UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2016.
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
(State of incorporation)
41-1347235
(I.R.S. Employer Identification No.)
7050 Winnetka Avenue North
Suite 100
Brooklyn Park, Minnesota 55428
(Address of principal executive office)
(763) 476-6866
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
(Title of class)
Common Stock, par value $.01 per share
(Including Series B Junior Participating Preferred
Share Purchase Rights)
(Name of exchange on which
registered)
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
YES
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
YES
NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.
YES
NO
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES
NO
The aggregate market value of the voting and non-voting equity held by non-affiliates of the
registrant, as of the last business day of the registrant’s most recently completed second fiscal quarter
computed by reference to the price at which the common equity was last sold was approximately
$180,135,910.
The number of shares of common stock outstanding as of November 15, 2016 was 14,126,181.
Documents Incorporated by Reference:
Portions of our proxy statement for the 2017 Annual Meeting of Shareholders, to be filed within
120 days after the end of the fiscal year covered by this report, are incorporated by reference into Part III.
CLEARFIELD, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
1
PART I
ITEM 1.
BUSINESS ............................................................................................................................ 1
ITEM 1A. RISK FACTORS .................................................................................................................. 6
ITEM 1B. UNRESOLVED STAFF COMMENTS. .......................................................................... 13
PROPERTIES. ................................................................................................................... 13
ITEM 2.
ITEM 3.
LEGAL PROCEEDINGS. ................................................................................................ 13
ITEM 4. MINE SAFETY DISCLOSURES ..................................................................................... 13
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF
EQUITY SECURITIES. ................................................................................................... 14
SELECTED FINANCIAL DATA .................................................................................... 17
ITEM 6.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
14
CONDITION AND RESULTS OF OPERATIONS ....................................................... 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
ITEM 8.
ITEM 9.
MARKET RISK ................................................................................................................ 27
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................ 28
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. .................................................... 47
ITEM 9A. CONTROLS AND PROCEDURES ................................................................................. 47
ITEM 9B. OTHER INFORMATION ................................................................................................. 48
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
48
ITEM 11.
ITEM 12.
GOVERNANCE. ............................................................................................................... 48
EXECUTIVE COMPENSATION. ................................................................................... 48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ........................... 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE ....................................................................................... 48
PRINCIPAL ACCOUNTANT FEES AND SERVICES ................................................ 49
ITEM 14.
49
PART IV.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ...................................... 49
SIGNATURES........................................................................................................................................... 52
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PART I
ITEM 1.
BUSINESS
Background
Clearfield, Inc. (“Clearfield” or the “Company”) is a Minnesota corporation which was founded in 1979.
Our corporate headquarters are located at 7050 Winnetka Avenue North, Suite 100, Brooklyn Park,
Minnesota, 55428, and our corporate website is www.clearfieldconnection.com. The information available
on our website is not part of this Report. You can access, free of charge, our filings with the Securities and
Exchange Commission, including our annual report on Form 10-K, our quarterly reports on Form 10-Q,
current reports on Form 8-K and any other amendments to those reports, through the “About Clearfield”
link at our website, or at the Commission’s website at www.sec.gov.
Description of Business
Clearfield, Inc. manufactures, markets and sells an end-to-end fiber management and enclosure platform
that consolidates, distributes and protects fiber as it moves from the inside plant to the outside plant and all
the way to the home, business and cell site. The Company has extended this product line with a fiber
delivery platform of optical cable, connectors and microduct that delivers fiber to environments previously
not economically or environmentally viable. The Company has successfully established itself as a value-
added supplier to its target market of broadband service providers, including independent local exchange
carriers (Traditional Carriers) (telephone), multiple service operators (cable), wireless service providers,
competitive local exchange carriers (Alternative Carriers) and municipal-owned utilities. Clearfield has
continued to expand its product offerings and broaden its customer base during its years of operation.
By aligning its in-house engineering and technical knowledge alongside its customers’ needs, the Company
has been able to develop, customize and enhance products from design through production. Substantially
all of the final build and assembly is completed at Clearfield’s plants in Brooklyn Park, Minnesota and
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 the customer, some made through
two-tier distribution partners and some sales through original equipment suppliers who private label its
products.
Products
Clearview Cassette
The Clearview™ Cassette, a patented technology, is the main building block of the Company’s product
platform. The value of the building block approach is that Clearfield is the only company to provide the
needs of every leg of the telecommunications network with a single building block architecture, reducing
the customers’ cost of deployment by reducing labor costs associated with training and reducing inventory
carrying costs.
Clearview Classic and Clearview Blue: Clearview Classic and Clearview Blue, is a system of five parts
that nest together in the cassette’s main housing to support a wide range of applications. Parts can be added
or removed as needed to support the environment in which it is deployed. Clearview Blue, while fully
compatible with Clearview Classic, is designed for the utmost in modularity and scalability. It builds upon
the Clearview Classic by offering a smaller footprint and integrated slack storage and splicing functionality.
Clearview xPAK: Engineered to land small port count fiber terminations and optical components, the
patented xPAK is shipped flat and unassembled. Following simple pictorial user instructions, a technician
will assemble the device to match the field requirements of the installation site. Application environments
1
include cell back-haul, business class service delivery, node segmentation, fiber exhaust scenarios, utility
sub-stations or fiber-to-the-desk deployment.
Clearview Black: Designed to handle harsh environments, Clearview Black incorporates the same
flexibility and scalability of both the Clearview Classic and Clearview Blue in a 50% smaller footprint. All
types of fiber cable construction can be integrated within the cassette to support all patch only, patch and
splice (in-cassette), passive optical component hardware and multi-fiber push on plug-and-play scenarios.
Connectivity and Optical Components
The Clearview system consolidates, distributes and protects fibers as they move from the inside plant to the
home and business. These fibers are either connectorized directly for cable-to-cable deployment or are
connectorized onto optical components that may amplify or divide the signals they carry. We provide
products that meet a customer’s cable-to-cable deployment or optical component needs.
Cable-to-Cable Deployment: Fiber Deep is a class of fiber assemblies that guarantees performance at .02dB
insertion loss – fully half that of the industry standard. This metric extends the link loss budget effectively,
extending the distance upon which fiber can be deployed. In addition, achieving 2dB improvement in
optical budget reduces power consumption by 10%. The power savings, multiplied by even a small
thousand home network, is a significant contribution to a community’s sustainability efforts.
Optical Components: Clearfield packages optical components for signal coupling, splitting, termination,
multiplexing, demultiplexing and attenuation for a seamless integration within its fiber management
platform. This value-added packaging allows the customer to source from a single supplier and reduces
space requirements. The products are built and tested to meet the strictest industry standards ensuring
customers trouble-free performance in extreme outside plant environments.
FieldSmart
Utilizing the Clearview Cassette and xPAK as building blocks, FieldSmart is a series of panels, cabinets,
wall boxes and other enclosures that house the Clearview components to provide a consistent design from
the inside plant of the telco’s “central office” or cable television’s “head-end”, all the way through the
outside plant to the access network and through to the home. At each leg of the network, the FieldSmart
platform delivers a modular and scalable architecture that allows the service provider to align their capital
equipment expenditures alongside their subscriber revenues.
Inside Plant: The FieldSmart Fiber Crossover Distribution System (“FxDS”) and high density FieldSmart
FxHD provides complete fiber management modularity and scalability across the fiber network. Using the
Clearview building block approach, each fiber management element provides modularity of physical fiber
protection in the environment in which it is placed. Easily configured for initial placement and scaling
from 12-ports to a full rack of 1,728-ports, the FieldSmart FxDS requires only four unique blocks to
configure initial deployment. The user then places what is needed on the frame as subscriber take rates
dictate. The FxHD is an integrated fiber management solution delivered via the Clearview Blue Cassette.
With instant access to all cassettes, adapters, and jumpers, the frame is designed as a front access frame,
meaning all installation is done from one side of the frame providing the option to reclaim the aisle space
required for frame solutions that require rear access – and to use that space for other equipment or more
frames. The FxHD can be placed against a wall, within a cage in data center co-location environments, or
back to back.
Outside Plant: The FieldSmart Fiber Scalability Center (“FSC”) is a modular and scalable outside plant
cabinet that allows rollout of Fiber-to-the-Premise services by communication service providers without a
large initial expense. Each outside plant cabinet stores feeder and distribution splices, splitters, connectors
and slack cable neatly and compactly, utilizing field-proven designs to maximize bend radius protection,
connector access, ease of cable routing and physical protection, thereby minimizing the risk of fiber
2
damage. The FieldSmart Makwa incorporates all of the features found in our above ground cabinets and
adds the ability to deploy the FieldSmart FSC Distribution Hub in a below grade application. The FSC
product, with the Clearview cassette at its heart, has been designed to scale with the application environment
as demand requires and to reduce service turn-up time for the end-user.
Access Network: FieldSmart Fiber Delivery Point (“FDP”) is a series of enclosure systems that incorporates
the delivery of fiber connectivity to the neighborhood or business district in the most cost-effective footprint
possible. This family of wall-mount enclosures provides 12 to 144 ports of connectivity for multi-dwelling
unit fiber deployments, fiber demarcation, security systems (CCTV), telecommunications room needs and
horizontal/intermediate cross-connects.
Access Network: FieldSmart Small Count Delivery (“SCD”) is a series of enclosure systems that are
packaged to make landing small count fiber more cost-effective and efficient than previously thought
possible. This family of wall-mount enclosures, panels and drop cable cases provide up to 12 ports of
connectivity when fiber management is critical but high-count density is required. The FieldSmart SCD is
targeted for application environments such as cell backhaul, business class service delivery, node
segmentation, fiber exhaust in a field pedestal, sub-station turn-up or fiber-to-the-desk deployment.
FieldShield
FieldShield is both a patented and patent-pending fiber pathway and protection method aimed at reducing
the cost of broadband deployment. FieldShield takes industry standard glass and makes it easier and less
expensive to install. FieldShield starts with a ruggedized microduct designed to support all aerial, direct
bury, and inside plant “last mile” needs. Created from the most rugged HDPE polymers, FieldShield
Microduct is strong enough to be placed using traditional methods of boring and plowing, leveraging
existing conduit placement equipment, as well as newer, less disruptive technologies such as micro
trenching or saw cutting.
FieldShield Pushable Fiber easily slips through the microduct's smooth inner wall. Utilizing bend-
insensitive glass, FieldShield Pushable Fiber is available in a variety of fiber counts, with bulk reels or
factory terminated options offering total installation flexibility. A factory pre-connectorized FieldShield
Pushable Connector eliminates costly labor in the field and presents reliable, consistent and guaranteed
performance along with lower installation costs. After being pushed into the microduct, the slip-resistant
protective housing of the FieldShield Pushable connector is removed and the connector snaps together - all
in seconds, providing a cost-effective, tech-friendly means of installing optical fiber without jeopardizing
fiber protection.
The FieldShield Multiport SmarTerminal extends the reach of FieldShield optical fiber to the hardened
connector marketplace. Teaming a FieldShield Pushable Connector with a field-installable, tool-less smart
housing that provides a water-tight seal decreases installation and maintenance time, while providing
superior durability and reliability in the drop segment of the network. These solutions, FieldShield
Hardened Connectors and the FieldShield Multiport SmarTerminal, bring together the advantages of
hardened connector technology with the ease of use and cost reductions associated with pushable fiber.
The FieldShield YOURx platform consists of hardened terminals, test access points, and multiple drop
cable options designed for the most challenging portion of the access network, the fiber drop to the
customer. FieldShield YOURx delivers drop cable options for any first build desire - FieldShield Flat-SC,
FieldShield D-ROP, FieldShield FLEXdrop and FieldShield StrongFiber. The hardened FieldShield
YOURx terminal provides a single product use approach at the drop for below grade, pedestal and pole
mount options. The FieldShield YOURx-TAP provides a secure demarcation between the service provider
and customer equipment that eliminates slack storage problems by using deploy reels. The YOURx
platform continues the Company theme of using a modular, building block approach with tool-less system
design focusing on the fiber drop to the customer.
3
CraftSmart
CraftSmart is a full line of optical protection field enclosures, extending Clearfield presence in the fiber
industry. The CraftSmart Fiber Protection Pedestals (“FPP”) and CraftSmart Fiber Protection Vaults
(“FPV”) are integrated solutions, optimized to house FieldSmart products at the last mile access point of
the network in above-grade or below-grade installations.
CraftSmart aims to optimize fiber protection and storage while ensuring industry standards. Utilizing
methods of sealing and below-grade protection, along with Clearfield innovation, CraftSmart is a turn-key
solution for the deployment of passive optics from the central office/head-end to the customer premise.
Cable Assemblies
Clearfield manufactures high quality fiber and copper assemblies with an industry-standard or customer-
specified configuration. Industry-standard assemblies built include but are not limited to: single mode fiber,
multimode fiber, multi-fiber, CATV node assembly, DS1 Telco, DS 3 (734/735) coax, Category 5e and 6,
SCSI, Token Ring, and V.35. In addition, Clearfield’s engineering services team works alongside the
engineering design departments of our original equipment manufacturer (“OEM”) customers to design and
manufacture custom solutions for both in-the-box as well as network connectivity assemblies specific to
that customer’s product line.
Markets
Clearfield’s products are sold across broadband service providers, including traditional telephone
companies, competitive local exchange carriers, multiple service operators (cable television), wireless
service providers, and municipal-owned utilities that utilize fiber in their service offerings to businesses
and consumers. The Company also sells fiber and copper products to commercial and industrial customers.
FTTP
Fiber to the Premise (also called Fiber to the Home) is a means of delivering the highest possible level of
bandwidth directly to the user. The Company’s sales and marketing efforts have principally been focused
on the U.S., with investments in Canada and the Caribbean regions added in recent years.
FTTB
Fiber to the Business is the rapid expansion of fiber services, principally by multiple service (cable TV)
operators to penetrate the business marketplace.
FTT-Cell site
Fiber to the Cell site is the trend in which wireless service providers are re-focusing their efforts from
building towers for coverage to enhancing their coverage for bandwidth. Fiber is the medium of choice for
their upgrade. Currently, a very small percentage of these cell sites are served by fiber.
DAS
A distributed-antenna system, or DAS, is a network of spatially separated antenna nodes connected to a
common source via a transport medium that provides wireless service within a geographic area or structure.
DAS antenna elevations are generally at or below the clutter level and node installations are compact. Fiber
may be used to backhaul data from the antenna.
CRAN
Cloud Radio Access Network (CRAN) uses front-haul fiber to connect the Remote Radio Head (RRH) to
a Baseband Unit (BBU) located in a datacenter (i.e., the cloud). CRAN is an evolution of RAN cellular
architecture that traditionally used fiber to backhaul signals from the BBU at a tower back to the Mobile
core network.
