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, 2021 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.
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The following discussion and analysis of the Company's financial condition and
results of operations as of and for the three and six months ended March 31,
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.
OVERVIEW
General
Clearfield, Inc. ("Clearfield" or the "Company") designs, manufactures, and
distributes fiber optic management, protection and delivery products for
communications networks. 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, and National Carriers, while
also serving the broadband needs of the International markets, primarily
countries in 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.
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 Tijuana, Mexico, with manufacturing
support from a network of domestic and global manufacturing partners. Clearfield
specializes in producing these products on both a quick-turn and scheduled
delivery basis. The Company deploys 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 sales 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 12 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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2022 VS. THREE MONTHS ENDED MARCH 31, 2021
Net sales for the second quarter of fiscal 2022 ended March 31, 2022 were
$53,495,000, an increase of approximately 80% or $23,802,000, from net sales of
$29,692,000 for the second quarter of fiscal 2021. Net sales to Broadband
Service Providers were $52,832,000 in the second quarter of fiscal 2022 versus
$28,934,000 in the same period of fiscal 2021. Among this group, the Company
recorded $1,450,000 in international sales for the second quarter of fiscal 2022
versus $1,948,000 in the same period of fiscal 2021. Net sales to Legacy
customers were $662,000 in the second quarter of fiscal 2022 versus $758,000 in
the same period of fiscal 2021. 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% and 7% of total
net sales for the second quarter of fiscal 2022 and 2021, respectively.
The increase in net sales for the quarter ended March 31, 2022 of $23,802,000
compared to the quarter ended March 31, 2021 was driven primarily by increased
sales to Community Broadband Service Providers, and MSO customers of
$19,306,000, and $3,335,000, respectively. The increase in sales to these
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 in the work from anywhere environment.
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. 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 second quarter of fiscal 2022 was $30,331,000, an increase
of $13,581,000, or 81%, from $16,750,000 in the comparable period of fiscal
2021. Gross profit percent was 43.3% of net sales in the second quarter of
fiscal 2022, a decrease from 43.6% of net sales for the second quarter of fiscal
2021. Gross profit increased $10,222,000 or 79%, to $23,164,000 for the three
months ended March 31, 2022 from $12,942,000 in the comparable period in fiscal
2021. The gross profit margin for the quarter remained relatively unchanged from
the prior year quarter.
Selling, general and administrative expenses increased $2,743,000 or 32%, to
$11,233,000 in the second quarter fiscal 2022 from $8,490,000 for the fiscal
2021 second quarter. The increase in expense in the second quarter of fiscal
2022 consists primarily of increases of $1,375,000 in compensation expense due
to additional headcount and increased wages and performance compensation
accruals driven by higher net sales, increased professional fees of $502,000,
increased travel and entertainment expenses of $228,000 due to reduced COVID-19
travel restrictions, increased stock compensation expense of $224,000 and a
recovery of $210,000 related to a bad debt recovery in the prior year.
Income from operations for the quarter ended March 31, 2022 was $11,931,000
compared to $4,451,000 for the comparable quarter of fiscal 2021, an increase of
approximately 168%. This increase is attributable to increased gross profit
driven by higher sales to the Company's Community Broadband, and MSO customers,
offset by higher selling, general and administrative expenses.
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Net investment income for the quarter ended March 31, 2022 was $121,000 compared
to $123,000 for the comparable quarter for fiscal 2021. Net investment income
for the quarter ended March 31, 2022 is comprised of $82,000 of interest income
and $39,000 net realized gains on sales of investments during the quarter. The
decrease in interest income is due to lower interest rates earned on investments
in the second quarter of fiscal 2022. We expect interest income to decline due
to the lower interest rates remaining in the Company's investment portfolio.
We recorded a provision for income taxes of $2,816,000 and $935,000 for the
three months ended March 31, 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 $1,881,000 from the second
quarter for fiscal 2021 is primarily due to increased income from operations.
The income tax expense rate for the second quarter of fiscal 2022 increased to
23.4%, from 20.4% recorded in the second quarter of fiscal 2021, due to
increased taxable income.
