,345,000,$17,915,000, or 94%59%, from $21,598,000$30,331,000 in the comparable period of fiscal 2021.2022. Gross profit percent was 41.1%32.8% of net sales in the thirdsecond quarter of fiscal 2022,2023, a decrease from 44.2%43.3% of net sales for the thirdsecond quarter of fiscal 2021.2022. Gross profit increased $12,169,000$399,000, or 71%2.0%, to $29,307,000$23,563,000 for the three months ended June 30, 2022March 31, 2023, from $17,138,000$23,164,000 in the comparable period in fiscal 2021. The decrease2022. Gross profit margin was negatively affected by the buildup in capacity in the Company’s Clearfield segment that was not utilized. Gross profit was also affected by lower gross profit marginrealized in our Nestor Cables cable manufacturing business which was acquired in July 2022 and was not included in the comparable period of fiscal 2022. The Company expects to operate at these gross profit percentage levels for the quarter was primarily due to componentseveral quarters with improving margins realized as revenue levels increase and cost increases absorbed by the Company due to the inflationary economic environment, increased facility costs from our expanded Mexico manufacturing and Minnesota distribution center operations, and increased freight and transportation costs.reduction measures are realized. Despite the decrease in gross profit margin percentage, gross profit increased due to the increase net sales.remained relatively consistent.
Selling, general and administrative expenses increased $3,285,000$274,000, or 35%2%, to $12,721,000$11,507,000 in the thirdsecond quarter fiscal 20222023 from $9,436,000$11,233,000 for the fiscal 2021 third2022 second quarter. TheThis increase is the result of the addition of $1,345,000 operating expenses of the Nestor Cables business acquired in expense inJuly 2022, offset by the third quarterreversal of fiscal 2022 consists primarily of increases of $1,468,000 in compensation expense due to additional headcount and increased wages, higher performanceperformance-based compensation accruals driven by higher net sales, increased professional fees of $326,000, increased travel and entertainment expenses of $460,000 due to reduced COVID-19 travel restrictions inapproximately $1,032,000 during the prior year, and an increase of stock compensation expense of $277,000.fiscal 2023 second quarter.
Income from operations for the quarter ended June 30, 2022 was $16,586,000March 31, 2023 remained relatively consistent at $12,056,000 compared to $7,702,000$11,931,000 for the comparable quarter of fiscal 2021, an increase of approximately 115%. This increase is attributable to increased gross profit driven by higher sales to the Company’s Community Broadband, MSO and National Carrier customers, offset by higher selling, general and administrative expenses.2022.
Net investment income for the quarter ended June 30, 2022March 31, 2023, was $43,000$1,395,000 compared to $121,000 for the comparable quarter for fiscal 2021.2022. Net investment income for the quarter ended June 30,March 31, 2023 is compromised of interest income only. Net investment income for the quarter ended March 31, 2022, is comprised of solely$82,000 of interest income and $39,000 net realized gains on sales of investments during the quarter. The decreaseincrease in interest income is due to lowerhigher interest rates earned on investments ina higher investment balance during the thirdsecond quarter of fiscal 2022 and lower invested balances.2023. We expect net investmentinterest income to declineremain at these levels through the remainder of the fiscal year, subject to changes in market interest rates.
Interest expense for the quarter ended March 31, 2023 was $112,000. The increase was due to debt held by Nestor Cables. The Company did not have any interest expense during the lower interest rates and the decrease in the Company’s investment portfolio as partsecond quarter of the Company’s inventory and supply chain management strategy.fiscal 2022.
We recorded a provision for income taxes of $3,884,000$2,974,000 and $1,725,000$2,816,000 for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively. We record our quarterly provision for income taxes based on our estimated annual effective tax rate for the year. The increase in tax expense of $2,159,000 in the third quarter of fiscal 2022$158,000 from the thirdsecond quarter for fiscal 20212022 is primarily due to increased income from operations.operations, partially offset by the decrease in the effective tax rate. The income tax expense rate for the thirdsecond quarter of fiscal 2023 decreased to 22.3%, from 23.4% recorded in the second quarter of fiscal 2022, increaseddue primarily to 23.4%, from 22.1% recorded in the third quarter of fiscal 2021, due to increased permanent addback items including nondeductible compensation and transaction costs.decreased non-deductible expenses.
