Clearfield, Inc. — Fiscal Q1 2023 Form 10-Q
Reporting period: Three months ended December 31, 2022, compared with the three months ended December 31, 2021. Results are unaudited. Clearfield designs, manufactures and distributes fiber protection, management and delivery solutions for broadband service providers and provides legacy build-to-print manufacturing services. Following the July 2022 acquisition of Nestor Cables, the Company reports Clearfield and Nestor Cables as separate operating segments.
Financial Results and Position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $85.9 million | $51.1 million | +68% |
| Gross profit | $30.6 million | $23.0 million | +33% |
| Gross margin | 35.7% | 44.9% | Down 9.2 percentage points |
| Income from operations | $17.9 million | $13.0 million | +37% |
| Net income | $14.3 million | $10.4 million | +37% |
| Diluted EPS | $1.00 | $0.75 | +33% |
| Operating cash flow | $1.1 million | $(0.03) million | Improved |
Net margin was approximately 16.6% versus 20.3% in the prior-year quarter. The effective tax rate was 20.6%, compared with 21.1%. Selling, general and administrative expense increased 29% to $12.8 million, including higher compensation, travel, professional fees, stock compensation and the first full quarter of Nestor operating expenses.
At December 31, 2022, cash and cash equivalents were $30.3 million, short-term investments were $117.5 million and long-term investments were $10.3 million. Total cash, cash equivalents and investments were $158.1 million. The Company had no outstanding balance on its $40 million revolving credit facility and $2.1 million of Nestor senior debt. Total liabilities were $57.9 million and shareholders’ equity was $293.9 million.
Operating cash flow was constrained by a $6.5 million increase in inventory and a $7.6 million decrease in accounts payable and accrued expenses. Inventory increased to $89.7 million, and days sales outstanding increased to 59 days from 52 days at September 30, 2022.
Material Changes Versus the Prior Comparable Period
- Sales increased $34.8 million, driven by higher demand from MSO/Cable TV customers, Community Broadband providers and international customers.
- Broadband service providers represented 97% of sales, compared with 99% in the prior-year quarter. International sales increased to $10.2 million, or 12% of sales, from $2.0 million, or 4%.
- Nestor Cables contributed $7.6 million of external sales and a $0.3 million net loss; it had not been part of the prior-year reporting structure.
- Gross margin declined to 35.7% from 44.9%, reflecting capacity investments, increased facility costs in Minnesota and Mexico, and lower margins in the Nestor cable manufacturing business.
- The Company completed a common stock offering generating $130.3 million of net proceeds and used $16.7 million to repay borrowings drawn for the Nestor acquisition.
- Order backlog was $136 million, down 17% from September 30, 2022, but up 34% from December 31, 2021, as fulfillment improved and customer ordering became more seasonal.
Guidance, Outlook, Risks and Unusual Items
Management expects gross margin to remain at approximately current levels for several quarters, with improvement as revenue increases later in the calendar year. The Company expects its Mexico cable manufacturing expansion related to Nestor to become operational in the second fiscal quarter. Management also expects investment income to increase because of higher invested balances and rising interest rates.
Management expects to maintain higher-than-historic inventory levels through fiscal 2023 to support backlog, safety stock requirements and long component and transportation lead times. Available liquidity is expected to fund working capital, capacity expansion, inventory growth, potential strategic transactions and other corporate purposes for beyond the next 12 months.
- Revenue visibility remains limited because customers generally purchase through purchase orders, and future orders are affected by deployment schedules, seasonality, supply-chain conditions and customer ordering strategies.
- Supply-chain, logistics, inflation, wage, component and commodity costs are pressuring profitability. The Company does not hedge commodity prices.
- Foreign exchange movements, particularly the euro against the U.S. dollar, affect Nestor’s results; the Company does not hedge foreign currency exposure.
- Available-for-sale investments had $1.9 million of gross unrealized losses at December 31, 2022. Management reported no other-than-temporary impairment and cited government or FDIC backing and intent to hold the securities.
- The Company was in compliance with debt covenants, and no material litigation was reported. Management stated that there were no material changes to previously disclosed risk factors.
- The Company is evaluating adoption of the current expected credit loss standard, which becomes effective in fiscal 2024.
Important Facts for Investors to Verify
- Whether Nestor Cables reaches profitability and whether its Mexico manufacturing expansion improves gross margins as planned.
- Whether backlog conversion, customer deployment schedules and seasonality support continued sales growth after the unusually strong prior periods.
- Inventory levels, working-capital conversion and accounts-receivable collection trends, including the 59-day days-sales-outstanding measure.
- The sustainability of the 35.7% gross margin and the timing and magnitude of expected margin recovery.
- Use of the $130.3 million equity offering proceeds, future capital expenditures, strategic transactions and any share repurchases.
- Exposure to inflation, supply-chain disruption, commodity costs and euro/U.S. dollar exchange-rate movements.
- Compliance with the revolving-credit facility’s financial covenants and repayment status of Nestor’s senior debt.