4
Build to Print
In addition to a proprietary product line designed for the broadband service provider marketplace, Clearfield
provides contract manufacturing services for original equipment manufacturers requiring copper and fiber
cable assemblies built to their specification.
Competition
Competitors to the FieldSmart product lines include, but are not limited to, Corning Cabling Systems, Inc.,
OFS (Furukawa Electric North America, Inc.), AFL Telecommunications (a subsidiary of Fujikura Ltd.),
Fujikura Ltd., Nokia, and Commscope, Inc. Competitors to the CraftSmart product line include Emerson
Network Power, a subsidiary of Emerson Electric Co., and Charles Industries, Ltd. Competitors to
FieldShield include PPC Broadband, Inc. Nearly all of these firms are substantially larger than Clearfield
and as a result may be able to procure pricing for necessary components and labor at much lower prices.
Clearfield believes that it has a competitive advantage with customers who can leverage the cost savings
the Clearview Cassette can provide and those who require quick-turn, high-performance customized
products, and that it is at competitive disadvantage with customers who principally seek large volume
commodity products.
Sources of Materials and Outsourced Labor
Numerous purchased materials, components, and labor are used in the manufacturing of the Company’s
products. Most of these are readily available from multiple suppliers. However, some components and
outsourced labor are purchased from a single or a limited number of suppliers. The loss of access to some
components and outsourced labor could have an adverse effect on our ability to deliver products on a timely
basis and on our financial performance.
Major Customers and Financial Information about Geographic Areas
The following table summarizes customers comprising 10% or more of net sales for the years ended
September 30, 2016, 2015, and 2014:
Customer A
Customer B
Customer C
* Less than 10%
Year Ended September 30,
2015
25%
*
*
2014
19%
*
21%
2016
21%
16%
*
These major customers, like our other customers, purchase our products from time to time through purchase
orders, and we do not have any agreement that obligates these major customers to purchase products in the
future from us. As of September 30, 2016, Customers A and B accounted for 18% and 12% of accounts
receivable, respectively. As of September 30, 2015, Customers A and B accounted for 14% and 17% of
accounts receivable, respectively. Customers A and B are both distributors. Customer C is an Alternative
Carrier.
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 the Caribbean,
Canada, Central and South America.
5
The following table presents our domestic and international sales for each of the last three fiscal years:
United States
All Other Countries
Total Net Sales
Patents and Trademarks
Year Ended September 30,
2015
2016
$ 71,264,000
4,024,000
$ 75,288,000
$ 55,324,000
5,000,000
$ 60,324,000
2014
$ 52,687,000
5,358,000
$ 58,045,000
As of September 30, 2016, we had nine patents granted and eight patent applications pending inside the
United States. We have also developed and are using trademarks and logos to market and promote our
products, including Clearview®, FieldSmart®, FieldShield®, and CraftSmart®.
Backlog
Backlog reflects purchase order commitments for our products received from customers that have yet to be
fulfilled. Backlog orders are generally shipped within three months. The Company had a backlog of
$4,568,000, $3,540,000, and $3,340,000 as of September 30, 2016, 2015, and 2014, respectively.
Seasonality
We are affected by the seasonal trends in the industries we serve. We typically experience sequentially
lower sales in our first and second fiscal year quarters, primarily due to customer budget cycles, deployment
schedules, some customer geographical concentrations as well as standard vacation and holiday calendars.
Sales usually reach a seasonal peak in our third and fourth fiscal quarters.
Product Development
Product development for Clearfield’s product line program has been conducted internally. We believe that
the communication industry environment is constantly evolving and our success depends on our ability to
anticipate and respond to these changes. Our focus is to analyze the environment and technology and work
to develop products that simplify our customers’ business by developing innovative high quality products
utilizing modular design wherever possible. Research and development are reflected in Selling, General &
Administrative expenses and are not material to the overall expense total.
Employees
As of September 30, 2016, the Company had 222 full-time employees. We also employ seasonal, part-time
employees and independent contractors. None of our employees are covered by any collective bargaining
agreement. We believe our employee relations to be good.
Segment Reporting
The Company operates in a single reportable segment.
ITEM 1A.
RISK FACTORS
To compete effectively, we must continually improve existing products and introduce new products that
achieve market acceptance.
The telecommunications equipment industry is characterized by rapid technological changes, evolving
industry standards, changing market conditions and frequent new product and service introductions and
enhancements. The introduction of products using new technologies or the adoption of new industry
6
standards can make our existing products, or products under development, obsolete or unmarketable. In
order to remain competitive and increase sales, we will need to anticipate and adapt to these rapidly
changing technologies, enhance our existing products and introduce new products to address the changing
demands of our customers.
Many of our competitors have greater engineering and product development resources than we have.
Although we expect to continue to invest resources in product development activities, our efforts to achieve
and maintain profitability will require us to be selective and focused with our research and development
expenditures. In addition, sales to certain broadband service providers may require third-party independent
laboratory testing in order to obtain industry certifications in order to be able to sell to those customers.
Further, our existing and development-stage products may become obsolete if our competitors introduce
newer or more appealing technologies. If these technologies are patented or proprietary to our competitors,
we may not be able to access these technologies.
If we fail to anticipate or respond in a cost-effective and timely manner to technological developments,
changes in industry standards or customer requirements, or if we experience any significant delays in
product development or introduction, our business, operating results and financial condition could be
affected adversely.
Our operating results may fluctuate significantly from quarter to quarter, which may make budgeting
for expenses difficult and may negatively affect the market price of our common stock.
Because many purchases by customers of our products relate to a specific customer project and are procured
by the customer from time to time through purchase orders, the short-term demand for our products can
fluctuate significantly. This fluctuation can be further affected by the long sales cycles necessary to obtain
contracts to supply equipment for these projects, the availability of capital to fund our customers’ projects,
changes, or delays in customer deployment schedules and the impact of the government regulation to
encourage service to unserved or underserved communities, rural areas or other high cost areas on customer
buying patterns. These long sales cycles may result in significant effort expended with no resulting sales
or sales that are not made in the anticipated quarter or fiscal year. Certain customers and prospective
customers, typically larger broadband service providers, are conducive to these long sales cycles which
may be multi-year efforts. Demand for our projects will also depend upon the extent to which our customers
and prospective customers initiate these projects and the extent to which we are selected to provide our
equipment in these projects, neither of which can be assured. In addition, a sharp increase in demand could
result in actual lead times longer than quoted, and a sharp decrease in demand could result in excess stock.
These factors generally result in fluctuations, sometimes significant, in our operating results. Other factors
that may affect our quarterly operating results including:
the volume and timing of orders from and shipments to our customers, particularly significant
customers such as Customer A that accounted for 21%, 25% and 19% of sales in the years ended
September 30, 2016, 2015 and 2014, respectively;
work stoppages and other developments affecting the operations of our customers;
the timing of and our ability to obtain new customer contracts and the timing of revenue
recognition;
the timing of new product and service announcements;
the availability of products and services;
market acceptance of new and enhanced versions of our products and services;
variations in the mix of products and services we sell;
the utilization of our production capacity and employees;
the availability and cost of key components of our products;
changes in the valuation allowance relating to our deferred tax assets and the resulting income tax
benefits or expenses; and
excess tax benefits for stock-based compensation.
7
Further, we budget our expenses based in part on expectations of future sales. If sales levels in a particular
quarter are lower than expected, our operating results will be affected adversely.
Because of these factors, our quarterly operating results are difficult to predict and are likely to vary in the
future. If our operating results are below financial analysts’ or investors’ expectations, the market price of
our common stock may fall abruptly and significantly.
Intense competition in our industry may result in price reductions, lower gross profits and loss of market
share.
Competition in the telecommunications equipment and services industry is intense. Our competitors may
have or could develop or acquire marketing, financial, development and personnel resources that exceed
ours. Our ability to compete successfully will depend on whether we can continue to advance the
technology of our products and develop new products, the acceptance of our products among our customers
and prospective customers and our ability to anticipate customer needs in product development, as well as
the price, quality and reliability of our products, our delivery and service capabilities and our control of
operating expenses.
We cannot assure you that we will be able to compete successfully against our current or future competitors.
Increased competition from manufacturers of telecommunications equipment such as ours may result in
price reductions, lower gross profit margins, and increased discounts to customers and loss of market share
and could require increased spending by us on research and development, sales and marketing and customer
support.
We rely on single-source suppliers, which could cause delays, increases in costs or prevent us from
completing customer orders, all of which could materially harm our business.
We assemble our products using materials and components supplied by various subcontractors and
suppliers. We purchase critical components for our products, including injected molded parts and
connectors from third parties, some of whom are single- or limited-source suppliers. If any of our suppliers
are unable to ship critical components, we may be unable to manufacture and ship products to our
distributors or customers. If the price of these components increases for any reason, or if these suppliers
are unable or unwilling to deliver, we may have to find another source, which could result in interruptions,
increased costs, delays, loss of sales and quality control problems.
Further, the costs to obtain certain raw materials and supplies, such as fiber and copper cabling, are subject
to price fluctuations, which may be substantial, because of global market demands. Many companies utilize
the same raw materials and supplies in the production of their products as we use in our products.
Companies with more resources than us may have a competitive advantage in obtaining raw materials and
supplies due to greater purchasing power. Some raw materials or supplies may be subject to regulatory
actions, which may affect available supplies. Furthermore, due to general economic conditions in the
United States and globally, our suppliers may experience financial difficulties, which could result in
increased delays, additional costs, or loss of a supplier.
The termination or interruption of any of these relationships, or the failure of these manufacturers or
suppliers to supply components or raw materials to us on a timely basis or in sufficient quantities, likely
would cause us to be unable to meet orders for our products and harm our reputation and our business.
Identifying and qualifying alternative suppliers would take time, involve significant additional costs and
may delay the production of our products. If we fail to forecast our manufacturing requirements accurately
or fail to properly manage our inventory with our contract manufacturers, we could incur additional costs,
experience manufacturing delays and lose sales. Further, if we obtain a new supplier or assemble our
product using an alternative source of supply, we may need to conduct additional testing of our products to
ensure the product meets our quality and performance standards. Any delays in delivery of our product to
8
distributors or customers could be extended, and our costs associated with the change in product
manufacturing could increase.
The failure of our third-party manufacturers to manufacture the products for us, and the failure of our
suppliers of components and raw materials to supply us consistent with our requirements as to quality,
quantity and timeliness could materially harm our business by causing delays, loss of sales, increases in
costs and lower gross profit margins.
A significant percentage of our sales in the last three fiscal years have been made to a small number of
customers, and the loss of these major customers would adversely affect us.
In fiscal year 2016, Customers A and B comprised approximately 21% and 16% of net sales, respectively.
In fiscal year 2015, Customer A comprised approximately 25% of net sales. Additionally, in fiscal year
2014, Customers A and C comprised approximately 19% and 21%, respectively, of net sales. These
customers purchase our products from time to time through purchase orders, and we do not have any
agreement that obligates these major customers to purchase products in the future from us. The loss of any
one or more of these customers, the substantial reduction, delay or cancellation in orders from any such
customer or our inability to collect the accounts receivable from these customers, could have a material
adverse effect on our business, financial position and results of operations.
Our success depends upon adequate protection of our patent and intellectual property rights.
Our future success depends in part upon our proprietary technology. We attempt to protect our proprietary
technology through patents, trademarks, copyrights and trade secrets. However, these legal means afford
us only limited protection and may not adequately protect our rights or remedies to gain or keep any
advantages we may have over our competitors. Accordingly, we cannot predict whether these protections
will be adequate, or whether our competitors will develop similar technology independently, without
violating our proprietary rights.
Our competitors, who may have or could develop or acquire significant resources, may make substantial
investments in competing technologies, or may apply for and obtain patents that will prevent, limit, or
interfere with our ability to manufacture or market our products. Further, although we do not believe that
any of our products infringe the rights of others, third parties may in the future claim our products infringe
on their rights, and these third parties may assert infringement claims against us in the future.
We may litigate to enforce patents issued to us and to defend against claimed infringement of the rights of
others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others.
Any claim of infringement against us could involve significant liabilities to third parties, could require us
to seek licenses from third parties, and could prevent us from manufacturing, selling or using our products.
The occurrence of this litigation, or the effect of an adverse determination in any of this type of litigation,
could have a material adverse effect on our business, financial condition and results of operations.
Our failure to protect or enforce our intellectual property rights could have a material adverse effect on our
business, results of operations and financial condition.
National Broadband Plan’s transitioning from the USF to the CAF program may cause our customers
and prospective customers to delay or reduce purchases.
In October of 2011, the Federal Communications Commission approved the National Broadband Plan
which called for the restructuring of the long-standing USF (Universal Service Fund). A key element of
this program is the transition out of the USF program, which awards an operating subsidy to
telecommunications companies providing service to high-cost serving areas, to the Connect America Fund
(CAF) which would provide a capital expenditure subsidy for the build-out of the country’s broadband
network. In addition, other universal service and inter-carrier compensation reforms scheduled to begin in
9
the coming years will eliminate subsidies that carriers have traditionally relied upon to support service in
high-cost, rural areas. Our customers or prospective customers may delay purchases until the financial
impact to them from the transition to the CAF becomes clear. To the extent our customers or prospective
customers receive reduced subsidies under the CAF, they may reduce the spending associated with their
projects, delay projects, or not pursue projects. Any of these actions may result in reduced demand for our
products with these customers or prospective customers.
Further consolidation among our customers may result in the loss of some customers and may reduce
sales during the pendency of business combinations and related integration activities.
We believe consolidation among our customers in the future will continue in order for them to increase
market share and achieve greater economies of scale. Consolidation has impacted our business as our
customers focus on completing business combinations and integrating their operations. In connection with
this merger and acquisition activity, our customers may postpone or cancel orders for our product based on
revised plans for technology or network expansion pending consolidation activity. Customers integrating
large-scale acquisitions may also reduce their purchases of equipment during the integration period, or
postpone or cancel orders.
The impact of significant mergers among our customers on our business is likely to be unclear until
sometime after such transactions are completed. After a consolidation occurs, a customer may choose to
reduce the number of vendors from which it purchases equipment and may choose one of our competitors
as its preferred vendor. There can be no assurance that we will continue to supply equipment to the
surviving communications service provider after a business combination is completed.
Our planned implementation of an enterprise resource planning (“ERP”) software solution and other
information technology systems could result in significant disruptions to our operations.