The Company’s net income for the three months ended June 30, 2022March 31, 2023 was $12,745,000,$10,364,000, or $0.93$0.67 per basic share or $0.92 perand diluted share. The Company’s net income for the three months ended June 30, 2021March 31, 2022 was $6,098,000,$9,236,000, or $0.44$0.67 per basic share and $0.66 per diluted share. The increase in basic and diluted earnings per share for the three months ended June 30, 2022March 31, 2023 as compared to June 30, 2021March 31, 2022 was due to higher net income.income, offset by the additional shares issued during the first quarter of fiscal 2023.
NINESIX MONTHS ENDED JUNE 30, 2022MARCH 31, 2023 VS. NINESIX MONTHS ENDED JUNE 30, 2021MARCH 31, 2022
Net sales for the ninesix months ended June 30, 2022March 31, 2023 were $175,854,000,$157,751,000, an increase of approximately 84%50%, or $80,335,000,$53,147,000, from net sales of $95,519,000$104,604,000 for the ninesix months ended June 30, 2021.March 31, 2022. Net sales to Broadband Service Providers were $173,907,000$152,779,000 in the ninesix months ended June 30, 2022March 31, 2023 versus $93,569,000$103,238,000 in the same period of fiscal 2021.2022. Among this group, the Company recorded $5,844,000$23,342,000 in international sales for the ninesix months ended June 30, 2022March 31, 2023 versus $5,933,000$3,456,000 in the same period of fiscal 2021. Net sales to Legacy customers were $1,947,000 in the nine months ended June 30, 2022 versus $1,951,000 in the same period of fiscal 2021.2022. The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 3%15% and 6%3% of total net sales for the ninesix months ended March 31, 2023 and March 31, 2022, and 2021.respectively. Net sales to Legacy customers were $1,343,000 in the six months ended March 31, 2023 versus $1,433,000 in the same period of fiscal 2022.
The increase in net sales for the ninesix months ended June 30, 2022March 31, 2023 of $80,335,000$53,147,000 compared to the ninesix months ended June 30, 2021March 31, 2022 was driven primarily by increased sales to Community Broadband Service Providers, MSO, and MSOinternational customers of $55,238,000,$70,757,000, $31,039,000 and $16,628,000,$23,342,000, respectively. The increase to Community Broadband and MSO customers was due to continuing increased demand for fiber connectivity products in response to COVID-19 driven by customers accelerating their purchasing decisions and deployment schedules of our fiber optic solutions and the need for high-speed broadband requiredsince the pandemic. The increase in sales to international customers was primarily driven by the work from anywhere environment.acquisition of Nestor Cables, which accounted for $18,945,000 of international sales.
Revenue from customers is obtained from purchase orders submitted from time to time, with a limited number of customers recently issuing purchase orders for longer time frames. The Company’s ability to predict orders in future periods or trends affecting orders in future periods is limited. The Company’s ability to predict revenue is further limited by global supply chain issues.issues, customer deployment schedules and factors affecting customer ordering patterns. The Company’s ability to recognize revenue in the future for customer orders will depend on the Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for the ninesix months ended 2022March 31, 2023 was $100,411,000,$103,539,000, an increase of $46,341,000,$45,071,000, or 86%77%, from $54,071,000$58,468,000 in the comparable period of fiscal 2021.2022. Gross profit percent was 42.9%34.4% of net sales for the ninesix months ended June 30, 2022,March 31, 2023, a decrease from 43.4%44.1% of net sales for the ninesix months ended June 30, 2021.March 31, 2022. Gross profit increased $33,994,000$8,076,000, or 82%18%, to $75,442,000$54,212,000 for the ninesix months ended June 30, 2022March 31, 2023, from $41,449,000$46,136,000 in the comparable period in fiscal 2021. The2022. Gross profit margin was negatively affected by the buildup in capacity in the Company’s Clearfield segment that was not utilized. Gross profit was also affected by lower gross profit realized in our Nestor Cables cable manufacturing business which was acquired in July 2022 and was not included in the comparable period of fiscal 2022. . Despite the decrease in gross profit margin was primarily duepercentage, gross profit remained relatively consistent. Given the dynamics impacting the industry, including rising supply costs, as well as our exposure to increased facility costs from our expanded Mexico manufacturing and Minnesota distribution center operations, and increased freight and transportation costs.Large Regional Service Providers, we now expect gross margins to finish the fiscal year near 30%.