The Company's net income for the three months ended March 31, 2022 was
$9,236,000, or $0.67 per basic share or $0.66 per diluted share. The Company's
net income for the three months ended March 31, 2021 was $3,640,000, or $0.27
per basic and diluted share. The increase in basic and diluted earnings per
share for the three months ended March 31, 2022 as compared to March 31, 2021
was due to higher net income.
SIX MONTHS ENDED MARCH 31, 2022 VS. SIX MONTHS ENDED MARCH 31, 2021
Net sales for the six months ended March 31, 2022 were $104,604,000, an increase
of approximately 84% or $47,819,000, from net sales of $56,784,000 for the six
months ended March 31, 2021. Net sales to Broadband Service Providers were
$103,238,000 in the six months ended March 31, 2022 versus $55,507,000 in the
same period of fiscal 2021. Among this group, the Company recorded $3,441,000
in international sales for the six months ended March 31, 2022 versus $3,008,000
in the same period of fiscal 2021. Net sales to Legacy customers were
$1,365,000 in the six months ended March 31, 2022 versus $1,277,000 in the same
period of fiscal 2021. 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% and 5% of total net sales for
the six months ended 2022 and 2021.
The increase in net sales for the six months ended March 31, 2022 of $47,819,000
compared to the six months ended March 31, 2021 was driven primarily by
increased sales to Community Broadband Service Providers, and MSO customers of
$75,695,000, and $16,496,000, 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 required in the work from anywhere
environment.
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. 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 six months ended 2022 was $58,468,000, an increase of
$25,995,000, or 80%, from $32,473,000 in the comparable period of fiscal 2021.
Gross profit percent was 44.1% of net sales for the six months ended March 31,
2022, an increase from 42.8% of net sales for the six months ended March 31,
2021. Gross profit increased $21,825,000 or 90%, to $46,135,000 for the six
months ended March 31, 2022 from $24,311,000 in the comparable period in fiscal
2021. The increase in gross profit margin was primarily due to a favorable
product mix associated with higher net sales in the Company's Community
Broadband market, as well as improved manufacturing efficiencies realized with
higher sales volumes, offset by higher freight and transportation costs.
Selling, general and administrative expenses increased $5,009,000 or 31%, to
$21,155,000 in the second quarter fiscal 2022 from $16,146,000 for the
comparable period of fiscal 2021. The increase in expense in the six months
ended March 31, 2022 consists primarily of increases of $2,989,000 in
compensation expense due to additional headcount and increased wages and
performance compensation accruals driven by higher net sales, increased
professional fees of $543,000, increased travel and entertainment expenses of
$399,000 due to reduced COVID-19 travel restrictions, increased stock
compensation expense of $352,000 and a recovery of $210,000 related to a bad
debt recovery in the prior year.
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Income from operations for six months ended March 31, 2022 was $24,981,000
compared to $8,165,000 for the comparable quarter of fiscal 2021, an increase of
approximately 206%. This increase is attributable to increased gross profit
driven by higher sales to the Company's Community Broadband, and MSO customers,
offset by higher selling, general and administrative expenses.
Net investment income for the six months ended March 31, 2022 was $241,000
compared to $257,000 for the comparable quarter for fiscal 2021. Net investment
income for the six months ended March 31, 2022 is comprised of $202,000 of
interest income and $39,000 net realized gains on sales of investments. The
decrease in interest income is due to lower interest rates earned on investments
in the six months ended March 31, 2022. We expect interest income to decline due
to the lower interest rates remaining in the Company's investment portfolio.
We recorded a provision for income taxes of $5,596,000 and $1,619,000 for the
six months ended March 31, 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 $3,977,000 from the six months ended
March 31, 2021 is primarily due to increased income from operations. The income
tax expense rate for the six months ended March 31, 2022 increased to 22.2%,
from 19.2% recorded in the comparable period of fiscal 2021, due to increased
taxable income.
The Company's net income for the six months ended March 31, 2022 was
$19,626,000, or $1.43 per basic share or $1.41 per diluted share. The Company's
net income for the six months ended March 31, 2021 was $6,803,000, or $0.50 per
basic and diluted share. The increase in basic and diluted earnings per share
for the six months ended March 31, 2022 as compared to March 31, 2021 was due to
higher net income.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2022, our principal source of liquidity was our cash, cash
equivalents and short-term investments. Those sources total $14,662,000 as of
March 31, 2022 compared to $23,590,000 as of September 30, 2021. Our excess cash
is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury
securities and money market accounts. Investments considered long-term were
$28,448,000 as of March 31, 2022, compared to $36,913,000 as of September 30,
2021. We believe the combined balances of short-term cash and investments along
with long-term investments provide a more accurate indication of our available
liquidity. At the end of the second quarter of fiscal 2022, our cash, cash
equivalents and short-term and long-term investments decreased to $43.1 million
compared to $58.2 million as of the prior quarter end. We had no long-term debt
obligations as of March 31, 2022 or September 30, 2021.
Subsequent to the end of the quarter, we secured a $40 million revolving line of
credit from Bremer Bank, National Association that may also be a source of
future liquidity. See Note 13, Subsequent Events.
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 expanding production capacity and facilities
as well as inventory growth to meet customer demand, and potential future
strategic transactions, 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 used by operating activities totaled $11,282,000 for the six months
ended March 31, 2022. This was primarily due to net income of $19,626,000,
non-cash expenses for depreciation and amortization of $1,362,000, and
stock-based compensation of $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 $33,393,000,
and increases in accounts receivable of $2,398,000, partially offset by
increases in accounts payable and accrued expenses of $3,344,000. The Company
increased stocking levels of inventory during the quarter ending March 31, 2022
to support the Company's increased sales order backlog, as well as provide for
safety stock for anticipated demand considering current long lead times for
components and transportation within the global supply chain. We expect to
maintain higher than historic stocking levels through fiscal year 2022. The
increase in accounts receivable is due to increased sales in the most recent
quarter 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, decreased 3 days to 37 days from September 30, 2021 to March 31,
2022. The increase in accounts payable and accrued expenses is due to the timing
of payments to vendors and inventory growth.
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Net cash provided by operating activities totaled $6,699,000 for the six months
ended March 31, 2021. This was primarily due to net income of $6,803,000,
non-cash expenses for depreciation and amortization of $1,139,000, and
stock-based compensation of $623,000 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 accounts receivable of $2,908,000,
offset by increases in accounts payable and accrued expenses of $1,240,000. 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 40 days from September 30, 2020 to March 31,
2021. The increase in accounts payable and accrued expenses is due to the timing
of payments to vendors in the quarter and $2,373,000 of fiscal 2020 accrued
bonus compensation accruals paid in the first quarter of fiscal 2021.
Investing Activities
We invest our excess cash in money market accounts, U.S. Treasury securities and
bank CDs in denominations across numerous banks. We believe we obtain a
competitive rate of return given the economic climate along with the security
provided by the FDIC on these investments. 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 $4,842,000 of cash during the six months ended March
31, 2022.
During the six months ended March 31, 2021, we used cash to purchase $6,448,000
of investment securities and received $6,651,000 on investment securities that
matured. Purchases of property, plant and equipment, mainly related to
manufacturing equipment, consumed $682,000 of cash during the six months ended
March 31, 2021.
Financing Activities
For the six months ended March 31, 2022, we received $249,000 from employees'
participation and purchase of stock through our ESPP, we used $281,000 related
to share withholding for exercise and taxes associated with the issuance of
common stock upon cashless exercise of stock options and used $274,000 to pay
for taxes as a result of employees' vesting of restricted shares using share
withholding. We did not repurchase common stock under our share repurchase
program in the six months ended March 31, 2022.
For the six months ended March 31, 2021, we received $179,000 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 six months
ended March 31, 2021.
As of March 31, 2022 and March 31, 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.
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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. Management
made no changes to the Company's critical accounting estimates during the
quarter ended March 31, 2022.
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
March 31, 2022.
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CLEARFIELD, INC. 
