Clearfield, Inc. (CLFD) FY 2022 MD&A

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.”

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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 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.

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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.

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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.

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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.

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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.

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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.

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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

The following table provides net sales and net income for the Clearfield Segment for the fiscal years ended:

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:

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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.

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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.

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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.