Selling, general and administrative expenses increased $8,294,000$3,111,000, or 32%15%, to $33,876,000$24,266,000 in the third quarter fiscal 2022six months ended March 31, 2023, from $25,582,000$21,155,000 for the comparable period of fiscal 2021.2022. The increase in expense infor the ninesix months ended June 30, 2022 consistsMarch 31, 2023 consisted primarily of increasesthe additional operating expenses of $4,357,000$2,643,000 from the Nestor Cables business acquired in July 2022, increased travel and entertainment expenses, and stock-based compensation, expense due to additional headcount and increased wages and performancepartially offset by reversal of performance-based compensation accruals driven by higher net sales, increased professional fees of $892,000, increased travel, entertainment, and trade show expenses of $990,000 due to reduced COVID-19 travel restrictions, increased stock compensation expense of $629,000 and a recovery of $210,000 related to a bad debt recovery induring the prior year.fiscal second quarter.
Income from operations for ninethe six months ended June 30, 2022March 31, 2023, was $41,567,000$29,946,000 compared to $15,867,000$24,981,000 for the comparable quarter of fiscal 2021,2022, an increase of approximately 162%20%. This increase is attributable to increased net sales, partially offset by lower gross profit driven by higher sales to the Company’s Community Broadband,margin percentage and MSO customers, offset by higherincreased selling, general and administrative expenses described above.expenses.
Net investment income for the ninesix months ended June 30, 2022March 31, 2023, was $284,000$1,698,000 compared to $378,000$241,000 for the comparable quarter for fiscal 2021. Net investment income for the nine months ended June 30, 2022 is comprised of $245,000 of interest income and $39,000 net realized gains on sales of investments.2022. The decreaseincrease in interest income is due to lowerhigher interest rates earned onand a higher average investments and lower invested balancesbalance in the ninesix months ended June 30, 2022.March 31, 2023. We expect net investmentinterest income to decline dueremain at the levels experienced during the three months ended March 31, 2023 through the remainder of the fiscal year, subject to the lowerchanges in market interest rates and the decreasechanges in the Company’s investment portfolio as part of the Company’s inventory and supply chain management strategy.average investments balance.
WeInterest expense for the quarter ended March 31, 2023, was $356,000. The Company did not have any interest expense during the second quarter of fiscal 2022. The increase in interest expense was due to $170,000 in interest on Clearfield’s line of credit which was repaid in the first quarter of fiscal 2023, and $186,000 in interest expense on debt held by Nestor Cables.
The Company recorded a provision for income taxes of $9,480,000$6,669,000 and $3,344,000$5,596,000 for the ninesix months ended June 30,March 31, 2023, and March 31, 2022, and 2021, respectively. We record ourThe Company records its quarterly provision for income taxes based on ourits estimated annual effective tax rate for the year. The increase in tax expense of $6,136,000$1,073,000 from the ninesix months ended June 30, 2021March 31, 2022, is primarily due to increased income from operations. The income tax expense rate for the ninesix months ended June 30, 2022 increasedMarch 31, 2023 decreased to 22.7%21.3%, from 20.6%22.2% recorded in the comparable period of fiscal 2021,2022, due to increased permanent addback items including nondeductable compensation and transaction costs.decreased non-deductible expenses.