We plan to implement an ERP software solution and other complementary information technology systems
over the next several years. Implementation of these solutions and systems is highly dependent on
coordination of numerous software and system providers and internal business teams. The interdependence
of these solutions and systems is a significant risk to the successful completion of the initiatives and the
failure of any one system could have a material adverse effect on the implementation of our overall
information technology infrastructure. We may experience difficulties as we transition to these new or
upgraded systems and processes, including loss or corruption of data, delayed shipments, decreases in
productivity as our personnel implement and become familiar with new systems, increased costs and lost
revenues. In addition, transitioning to these new systems requires significant capital investments and
personnel resources. Difficulties in implementing new or upgraded information systems or significant
system failures could disrupt our operations and have a material adverse effect on our capital resources,
financial condition, results of operations or cash flows. Implementation of this new information technology
infrastructure has a significant impact on our business processes and information systems across a
significant portion of our operations. As a result, we will be undergoing significant changes in our
operational processes and internal controls as our implementation progresses, which in turn require
significant change management, including recruiting and training of qualified personnel. If we are unable
to successfully manage these changes as we implement these systems, including harmonizing our systems,
data, processes and reporting analytics, our ability to conduct, manage and control routine business
functions could be negatively affected and significant disruptions to our business could occur. In addition,
we could incur material unanticipated expenses, including additional costs of implementation or costs of
conducting business. These risks could result in significant business disruptions or divert management's
attention from key strategic initiatives and have a material adverse effect on our capital resources, financial
condition, results of operations or cash flows.
10
Product defects or the failure of our products to meet specifications could cause us to lose customers
and sales or to incur unexpected expenses.
If our products do not meet our customers’ performance requirements, our customer relationships may
suffer. Also, our products may contain defects or fail to meet product specifications. Any failure or poor
performance of our products could result in:
lack of or delayed market acceptance of our products;
delayed product shipments;
unexpected expenses and diversion of resources to replace defective products or identify and
correct the source of errors;
damage to our reputation and our customer relationships;
delayed recognition of sales or reduced sales; and
product liability claims or other claims for damages that may be caused by any product defects or
performance failures.
Our products are often critical to the performance of telecommunications systems. Many of our supply
agreements contain limited warranty provisions. If these contractual limitations are unenforceable in a
particular jurisdiction or if we are exposed to product liability claims that are not covered by insurance, a
claim could harm our business.
We are dependent on key personnel.
Our failure to attract and retain skilled personnel could hinder the management of our business, our research
and development, our sales and marketing efforts and our manufacturing capabilities. Our future success
depends to a significant degree upon the continued services of key senior management personnel, including
Cheryl Beranek, our Chief Executive Officer and John Hill, our Chief Operating Officer. We have
employment agreements with Ms. Beranek and Mr. Hill that provide that if we terminate the employment
of either executive without cause or if the executive terminates her or his employment for good reason, we
would be required to make specified payments to them as described in their employment agreements. We
have key person life insurance on Ms. Beranek and Mr. Hill. Further, our future success also depends on
our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales
personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and
thereby materially harm our business and financial condition.
We face risks associated with expanding our sales outside of the United States.
We believe that our future growth depends in part upon our ability to increase sales in international markets.
These sales are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts
receivable payment cycles, potentially adverse tax consequences, and export license requirements. In
addition, we are subject to the risks inherent in conducting business internationally, including political and
economic instability and unexpected changes in diplomatic and trade relationships. Currency fluctuations
may also increase the relative price of our product in international markets and thereby could also cause
our products to become less affordable or less price competitive than those of international manufacturers.
These risks associated with international operations may have a material adverse effect on our revenue from
or costs associated with international sales.
Our results of operations could be adversely affected by economic conditions and the effects of these
conditions on our customers’ businesses.
Adverse changes in economic conditions, including the recent recession in the United States, have resulted
and may continue to result in lower spending among our customers and contribute to decreased sales to our
11
distributors and customers. Further, our business may be adversely affected by factors such as downturns
in economic activity in specific geographic areas or in the telecommunications industry; social, political or
labor conditions; or adverse changes in the availability and cost of capital, interest rates, tax rates, or
regulations. These factors are beyond our control, but may result in decreases in spending among customers
and softening demand for our products. Declines in demand for our products will adversely affect our sales.
Further, challenging economic conditions also may impair the ability of our customers to pay for products
and services they have purchased. As a result, our cash flow may be negatively impacted and our allowance
for doubtful accounts and write-offs of accounts receivable may increase.
Our stock price has been volatile historically and may continue to be volatile. The price of our common
stock may fluctuate significantly.
The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our
stock price may fluctuate in response to a number of events and factors, such as quarterly variations in
operating results, announcements of technological innovations or new products by us or our competitors,
changes in financial estimates and recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to us, and new reports relating to
trends in our markets or general economic conditions.
In addition, the stock market is subject to price and volume fluctuations that affect the market prices for
companies in general, and small-capitalization, high-technology companies like us in particular. These
broad market and industry fluctuations may adversely affect the price of our common stock, regardless of
our operating performance. Further, any failure by us to meet or exceed the expectations of financial
analysts or investors is likely to cause a decline in our common stock price. Further, recent economic
conditions have resulted in significant fluctuations in stock prices for many companies, including
Clearfield. We cannot predict when the stock markets and the market for our common stock may stabilize.
In addition, although our common stock is listed on the NASDAQ Stock Market, our common stock has at
times experienced low trading volume in our past. Limited trading volume subjects our common stock to
greater price volatility and may make it difficult for our shareholders to sell shares at an attractive price.
Future sales of shares of our common stock in the public market may negatively affect our stock price.
Future sales of our common stock, or the perception that these sales could occur, could have a significant
negative effect on the market price of our common stock. This increase, in turn, could dilute future earnings
per share, if any, and could depress the market value of our common stock. Dilution and potential dilution,
the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of
our common stock may negatively affect both the trading price of our common stock and the liquidity of
our common stock.
Anti-takeover provisions in our organizational documents, Minnesota law and other agreements could
prevent or delay a change in control of our company.
Certain provisions of our articles of incorporation and bylaws, Minnesota law and other agreements may
make it more difficult for a third-party to acquire, or discourage a third-party from attempting to acquire,
control of our company, including:
the provisions of our bylaws setting forth the advance notice and information requirements for
shareholder proposals, including nominees for directors, to be considered properly brought before
shareholders;
the right of our board of directors to establish more than one class or series of shares and to fix the
relative rights and preferences of any such different classes or series;
the provisions of Minnesota law relating to business combinations and control share acquisitions;
and
12
the provisions of our stock option plans allowing for the acceleration of vesting or payments of
awards granted under the plans in the event of specified events that result in a “change in control”
and provisions of agreements with certain of our executive officers requiring payments if their
employment is terminated and there is a “change in control.”
These measures could discourage or prevent a takeover of us or changes in our management, even if an
acquisition or such changes would be beneficial to our shareholders. This may have a negative effect on
the price of our common stock.
Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate
governance and public company disclosure requirements, including the Sarbanes-Oxley Act of 2002 and in
particular Section 404 of that Act relating to management certification of internal controls, new disclosures
relating to “conflict minerals”, the regulations of the Securities and Exchange Commission and the rules of
the NASDAQ Stock Market have required an increased amount of management attention and external
resources. We intend to invest all reasonably necessary resources to comply with evolving corporate
governance and public disclosure standards, and this investment may result in increased general and
administrative expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Clearfield leases a 70,771 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota
consisting of our corporate offices, manufacturing and warehouse space. The lease term is ten years and
two months and commenced on January 1, 2015. However, upon proper notice and payment of a
termination fee of approximately $214,000, the Company has a one-time option to terminate the lease
effective as of the last day of the eighth year of the term after the Company commenced paying base rent.
We believe our existing facilities are sufficient to meet our current and future space requirements.
ITEM 3.
LEGAL PROCEEDINGS
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.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
13
PART II.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is traded on The NASDAQ Global Market system of The NASDAQ Stock Market LLC
under the symbol “CLFD.”
The following table sets forth the quarterly high and low sales prices for our common stock for each
quarter of the past two fiscal years.
Fiscal Year Ended September 30, 2016
Quarter ended December 31, 2015
Quarter ended March 31, 2016
Quarter ended June 30, 2016
Quarter ended September 30, 2016
Fiscal Year Ended September 30, 2015
Quarter ended December 31, 2014
Quarter ended March 31, 2015
Quarter ended June 30, 2015
Quarter ended September 30, 2015
High
$ 16.51
16.24
18.99
20.28
High
$ 14.99
15.54
16.75
20.28
Low
$ 11.59
12.27
15.27
16.82
Low
$ 10.82
11.21
12.90
12.76
The foregoing prices reflect inter-dealer prices, without dealer markup, markdown, or commissions and
may not represent actual transactions.
Approximate Number of Holders of Common Stock
There were approximately 270 holders of record of our common stock as of September 30, 2016.
Dividends
We have never paid cash dividends on our common stock. We currently intend to retain any earnings for
use in our operations and do not intend in the foreseeable future to pay cash dividends on our common
stock.
Stock Performance Graph
The information provided under this subsection shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into
any filing of Clearfield, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as
shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison of the 5-year cumulative total return on Clearfield, Inc.’s common
stock relative to the NASDAQ Composite index, which the Company has selected as a broad market index,
and the NASDAQ Telecommunications index, which the Company has selected as a published industry
index. The graph assumes an investment of $100 (with reinvestment of all dividends) is made in the
Company’s common stock and in each index on September 30, 2011 and its relative performance is tracked
through September 30, 2016. The returns shown are based on historical results and are not intended to
suggest future performance.
14
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
Among Clearfield, Inc., The NASDAQ Stock Market Composite Index
And The NASDAQ Telecommunications Index
D
O
L
L
A
R
S
$350
$300
$250
$200
$150
$100
$50
$0
9/11
9/12
9/13
9/14
9/15
9/16
Clearfield, Inc.
Nasdaq Composite
Nasdaq Telecommunications
Company/Index
Clearfield, Inc.
Nasdaq Composite Index
Nasdaq Telecommunications
Index
September
30, 2011
September
30, 2012
September
30, 2013
September
30, 2014
September
30, 2015
September
30, 2016
$
100.00 $
100.00
86.61 $
130.53
227.63 $
160.26
215.76 $
193.28
227.63 $
201.01
318.64
234.02
100.00
132.98
135.24
153.29
142.36
179.44
Equity Compensation Plan Information
The following table describes shares of our common stock that are available on September 30, 2016 for
purchase under outstanding stock-based awards, or reserved for issuance under stock-based awards or other
rights that may be granted in the future, under our equity compensation plans:
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding those
reflected in first
column)
54,800
54,800
$
$
15
3.13
3.13
95,848
95,848
Plan Category
Equity compensation plans approved
by security holders
2007 Stock Compensation Plan
Total
All outstanding equity awards have been granted pursuant to shareholder-approved plans. In addition to
options, shares may be issued in the form of restricted stock awards and other stock-based awards.
Issuer Repurchases
The Company repurchased a total of 18,099 shares of our common stock during the fourth quarter of fiscal
year 2016 in connection with payment of taxes upon the vesting of restricted stock previously issued to
employees. The Company may also repurchase shares as a part of its stock repurchase program approved
in November 2014 by which the Company’s Board of Directors authorized the repurchase of up to
$8,000,000 of the Company’s common stock.
The following table presents the total number of shares repurchased during the fourth quarter of fiscal 2016
by month and the average price paid per share:
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number
of Shares
Purchased
Average
Price Paid
per Share
—
18,099
—
18,099
$—
18.03
—
$18.03
Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
Approximate Dollar Value
of Shares that
May Yet Be Purchased
Under the Program (1)
—
—
—
—
$—
—
—
$6,817,082
Period
July 1-31, 2016
August 1-31, 2016
September 1-30, 2016
Total
(1) Amount remaining from the $8,000,000 repurchase authorization approved by the Company’s Board
of Directors in November 2014. The program does not obligate Clearfield to repurchase any particular
amount of common stock during any period. The repurchase will be funded by cash on hand. The
repurchase program is expected to continue indefinitely until the maximum dollar amount of shares
has been repurchased or until the repurchase program is earlier modified, suspended or terminated by
the Board of Directors.
16
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data has been derived from our financial statements and should be read in
conjunction with the Financial Statements and related notes thereto set forth in Item 8 and with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in
Item 7 of this Annual Report on Form 10-K.
Year Ended September 30
2016
2015
2014
2013
2012
Selected Statements of Earnings
Data
Net sales
Gross profit
Income from operations
Income tax expense (benefit)
Net income
Net income per share basic
Net income per share diluted
Selected Balance Sheet Data
Total assets
Long-term liabilities
Shareholders’ equity
$ 75,287,726 $ 60,323,917 $
32,870,248
10,731,692
2,876,032
8,013,062
$0.60
$0.59
24,867,953
7,051,355
2,475,238
4,682,008
$0.35
$0.34
58,045,292 $
24,598,766
8,518,126
3,180,978
5,432,851
$0.42
$0.40
53,353,080 $
21,989,578
7,444,735
2,803,172
4,733,844
$0.38
$0.36
37,473,966
15,285,721
4,274,881
(3,324,299)*
7,701,194
$0.62
$0.60
$ 70,595,313 $ 57,627,617 $
51,847,898 $
655,534
62,594,043
1,311,232
51,279,130
-
46,746,634
46,413,339 $
21,101
40,078,036
37,740,338
37,643
34,685,901
*During the fourth quarter of fiscal year 2012, the Company reversed a substantial portion of a valuation
allowance of the deferred tax assets in the amount of $3,518,000. This reversal increased our net income
by that amount for the year ended September 30, 2012 and contributed $0.28 per diluted share for the year.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Statements made in this Annual Report on Form 10-K, in the Company’s other SEC filings, in press releases
and in oral statements, that are not statements of historical fact are “forward-looking statements.” Such
forward-looking statements involve known and unknown risks, uncertainties and other factors which may
cause the actual results or performance of the Company to be materially different from the results or
performance expressed or implied by such forward-looking statements. The words “believes,” “expects,”
“anticipates,” “seeks” and similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of the date the
statement was made. The risks and uncertainties that could cause actual results to differ materially and
adversely from those expressed or implied by the forward-looking statements include those risks described
in Part I, Item 1A “Risk Factors.”
Overview of Business: The Company sells highly configurable fiber management and connectivity
products to broadband service providers serving the FTTP, FTTB, FTT-Cell site markets in the U.S. and in
certain limited markets outside the U.S., currently countries in the Caribbean, Canada, Central and South
America. The Company’s sales channels include direct to customer, through distribution partners, and to
original equipment suppliers who private label its products. The Company’s products are sold by its sales
employees and independent sales representatives.
Critical Accounting Policies: In preparing our financial statements, we make estimates, assumptions and
judgments that can have a significant impact on our sales, income or loss from operations and net income
or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that there
17
are several accounting policies that are critical to an understanding of our historical and future performance,
as these policies affect the reported amounts of sales, expenses and significant estimates and judgments
applied by management. While there are a number of accounting policies, methods and estimates affecting
our financial statements, areas that are particularly significant include:
Revenue recognition;
Accounting for income taxes;
Valuation and evaluating impairment of long-lived assets and goodwill; and
Valuation of inventory.
Revenue Recognition Revenue is recognized when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed, acceptance by the customer is reasonably certain and collection
is reasonably assured. This generally occurs upon shipment of product to the customer. Sales of the
Company’s products are subject to limited warranty obligations that are included in the Company’s terms
and conditions. Also, the Company offers limited discounts and rebates to customers which are recorded
in net sales on an estimated basis as the sales are recognized. The Company records freight revenues billed
to customers as sales and the related shipping and handling cost in cost of sales. Taxes collected from
customers and remitted to governmental authorities are presented on a net basis.
Income Taxes We account for income taxes in accordance with Accounting Standards Codification
(“ASC”) 740, Income Taxes, under which deferred income taxes are recognized based on the estimated
future tax effects of differences between the financial statement and tax bases of assets and liabilities given
the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to
the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of
the jurisdictions in which we operate, estimates of future taxable income, and available tax planning
strategies. If tax regulations, operating results, or the ability to implement tax-planning strategies vary,
adjustments to the carrying value of deferred tax assets and liabilities may be required. A valuation
allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. The
recorded valuation allowance is based on significant estimates and judgments and if the facts and
circumstances change, the valuation allowance could materially change.
In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense.
As of September 30, 2016, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards
and approximately $9,283,000 state NOLs. The U.S. federal NOL carry forward amounts were fully
utilized in the current year. The state NOL carry forward amounts expire in fiscal years 2017 through 2022
if not utilized. In fiscal year 2009, the Company completed an Internal Revenue Code Section 382 analysis
of the loss carry-forwards and determined that all of the Company’s loss carry-forwards were utilizable and
not restricted under Section 382. The Company has not updated its Section 382 analysis subsequent to
2009 and does not believe there have been any events subsequent to 2009 that would impact the analysis.
As part of the process of preparing our financial statements, we are required to estimate our income tax
liability in each of the jurisdictions in which we do business. This process involves estimating our actual
current tax expense together with assessing temporary differences resulting from differing treatment of
items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We
must then assess the likelihood that these deferred tax assets will be recovered from future taxable income
and, to the extent we believe that recovery is not more likely than not or unknown, we must establish a
valuation allowance. If the valuation allowance is reduced, the Company would record an income tax
18
benefit in the period in which that determination is made. If the valuation allowance is increased, the
Company would record additional income tax expense.
As of September 30, 2015, the Company’s remaining valuation allowance of approximately $659,000
related to state net operating loss carry forwards. During the fourth quarter of 2016, the Company reversed
approximately $337,000 of its remaining valuation allowance. Approximately $259,000 of the change
related to the expiration and utilization of state net operating losses in 2016. The remaining decrease of
$78,000 is related to higher future year expected NOL utilization due to updated profitability estimates.
The remaining valuation allowance balance as of September 30, 2016 of $322,000 relates entirely to state
net operating loss carry forwards we do not expect to utilize. The Company will continue to assess the
assumptions used to determine the amount of our valuation allowance and may adjust the valuation
allowance in future periods based on changes in assumptions of estimated future income and other factors.
The Company files income tax returns in the U.S. Federal jurisdiction, and various state jurisdictions.
Based on its evaluation, the Company has concluded that it has no significant unrecognized tax benefits.
With limited exceptions, the Company is no longer subject to U.S. federal and state income tax
examinations for fiscal years ending prior to 2001. We are generally subject to U.S. federal and state tax
examinations for all tax years since 2001 due to our net operating loss carryforwards and the utilization of
the carryforwards in years still open under statute. In 2007, the Company changed its fiscal year end from
March 31 to September 30.
During the quarter ended December 31, 2015, the Company early adopted Accounting Standards Update
(“ASU”) 2015-17 to present balance sheet classification of deferred income taxes as noncurrent. This
adoption was applied prospectively and therefore, prior periods were not retrospectively adjusted.
During the quarter ended September 30, 2016, the Company early adopted ASU 2016-09, Improvements to
Employee Share-Based Payment Accounting. The standard is intended to simplify various aspects of the
accounting and presentation of share-based payments. During the quarter ended September 30, 2016, the
Company elected to early adopt this standard as of October 1, 2015. The impact of this early adoption is
more fully described in Footnote D.
Impairment of Long-Lived Assets and Goodwill The Company’s long-lived assets at September 30, 2016
consisted primarily of property, plant and equipment, patents and goodwill. The Company reviews the
carrying amount of its property, plant and equipment and patents if events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. When this review indicates the
carrying amount of an asset or asset group exceeds the sum of the future undiscounted cash flows expected
to be generated by the assets, the Company recognizes an asset impairment charge against operations for
the amount by which the carrying amount of the impaired asset exceeds its fair value.
Determining fair values of property, plant and equipment and patents using a discounted cash flow method
involves significant judgment and requires the Company to make significant estimates and assumptions,
including long-term projections of cash flows, market conditions and appropriate discount rates. Judgments
are based on historical experience, current market trends, consultations with external valuation specialists
and other information. If facts and circumstances change, the use of different estimates and assumptions
could result in a materially different outcome. The Company generally develops these forecasts based on
recent sales data for existing products, planned timing of new product launches, and estimated expansion
of the FTTP market.
The Company operates as one reporting unit and reviews the carrying amount of goodwill annually in the
fourth quarter of each fiscal year and more frequently if events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. The Company determines its fair value for
goodwill impairment testing purposes by calculating its market capitalization and comparing that to the
Company’s carrying value. The Company’s goodwill impairment test for the years ended September 30,
2016, 2015 and 2014 resulted in excess fair value over carrying value and therefore, no adjustments were
19
made to goodwill. During the year ended September 30, 2016, there were no triggering events that indicated
goodwill could be impaired.
A significant reduction in our market capitalization or in the carrying amount of net assets of a reporting
unit could result in an impairment charge. If the carrying amount of a reporting unit exceeds its fair value,
the Company would measure the possible goodwill impairment loss based on an allocation of the estimate
of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including
any previously unrecognized intangible assets. The excess of the fair value of a reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is
recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.
An impairment loss would be based on significant estimates and judgments, and if the facts and
circumstances change, a potential impairment could have a material impact on the Company’s financial
statements.
No impairment of long-lived assets or goodwill has occurred during the years ended September 30, 2016,
2015 or 2014, respectively.
Valuation of Inventory The Company maintains a material amount of inventory to support its
manufacturing operations and customer demand. This inventory is stated at the lower of cost or market.
On a regular basis, the Company reviews its inventory and identifies that which is excess, slow moving and
obsolete by considering factors such as inventory levels, expected product life and forecasted sales demand.
Any identified excess, slow moving and obsolete inventory is written down to its market value through a
charge to cost of sales. It is possible that additional inventory write-down charges may be required in the
future if there is a significant decline in demand for the Company’s products and the Company does not
adjust its manufacturing production accordingly.
Results of Operations
Year ended September 30, 2016 compared to year ended September 30, 2015
Net sales for fiscal year 2016 increased 25% to $75,288,000 from net sales of $60,324,000 in 2015. Sales
growth was experienced from existing clients as well as from the development of new accounts within the
telecommunications industry. The growth in sales includes increased sales from within the wireless market
and cable providers customer group and increased sales to our Alternative Carrier customer group, offset
slightly by decreased international sales.
As a result of the above factors, sales in fiscal year 2016 to commercial data networks and broadband
service providers were 93% of net sales, or $69,850,000, compared to $54,822,000, or 91%, of net sales in
fiscal 2015. Among this group, the Company recorded $4,024,000 in international sales in fiscal year 2016
versus $5,000,000 in fiscal year 2015. Sales associated with build-to-print manufacturing for original
equipment manufacturers outside of the telecommunications market in 2016 were 7% of net sales, or
$5,438,000, compared to $5,502,000, or 9%, of net sales in fiscal year 2015. The Company allocates sales
from external customers to geographic areas based on the location to which the product is transported.
Accordingly, international sales represented 5% and 8% of net sales for the years ended September 30,
2016 and 2015, respectively.
The increase in net sales for the year ended September 30, 2016 of $14,964,000 compared to fiscal year
2015 is primarily attributable to an increase of $13,506,000 in net sales to our customer base of commercial
data network providers, build-to-print and OEM manufacturers, and broadband service providers, outside
of the Alternative Carrier group and international sales noted below, when compared to fiscal 2015. The
improvement was due to increased deployments by the Company’s Traditional Carrier customers, as well
as expanded sales channels. Ongoing builds of an Alternative Carrier customer also increased net sales by
$2,434,000 for the year ended September 30, 2016. Net sales for fiscal year 2016 were negatively affected
by a decrease in international sales of $976,000 from the prior fiscal year due to sluggish demand. The
20
Company expects its international sales may continue to be lower than the prior years until a more favorable
foreign currency exchange rate environment exists.
Cost of sales for fiscal year 2016 was $42,417,000, an increase of $6,961,000, or 20% from the $35,456,000
in fiscal year 2015. Gross margin was 43.7% in fiscal year 2016, as compared to 41.2% for fiscal year
2015. Gross profit increased 32%, or $8,002,000, from $24,868,000 for fiscal year 2015 to $32,870,000
for fiscal year 2016. The year-over-year increase in cost of sales is primarily a result of increased sales
volume. The increase in gross profit percentage is the result of a higher percentage of sales associated with
the integration of optical components within our product line, which generally have higher margins.
Selling, general and administrative expense for fiscal year 2016 was $22,139,000, up 24% compared to
$17,817,000 for fiscal year 2015. This increase is primarily composed of higher compensation expenses in
the amount of $3,376,000 mainly due to additional personnel, wage increases, higher performance
compensation accruals, increased stock compensation expense of $198,000, and increased depreciation
expense of $121,000.
Income from operations for fiscal year 2016 was $10,732,000 compared to $7,051,000 for fiscal year 2015.
This increase is attributable to increased net sales and higher gross profit.
Interest income in fiscal year 2016 was $157,000 compared to $106,000 for fiscal year 2015. The increase
is due mainly to higher interest rates earned on its investments in fiscal 2016. The Company invests its
excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts.
Income tax expense for fiscal year 2016 was $2,876,000 compared to $2,475,000 for fiscal year 2015. Due
to net operating loss utilization, income tax expense primarily had a non-cash effect on the operating cash
flow for the years ended September 30, 2016 and 2015. The increase in tax expense of $401,000 from the
year ended September 30, 2015 is primarily due to increased profitability in fiscal year 2016. The decrease
in the income tax expense rate to 26.4% for fiscal year 2016 from 34.6% for fiscal year 2015 is primarily
the result of the Company early adopting ASU 2016-09 effective with the fourth quarter ended September
30, 2016. The new accounting standard requires that the tax effects of stock-based compensation be
recognized in the income tax provision of the Company’s statement of earnings. For prior quarters of fiscal
2016, the amounts relating to the tax effects of stock-based compensation were recasted to conform to the
current year’s presentation. Previously, these amounts were recognized in additional paid-in capital on the
Company’s balance sheet. As a result, the Company recognized net tax benefits related to stock-based
compensation awards which lowered income tax expense by $675,000 for fiscal year 2016. Our provisions
for income taxes include current federal tax expense, state income tax expense, and deferred tax expense.
Net income for fiscal year 2016 was $8,013,000 or $0.60 per basic share and $0.59 per diluted share,
compared to $4,682,000 or $0.35 per basic share and $0.34 per diluted share for the year 2015.
Year ended September 30, 2015 compared to year ended September 30, 2014
Net sales for fiscal year 2015 increased 4% to $60,324,000 from net sales of $58,045,000 in 2014. Sales
growth was experienced from existing clients as well as from the development of new accounts within the
telecommunications industry. The growth in sales includes gains from within Tier 3 Carriers, an emerging
presence associated with Tier 2 Carriers who have a national footprint and cable providers, offset by lower
sales to our Alternative Carrier customer group.
As a result of the above factors, sales in fiscal year 2015 to commercial data networks and broadband
service providers were 91% of net sales, or $54,822,000, compared to $53,627,000, or 92%, of net sales in
fiscal 2014. Among this group, the Company recorded $5,000,000 in international sales in fiscal year 2015
versus $5,358,000 in fiscal year 2014. Sales associated with build-to-print manufacturing for original
equipment manufacturers outside of the telecommunications market in 2015 were 9% of net sales, or
$5,502,000, compared to $4,418,000, or 8%, of net sales in fiscal year 2014. The Company allocates sales
21
from external customers to geographic areas based on the location to which the product is transported.
Accordingly, international sales represented 8% and 9% of net sales for the years ended September 30,
2015 and 2014, respectively.
The increase in net sales for the year ended September 30, 2015 of $2,279,000 compared to fiscal year 2014
is primarily attributable to an increase of $10,107,000 in net sales to our customer base of commercial data
network providers, build-to-print and OEM manufacturers, and broadband service providers, outside of the
Alternative Carrier customer group and international sales noted below, when compared to 2014. The
improvement was due to increased deployments by the Company’s Traditional Carriers, as well as
expanded sales channels. Offsetting this increase was a decrease of $7,470,000 related to a slowdown in
ongoing builds of an Alternative Carrier. Net sales were also negatively affected by a decrease in
international sales of $358,000 during the same period.
Cost of sales for fiscal year 2015 was $35,456,000, an increase of $2,009,000, or 6% from $33,447,000 in
fiscal year 2014. Gross margin was 41.2% in fiscal year 2015, as compared to 42.4% for fiscal year 2014.
Gross profit increased 1%, or $269,000, from $24,599,000 for fiscal year 2014 to $24,868,000 for fiscal
year 2015. The year-over-year increase in cost of sales is primarily a result of increased sales volume.
Gross profit percentage decreased primarily as a result of costs associated with operations related to the
addition of our Mexico manufacturing facility in late fiscal year 2014 in the amount of $249,000 along with
product mix changes of $601,000.
Selling, general and administrative expense for fiscal year 2015 was $17,817,000, up 11% compared to
$16,081,000 for fiscal year 2014. This increase is primarily composed of higher compensation expenses in
the amount of $997,000 mainly due to additional personnel and wage increases and one-time costs of
$137,000 associated with our move to expanded U.S. operations which was completed in the second
quarter. Also, stock compensation expense increased $280,000 when compared to the same period of 2014
due to a higher amount of equity awards outstanding. Additionally, depreciation increased $252,000
compared to the same period of 2014 primarily due an increase in leasehold improvements associated with
our new facility.
Income from operations for fiscal year 2015 was $7,051,000 compared to $8,518,000 for fiscal year 2014.
This decrease is attributable to increased selling, general and administrative expense.
Interest income in fiscal year 2015 was $106,000 compared to $96,000 for fiscal year 2014. The Company
invests its excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts.
Income tax expense for fiscal year 2015 was $2,475,000 compared to $3,181,000 for fiscal year 2014. Due
to net operating loss utilization, income tax expense primarily had a non-cash effect on the operating cash
flow for the years ended September 30, 2015 and 2014. The decrease in tax expense of $706,000 from the
year ended September 30, 2014 is primarily due to decreased deferred tax expense resulting from lower
profitability in fiscal year 2015. The decrease in the income tax expense rate to 34.6% for fiscal year 2015
from 36.9% for fiscal year 2014 is primarily the result of the Company reversing a portion of its remaining
valuation allowance primarily related to the expiration of state net operating losses in 2015 during the fourth
quarter of fiscal year 2015. Our provisions for income taxes include current federal alternative minimum
tax expense, state income tax expense and deferred tax expense.
Net income for fiscal year 2015 was $4,682,000 or $0.35 per basic share and $0.34 per diluted share,
compared to $5,433,000 or $0.42 per basic share and $0.40 per diluted share for the year 2014.
Liquidity and Capital Resources
At September 30, 2016, the Company had combined balances of short-term cash and investments and long-
term investments of $44,244,000 as compared to $34,286,000 at September 30, 2015. As of September 30,
2016, our principal source of liquidity was our cash and cash equivalents and short-term investments. Those
22
sources total $33,541,000 at September 30, 2016, compared to $25,996,000, at September 30, 2015.
Investments considered long-term are $10,703,000 at September 30, 2016, compared to $8,290,000 at
September 30, 2015. Our excess cash is invested mainly in certificates of deposit and money market
accounts. Substantially all of our funds are insured by the FDIC. 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. We had no long-term debt obligations at September 30, 2016 or 2015, respectively.
We believe our existing cash equivalents and short-term investments, along with cash flow from operations,
will be sufficient to meet our working capital and investment requirements for beyond the next 12 months.
The Company intends on utilizing its available cash and assets primarily for its continued organic growth
and potential future strategic transactions, as well as execution of the $8,000,000 share repurchase program
adopted by the Board of Directors on November 13, 2014.
Operating Activities
Net cash generated from operations for the fiscal year ended September 30, 2016 totaled $11,553,000. Cash
provided by operations included net income of $8,013,000 for the fiscal year ended September 30, 2016,
which included non-cash expenses for depreciation and amortization of $1,449,000 and stock-based
compensation of $1,405,000, along with a non-cash benefit from deferred taxes of $2,341,000. The
Company has historically been utilizing its net operating losses (“NOLs”) for taxes due and made cash
payments related to taxes of $1,131,000, $51,000 and $361,000 in the fiscal periods 2016, 2015 and 2014,
respectively. Since the federal NOLs are now fully consumed as of September 30, 2016, the Company will
no longer have this non-cash tax benefit, which will result in the Company having to use cash for its tax
expense. Changes between fiscal year 2016 and fiscal year 2015 in working capital items using cash
included increases in accounts receivable, inventory, and other current assets of $1,988,000, $1,190,000,
and $813,000, respectively. The increase in accounts receivable is primarily attributable to increased sales
in the quarter ended September 30, 2016. 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, was 35 days for both September 30, 2015 and September 30, 2016. The increase
in inventory represents an adjustment for seasonal demand along with changes in stocking levels for new
product development. The increase in other current assets is primarily due to an increase in income taxes
receivable at September 30, 2016. Changes in working capital items providing cash between fiscal year
2016 and fiscal year 2015 included an increase in accounts payable and accrued expenses of $2,324,000,
primarily due to increased performance compensation accruals.
Net cash generated from operations for the fiscal year ended September 30, 2015 totaled $6,848,000. Cash
provided by operations included net income of $4,682,000 for the fiscal year ended September 30, 2015,
which included non-cash expenses for depreciation and amortization of $1,216,000 and stock-based
compensation of $1,075,000, along with a non-cash benefit from deferred taxes of $2,342,000. The
Company has historically been utilizing its net operating losses (“NOLs”) for taxes due and made cash
payments related to taxes of $51,000, $361,000 and $154,000 in the fiscal periods 2015, 2014 and 2013,
respectively. When the NOLs are fully consumed, the Company will no longer have this non-cash tax
benefit which will result in the Company having to use cash for its tax expense. Changes between fiscal
year 2015 and fiscal year 2014 in working capital items using cash included increases in inventory and
accounts receivable of $1,793,000 and $983,000, respectively. The increase in inventory represents an
adjustment for seasonal demand along with changes in stocking levels for new product development. The
increase in accounts receivable is primarily attributable to increased sales in the quarter ended September
30, 2015. 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 three days to 35 days from September 30, 2014 to September 30, 2015. Changes in working
capital items providing cash between fiscal year 2015 and fiscal year 2014 included an increase in accounts
payable and accrued expenses of $164,000 and a decrease in other current assets of $121,000.
23
Net cash generated from operations for the fiscal year ended September 30, 2014 totaled $11,529,000. Cash
provided by operations included net income of $5,433,000 for the fiscal year ended September 30, 2014,
which included non-cash expenses for depreciation and amortization of $700,000 and stock-based
compensation of $795,000, along with a non-cash benefit from deferred taxes of $3,020,000. Changes
between fiscal year 2014 and fiscal year 2013 in working capital items providing cash included decreases
in accounts receivable and inventory of $2,810,000 and $236,000, respectively. Accounts receivable
balances can be influenced by the timing of shipments for customer projects and payment terms. The
decrease in accounts receivable was primarily the result of significant payments received in the first quarter
from one customer with a large balance at September 30, 2013, and lower sales in the fourth quarter of
fiscal 2014 compared to fiscal 2013, resulting in a substantially lower balance at September 30, 2014. The
decrease in inventory reflects the fulfillment of orders that were in the Company’s backlog as of September
30, 2013 and also represents an adjustment for seasonal demand along with changes in stocking levels for
new product development. Changes in working capital items using cash between fiscal year 2014 and fiscal
year 2013 included a decrease in accounts payable and accrued expenses of $1,234,000 and an increase in
other current assets of $243,000. Changes in accounts payable and accrued expenses primarily reflect a
decrease related to fiscal year 2013 accrued bonus compensation accruals of $2,691,000 which were paid
during the first quarter of fiscal year 2014.
Investing Activities
For the fiscal year ended September 30, 2016, we used $1,627,000 in cash for the purchase of capital
equipment and patents. These purchases were mainly related to information technology and manufacturing
equipment. During fiscal year 2016, we purchased $8,138,000 of FDIC-backed certificates of deposit and
sold $8,123,000 of FDIC-backed certificates of deposit. The result is cash used in investing activities of
$1,642,000 in fiscal year 2016 as compared to $5,744,000 in fiscal year 2015. In fiscal year 2017, the
Company intends to invest in the necessary computer hardware and software required to optimize its
business, along with appropriate manufacturing equipment to continue to maintain a competitive position
in manufacturing capability.
For the fiscal year ended September 30, 2015, we used $4,543,000 in cash for the purchase of capital
equipment and patents. Included in this amount were purchases of $3,027,000 in leasehold improvements
and office equipment for the build out of our new Minnesota facility which was completed in the fiscal
2015 second quarter and purchases of manufacturing and warehouse equipment of $1,079,000. During
fiscal year 2015, we purchased $10,374,000 of FDIC-backed certificates of deposit and sold $9,093,000 of
FDIC-backed certificates of deposit. The result is cash used in investing activities of $5,744,000 in fiscal
year 2015 as compared to $3,586,000 in fiscal year 2014.
For the fiscal year ended September 30, 2014, we used $1,455,000 in cash for the purchase of capital
equipment and prosecution of patents. Included in this amount were purchases for manufacturing
equipment in the amount of $851,000. During the same period, we purchased $8,899,000 of FDIC-backed
certificates of deposit and sold $6,727,000 of FDIC-backed certificates of deposit. The result is cash used
in investing activities of $3,586,000 in fiscal year 2014 as compared to $114,000 in fiscal year 2013.
Financing Activities
For the fiscal year ended September 30, 2016, the Company used $334,000 for the repurchase of common
stock. Also, the Company received $254,000 and $549,000 during the fiscal year ended September 30,
2016 from employees’ purchase of stock through our Employee Stock Purchase Plan (“ESPP”) and the
exercise of stock options, respectively. The Company used $438,000 to pay for taxes as a result of
employees’ exercises of stock options and vesting of restricted shares using share withholding. As a result,
the net cash provided by financing activities during fiscal year 2016 was $32,000.
For the fiscal year ended September 30, 2015, the Company used $849,000 for the repurchase of common
stock. Also, the Company received $211,000 and $43,000 during the fiscal year ended September 30, 2015
24
from employees’ purchase of stock through the ESPP and the exercise of stock options, respectively. The
Company used $639,000 to pay for taxes as a result of employees’ exercises of stock options and vesting
of restricted shares using share withholding. As a result, the net cash used by financing activities during
fiscal year 2015 was $1,224,000.
For the fiscal year ended September 30, 2014, the Company received $186,000 and $646,000 from
employees’ purchase of stock through our ESPP and the exercise of stock options, respectively. The
Company used $400,000 to pay for taxes as a result of employees’ exercises of stock options and vesting
of restricted shares using share withholding. As a result, the net cash provided by financing activities during
fiscal year 2014 was $441,000.
Contractual Obligations as of September 30, 2016
Total
Less than
1 year
Operating lease obligations $ 3,442,660
$ 3,442,660
Total
$
$
442,070
442,070
1-3 years
$ 756,155
$ 756,155
3-5 years
$ 794,441
$ 794,441
More than
5 years
$ 1,449,994
$ 1,449,994
Payments due by period
Operating Leases
We have entered into various non-cancelable operating lease agreements for office equipment and our
office and manufacturing space in Brooklyn Park, Minnesota that was entered into on September 9, 2014
with a lease term that commenced on January 1, 2015. Certain of these leases have escalating rent payment
provisions. We recognize rent expense under such leases on a straight-line basis over the term of the lease.
Quarterly Financial Data (Unaudited)
Quarterly data for the years ended September 30, 2016 and 2015 was as follows:
Statement of Earnings Data
2015
December 31,
March 31,
2016
June 30,
2016
September 30,
2016
Quarter Ended
$
Net sales
Gross profit
Income from operations
Net income
Net income per share Basic
Net income per share Diluted
15,689,715
6,676,796
1,979,781
1,487,454*
$0.11
$0.11
$ 16,947,187
7,280,449
2,143,497
1,492,979*
$0.11
$0.11
$ 21,598,720
9,340,197
3,461,845
2,362,061*
$0.18
$0.17
$
21,052,104
9,572,806
3,146,569
2,670,568*
$0.20
$0.20
Statement of Earnings Data
2014
December 31,
March 31,
2015
June 30,
2015
September 30,
2015
Quarter Ended
$
Net sales
Gross profit
Income from operations
Net income
Net income per share Basic
Net income per share Diluted
13,986,620
5,742,514
1,616,517
1,069,373
$0.08
$0.08
$ 12,370,784
4,753,437
464,133
288,661
$0.02
$0.02
$ 18,195,911
7,796,740
2,950,976
1,952,900
$0.15
$0.14
$
15,770,602
6,575,262
2,019,729
1,371,074
$0.10
$0.10
*In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting. The standard is required to be adopted by
25
all companies in their first fiscal year beginning after December 15, 2016 but allows companies to early
adopt prior to this date. The standard is intended to simplify various aspects of the accounting and
presentation of share-based payments. During the quarter ended September 30, 2016, the Company elected
to early adopt this standard as of October 1, 2015. Adoption of this standard impacted the previously filed
10-Qs for fiscal 2016 as follows:
Statements of earnings – The new accounting standard requires that the tax effects of stock-based
compensation be recognized in the income tax provision of the Company’s Statements of Earnings.
Previously, these amounts were recognized in additional paid-in capital on the Company’s Balance Sheets.
The new standard requires these amounts to be recasted within these quarters due to the prospective
adoption of this standard in the fourth quarter of fiscal 2016. Accordingly, net tax benefits related to stock-
based compensation awards of $104,134, $54,313, and $79,640 for the quarters ended December 31, 2015,
March 31, 2016, and June 30, 2016, respectively, were recognized as reductions of income tax expense in
the statements of earnings. These tax benefits reduced our effective income tax rate 5.2%, 2.5%, and 2.3%
for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016, respectively. The changes
were applied on a prospective basis and resulted in an increase in basic and diluted earnings per share of
$0.01 and $0.01 for the quarters ended December 31, 2015 and June 30, 2016, respectively. The change
had no effect on basic and diluted earnings per share for the quarter ended March 31, 2016. The net tax
benefit recognized during the quarter ended September 30, 2016 was $437,096, which reduced our effective
tax rate 13.7% to 16.3% for the quarter and resulted in an increase in basic and diluted earnings per share
of $0.03 and $0.04, respectively. The net tax benefit recognized during the year ended September 30, 2016
was $675,183, which reduced our effective tax rate 6.2% to 26.4% for the year and resulted in an increase
in basic and diluted earnings per share of $0.05.
Recent Accounting Pronouncements:
In May 2014, the FASB issued guidance creating Accounting Standards Codification (“ASC”) Section 606,
Revenue from Contracts with Customers. The new section will replace Section 605, “Revenue
Recognition” and creates modifications to various other revenue accounting standards for specialized
transactions and industries. The section is intended to conform revenue accounting principles with
concurrently issued International Financial Reporting Standards (“IFRS”) containing differing treatment
between United States practice and those of much of the rest of the world, as well as to enhance disclosures
related to disaggregated revenue information. The updated guidance is effective for annual reporting
periods beginning after December 15, 2017, and interim periods within that reporting period. Early
application is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. Although the Company has not completed a full impact
assessment of this guidance, we do not believe it will have a material impact on the reported net sales
amounts.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) Related to Simplifying the
Measurement of Inventory which applies to all inventory except inventory that is measured using last-in,
first-out (“LIFO”) or the retail inventory method. Inventory measured using first-in, first-out (“FIFO”) or
average cost is covered by the new amendments. Inventory within the scope of the new guidance should
be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail
inventory method. The amendments will take effect for public business entities for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The new guidance should be
applied prospectively, and earlier application is permitted as of the beginning of an interim or annual
reporting period. Although the Company has not completed a full impact assessment of this guidance, we
do not believe it will have a material impact on reported inventory amounts.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to present right-of-use
assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The
26
guidance is to be applied using a modified retrospective approach at the beginning of the earliest
comparative period in the financial statements and is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company
is evaluating the impact the adoption of this ASU will have on our financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is subject to changes in market interest rates on cash, cash equivalents, and short-term
investments. These market risks have not changed significantly since September 30, 2015. Increases or
decreases in interest rates will have an effect on these balances. At September 30, 2016, and 2015, the
Company had cash and cash equivalents and short-term investments totaling $33,541,000 and $25,996,000,
respectively. Most of these balances were invested in interest-bearing money market accounts or CD’s
maturing within 12 months. Due to the nature of these money market accounts and CD’s, we believe that
we do not have any material exposure to changes in the fair value of our cash equivalents and short-term
investments as a result of changes in interest rates.
The Company uses the U.S. dollar as its functional currency. As such, fluctuations in foreign currency
exchange rates have historically not been material to the Company. Accordingly, the Company believes it
does not have any material exposure to fluctuations in foreign currency.
27
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Clearfield, Inc.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firms
Financial Statements
Balance Sheets
Statements of Earnings
Statements of Shareholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Page
29
31
32
33
34
35
The supplementary financial information required by this Item 8 is included in Item 7 under the caption
“Quarterly Financial Data (Unaudited).”
28
Report of Independent Registered Public Accounting Firm
To the Shareholders, Audit Committee and Board of Directors
Clearfield, Inc.
We have audited the accompanying balance sheets of Clearfield, Inc. as of September 30, 2016 and 2015,
and the related statements of earnings, shareholders' equity and cash flows for each of the years in the
three-year period ended September 30, 2016. We also have audited Clearfield, Inc.'s internal control over
financial reporting as of September 30, 2016, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
(2013 framework). The company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Annual Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial
statements and an opinion on the company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements include examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Clearfield, Inc. as of September 30, 2016 and 2015 and the results of its operations and cash
flows for each of the years in the three-year period ended September 30, 2016, in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, Clearfield,
Inc. maintained, in all material respects, effective internal control over financial reporting as of September
30, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework).
29
As discussed in Note D to the financial statements, effective October 1, 2015, the company adopted
Accounting Standards Update (ASU) 2015-17, Income Taxes (Topic 740) Balance Sheet Classification of
Deferred Taxes and Compensation - Stock Compensation (Topic 718) ASU 2016-09, Improvements to
Employee Share-Based Payment Accounting.
/s/ Baker Tilly Virchow Krause, LLP
Minneapolis, Minnesota
November 22, 2016
30
CLEARFIELD, INC.
BALANCE SHEETS
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred taxes
Other current assets
Total current assets
Property, plant and equipment, net
Other Assets
Long-term investments
Goodwill
Other
Total other assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable
Accrued compensation
Accrued expenses
Total current liabilities
Other Liabilities
Deferred taxes
Deferred rent
Total other liabilities
Total Liabilities
Commitment and Contingencies
Shareholders’ Equity
$
$
$
September 30,
2016
September 30,
2015
$
28,014,321
5,527,075
7,999,210
8,373,155
-
1,198,917
51,112,678
18,071,210
7,925,000
6,010,900
7,182,854
1,146,899
416,766
40,753,629
5,780,814
5,689,673
$
$
10,703,000
2,570,511
428,310
13,701,821
70,595,313
2,573,292
4,697,138
75,306
7,345,736
411,779
243,755
655,534
8,001,270
8,290,000
2,570,511
323,804
11,184,315
57,627,617
2,357,791
2,598,661
80,803
5,037,255
1,082,887
228,345
1,311,232
6,348,487
Preferred stock, $.01 par value; 500 shares; no shares
issued or outstanding
Common stock, $ .01 par value; 50,000,000 shares
authorized; 14,126,279 and 13,705,658 shares issued
and outstanding at September 30, 2016 and 2015,
respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
$
-
-
141,263
57,320,515
5,132,265
62,594,043
70,595,313
$
137,057
55,887,850
(4,745,777)
51,279,130
57,627,617
The accompanying notes are an integral part of these financial statements.
31
CLEARFIELD, INC.
STATEMENTS OF EARNINGS
Year Ended
September 30,
2016
Year Ended
September 30,
2015
Year Ended
September 30,
2014
$
75,287,726
$
60,323,917
$
58,045,292
Net sales
Cost of sales
Gross profit
Operating expenses
Selling, general and administrative
Income from operations
Interest income
Income before income taxes
42,417,478
32,870,248
22,138,556
10,731,692
157,402
10,889,094
Income tax expense
Net income
$
2,876,032
8,013,062
$
Net income per share Basic
Net income per share Diluted
$0.60
$0.59
35,455,964
24,867,953
17,816,598
7,051,355
105,891
7,157,246
2,475,238
4,682,008
$0.35
$0.34
$
33,446,526
24,598,766
16,080,640
8,518,126
95,703
8,613,829
3,180,978
5,432,851
$0.42
$0.40
Shares used in calculation of net
income per share:
Basic
Diluted
13,372,579
13,663,349
13,216,010
13,587,532
12,916,273
13,601,594
The accompanying notes are an integral part of these financial statements.
32
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33
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CLEARFIELD, INC.
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization
Deferred income taxes
Loss on disposal of assets
Stock-based compensation expense
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Other current assets
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Purchase of investments
Proceeds from sale of property and equipment
Patent additions
Sale of investments
Net cash used in investing activities
Cash flows from financing activities:
Repurchase of common stock
Proceeds from issuance of common stock under
employee stock purchase plan
Proceeds from issuance of common stock
Excess tax benefit from exercise of stock options
Tax withholding related to vesting of restricted
stock grants and exercise of stock options
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Cash paid during the year for income taxes, net
of refunds
Non-cash financing activities
Cashless exercise of stock options
Establishment of deferred tax asset for the
adoption of ASU 2016-09
Year Ended
September 30,
2016
Year Ended
September 30,
2015
Year Ended
September 30,
2014
$
8,013,062
$
4,682,008
$
5,432,851
1,449,202
2,340,771
12,348
1,404,899
(1,988,310)
(1,190,301)
(812,811)
2,323,891
11,552,751
(1,550,128)
(8,138,075)
729
(77,138)
8,123,000
(1,641,612)
1,216,083
2,342,045
23,196
1,074,727
(983,044)
(1,792,512)
121,381
164,336
6,848,220
(4,518,782)
(10,374,000)
79,936
(24,418)
9,093,000
(5,744,264)
(333,761)
(849,157)
254,426
548,844
-
(437,537)
31,972
9,943,111
18,071,210
28,014,321
1,130,930
853,033
1,864,980
$
$
$
$
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43,106
9,660
(639,307)
(1,224,239)
(120,283)
18,191,493
18,071,210
50,850
207,738
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$
$
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$
$
$
699,869
3,019,626
12,809
794,865
2,809,687
236,422
(243,339)
(1,234,039)
11,528,751
(1,418,461)
(8,899,000)
40,908
(36,544)
6,727,000
(3,586,097)
-
185,584
646,453
8,474
(399,629)
440,882
8,383,536
9,807,957
18,191,493
361,284
297,883
-
The accompanying notes are an integral part of these financial statements.
34
NOTES TO FINANCIAL STATEMENTS
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Clearfield, Inc., (the “Company”) is a manufacturer of a broad range of standard
and custom passive connectivity products to customers throughout the United States and internationally.
These products include fiber distribution systems, optical components, Outside Plant (“OSP”) cabinets, and
fiber and copper cable assemblies that serve the communication service provider, including Fiber-to-the-
Premises (“FTTP”), large enterprise, and original equipment manufacturer (“OEM”) markets.
Revenue Recognition: Revenue is recognized when persuasive evidence of an arrangement exists, the
product has been delivered, the fee is fixed, acceptance by the customer is reasonably certain and collection
is reasonably assured. This generally occurs upon shipment of product to the customer. Sales of the
Company’s products are subject to limited warranty obligations that are included in the Company’s terms
and conditions. Also, the Company offers limited discounts and rebates to customers which are recorded
in net sales on an estimated basis as the sales are recognized. The Company records freight revenues billed
to customers as sales and the related shipping and handling cost in cost of sales. Taxes collected from
customers and remitted to governmental authorities are presented on a net basis.
Cash and Cash Equivalents: The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents at September 30, 2016 and 2015
consist entirely of short-term money market accounts.
The Company maintains cash balances at several financial institutions, and at times, such balances exceed
insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
Investments: The Company currently invests its excess cash in bank certificates of deposit (“CD’s”) that
are fully insured by the Federal Deposit Insurance Corporation (“FDIC)” with a term of not more than three
years. CD’s with original maturities of more than three months are reported as held-to-maturity investments
and are recorded at amortized cost, which approximates fair value due to the negligible risk of changes in
value due to interest rates. The maturity dates of our CD’s are as follows:
Less than one year
1-3 years
Total
September 30,
2016
September 30,
2015
$
$
5,527,075
10,703,000
16,230,075
$
$
7,925,000
8,290,000
16,215,000
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 does not charge interest on past due receivables. The
Company determines its allowance by considering a number of factors, including the length of time trade
receivables are past due, the Company’s previous loss history, the customer’s current ability to pay its
obligation to the Company, and the condition of the general economy and the industry as whole. The
Company writes off accounts receivable when they become uncollectible; payments subsequently received
on such receivables are credited to the allowance for doubtful accounts.
35
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The allowance for doubtful accounts activity for the years ended September 30, 2016, 2015 and 2014 is as
follows:
Year Ended
September 30, 2016
September 30, 2015
September 30, 2014
Balance at
Beginning
of Year
79,473
97,950
97,950
Additions
Charged to
Costs and
Expenses
25,000
-
-
$
$
Less
Write-offs
(11,000)
(18,477)
-
$
Balance
at End
of Year
93,473
79,473
97,950
$
Fair Value of Financial Instruments: The financial statements include the following financial
instruments: cash and cash equivalents, short-term investments, long-term investments, accounts
receivable, accounts payable and accrued expenses. Other than long-term investments, all financial
instruments’ carrying values approximate fair values because of the short-term nature of the instruments.
Long-term investments’ carrying value approximates fair value due to the negligible risk of changes in
value due to interest rates.
Inventories: Inventories consist of finished goods, raw materials and work in process and are stated at the
lower of average cost (which approximates first in, first out) or market. Inventory is valued using material
costs, labor charges, and allocated factory overhead charges and consists of the following:
Raw materials
Work-in-process
Finished goods
Inventories
September 30,
2016
September 30,
2015
$
$
5,702,762
471,305
2,199,088
8,373,155
$
$
4,811,993
310,149
2,060,712
7,182,854
Inventory is stated at the lower of cost or market. On a regular basis, the Company reviews its inventory
and identifies that which is excess, slow moving, and obsolete by considering factors such as inventory
levels, expected product life, and forecasted sales demand. Any identified excess, slow moving, and
obsolete inventory is written down to its market value through a charge to cost of sales. It is possible that
additional inventory write-down charges may be required in the future if there is a significant decline in
demand for the Company’s products and the Company does not adjust its manufacturing production
accordingly or if new products are not accepted by the market.
Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Significant additions
or improvements extending asset lives are capitalized, while repairs and maintenance are charged to
expense when incurred. Depreciation is provided in amounts sufficient to relate the cost of assets to
operations over their estimated useful lives. Leasehold improvements are amortized over the shorter of the
remaining term of the lease or estimated life of the asset. Estimated useful lives of the assets are as follows:
Equipment
Leasehold improvements
Vehicles
Years
3 – 7
7-10 or life of lease
3
36
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Property, plant and equipment consist of the following:
September 30,
2016
September 30,
2015
Manufacturing Equipment
Office Equipment
Leasehold Improvements
Vehicles
Property, plant and equipment, gross
Less accumulated depreciation
Property, plant and equipment, net
$
$
4,585,422
3,513,002
2,422,669
193,702
10,714,795
4,933,981
5,780,814
$
$
4,102,868
2,655,088
2,414,133
193,702
9,365,791
3,676,118
5,689,673
Depreciation expense for the years ended September 30, 2016, 2015 and 2014 were $1,445,910, $1,214,512
and $699,306, respectively.
Goodwill and Patents: The Company operates as one reporting unit and reviews the carrying amount of
goodwill annually in the fourth quarter of each fiscal year and more frequently if events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. The Company
determines its fair value for goodwill impairment testing purposes by calculating its market capitalization
and comparing that to the Company’s carrying value. The Company’s goodwill impairment test for the
years ended September 30, 2016, 2015 and 2014 resulted in excess fair value over carrying value and
therefore, no adjustments were made to goodwill. During the year ended September 30, 2016, there were
no triggering events that indicated goodwill could be impaired.
A significant reduction in our market capitalization or in the carrying amount of net assets of a reporting
unit could result in an impairment charge. If the carrying amount of a reporting unit exceeds its fair value,
the Company would measure the possible goodwill impairment loss based on an allocation of the estimate
of fair value of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including
any previously unrecognized intangible assets. The excess of the fair value of a reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is
recognized to the extent that a reporting unit's recorded goodwill exceeds the implied fair value of goodwill.
An impairment loss would be based on significant estimates and judgments, and if the facts and
circumstances change, a potential impairment could have a material impact on the Company’s financial
statements.
No impairment of goodwill has occurred during the years ended September 30, 2016, 2015 or 2014,
respectively.
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 September 30, 2016, the
Company has nine patents granted and eight pending applications inside the United States.
Impairment of Long-Lived Assets: The Company assesses potential impairments to its long-lived assets
or asset groups when there is evidence that events occur or changes in circumstances indicate that the
carrying amount of an asset or asset group may not be recovered. An impairment loss is recognized when
the carrying amount of the long-lived asset or asset group is not recoverable and exceeds its fair value. The
carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.
37
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Any required impairment loss is measured as the amount by which the carrying amount of a long-lived
asset or asset group exceeds its fair value and is recorded as a reduction in the carrying value of the related
asset or asset group and a charge to operating results. No impairment of long-lived assets has occurred
during the years ended September 30, 2016, 2015 and 2014.
Income Taxes: The Company records income taxes in accordance with the liability method of accounting.
Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted
tax law. The Company establishes a valuation allowance to reduce the deferred tax assets when it is more
likely than not that a deferred tax asset will not be realizable. Changes in tax rates are reflected in the tax
provision as they occur.
In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate settlement with the relevant tax authority. As of September 30, 2016, the Company does not
have any unrecognized tax benefits. The Company recognizes interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. We do not expect any material changes
in our unrecognized tax benefits over the next 12 months.
Stock-Based Compensation: We measure and recognize compensation expense for all stock-based
payments at fair value over the requisite service period. We use the Black-Scholes option pricing model to
determine the weighted average fair value of options. For restricted stock grants, fair value is determined
as the average price of the Company’s stock on the date of grant. Equity-based compensation expense is
broken out between cost of sales and selling, general and administrative expenses based on the classification
of the employee. The determination of fair value of stock-based payment awards on the date of grant using
an option-pricing model is affected by our stock price as well as by assumptions regarding a number of
subjective variables. These variables include, but are not limited to, the expected stock price volatility over
the term of the awards, and actual and projected employee stock option exercise behaviors.
The expected terms of the options are based on evaluations of historical and expected future employee
exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with
maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and
expected future volatility of the Company’s stock. The Company has not historically issued any dividends
and does not expect to in the future. Forfeitures for both option and restricted stock grants are estimated at
the time of the grant and revised in subsequent periods if actual forfeitures differ from estimates.
If factors change and we employ different assumptions in the determination of the fair value of grants in
future periods, the related compensation expense that we record may differ significantly from what we have
recorded in the current periods.
Research and Development Costs: Research and development costs amounted to $838,122, $750,107,
and $703,693, in 2016, 2015, and 2014, respectively, and are charged to expense when incurred.
Advertising Costs: Advertising costs amounted to $350,399, $284,093, and $238,026, in 2016, 2015, and
2014, respectively, and are charged to expense when incurred.
38
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Net Income Per Share: Basic and diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding and the weighted average number of dilutive
shares outstanding, respectively. Weighted average common shares outstanding for the years ended
September 30, 2016, 2015 and 2014 were as follows:
Year ended September 30,
Net income
Weighted average common shares
Dilutive potential common shares
Weighted average dilutive
common shares outstanding
Earnings per share:
Basic
Diluted
$
2016
8,013,062
13,372,579
290,770
$
2015
4,682,008
13,216,010
371,522
$
2014
5,432,851
12,916,273
685,321
13,663,349
13,587,532
13,601,594
$0.60
$0.59
$0.35
$0.34
$0.42
$0.40
There were no potentially dilutive shares excluded from the calculation above for the years ended
September 30, 2016, 2015 and 2014.
Use of Estimates: The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses and
disclosure about contingent assets and liabilities at the date of the financial statements. Significant
estimates include the deferred tax asset valuation allowance, the valuation of our inventory, rebates related
to revenue recognition, performance compensation accruals and the valuation of long-lived assets and
goodwill. Actual results may differ materially from these estimates.
Recently Issued Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting
Standards Codification (“ASC”) Section 606, Revenue from Contracts with Customers. The new section
will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue
accounting standards for specialized transactions and industries. The section is intended to conform
revenue accounting principles with a concurrently issued International Financial Reporting Standards with
previously differing treatment between United States practice and those of much of the rest of the world,
as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is
effective for annual reporting periods beginning after December 15, 2017, and interim periods within that
reporting period. Early application is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Although the Company has not
completed a full impact assessment of this guidance, we do not believe it will have a material impact on the
reported net sales amounts.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) Related to Simplifying the
Measurement of Inventory which applies to all inventory except inventory that is measured using last-in,
first-out (“LIFO”) or the retail inventory method. Inventory measured using first-in, first-out (“FIFO”) or
average cost is covered by the new amendments. Inventory within the scope of the new guidance should
be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail
inventory method. The amendments will take effect for public business entities for fiscal years beginning
39
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
after December 15, 2016, including interim periods within those fiscal years. The new guidance should be
applied prospectively, and earlier application is permitted as of the beginning of an interim or annual
reporting period. Although the Company has not completed a full impact assessment of this guidance, we
do not believe it will have a material impact on reported inventory amounts.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to present right-of-use
assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The
guidance is to be applied using a modified retrospective approach at the beginning of the earliest
comparative period in the financial statements and is effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company
is evaluating the impact the adoption of this ASU will have on our financial statements.
NOTE B – COMMITMENTS AND FACILITIES
Operating Leases: The Company leases office and manufacturing facilities in Brooklyn Park, Minnesota
for its ongoing operations. The lease term commenced on January 1, 2015. The Company also leases
various pieces of office equipment. Certain of these leases have escalating rent payment provisions. We
recognize rent expense under such leases on a straight-line basis over the term of the lease. For the years
ended September 30, 2016, 2015 and 2014, total rent expense was $658,000, $630,000 and $505,000
respectively. Rent expense includes operating expenses, insurance, and related taxes.
As of September 30, 2016, the future minimum lease payments required under operating lease agreements
are as follows:
Year ending September 30
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
Operating leases
442,070
373,409
382,746
392,318
402,123
1,449,994
3,442,660
$
$
Share Repurchase: On November 13, 2014, the Company announced that its board of directors had
approved a stock repurchase program under which it will purchase up to $8 million of its outstanding shares
of common stock. The program does not obligate Clearfield to repurchase any particular amount of
common stock during any period. The repurchase will be funded by cash on hand. The repurchase program
is expected to continue indefinitely until the maximum dollar amount of shares has been repurchased or
until the repurchase program is earlier modified, suspended or terminated by the board of directors. As of
September 30, 2016, the Company may repurchase up to $6,817,082 of its outstanding shares of common
stock.
NOTE C – SHAREHOLDERS’ EQUITY
The Board of Directors may, by resolution, establish from the undesignated shares different classes or series
of shares and may fix the relative rights and preferences of shares in any class or series. The Company is
authorized to issue 500 shares of preferred stock and 50,000,000 shares of common stock at $.01 par value.
The Company has not issued any shares of preferred stock.
40
NOTE C – SHAREHOLDERS’ EQUITY - Continued
Stock-Based Compensation: The Company’s stock-based compensation plans are administered by the
Compensation Committee of the Board of Directors, which selects persons to receive awards and
determines the number of shares subject to each award and the terms, conditions, performance measures
and other provisions of the award.
The Company has two equity compensation plans which are used as an incentive for directors, officers, and
other employees. The director’s plan was terminated in February of 2010 and 67,500 authorized but
unissued shares were removed from the plan. The employee plan has 95,848 shares available for issue as
of September 30, 2016. As of September 30, 2016, $7,434,060 of total unrecognized compensation expense
related to non-vested awards is expected to be recognized over a period of approximately 8.1 years. The
Company recorded related compensation expense for the years ended September 30, 2016, 2015, and 2014
of $1,404,899, $1,074,727, and $794,865, respectively. For the year ended September 30, 2016, $1,272,656
of this expense was included in selling, general and administrative expense and $132,243 was included in
cost of sales. For the years ended September 30, 2015 and 2014, all of this expense was included in selling,
general and administrative expense.
Stock Options: The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-
based awards. The Company did not grant stock options during the years ended September 30, 2016, 2015
and 2014.
Options are generally granted at fair market values determined on the date of grant and vesting normally
occurs over a three to five-year period. The maximum contractual term is normally six years. However,
options granted to directors have a one year vesting period and a six year contractual term. Shares issued
upon exercise of a stock option are new shares. There were no options vested during the year ended
September 30, 2016. The number of options vested during the year ended September 30, 2015 was 59,090
with a total grant date fair value of $373,271 and a weighted average grant date fair value of $6.32. For the
year ended September 30, 2016, there were 152,484 stock options that were exercised using a cashless
method of exercise. For the year ended September 30, 2015, there were 56,767 stock options that were
exercised using a cashless method of exercise. The intrinsic value of options exercised during the years
ended September 30, 2016 and 2015 was $2,644,220 and $876,841, respectively. The intrinsic value of
options exercisable as of September 30, 2016 is $858,771.
Option transactions under these plans during the years ended September 30, 2016 and 2015 are summarized
as follows:
Outstanding at September 30, 2014
Granted
Cancelled or Forfeited
Exercised
Outstanding at September 30, 2015
Granted
Cancelled or Forfeited
Exercised
Outstanding at September 30, 2016
Weighted average
exercise price
Weighted
average fair value
$4.93
-
6.36
3.43
5.29
-
-
5.78
$3.13
-
-
Number of
shares
373,051
-
(2,500)
(73,167)
297,384
-
-
(242,584)
54,800
41
NOTE C – SHAREHOLDERS’ EQUITY – Continued
The following table summarizes information concerning options exercisable under the equity compensation
plans:
Year ended
September 30, 2016
September 30, 2015
Exercisable
54,800
297,384
Weighted average
remaining contractual life
2.83 years
1.57 years
Weighted average
exercise price
$3.13
$5.29
The following table summarizes information concerning options currently outstanding at:
Year Ended
September 30, 2016
September 30, 2015
Number
outstanding
54,800
297,384
Weighted
average
remaining
contractual life
2.83 years
1.57 years
Weighted
average
exercise
price
$3.13
$5.29
Aggregate
intrinsic
value
$858,771
$2,420,521
Restricted Stock: The Company’s 2007 Stock Compensation Plan permits our Compensation Committee
to grant other stock-based awards. The Company awards restricted stock grants that vest over one to ten
years to employees.
Restricted stock transactions during the years ended September 30, 2016 and 2015 are summarized as
follows:
Unvested shares at September 30, 2014
Granted
Vested
Forfeited
Unvested shares at September 30, 2015
Granted
Vested
Forfeited
Unvested shares at September 30, 2016
Number of
shares
518,515
7,300
(101,485)
(15,200)
409,130
269,173
(103,826)
(10,907)
563,570
Weighted average
grant date fair value
$10.02
13.69
17.07
10.80
9.97
17.43
7.99
12.99
$14.26
The Company repurchased a total of 19,072 shares of our common stock at an average price of $17.97 in
connection with payment of taxes upon the vesting of restricted stock previously issued to employees for
the year ended September 30, 2016. The Company repurchased a total of 33,896 shares of our common
stock at an average price of $16.89 in connection with payment of taxes upon the vesting of restricted stock
previously issued to employees for the year ended September 30, 2015.
Employee Stock Purchase Plan: The Clearfield, Inc. 2010 Employee Stock Purchase Plan (“Stock Plan”)
allows participating employees to purchase shares of the Company’s common stock at a discount through
payroll deductions. The Stock Plan is available to all employees subject to certain eligibility requirements.
Terms of the Stock Plan provide that participating employees may 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
42
NOTE C – SHAREHOLDERS’ EQUITY – Continued
of each stock purchase period or phase. The Stock Plan is carried out in six-month phases, with phases
beginning on July 1 and January 1 of each calendar year. For the phases that ended on December 31, 2015
and June 30, 2016, employees purchased 10,352 and 11,966 shares, respectively, at a price of $11.40 per
share. For the phases that ended on December 31, 2014 and June 30, 2015, employees purchased 10,097
and 10,119 shares, respectively, at a price of $10.46 per share. As of September 30, 2016, the Company
has withheld approximately $90,054 from employees participating in the phase that began on July 1, 2016.
After the employee purchase on June 30, 2016, 143,122 shares of common stock were available for future
purchase under the Stock Plan.
NOTE D – INCOME TAXES
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting. The standard is required to be adopted by
all companies in their first fiscal year beginning after December 15, 2016 but allows companies to early
adopt prior to this date. The standard is intended to simplify various aspects of the accounting and
presentation of share-based payments. During the quarter ended September 30, 2016, the Company elected
to early adopt this standard as of October 1, 2015. Adoption of this standard had the following impact on
the Company’s financial statements:
Statements of earnings – The new accounting standard requires that the tax effects of stock-based
compensation be recognized in the income tax provision of the Company’s Statements of Earnings.
Previously, these amounts were recognized in additional paid-in capital on the Company’s Balance Sheets.
The new standard requires these amounts to be recasted within these quarters due to the prospective
adoption of this standard in the fourth quarter of fiscal 2016. Accordingly, tax benefits related to stock-
based compensation awards of $104,134, $54,313, and $79,640 for the quarters ended December 31, 2015,
March 31, 2016, and June 30, 2016, respectively, were recognized as reductions of income tax expense in
the statements of earnings. These tax benefits reduced our effective income tax rate 5.2%, 2.5%, and 2.3%
for the quarters ended December 31, 2015, March 31, 2016, and June 30, 2016, respectively. The changes
were applied on a prospective basis and resulted in an increase in basic and diluted earnings per share of
$0.01 and $0.01 for the quarters ended December 31, 2015 and June 30, 2016, respectively. The change
had no effect on basic and diluted earnings per share for the quarter ended March 31, 2016. The net tax
benefit recognized during the quarter ended September 30, 2016 was $437,096, which reduced our effective
tax rate 13.7% to 16.3% for the quarter and resulted in an increase in basic and diluted earnings per share
of $0.03 and $0.04, respectively. The net tax benefit recognized during the year ended September 30, 2016
was $675,183, which reduced our effective tax rate 6.2% to 26.4% for the year and resulted in an increase
in basic and diluted earnings per share of $0.05.
Statements of cash flows – The standard requires that excess tax benefits from stock-based employee awards
be reported as operating activities in the Company’s Statements of Cash Flows. Previously, these cash
flows were included as hypothetical inflows/outflows in both operating and financing activities. We elected
to apply this change on a prospective basis, resulting in an increase in net cash provided by operating
activities and a decrease in net cash used by financing activities of $348,000, $741,000, and $1,786,000 for
the three months ended December 31, 2015, the six months ended March 31, 2016, and the nine months
ended June 30, 2016, respectively, compared to the previously filed Form 10-Qs.
Statements of shareholders’ equity – The standard requires that as of the beginning of the annual period of
adoption, previously unrecognized excess tax benefits be recognized on a modified retrospective basis and
record a deferred tax asset for the balance with an offsetting adjustment to retained earnings. The Company
43
NOTE D – INCOME TAXES – Continued
recognized additional deferred tax assets and adjusted retained earnings in the amount of $1,864,980 on
October 1, 2015.
In recording stock-based compensation expense, the new standard allows companies to make a policy
election as to whether they will include an estimate of awards expected to be forfeited or whether they will
account for forfeitures as they occur. We have elected to include an estimate of forfeitures in the
computation of our stock-based compensation expense. As this treatment is consistent with the Company’s
previous practice, this election had no impact on our financial statements.
The new standard requires that employee taxes paid when an employer withholds shares for tax-withholding
purposes be reported as financing activities in the consolidated statements of cash flows. As this treatment
is consistent with the Company’s previous practice, this election had no impact on our consolidated
financial statements.
Realization of net operating loss carry-forward and other deferred tax temporary differences are contingent
upon future taxable earnings. The Company’s deferred tax assets were reviewed for expected utilization
by assessing the available positive and negative factors surrounding its recoverability.
As of September 30, 2015, the Company’s remaining valuation allowance of approximately $659,000
related to state net operating loss carry forwards. During the fourth quarter of 2016, the Company reversed
approximately $337,000 of its remaining valuation allowance. Approximately $259,000 of the change
related to the expiration and utilization of state net operating losses in 2016. The remaining decrease of
$78,000 is related to higher future year expected NOL utilization due to updated profitability estimates.
The remaining valuation allowance balance as of September 30, 2016 of $322,000 relates entirely to state
net operating loss carry forwards we do not expect to utilize. The Company will continue to assess the
assumptions used to determine the amount of our valuation allowance and may adjust the valuation
allowance in future periods based on changes in assumptions of estimated future income and other factors.
If the valuation allowance is reduced, we would record an income tax benefit in the period the valuation
allowance is reduced. If the valuation allowance is increased, we would record additional income tax
expense.
The valuation allowance activity for the years ended September 30, 2016, 2015 and 2014 is as follows:
Year Ended
September 30, 2016
September 30, 2015
September 30, 2014
Balance at
Beginning
of Year
658,808
847,826
975,258
$
Income Tax
Benefit
$
$
(78,044)
(53,836)
-
Reversal
for State
NOL
Expiration
and
Utilization
(258,360)
(135,182)
(127,432)
Balance at
End of
Year
322,404
658,808
847,826
$
44
NOTE D – INCOME TAXES – Continued
Significant components of deferred income tax assets and liabilities are as follows at:
Current deferred income tax assets (liabilities):
Inventories
Accrued expenses and reserves
Prepaid expenses
Net operating loss carry forwards and credits
Valuation allowance
Net current deferred tax asset
Long-term deferred income tax assets (liabilities):
Intangibles
Property and equipment depreciation
Net operating loss carry forwards and credits
Stock-based compensation
Inventories
Prepaid expenses
Accrued expenses and reserves
Goodwill
Valuation allowance
Net long-term deferred tax liability
$
$
$
$
September 30,
2016
September 30,
2015
-
-
-
-
-
-
-
(67,450)
(815,374)
702,113
221,905
388,292
(44,511)
312,227
(786,577)
(89,375)
(322,404)
(411,779)
$
$
$
$
309,791
261,452
(42,304)
652,533
1,181,472
(34,573)
1,146,899
(39,819)
(726,035)
938,168
49,926
-
-
25,887
(706,779)
(458,652)
(624,235)
(1,082,887)
As of September 30, 2016 and 2015, the current income tax receivable was approximately $643,000 and
$48,000, respectively. Current income tax receivable amounts are included in Other Current Assets in the
Company’s balance sheets.
During the quarter ended December 31, 2015, the Company early adopted ASU 2015-17 to present balance
sheet classification of deferred income taxes as noncurrent. This adoption was applied prospectively and
therefore, prior periods were not retrospectively adjusted.
As of September 30, 2016, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards
and approximately $9,283,000 state NOLs. The U.S. federal NOL carry forward amounts were fully
utilized in the current year. The state NOL carry forward amounts expire in fiscal years 2017 through 2022
if not utilized.
The Company completed an Internal Revenue Code Section 382 analysis of the loss carry forwards in 2009
and determined then that all of the Company’s loss carry forwards are utilizable and not restricted under
Section 382. The Company has not updated its Section 382 analysis subsequent to 2009 and does not
believe there have been any events subsequent to 2009 that would impact the analysis.
Under ASU No. 2016-09, an entity recognizes all excess tax benefits and tax deficiencies relating to stock-
based compensation as income tax expense or benefit in the statement of earnings. This change eliminates
the notion of the “APIC” pool and related prior year disclosures for excess tax deductions not reflected in
the Company’s deferred tax asset presentation.
45
NOTE D – INCOME TAXES – Continued
The following is a reconciliation of the federal statutory income tax rate to the consolidated effective tax
rate as a percent of pre-tax income for the following years ended:
Federal statutory rate
State income taxes
Permanent differences
Change in valuation allowance
Expiration of state NOL’s
Research and development credits
Excess tax benefits from stock-based
compensation (adoption of ASU 2016-
09)
Tax rate
September 30,
2016
34%
1%
-
(3%)
2%
(1%)
September 30,
September 30,
2015
34%
1%
1%
(3%)
2%
-
2014
34%
1%
2%
(1%)
1%
-
(7%)
26%
-
35%
-
37%
Components of the income tax expense are as follows for the years ended:
September 30,
2016
September 30,
2015
September 30,
2014
Current:
Federal
State
Deferred:
Federal
State
$
$
428,638
106,623
535,261
$
67,373
65,820
133,193
2,434,294
(93,523)
2,340,771
2,876,032
$
2,377,590
(35,545)
2,342,045
2,475,238
$
115,049
46,303
161,352
2,903,110
116,516
3,019,626
3,180,978
Income tax expense
$
The Company is required to recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain the position following an
audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. The Company applies the interpretation to all tax positions for
which the statute of limitations remained open. The Company had no liability for unrecognized tax benefits
and did not recognize any interest or penalties during the years ended September 30, 2016, 2015, or 2014.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions.
Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and
regulations and require significant judgment to apply. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, income tax examinations by tax authorities for fiscal years ending
prior to 2001. We are generally subject to U.S. federal and state tax examinations for all tax years since
2000 due to our net operating loss carryforwards and the utilization of the carryforwards in years still open
under statute. The Company changed its fiscal year end in 2007 from March 31 to September 30.
46
NOTE E – CONCENTRATIONS
Suppliers: The Company purchases critical components for our products, including injection molded parts
and connectors from third parties, some of whom are single- or limited-source suppliers. If any of our
suppliers are unable to ship critical components, we may be unable to manufacture and ship products to our
distributors or customers. If the price of these components increases for any reason, or if these suppliers
are unable or unwilling to deliver, we may have to find another source, which could result in interruptions,
increased costs, delays, loss of sales and quality control problems.
Customers: The following table summarizes customers comprising 10% or more of net sales for the years
ended September 30, 2016, 2015, and 2014:
Customer A
Customer B
Customer C
* Less than 10%
Year Ended September 30,
2015
25%
*
*
2014
19%
*
21%
2016
21%
16%
*
As of September 30, 2016, Customers A and B accounted for 18% and 12% of accounts receivable,
respectively. As of September 30, 2015, Customers A and B accounted for 14% and 17% of accounts
receivable, respectively. Customers A and B are both distributors. Customer C is an Alternative Carrier.
NOTE F – EMPLOYEE BENEFIT PLAN
The Company maintains a contributory 401(k) profit sharing benefit plan, whereby eligible employees may
contribute a portion of their earnings, not to exceed annual amounts allowed under the Internal Revenue
Code. For the year ended September 30, 2014 and through December 31, 2014, the Company matched
100% of the first 3% and 50% of the next 2% of the participant’s eligible compensation that was contributed
by the participant. Effective January 1, 2015, the Company matched 100% of the first 3% and 50% of the
next 3% of the participant’s eligible compensation that was contributed by the participant. The Company’s
contributions under this plan were $520,530, $460,868 and $379,630 for the years ended September 30,
2016, 2015 and 2014, respectively.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
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 September 30, 2016. 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.
47
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control
over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the
supervision and with the participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in the 2013 Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation,
management concluded that, as of September 30, 2016, our internal control over financial reporting was
effective. Management reviewed the results of its assessment with our Audit Committee. The effectiveness
of our internal control over financial reporting as of September 30, 2016 has been audited by Baker Tilly
Virchow Krause, LLP, an independent registered public accounting firm, as stated in its report which is
included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
No changes in the Company’s internal control over financial reporting occurred during the fourth quarter
of fiscal year 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
PART III.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 10 to be included in our Proxy Statement for our 2017 Annual Meeting of
Shareholders (the “2017 Proxy Statement”), which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year for which this
report is filed, is incorporated herein by reference into this section.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 to be included in the 2017 Proxy Statement, is incorporated herein by
reference into this section.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 to be included in the 2017 Proxy Statement, is incorporated herein by
reference into this section.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by Item 13 to be included in the 2017 Proxy Statement, is incorporated herein by
reference into this section.
48
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 to be included in the 2017 Proxy Statement, is incorporated herein by
reference into this section.
PART IV.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report.
Financial Statements.
(1)
The financial statements of Clearfield, Inc. are filed herewith under Item 8. “Financial Statements
and Supplementary Data” of this Annual Report on Form 10-K.
(2)
Certain financial statement schedules have been omitted because they are not required, not
applicable, or the required information is provided in other financial statements or the notes to the
financial statements.
(b)
Exhibits.
49
EXHIBIT INDEX
Number
3.1
Description
Incorporated
by Reference to
Restated Articles of Incorporation, of APA Optics, Inc.
(n/k/a Clearfield, Inc.) dated November 3, 1983 and
Articles of Amendment dated December 9, 1983, July
30, 1987, March 22, 1989, September 14, 1994 and
August 17, 2000
3.1
Exhibit
to Registrant’s
Quarterly Report on Form 10-Q for
the quarter ended September 30,
2000
3.1 (a) Articles of Amendment to Articles of Incorporation
dated August 25, 2004
3.2
Amended and Restated Bylaws of Clearfield, Inc.
10.1
Stock Option Plan for Non-Employee Directors
3.1
Exhibit
to Registrant’s
Quarterly Report on Form 10-Q for
the quarter ended September 30,
2004
Exhibit 3.1 to Registrant’s Current
Report on Form 8-K dated
February 25, 2016
Exhibit 10.3a
to Registrant’s
Annual Report on Form 10-KSB
for the fiscal year ended March 31,
1994
*10.3
Form of Agreement regarding Indemnification of
Directors and Officers with certain current and former
directors
Exhibit 10.7 to Registrant’s Annual
Report on Form 10-K for the fiscal
year ended March 31, 2002
*10.5
2007 Stock Compensation Plan, as amended
Appendix A to the Registrant’s
the 2011
Proxy Statement for
Annual Meeting of Shareholders
held on February 24, 2011.
Exhibit 10.26
to Registrant’s
Current Report on Form 8-K dated
December 16, 2008
Exhibit 10.27
to Registrant’s
Current Report on Form 8-K dated
December 16, 2008
10.1
Exhibit
to Registrant’s
Current Report on Form 8-K dated
November 18, 2010.
Employment Agreement dated December 16, 2008 by
and between Clearfield, Inc. and Cheryl P. Beranek.
Employment Agreement dated December 16, 2008 by
and between Clearfield, Inc. and John P. Hill.
Clearfield, Inc. Code 280G Tax Gross Up Payment
Plan Adopted November 18, 2010
*10.6
*10.7
*10.8
10.9
Clearfield, Inc. 2010 Employee Stock Purchase Plan Appendix A to the Registrant’s
Proxy Statement for
the 2010
Annual Meeting of Shareholders
held on February 25, 2010.
10.11
Standard Form Industrial Building Lease dated
September 9, 2014 by and between Clearfield, Inc. and
First Industrial, L.P.
10.1
Exhibit
to Registrant’s
Current Report on Form 8-K dated
September 10, 2014.
23.1
Consent of Baker Tilly Virchow Krause, LLP
**
50
Incorporated
by Reference to
Number
31.1
Description
Certification of Chief Executive Officer (principal
executive officer) Pursuant to Rules 13a-14(a) and 15d-
14(a) of the Exchange Act
31.2
32
Certification of Chief Financial Officer (principal
financial officer) Pursuant to Rules 13a-14(a) and 15d-
14(a) of the Exchange Act
Certification of Chief Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. § 1350
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Calculation Linkbase
101.LAB XBRL Taxonomy Labels Linkbase
101.PRE XBRL Taxonomy Presentation Linkbase
101.DEF XBRL Taxonomy Definition Linkbase
**
**
**
**
**
**
**
**
**
* Indicates a management contract or compensatory plan or arrangement.
** Indicates exhibit filed herewith.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 22, 2016
Clearfield, Inc.
/s/ Cheryl Beranek
Cheryl Beranek
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
52
Each person whose signature appears below hereby constitutes and appoints Cheryl Beranek and Daniel
Herzog and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution,
to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and
to file the same, with all exhibits thereto and any other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about
the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying
and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue
thereof.
Signatures
Title
Date
/s/ Cheryl Beranek
Cheryl Beranek
President, Chief Executive Officer and
Director (principal executive officer )
November 22, 2016
/s/ Daniel Herzog
Daniel Herzog
/s/ Ronald G. Roth
Ronald G. Roth
/s/ Roger G. Harding
Roger G. Harding
/s/ Donald R. Hayward
Donald R. Hayward
/s/ Charles N. Hayssen
Charles N. Hayssen
/s/ Patrick F. Goepel
Patrick F. Goepel
Chief Financial Officer (principal
November 22, 2016
financial and accounting officer)
Director
November 22, 2016
Director
November 22, 2016
Director
November 22, 2016
Director
November 22, 2016
Director
November 22, 2016
53
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File No.
333-44500, File No. 333-136828, File No. 333-151504, File No. 333-166495 and File No. 333-173793) of
Clearfield, Inc. of our report dated November 22, 2016, relating to the financial statements and the
effectiveness of internal control over financial reporting, which appears in this annual report on Form 10-K
for the year ended September 30, 2016.
/s/ Baker Tilly Virchow Krause, LLP
Minneapolis, Minnesota
November 22, 2016
54
CERTIFICATION
Exhibit 31.1
I, Cheryl Beranek, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Clearfield, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly represent in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s control over financial reporting.
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal controls
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls over financial reporting.
November 22, 2016
/s/ Cheryl Beranek
Cheryl Beranek
Chief Executive Officer
(Principal executive officer)
55
I, Daniel Herzog, certify that:
CERTIFICATION
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Clearfield, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly represent in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s control over financial reporting.
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal controls
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls over financial reporting.
November 22, 2016
/s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer
(Principal financial and accounting officer)
56
Exhibit 32
The undersigned certifies pursuant to 18 U.S.C. 1350 that:
CERTIFICATION
1.
2.
The accompanying Annual Report on Form 10-K for the period ended September 30, 2016 fully
complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: November 22, 2016
/s/ Cheryl Beranek
Cheryl Beranek
Chief Executive Officer
/s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer
57
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BR18482P-0117-10K