Clearfield, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Significant Accounting Policies (Policies)

Significant Accounting Policies (Policies)

12 Months Ended

Sep. 30, 2022

Consolidation, Policy [Policy Text Block]

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 [Policy Text Block]

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, Policy [Policy Text Block]

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.

Investment, Policy [Policy Text Block]

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 Transactions and Translations Policy [Policy Text Block]

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, Policy [Policy Text Block]

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, Policy [Policy Text Block]

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 [Policy Text Block]

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.

The allowance for doubtful accounts activity for the years ended September 30, 2022, and 2021 is as follows:

Year Ended	Balance at Beginning of Year		Additions (Recoveries) Charged to Costs and Expenses			Less Write-offs		Balance at End of Year
September 30, 2022	$	79,000	$	-		$	-	$	79,000
September 30, 2021	$	289,000	$	(210,000	)	$	-	$	79,000

Inventory, Policy [Policy Text Block]

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:

	September 30, 2022			September 30, 2021
In thousands
Raw materials	$	66,440		$	23,072
Work-in-process		7,294			2,482
Finished goods		10,803			3,361
Inventories, gross		84,537			28,915
Inventory reserve		(2,329	)		(1,391	)
Inventories, net	$	82,208		$	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, Policy [Policy Text Block]

Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense when incurred. Depreciation is provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining term of the lease or estimated life of the asset.

Estimated useful lives of the assets are as follows:

	Years
Equipment	3 – 15
Leasehold improvements	7-10 or life of lease
Vehicles	3

Property, plant and equipment consist of the following:

(In thousands)	September 30, 2022		September 30, 2021
Manufacturing equipment	$	18,418	$	9,179
Office equipment		4,174		2,901
Leasehold improvements		5,000		2,590
Vehicles		340		246
Construction in progress		1,715		150
Property, plant and equipment, gross		29,647		15,066
Less accumulated depreciation		11,418		10,068
Property, plant and equipment, net	$	18,229	$	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, Policy [Policy Text Block]

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.

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:

	September 30, 2022
(In thousands)	Years		Gross Carrying Amount		Accumulated Amortization		Net Book Value Amount
Customer relationships		15	$	4,833	$	1,273	$	3,559
Certifications		8		584		133		451
Trademarks		8-10		1,306		586		720
Patents		20		931		118		813
Developed Technology		10		295		5		290
Other		5		6		6		-
Software		1-3		2,452		1,909		543
Totals			$	10,407	$	4,030	$	6,376

	September 30, 2021
(In thousands)	Years		Gross Carrying Amount		Accumulated Amortization		Net Book Value Amount
Customer relationships		15	$	3,742	$	904	$	2,838
Certifications		8		1,068		484		584
Trademarks		8		563		255		308
Patents		20		790		85		706
Other		5		31		25		6
Software		1-3		1,960		1,705		255
Totals			$	8,154	$	3,458	$	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)	Estimated amortization expense
FY 2023	$	865
FY 2024		786
FY 2025		685
FY 2026		470
FY 2027		394
Total	$	3,200

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment of Long-Lived Assets: The Company assesses potential impairments to its long-lived assets or asset groups when there is evidence that events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value and is recorded as a reduction in the carrying value of the related asset or asset group and a charge to operating results. No impairment of long-lived assets occurred during the years ended September 30, 2022, 2021, or 2020, respectively.

Income Tax, Policy [Policy Text Block]

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.

Share-Based Payment Arrangement [Policy Text Block]

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 [Policy Text Block]

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.

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 Expense, Policy [Policy Text Block]

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 Cost [Policy Text Block]

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.

Earnings Per Share, Policy [Policy Text Block]

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)	2022		2021		2020
Net income	$	49,362	$	20,327	$	7,293
Weighted average common shares		13,771,665		13,720,699		13,643,355
Dilutive potential common shares		134,319		63,593		-
Weighted average dilutive common shares outstanding		13,905,984		13,784,294		13,643,355
Earnings per share:
Basic		3.58	$	1.48	$	0.53
Diluted		3.55	$	1.47	$	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, Policy [Policy Text Block]

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, Comparability Adjustment [Policy Text Block]

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.

New Accounting Pronouncements, Policy [Policy Text Block]

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.