The Company’s net income for the ninesix months ended June 30, 2022March 31, 2023, was $32,370,000,$24,619,000, or $2.35$1.68 per basic share or $2.33$1.67 per diluted share. The Company’s net income for the ninesix months ended June 30, 2021March 31, 2022, was $12,901,000,$19,626,000, or $0.94$1.43 per basic andshare or $1.41 per diluted share. The increase in basic and diluted earnings per share for the ninesix months ended June 30, 2022March 31, 2023, as compared to June 30, 2021March 31, 2022 was due to higher net income.income, partially offset by the additional shares issued during the first quarter of fiscal 2023.
LIQUIDITY AND CAPITAL RESOURCESReportable Segments
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
On July 26, 2022, Clearfield, through its newly created Finnish subsidiary, Clearfield Finland Ltd, acquired all of the equity of Nestor Cables Ltd, which has a wholly-owned Estonian subsidiary, Nestor Cables Baltics Ltd. Following the closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Prior to July 26, 2022, the Company was considered to be in a single reporting segment and operating unit structure. Based upon the Company’s assessment following the acquisition of Nestor Cables, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
For the three and six months ended March 31, 2023, the Company has two reportable segments: (1) Clearfield and (2) Nestor Cables. The entities that comprise the Nestor Cables segment are Clearfield Finland Ltd, Nestor Cables Ltd and Nestor Cables Baltics Ltd.
Reportable segments are as follows:
● | Clearfield Segment –Clearfield designs, manufactures and sells fiber management, protection, and delivery solutions. |
● | Nestor Cables Segment –Nestor Cables designs, manufactures, and sells fiber optic and copper telecommunication cables and equipment. |
Clearfield Segment
The following table provides net sales and net income for the Clearfield Segment for the three and six months ended:
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Segment net sales | $ | 60,451 | $ | 53,495 | $ | 138,806 | $ | 104,604 | ||||||||
Segment net income | 10,395 | 9,236 | 25,113 | 19,626 |
Net sales in the Clearfield segment increased 13%, or $6,956,000, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Net sales in the Clearfield segment increased 33%, or $34,202,000, for the six months ended March 31, 2023 as compared to the six months ended March 31, 2022. The increase in net sales was driven by increased sales to the Company’s Community Broadband and MSO/Cable TV customers, offset by decreased sales to Large Regional Service Provider customers. The increased sales to Community Broadband and MSO/Cable TV customers was due to continuing demand for fiber connectivity products and the demand for high-speed broadband since the pandemic. The decreased sales to Large Regional Service Provider customers was due to slower inventory consumption from these customers who had accumulated an excess inventory position during the COVID-19 pandemic.
Net income in the Clearfield segment for the three months ended March 31, 2023 increased 13%, or $1,159,000, as compared to the three months ended March 31, 2022. Net income in the Clearfield segment for the six months ended March 31, 2023 increased 28%, or $5,487,000, as compared to the six months ended March 31, 2022 The increase in net income was driven by the increase in sales outlined aboveand decreased selling, general and administrative expenses resulting from the reversal of performance-based compensation accruals, partially offset by lower gross profit margin due to buildup in capacity that was not utilized.
Nestor Cables Segment
The following table provides net sales and net income for the Nestor Cables segment for the three and six months:
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
(In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Segment net sales to external customers | $ | 11,358 | $ | - | $ | 18,945 | $ | - | ||||||||
Segment net income | 402 | - | 92 | - |
Nestor Cables was acquired on July 26, 2022. Prior to the acquisition, the Company operated as one reporting segment.
Net sales in the Nestor Cables segment for the three and six months ended March 31, 2023 were $11,358,000 and $18,945,000, respectively, excluding sales to the Clearfield Segment.
Net income in the Nestor Cables segment for the three and six months ended March 31, 2023 was $402,000 and $92,000, respectively.
