UNITED
STATES
SECURITIES
AND
EXCHANGE
COMMISSION
Washington,
D.C.
20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2018.
☐ 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)
7050
Winnetka
Avenue
North
Suite
100
Brooklyn
Park,
Minnesota
55428
(Address of principal executive office)
41-1347235
(I.R.S.
Employer
Identification
No.)
(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 [X] 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 [X] 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.
[X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[X] 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.
[X] YES [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller Reporting Company [X] Emerging Growth Company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] YES [X] 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 $145,057,933.
The number of shares of common stock outstanding as of November 7, 2018 was 13,646,062.
Documents
Incorporated
by
Reference:
Portions of our proxy statement for the 2019 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
BUSINESS
RISK
FACTORS
UNRESOLVED
STAFF
COMMENTS.
PROPERTIES.
LEGAL
PROCEEDINGS.
MINE
SAFETY
DISCLOSURES
MARKET
FOR
REGISTRANT’S
COMMON
EQUITY,
RELATED
STOCKHOLDER
MATTERS
AND
ISSUER
REPURCHASES
OF
EQUITY
SECURITIES.
SELECTED
FINANCIAL
DATA
MANAGEMENT’S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND
RESULTS
OF
OPERATIONS
QUANTITATIVE
AND
QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK
FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
DATA
CHANGES
IN
AND
DISAGREEMENTS
WITH
ACCOUNTANTS
ON
ACCOUNTING
AND
FINANCIAL
DISCLOSURE.
CONTROLS
AND
PROCEDURES
OTHER
INFORMATION
DIRECTORS,
EXECUTIVE
OFFICERS
AND
CORPORATE
GOVERNANCE.
EXECUTIVE
COMPENSATION.
SECURITY
OWNERSHIP
OF
CERTAIN
BENEFICIAL
OWNERS
AND
MANAGEMENT
AND
RELATED
STOCKHOLDER
MATTERS.
CERTAIN
RELATIONSHIPS
AND
RELATED
TRANSACTIONS,
AND
DIRECTOR
INDEPENDENCE
PRINCIPAL
ACCOUNTANT
FEES
AND
SERVICES
EXHIBITS
AND
FINANCIAL
STATEMENT
SCHEDULES
FORM
10-K
SUMMARY
1
1
5
12
12
12
12
13
13
15
15
24
24
46
46
47
47
47
47
47
47
48
48
48
48
51
PART
I
ITEM
1.
ITEM
1A.
ITEM
1B.
ITEM
2.
ITEM
3.
ITEM
4.
PART
II.
ITEM
5.
ITEM
6.
ITEM
7.
ITEM
7A.
ITEM
8.
ITEM
9.
ITEM
9A.
ITEM
9B.
PART
III.
ITEM
10.
ITEM
11.
ITEM
12.
ITEM
13.
ITEM
14.
PART
IV.
ITEM
15.
ITEM
16.
SIGNATURES
PART
I
ITEM
1.
BUSINESS
Background
Clearfield, Inc. (“Clearfield” or the “Company”) designs, manufactures and distributes fiber protection, fiber management and fiber delivery solutions to enable
rapid and cost-effective fiber-fed deployment throughout the broadband service provider space across North America. Our “fiber to anywhere” platform serves the
unique requirements of leading incumbent local exchange carriers (Traditional Carriers), wireless operators, MSO/cable TV companies, and competitive local
exchange carriers (Alternative Carriers), while also catering to the broadband needs of the utility/municipality, enterprise, data center, and military markets.
We were incorporated under the laws of Minnesota and 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.seeclearfield.com. The information available on our website is not part of this Report. Our
annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available free of charge through the “About Clearfield” link at our website as soon as reasonably practicable after
we file such material with, or furnish it to, the Securities and Exchange Commission. Our filings with the Securities and Exchange Commission are also available
at www.sec.gov.
Description
of
Business
Service providers of all types are being challenged to deliver Gigabit speed bandwidth using fiber connections for a variety of uses--residential homes, businesses,
and network infrastructure. Clearfield is focused on providing fiber management, fiber protection, and fiber delivery products that accelerate the turn-up of these
fiber services in the wireline and wireless access network. We offer a broad portfolio of fiber products that allow service providers to build fiber networks faster,
meet service delivery demands, and align build costs with take rates.
Our products allow our customers to connect twice as many homes in their Fiber to the Home (FTTH) builds by using fewer resources in less time. Our products
speed up the time to revenue for our service provider customers in Multiple Dwelling Units (MDUs) and Multiple Tenant Units (MTUs) by reducing the amount of
labor and materials needed to provide Gigabit service. Our products help make business services more profitable through faster building access, easier
reconfiguration and quicker services turn-up. Finally, Clearfield is removing barriers to wireless small cell, Cloud Radio Access Network (C-RAN), and distributed
antenna system (DAS) deployments through better fiber management, test access, and fiber protection.
By combining in-house engineering and technical knowledge alongside 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.
Products
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 to within the home or business. The
central building block of FieldSmart is the patented technology surrounding the Clearview ® Cassette.
1
WaveSmart
® optical components are integrated for signal coupling, splitting, termination, multiplexing, demultiplexing and attenuation for a seamless integration
within our fiber management platform. The products are built and tested for harsh environments to meet the strictest industry standards ensuring customers trouble-
free performance in extreme outside plant conditions.
The ODC
outdoor active cabinet product line was acquired from Calix, Inc. in February 2018. This product line features a line of fully integrated, fully engineered
cabinets equipped with specific active electronics configurations as well as Clearfield’s fiber management solutions housing the Clearview Cassette. These
Clearfield ODC cabinets meet the rigorous demands of delivering information, communication, and entertainment services in an evolving, multi-media
environment.
FieldShield
®
is a patented 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 rugged high density polyethylene 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. FieldShield
FLEXdrop, FieldShield Flat Drop, FieldShield D-ROP and FieldShield Strong Fiber, through the use of the Flexport and Flex Connector, provide same port
connectivity regardless of the media being deployed.
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. The YOURx platform consists of hardened terminals, test access points, and multiple drop cable options designed for the most challenging portion of the
access network across all fiber drop cable media.
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.
Clearfield manufactures high quality Fiber
and
Copper
assemblies
with an industry-standard or customer-specified configuration. 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
and
Customers
Clearfield’s products are sold across broadband service providers, which we categorize as Community Broadband (Tier 2 and 3 telco carriers, utilities,
municipalities, and alternative carriers), National Carrier (wireless/wireless national telco carriers (Tier 1)), Multiple Service Operators (cable television),
International (primarily Central/Latin America and Canada), and Legacy (primarily contract manufacturing).
2
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 Central/Latin America.
FTTB
Fiber to the Business is the rapid expansion of fiber services, principally by Multiple Service Operators (cable television) and wireless/wireless national telco
carriers (Tier 1) 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, the majority 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.
C-RAN
C-RAN uses front-haul fiber to connect the Remote Radio Head (RRH) to a Baseband Unit (BBU) located in a datacenter (i.e., the cloud). C-RAN 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.
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 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.
3
Major
Customers
and
Financial
Information
about
Geographic
Areas
For the years ended September 30, 2018, 2017, and 2016, the Company had two customers that comprised 10% or more of net sales. Both of these customers are
distributors. These major customers, like our other customers, purchase our products from time to time through purchase orders, and we do not have any
agreements that obligate these major customers to purchase products in the future from us.
As of September 30, 2018, three customers accounted for 10% or more of accounts receivable. Two of these customers were distributors and one was a private
label original equipment manufacturer. As of September 30, 2017, one customer accounted for 10% or more of accounts receivable. This customer was a
distributor.
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.
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
2018
Year Ended September 30,
2017
$
$
72,295,000 $
5,356,000
77,651,000 $
67,901,000 $
6,047,000
73,948,000 $
2016
71,264,000
4,024,000
75,288,000
As of September 30, 2018, we had 15 patents granted and multiple patent applications pending both inside and outside the United States. We have also developed
and are using trademarks and logos to market and promote our products, including Clearview ® , FieldSmart ® , FieldShield ® , CraftSmart ® , and YOURx ® .
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 $5,637,000, $3,984,000, and $4,568,000 as of September 30, 2018, 2017, and 2016, 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.
4
Employees
As of September 30, 2018, the Company had approximately 225 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 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 products 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 include:
5
·
·
·
·
·
·
·
·
·
·
·
·
the volume and timing of orders from and shipments to our customers, particularly significant customers;
mergers and acquisitions activity among our customers;
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.
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.
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, many of which have significant resources, may make substantial investments in competing products and technologies, or may apply for and
obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. 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.
On January 31, 2017, CommScope Technologies LLC filed a complaint against us asserting infringement of CommScope patents by certain Clearfield products.
On February 22, 2018, CommScope and the Company agreed to terms of a settlement of the litigation and entered into a definitive settlement agreement reflecting
these terms on March 28, 2018. Under the terms of the settlement, the parties jointly dismissed the litigation and Clearfield withdrew its inter-partes reviews of
certain CommScope patents. In addition, the Company paid CommScope a one-time payment of $850,000 on March 30, 2018.
Additional litigation may be necessary in the future to defend or enforce our intellectual property rights, to protect our patents and trade secrets, and to determine
the validity and scope of our proprietary rights. Any additional litigation also may involve substantial costs and diversion of the attention of company management
away from operational activities . 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
the current litigation or similar future litigation could have a material adverse effect on our business, financial condition and results of operations.
6
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. 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, various cabling, optical components, 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 distributors or
customers could be extended, and our costs associated with the change in product manufacturing could increase.
7
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.
Our customer base includes direct customers, original equipment manufacturers (OEMs) and distributors. In fiscal year 2018, 2017, and 2016, the Company had
two customers that comprised 10% or more of net sales. Both of these customers are distributors.
These customers purchase our products from time to time through purchase orders, and we do not have any agreements that obligate our customers to purchase
products in the future from us. Our agreements with our distributor customers do not prohibit them from purchasing or offering products or services that compete
with ours.
We believe that the loss of our major distributor customers would likely result in purchases being re-directed through other sales channels, for example our other
distributors, independent sales representatives, or through direct sales to customers. However, there can be no assurance that the loss of a distributor customer
would not have an adverse effect on our sales or gross margins in this event.
The loss of any one or more of our key 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 .
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. 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.
We may be subject to risks associated with acquisitions, and the risks could adversely affect future operating results.
The Company monitors its business portfolio and organizational structure and has made and may continue to make acquisitions. The success of our acquisitions
will depend on our ability to integrate the new operations with the existing operations. The Company cannot ensure that the expected benefits of any acquisition
will be realized. Costs could be incurred on pursuits or proposed acquisitions that have not yet or may not close which could impact our operating results, financial
condition, or cash flows. Additionally, after the acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not
recoverable as an adjustment to the purchase price. The price we pay for a business may exceed the value we realize and we cannot be assured we will obtain the
expected revenues, anticipated synergies and strategic benefits of any acquisition. Acquisitions may result in the recording of goodwill and other intangible assets
which are subject to potential impairments in the future that could negatively impact our financial results.
8
Our business is dependent on effective management information systems and information technology infrastructure .
We rely on effective management information systems, including our enterprise resource planning (“ERP”) software, for critical business operations and to support
strategic business decisions. We rely on our ERP system to support such important business operations as processing sales orders and invoicing; manufacturing;
shipping; inventory control; purchasing and supply chain management; human resources; and financial reporting. Some of these systems are made up of multiple
software and system providers. The interdependence of these solutions and systems is a risk and the failure of any one system could have a material adverse effect
on our overall information technology infrastructure. We also rely on management information systems to produce information for business decision-making and
planning and to support e-commerce activities. Failure to maintain an adequate digital platform to support e-commerce activities could have a material adverse
impact on our business through lost sales opportunities. If we are unable to maintain our management information systems, including our IT infrastructure, to
support critical business operations and to produce information for business decision-making activities, we could experience a material adverse impact on our
business or an inability to timely and accurately report our financial results.
Our IT systems may also be vulnerable to disruptions from human error, outdated applications, computer viruses, natural disasters, unauthorized access, cyber-
attack and other similar disruptions. Any significant disruption, breakdown, intrusion, interruption or corruption of these systems or data breaches could cause
the loss of data, equipment damage, downtime, and/or safety related issues and could have a material adverse effect on our business.
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;
increased product warranty claims; 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. We offer customers limited warranty provisions. If the limitations on the
product warranties 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.
9
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. We
also have employment agreements with other key management. 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 have in the past resulted and may in the future result in lower spending among our customers and contribute to decreased
sales. 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; trade restrictions such as tariffs or changes imposed on international trade agreements; 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.
10
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 the 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.
National Broadband Plan’s transitioning from the USF to the CAF program may cause our customers and prospective customers to delay or reduce purchases.
The telecommunications and cable television industries are subject to significant and changing U.S. federal and state regulation, some of which subsidizes or
encourages spending on initiatives that utilize our products.
For example, the Federal Communications Commission has 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 the coming years will
eliminate subsidies that carriers have traditionally relied upon to support service in high-cost, rural areas. In 2019, Federal Communications Commission is expect
to take action on the Remote Areas Fund, another broadband buildout subsidy program targeting rural communities in the United States.
Changes in government programs in our industry or uncertainty regarding future changes could adversely impact our customers’ or prospective customers’
decisions regarding capital spending, which could decrease demand for our products, delay orders or result in pricing pressure from these customers.
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
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.”
11
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 71,000 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 also have an indirect lease arrangement for a 46,000 square foot manufacturing facility in Tijuana, Mexico. The lease term is three years and commenced on
August 1, 2017.
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.
12
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,
2018
Quarter ended December 31, 2017
Quarter ended March 31, 2018
Quarter ended June 30, 2018
Quarter ended September 30, 2018
Fiscal
Year
Ended
September
30,
2017
Quarter ended December 31, 2016
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Number
of
Holders
of
Common
Stock
There were 288 holders of record of our common stock as of November 7, 2018.
Dividends
$
$
High
14.75 $
15.30
14.10
14.10
High
21.60 $
21.50
16.50
14.80
Low
11.95
11.00
10.35
10.85
Low
16.01
15.00
12.20
11.00
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.
Equity
Compensation
Plan
Information
The following table describes shares of our common stock that are available on September 30, 2018 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:
Plan Category
Equity compensation plans approved by security holders
2010 Employee Stock Purchase Plan
2007 Stock Compensation Plan
Total
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)
- $
138,500
138,500 $
-
10.99
10.99
87,081
1,003,644
1,090,725
13
There are no equity compensation plans not approved by the Company’s shareholders and all outstanding equity awards have been granted pursuant to shareholder-
approved plans. In addition to options, the 2007 Stock Compensation Plan permits restricted stock awards and other stock-based awards.
Issuer
Repurchases
The Company repurchased a total of 10,776 shares of our common stock during the fourth quarter of fiscal year 2018 in connection with payment of taxes upon the
vesting of restricted stock previously issued to employees.
Additionally, in November 2014, the Company’s Board of Directors authorized an $8,000,000 common stock repurchase program, which was increased by
$4,000,000 on April 25, 2017 to a total authorization of $12,000,000. As of September 30, 2018, we have repurchased an aggregate of 523,794 shares for
approximately $6,600,000, leaving approximately $5,400,000 available within our $12,000,000 stock repurchase program. The repurchase 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.
The following table presents the total number of shares repurchased during the fourth quarter of fiscal 2018 by month and the average price paid per share:
ISSUER
PURCHASES
OF
EQUITY
SECURITIES
Total
Number
of
Shares
Purchased
Average
Price
Paid
per
Share
34,776 $
10,776
-
45,552 $
11.19
13.08
-
11.63
Period
July 1-31, 2018
August 1-31, 2018
September 1-30, 2018
Total
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)
5,409,326
5,409,326
5,409,326
5,409,326
34,776 $
-
-
34,776 $
(1) Amount remaining from the aggregate $12,000,000 repurchase authorizations approved by the Company’s Board of Directors on April 25, 2017.
14
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.
Selected Statements of Earnings Data
Net sales
Gross profit
Income from operations
Income tax expense
Net income
Net income per share basic
Net income per share diluted
Selected Balance Sheet Data
Total assets
Long-term liabilities
Shareholders’ equity
2018
2017
Year Ended September 30
2016
2015
2014
77,651,354 $
30,996,784
5,070,851
1,253,405
4,274,547
0.32 $
0.32 $
73,947,619 $
30,264,259
5,311,883
1,737,974
3,847,839
0.28 $
0.28 $
75,287,726 $
32,870,248
10,731,692
2,876,032
8,013,062
0.60 $
0.59 $
60,323,917 $
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
74,228,642 $
372,975
68,874,876
69,494,037 $
725,796
64,525,120
70,595,313 $
655,534
62,594,043
57,627,617 $
1,311,232
51,279,130
51,847,898
-
46,746,634
$
$
$
$
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 Fiber-to-
the-Premises (“FTTP”), Fiber-to-the-Business (“FTTB”), and Fiber-to-the-Cell site markets in the U.S. and in certain limited markets outside the U.S., including
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.
On February 20, 2018, the Company completed the acquisition of a portfolio of Telcordia certified outdoor active cabinet products from Calix, Inc. (“Calix”) upon
the terms and conditions contained in an Asset Purchase Agreement dated February 20, 2018. The introduction of the Clearfield active cabinet line provides
customers a single point of contact for cabinet solutions—both passive and active. We believe the acquisition enables Clearfield to expand its Fiber-to-the-
Anywhere expertise to include active electronic cabinet platforms while leveraging its supply chain. We believe the acquisition also enables Clearfield to capitalize
on and expand its reach to a broader customer base, including service providers in the Tier 1 and Tier 2 markets.
15
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 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, 2018, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards and approximately $3,468,000 state NOLs. The U.S.
federal NOL carry forward amounts were fully utilized in fiscal year 2016. The state NOL carry forward amounts expire in fiscal years 2019 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.
16
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 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, 2017, the Company’s remaining valuation allowance of approximately $159,000 related to state net operating loss carry forwards. As a result
of recording the impact of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on its deferred assets and liabilities, the Company recorded an increase in its
valuation allowance against state net operating losses carried forward of approximately $32,000 in the first quarter of 2018. D uring the fourth quarter of 2018, the
Company reversed approximately $86,000 of its remaining valuation allowance. This consisted of decreasing the valuation allowance for the expiration and
utilization of state net operating losses in 2018 of approximately $133,000 and increasing the valuation allowance by approximately $47,000 for future expected
NOL utilization based on updated profitability estimates and the federal rate change from 34% to 21%. The remaining valuation allowance balance as of
September 30, 2018 of $105,000 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 2003. We are generally subject to U.S. federal and state tax examinations for all tax years since 2003 due to our net operating loss
carryforwards and the utilization of the carryforwards in years still open under statute. During the year ended September 30, 2018, the Company was examined by
the U.S. Internal Revenue Service for fiscal year 2016. This examination resulted in no adjustments. In 2007, the Company changed its fiscal year end from March
31 to September 30.
During the quarter ended September 30, 2016, the Company early adopted Accounting Standards Update (“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
Note D.
Impairment
of
Long-Lived
Assets
and
Goodwill
The Company’s long-lived assets as of September 30, 2018 consisted primarily of property, plant and
equipment, patents, intangibles, 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 or acquisitions, and estimated expansion of the FTTP market.
17
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, 2018, 2017, and 2016 resulted in excess fair value over carrying value and therefore, no adjustments were made to goodwill.
During the year ended September 30, 2018, 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.
During the year ended September 30, 2017, the Company incurred an impairment charge on long-lived assets of $643,604. This impairment was related to the
cancellation of an enterprise resource planning software implementation. No impairment of long-lived assets or goodwill has occurred during the years ended
September 30, 2018 or 2016, 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 net realizable value. 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,
2018
compared
to
year
ended
September
30,
2017
Net sales for fiscal year 2018 increased 5%, or $3,703,000, to $77,651,000 from net sales of $73,948,000 in 2017. The Company allocates sales from external
customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 7% and 8% of net sales for
the years ended September 30, 2018 and 2017, respectively.
Sales in fiscal year 2018 to commercial data networks and broadband service providers were 95% of net sales, or $73,900,000, compared to $69,921,000, or 95%,
of net sales in fiscal 2017. Among this group, the Company recorded $5,356,000 in international sales in fiscal year 2018 versus $6,047,000 in fiscal year 2017.
Sales associated with build-to-print manufacturing for original equipment manufacturers in 2018 were 5% of net sales, or $3,751,000, compared to $4,027,000, or
5%, of net sales in fiscal year 2017.
The increase in net sales for fiscal year 2018 of $3,703,000 as compared to fiscal year 2017 is primarily attributable to an increase in sales to an OEM manufacturer
in the amount of $5,913,000 driven by the acquisition of our active cabinet line in February 2018. This was slightly offset by a decrease in the ongoing builds of an
Alternative Carrier customer of $1,383,000 and a decrease in international sales of $691,000 for fiscal year 2018 as compared to fiscal 2017 due to decreased
demand. Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, the Company’s ability to predict orders in future
periods or trends affecting orders in future periods is limited.
18
Cost of sales for fiscal year 2018 was $46,655,000, an increase of $2,972,000, or 7%, from the $43,683,000 in fiscal year 2017. Gross profit increased 2%, or
$733,000, from $30,264,000 for fiscal year 2017 to $30,997,000 for fiscal year 2018. Gross profit percent was 39.9% in fiscal year 2018, as compared to 40.9% for
fiscal year 2017. The year-over-year increase in gross profit was primarily due to increased sales volume. The decrease in gross profit percent was primarily due to
the integration of the Company’s acquired active cabinet line into its manufacturing processes as well as a higher percentage of sales associated with these
products, which generally have lower gross margins.
Selling, general and administrative expense for fiscal year 2018 was $25,926,000, an increase of $974,000, or 4%, compared to $24,952,000 for fiscal year 2017.
This increase is primarily composed of an increase of $913,000 in compensation costs due to additional sales and marketing personnel, an increase of $337,000 in
depreciation and amortization expense, and an increase of $1,131,000 of expenses due to the litigation and settlement of patent infringement claims that occurred
during the second quarter of fiscal 2018. These were partially offset by a decrease of $269,000 in stock compensation expense, a decrease of $324,000 in product
development costs, and a decrease of $409,000 in performance compensation accruals when compared to fiscal year 2017.
Income from operations for fiscal year 2018 was $5,071,000 compared to $5,312,000 for fiscal year 2017. This decrease is attributable to increased selling, general
and administrative expenses described above.
Interest income in fiscal year 2018 was $457,000 compared to $274,000 for fiscal year 2017. The increase is due mainly to higher interest rates earned on its
investments in fiscal 2018. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit and money market accounts .
Income tax expense for fiscal year 2018 was $1,253,000 compared to $1,738,000 for fiscal year 2017. The decrease in tax expense of $485,000 from the year
ended September 30, 2017 is primarily due to the Tax Reform Act enacted on December 22, 2017 that resulted in a lower federal tax rate and a one-time benefit of
$384,000 related to the favorable impact of a revaluation of our net deferred tax liability that decreased the income tax provision . The decrease in the income tax
expense rate to 22.7% for fiscal year 2018 from 31.1% for fiscal year 2017 is primarily due to the Tax Reform Act as described above. Our provisions for income
taxes include current federal tax expense, state income tax expense, and deferred tax expense.
Net income for fiscal year 2018 was $4,275,000 or $0.32 per basic and diluted share, compared to $3,848,000 or $0.28 per basic and diluted share for the year
2017.
Year
ended
September
30,
2017
compared
to
year
ended
September
30,
2016
Net sales for fiscal year 2017 decreased 2%, or $1,340,000, to $73,948,000 from net sales of $75,288,000 in 2016. The Company allocates sales from external
customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 8% and 5% of net sales for
the years ended September 30, 2017 and 2016, respectively.
Sales in fiscal year 2017 to commercial data networks and broadband service providers were 95% of net sales, or $69,921,000, compared to $69,850,000, or 93%,
of net sales in fiscal 2016. Among this group, the Company recorded $6,047,000 in international sales in fiscal year 2017 versus $4,024,000 in fiscal year 2016.
Sales associated with build-to-print manufacturing for original equipment manufacturers outside of the telecommunications market in 2017 were 5% of net sales,
or $4,027,000, compared to $5,438,000, or 7%, of net sales in fiscal year 2016.
19
The decrease in net sales for the fiscal year 2017 as compared to fiscal year 2016 is primarily attributable to a decrease in fiscal year 2017 of the ongoing builds of
an Alternative Carrier customer by $4,733,000 as compared to the fiscal year 2016. International sales increased $2,023,000 during the same period due to an
increase in demand in fiber deployments. In addition, the Company had an increase of $1,370,000 in fiscal year 2017 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 above when compared to fiscal 2016. The improvement was due to increased deployments by the Company’s Traditional Carrier and Tier 1 customers.
Revenue from all customers is obtained from purchase orders submitted from time to time. Accordingly, the Company’s ability to predict orders in future periods
or trends affecting orders in future periods is limited.
Cost of sales for fiscal year 2017 was $43,683,000, an increase of $1,266,000, or 3%, from the $42,417,000 in fiscal year 2016. Gross profit decreased 8%, or
$2,606,000, from $32,870,000 for fiscal year 2016 to $30,264,000 for fiscal year 2017. Gross profit percent was 40.9% in fiscal year 2017, as compared to 43.7%
for fiscal year 2016. The year-over-year decrease in gross profit was primarily due to decreased volume. The decrease in gross profit percent was primarily due to a
higher percentage of sales to the Tier 1 customer group, which typically have lower margins, along with a lower percentage of sales associated with the integration
of optical components within our product line, which typically have higher margins.
Selling, general and administrative expense for fiscal year 2017 was $24,952,000, an increase of $2,813,000, or 13%, compared to $22,139,000 for fiscal year
2016. This increase is primarily composed of an increase of $1,793,000 in compensation costs due primarily to additional sales and marketing personnel, an
increase of $831,000 in stock compensation expense, an increase of $702,000 in product development costs, an increase of $928,000 in legal expenses, and an
impairment of long-lived assets of $644,000, somewhat offset by a decrease of $2,444,000 in performance compensation accruals when compared to fiscal year
2016.
Income from operations for fiscal year 2017 was $5,312,000 compared to $10,732,000 for fiscal year 2016. This decrease is attributable to decreased gross profit
and the increased selling, general and administrative expenses described above.
Interest income in fiscal year 2017 was $274,000 compared to $157,000 for fiscal year 2016. The increase is due mainly to higher interest rates earned on its
investments in fiscal 2017 as well as higher cash invested balances. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit and
money market accounts .
Income tax expense for fiscal year 2017 was $1,738,000 compared to $2,876,000 for fiscal year 2016. Due to net operating loss utilization, income tax expense
primarily had a non-cash effect on the operating cash flow for the year ended September 30, 2016. The decrease in tax expense of $1,138,000 from the year ended
September 30, 2016 is primarily due to decreased profitability in fiscal year 2017. The increase in the income tax expense rate to 31.1% for fiscal year 2017 from
26.4% for fiscal year 2016 is primarily the result of the Company having fewer positive discrete items in fiscal year 2017 compared to fiscal year 2016 as a result
of the Company early adopting ASU 2016-09 in the fourth quarter ended September 30, 2016. The accounting standard update required 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 2017 was $3,848,000 or $0.28 per basic and diluted share, compared to $8,013,000 or $0.60 per basic share and $0.59 per diluted share
for the year 2016.
20
Liquidity and Capital Resources
As of September 30, 2018, the Company had combined balances of short-term cash and investments and long-term investments of $35,452,000 as compared to
$44,289,000 as of September 30, 2017. As of September 30, 2018, our principal source of liquidity was our cash and cash equivalents and short-term investments.
Those sources total $17,478,000 as of September 30, 2018, compared to $24,473,000, as of September 30, 2017. Investments considered long-term were
$17,974,000 as of September 30, 2018, compared to $19,816,000 as of September 30, 2017. 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 as of September 30, 2018 or 2017,
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 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 share repurchase program adopted by our Board of Directors. The share repurchase program was
originally adopted on November 13, 2014 with $8,000,000 authorized for common stock repurchases. On April 25, 2017, our Board of Directors increased the
authorization to $12,000,000 of common stock.
Operating Activities
Net cash generated from operations for the fiscal year ended September 30, 2018 totaled $4,548,000. Cash provided by operations included net income of
$4,275,000 for the fiscal year ended September 30, 2018, non-cash expenses for depreciation and amortization of $2,048,000, and stock-based compensation of
$2,003,000, slightly offset by a non-cash benefit to deferred taxes of $339,000 related to the newly enacted Tax Reform Act, in addition to changes in operating
assets and liabilities using cash. Changes in operating assets and liabilities providing cash include a decrease to inventories of $1,184,000, net of the acquisition of
$2,781,000 in inventories as a result of the product line acquisition of Calix active cabinets that occurred during the year ended September 30, 2018. Also, changes
in operating assets and liabilities providing cash include an increase in accounts payable and accrued expenses of $724,000 due primarily to increased inventory.
Changes in operating assets and liabilities using cash include an increase in accounts receivable from September 30, 2017 to September 30, 2018 of $5,584,000.
The increase in accounts receivable was primarily due to increased net sales for the three months ended September 30, 2018 when compared to the three months
ended September 30, 2017. Additionally, days sales outstanding, which measures how quickly receivables are collected, increased 16 days to 52 days from
September 30, 2017 to September 30, 2018.
Net cash generated from operations for the fiscal year ended September 30, 2017 totaled $6,298,000. Cash provided by operations included net income of
$3,848,000 for the fiscal year ended September 30, 2017, which included non-cash expenses for depreciation and amortization of $1,622,000, stock-based
compensation of $2,320,000, and impairment of long-lived assets of $644,000 offset by changes in operating assets and liabilities using cash. Changes between
fiscal year 2017 and fiscal year 2016 in working capital items using cash consisted primarily of a decrease in accounts payable and accrued expenses of $3,065,000
offset slightly by a decrease in accounts receivable of $762,000. The decrease in accounts payable and accrued expenses is primarily due to decreased performance
compensation accruals . The decrease in accounts receivable is primarily attributable to decreased sales in the quarter ended September 30, 2017 compared to the
same quarter of fiscal 2016. Days sales outstanding was 36 days for September 30, 2017 and 35 days for September 30, 2016.
21
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. Days sales outstanding was 35 days for both September 30, 2016 and September 30, 2015.
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 as of 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 .
Investing Activities
For the fiscal year ended September 30, 2018, we acquired the active cabinet product line in February 2018 for the amount of $10,350,000, which was paid from
our available cash. Additionally, we used $1,190,000 in cash for the purchase of capital equipment and patents. These purchases were mainly related to information
technology and manufacturing equipment . During fiscal year 2018, we purchased $7,283,000 of FDIC-backed certificates of deposit and sold $6,132,000 of
FDIC-backed certificates of deposit. The result is cash used in investing activities of $12,608,000 in fiscal year 2018 as compared to $11,540,000 in fiscal year
2017. In fiscal year 2019, the Company intends to continue investing 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, 2017, we used $2,022,000 in cash for the purchase of capital equipment and patents. These purchases were mainly related
to information technology and manufacturing equipment . During fiscal year 2017, we purchased $17,630,000 of FDIC-backed certificates of deposit and sold
$8,107,000 of FDIC-backed certificates of deposit. The result is cash used in investing activities of $11,540,000 in fiscal year 2017 as compared to $1,642,000 in
fiscal year 2016.
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.
Financing Activities
For the fiscal year ended September 30, 2018, the Company used $1,760,000 for the repurchase of common stock. Also, the Company received $298,000 during
the fiscal year ended September 30, 2018 from employees’ purchase of stock through our Employee Stock Purchase Plan (“ESPP”). The Company used $489,000
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 in
financing activities during fiscal year 2018 was $1,928,000.
For the fiscal year ended September 30, 2017, the Company used $3,647,000 for the repurchase of common stock. Also, the Company received $335,000 during
the fiscal year ended September 30, 2017 from employees’ purchase of stock through our Employee Stock Purchase Plan (“ESPP”). The Company used $953,000
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 in
financing activities during fiscal year 2017 was $4,237,000.
22
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 the 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.
Recent
Accounting
Pronouncements:
In May 2014, the Financial Accounting Standards Board (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 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. The Company has identified major revenue streams, performed an analysis of a sample of contracts to evaluate the
impact of the standard, and begun drafting its accounting policies and evaluating the new disclosure requirements. The updated guidance permits two methods of
adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the
guidance recognized at the date of initial application (the cumulative catch-up transition method). The updated guidance requires expanded disclosures relating to
the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures
are required for customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The
Company anticipates there will be expanded financial statement disclosures in order to comply with the updated guidance and has decided that it would use the
cumulative catch-up transition method should the adoption of this standard require any restatement. While the Company has not completed the entire assessment
as of September 30, 2018, based on the work done to date, the Company believes the adoption of ASU 2015-14 will not have a material impact on our results of
operations, cash flows, or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases
, which introduces the recognition of lease assets and lease liabilities by lessees for those leases
classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim
periods within those reporting periods, with early adoption permitted. The guidance will be applied on a modified retrospective basis with the earliest period
presented. Based on the effective date, this guidance will apply beginning October 1, 2019. While the Company is still in the process of evaluating the effect of
adoption on our financial statements, it is expected the adoption will lead to a material increase in the assets and liabilities recorded on the balance sheets.
In January 2017, the FASB issued ASU 2017-04 which offers amended guidance to simplify the accounting for goodwill impairment by removing Step 2 of the
goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to
the amount of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective for the Company’s interim and annual
periods beginning after January 1, 2020, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company does not believe
the adoption of this ASU will have a material impact on our financial statements.
23
ITEM
7A.
QUANTITATIVE
AND
QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK
Not applicable.
ITEM
8.
FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
DATA
Clearfield,
Inc.
INDEX
TO
FINANCIAL
STATEMENTS
Report of Independent Registered Public Accounting Firm
Financial Statements
Balance Sheets
Statements of Earnings
Statements of Shareholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
24
Page
25
27
28
29
30
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Clearfield, Inc.:
Opinions
on
the
Financial
Statements
and
Internal
Control
over
Financial
Reporting
We have audited the accompanying balance sheets of Clearfield, Inc. (the "Company") as of September 30, 2018 and 2017, the related statements of earnings,
shareholders’ equity and cash flows, for each of the three years in the period ended September 30, 2018, and the related notes (collectively referred to as the
"financial statements"). We also have audited the Company’s internal control over financial reporting as of September 30, 2018, based on criteria established in
Internal
Control
–
Integrated
Framework:
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the
results of its operations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of September 30, 2018, based on criteria established in Internal
Control
–
Integrated
Framework:
(2013)
issued by COSO.
Basis
for
Opinions
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 the Company's financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over
financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. 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.
Definition
and
Limitations
of
Internal
Control
Over
Financial
Reporting
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.
25
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.
/s/ Baker Tilly Virchow Krause, LLP
We have served as the Company's auditor since 2014.
Minneapolis, Minnesota
November 14, 2018
26
CLEARFIELD,
INC.
BALANCE
SHEETS
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Other Assets
Long-term investments
Goodwill
Intangible assets, net
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
Shareholders’ Equity
Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding
Common stock, $ .01 par value; 50,000,000 shares authorized; 13,646,553 and 13,812,821 shares issued and
outstanding as of September 30, 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total
Liabilities
and
Shareholders’
Equity
The accompanying notes are an integral part of these financial statements.
27
September 30,
2018
September 30,
2017
$
$
$
8,547,777 $
8,930,225
12,821,258
10,050,135
742,136
41,091,531
18,536,111
5,937,150
7,237,641
8,453,567
978,933
41,143,402
4,744,584
5,434,172
17,974,000
4,708,511
5,482,555
227,461
28,392,527
74,228,642 $
19,816,000
2,570,511
284,787
245,165
22,916,463
69,494,037
2,363,380 $
2,048,904
568,507
4,980,791
104,935
268,040
372,975
5,353,766
1,739,791
2,410,026
93,304
4,243,121
444,076
281,720
725,796
4,968,917
-
-
136,466
55,483,759
13,254,651
68,874,876
74,228,642 $
138,128
55,406,888
8,980,104
64,525,120
69,494,037
$
Net sales
Cost of sales
Gross profit
Operating expenses
Selling, general, and administrative
Income from operations
Interest income
Income before income taxes
Income tax expense
Net income
Net income per share Basic
Net income per share Diluted
Shares used in calculation of net income per share:
Basic
Diluted
CLEARFIELD,
INC.
STATEMENTS
OF
EARNINGS
Year Ended
September 30,
2018
Year Ended
September 30,
2017
Year Ended
September 30,
2016
$
77,651,354 $
73,947,619 $
75,287,726
46,654,570
43,683,360
42,417,478
30,996,784
30,264,259
32,870,248
25,925,933
5,070,851
24,952,376
5,311,883
22,138,556
10,731,692
457,101
273,930
157,402
5,527,952
5,585,813
10,889,094
1,253,405
4,274,547 $
1,737,974
3,847,839 $
2,876,032
8,013,062
0.32 $
0.32 $
0.28 $
0.28 $
0.60
0.59
$
$
$
13,429,232
13,452,860
13,532,375
13,660,806
13,372,579
13,663,349
The accompanying notes are an integral part of these financial statements.
28
Balance
as
of
September
30,
2015
Establishment of deferred tax asset for the
adoption of ASU 2016-09
Stock-based compensation expense
Repurchase of common stock
Restricted stock issuance, net
Employee stock purchase plan
Exercise of stock options, net of shares
exchanged for payment
Tax withholding related to vesting of
restricted stock grants and exercise of
stock options
Net income
Balance
as
of
September
30,
2016
Stock-based compensation expense
Repurchase of common stock
Restricted stock issuance, net
Employee stock purchase plan
Exercise of stock options, net of shares
exchanged for payment
Tax withholding related to vesting of
restricted stock grants and exercise of
stock options
Net income
Balance
as
of
September
30,
2017
Stock-based compensation expense
Repurchase of common stock
Restricted stock issuance, net
Employee stock purchase plan
Exercise of stock options, net of shares
exchanged for payment
Tax withholding related to vesting of
restricted stock grants and exercise of
stock options
Net income
Balance
as
of
September
30,
2018
CLEARFIELD,
INC.
STATEMENTS
OF
SHAREHOLDERS’
EQUITY
Common Stock
Additional
Retained earnings
Total shareholders’
Shares
13,705,658 $
-
-
(27,090)
258,266
22,318
Amount
paid-in capital (accumulated deficit)
(4,745,777) $
55,887,850 $
137,057 $
-
-
(271)
2,583
223
-
1,404,899
(333,490)
(2,583)
254,203
1,864,980
-
-
-
-
equity
51,279,130
1,864,980
1,404,899
(333,761)
-
254,426
191,853
1,918
546,926
-
548,844
(24,726)
-
14,126,279
-
(270,124)
(7,809)
25,867
(247)
-
141,263
-
(2,701)
(78)
258
(437,290)
-
57,320,515
2,319,975
(3,644,613)
78
334,434
-
8,013,062
5,132,265
-
-
-
-
(437,537)
8,013,062
62,594,043
2,319,975
(3,647,314)
-
334,692
14,053
140
28,577
-
28,717
(75,445)
-
13,812,821
-
(154,491)
(7,987)
30,174
(754)
-
138,128
-
(1,545)
(80)
302
(952,078)
-
55,406,888
2,003,207
(1,758,897)
80
297,558
-
3,847,839
8,980,104
-
-
-
-
(952,832)
3,847,839
64,525,120
2,003,207
(1,760,442)
-
297,860
8,025
81
23,931
-
24,012
(41,989)
-
13,646,553 $
(420)
-
136,466 $
(489,008)
-
55,483,759 $
-
4,274,547
13,254,651 $
(489,428)
4,274,547
68,874,876
The accompanying notes are an integral part of these financial statements.
29
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
Impairment of long-lived assets
Deferred income taxes
(Gain) loss on disposal of assets
Stock-based compensation expense
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisition
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
Tax withholding related to vesting of restricted stock grants and exercise of stock options
Net cash (used in) provided by financing activities
(Decrease) increase 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,
2018
Year Ended
September 30,
2017
Year Ended
September 30,
2016
$
4,274,547 $
3,847,839 $
8,013,062
2,047,746
-
(339,141)
(17,691)
2,003,207
(5,583,617)
1,183,998
254,501
723,990
4,547,540
(10,350,000)
(1,066,284)
(7,283,075)
83,052
(123,569)
6,132,000
(12,607,876)
(1,760,442)
297,860
24,012
(489,428)
(1,927,998)
(9,988,334)
18,536,111
8,547,777 $
1,622,094
643,604
32,297
35,281
2,319,975
761,569
(80,412)
180,456
(3,064,650)
6,298,053
-
(1,951,615)
(17,630,075)
5,100
(69,936)
8,107,000
(11,539,526)
(3,647,314)
334,692
28,717
(952,832)
(4,236,737)
(9,478,210)
28,014,321
18,536,111 $
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)
(333,761)
254,426
548,844
(437,537)
31,972
9,943,111
18,071,210
28,014,321
719,694 $
1,471,203 $
1,130,930
5,782 $
- $
34,268 $
- $
853,033
1,864,980
The accompanying notes are an integral part of these financial statements.
30
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 as of September 30, 2018 and 2017 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 five 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
1-5 years
Total
September 30, 2018
September 30, 2017
$
$
8,930,225 $
17,974,000
26,904,225 $
5,937,150
19,816,000
25,753,150
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.
31
NOTE
A
–
SUMMARY
OF
SIGNIFICANT
ACCOUNTING
POLICIES
-
Continued
The allowance for doubtful accounts activity for the years ended September 30, 2018, 2017, and 2016 is as follows:
Year Ended
September 30, 2018
September 30, 2017
September 30, 2016
$
Balance at Beginning of
Year
Additions Charged to Costs
and Expenses
Less Write-offs
Balance at End of Year
79,085 $
93,473
79,473
- $
-
25,000
- $
(14,388)
(11,000)
79,085
79,085
93,473
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 net realizable value. 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, net
September 30,
2018
September 30,
2017
$
$
6,013,166 $
560,988
3,475,981
10,050,135 $
5,991,863
724,248
1,737,456
8,453,567
During the year ended September 30, 2018, as part of the acquisition described in Note F, the Company acquired inventory with a fair value of $2,781,000.
Inventory is stated at the lower of cost or net realizable value. 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.
Also during the year ended September 30, 2018, the Company adopted Accounting Standards Update (“ASU”) 2015-11, Inventory
(Topic
330)
Related
to
Simplifying
the
Measurement
of
Inventory
which applies to all inventory except inventory that is measured using last-in, first-out or the retail inventory method.
This adoption had no effect on the financial statements and was applied prospectively. Therefore, prior periods were not retrospectively adjusted.
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.
32
NOTE
A
–
SUMMARY
OF
SIGNIFICANT
ACCOUNTING
POLICIES
–
Continued
Estimated useful lives of the assets are as follows:
Equipment
Leasehold improvements
Vehicles
Property, plant and equipment consist of the following:
Manufacturing equipment
Office equipment
Leasehold improvements
Vehicles
Property, plant and equipment, gross
Less accumulated depreciation
Property, plant and equipment, net
3
7
Years
7
-
-
10 or life of lease
3
September 30,
September 30,
2018
5,202,532 $
3,809,614
2,417,786
226,221
11,656,153
6,911,569
4,744,584 $
2017
5,370,962
3,600,006
2,404,331
193,702
11,569,001
6,134,829
5,434,172
$
$
Depreciation expense for the years ended September 30, 2018, 2017, and 2016 were $1,748,945, $1,614,272, and $1,445,910, respectively.
Goodwill
and
Intangible
Assets:
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, 2018, 2017, and 2016 resulted in excess fair value over carrying value and therefore,
no adjustments were made to goodwill. During the year ended September 30, 2018, 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, 2018, 2017, or 2016, 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, 2018, the Company has 15
patents granted and multiple pending applications both inside and outside the United States.
33
NOTE
A
–
SUMMARY
OF
SIGNIFICANT
ACCOUNTING
POLICIES
–
Continued
In addition, the Company has various finite life intangible assets, most of which were acquired as a result of the acquisition of a portfolio of Telcordia certified
outdoor active cabinet products from Calix, Inc. (“Calix”) during fiscal year 2018 as described in Note F in greater detail below. Finite life intangible assets at
September 30, 2018 and 2017 are as follows:
Customer relationships
Certifications
Trademarks
Patents
Other
Totals
Patents
Other
Totals
September 30, 2018
Years
Gross Carrying
Amount
Accumulated
Amortization
Net Book Value
Amount
15 $
8
8
20
5
$
3,742,000 $
1,068,000
563,000
393,002
31,091
5,797,093 $
155,917 $
83,437
43,984
24,981
6,219
314,538 $
3,586,083
984,563
519,016
368,021
24,872
5,482,555
September 30, 2017
Years
Gross Carrying
Amount
Accumulated
Amortization
Net Book Value
Amount
20 $
5
$
269,433 $
31,091
300,524 $
15,737 $
-
15,737 $
253,696
31,091
284,787
Amortization expense related to these assets for the years ended September 30, 2018, 2017, and 2016 were $298,801, $7,822, and $3,292, respectively.
Estimated future annual amortization expense associated with finite lived intangible assets is expected to be as follows:
Year ending September 30
2019
2020
2021
2022
2023
Thereafter
Total future amortization expense
$
$
Amount
471,215
471,215
471,215
471,215
464,997
3,132,698
5,482,555
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.
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. During the year ended September 30, 2017, the Company
incurred an impairment charge on long-lived assets of $643,604 which was charged to selling, general, and administrative expenses.
34
NOTE
A
–
SUMMARY
OF
SIGNIFICANT
ACCOUNTING
POLICIES
-
Continued
This impairment was related to the cancellation of an enterprise resource planning software implementation. No impairment of long-lived assets occurred during
the years ended September 30, 2018 or 2016, respectively.
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 both September 30, 2018 and September 30, 2017, the Company did 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 $787,364, $865,568, and $838,122, for the years ended September 30, 2018,
2017, and 2016, respectively, and are charged to expense when incurred.
Advertising
Costs
: Advertising costs amounted to $365,859, $378,217, and $350,399, for the years ended September 30, 2018, 2017, and 2016, respectively, and
are charged to expense when incurred.
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.
35
NOTE
A
–
SUMMARY
OF
SIGNIFICANT
ACCOUNTING
POLICIES
-
Continued
Weighted average common shares outstanding for the years ended September 30, 2018, 2017, and 2016 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
2018
4,274,547 $
13,429,232
23,628
13,452,860
2017
3,847,839 $
13,532,375
128,431
13,660,806
2016
8,013,062
13,372,579
290,770
13,663,349
0.32 $
0.32 $
0.28 $
0.28 $
0.60
0.59
$
$
$
There were 108,000 shares for the year ended September 30, 2018 that were excluded from the above calculation as they were considered antidilutive in nature. No
shares were considered antidilutive for the years ended September 30, 2017 and 2016.
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.
Reclassifications:
Certain comparative figures have been reclassified to conform to the current period's presentation. These reclassifications did not affect the prior
periods' net income, shareholders’ equity, or cash flows.
Recently
Issued
Accounting
Pronouncements:
In May 2014, the Financial Accounting Standards Board (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 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. The Company has identified major revenue streams, performed an analysis of a sample of contracts to evaluate the
impact of the standard, and begun drafting its accounting policies and evaluating the new disclosure requirements. The updated guidance permits two methods of
adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the
guidance recognized at the date of initial application (the cumulative catch-up transition method). The updated guidance requires expanded disclosures relating to
the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures
are required for customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The
Company anticipates there will be expanded financial statement disclosures in order to comply with the updated guidance and has decided that it would use the
cumulative catch-up transition method should the adoption of this standard require any restatement. While the Company has not completed the entire assessment
as of September 30, 2018, based on the work done to date, the Company believes the adoption of ASU 2015-14 will not have a material impact on our results of
operations, cash flows, or financial position.
36
NOTE
A
–
SUMMARY
OF
SIGNIFICANT
ACCOUNTING
POLICIES
-
Continued
In February 2016, the FASB issued ASU 2016-02, Leases
, which introduces the recognition of lease assets and lease liabilities by lessees for those leases
classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim
periods within those reporting periods, with early adoption permitted. The guidance will be applied on a modified retrospective basis with the earliest period
presented. Based on the effective date, this guidance will apply beginning October 1, 2019. While the Company is still in the process of evaluating the effect of
adoption on our financial statements, it is expected the adoption will lead to a material increase in the assets and liabilities recorded on the balance sheets.
In January 2017, the FASB issued ASU 2017-04 which offers amended guidance to simplify the accounting for goodwill impairment by removing Step 2 of the
goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to
the amount of goodwill allocated to that reporting unit. This guidance is to be applied on a prospective basis effective for the Company’s interim and annual
periods beginning after January 1, 2020, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company does not believe
the adoption of this ASU will have a material impact on our financial statements.
NOTE
B
–
COMMITMENTS
AND
FACILITIES
Operating
Leases:
The Company leases office and manufacturing facilities in Minnesota and Mexico for its ongoing operations, which expire at various dates
through February 2024. 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, 2018, 2017, and 2016, total rent
expense was $869,000, $768,000 and $658,000 respectively. Rent expense includes operating expenses, insurance, and related taxes.
As of September 30, 2018, the future minimum lease payments required under operating lease agreements are as follows:
Year ending September 30
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
Operating leases
593,586
568,018
402,123
412,177
422,481
615,336
3,013,721
Share
Repurchase
Program:
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 $8,000,000 of its outstanding shares of common stock. On April 25, 2017, the Board of Directors increased the repurchase authorization by
$4,000,000 to $12,000,000 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, 2018, the Company may
repurchase up to $5,409,326 of its outstanding shares of common stock.
37
NOTE
C
–
SHAREHOLDERS’
EQUITY
The Company is authorized to issue 50,000,000 shares of common stock at $.01 par value and 5,000,000 undesignated shares. From the undesignated shares,
500,000 shares have been designated as Series B Junior Participating Preferred Shares and none of such shares have been issued or are outstanding. The Board of
Directors may, by resolution, establish from the remaining undesignated shares different classes or series of shares and may fix the relative rights and preferences
of shares in any class or series.
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 currently has one equity compensation plan, the 2007 Stock Compensation Plan, from which it grants equity awards that are used as an incentive for
directors, officers, and other employees. The 2007 Stock Compensation Plan has 1,003,644 shares available for issue as of September 30, 2018. As of September
30, 2018, $3,522,909 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a period of approximately 6.1
years. The Company recorded related compensation expense for the years ended September 30, 2018, 2017, and 2016 of $2,003,207, $2,319,975, and $1,404,899,
respectively. For the year ended September 30, 2018, $1,835,086 of this expense was included in selling, general and administrative expense and $168,121 was
included in cost of sales. For the year ended September 30, 2017, $2,103,621 of this expense was included in selling, general and administrative expense and
$216,354 was included in cost of sales. 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.
Stock
Options:
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options granted. During the fiscal year
ended September 30, 2018, the Company granted employees non-qualified stock options to purchase an aggregate of 108,000 shares of common stock with a
weighted average contractual term of 4.7 years, a three year vesting term, and a weighted average exercise price of $13.37. There were no stock options granted
during the years ended September 30, 2017 and 2016. The weighted-average fair value at the grant date for options issued during the year ended September 30,
2018 was $4.78. This fair value was estimated at the grant date using the assumptions listed below:
Dividend yield
Weighted average expected volatility
Weighted average risk-free interest rate
Weighted average expected life
Vesting period
Year ended
September 30, 2018
0%
43.68%
2.70%
3.7years
3.0years
The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life. The expected life
represents the period of time that options are expected to be outstanding after their grant date. The risk-free interest rate reflects the interest rate at grant date on
zero-coupon U.S. governmental bonds having a remaining life similar to the expected option term.
38
NOTE
C
–
SHAREHOLDERS’
EQUITY
–
Continued
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. However, options
granted to directors have a one year vesting period and a six year contractual term. The maximum contractual term is normally six years. Shares issued upon
exercise of a stock option are issued form the Company’s authorized but unissued shares. There were no options vested during the year ended September 30, 2018
and 2017, respectively. For the year ended September 30, 2018, there were 2,250 stock options that were exercised using a cashless method of exercise. For the
year ended September 30, 2017, there were 10,500 stock options that were exercised using a cashless method of exercise. The intrinsic value of options exercised
during the years ended September 30, 2018 and 2017 was $75,767 and $237,172, respectively. The intrinsic value of options exercisable as of September 30, 2018
is $331,535.
Option transactions under the 2007 Stock Compensation Plan during the years ended September 30, 2018 and 2017 are summarized as follows:
Outstanding as of September 30, 2016
Granted
Cancelled or Forfeited
Exercised
Outstanding as of September 30, 2017
Granted
Cancelled or Forfeited
Exercised
Outstanding as of September 30, 2018
Number of
shares
Weighted
average
exercise price
Weighted
average fair
value
54,800 $
-
-
(15,850)
38,950
108,000
-
(8,450)
138,500 $
3.13
-
-
3.97
2.79
13.37 $
-
3.58
10.99
-
4.78
The following table summarizes information concerning options exercisable under the 2007 Stock Compensation Plan:
Year ended
September 30, 2018
September 30, 2017
Exercisable
30,500
38,950
Weighted average remaining
contractual life
1.89 years
2.73 years
Weighted average exercise price
2.58
2.79
$
$
The following table summarizes information concerning options currently outstanding at:
Year Ended
Number outstanding
September 30, 2018
September 30, 2017
138,500
38,950
Weighted average remaining
contractual life
3.82 years
2.73 years
$
$
Weighted average exercise
price
Aggregate intrinsic value
340,531
421,237
10.99 $
2.79 $
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 to employees that vest over one to ten years.
39
NOTE
C
–
SHAREHOLDERS’
EQUITY
–
Continued
Restricted stock transactions during the years ended September 30, 2018 and 2017 are summarized as follows:
Unvested shares as of September 30, 2016
Granted
Vested
Forfeited
Unvested shares as of September 30, 2017
Granted
Vested
Forfeited
Unvested shares as of September 30, 2018
Weighted
average
grant date
fair value
14.26
16.45
12.30
14.79
15.24
14.17
16.45
15.41
14.65
Number of
shares
563,570 $
3,795
(185,231)
(11,604)
370,530
7,235
(113,930)
(15,222)
248,613 $
The Company repurchased a total of 41,989 shares of our common stock at an average price of $11.66 in connection with payment of taxes upon the vesting of
restricted stock previously issued to employees for the year ended September 30, 2018. The Company repurchased a total of 75,445 shares of our common stock at
an average price of $12.63 in connection with payment of taxes upon the vesting of restricted stock previously issued to employees for the year ended September
30, 2017.
Employee
Stock
Purchase
Plan:
The Clearfield, Inc. 2010 Employee Stock Purchase Plan (“ESPP”) allows participating employees to purchase shares of the
Company’s common stock at a discount through payroll deductions. The ESPP is available to all employees subject to certain eligibility requirements. Terms of the
ESPP provide 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 of each stock purchase
period or phase. The ESPP 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, 2017 and June 30, 2018, employees purchased 14,242 and 15,932 shares, respectively, at a price of $10.41 and $9.39 per share, respectively. For the
phases that ended on December 31, 2016 and June 30, 2017, employees purchased 11,144 and 14,723 shares, respectively, at a price of $15.21 and $11.22 per
share, respectively. As of September 30, 2018, the Company has withheld approximately $70,905 from employees participating in the phase that began on July 1,
2018. After the employee purchase on June 30, 2018, 87,081 shares of common stock were available for future purchase under the ESPP.
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:
40
NOTE
D
–
INCOME
TAXES
–
Continued
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. The Company
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
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 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, 2017, the Company’s remaining valuation allowance of approximately $159,000 related to state net operating loss carry forwards. As a result
of recording the impact of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on its deferred assets and liabilities, the Company recorded an increase in its
valuation allowance against state net operating losses carried forward of approximately $32,000 in the first quarter of 2018. D uring the fourth quarter of 2018, the
Company reversed approximately $86,000 of its remaining valuation allowance. This consisted of decreasing the valuation allowance for the expiration and
utilization of state net operating losses in 2018 of approximately $133,000 and increasing the valuation allowance by approximately $47,000 for future expected
NOL utilization based on updated profitability estimates and the Federal rate change due to the Tax Reform Act. The remaining valuation allowance balance as of
September 30, 2018 of $105,000 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.
41
NOTE
D
–
INCOME
TAXES
–
Continued
The valuation allowance activity for the years ended September 30, 2018, 2017, and 2016 is as follows:
Year Ended
September 30, 2018
September 30, 2017
September 30, 2016
$
Balance at Beginning of
Year
Income Tax Expense
(Benefit)
Reversal for State NOL
Expiration and Utilization
Balance at End of Year
159,154 $
322,404
658,808
79,377 $
(32,154)
(78,044)
(133,673) $
(131,096)
(258,360)
104,858
159,154
322,404
Significant components of deferred income tax assets and liabilities are as follows at:
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
Gross long-term deferred tax liability
Valuation allowance
Net long-term deferred tax liability
September 30,
2018
September 30,
2017
$
$
(70,467) $
(552,119)
464,274
151,558
400,111
(60,806)
250,787
(583,415)
(77)
(104,858)
(104,935) $
(90,085)
(948,653)
551,125
209,645
503,632
(48,847)
404,649
(866,388)
(284,922)
(159,154)
(444,076)
As of September 30, 2018, the current income tax payable was approximately $464,000 and as of September 30, 2017, the current income tax receivable was
$409,000. Current income tax payable amounts are included in Accrued Expenses and 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, 2018, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards and approximately $3,468,000 state NOLs. The U.S.
federal NOL carry forward amounts were fully utilized in fiscal year 2016. The state NOL carry forward amounts expire in fiscal years 2019 through 2022 if not
utilized. In addition, as of September 30, 2018, the Company has Minnesota research and development and alternative minimum tax credits of $198,000 and
$50,000, respectively. The Company has not recorded a valuation allowance on these deferred tax assets as the Company believes it is more likely than not they
will be utilized before they begin to expire in fiscal year 2030.
42
NOTE
D
–
INCOME
TAXES
–
Continued
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.
The following is a reconciliation of the federal statutory income tax rate to the effective tax rate as a percent of pre-tax income for the following years ended:
Federal statutory rate
Federal rate change
State income taxes
Permanent differences
Change in valuation allowance
Expiration and utilization of state NOL’s
Research and development credits
Excess tax expense (benefits) from stock-based compensation
Tax rate
Components of the income tax expense are as follows for the years ended:
Current:
Federal
State
Current income tax expense
Deferred:
Federal
State
Deferred income tax expense
Income tax expense
September 30,
2018
September 30,
2017
September 30,
2016
24%
(5%)
2%
-
(3%)
4%
(1%)
2%
23%
34%
-
1%
(1%)
(4%)
3%
(1%)
(1%)
31%
34%
-
1%
-
(3%)
2%
(1%)
(7%)
26%
September 30,
2018
September 30,
2017
September 30,
2016
$
$
1,472,512 $
120,034
1,592,546
(463,798)
124,657
(339,141)
1,253,405 $
1,627,125 $
78,552
1,705,677
8,680
23,617
32,297
1,737,974 $
428,638
106,623
535,261
2,434,294
(93,523)
2,340,771
2,876,032
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, 2018, 2017, or 2016.
43
NOTE
D
–
INCOME
TAXES
–
Continued
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 2003. We are generally subject to U.S. federal and state tax
examinations for all tax years since 2002 due to our net operating loss carryforwards and the utilization of the carryforwards in years still open under statute.
During the year ended September 30, 2018, the Company was examined by the U.S. Internal Revenue Service for fiscal year 2016. This examination resulted in no
adjustments. The Company changed its fiscal year end in 2007 from March 31 to September 30.
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:
For the years ended September 30, 2018, 2017, and 2016, the Company had two customers that comprised 10% or more of net sales. Both of these
customers are distributors. These major customers, like our other customers, purchase our products from time to time through purchase orders, and we do not have
any agreements that obligate these major customers to purchase products in the future from us.
As of September 30, 2018, three customers accounted for 10% or more of accounts receivable. Two of these customers are distributors and the other is a private
label original equipment manufacturer. As of September 30, 2017, one customer accounted for 19% of accounts receivable. This customer was a distributor.
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.
The following table presents our domestic and international sales for each of the last three fiscal years:
Year Ended September 30,
2017
2018
2016
United States
All Other Countries
Total Net Sales
$ 72,295,000 $ 67,901,000 $ 71,264,000
4,024,000
$ 77,651,000 $ 73,948,000 $ 75,288,000
5,356,000
6,047,000
Long-lived
assets:
As of September 30, 2018 and 2017, the Company had property, plant and equipment with a net book value of $412,755 and $581,396,
respectively, located in Mexico.
44
NOTE
F
–
ACQUISITION
On February 20, 2018, the Company completed the acquisition of a portfolio of Telcordia certified outdoor active cabinet products from Calix, Inc. (“Calix”) upon
the terms and conditions contained in an Asset Purchase Agreement dated February 20, 2018.
The introduction of the Clearfield active cabinet line provides customers a single point of contact for cabinet solutions—both passive and powered. The acquisition
enables Clearfield to expand its Fiber-to-Anywhere expertise to include active powered electronic cabinet platforms while leveraging its supply chain. The
acquisition also enables Clearfield to capitalize on and expand its reach to a broader customer base, including service providers in the Tier 1 and Tier 2 markets.
Acquisition date fair value of the consideration transferred totaled $10,350,000 which was comprised of a cash payment of $10,350,000 from the Company’s cash
operating account.
We assumed no liabilities in the acquisition. As part of the acquisition, we also agreed to purchase a minimum of $3,500,000 in inventory and purchase orders from
a subcontractor. We are currently purchasing inventory from the subcontractor under the normal course of business and expect to fulfill the commitment during
fiscal year 2019.
The following table summarizes the preliminary estimated fair values of the assets acquired at the acquisition date:
Inventories
Property, plant and equipment
Trademarks
Customer relationships
Product certification
Goodwill
Total Assets
$
February 20,
2018
2,781,000
58,000
563,000
3,742,000
1,068,000
2,138,000
$ 10,350,000
The active cabinet acquisition resulted in $2,138,000 of goodwill, which is expected to be deductible for tax purposes . Specifically, the goodwill recorded as part
of the acquisition of the Calix active cabinets includes the expected synergies and other benefits that we believe will result from combining the operations of active
cabinet lines with the operations of Clearfield, Inc.
The Company incurred approximately $106,000 in legal, professional, and other costs related to this acquisition accounted for as selling and administrative
expenses when incurred. The remaining weighted-average useful life of intangible assets acquired is 12.5 years.
As the active cabinet business was not operated as a separate subsidiary, division or entity, Calix did not maintain separate financial statements for the active
cabinet business. As a result, we are unable to accurately determine earnings/loss for the active cabinet business on a standalone basis since the date of acquisition.
The following table below reflects our unaudited pro forma combined results of operations as if the acquisition had taken place as of October 1, 2016 and shows
the net sales and net income as if the active cabinet business were combined with the Clearfield business for the years ended September 30, 2018 and 2017.
45
NOTE
F
–
ACQUISITION
–
Continued
The pro forma includes estimated expenses relating to the amortization of intangibles purchased, the amortization of the inventory fair value adjustment, and
estimated personnel costs:
Net sales
Income from operations
Net income
Net income per share:
Basic
Diluted
Pro Forma
Year Ended
September 30,
2017
(unaudited)
Pro Forma
Year Ended
September 30,
2018
(unaudited)
$ 89,672,074 $ 80,958,789
$
8,174,841 $
5,554,766
$
5,809,018 $
4,794,757
$
$
0.43 $
0.43 $
0.36
0.36
The pro forma unaudited results do not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the
beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the
acquisition due to synergies that may be derived from the elimination of any duplicative costs.
NOTE
G
–
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. 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 $654,001, $652,615 and $520,530 for the years ended
September 30, 2018, 2017, and 2016, 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, 2018. 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.
46
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, 2018, 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, 2018 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 2018 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 2019 Annual Meeting of Shareholders (the “2019 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 2019 Proxy Statement, is incorporated herein by reference into this section.
ITEM
12.
SECURITY
OWNERSHIP
OF
CERTAIN
BENEFICIAL
OWNERS
AND
MANAGEMENT
AND
RELATED
STOCKHOLDER
MATTERS
See “Equity Compensation Plan Information” under Item 5, “Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities” of Part II hereof.
The remainder of the information required by Item 12 to be included in the 2019 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 2019 Proxy Statement, is incorporated herein by reference into this section.
47
ITEM
14.
PRINCIPAL
ACCOUNTANT
FEES
AND
SERVICES
The information required by Item 14 to be included in the 2019 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.
(1) Financial Statements.
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.
ITEM
16.
FORM
10-K
SUMMARY
Not applicable.
48
EXHIBIT
INDEX
Number
2.1
3.1
3.1 (a)
Description
Asset Purchase Agreement dated February 20, 2018 by and between Calix, Inc. and
Clearfield Inc.
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
Articles of Amendment to Articles of Incorporation dated August 25, 2004
3.2
Amended and Restated Bylaws of Clearfield, Inc.
Form of Agreement regarding Indemnification of Directors and Officers with certain
current and former directors
2007 Stock Compensation Plan, as amended through December 23, 2016
*10.1
*10.2
*10.3
*10.4
*10.5
Incorporated
by
Reference
to
Exhibit 2.1 to the Registrant’s Current Report on Form
8-K dated February 20, 2018
Exhibit 3.1 to Registrant’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2000
Exhibit 3.1 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 10.1 to Registrant’s Annual Report on Form 10-
K for the quarter ended September 30, 2017
Appendix A to the Registrant’s Proxy Statement filed
with the SEC on January 10, 2017 for the 2017 Annual
Meeting of Shareholders held on February 23, 2017.
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
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 Exhibit 10.1 to Registrant’s Current Report on Form 8-K
10.6
Clearfield, Inc. 2010 Employee Stock Purchase Plan
10.7
Standard Form Industrial Building Lease dated September 9, 2014 by and between
Clearfield, Inc. and First Industrial, L.P.
49
dated November 18, 2010.
Appendix A to the Registrant’s Proxy Statement filed
with the SEC on January 26, 2010 for the 2010 Annual
Meeting of Shareholders held on February 25, 2010.
Exhibit 10.1 to Registrant’s Current Report on Form 8-K
dated September 10, 2014.
*10.8
23.1
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Employment Agreement dated November 16, 2017 by and between Clearfield, Inc. and
Daniel Herzog
Consent of Baker Tilly Virchow Krause, LLP
Certification of Chief Executive Officer (principal executive officer) Pursuant to Rules
13a-14(a) and 15d-14(a) of the Exchange Act
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
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Calculation Linkbase
XBRL Taxonomy Labels Linkbase
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* Indicates a management contract or compensatory plan or arrangement.
** Indicates exhibit filed herewith.
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Exhibit 10.1 to Registrant’s Current Report on Form 8-K
dated November 16, 2017
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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 14, 2018
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.
51
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
/s/ Cheryl Beranek
Cheryl Beranek
/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
Title
Date
President, Chief Executive Officer (principal executive officer)
and Director
November 14, 2018
Chief Financial Officer (principal financial and accounting
November 14, 2018
officer)
Director
Director
Director
Director
Director
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November 14, 2018
November 14, 2018
November 14, 2018
November 14, 2018
November 14, 2018
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, File No. 333-173793 and File No. 333-217652) of Clearfield, Inc. of our report dated November 14, 2018, 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, 2018.
Exhibit
23.1
/s/ Baker Tilly Virchow Krause, LLP
Minneapolis, Minnesota
November 14, 2018
Exhibit
31.1
I, Cheryl Beranek, certify that:
CERTIFICATION
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 14, 2018
/s/ Cheryl Beranek
Cheryl Beranek
Chief Executive Officer
(Principal executive officer)
Exhibit
31.2
I, Daniel Herzog, certify that:
CERTIFICATION
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 14, 2018
/ s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer
(Principal financial and accounting officer)
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, 2018 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 14, 2018
/s/ Cheryl Beranek
Cheryl Beranek
Chief Executive Officer
/s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer