UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2022.
☐ 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)
Securities registered pursuant to Section 12(b) of the Act:
41-1347235
(I.R.S. Employer Identification No.)
(763) 476-6866
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, $0.01 par value
Trading Symbol
CLFD
Name of each exchange on which registered
The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
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 ☐
Non-accelerated filer ☐
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes ☒ No
The aggregate market value of the voting and non-voting equity held by non-affiliates of the registrant, as of the last business day of the registrant’s most recently
completed second fiscal quarter computed by reference to the price at which the common equity was last sold was approximately $747,737,778.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class:
Common stock, par value $.01
Outstanding as of November 1, 2022
13,818,452
Documents Incorporated by Reference:
Portions of our proxy statement for the 2023 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 PURCHASES
OF EQUITY SECURITIES
[RESERVED]
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
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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
Cautionary Note Regarding Forward-Looking Statements
Clearfield, Inc., together with its subsidiaries, is referred to in this report as “we,” “us,” “our,” and the “Company.” We make statements from time to time regarding our
business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,”
“estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking
statements. Forward-looking statements may appear in documents, reports, filings with the Securities and Exchange Commission (SEC), news releases, written or oral
presentations made by our authorized officers or other representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results expressed in or implied by forward-looking statements, involve a number of risks and uncertainties. Forward-looking statements are not
guarantees of future actions, outcomes, results or performance. Any forward-looking statement made by us or on our behalf speaks only as of the date on which such
statement is made. We do not undertake any obligation to update or keep current any forward-looking statement to reflect events or circumstances arising after the date of
such statement, except as required by law.
In addition to the factors identified or described by us from time to time in filings with the SEC, there are many important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by us, or the results expressed in or implied by any forward-looking statements. These important
factors are described below under Part I, Item 1A. “Risk Factors.”
ITEM 1. BUSINESS
Company Overview
We design, manufacture and distribute fiber protection, fiber management and fiber delivery solutions to enable rapid and cost-effective fiber-fed deployment throughout the
broadband service provider space primarily across North America. Our “fiber to anywhere” platform serves the unique requirements of leading incumbent local exchange
carriers (“Traditional Carriers”), wireless operators, Multiple Systems Operators and Cable TV companies (“MSO’s”), and competitive local exchange carriers (“Alternative
Carriers”), while also catering to the broadband needs of the utility/municipality, enterprise, and data center markets.
We are engaged in global operations. Our operations currently comprise of two reportable segments: the Clearfield Operating Segment, (referred to herein as “Clearfield”)
and, since July 26, 2022, the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”). Prior to July 26, 2022, we were considered to be in a
single reporting segment and operating unit structure.
On July 26, 2022, we acquired Nestor Cables Ltd, a leading developer and manufacturer of fiber optic cable solutions located in Finland, upon the terms and conditions
contained in a Share Sale and Purchase Agreement entered into on May 17, 2022. The purchase of Nestor Cables is expected to provide Clearfield with the ability to
vertically integrate the supply of fiber optic cables and help meet customer demand for its products. Nestor Cables’ technical expertise is expected to extend the supply of
FieldShield into the North American market to reduce cost and complexity of transportation.
1
Upon closing of the acquisition of Nestor Cables, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280,
Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated
regularly by the chief operating decision-maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment, the
Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
Nestor Cables Operating Segment
As of July 26, 2022, Clearfield through its newly created Finnish subsidiary, Clearfield Finland Ltd, acquired Nestor Cables. Nestor Cables is based in Oulu, Finland, with
operations in Keila, Estonia through its wholly -owned subsidiary, Nestor Cables Baltics Ltd. Nestor Cables manufactures fiber optic and copper telecommunication cables
and equipment which it distributes to telecommunication operators, network owners, electric companies, building contractors, and industrial companies. Prior to our
acquisition, Nestor Cables had been a supplier to Clearfield for over a decade and that relationship continued following the closing of the acquisition. Nestor has two types
of production processes, the process of making cable in its Finland facility and the finished assembly portion of its business performed in Estonia. Nestor Cables’ customer
base includes telecom operators, network owners, contractors, industries and wholesalers. Products are sold via distributors, and directly to end users. Nestor Cables is
subject to Finnish government regulation; Nestor Cables Baltics is subject to Estonian government regulation.
Clearfield Operating Segment
Clearfield is focused on providing fiber management, fiber protection, and fiber delivery products that accelerate the turn-up of gigabit speed bandwidth to residential
homes, businesses, and network infrastructure in the wireline and wireless access network. We offer a broad portfolio of fiber products that allow service providers to build
fiber networks faster, meet service delivery demands, and align build costs with take rates.
Clearfield’s products allow its customers to connect 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 4G/5G small cell, Cloud Radio Access Network (“C-RAN”), and distributed antenna system
(“DAS”) deployments through better fiber management, test access, and fiber protection.
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
Product development for the Company’s product line program has mainly 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 product strategy involves analyzing the environment and technology, with a
particular focus on simplifying our customers’ business, and developing innovative high-quality products utilizing modular design wherever possible. Research and
development are reflected in Selling, General, & Administrative expenses.
Some of our products currently offered are described below:
2
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.
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.
Active Cabinets (“ODC”), Fiber Active Cabinet (“FAC”), and FiberFlex product lines feature either fully integrated, fully engineered cabinets equipped with specific
active electronics configurations or universal cabinets ready for mounting other electronic equipment. This product line features Clearfield’s fiber management solutions
housing the Clearview Cassette. The FieldSmart® FAC and FiberFlex product line of outdoor active cabinets feature multiple sizes for universal configurations of electronic
equipment.
FieldShield® is a patented fiber pathway and protection method aimed at reducing the cost of broadband deployment. FieldShield starts with a ruggedized microduct
designed to support all aerial, direct bury, and inside plant “last mile” needs. 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.
Fiber and Copper Assemblies - Clearfield manufactures high quality 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.
Fiber Optic Cables manufactured by Nestor Cables include a comprehensive range of optical fiber cables that offer dependable solutions for various installation conditions
and special requirements, including direct buried cables, duct cables, microduct cables, indoor/outdoor cables, aerial cables and submarine cable.
Copper Cables manufactured by Nestor cables include copper conducted instrumentation and automation cables as well as central and signaling cables Nestor also
manufactures copper cable for telecommunications networks.
Nestor Optimus product family is a complete solution which includes all needed products - cables, microducts, microduct accessories and tools - for construction of
microduct networks which are easily expandable, suitable for changing and growing urban and suburban areas, and enables the use of lighter installation techniques, which
reduces construction costs and interference during installation.
NesCon Connectivity Products is a product family by Nestor Cables that includes essential installation and connection accessories for fiber optic networks, all of which
are compatible with Nestor Cable’s optical fiber cables.
Markets and Customers
The Company’s products are sold across broadband service providers, which we categorize as National Carrier (wireless/wireless national telco carriers (Tier 1)),
Community Broadband (Tier 2 and 3 telco carriers, utilities, municipalities, and alternative carriers), Multiple System Operators (cable television), International (primarily
Europe, Central/Latin America and Canada), and Legacy build-to-print copper and fiber assemblies (primarily contract manufacturing). Nestor’s products are sold to
telecommunication wholesalers and telecommunication operators, primarily in Europe.
3
The Company’s products are sold direct to customers through the Company’s sales force as well as through authorized distributors. In addition, the Company uses
manufacturing sales representatives and sales agents for customer and geography specific needs.
The Company considers the primary markets for its products to be as follows:
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 additional efforts in Canada and Central/Latin America.
FTTB
Fiber to the Business is principally for Multiple System 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 enhance their coverage for bandwidth. 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.
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
The market for the fiber management, fiber protection, and fiber delivery products provided by the Clearfield segment is highly competitive. Competition is largely based
on any one or a combination of the following factors: functionality and features, price, product quality, cost and ease of installation, service and support, long-term returns to
customers, scalability, product innovation and manufacturing capability.
Competitors to the FieldSmart product lines include, but are not limited to, products offered by 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 products
offered by Emerson Network Power, a subsidiary of Vertiv Co., and Charles Industries, Ltd., a subsidiary of Amphenol. Competitors to FieldShield include products offered
by PPC Broadband, Inc. In various geographic or vertical markets, there are also several smaller companies with which we compete. 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 a competitive disadvantage with customers who principally seek large volume commodity products.
4
The Nestor Cables segment faces competition from numerous competitors within each of the markets it serves. The Nestor Cables segment competes primarily on the basis
of its product performance and its ability to meet its customers’ highly specified design, engineering and delivery needs on a timely basis. The market demand and resulting
build rates of fiber optic networks and capital expenditures by telecommunications wholesalers and telecommunications providers, has a large and direct influence on the
demand for the Nestor Cables segment products.
Many of our competitors have greater resources than we do, including greater sales, product development, marketing, financial, technical, or engineering resources. As a
result, our competitors may be able to procure necessary components and labor at much lower prices than we can or may offer competitive products at below market prices,
which could prevent us from competing effectively.
Sources of Materials and Supply Chain
Numerous purchased materials and components, and sources of labor are used in the manufacturing of the Company’s products. Most of these are available from multiple
suppliers. However, some components and third-party contract manufacturing services are purchased from a single or a limited number of suppliers. The loss of access to
some components and third-party contract manufacturing services could have an adverse effect on our ability to deliver products on a timely basis and on our financial
performance.
Clearfield’s Mexico facility operates under a Maquiladora arrangement. Under this arrangement, we contract with a company to provide certain personnel and other services
at the production facilities in Mexico that complete final build and assembly of a significant portion of Clearfield’s products. Maquiladora also status allows us to import
certain items from the United States into Mexico duty-free, provided that such items, after processing, are exported from Mexico within a stipulated time frame.
Our supply chain management team oversees our suppliers to source and procure materials, manufacture and deliver our products to customers from the site of manufacture,
whether at Clearfield’s facility in Brooklyn Park, Minnesota or the two facilities in Tijuana, Mexico that operate as Maquiladoras. Our supply chain management team
consists of planning, sourcing, and logistics personnel. We tightly integrate our supply chain management, our product innovation activities, and our manufacturing
operations. Our supply chain team also manages the critical logistics and transport services for our materials, components and finished products in and out of Mexico to
ensure sufficient materials to timely produce products and to ensure timely export of products in order to qualify as duty-free.
Over the last several years, we have taken steps to improve our supply chain operations, enhance resiliency and mitigate risk of disruption that are described below under
“Developments Regarding, and Actions Taken in Response to, COVID-19.”
Major Customers and Financial Information about Geographic Areas
For the fiscal year ended September 30, 2022, the Company had one customer that comprised 14% of net sales. This customer is a distributor. For the fiscal years ended
September 30, 2021, and 2020 the Company had two customers that comprised 28% and 30% of net sales, respectively. Both of these customers were 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, 2022, one customer accounted for 20% of accounts receivable. This customer is a distributor. As of September 30, 2021, one customer accounted for
17% of accounts receivable. This customer is a telecommunications service provider in the Company’s Community Broadband market.
5
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 customers in countries in the Caribbean, Canada, Europe and Central and South America. Since our acquisition of Nestor Cables in July 2022, we have
experienced an increased concentration of customers based in Europe.
Patents and Trademarks
As of September 30, 2022, Clearfield has 36 patents granted and multiple patent applications pending both inside and outside the United States. These patents begin to
expire in 2028. We have also developed and are using multiple trademarks and logos to market and promote our products.
Sales Backlog
Sales backlog reflects purchase order commitments for our products received from customers that have yet to be fulfilled. The Company had a backlog of $164,914,000,
and $66,365,000 as of September 30, 2022, and 2021, respectively. At September 30, 2022, most of the Company’s backlog orders are scheduled to ship within the next six
months. We believe that the Nestor Cables segment generally experiences the same seasonality as the Clearfield segment.
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 of outdoor products, some customer geographical concentrations as well as standard vacation and holiday calendars. Sales
have usually reach a seasonal peak in our third and fourth fiscal quarters.
Human Capital Resources
As of September 30, 2022, the Company had approximately 407 full-time employees, of which 70% were based in the United States (“U.S.”) and 30% were based outside
of the U.S., primarily in Finland and Estonia due to our Nestor Cables operations. We also employ seasonal, part-time employees and independent contractors. Subject to
customarily local collective bargaining arrangements for employees in Finland and Estonia, none of our employees are covered by any collective bargaining agreement.
Our U.S. employees include approximately 160 office personnel and 120 manufacturing personnel as of September 30, 2022. The substantial majority of these employees
work out of our Brooklyn Park, Minnesota headquarters. The Company’s office personnel are comprised of sales, marketing, engineering, and administrative personnel. The
manufacturing personnel include both individuals directly involved in the manufacturing of our products, as well as warehouse and operations supervisory personnel.
Certain positions within our organization require industry specific technical knowledge. Our manufacturing personnel currently work in two shifts as needed at our
Brooklyn Park facility.
We invest significant management attention, time and resources to attract, engage, develop and retain our employees, particularly for positions that require technical
knowledge or expertise. For this reason, we offer rigorous training programs for manufacturing and other technical employees to allow them to develop the necessary
skillset for their roles and promote career development. To date, our training programs and overall collaborative working environment have allowed us to be successful in
attracting and retaining qualified technical personnel for these positions.
6
Nestor Cables has approximately 40 office personnel and 90 manufacturing personnel as of September 30, 2022.
As of September 30, 2022, we had contracted for approximately 725 personnel in the Mexico facilities through a Maquiladora agreement and these manufacturing personnel
are also currently working in two shifts as needed.
In our manufacturing operations, we monitor key metrics and goals based on quality, productivity, and ability to meet shipping promise dates. As a measure of quality, we
focus on First Pass Yield (“FPY”), which is calculated as the percentage of product that meets all performance criteria upon first completion from our manufacturing floor
and requires no rework. The Company’s target for FPY ranges from 92-99%, depending on key manufacturing steps and the product line being produced. We also measure
our On-Time Delivery (“OTD”) which is determined by the Company’s ability to ship product on the date necessary, accounting for standard shipping times, in order to
meet the agreed upon delivery date with our customers. The Company’s OTD target is a minimum of 95%. This metric is important as the Company has taken a strategic
approach to be able to offer low industry lead times for our customers. The Company incentivizes certain of its personnel based on the metrics.
Climate Change
Certain government and regulatory bodies have introduced or are contemplating regulatory changes relating to climate change. While we do not believe climate-related
risks are reasonably likely to have a material impact on our business, results of operations, or financial condition at this time, we are continuing to assess the nature and
extent of risk from a changing climate and the potential for increased regulation.
The majority of our manufacturing operations calls for compiling raw material and other purchased components from suppliers. As part of our operations, we focus on
minimizing scrap and other waste and look to recycle and salvage this scrap wherever possible. Any new regulation of emissions may result in additional costs to our
suppliers which may be passed on to us.
In addition, the physical impacts of climate change and other natural events, including adverse weather conditions such as heavy or sustained rainfall, flooding, cold weather
and snow, can impact deployment schedules of outdoor products and potentially affect demand for our products. Additionally, we may need to take into account the
increasing frequency of extreme weather events in the development of our products.
The increasing frequency of extreme weather events, changes in weather patterns, drought, rising ocean and temperature levels, earthquakes and the like may impact our
manufacturing operations or the manufacturing operations of suppliers of our critical raw materials or components. These types of impacts from climate change may also
result in transportation-related supply chain challenges and negatively impact the delivery of raw materials, components or products to or from our facilities. These potential
physical effects may increase costs, cause delays or shortages in components required to produce our products or cause delays in the shipment of our products to customers.
Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas (“GHG”) emissions, could lead to new or additional investment
in the Company’s products or facilities and could increase environmental compliance expenditures. Changes in climate change concerns, or in the regulation of such
concerns, including GHG emissions, could subject the Company to additional costs and restrictions, including increased energy and raw material costs and other compliance
requirements which could negatively impact the Company’s reputation, business, capital expenditures, results of operations, and financial position.
7
Developments Regarding, and Actions Taken in Response to, COVID-19
Under U.S. federal and state guidance in response to the COVID-19 pandemic, Clearfield’s operations are classified as part of the Cybersecurity and Infrastructure Security
Agency (“CISA”) critical infrastructure sector and similar categorization in Minnesota. In March 2020, we transitioned our corporate employees at our Brooklyn Park
headquarters to remote work arrangements and they currently continue primarily working remote. In accordance with the Centers for Disease Control and Prevention
(“CDC”) and World Health Organization (“WHO”) guidelines, we implemented and have continued health and safety measures for the production staff that remain onsite at
our Brooklyn Park facility. We have maintained our manufacturing capacity in Brooklyn Park with these personnel at near historic levels. Similarly, we have ensured
implementation of the recommended health and safety measures for the production staff that remain onsite at our Tijuana, Mexico manufacturing facilities that operate as
Maquiladoras. Throughout the COVID-19 pandemic, the Company has closely monitored the operations and staffing levels at its Brooklyn Park facility and the two
manufacturing facilities in Tijuana, Mexico.
Due to the risks to timely supply of materials to our facilities, we have taken multiple actions to ensure sufficient safety stock inventory levels at both our Minnesota and
Mexico facilities. Additionally, we made the decision to maximize the availability of all product lines at all three of our plants by assuring that each location can
manufacture across our broad product portfolio. These actions, combined with our historic practice of dual sourcing most of our components, has positioned us to meet our
obligations to customers and to fulfill our sales backlog. However, in the event of serious border restrictions or border delays, continuing or worsening component material
shortages, supply chain transportation delays, or other serious disruption in our supply chain, we may experience diminished or temporarily suspended operations, longer
lead times than typical for product deliveries, or temporarily suspended product deliveries, which would result in delayed or reduced revenue from the affected orders in
production and higher operating costs. In addition, due to the unprecedented lead-times and challenges in the global supply chain, we are working with our customers to
place longer lead-time purchase orders to ensure availability of components and materials from our supply chain. Based on current supply chain dynamics, lead times have
stretched to 8 to 10 weeks for certain product categories. Over the remainder of calendar 2022 and into 2023, the Company expects to work to manage lead times to more
historic levels from receipt of purchase order.
Corporate Information
Clearfield, Inc. was incorporated under the laws of Minnesota 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. We do not incorporate the information on or accessible through our website into this annual report
on Form 10-K, and you should not consider any information on, or that can be accessed through, our website as part of this annual report on Form 10-K.
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 at our website as soon as reasonably practicable after we file such material with, or furnish it to, the SEC.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers, like Clearfield, that file electronically
with the SEC and that internet site is http://www.sec.gov.
We use various trademarks and trade names in our business, including without limitation our corporate name and logo. Solely for convenience, the trademarks and trade
names in this annual report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the
fullest extent under applicable law, our rights thereto.
8
ITEM 1A. RISK FACTORS
Risks Relating to Our Operations
The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our business, financial condition and
operating results.
As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to
contain the virus, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, and business shutdowns. We have manufacturing operations
in the U.S. and Mexico that have been affected by the outbreak and we have taken measures to try to contain it. Measures providing for business shutdowns generally
exclude certain essential services, and those essential services commonly include critical infrastructure and the businesses that support that critical infrastructure. While our
facilities currently remain operational, these measures have impacted and may further impact our workforce and operations, as well as those of our customers and suppliers.
The constraints and limits imposed on our operations may slow or diminish our product development activities and qualification activities with our customers. Although
many governmental measures have had specific expiration dates, some of those measures have already been extended more than once; as a result, there is considerable
uncertainty regarding the duration of such measures and potential future measures. Restrictions on our manufacturing, support operations or workforce, or similar
limitations for our suppliers, could limit our ability to meet customer demand and could have a material adverse effect on our financial condition and results of operations.
Furthermore, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, resulting in
higher costs and delays, which could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers.
In response to these developments, we have modified our business practices, including restricting employee travel, modifying employee work locations, implementing
social distancing and enhanced sanitary measures in our facilities, and cancelling attendance at industry events and conferences. Many of our customers, suppliers, and
service providers have made similar modifications. The resources available to employees working remotely may not enable them to maintain the same level of productivity
and efficiency, particularly our sales employees whose in-person access to our customers and customer prospects has been significantly limited. While we have experienced
only limited absenteeism from those employees who are required to be on-site to perform their jobs, absenteeism may increase in the future and may harm our productivity.
Further, our increased reliance on remote access to our information systems increases our exposure to potential cybersecurity breaches. We may take further actions as
government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers. There is no certainty that
such measures will be sufficient to mitigate the risks posed by COVID-19, in which case our ability to continue operations may be significantly negatively impacted, and we
may be required to temporarily suspend our operations in the U.S., Mexico or Finland. The resumption of normal business operations after such interruptions may be
delayed or constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers.
In addition, government funding programs such as the CARES Act, which was enacted in response to the COVID-19 pandemic, provides grant money for customers that
deploy products by certain calendar dates. The Company has increased its inventory to respond to increased demand related to this program. If the program ends or is not
extended, we could see a decrease in orders which may result in decreasing customer purchasing patterns. If the programs are extended by governments, we may not be able
to predict increases and decreased in customer purchasing patterns.
The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to,
the duration and spread of the outbreak, its severity, the actions to contain the virus and address its impact, and how quickly and to what extent normal economic and
operating conditions can resume.
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Inflationary price pressures and uncertain availability of components, raw materials, labor and logistics used by us and our suppliers could negatively impact our
profitability.
Increases in the price of raw materials, labor and other components utilized in the production of our products, along with logistics and other related costs, may lead to higher
production and shipping costs for our products. Additionally, increasing global demand for, and uncertain supply of, such materials could disrupt our ability to obtain such
materials in a timely manner to meet our supply needs and could lead to increased costs. An increase in the cost of inputs needed to produce our products could lead to
higher costs and could negatively impact our results of operation, future profitability and ability to meet customer demand. Passing along these increased prices to our
customers to offset the impact of higher costs, may cause certain customers to cancel, push out, or refrain from purchasing our products, which could negatively impact
demand for our products, and therefore also negatively impact our results of operations and future profitability.
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, lost 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. Further, tariffs may be imposed by the U.S. on imports from other countries that are the single- or
limited-source of our materials and components. Tariffs increase the cost of the materials and components that go into making our products, but we are generally unable to
pass long these increased costs to our customers. Accordingly, these increased costs adversely impact the gross margin that we earn on our products. Furthermore, due to
general economic conditions in the U.S. 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 they meet 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.
The failure of our third-party manufacturers to manufacture the products for us or the failure of our suppliers of components and raw materials to supply us these items
consistent with our requirements as to quality, quantity and timeliness could materially harm our business by causing delays, lost sales, increases in costs and lower gross
profit margins.
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An increasing amount of products manufactured by the Company are produced outside the U.S., including in our Mexico facilities. The Company’s manufacturing facilities
in Mexico are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows the Company to import certain items from the U.S.
into Mexico duty-free, provided that such items, after processing, are exported from Mexico within a stipulated time frame. Maquiladora status, which is renewed
periodically, is subject to various restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations. Failure to
comply with these regulations or other disruptions within the program could adversely affect the Company’s financial position, results of operations, and cash flows.
Due to COVID-19, the Company has increased its safety stock of inventory at multiple facilities in order to be able to manufacture it products to increased levels in the case
there is a shut down or short-term disruptions at any of its production facilities. As a result, the Company has increased inventory of high run rate components to meet
increased orders for fiber optic products. Should ordering patterns decline in the short term for any reason, the Company may have excess inventory.
We depend on the availability of sufficient supply of certain materials and global disruptions in the supply chain for these materials could prevent us from meeting
customer demand for our products.
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.
We depend on the ability of these third-party suppliers to secure a sufficient supply of raw materials and maintain sufficient manufacturing and shipping capacity. The
global supply chain for raw materials critical to our products, such as resin used to manufacture plastics and fiber optic cable, recently has suffered shortages, shipping
delays and shipping shortages. This has led some manufacturers who depend on these raw materials to experience shortages, delivery delays and price increases for both the
raw materials and shipping, with the corresponding consequence that these manufacturers may be delayed in delivering products to their customers or may charge higher
prices for these products, or there may be increased shipping costs associated with the products. Some manufacturers have allocated short supply among their customers.
Additionally, the COVID-19 pandemic has driven demand for certain goods that have exacerbated these disruptions as supply has not kept pace with demand. We believe
these global supply chain issues will persist and will likely intensify into the future due to the complex and compounding problems associated with shortages of personnel
due to the COVID-19 pandemic, backlogs at ports, shortages of shipping containers, extreme weather events, and other logistical issues.
In fiscal 2022, the Company has experienced and expects to continue to experience increased demand for its products from its customers, putting pressure on the
Company’s supply chain to meet demand amidst these global issues. While we have not experienced significant increases in costs or delays in obtaining the materials and
components for our products from our suppliers, we cannot assure you that we will not experience these costs or delays in the future. The Company’s ability to recognize
revenue in the future for customer orders will depend on our ability to manufacture and deliver products to the customers and fulfill other contractual obligations. Our
ability to meet expected future customer demand for our products will in turn depend upon our suppliers receiving timely and adequate supply of raw materials to be able to
produce the critical materials and components they supply to us. Although we place a high value on long-term relationships with our suppliers, generally we do not have
long-term supply contracts but instead conduct business on an order-by-order basis. Therefore, we also compete with other companies for the production capacity of
manufacturers of the materials and components we need for our products. We also are exposed to potentially increasing costs associated with the materials and components
we purchase from suppliers or increased costs associated with shipping generally. We may attempt to mitigate the effect of increases in our cost of goods sold through
sourcing or stocking initiatives and by selectively increasing the prices of our products. However, we may be unable to fully pass on these costs to our customers. Long lead
times for certain components, as detailed above, along with increased demand for our products may impact our ability to accurately forecast our production requirements.
As a result, certain component inventory purchases may become excess or obsolete, which could have an adverse effect on our financial condition and results of operations.
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The reduction of available production capacity among our suppliers, their failures to meet production deadlines or increases to us in their manufacturing or shipping costs
may impact our ability to deliver quality products to our customers on a timely basis, make our products less competitive due to extended delivery times or increased price,
negatively impact our customer or distributor relationships, and result in lower net sales and profit. Any delays or inabilities in meeting customer required shipping dates
may also expose us to order cancellations in our sales backlog by customers, which could have an adverse effect on our results of operations.
We rely on our manufacturing operations to produce product to ship to customers. Manufacturing constraints and disruptions could result in decreased future revenue.
We currently manufacture our products at our manufacturing facilities in Brooklyn Park, Minnesota, Tijuana, Mexico, Oulu, Finland and Keila, Estonia. We also rely on our
network of suppliers and subcontractors that supply these facilities. Disruption affecting our manufacturing operations, subcontractors, or in the transportation of
components to these facilities could significantly impact our ability to ship products to our customers. Any significant interruption in manufacturing or supply availability,
including natural disasters, transportation delays and disruptions, pandemics, social unrest, labor shortages or competition for components, would require us to reduce our
product supply to customers, which would result in lost or delayed revenue and negatively impact our relationships with customers.
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 could
adversely affect us.
Our customer base includes direct customers, OEMs and distributors. For fiscal year 2022, the Company had one customer that comprised 14% of net sales. For fiscal years
2021 and 2020, the Company had two customers that comprised 28% and 30% of net sales, respectively. These customers are all distributors.
These customers, like our other customers, purchase our products from time to time through purchase orders. 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 by the Company 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 of orders received from any of our customers in our sales backlog 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.
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The impact of significant mergers among our customers on our business is likely to be unclear until sometime after such transactions are completed, which may take a year
or more. 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.
We monitor our product portfolio and business and customer trends. In response, we have made and may continue to make acquisitions. The success of our acquisitions will
depend on our ability to integrate the new products or operations with our existing products or operations. We cannot ensure that the expected benefits of any acquisition
will be realized or will be realized within the time frames we expect. 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 or product line may exceed the value we realize, and
we cannot provide assurance that we will obtain the expected revenues, anticipated synergies and strategic benefits of any acquisition within the time we expect or at all.
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.
We have exposure to movements in foreign currency exchange rates
Nestor Cable's functional currency is the Euro which is translated to the Company’s reporting currency of the U.S. dollar. Fluctuations in exchange rates between the Euro
and U.S. dollar may impact our results of operations, financial position and cashflows. The Company expects to continue to experience fluctuations in the U.S. dollar value
of these activities if it is not possible, cost-effective or should we not elect to hedge certain currency exposure. These factors, which are variable and generally outside of our
control, could materially impact our results of operations, anticipated future results, financial position and cash flows.
If we are unable to integrate acquired businesses, our financial results could be materially and adversely affected.
From time to time, we evaluate acquisition candidates that may strategically fit our business objectives. On July 26, 2022, we closed the acquisition of Nestor
Cables Ltd, a leading developer and manufacturer of fiber optic cable solutions located in Finland. The benefits that are expected to result from the Nestor acquisition or any
future acquisition will depend, in part, on our ability to successfully integrate Nestor within our anticipated timeframe. If we are unable to complete acquisitions or
successfully integrate and develop acquired businesses, our financial results could be materially and adversely affected. The risks inherent in pursuing or completing an
acquisition include:
● diversion of management’s attention from existing business activities;
● difficulties or delays in integrating and assimilating information and financial systems, operations and products of an acquired business or other business
venture or in realizing projected efficiencies, growth prospects, cost savings and synergies;
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● potential difficulties in managing our expanded international operations and, in the case of the Nestor acquisition, potential difficulties in managing our
non-U.S. subsidiaries, including the burden and cost of complying with a variety of international laws;
● potential loss of key employees, customers and suppliers of the acquired businesses or adverse effects on relationships with existing customers and
suppliers;
● adverse impact on overall profitability if the acquired business does not achieve the return on investment projected at the time of acquisition;
● currency translations and fluctuations may adversely affect the financial performance of our consolidated operations; and
● with respect to the acquired assets and liabilities, inaccurate assessment of additional post-acquisition capital investments; undisclosed, contingent or other
liabilities; problems executing backlog of material supply or installation projects; unanticipated costs; and an inability to recover or manage such
liabilities and costs.
These risks associated with acquisition, integration of acquired businesses and management of our expanded international operations may have a material adverse
effect on our sales, financial condition, and results of operations.
Adverse global economic conditions and geopolitical issues could have a negative effect on our business, and results of operations and financial condition.
Our business, including global supply chain is affected by global economic conditions and geopolitical issues. Geopolitical issues, such as the Russia invasion of
Ukraine and related economic sanctions and tensions between Russia and NATO countries, has resulted in increasing global tensions, rising fuel costs and creates
uncertainty for our global supply chain. Sustained or worsening of global economic conditions and geopolitical issues may disrupt or increase our cost of doing business and
otherwise disrupt and delay our supply chain operations. These factors could negatively affect the cost and supply of components needed for our products, our ability to ship
products to customers and ultimately impact our business, financial condition and result of operations.
Our planned growth may strain our business infrastructure, which could adversely affect our operations and financial condition.
Net sales for fiscal year 2022 increased 92% as compared to net sales in fiscal year 2021. In fiscal year 2023, we expect to experience additional significant net
sales growth as compared to fiscal year 2022. As we grow, we will face the risk that our existing resources and systems, including management resources, enterprise
technology and operating systems, may be inadequate to support our growth. We cannot assure you that we will be able to retain the personnel or make the changes in our
systems that may be required to support our growth. Failure to secure these resources and implement these systems on a timely basis could have a material adverse effect on
our operating results. In addition, hiring additional personnel and implementing changes and enhancements to our systems will require capital expenditures and other
increased costs that could also have a material adverse impact on our operating results.
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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.
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 P. 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.
Cyber-security incidents on our information technology systems, including ransomware, data breaches or computer viruses, could disrupt our business operations,
damage our reputation, and potentially lead to litigation.
Cybersecurity threats continue to expand and evolve, making it difficult to detect and prevent such threats from impacting the Company. While we monitor our networks
and continue to enhance our network security measures, particularly as we transitioned to some remote work, cyber-attacks have increased in frequency and sophistication,
and our efforts may not be adequate to prevent all cybersecurity incidents. Cybersecurity threats to the Company could lead to unauthorized access to the Company’s
information technology systems, customers, suppliers, and third-party service providers. Cybersecurity incidents could potentially result in the disruption of our business
operations and/or the theft, destruction, publication, or corruption of critical data and confidential or proprietary information. Cybersecurity events could also result in the
Company being unable to access critical data in a timely manner, or at all. Cybersecurity incidents could also result from unauthorized parties gaining access to our systems
or information through fraudulent or other means of deceiving our employees, suppliers, customers, or third-party service providers. Despite the Company’s implementation
of preventative security measures and controls to prevent, detect, and mitigate these threats, our infrastructure may still be susceptible to disruptions from cybersecurity
incidents including ransomware attacks, security breaches, computer viruses, outages, systems failures, any of which could include the inability to access critical data,
reputational damage, loss of our intellectual property, release of highly sensitive confidential information, litigation with third parties and/or governmental investigations
and fines, which could have a material adverse effect on our financial condition and results of operations. Additionally, as cybersecurity threats continue to evolve, we may
be required to devote additional resources to continue to enhance our information security measures and controls to mitigate these new and emerging threats.
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Our business is dependent on interdependent management information systems.
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 system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions, cyber-attack or
other security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be
required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Risks Relating to Our Markets and Industry
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 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.
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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.
If the telecommunications market does not continue to expand, our business may not grow as fast as we expect, which could adversely impact our business, financial
condition and operating results.
Our future success as a provider of fiber management, fiber protection and fiber delivery products depends on the continued growth of demand for fiber broadband and, in
particular, the continued expansion in the United States and in our other markets of information networks, particularly those directly or indirectly dependent upon a fiber
optic infrastructure. As part of that growth, we anticipate that demand for voice, video, and other data services delivered over high-speed connections (both wired and
wireless) will continue to increase. If this demand does not increase, the need for enhanced high-speed bandwidth using fiber connections may not increase. Currently,
demand for high-speed broadband capabilities and access is increasing rapidly due to the pandemic, but future growth may be limited by several factors, including, among
others: (1) relative strength or weakness of the global economy or certain countries or regions, including the impact of the current global effects due to COVID-19, (2) an
uncertain regulatory environment, and (3) uncertainty regarding long-term sustainable business models as multiple industries, such as the cable, traditional
telecommunications, wireless and satellite industries, offer competing content delivery solutions. The telecommunications market also has experienced periods of
overcapacity, some of which have occurred even during periods of relatively high network usage and bandwidth demands. If the factors described above were to occur and
cause the demand for fiber broadband capabilities or access to slow, stop or reverse, our business, financial condition and operating results would be negatively affected.
Changes in U.S. government funding programs may cause our customers and prospective customers to delay, reduce, or accelerate purchases, leading to unpredictable
and irregular purchase cycles.
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, programs like the Connect America Fund (CAF), which provides a capital expenditure subsidy for the build-out of the country’s broadband network, and the
Rural Digital Opportunity Fund (RDOF), which will provide a capital expenditure subsidy for the support high-speed broadband networks in rural America, may subsidize
or encourage spending by our customers or prospective customers on capital spending projects that utilize our products. Customers may seek to time or otherwise adjust
their technology or network expansion projects to the availability of subsidies under these or other programs, which will affect the timing and size of orders for our
products. 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. Further, changes in government programs in our industry or uncertainty regarding future changes could
adversely impact our customers’ or prospective customers’ decisions regarding timing and amounts of capital spending, which could decrease demand for our products,
delay orders or result in pricing pressure from these customers. In addition, government funding programs such as the CARES Act, which was enacted in March 2020 in
response to the COVID-19 pandemic, provides grants to our customers and prospective customers for deploying improved broadband connections to unserved and
underserved areas of the United States provided they are deployed by specific calendar deadlines, which may cause customers and prospective customers to accelerate their
purchases for their long term network deployment plans into a shorter timeframe.
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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, increased discounts to customers, and loss of market share could require increased
spending by us on research and development, sales and marketing, and customer support.
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.
Litigation has been in the past and 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 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.
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.
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Risks Relating to Our Common Stock
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:
● 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 required certifications or qualifications to sell products, 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, including the impact of government regulations on customers purchasing decisions;
● variations in the mix of products and services we sell;
● the utilization of our production capacity and employees, including foreign operations;
● the availability and cost of key components of our products, including the impact of new or increased tariffs; and
● accounting treatment related to 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 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.
19
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.
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 equity compensation plans allowing for the acceleration of vesting or payments of awards granted under the plans in the event of specified events
that result in a “change in control” and provisions of agreements with certain of our executive officers requiring payments if their employment is terminated and there
is a “change in control.”
These measures could discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders.
This may have a negative effect on the price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Clearfield leases an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing and warehouse
space. The lease term is ten years and two months, ending on February 28, 2025 and is renewable. The renewal options have not been included within the lease term
because it is not reasonably certain that the Company will exercise either option.
In July 2021, Clearfield entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico. The lease term is for
7 years of which 5 years are mandatory, commencing March 2022. The lease contains written options to renew for two additional consecutive periods of 5 years each. The
lease calls for monthly rental payments of $162,000, increasing 2% annually. The renewal options have not been included within the lease term because it is not reasonably
certain that the Company will exercise either option.
20
Clearfield’s Mexico facility operates under a Maquiladora arrangement pursuant to which we contract with a company to provide certain personnel and other services at the
Tijuana, Mexico facility. Maquiladora status allows us to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are
exported from Mexico within a stipulated time frame. Maquiladora status, which is renewed with the Ministry of the Economy of Mexico periodically, is subject to various
restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations, which have become stricter in recent years.
On November 19, 2021, Clearfield signed a lease for a 105,000 square foot warehouse in Brooklyn Park, Minnesota. The lease term is five years commencing March 2022
and ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal option
has not been included within the lease term because it is not reasonably certain that the Company will exercise the option. The lease commenced in the second quarter of
fiscal 2022.
Nestor leases an approximately 25,000 square foot manufacturing facility in Oulu, Finland, which is utilized for the operations of Nestor Cables. The original lease term
ends on October 31, 2022, but auto renews indefinitely until terminated with two years written notice. It is not reasonably certain that the Company will not exercise the
termination option. The lease calls for monthly rental payments of approximately $40,000 Rent is increased each year on January 1st based upon the cost of living index
published by the Finnish government.
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.
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 under the symbol “CLFD.”
Number of Holders of Common Stock
There were 277 holders of record of our common stock as of September 30, 2022.
Dividends
We have never paid cash dividends on our common stock. We currently intend to retain any earnings for use in our operations, continued organic growth and potential future
strategic transactions, as well as execution of the repurchase program described below, and do not intend in the foreseeable future to pay cash dividends on our common
stock.
21
Stock Performance Graph
The following graph shows a comparison of the 5-year cumulative total return on Clearfield, Inc.’s common stock relative to the Standard & Poor’s 500 Stock Index
(S&P500 Index), which the Company has selected as a broad market index, and The Standard & Poor’s 1500 Communications Equipment Index (S&P 1500
Communications Equipment Index), which the Company has selected as a published industry index. The graph assumes an investment of $100 (with reinvestment of all
dividends) is made in the Company’s common stock and in each index on September 30, 2017 and its relative performance is tracked through September 30, 2022. The
returns shown are based on historical results and are not intended to suggest future performance.
22
Company/Index
Clearfield, Inc.
S&P 500 Index
S&P 1500 Communications Equipment Index
$
September 30,
2017
September 30,
2018
September 30,
2019
September 30,
2020
September 30,
2021
September 30,
2022
$
100.00
100.00
100.00
$
98.90
105.30
137.03
87.13 $
117.95
138.73
148.31 $
126.98
114.40
324.63 $
178.83
160.72
769.41
150.35
130.81
Issuer Repurchases
The Company repurchased a total of 9,170 shares of our common stock during the fourth quarter of fiscal year 2022 in connection with payment of taxes upon the vesting of
restricted stock previously issued to employees. These repurchases are unrelated to the stock repurchase program.
Effective January 27, 2022, the Company reinstated its stock repurchase program that had been suspended due to COVID uncertainty in April 2020. In addition, effective
January 27, 2022, the Company’s board of directors increased the share repurchase program by an additional $10 million to an aggregate of $22 million, from the previous
$12 million. As of September 30, 2022, we have repurchased an aggregate of 565,590 shares for approximately $7,019,000, leaving approximately $14,981,000 available
within our $22,000,000 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. During the year ended September 30, 2022, the Company did not repurchase any shares under the stock repurchase
program.
The following table presents the total number of shares repurchased during the fourth quarter of fiscal 2022 by month and the average price paid per share:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
July 1-31, 2022
August 1-31, 2022
September 1-30, 2022
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)
Total
Number
of Shares
Purchased
Average
Price Paid
per Share
-
9,170
-
9,170
$
$
-
123.45
-
123.45
- $
-
-
- $
14,980,671
14,980,671
14,980,671
14,980,671
(1) Amount remaining from the aggregate $22,000,000 repurchase authorizations approved by the Company’s Board of Directors on January 27, 2022.
ITEM 6. [RESERVED]
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,” “may,” “will,” 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.”
23
Overview of Business: The Clearfield operating segment designs, manufactures and distributes fiber optic management, protection and delivery products for
communications networks. Its “fiber to the anywhere” platform serves the unique requirements of leading broadband service providers in the United States, which include
Community Broadband, National Carriers, and Multiple System Operators (“MSO’s” or “cable TV”), while also serving the broadband needs of the International markets,
primarily in the Caribbean, in Canada, and Central and South America. These customers are collectively included in the category of Broadband Service Providers. The
Clearfield operating segment also provides contract manufacturing services to its Legacy customers for build-to-print services which include OEM requiring copper and
fiber cable assemblies built to their specifications. 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.
The Nestor Cables operating segment manufactures fiber optic and copper telecommunication cables and equipment which it distributes to telecommunication operators,
network owners, electric companies, building contractors, and industrial companies. Nestor Cables has been a supplier to Clearfield for over a decade. Nestor has two types
of production processes, the process of manufacturing cable in its Finland facility and the finished assembly portion of its business performed in Estonia. Nestor Cables sells
its products predominantly to customers in Europe.
Critical Accounting Policies: In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our sales, income
from operations and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheets. 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 stock-based compensation
●Income taxes
●Valuation of inventory, long-lived assets, finite lived intangible assets and goodwill
●Valuation in business combinations
Revenue Recognition Our revenue is comprised of the sale of our products to customers and is recognized when the Company satisfies its performance obligations under
the contract. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. The majority of our contracts have a single
performance obligation and are short term in nature. We recognize revenue by transferring the promised products to the customer, with substantially all revenue recognized
at the point in time the customer obtains control of the products. Shipping and handling costs charged to our customers are included in net sales, while the corresponding
shipping expenses are included in cost of sales. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a
net (excluded from revenue) basis.
Stock-Based Compensation We measure and recognize compensation expense for all stock-based awards at fair value over the requisite service period. We use the Black-
Scholes option pricing model to determine the 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 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.
24
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.
Income Taxes We account for income taxes in accordance with 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, 2022 and 2021, the Company had no U.S. federal, state or Finnish net operating loss (“NOL”) carry-forwards.
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.
The Company files income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. Based on its evaluation, the Company has concluded that
it has no significant unrecognized tax benefits. The Company is generally subject to U.S. federal examination for all tax years after 2017. The Company is subject to state
examinations for all tax years after 2013 due to unexpired research and development credit carryforwards still open under statute. Nestor is generally subject to Finland
examination for all tax years after 2018.
25
Impairment of Long-Lived Assets, Intangible Assets and Goodwill The Company’s long-lived assets as of September 30, 2022 consisted primarily of property, plant and
equipment, right of use lease assets, patents, intangibles, and goodwill. The Company reviews the carrying amount of its property, plant and equipment, right of use lease
assets, and intangible assets 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, right of use lease assets, and intangible assets 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 future growth of the FTTP market.
Beginning in fiscal year 2022, the Company operates as two reporting units, the Clearfield operating segment conducted through Clearfield, Inc. in the United States, and
the Nestor Cables operating segment conducted through Clearfield Finland Ltd and its subsidiaries in Finland and Estonia. The Company 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 performed step zero of the impairment test to determine whether there are any qualitative factors which may indicate a potential impairment.
During the year ended September 30, 2022, there were no triggering events that indicated goodwill could be impaired. Prior to fiscal year 2022, when the Company
operated as one reporting unit, the Company determined 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 year ended September 30, 2021 resulted in excess fair value over carrying value and
therefore, no adjustments were made to goodwill.
A significant reduction in our market capitalization or in the carrying amount of net assets of a reporting unit could result in an impairment charge. If the carrying amount of
a reporting unit exceeds its fair value, the Company would measure the possible goodwill impairment loss based on an allocation of the estimate of fair value of the
reporting unit to all of the underlying assets and liabilities of the reporting unit, including any previously unrecognized intangible assets. The excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting
unit's recorded goodwill exceeds the implied fair value of goodwill. An impairment loss would be based on significant estimates and judgments, and if the facts and
circumstances change, a potential impairment could have a material impact on the Company’s financial statements.
No impairment of long-lived assets, intangible assets or goodwill has occurred during the years ended September 30, 2022, 2021, and 2020, 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 inventory procurement accordingly.
26
Valuation in Business Combinations We record tangible and intangible assets acquired and liabilities assumed in business combinations under the purchase method of
accounting under ASC 805- Business combinations. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values
at the dates of acquisition. The value recorded is based on estimates of future financial projections. These cash flow projections are discounted with a risk adjusted rate. The
fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, which consider management’s best
estimate of inputs and assumptions that a market participant would use. We allocate any excess purchase price over the fair value of the net tangible and intangible assets
acquired and liabilities assumed to goodwill.
Results of Operations
Year ended September 30, 2022 compared to year ended September 30, 2021
The Company’s net sales for fiscal year 2022 increased 92%, or $130,128,000, to $270,883,000 from net sales of $140,755,000 in fiscal year 2021. The Company allocates
sales from external customers to geographic areas based on the location to which the product is transported. Accordingly, international sales represented 6% and 7% of net
sales for the years ended September 30, 2022 and 2021, respectively.
The increase in net sales for fiscal year 2022 of $130,128,000 compared to fiscal year 2021 is attributable to increased demand across Clearfield’s core markets. Sales to the
Community Broadband market increased 84% or $82,651,000 from $97,978,000 in fiscal year 2021 to $180,629,000 fiscal year 2022. Sales to Clearfield’s MSO/Cable TV
market increased 164% or $30,379,000 from $18,490,000 in fiscal year 2021 to $48,868,000 in fiscal year 2022. Sales to National Carriers increased 96% or $11,499,000
from $11,956,000 in fiscal year 2021 to $23,456,000 in fiscal year 2022. The increase in sales to these customers was due to continuing increased demand for fiber
connectivity products in response to COVID-19 driven by customers accelerating their purchasing decisions and deployment schedules of our fiber optic solutions and the
need for high-speed broadband required in the work from anywhere environment. Net sales to International customers increased 62% or $5,846,000 from $9,470,000 in
fiscal year 2021 to $15,276,000 in fiscal year 2022, partially driven by the Company’s acquisition of Nestor Cables on July 26, 2022.
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. The Company’s ability to predict revenue has become further limited by potential disruption to its supply chains or changes in
customer ordering patterns due to COVID-19. The Company’s ability to recognize revenue in the future for its backlog of customer orders will depend on the Company’s
ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for fiscal year 2022 was $157,936,000, an increase of $78,358,000, or 98%, from the $79,578,000 in fiscal year 2021. Gross profit increased 85%, or
$51,770,000 from $61,177,000 for fiscal year 2021 to $112,947,000 for fiscal year 2022.
Gross profit percent was 41.7% in fiscal year 2022 compared to 43.5% for fiscal year 2021. The decrease in gross profit margin for the period was primarily due to
component cost increases absorbed by the Company due to the inflationary economic environment, increased facility costs from our expanded Mexico manufacturing and
Minnesota distribution center operations, and increased freight and transportation costs. Despite the decrease in gross profit percentage, gross profit dollars increased due to
the increase net sales.
Selling, general and administrative expense for fiscal year 2022 was $49,130,000, an increase of $13,187,000, or 37%, compared to $35,943,000 for fiscal year 2021. This
increase is primarily comprised of an increase of $6,976,000 in Clearfield’s compensation costs due to additional personnel this year over last, higher performance-based
compensation accruals as well as sales commissions due to significantly higher sales volumes, expenses and fees related to the acquisition of Nestor Cables of $1,647,000,
increased travel, entertainment, and tradeshows cost of $1,382,000 due to reduced COVID-19 travel restrictions as compared to the prior year, and increased stock
compensation expenses of $990,000 due to issuances of equity awards in fiscal 2022.
27
Income from operations for fiscal year 2022 was $63,817,000 compared to $25,234,000 for fiscal year 2021. This increase is attributable to increased sales and gross profit,
partially offset by increased selling, general and administrative expenses as described above.
Net investment income in fiscal year 2022 was $328,000 compared to $500,000 for fiscal year 2021. The decrease is due to lower interest rates earned on decreased
investment balances in fiscal 2022. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit, treasury securities, and money market
accounts. We expect net investment income to decline as we do not plan to reinvest the majority of funds from these securities upon maturity but rather use the funds to
continue to invest in our operations.
Interest expense in fiscal year 2022 was $311,000. The increase is due to $141,000 in interest as a result of $16,700,000 borrowed on the Company’s line of credit drawn on
in the fourth quarter of fiscal 2022 to fund the acquisition of Nestor Cables, and $170,000 in interest on debt held with Nestor Cables. The Company did not have any
interest expense for fiscal year 2021.
Income tax expense for fiscal year 2022 was $14,472,000 compared to $5,407,000 for fiscal year 2021. The increase in tax expense of $9,065,000 from the year ended
September 30, 2021 is primarily due to the increase in taxable income for fiscal year 2022. The increase in the income tax expense rate to 22.7% for fiscal year 2022 from
21.0% for fiscal year 2021 is due to increased permanent addback items including nondeductible compensation and transaction costs. Our provision for income taxes
includes current U.S. federal tax expense and state tax expense, Finland taxes and deferred tax expense.
Net income for fiscal year 2022 was $49,362,000 or $3.58 per basic and $3.55 per diluted share compared to $20,327,000 or $1.48 per basic and $1.47 per diluted share for
the fiscal year 2021.
Year ended September 30, 2021 compared to year ended September 30, 2020
Net sales for fiscal year 2021 increased 51%, or $47,681,000, to $140,755,000 from net sales of $93,075,000 in 2020. 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 4% of net sales for the years ended
September 30, 2021 and 2020, respectively.
Sales in fiscal year 2021 to broadband service providers were 98% of net sales, or $138,021,000 compared to $89,571,000, or 96%, of net sales in fiscal 2020. Among this
group, the Company recorded $9,470,000 in international sales in fiscal year 2021 versus $4,054,000 in fiscal year 2020. Sales to Legacy customers in 2021 were 2% of net
sales, or $2,734,000 compared to $3,503,000, or 4%, of net sales in fiscal year 2020.
The increase in net sales for fiscal year 2021 of $47,681,000 compared to fiscal year 2020 was primarily attributable to an increase in sales to Community Broadband, MSO
and International customers of $38,920,000, $6,245,000 and $5,396,000 respectively. This was offset by decreased sales to Tier 1 and Legacy customers of $2,172,000, and
$708,000, respectively. The increase to Community Broadband and MSO customers was due to increased demand in response to COVID-19 driven by customers
accelerating their purchasing decisions and deployment schedules of our fiber optic solutions and the need for high-speed broadband required in the work from anywhere
environment, as well as market share gains among customers in these markets. The increase in International sales was a result of increased demand as purchases in the prior
year were negatively affected by COVID-19. The decrease in sales to Tier 1 customers was due to a reduction in capital spending in the consumer markets for fiber to the
home at one of our Tier 1 customers resulting in a slower pace of their spend with us.
28
Revenue from all customers was 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. The Company’s ability to predict revenue has become further limited by potential disruption to its supply chains or
changes in customer ordering patterns due to COVID-19. The Company’s ability to recognize revenue in the future for its backlog of customer orders will depend on the
Company’s ability to manufacture and deliver products to the customers and fulfill its other contractual obligations.
Cost of sales for fiscal year 2021 was $79,578,000, an increase of $24,418,000, or 44%, from the $55,160,000 in fiscal year 2020. Gross profit increased 61%, or
$23,264,000, from $37,914,000 for fiscal year 2020 to $61,178,000 for fiscal year 2021. Gross profit percent was 43.5% in fiscal year 2021 compared to 40.7% for fiscal
year 2020. The year-over-year increase in gross profit was due to increased sales volume. The increase in gross profit percent was primarily due to favorable product mix
associated with higher net sales in the Company’s Community Broadband markets, improved overhead absorption gained from increased sales volumes, and greater use of
its Mexico manufacturing plants in fiscal 2021 compared to fiscal year 2020. In fiscal year 2021, the Company did experience increased material and supply chain
transportation costs in its cost of sales due to substantial material demand and strained supply chain and transportation systems caused by COVID-19 and expects that
higher level of expense to continue in fiscal year 2022.
Selling, general and administrative expense for fiscal year 2021 was $35,943,000, an increase of $6,412,000, or 22%, compared to $29,531,000 for fiscal year 2020. This
increase is primarily composed of an increase of $6,146,000 in compensation costs due to additional personnel and higher performance-based compensation accruals as well
as sales commissions due to higher sales volumes. In addition, stock compensation expenses increased $471,000 due to issuances of equity awards in fiscal 2021. These
were partially offset by lower travel and entertainment costs in fiscal year 2021 of $263,000 due to a full year of COVID-19 restrictions, and a recovery of bad debt expense
of $210,000.
Income from operations for fiscal year 2021 was $25,234,000 compared to $8,384,000 for fiscal year 2020. This increase is attributable to increased sales and gross profit,
partially offset by increased selling, general and administrative expenses as described above.
Interest income in fiscal year 2021 was $500,000 compared to $771,000 for fiscal year 2020. The decrease is due to lower interest rates earned on increased investment
balances in fiscal 2021. The Company invests its excess cash primarily in FDIC-backed bank certificates of deposit, treasury securities, and money market accounts. We
expect interest income to decline due to the prevailing lower interest rates in the current economic environment.
Income tax expense for fiscal year 2021 was $5,407,000 compared to $1,862,000 for fiscal year 2020. The increase in tax expense of $3,545,000 from the year ended
September 30, 2020 is primarily due to the increase in taxable income for fiscal year 2021. The increase in the income tax expense rate to 21.0% for fiscal year 2021 from
20.3% for fiscal year 2020 is due to dilution of the permanent differences between tax and book income as a result of substantially higher taxable income in fiscal year
2021. Our provision for income taxes includes current federal tax expense, state income tax expense, and deferred tax expense.
Net income for fiscal year 2021 was $20,327,000 or $1.48 per basic and $1.47 per diluted share compared to $7,293,000 or $0.53 per basic and diluted share for the fiscal
year 2020.
Reportable Segments
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that
would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined
based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
29
On July 26, 2022, Clearfield through its newly created Finnish subsidiary, Clearfield Finland Ltd, acquired all of the equity of Nestor Cables Ltd, which has a wholly-owned
Estonian subsidiary. Nestor Cables Baltics OÜ. Following the closing of the acquisition of Nestor Cables on July 26, 2022, the Company reassessed its operating segments
as defined under Accounting Standards Codification (“ASC”) 280, Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise
where discrete financial information is available that is evaluated regularly by the chief operating decision -maker (“CODM”), in deciding how to allocate resources and in
assessing performance. Prior to July 26, 2022, we were considered to be in a single reporting segment and operating unit structure. Based upon the Company’s assessment
following the acquisition of Nestor Cables, the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
Accordingly, for the year ended September 30, 2022, the Company has two reportable segments: (1) Clearfield and (2) Nestor Cables. The entities that comprise the Nestor
Cables segment are Clearfield Finland Ltd, Nestor Cables Ltd and Nestor Cables Baltics Ltd.
Reportable segments are as follows:
-
-
Clearfield Segment- Clearfield designs, manufactures and sells fiber management, protection, and delivery solutions.
Nestor Cables Segment- Nestor Cables designs, manufactures and sells fiber optic and copper telecommunication cables and equipment.
Clearfield Segment
The following table provides net sales and net income for the Clearfield Segment for the fiscal years ended:
(In thousands)
Segment net sales
Segment net income
September 30, 2022 September 30, 2021 September 30, 2020
93,075
$
7,293
140,755 $
20,327
263,822 $
49,771
Net sales in the Clearfield segment increased 87% or $123,067,000 for the fiscal year ended September 30, 2022, resulting in increased sales to its Community Broadband,
MSO/Cable TV, and Tier 1 customers due to continuing demand for fiber connectivity products in response to COVID-19, driven by these customers to accelerate their
purchasing decisions and deployment schedules of our fiber optic solutions and the need for high-speed broadband.
Net income in the Clearfield segment for the fiscal year ended September 30, 2022 increased 145% or $29,444,000 for the fiscal year ended September 30, 2022, driven by
the changes in sales outlined above.
Nestor Cables Segment
The following table provides net sales and net income for the Nestor Cables segment for the fiscal year ended:
(In thousands)
Segment net sales
Segment net income (loss)
30
September 30, 2022 September 30, 2021 September 30, 2020
-
$
-
7,061 $
(409)
- $
-
Nestor Cables was acquired on July 26, 2022. Prior to the acquisition the Company operated as one reporting segment.
Net sales in the Nestor Cables segment for the fiscal year ended September 30, 2022 were $7,061,000.
Net loss in the Nestor Cables segment for the fiscal year ended September 30, 2022 was $409,000, driven by one time acquisition related transaction expenses of
approximately $527,000.
Liquidity and Capital Resources
As of September 30, 2022, the Company had combined consolidated balances of cash, cash equivalents, short term and long-term investments of $45,199,000 compared to
$60,503,000 as of September 30, 2021. As of September 30, 2022, our principal sources of liquidity were our cash and cash equivalents and short-term investments. Those
sources total $22,452,000 as of September 30, 2022 compared to $23,590,000 as of September 30, 2021. Investments considered long-term were $22,747,000 as of
September 30, 2022 compared to $36,913,000 as of September 30, 2021. Our excess cash is invested mainly in certificates of deposit backed by the FDIC, U.S. Treasury
securities and money market accounts. On April 27, 2022, Clearfield entered into a loan agreement and a security agreement with a bank that provides the Company with a
$40 million revolving line of credit that is secured by certain of the Company’s U.S. assets. The line of credit matures on April 27, 2025 and borrowed amounts will bear
interest at a variable rate of the CME Group one-month term Secured Overnight Financing Rate (“SOFR”) plus 1.85%, but not less than 1.80% per annum. As of
September 30, 2022, the interest rate was 4.36%. The loan agreement and the security agreement contains customary affirmative and negative covenants and requirements
relating to the Company and its operations, including a requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each
fiscal year for the fiscal year then ended and maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for
the trailing twelve (12) month period. Debt service coverage ratio is the ratio of Cash Available for Debt Service to Debt Service, each as defined in the loan agreement.
Debt and Cash Flow are also as defined in the loan agreement for the purposes of the debt to cash flow ratio covenant. As of September 30, 2022, the Company has
borrowed $16,700,000 against this line of credit. As of September 30, 2022, the Company was in compliance with all covenants. We had long-term debt obligations of
$18,666,000 as of September 30, 2022 and no long-term debt obligations as of September 30, 2021. We believe the combined balances of short-term cash and investments,
along with long-term investments and available bank lines of credit provide a more accurate indication of our available liquidity.
We believe our existing cash equivalents and short-term investments, along with cash flow from operations and line of credit, 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. Effective January 27, 2022, the Company reinstated its stock
repurchase program that had been suspended in April 2020 due to COVID-19 uncertainty. In addition, effective January 27, 2022, the Company’s board of directors
increased the share repurchase program by an additional $10 million to an aggregate of $22 million, from the previous $12 million. As of September 30, 2022, we have
repurchased an aggregate of 565,590 shares for approximately $7,019,000, leaving approximately $14,981,000 available within our $22,000,000 stock repurchase program.
The repurchase program does not obligate the Company to repurchase any particular amount of common stock during any period. The repurchase will be funded by cash on
hand. During the year ended September 30, 2022, the Company did not repurchase any shares under the stock repurchase program.
Operating Activities
Net cash generated from operations for the fiscal year ended September 30, 2022 totaled $1,001,000. Cash provided by operations included net income of $49,362,000 for
the fiscal year ended September 30, 2022, non-cash expenses for depreciation and amortization of $3,413,000, stock-based compensation of $2,339,000, in addition to
changes in operating assets and liabilities using cash. Changes in operating assets and liabilities using cash include an increase in net inventories of $43,744,000 and
accounts receivables of $24,234,000. The increase in inventory is a result of additional stocking levels to support the Company’s increased sales backlog and higher
demand, and stocking of high turn and long lead time components to limit manufacturing delays due to raw material component shortages and delays. The increase in
accounts receivable was due to higher net sales as well as increased days sales outstanding (“DSO”) due to higher sales to certain customers with longer payment terms.
DSO, which measures how quickly receivables are collected, increased 13 days from 39 to 52 from September 30, 2021 to September 30, 2022. Also, changes in operating
assets and liabilities providing cash include an increase in accounts payable and accrued expenses of $14,502,000, due to timing of accounts payable and $8,738,000 in
fiscal year 2022 incentive compensation accruals to be paid after year end.
Net cash generated from operations for the fiscal year ended September 30, 2021 totaled $10,903,000. Cash provided by operations included net income of $20,327,000 for
the fiscal year ended September 30, 2021, non-cash expenses for depreciation and amortization of $2,302,000, stock-based compensation of $1,280,000, and decrease in
allowance for doubtful accounts of $210,000, in addition to changes in operating assets and liabilities using cash. Changes in operating assets and liabilities using cash
include an increase in net inventories of $13,116,000 and accounts receivables of $9,151,000. The increase in inventory is a result of additional stocking levels to support
the Company’s increased sales backlog and higher demand, and stocking of high turn and long lead time components to limit manufacturing delays due to raw material
component shortages and delays. The increase in accounts receivable was due to higher net sales. The Company’s DSO, which measures how quickly receivables are
collected, increased 1 day from 38 to 39 from September 30, 2020 to September 30, 2021. Also, changes in operating assets and liabilities providing cash include an
increase in accounts payable and accrued expenses of $9,776,000, due to timing of accounts payable and $6,513,000 in fiscal year 2021 incentive compensation accruals to
be paid after year end.
31
Net cash generated from operations for the fiscal year ended September 30, 2020 totaled $6,656,000. Cash provided by operations included net income of $7,293,000 for
the fiscal year ended September 30, 2020, non-cash expenses for depreciation and amortization of $2,422,000, stock-based compensation of $774,000, slightly offset by a
non-cash amortization of discounts on investments of $64,000, in addition to changes in operating assets and liabilities using cash. Changes in operating assets and
liabilities using cash include an increase in net inventories of $5,396,000 and accounts receivables of $1,378,000. The increase in inventory is a result of additional stocking
levels to support the Company’s increased backlog and higher demand, and additional safety stock across the Company’s multiple locations due to the uncertainty of
COVID-19 on the Company’s supply chain and manufacturing locations. The increase in accounts receivable was due to higher net sales offset by improved DSO in the
current year. The Company’s DSO, which measures how quickly receivables are collected, decreased 9 days from 47 to 38 from September 30, 2019 to September 30,
2020. Also, changes in operating assets and liabilities providing cash include an increase in accounts payable and accrued expenses of $3,152,000.
Investing Activities
For the fiscal year ended September 30, 2022, the Company had $17,386,000 of FDIC-backed certificates of deposit and U.S. Treasuries mature or be sold. The Company
used $9,148,000 in cash to purchase fixed and intangible assets. Additionally, the Company used $16,187,000 in cash to acquire Nestor Cables on July 26, 2022. The result
is cash used in investing activities of $8,197,000 in fiscal year 2022. In fiscal year 2023, the Company intends to continue investing in the necessary information
technology, manufacturing equipment and facility needs, including further expansion of manufacturing in our Mexico facility.
For the fiscal year ended September 30, 2021, we purchased $24,809,000 of FDIC-backed certificates of deposit and U.S. Treasuries and had $13,255,000 of FDIC-backed
certificates of deposit and U.S. Treasuries mature or be called. The result is cash used in investing activities of $13,600,000 in fiscal year 2021. The increase in cash used in
investing activities was driven by increased investment of cash in excess of operating needs into long-term investments. During fiscal year 2021, we used $2,046,000 in
cash for the purchase of capital equipment and software and for obtaining patents. These purchases were mainly related to manufacturing and information technology
equipment.
For the fiscal year ended September 30, 2020, we used $1,806,000 in cash for the purchase of capital equipment and for obtaining patents. These purchases were mainly
related to manufacturing equipment, including the expansion to a second manufacturing facility in Mexico, as well as information technology equipment. During fiscal year
2020, we purchased $34,057,000 of FDIC-backed certificates of deposit and U.S. Treasuries and had $35,822,000 of FDIC-backed certificates of deposit and U.S.
Treasuries mature or be called. The result is cash used in investing activities of $41,000 in fiscal year 2020. The decrease in cash used in investing activities was driven by
reduced purchases of long-term investments due to the current low interest rate environment.
Financing Activities
For the fiscal year ended September 30, 2022, the Company borrowed $16,700,000 on its line of credit to fund the July acquisition of Nestor Cables. The Company received
$544,000 from employees’ purchase of stock through our Employee Stock Purchase Plan (“ESPP”). The Company used $5,183,000 related to share withholding for
exercise and taxes associated with the issuance of common stock upon cashless exercise of stock options and used $1,406,000 to pay for taxes as a result of employees’
vesting of restricted shares using share withholding. As a result, the net cash provided by financing activities during fiscal year 2022 was $10,655,000.
For the fiscal year ended September 30, 2021, the Company received $384,000 from employees’ purchase of stock through our ESPP. The Company used $462,000 to pay
for taxes related to employees’ exercises of stock options and $458,000 to pay for taxes related to employees’ vesting of restricted shares using share withholding. As a
result, the net cash used in financing activities during fiscal year 2021 was $536,000.
For the fiscal year ended September 30, 2020, the Company used $429,000 of cash to repurchase its own common stock prior to the suspension of the share repurchase plan
in April 2020. For the fiscal year ended September 30, 2020, the Company received $349,000 from employees’ purchase of stock through the ESPP. The Company used
$176,000 to pay for taxes related to 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 2020 was $247,000.
32
Operating Leases
We have entered into various non-cancelable operating lease agreements for office equipment and our office and manufacturing spaces in Minnesota, Mexico, Finland and
Estonia expiring at various dates through February 2027. 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.
New Accounting Pronouncements:
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. In November 2018, the FASB issued update ASU 2018-19 that
clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance introduces a new model for recognizing credit losses on financial instruments based
on an estimate of current expected credit losses. Financial instruments impacted include accounts receivable, trade receivables, other financial assets measured at amortized
cost and other off-balance sheet credit exposures. The new guidance is effective for the Company beginning in the first quarter of fiscal 2024, with early adoption permitted.
The Company is evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently invests its excess cash in bank certificates of deposit (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation (“FDIC”) and
United States Treasury (“Treasuries”) securities with terms of not more than five years, as well as money market accounts. The fair value of these investments fluctuates
subject to changes in market interest rates. As of September 30, 2022, and 2021, the Company had combined consolidated balances of cash, cash equivalents, short term
and long-term investments of $45,199,000 and $60,503,000, respectively.
Foreign Exchange Rates:
The Company uses the U.S. dollar as its reporting currency. The functional currency of Nestor Cables is the Euro. The changing relationships of the U.S. dollar to the Euro
could have a material impact on our financial results. Fluctuations in the Euro to U.S. dollar exchange rate impacts our consolidated balance sheets, as well as sales, cost of
sales, and net income. If the Euro had appreciated or depreciated by 10%, relative to the U.S. Dollar, our operating expenses for fiscal year 2022 would have increased or
decreased by approximately $70,000 or less than 1%. We do not hedge against foreign currency fluctuations. As such, fluctuations in foreign currency exchange rates could
have a material impact on the Company’s financial statements.
Inflation:
Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our profitability. We are subject to market risk from fluctuating
market prices of certain purchased commodities and raw materials which has outpaced our ability to reduce the cost structure and manufacturability. We do not hedge
commodity prices. Accordingly, inflation impacts our profitability, including cost of sales and operating expenses and may have a material impact on the Company’s
financial statements.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United
States generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting as of September 30, 2022. In making this evaluation,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—2013 Integrated
Framework. Based on management’s evaluation and those criteria, management concluded that the Company’s system of internal control over financial reporting was
effective as of September 30, 2022.
Management’s internal control over financial reporting as of September 30, 2022 has been audited by Baker Tilly LLP, an independent registered public accounting firm, as
stated in their report appearing on the following page, in which they expressed an unqualified opinion thereon.
Date: November 23, 2022
/s/ Cheryl Beranek
Cheryl Beranek
Chief Executive Officer
/s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer
Further discussion of our internal controls and procedures is included in Item 9A of this report, under the caption “Controls and Procedures.”
34
Clearfield, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 23)
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statement of Other Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
35
Page
36
39
40
41
42
43
44
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 consolidated balance sheets of Clearfield, Inc. (the "Company") as of September 30, 2022 and 2021, the related consolidated statements
of earnings, shareholders' equity, and cash flows, for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the
"consolidated financial statements"). We also have audited the Company’s internal control over financial reporting as of September 30, 2022, 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 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and
the results of their operations and their cash flows for each of the three years in the period ended September 30, 2022, 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, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
The Company has excluded the acquisition of Nestor Cables LTD, which closed on July 26, 2022, from their management report on internal controls over financial
reporting as of September 30, 2022. This exclusion is supported by Securities and Exchange Commission guidance for an acquired business internal control assessment for
a period of up to one year from the date of acquisition. Our audit of internal controls over financial reporting of the Company also excludes any consideration for Nestor
Cables LTD internal control over financial reporting.
Basis for Opinions
The Company’s management is responsible for these consolidated 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 report on internal control over financial reporting.
Our responsibility is to express an opinion on the Company's consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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.
36
The Company has excluded the acquisition of Nestor Cables Ltd, which closed on July 26, 2022, from their management report on internal controls over financial reporting.
This exclusion is supported by Securities and Exchange Commission guidance for an acquired business internal control assessment for a period of up to one year from the
date of acquisition. Our report on internal controls over financial reporting also excludes any consideration of Nestor Cables Ltd internal controls.
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.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to
be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or
disclosure to which it relates.
Critical Audit Matter Description
Nestor Cables LTD Acquisition – Fair Value Related to Business Combination
As discussed in Note 2 to the consolidated financial statements, the Company accounted for the Nestor Cables LTD acquisition as a business combination and
allocated the purchase price between the tangible assets acquired and liabilities assumed and intangible assets and goodwill acquired. Auditing the accounting for
the acquisition was complex due to the significant estimation uncertainty in determining the fair values of those assets and liabilities.
The fair value estimates were based on underlying assumptions about future performance of the acquired business, which involves significant estimation
uncertainty. The significant assumptions used to form the basis of the fair values included customer margins, revenue growth rates, attrition rates and discount
rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
The primary procedures we performed to address this critical audit matter included substantively testing, with the assistance of firm personnel with expertise in the
application of fair value and valuation methodologies, the appropriateness of the judgements and assumptions used in management’s process for determining the
fair value of the identifiable intangibles, which included the following procedures:
37
•Obtained management’s purchase price allocation detailing fair values assigned to the acquired tangible and intangible assets.
•Obtained the valuation report prepared by a valuation specialist engaged by management to assist in the purchase price allocation, including determination of fair
values assigned to acquired identifiable intangible assets. We reviewed the qualifications of the specialist and tested the assumptions used within the discounted
cash-flow models to estimate the fair value of the intangible assets which included assumptions such as discount rate, revenue growth rate, operating expenses,
EBITDA margin, capital expenditures, customer turnover rate and contributory asset charges.
•Utilized an internal valuation specialist to assist the engagement team in evaluating: the methodologies used and whether they were acceptable for the underlying
acquisitions and whether such methodologies were being applied correctly, the appropriateness of the discount rate used by performing a sensitivity analysis, and
the qualifications of the valuation specialist engaged by the Company based on their credentials and experience.
•Evaluated the Company’s ability to forecast future cash flows for acquired businesses by reviewing actual results in the first year after being acquired compared to
amounts forecasted when the fair values of acquired assets and liabilities were determined.
•Performed inquiries of personnel at Nestor Cables LTD that were highly involved in the development of the forecasts to evaluate the reasonableness of revenue
and margin forecasts.
•Reviewed the Company’s internal control environment and tested the Company’s controls related to accounting for the acquisition.
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2013.
Minneapolis, Minnesota
November 23, 2022
38
CLEARFIELD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30,
2022
September 30,
2021
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivables, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Other Assets
Long-term investments
Goodwill
Intangible assets, net
Right of use lease assets
Deferred tax asset
Other
Total other assets
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Current portion of lease liability
Accounts payable
Accrued compensation
Accrued expenses
Factoring liability
Total current liabilities
Other Liabilities
Long-term debt
Long-term portion of lease liability
Deferred tax liability
Total liabilities
Shareholders’ Equity
Preferred stock, $.01 par value; 500,000 shares; no shares issued or outstanding
Common stock, authorized 50,000,000, $.01 par value; 13,818,452 and 13,732,188 shares issued and outstanding as
of September 30, 2022, and 2021
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
$
$
$
$
16,650 $
5,802
53,704
82,208
1,758
160,122
18,229
22,747
6,402
6,376
13,256
1,414
582
50,777
229,128 $
3,385 $
24,118
13,619
6,181
4,391
51,694
18,666
10,412
774
81,546
-
138
54,539
(1,898)
94,803
147,582
229,128 $
13,216
10,374
19,438
27,524
953
71,505
4,998
36,913
4,709
4,696
2,305
365
419
49,407
125,911
915
9,215
8,729
1,613
-
20,472
-
1,615
-
22,087
-
137
58,246
-
45,441
103,824
125,911
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
Net sales
Cost of sales
Gross profit
Operating expenses
Selling, general and administrative
Income from operations
Net investment income
Interest expense
Income before income taxes
Income tax expense
Net income
Net income per share Basic
Net income per share Diluted
Weighted average shares outstanding:
Basic
Diluted
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended
September 30,
2022
Year Ended
September 30,
2021
Year Ended
September 30,
2020
$
270,883 $
140,755 $
157,936
79,578
112,947
61,177
49,130
63,817
328
(311)
35,943
25,234
500
-
63,834
25,734
14,472
49,362 $
3.58 $
3.55 $
5,407
20,327 $
1.48 $
1.47 $
$
$
$
93,075
55,160
37,915
29,531
8,384
771
-
9,155
1,862
7,293
0.53
0.53
13,771,665
13,905,984
13,720,699
13,784,294
13,643,355
13,643,355
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
Year Ended
September 30,
2022
Year Ended
September 30,
2021
Year Ended
September 30,
2020
Net Income
$
49,362 $
20,327 $
7,293
Other comprehensive loss before income taxes:
Unrealized losses on available-for-sale investments
Unrealized loss on foreign currency translation
Total other comprehensive loss before income taxes
Income tax benefit
Total other comprehensive loss
Total comprehensive income
(1,590)
(854)
(2,444)
546
(1,898)
47,464 $
-
-
-
-
-
-
-
-
-
-
20,327 $
7,293
$
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN THOUSANDS)
-
(1,898)
-
(1,898) $
-
-
49,362
94,803 $
For the year ended September 30, 2022
Balance as of September 30, 2021
Stock-based compensation expense
Restricted stock issuance, net of forfeitures
Issuance of common stock under employee
stock purchase plan
Exercise of stock options, net of shares
exchanged for payment
Repurchase of shares for payment of
withholding taxes for vested restricted
stock grants
Other comprehensive loss
Net income
Balance at September 30, 2022
For the year ended September 30, 2021
Balance as of September 30, 2020
Stock-based compensation expense
Restricted stock issuance, net of forfeitures
Issuance of common stock under employee
stock purchase plan
Exercise of stock options, net of shares
exchanged for payment
Repurchase of shares for payment of
withholding taxes for vested restricted
stock grants
Net income
Balance at September 30, 2021
For the year ended September 30, 2020
Balance as of September 30, 2019
Repurchase of common stock
Stock-based compensation expense
Restricted stock issuance, net of forfeitures
Issuance of common stock under employee
stock purchase plan
Exercise of stock options, net of shares
exchanged for payment
Repurchase of shares for payment of
withholding taxes for vested restricted
stock grants
Net income
Balance at September 30, 2020
Common Stock
Shares
Amount
$
13,732
-
27
13
60
(13)
-
-
13,819
$
Common Stock
Shares
Amount
$
13,650
-
36
24
34
(12)
-
13,732
$
Common Stock
Shares
Amount
13,642
$
(42)
-
9
30
21
(10)
-
13,650
$
$
137
-
-
-
1
-
-
-
138
$
$
137
-
-
-
-
-
-
137
$
$
136
-
-
-
-
-
-
-
137
$
Accumulated
other
comprehensive
loss
Additional
paid-in capital
- $
-
-
-
-
58,246 $
2,339
-
544
(5,184)
(1,406)
-
-
54,539 $
Accumulated
other
comprehensive
loss
Additional
paid-in capital
57,503 $
1,280
-
383
(458)
(462)
-
58,246 $
- $
-
-
-
-
-
-
- $
Accumulated
other
comprehensive
loss
Additional
paid-in capital
56,976 $
(428)
774
-
349
9
(176)
-
57,503 $
- $
-
-
-
-
-
-
-
- $
Retained
earnings
Total share-
holders’ equity
103,824
2,339
-
45,441 $
-
-
-
-
544
(5,183)
(1,406)
(1,898)
49,362
147,582
Total share-
Retained
earnings
holders’ equity
82,754
1,280
-
25,114 $
-
-
-
-
383
(458)
-
20,327
45,441 $
(462)
20,327
103,824
Retained
earnings
Total share-
holders’ equity
74,933
(428)
774
-
17,821 $
-
-
-
-
-
349
9
-
7,293
25,114 $
(176)
7,293
82,754
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
CLEARFIELD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
September 30,
2022
Year Ended
September 30,
2021
Year Ended
September 30,
2020
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
$
49,362 $
20,327 $
Depreciation and amortization
Change in allowance for doubtful accounts
Amortization of discount on investments
Deferred taxes
Loss on disposal of assets
Stock-based compensation
Changes in operating assets and liabilities, net of acquired amounts:
Accounts receivable
Inventories, net
Other assets
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property, plant and equipment and intangible assets
Purchases of investments
Proceeds from sales and maturities of investments
Business acquisition, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Borrowing on line of credit
Proceeds from issuance of common stock under employee stock purchase plan
Repurchase of shares for payment of withholding taxes for vested restricted stock grants
Withholding related to exercise of stock options
Repurchase of common stock
Net cash provided by (used in) financing activities
Effect of exchange rates on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures for cash flow information
Cash paid during the year for income taxes
Cash paid for interest
Non-cash financing activities
Cashless exercise of stock options
$
$
$
3,413
-
(42)
(326)
13
2,339
(24,234)
(43,744)
(282)
14,502
1,001
(9,148)
(248)
17,386
(16,187)
(8,197)
16,700
544
(1,406)
(5,183)
-
10,655
(24)
3,434
13,216
16,650 $
13,744 $
119
2,302
210
(7)
(187)
-
1,280
(9,151)
(13,116)
(531)
9,776
10,903
(2,046)
(24,809)
13,255
-
(13,600)
-
384
(462)
(458)
-
(536)
-
(3,233)
16,450
13,216 $
5,505 $
-
7,293
2,422
-
(64)
(280)
6
774
(1,378)
(5,396)
128
3,152
6,656
(1,806)
(34,057)
35,822
-
(41)
-
349
(176)
10
(429)
(247)
-
6,368
10,082
16,450
1,442
-
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
1,624 $
1,271 $
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Clearfield, Inc. and subsidiaries (the “Company”) manufactures a broad range of standard and custom passive connectivity products to
customers throughout the United States and internationally and since the July 26, 2022 acquisition of Nestor Cables Ltd, manufactures fiber optic and copper
telecommunication cables and equipment through its Finnish subsidiaries. Refer to Note 11 for further information regarding the acquisition of Nestor Cables.
We are engaged in global operations. Our operations currently comprise of two reportable segments: the Clearfield Operating Segment, (referred to herein as
“Clearfield”) and, since July 26, 2022, the Nestor Cables Operating Segment (referred to herein as “Nestor Cables” or “Nestor”). Prior to July 26, 2022, we were
considered to be in a single reporting segment and operating unit structure.
The Company’s 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.
Principles of Consolidation The consolidated financial statements include the accounts of Clearfield, Inc. and its wholly-owned subsidiaries .All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition: Our revenue is comprised of the sale of our products to customers and is recognized when the Company satisfies its performance obligations
under the contract. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. The majority of our contracts have a single
performance obligation and are short term in nature. We recognize revenue by transferring the promised products to the customer, with substantially all revenue
recognized at the point in time when the customer obtains control of the products. Shipping and handling costs charged to our customers are included in net sales, while
the corresponding shipping expenses are included in cost of sales. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are
accounted for on a net (excluded from revenue) 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, 2022, and 2021 consist entirely of short-term money market accounts.
The Company maintains cash balances at multiple 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 (“CDs”) that are fully insured by the Federal Deposit Insurance Corporation
(“FDIC”) and United States Treasury (“Treasuries”) securities with terms of not more than five years, as well as money market accounts. Historically, the Company’s
investment portfolio had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and
has reclassified its investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other
comprehensive income, net of tax.
Foreign Currency Translation: Balance sheets and statement of earnings of our international subsidiaries are measured using local currency as their functional currency.
Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year-end. Statements of operations accounts are translated at the
average rates of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a
cumulative translation adjustment in shareholders’ equity.
Comprehensive Income: Total comprehensive income and the components of accumulated other comprehensive loss are presented in the Consolidated Statements of
Comprehensive Income and the Consolidated Statements of Shareholders' Equity. Accumulated other comprehensive loss is composed of foreign currency translation
effects and unrealized gains and losses on available-for-sale marketable debt securities. We use the individual item approach for releasing income tax effects from
accumulated other comprehensive loss.
Fair Value of Financial Instruments: The financial statements include the following financial instruments: cash and cash equivalents, investments, accounts receivable
and accounts payable. The Company estimates the fair value of investments as of the balance sheet date. All other financial instruments’ carrying values approximate fair
values because of the short-term nature of the instruments.
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 for doubtful accounts 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.
44
The allowance for doubtful accounts activity for the years ended September 30, 2022, and 2021 is as follows:
Year Ended
September 30, 2022
September 30, 2021
Balance at
Beginning of
Year
$
$
79,000 $
289,000 $
Additions
(Recoveries)
Charged to
Costs and
Expenses
Less Write-offs
- $
(210,000) $
- $
- $
Balance at End
of Year
79,000
79,000
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:
In thousands
Raw materials
Work-in-process
Finished goods
Inventories, gross
Inventory reserve
Inventories, net
September 30,
2022
September 30,
2021
$
$
66,440 $
7,294
10,803
84,537
(2,329)
82,208 $
23,072
2,482
3,361
28,915
(1,391)
27,524
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. A reserve is established for any identified excess, slow moving, and obsolete inventory through a charge to cost of
sales. Inventory write-down charges may be required in the future if there is a significant decline in demand for the Company’s products and the Company does not adjust
its manufacturing production accordingly or if new products are not accepted by the market.
Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Significant additions or improvements extending asset lives are capitalized, while
repairs and maintenance are charged to expense when incurred. Depreciation is provided in amounts sufficient to relate the cost of assets to operations over their
estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining term of the lease or estimated life of the asset.
45
Estimated useful lives of the assets are as follows:
Equipment
Leasehold improvements
Vehicles
Property, plant and equipment consist of the following:
(In thousands)
Manufacturing equipment
Office equipment
Leasehold improvements
Vehicles
Construction in progress
Property, plant and equipment, gross
Less accumulated depreciation
Property, plant and equipment, net
Years
3 – 15
7-10 or life of lease
3
September 30,
2022
September 30,
2021
$
$
18,418 $
4,174
5,000
340
1,715
29,647
11,418
18,229 $
9,179
2,901
2,590
246
150
15,066
10,068
4,998
Depreciation expense for the years ended September 30, 2022, 2021, and 2020 was $2,647,000, $1,699,000, and $1,944,000, respectively.
Goodwill and Intangible Assets: The Company operates as two reporting units 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, 2022, 2021 and 2020 resulted in excess fair value over carrying value and therefore, no adjustments were made to
goodwill. During the years ended September 30, 2022, 2021 and 2020, 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, 2022, 2021 and 2020, 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, 2022, the Company has 36 patents
granted and multiple pending applications both inside and outside the United States.
46
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 and the acquisition of Nestor Cables as of July 26, 2022. Refer to Note 11 for further
information regarding the acquisition of Nestor Cables. Finite life intangible assets as of September 30, 2022, and 2021 are as follows:
(In thousands)
Customer relationships
Certifications
Trademarks
Patents
Developed Technology
Other
Software
Totals
(In thousands)
Customer relationships
Certifications
Trademarks
Patents
Other
Software
Totals
September 30, 2022
Years
Gross Carrying
Amount
Accumulated
Amortization
Net Book Value
Amount
15 $
8
8-10
20
10
5
1-3
$
4,833 $
584
1,306
931
295
6
2,452
10,407 $
1,273 $
133
586
118
5
6
1,909
4,030 $
3,559
451
720
813
290
-
543
6,376
September 30, 2021
Years
Gross Carrying
Amount
Accumulated
Amortization
Net Book Value
Amount
15 $
8
8
20
5
1-3
$
3,742 $
1,068
563
790
31
1,960
8,154 $
904 $
484
255
85
25
1,705
3,458 $
2,838
584
308
706
6
255
4,696
Amortization expense related to these assets for the years ended September 30, 2022, 2021, and 2020 was $766,000, $602,000, and $478,000, respectively.
Our future estimated amortization expense for intangibles is as follows as of September 30, 2022:
(In thousands)
FY 2023
FY 2024
FY 2025
FY 2026
FY 2027
Total
Estimated
amortization expense
865
786
685
470
394
3,200
$
$
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.
47
Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value and is recorded as a
reduction in the carrying value of the related asset or asset group and a charge to operating results. No impairment of long-lived assets occurred during the years ended
September 30, 2022, 2021, or 2020, 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 September
30, 2022, and 2021, 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 awards at fair value over the requisite service period. We use the
Black-Scholes option pricing model to determine the 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 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.
Share Repurchase Program: Effective January 27, 2022, the Company reinstated its stock repurchase program that had been suspended in April 2020 due to COVID
uncertainty. In addition, effective January 27, 2022, the Company’s board of directors increased the share repurchase program by an additional $10 million to an aggregate
of $22 million, from the previous $12 million. As of September 30, 2022, we have repurchased an aggregate of 565,590 shares for approximately $7,019,000, leaving
approximately $14,981,000 available within our $22,000,000 stock repurchase program. The repurchase program does not obligate the Company to repurchase any
particular amount of common stock during any period. The repurchase will be funded by cash on hand. During the year ended September 30, 2022, the Company did not
repurchase any shares under the stock repurchase program.
48
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.
Research and Development Costs: Research and development costs amounted to $895,000, $1,243,000 and $1,267,000 for the years ended September 30, 2022, 2021,
and 2020, respectively, and are charged to expense when incurred.
Advertising Costs: Advertising costs amounted to $537,000, $436,000 and $297,000 for the years ended September 30, 2022, 2021, and 2020, 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.
Weighted average common shares outstanding for the years ended September 30, 2022, 2021 and 2020 were as follows:
Year ended September 30,
(In thousands except share data)
Net income
Weighted average common shares
Dilutive potential common shares
Weighted average dilutive common shares outstanding
Earnings per share:
Basic
Diluted
2022
2021
2020
$
49,362 $
13,771,665
134,319
13,905,984
20,327 $
13,720,699
63,593
13,784,294
3.58 $
3.55 $
1.48 $
1.47 $
7,293
13,643,355
-
13,643,355
0.53
0.53
There were no antidilutive shares for the years ended September 30, 2022 or 2021, and 337,100 shares for the year ended September 30, 2020 that were excluded from the
above calculation as they were considered antidilutive in nature.
Use of Estimates: The preparation of consolidated 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 rebates related to revenue recognition, stock-based compensation
and the valuation of inventory, long-lived assets, finite lived intangible assets and goodwill. Actual results may differ materially from these estimates.
Reclassification: For the purposes of comparability, certain prior period amounts have been reclassified to conform to current period classification. There was no impact
to prior period net income or shareholders’ equity.
49
New Accounting Pronouncements:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial
Instruments. In November 2018, the FASB issued update ASU 2018-19 that clarifies the scope of the standard in the amendments in ASU 2016-13. This guidance
introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Financial instruments impacted
include accounts receivable, trade receivables, other financial assets measured at amortized cost and other off-balance sheet credit exposures. The new guidance is
effective for the Company beginning in the first quarter of fiscal 2023, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU
2016-13 on its financial statements.
NOTE 2 – STOCK BASED COMPENSATION
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 580,000 shares available for issue as of September 30, 2022. As of September 30, 2022,
$3,664,000 of total unrecognized compensation expense related to non-vested awards is expected to be recognized over a period of approximately 2.1 years. The
Company recorded related compensation expense for the years ended September 30, 2022, 2021 and 2020 of $2,339,000, $1,280,000 and $774,000, respectively. For the
year ended September 30, 2022, $2,213,000 of this expense was included in selling, general and administrative expense and $126,000 was included in cost of sales. For
the year ended September 30, 2021, $1,223,000 of this expense was included in selling, general and administrative expense and $57,000 was included in cost of sales. For
the year ended September 30, 2020, $752,000 of this expense was included in selling, general and administrative expense and $22,000 was included in cost of sales.
Stock Options: The Company uses the Black-Scholes option pricing model to determine the fair value of options granted. During the fiscal year ended September 30,
2022, the Company granted employees non-qualified stock options to purchase an aggregate of 62,730 shares of common stock with a weighted average contractual term
of five years, a weighted average three-year vesting term, and a weighted average exercise price of $66.48. During the fiscal year ended September 30, 2021, the
Company granted employees non-qualified stock options to purchase an aggregate of 105,089 shares of common stock with a weighted average contractual term of 5
years, a 3-year weighted average vesting term, and an exercise price of $23.74. During the fiscal year ended September 30, 2020, the Company granted employees non-
qualified stock options to purchase an aggregate of 121,350 shares of common stock with a weighted average contractual term of 5.71 years, a 4.71 year weighted average
vesting term, and an exercise price of $12.43.
Dividend yield
Weighted average expected volatility
Weighted average risk-free interest rate
Weighted average expected life
Vesting period
Year ended
September 30,
2022
Year ended
September 30,
2021
Year ended
September 30,
2020
0%
52.02%
0.97%
5 years
3 years
0%
46.90%
0.24%
5 years
3 years
0%
39.5 –44.9%
0.24 - 1.69%
4 - 6 years
3 – 5 years
50
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.
Options are generally granted at fair market values determined on the date of grant and vesting normally occurs over a three to five-year period. The maximum
contractual term is normally six years. Shares issued upon exercise of a stock option are issued from the Company’s authorized but unissued shares. There were 113,727
options vested during the year ended September 30, 2022, 79,833 options vested during the year ended September 30, 2021 and 44,000 options vested during the year
ended September 30, 2020. For the year ended September 30, 2022, there were 125,651 stock options that were exercised using a cashless method of exercise. For the
year ended September 30, 2021, there were 101,966 stock options that were exercised using a cashless method of exercise. For the year ended September 30, 2020, there
were 14,688 stock options that were exercised using a cashless method of exercise. The intrinsic value of options exercised during the years ended September 30, 2022,
2021 and 2020 was $11,279,000, $1,315,000, and $332,000 respectively.
Option transactions under the 2007 Stock Compensation Plan during the years ended September 30, 2022, 2021 and 2020 are summarized as follows:
Number of
shares
Weighted average
exercise price
Weighted
average fair value
Outstanding as of September 30, 2019
Granted
Exercised
Forfeited and expired
Outstanding as of September 30, 2020
Granted
Exercised
Forfeited and expired
Outstanding as of September 30, 2021
Granted
Exercised
Forfeited and expired
Outstanding as of September 30, 2022
290,750 $
121,350
(26,750)
(48,250)
337,100 $
105,089
(101,966)
(38,709)
301,514 $
62,730
(125,651)
(2,084)
236,509 $
11.86
12.43 $
4.01
13.35
12.48
23.74 $
12.47
13.68
16.25
66.48 $
12.92
19.94
31.30
The following table summarizes information concerning options exercisable under the 2007 Stock Compensation Plan:
Year ended
September 30, 2022
September 30, 2021
September 30, 2020
Exercisable
39,276
51,201
97,333
Weighted average
remaining
contractual life
2.78 years
2.29 years
2.19 years
51
$
$
$
Weighted
average
exercise
price
Aggregate
intrinsic value (in
thousands)
20.26 $
12.28 $
12.76 $
4.62
8.14
25.54
3,314
1,632
721
The following table summarizes information concerning options currently outstanding at:
Year Ended
September 30, 2022
September 30, 2021
September 30, 2020
Number
outstanding
236,509
301,514
337,100
Weighted
average
remaining
contractual life
3.3 years
3.22 years
3.43 years
$
$
$
Weighted
average
exercise
price
Aggregate
intrinsic
value (in
thousands)
31.30 $
16.25 $
12.48 $
17,343
8,412
721
Restricted Stock: The Company’s 2007 Stock Compensation Plan permits our Compensation Committee to grant other stock-based awards. The Company has awarded
restricted stock grants to employees that vest over one to ten years.
Restricted stock transactions during the years ended September 30, 2022, 2021 and 2020 are summarized as follows:
Unvested shares as of September 30, 2019
Granted
Vested
Forfeited
Unvested shares as of September 30, 2020
Granted
Vested
Forfeited
Unvested shares as of September 30, 2021
Granted
Vested
Forfeited
Unvested shares as of September 30, 2022
Number of
shares
Weighted average
grant date fair value
13.25
10.30
13.36
12.14
12.98
24.20
12.48
15.45
17.14
65.90
17.78
16.84
31.51
130,440 $
19,455
(29,950)
(10,875)
109,070 $
39,807
(35,840)
(4,198)
108,839 $
29,512
(37,094)
(2,749)
98,508 $
The fair value of restricted shares vested during the year end September 30, 2022, 2021 and 2020 was $3,744,000, $1,364,000 and $497,000, respectively. The Company
repurchased a total of 13,292 shares of our common stock at an average price of $105.78 in connection with payment of taxes upon the vesting of restricted stock
previously issued to employees for the year ended September 30, 2022. The Company repurchased a total of 11,754 shares of our common stock at an average price of
$39.32 in connection with payment of taxes upon the vesting of restricted stock previously issued to employees for the year ended September 30, 2021. The Company
repurchased a total of 10,038 shares of our common stock at an average price of $17.57 in connection with payment of taxes upon the vesting of restricted stock
previously issued to employees for the year ended September 30, 2020.
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, 2021 and June
30, 2022, employees purchased 7,678 and 5,605 shares at a price of $32.43 and $52.66 per share, respectively. For the phases that ended on December 31, 2020 and June
30, 2021, employees purchased 15,011 and 9,739 shares, respectively, at a price of $11.93 and $21.01, respectively. As of September 30, 2021, the Company has withheld
approximately $191,352 from employees participating in the phase that began on July 1, 2022. In February 2020, the shareholders of Clearfield, Inc. approved an
increase of 200,000 in the shares authorized for issuance under the ESPP. After the employee purchase on June 30, 2022, 181,590 shares of common stock were available
for future purchase under the ESPP.
52
NOTE 3 – Investments
The Company invests in CDs that are fully insured by the FDIC as well as U.S. Treasury and money market securities. Historically, the Company’s investment portfolio
had been classified as held-to-maturity and recorded at amortized cost. During the second quarter of fiscal 2022, the Company sold investments and has reclassified its
investment portfolio to available-for-sale, which is reported at fair value. The unrealized gain or loss on investment securities is recorded in other comprehensive income
(loss), net of tax. The proceeds from sales of investments during the year ended September 30, 2022 was $14,365,000. Related to this sale, the Company recorded within
earnings gross realized gains on the sale of $92,000 partially offset by gross realized losses of $53,000. The specific identification method is used to determine the cost of
the securities sold. The Company’s sale of investment securities was associated with its need to respond to significant unanticipated and unprecedented growth in its sales
order backlog coupled with supply chain challenges to obtain the inventory necessary for fulfillment of these orders, as well as the reevaluation of the Company’s
approach to use of available capital. The Company did not sell investment securities during the years ended September 30, 2021 and 2020.
At September 30, 2022, available-for-sale investments consist of the following:
(In thousands)
Short-Term
Certificates of deposit
Investment securities – short-term
Long-Term
U.S treasury securities
Certificates of deposit
Investment securities – long-term
September 30, 2022
Unrealized
Gains
Unrealized
Losses
Cost
Fair Value
$
$
$
5,945
5,945 $
16,178 $
8,016
24,194 $
-
- $
- $
-
- $
143
143 $
1,085 $
362
1,447 $
5,802
5,802
15,093
7,654
22,747
At September 30, 2022, investments in debt securities in an unrealized loss position were as follows:
(In thousands)
U.S treasury securities
Certificates of deposit
Investment securities
In Unrealized Loss Position For
Less
Than 12 Months
In Unrealized Loss Position For
Greater
Than 12 Months
Fair Value
$
$
- $
6,345
6,345 $
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
- $
176
176 $
15,093 $
7,111
22,204 $
1,085
329
1,414
As of September 30, 2022, there were 62 securities in an unrealized loss position which is due to the securities paying lower interest rates than the market. As of
September 30, 2022, there are no securities which are other than temporarily impaired as the Company intends to hold these securities until their value recovers and there
is negligible credit risk due to the nature of the securities which are backed by the FDIC and US federal government.
53
NOTE 4 – Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the market price that would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company
determines the fair value of U.S. treasury securities, and certificates of deposit based on valuations provided by an external pricing service, who obtains them from a
variety of industry standard data providers.
The Company’s investments are categorized according to the three-level fair value hierarchy which distinguishes between observable and unobservable inputs, in one of
the following levels:
Level 1- Quoted prices in active markets for identical assets or liabilities.
Level 2- Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3- Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value
of the assets or liabilities. Level 3 assets and liabilities include those with fair value measurements that are determined using pricing models, discounted cash flow
valuation or similar techniques, as well as significant management judgment or estimation.
The following provides information regarding fair value measurements for our investment securities as of September 30, 2022 according to the three-level fair value
hierarchy:
(In thousands)
Investment securities:
U.S treasury securities
Certificates of deposit
Total investment securities
Fair Value Measurements at September 30, 2022
Total
Level 1
Level 2
Level 3
$
$
15,093 $
13,456
28,549 $
- $
-
- $
15,093 $
13,456
28,549 $
-
-
-
During the year ended September 30, 2022, we owned no Level 3 securities and there were no transfers within the fair value level hierarchy.
Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets and right-of-use assets for operating leases are subject to non-
recurring fair value measurements if they are deemed impaired. We had no re-measurements of non-financial assets to fair value in the year-end September 30, 2022.
54
NOTE 5 – Other Comprehensive Loss
Changes in components of other comprehensive loss and taxes related to items of other comprehensive loss are as follows:
(In thousands)
Unrealized losses on available-for-sale securities
Unrealized loss on foreign currency translation
Other comprehensive loss
Year ended September 30, 2022
Before Tax
Tax Effect
$
$
(1,590) $
(854)
(2,444) $
Net of Tax
Amount
(1,224)
(674)
(1,898)
366 $
180
546 $
The Company did not have any other comprehensive income or loss for the years ended September 30, 2021, and 2020.
NOTE 6 – INCOME TAXES
Components of income tax expense are as follows for the years ended:
(In thousands)
Current:
Federal
State
Foreign
Current income tax expense
Deferred:
Federal
State
Foreign
Deferred income tax expense
Income tax expense
September 30,
2022
September 30,
2021
September 30,
2020
$
$
13,230 $
1,532
48
14,810
(509)
6
165
(334)
14,472 $
5,154 $
440
-
5,594
(234)
47
-
(187)
5,407 $
1,966
175
-
2,142
(252)
(26)
-
(280)
1,862
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
State income taxes
Foreign 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
Effective Tax rate
September 30,
2022
September 30,
2021
September 30,
2020
21.0%
2.1%
0.4%
4.6%
-
-
(0.5%)
(4.9%)
22.7%
21.0%
2.2%
-
-
-
-
(0.7%)
(1.5%)
21.0%
21.0%
2.0%
-
-
(0.5%)
0.4%
(2.5%)
(0.1%)
20.3%
As of September 30, 2022 and 2021, the current income tax payable was approximately $1,791,000, and $933,000, respectively. Current income tax payable amounts are
included in accrued expenses in the Company’s consolidated balance sheets.
55
As of September 30, 2022 and 2021, the Company had no U.S. federal net operating loss (“NOL”) carry-forwards. The state NOL carryforwards of $769,000 at
September 30, 2020 were fully utilized during fiscal 2021 resulting in no state NOL carryforwards at September 30, 2022. In addition, as of September 30, 2022, the
Company had Minnesota research and development tax credits of $292,000. As of September 30, 2021, the Company had Minnesota research and development tax credits
of $300,000. The Company has not recorded a valuation allowance on these research and development related 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 2031.
Significant components of deferred income tax assets and liabilities are as follows at:
(In thousands)
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
Foreign currency translation
Unrealized loss on investments
Goodwill
Net deferred tax asset
September 30,
2022
September 30,
2021
$
$
(102) $
(1,068)
256
416
813
(163)
1,020
180
365
(1,077)
640 $
(92)
(381)
300
231
519
(48)
519
-
-
(683)
365
Realization of NOL carryforwards and other deferred tax temporary differences are contingent upon future taxable earnings. The deferred tax assets and deferred tax
liabilities are not netted due to being within different tax jurisdictions. The Company’s deferred tax assets were reviewed for expected utilization by assessing the
available positive and negative factors surrounding their recoverability. As of September 30, 2022 and 2021, no valuation allowance was deemed necessary as the
Company determined it was more likely than not that the Company’s deferred tax assets will be realized.
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, 2022 or 2021.
The Company is subject to income taxes in the U.S. federal and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant judgment to apply. Clearfield, Inc. is generally subject to U.S. federal examination for all tax
years after 2017 and state examinations for all tax years after 2013 due to unexpired research and development credit carryforwards still open under statute. Nestor is
generally subject to Finland examination for all tax years after 2018.
56
NOTE 7 – 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 fiscal year ended September 30, 2022, the Company had one customer that comprised 14% of net sales. This customer is a distributor. For the fiscal
years ended September 30, 2021 and 2020, the Company had two customers that comprised 28% and 30% of net sales, respectively. Both of these customers were
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, 2022, one customer accounted for 20% of accounts receivable. This customer is a distributor. As of September 30, 2021, one customer accounted for
17% of accounts receivable. This customer was a telecommunications service provider in the Company’s Community Broadband market.
Disaggregation of Revenue: The Company allocates sales from external customers to geographic areas based on the location to which the product is transported. Sales
outside the United States are principally to customers in Europe, the Caribbean, Canada, and in 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
2022
Year Ended September 30,
2021
2020
$
$
255,607 $
15,276
270,883 $
131,285 $
9,470
140,755 $
89,022
4,053
93,075
The Company sells its products to the Broadband Service Provider marketplace. In addition, the Company provides Legacy services for original equipment manufacturers
requiring copper and fiber cable assemblies built to their specification.
57
The percentages of our sales by these markets were as follows for each of the last three fiscal years:
Broadband service providers
Legacy customers
Total Net Sales
2022
Year Ended September 30,
2021
2020
99%
1%
100%
98%
2%
100%
96%
4%
100%
Broadband Service Providers are made up of Community Broadband, which includes local and regional telecom companies, utilities, municipalities and alternative
carriers, also referred to as Tier 2 and 3 customers, National Carriers, which includes large national and global wireline and wireless providers also referred to as Tier 1’s,
MSO’s, which include cable television companies, and international customers.
Long-lived assets: As of September 30, 2022 and 2021, the Company had property, plant, and equipment with a net book value of $4,213,000, and $1,769,000,
respectively, located in Mexico. In addition as of September 30, 2022, the Nestor Cables acquisition brought property, plant, and equipment with a net book value
$6,916,000 and $280,000 in Oulu, Finland and Keila, Estonia, respectively. All other property, plant, and equipment is located within the United States.
NOTE 8 – EMPLOYEE BENEFIT PLAN
Clearfield, Inc. 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 $1,129,000, $915,000 and $839,000 for the years ended September 30, 2022, 2021
and 2020, respectively.
Nestor Cables is mandated by the Finnish government to participate in a pension and social expense plan to which Nestor and its employees make contributions. The plan
is accounted for as defined contribution plan and Nestor Cables is responsible for an average of 17.45% of employees wages. Nestor’s contributions under this plan were
$204,000 under the plan for the year ended September 30, 2022.
NOTE 9 – LEASES
Clearfield, Inc. leases an 85,000 square foot facility at 7050 Winnetka Avenue North, Brooklyn Park, Minnesota consisting of corporate offices, manufacturing and
warehouse space. The lease term is ten years and two months, ending on February 28, 2025 and is renewable. The renewal options have not been included within the
lease term because it is not reasonably certain that the Company will exercise either option.
In July 2021, Clearfield, Inc. entered into an indirect lease arrangement for an approximately 318,000 square foot manufacturing facility in Tijuana, Mexico. The lease
term is for 7 years of which 5 years are mandatory, commencing March 2022. The lease contains written options to renew for two additional consecutive periods of 5
years each. The lease calls for monthly rental payments of $162,000, increasing 2% annually. The renewal options have not been included within the lease term because it
is not reasonably certain that the Company will exercise either option.
On November 19, 2021, Clearfield, Inc. signed a lease for a 105,000 square foot warehouse in Brooklyn Park, Minnesota. The lease term is five years commencing March
2022 and ending on February 28, 2027, with rent payments increasing annually. The lease includes an option to extend the lease for an additional five years. The renewal
option has not been included within the lease term because it is not reasonably certain that the Company will exercise the option. The lease commenced in the second
quarter of fiscal 2022.
58
Nestor leases an approximately 25,000 square foot manufacturing facility in Oulu, Finland, which is utilized for the operations of Nestor Cables. The original lease term
ends on October 31, 2022, but auto renews indefinitely until terminated with two years written notice. It is not reasonably certain that the Company will not exercise the
termination option. The lease calls for monthly rental payments of approximately $40,000 Rent is increased each year on January 1st based upon the cost-of-living index
published by the Finnish government.
Right-of-use lease assets and lease liabilities are recognized as of the commencement date based on the present value of the remaining lease payments over the lease term
which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense included within cost of sales and selling, general and administrative expense was as follows:
(In thousands)
Operating lease expense under ASC842, Leases, within:
Cost of sales
Selling, general and administrative
Total lease expense
Year ended
September 30,
2022
Year ended
September 30,
2021
Year ended
September 30,
2020
$
$
2,534 $
277
2,801 $
999
217
1,216
905
221
1,126
Our future lease obligations for leases that have commenced were as follows as of September 30, 2022:
(In thousands)
FY 2023
FY 2024
FY 2025
FY 2026
FY 2027
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Operating
Leases
3,775
3,823
3,056
2,868
1,196
-
14,718
(921)
13,797
$
$
As of September 30, 2022, the weighted average term and weighted average discount rate for our leases were 4.04 years and 3.22%, respectively. As of September 30,
2021, the weighted average term and weighted average discount rate for our leases were 3.09 years and 3.41%, respectively. For the year ended September 30, 2022,
2021, and 2020 the operating cash outflows from our leases were $2,064,000, $1,290,000, and $812,000, respectively.
59
NOTE 10 – DEBT
On April 27, 2022, the Company entered into a loan agreement and a security agreement with a bank that provides the Company with a $40,000,000 revolving line of
credit that is secured by certain of the Company’s U.S. assets. The line of credit matures on April 27, 2025 and borrowed amounts will bear interest at a variable rate of
the CME Group one-month term Secured Overnight Financing Rate (“SOFR”) plus 1.85%, but not less than 1.80% per annum. As of September 30, 2022, the interest
rate was 4.36%. The loan agreement and the security agreement contains customary affirmative and negative covenants and requirements relating to the Company and its
operations, including a requirement that the Company maintain a debt service coverage ratio of not less than 1.20 to 1 as of the end of each fiscal year for the fiscal year
then ended and maintain a debt to cash flow ratio of not greater than 2 to 1 measured as of the end of each of the Company’s fiscal quarters for the trailing twelve (12)
month period. Debt service coverage ratio is the ratio of Cash Available for Debt Service to Debt Service, each as defined in the loan agreement. Debt and Cash Flow are
also as defined in the loan agreement for the purposes of the debt to cash flow ratio covenant. As of September 30, 2022, the Company has borrowed $16,700,000 against
this line of credit. As of September 30, 2022, the Company was in compliance with all covenants. The line of credit is collateralized by Clearfield, Inc’s assets of
$198,087,000 as of September 30, 2022.
During March 2021, Nestor Cables entered into a loan agreement, providing $2 million senior loan with a term of three years. The National Emergency Supply Agency
(“NESA”) pays the interest, capped at 5% with the interest to be paid by NESA when the loan is used for stockpiling purposes and is repayable with a 2% additional
interest penalty if there is a violation of the terms. The loan is due on March 31, 2024. The loan is fully secured by a Finnish Government guarantee. If used for any
purposes other than stockpiling, the lender has the right to terminate the agreement and the entire outstanding balance will become due. As of September 30, 2022, Nestor
Cables was in compliance with all covenants. The interest expense associated with this loan has been presented net of government payments on the Company’s income
statement.
The Company did not have any debt as of September 30, 2021.
60
NOTE 11 – ACQUISITION OF NESTOR CABLES
On July 26, 2022, the Company, through its newly formed wholly owned subsidiary, Clearfield Finland Ltd., acquired 100% of the share capital of Nestor Cables Ltd
(“Nestor”), a leading developer and manufacturer of fiber optic cable solutions located in Finland, upon the terms and conditions contained in a Share Sale and Purchase
Agreement entered into on May 17, 2022. The total purchase price and the acquisition date fair value of the consideration transferred for the shares totaled €7.9 million
($8.0 million) in addition to €7.6 million ($7.8 million) related to the repayment of certain of Nestor’s debt. The purchase price was funded from a draw of $16.7 million
under the Company’s revolving line of credit. The purchase of Nestor Cables is expected to provide the Company with the ability to vertically integrate the supply fiber
optic cables and fulfill customer demand more rapidly. Nestor Cables technical expertise is expected to extend the supply of the Company’s FieldShield product line into
the North American market, to reduce cost and complexity of transportation. Finally, Nestor enhances the possibility of introducing Clearfield, Inc.’s cassette-based fiber
management solutions into the European market.
The following table summarizes the estimated fair value of the assets and liabilities acquired as of July 26, 2022:
(in thousands)
Cash
Accounts receivables
Inventories
Other current assets
Total current assets
Property and equipment
Intangibles assets
Right of use lease asset
Goodwill
Other
Total assets
Accounts payable
Accrued compensation
Accrued expenses
Deferred tax liability
Lease liability
Factoring liability
Long term debt
Total liabilities
Net assets acquired
$
$
$
$
72
10,562
11,377
173
22,184
7,689
1,840
1,297
1,762
55
34,827
5,839
1,430
1,916
621
1,297
5,849
2,045
18,997
15,830
The Nestor acquisition resulted in approximately $1,700,000 of goodwill due to intangible assets not qualifying for separate recognition as well as expected synergies.
The goodwill created from the acquisition of Nestor Cables is expected to be deductible for tax purposes.
61
Nestor Cables acquired accounts receivable balance is the gross amount which is expected to be collected, which approximates fair value. As of the acquisition date no
allowance for uncollectible amounts is deemed necessary.
The intangible assets acquired include customer relationships, developed technology and trademarks. The remaining weighted average useful life of intangible assets
acquired is 12.78 years as of the acquisition date. Refer to Note 1 for further information.
The Company incurred approximately $1,600,000 in legal, professional, and other costs related to the acquisition which were accounted for as selling, general and
administrative expenses when incurred. Refer to Note 12-Segment Reporting for the operating results of Nestor Cables from the date of acquisition through September 30,
2022.
The Company has a fiscal year end of September 30 and reports its financial results in U.S. GAAP. Nestor Cables has historically had a fiscal year end of December 31
and reported its results under Finnish Accounting Standards. Accordingly, it is impracticable to disclose the revenue and earnings of the combined entity as though the
business combination occurred as of the beginning of the comparable prior year periods due to the differing basis of accounting and reporting periods of the entities
requiring assumptions about management’s intent that cannot be independently substantiated. In addition, these disclosures would require significant estimates that are not
possible to reliably establish in order to distinguish objective information that provides evidence of circumstances that existed on the dates at which those amounts would
have been recognized, measured and disclosed and would have been available when the financial statements for that prior period were issued.
NOTE 12 – SEGMENT REPORTING
The Company’s reportable segments are based on the Company’s method of internal reporting. These results are not necessarily indicative of the results of operations that
would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined
based, in part, on the reporting and review process used by the Company’s Chief Executive Officer.
Upon closing of the acquisition of Nestor Cables, the Company reassessed its operating segments as defined under Accounting Standards Codification (“ASC”) 280,
Segment Reporting. Under ASC 280, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated
regularly by the chief operating decision -maker (“CODM”), in deciding how to allocate resources and in assessing performance. Based upon the Company’s assessment,
the Company determined that the business of Nestor Cables was considered a second reportable segment as of July 26, 2022.
For the year ended September 30, 2022, the Company has two reportable segments: (1) Clearfield and (2) Nestor Cables. Clearfield’s Finnish holding company Clearfield
Finland Ltd purchased Nestor Cables Ltd, including its Estonia subsidiary Nestor Cables Baltics on July 26, 2022. These entities comprise the Nestor Cables Segment.
Refer to Note 11 -Acquisition of Nestor Cables for additional information on this transaction.
Financial results for the reportable segments are prepared on a basis consistent with the internal disaggregation of financial information to assist the CODM in making
internal operating decisions. For consolidated reporting, the Company eliminates transactions between reportable segments.
62
The following table summarizes the amounts between the two reportable segments year ended September 30, 2022.
(in thousands)
Revenue from external customers
Revenue from internal customers (Clearfield, Inc.)
Net investment income
Interest Expense
Depreciation and amortization
Stock based compensation
Income taxes
Net Income (loss)
Capital Expenditures
Goodwill
Total Assets
NOTE 13 – FINANCING RECEIVABLES
Year ended September 30, 2022
Nestor
Cables
Clearfield
Consolidated
$
$
263,822 $
-
327
141
3,174
2,339
14,258
49,771
8,487
4,709
198,255 $
7,061 $
182
1
170
239
-
214
(409)
13
1,693
30,873 $
270,883
182
328
311
3,413
2,339
14,472
49,362
8,500
6,402
229,128
Nestor Cables factors certain of its accounts receivable, with recourse provisions that is accounted for as a secured borrowing. Nestor Cables has a total factoring liability
of $4,391,000 as of September 30, 2022. Nestor receives cash for 80% of the receivable balance from the bank initially and the remaining 20% when the invoice is paid
up to a limit of €12.5 million ($12.3 million). Due to the conditions mentioned above, these transactions do not qualify as a sale and are thus accounted for as secured
borrowing. The contractual interest rate on Nestor’s factoring arrangements is the 3-month Euribor rate plus a range of .75% to 1.3%. The average interest rate for the
year ended September 30, 2022, was 2.14%. These agreements are indefinite with a termination notice period ranging from zero to one month.
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, 2022. 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-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 as of September 30, 2022 based on the framework in the 2013 Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management concluded
that, as of September 30, 2022, our internal control over financial reporting was effective based on the COSO internal control criteria. The effectiveness of our internal
control over financial reporting as of September 30, 2022 has been audited by Baker Tilly US, LLP, an independent registered public accounting firm, as stated in their
report included in this Annual Report on Form 10-K.
63
During the fourth quarter of fiscal year 2022, the Company acquired all of the share capital of Nestor Cables Ltd. The Company’s management have excluded Nestor
Cables from the scope of the foregoing management report on internal control over financial reporting consistent with SEC guidance that indicates the SEC will not object
to such exclusion of an acquired business for a period of up to one year from the date of acquisition.
Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal year 2022, the Company acquired Nestor Cables. The Company has implemented additional controls over the business combination and
the consolidation of Nestor Cables.
No other changes in the Company’s internal control over financial reporting occurred during the fourth quarter of fiscal year 2022 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
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 2023 Annual Meeting of Shareholders (the “2023 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 2023 Proxy Statement, is incorporated herein by reference into this section.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table describes shares of our common stock that are available on September 30, 2022, 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:
64
Plan Category
Equity compensation plans approved by security holders
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)
- $
236,509
236,509 $
-
31.30
31.30
181,590
691,596
862,338
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.
The remainder of the information required by Item 12 to be included in the 2023 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 2023 Proxy Statement, is incorporated herein by reference into this section.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 to be included in the 2023 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 note to the financial statements.
(3) Exhibits: See Items 15(b) below.
(b) Exhibits.
65
EXHIBIT INDEX
Number
3.1
3.1 (a)
Description
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
Amended and Restated Bylaws of Clearfield, Inc.
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934
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
Incorporated
by Reference to
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 4.1 to the Registrant’s Annual Report on Form 10-K
for the year ended September 30, 2019
Exhibit 10.1 to Registrant’s Annual Report on Form 10-K for
the year 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 dated
Clearfield, Inc. 2010 Employee Stock Purchase Plan, as amended
Standard Form Industrial Building Lease dated September 9, 2014 by and between
Clearfield, Inc. and First Industrial, L.P.
66
November 18, 2010
Appendix A to the Registrant’s Proxy Statement filed with the
SEC on January 14, 2020 for the 2020 Annual Meeting of
Shareholders held on February 27, 2020
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
September 10, 2014
3.2
4.1
*10.1
*10.2
*10.3
*10.4
*10.5
10.6
10.7
Number
10.8
*10.9
*10.10
10.11
10.12
10.13
21.1
23.1
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
104
Description
First Amendment to Lease Agreement dated May 9, 2019 by and between First
Industrial, L.P. and Clearfield, Inc.
Employment Agreement dated November 16, 2017 by and between Clearfield, Inc. and
Daniel Herzog
Amendment No. 1 to Employment Agreement dated December 3, 2019 by and between
Daniel Herzog and Clearfield, Inc.
Loan Agreement dated April 27, 2022 by and between Clearfield, Inc. and Bremer
Bank, National Association †
Security Agreement dated April 27, 2022 by Clearfield, Inc. in favor of Bremer Bank,
National Association †
Share Sale and Purchase Agreement dated 17 May 2022 by and between the Sellers
identified therein and Clearfield Finland Ltd relating Nestor Cables Ltd †
Subsidiaries of Clearfield, Inc.
Consent of Baker Tilly US, 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
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema
Inline XBRL Taxonomy Calculation Linkbase
Inline XBRL Taxonomy Labels Linkbase
Inline XBRL Taxonomy Presentation Linkbase
Inline XBRL Taxonomy Definition Linkbase
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit
101).
† Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
* Indicates a management contract or compensatory plan or arrangement.
** Filed herewith.
(c) Financial Statement Schedules.
67
Incorporated
by Reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
May 15, 2019
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
November 16, 2017
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
December 6, 2019
Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
April 27, 2022
Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated
April 27, 2022
Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2022
**
**
**
**
**
**
**
**
**
**
**
**
All schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes.
ITEM 16. FORM 10-K SUMMARY
None.
68
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 23, 2022
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.
69
Each person whose signature appears below hereby constitutes and appoints Cheryl Beranek and Daniel Herzog and each of them, as his true and lawful attorney-in-fact
and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments to this Form 10-K and to file the same,
with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and
purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by
virtue thereof.
Signatures
Title
Date
/s/ Cheryl Beranek
Cheryl Beranek
/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
/s/ Walter L. Jones, Jr.
Walter L. Jones, Jr.
/s/ Carol A. Wirsbinski
Carol Wirsbinski
President, Chief Executive Officer (principal executive officer) and
November 23, 2022
Director
Chief Financial Officer (principal financial and accounting officer)
November 23, 2022
Director
Director
Director
Director
Director
Director
Director
70
November 23, 2022
November 23, 2022
November 23, 2022
November 23, 2022
November 23, 2022
November 23, 2022
November 23, 2022
SUBSIDIARIES OF CLEARFIELD, INC.
As of September 30, 2022
EXHIBIT 21.1
State or Other
Jurisdiction of Incorporation
Finland
Finland
Entity Name
Clearfield Finland Ltd (1)
Nestor Cables Ltd (2)
1.
2.
100% owned subsidiary of Clearfield, Inc.
100% owned subsidiary of Clearfield Finland Ltd
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
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, File No. 333‑217652 and File No. 333‑237947) and Form S‑3 (File No. 333‑264533) of Clearfield, Inc. of our report dated November 23,
2022, relating to the consolidated financial statements, which appears in this annual report on Form 10‑K for the year ended September 30, 2022.
/s/ Baker Tilly US, LLP
Minneapolis, Minnesota
November 23, 2022
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 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 report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s control over
financial reporting.
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) 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
b) 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 23, 2022
/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 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 report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s control over
financial reporting.
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) 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
b) 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 23, 2022
/s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer
(Principal financial and accounting officer)
The undersigned certifies pursuant to 18 U.S.C. Section 1350 that:
CERTIFICATION
1. The accompanying Annual Report on Form 10-K for Clearfield, Inc. (the “Company”) for the period ended September 30, 2022 fully complies with the requirements
of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 23, 2022
Exhibit 32
/s/ Cheryl Beranek
Cheryl Beranek
Chief Executive Officer
/s/ Daniel Herzog
Daniel Herzog
Chief Financial Officer