Liquidity and Capital Resources
As of June 30, 2022,March 31, 2023, our principal source of liquidity was our cash, cash equivalents, and short-term investments and line of credit.investments. Those sources total $18,086,000$157,065,000 as of June 30, 2022March 31, 2023 compared to $23,590,000$22,452,000 as of September 30, 2021. Our2022. Additionally, we have a line of credit isfor $40 million andthat has no borrowings against itoutstanding borrowing as of June 30, 2022.March 31, 2023. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury securities, and money market accounts.funds. Investments considered long-term were $24,994,000$8,527,000 as of June 30, 2022,March 31, 2023, compared to $36,913,000$22,747,000 as of September 30, 2021.2022. We believe the combined balances of short-term cash and investments, long-term investments, along with outour line of credit provide a more accurate indication of our available liquidity. At the endAs of the third quarter of fiscal 2022,March 31, 2023, our cash, cash equivalents, and short-term and long-term investments totaled $43,080,000. We had no long-term debt obligations$165,592,000, compared to $45,199,000 as of June 30, 2022 or September 30, 2021.2022.
We believe our existing cash equivalents, short-term investments, and line of credit facility along with cash flow from operations will be sufficient to meet our working capital and investment requirements for beyond the next 12 months. The Company intends on utilizing its available cash and assets primarily for its continued organic growth including the acquisition of Nestor on July 26, 2022, expanding production capacity and facilities, as well as inventory growth to meet previously anticipated customer demand, and potential future strategic transactions, and the Company’s share repurchase program, as well as to mitigate the potential impacts on the Company’s business due to COVID-19 or supply chain, logistics, and customer fulfillment risks.
Operating Activities
Net cash provided by operating activities totaled $10,141,000 for the six months ended March 31, 2023. This was primarily due to net income of $24,619,000, non-cash expenses for depreciation and amortization of $2,822,000, stock-based compensation of $1,444,000, and non-cash income related to amortization of discounts on investments of $1,139,000, in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities using cash was a decrease in accounts payable and accrued expenses of $14,273,000 and an increase in inventory of $17,243,000. The decrease in accounts payable and accrued expenses is due to the timing of payments to vendors. The Company increased stocking levels of inventory during the quarter ending March 31, 2023 to support previously anticipated demand. Days sales outstanding, which measures how quickly receivables are collected, decreased 3 days to 49 days as of March 31, 2023, compared to 52 days from September 30, 2022.
Net cash used by operating activities totaled $9,289,000$11,282,000 for the ninesix months ended June 30,March 31, 2022. This was primarily due to net income of $32,370,000,$19,626,000, non-cash expenses for depreciation and amortization of $2,205,000,$1,362,000, and stock-based compensation of $1,647,000$1,010,000 in addition to changes in operating assets and liabilities providing and using cash. The primary change in operating assets and liabilities using cash was an increase in inventory of $41,816,000,$33,394,000, and increases in accounts receivable of $12,156,000,$2,398,000, partially offset by increases in accounts payable and accrued expenses of $8,677,000.$3,344,000. The Company increased stocking levels of inventory during the quarter ending June 30,March 31, 2022 to support the Company’s increased sales order backlog, as well as provide for safety stock for anticipated demand considering currentthen-current long lead times for components and transportation within the global supply chain. We expect to maintainThe Company maintained higher than historic stocking levels through fiscal year 2022. The increase in accounts receivable iswas due to increased sales in the most recent quarter ending March 31, 2022 as well as timing of payments from customers. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding which measures how quickly receivables are collected, stayed consistent at 40decreased 3 days to 37 days from September 30, 2021 to June 30,March 31, 2022. The increase in accounts payable and accrued expenses iswas due to the timing of payments to vendors and inventory growth.
Net cash provided by operating activities totaled $8,117,000 for the nine months ended June 30, 2021. This was primarily due to net income of $12,901,000, non-cash expenses for depreciation and amortization of $1,726,000, and stock-based compensation of $966,000 in addition to changes in operating assets and liabilities providing cash. The primary changes in operating assets and liabilities using cash include an increase in inventory of $6,571,000, and accounts receivable of $5,896,000, offset by increases in accounts payable and accrued expenses of $5,043,000. The increase in accounts receivable is due to increased sales during the most recent quarter and the timing of payments from customers. Accounts receivable balances can be influenced by the timing of shipments for customer projects and payment terms. Days sales outstanding, which measures how quickly receivables are collected, increased five days to 38 days from September 30, 2020 to June 30, 2021. The increase in accounts payable and accrued expenses is due to the timing of payments to vendors in the quarter and $4,500,000 of fiscal 2021 incentive compensation accruals.
Investing Activities
We invest our excess cash in money market accounts,funds, U.S. Treasury securities and bank CDs in denominations across numerous banks.not exceeding FDIC insured levels. We believe we obtain a competitive rate of return given the economic climate along with the security provided by the FDIClow credit risk on these investments. During the ninesix months ended June 30,March 31, 2023, we received proceeds from maturities of investments of $100,743,000 and used cash to purchase $99,126,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $4,797,000 of cash during the six months ended March 31, 2023.
During the six months ended March 31, 2022, we received $17,386,000 on sales and maturities of investment securities and used cash to purchase $248,000 of investment securities. Purchases of property, plant and equipment, mainly related to manufacturing equipment and intangible assets, consumed $6,764,000$4,842,000 of cash during the ninesix months ended June 30,March 31, 2022.
During the nine months ended June 30, 2021, we used cash to purchase $11,904,000 of U.S. Treasury and FDIC-backed securities and received $10,044,000 on CDs that matured. Purchases of property, plant and equipment, mainly related to manufacturing equipment, consumed $1,275,000 of cash during the nine months ended June 30, 2021.
Financing Activities
For the ninesix months ended June 30,March 31, 2023, we received $130,262,000 of net proceeds through the issuance of common stock. We used $16,700,000 to pay down the principal on our line of credit, which was originally drawn in the fourth quarter of fiscal 2022 to fund the acquisition of Nestor Cables. We received $299,000 from employees’ participation and purchase of stock through our ESPP, we received $954,000 related to the issuance of stock as payment for incentive compensation previously earned, we used $471,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exercises of stock options, and used $954,000 for payment of withholding taxes for stock grants. We did not repurchase common stock under our share repurchase program in the six months ended March 31, 2023.
For the six months ended March 31, 2022, we received $544,000$249,000 from employees’ participation and purchase of stock through our ESPP, we used $379,000$282,000 related to share withholding for the exercise price and taxes associated with the issuance of common stock upon cashless exerciseexercises of stock options, and used $274,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We did not repurchase common stock under our share repurchase program in the ninesix months ended June 30,March 31, 2022.
For the nine months ended June 30, 2021, we received $383,000 from employees’ participation and purchase of stock through our ESPP, we used $456,000 related to share withholding for taxes associated with the issuance of common stock upon cashless exercise of stock options and used $54,000 to pay for taxes as a result of employees’ vesting of restricted shares using share withholding. We did not repurchase common stock under our share repurchase program in the nine months ended June 30, 2021.
As of June 30, 2022 and June 30, 2021, we had the authority to purchase approximately $14,981,000 and $4,981,000, respectively, in additional shares under the repurchase program announced on November 13, 2014 that was subsequently increased on April 25, 2017. Effective January 27, 2022, the Company reinstated its stock repurchase program that had been suspended due to COVID uncertainty in April 2020. In addition, effective January 27, 2022, the Company’s board of directors increased the share repurchase program by an additional $10 million to an aggregate of $22 million, from the previous $12 million.
CRITICAL ACCOUNTING ESTIMATES
Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company’s accounting estimates. The accounting estimates considered by management to be the most critical to the presentation of the financial statements because they require the most difficult, subjective and complex judgments include the fair value of investments, stock-based compensation, and valuation of inventory, long-lived assets, finite lived intangible assets and goodwill.
These accounting estimates are described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended September 30, 2021.2022. Management made no changes to the Company’s critical accounting estimates during the quarter ended June 30, 2022.March 31, 2023.
In applying its critical accounting estimates, management reassesses its estimates each reporting period based on available information. Changes in these estimates did not have a significant impact on earnings for the quarter ended June 30, 2022.March 31, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.The Company currently invests its excess cash in bank certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and United States Treasury (“Treasuries”) securities with terms of not more than five years, as well as money market funds. The fair value of these investments fluctuates subject to changes in market interest rates.
Foreign Exchange Rates:
The Company uses the U.S. dollar as its reporting currency. The functional currency of Nestor Cables is the Euro. The changing relationships of the U.S. dollar to the Euro could have a material impact on our financial results. Fluctuations in the Euro to U.S. dollar exchange rate impacts our consolidated balance sheets, as well as sales, cost of sales, and net income. If the Euro had appreciated or depreciated by 10%, relative to the U.S. Dollar, our operating expenses would have increased or decreased by approximately $135,000 and $264,000, or approximately 1%, for the three and six months ended March 31, 2023, respectively. We do not hedge against foreign currency fluctuations. As such, fluctuations in foreign currency exchange rates could have a material impact on the Company’s financial statements.
Inflation:
Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our profitability. We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials such as fiber cable and other components, which has outpaced our ability to reduce the cost structure and manufacturability or increase prices. We do not hedge commodity prices. Accordingly, inflation impacts our profitability, including cost of sales and operating expenses and may have a material impact on the Company’s consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2022.March 31, 2023. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes to the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, that occurred during the quarter ended June 30, 2022March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.reporting except that the Company continues to integrate and improve the internal control over financial reporting environment of the Nestor Cables segment.
There are no pending legal proceedings against or involving the Company for which the outcome is likely to have a material adverse effect upon its financial position or results of operations.
The most significant risk factors applicable to the Company are described in Part II, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended September 30, 2021, as updated in our Form 10-Q for the quarter ended March 31, 2022.2022, There have been no material changes from the risk factors previously disclosed except for the following:
If we are unable to complete acquisitions or integrate acquired businesses, our financial results could be materially and adversely affected.
From time to time, we evaluate acquisition candidates that may strategically fit our business objectives. On July 26, 2022, we closed the acquisition of Nestor Cables Ltd, a leading developer and manufacturer of fiber optic cable solutions located in Finland. The benefits that are expected to result from the Nestor acquisition or any future acquisition will depend, in part, on our ability to successful integrate Nestor within our anticipated timeframe. If we are unable to complete acquisitions or successfully integrate and develop acquired businesses, our financial results could be materially and adversely affected. The risks inherent in pursuing or completing an acquisition include:
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These risks associated with acquisition, integration of acquired businesses and management of our expanded international operations may have a material adverse effect on our sales, financial condition, and results of operations..
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company repurchased no shares of stock associated with exercise and satisfaction of employee tax withholding requirements on vesting or exercise of equity awards under the Company’s 2007 Stock Compensation Plan for the three months ended June 30, 2022. Accordingly, the Company’s purchases of equity securities for the three months ended June 30, 2022 were as follows:Not applicable.
ISSUER PURCHASES OF EQUITYITEM 3. DEFAULTS UPON SENIOR SECURITIES
Period | Total | Average | Total Number of | Approximate Dollar Value | ||||||||||||
April 1-30, 2022 | - | - | - | $ | 14,980,671 | |||||||||||
May 1-31, 2022 | - | - | - | 14,980,671 | ||||||||||||
June 1-30, 2022 | - | - | - | 14,980,671 | ||||||||||||
Total | - | - | - | $ | 14,980,671 |
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES5. OTHER INFORMATION
Not applicable.
Not applicable.
101 –The101–The following materials from Clearfield, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2022March 31, 2023 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) CondensedConsolidated Balance Sheets at June 30, 2022March 31, 2023 and September 30, 2021;March 31, 2022; (ii) CondensedConsolidated Statements of Earnings for the three and six months ended June 30, 2022March 31, 2023 and 2021;2022; (iii) CondensedConsolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2022March 31, 2023 and 2021;2022; (iv) CondensedConsolidated Statements of Cash Flows for the threesix months ended June 30, 2022March 31, 2023 and 2021;2022; and (v) Notes to the CondensedConsolidated Financial Statements.
104 - Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CLEARFIELD, INC. | |||
| /s/ Cheryl Beranek | ||
By: Cheryl Beranek Its: President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
| /s/ Daniel Herzog | ||
By: Daniel Herzog Its: Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |