ADTRAN INC, 10-K filed on 2/25/2020
Annual Report
v3.19.3.a.u2
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Feb. 21, 2020
Jun. 30, 2019
Cover [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2019    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Trading Symbol ADTN    
Entity Registrant Name ADTRAN, Inc.    
Entity Central Index Key 0000926282    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Large Accelerated Filer    
Entity Shell Company false    
Entity Emerging Growth Company false    
Entity Small Business false    
Entity Common Stock, Shares Outstanding   48,086,618  
Entity Public Float     $ 724,323,806
Entity Interactive Data Current Yes    
Entity File Number 000-24612    
Entity Tax Identification Number 63-0918200    
Entity Address, Address Line One 901 Explorer Boulevard    
Entity Address, City or Town Huntsville    
Entity Address, State or Province AL    
Entity Address, Postal Zip Code 35806-2807    
City Area Code 256    
Local Phone Number 963-8000    
Entity Incorporation, State or Country Code DE    
Document Annual Report true    
Document Transition Report false    
Title of 12(b) Security Common Stock, Par Value $0.01    
Security Exchange Name NASDAQ    
Documents Incorporated by Reference

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 2020 are incorporated herein by reference in Part III.

   
v3.19.3.a.u2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current Assets    
Cash and cash equivalents $ 73,773 $ 105,504
Short-term investments 33,243 3,246
Accounts receivable, less allowance for doubtful accounts of $38 and $128 as of December 31, 2019 and 2018, respectively 90,531 99,385
Other receivables 16,566 36,699
Inventory, net 98,305 99,848
Prepaid expenses and other current assets 7,892 10,744
Total Current Assets 320,310 355,426
Property, plant and equipment, net 73,708 80,635
Deferred tax assets, net 7,561 37,187
Goodwill 6,968 7,106
Intangibles, net 27,821 33,183
Other assets 14,261 5,668
Long-term investments 94,489 108,822
Total Assets 545,118 628,027
Current Liabilities    
Accounts payable 44,870 60,054
Bonds payable 24,600 1,000
Unearned revenue 11,963 17,940
Accrued expenses and other current liabilities 13,876 11,746
Accrued wages and benefits 13,890 14,752
Income tax payable, net 3,512 12,518
Total Current Liabilities 112,711 118,010
Non-current unearned revenue 6,012 5,296
Pension liability 15,886 13,086
Deferred compensation liability 21,698 18,256
Other non-current liabilities 8,385 2,500
Bonds payable   24,600
Total Liabilities 164,692 181,748
Commitments and contingencies (see Note 16)
Stockholders' Equity    
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 48,020 shares outstanding as of December 31, 2019 and 79,652 shares issued and 47,751 shares outstanding as of December 31, 2018 797 797
Additional paid-in capital 274,632 267,670
Accumulated other comprehensive loss (16,417) (14,416)
Retained earnings 806,702 883,975
Less treasury stock at cost: 31,638 and 31,901 shares as of December 31, 2019 and 2018, respectively (685,288) (691,747)
Total Stockholders' Equity 380,426 446,279
Total Liabilities and Stockholders' Equity $ 545,118 $ 628,027
v3.19.3.a.u2
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts $ 38 $ 128
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 79,652,000 79,652,000
Common stock, shares outstanding 48,020,000 47,751,000
Treasury stock, shares 31,638,000 31,901,000
v3.19.3.a.u2
Consolidated Statements of Income (Loss) - USD ($)
shares in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Sales      
Total Sales $ 530,061,000 $ 529,277,000 $ 666,900,000
Cost of Sales      
Total Cost of Sales 310,894,000 325,712,000 363,265,000
Gross Profit 219,167,000 203,565,000 303,635,000
Selling, general and administrative expenses 130,288,000 124,440,000 135,583,000
Research and development expenses 126,200,000 124,547,000 130,666,000
Asset impairments 3,872,000 0 0
Gain on contingency (1,230,000)    
Operating Income (Loss) (39,963,000) (45,422,000) 37,386,000
Interest and dividend income 2,765,000 4,026,000 4,380,000
Interest expense (511,000) (533,000) (556,000)
Net investment gain (loss) 11,434,000 (4,050,000) 4,685,000
Other income (expense), net 1,498,000 1,286,000 (1,208,000)
Gain on bargain purchase of a business   11,322,000  
Income (Loss) Before Income Taxes (24,777,000) (33,371,000) 44,687,000
Income tax (expense) benefit (28,205,000) 14,029,000 (20,847,000)
Net Income (Loss) $ (52,982,000) $ (19,342,000) $ 23,840,000
Weighted average shares outstanding – basic 47,836 47,880 48,153
Weighted average shares outstanding – diluted 47,836 47,880 48,699
Earnings (loss) per common share – basic $ (1.11) $ (0.40) $ 0.50
Earnings (loss) per common share – diluted $ (1.11) $ (0.40) $ 0.49
Network Solutions [Member]      
Sales      
Total Sales $ 455,226,000 $ 458,232,000 $ 540,396,000
Cost of Sales      
Total Cost of Sales 263,677,000 278,929,000 279,563,000
Gross Profit 191,549,000 179,303,000 260,833,000
Services & Support [Member]      
Sales      
Total Sales 74,835,000 71,045,000 126,504,000
Cost of Sales      
Total Cost of Sales 47,217,000 46,783,000 83,702,000
Gross Profit $ 27,618,000 $ 24,262,000 $ 42,802,000
v3.19.3.a.u2
Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement Of Income And Comprehensive Income [Abstract]      
Net Income (loss) $ (52,982) $ (19,342) $ 23,840
Other Comprehensive Income (Loss), net of tax      
Net unrealized gains (losses) on available-for-sale securities 279 (3,130) 2,163
Defined benefit plan adjustments (1,185) (3,755) 731
Foreign currency translation (1,480) (4,236) 5,999
Other Comprehensive Income (Loss), net of tax (2,386) (11,121) 8,893
Comprehensive Income (Loss), net of tax $ (55,368) $ (30,463) $ 32,733
v3.19.3.a.u2
Consolidated Statements of Changes in Stockholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Loss [Member]
Beginning Balance at Dec. 31, 2016 $ 479,517 $ 797 $ 252,957 $ 921,942 $ (683,991) $ (12,188)
Beginning Balance, Shares at Dec. 31, 2016   79,652        
Net income (loss) 23,840     23,840    
Other comprehensive income (loss), net of tax 8,893         8,893
Dividend payments ($0.09 per share) (17,368)     (17,368)    
Dividends accrued on unvested restricted stock units (37)     (37)    
Stock options exercised 13,412     (2,827) 16,239  
PSUs, RSUs and restricted stock vested (441)     (3,257) 2,816  
Purchase of treasury stock (17,348)       (17,348)  
Stock-based compensation expense 7,433   7,433      
ASU 2016-09 adoption 10   125 (115)    
Ending Balance at Dec. 31, 2017 497,911 $ 797 260,515 922,178 (682,284) (3,295)
Ending Balance, Shares at Dec. 31, 2017   79,652        
Net income (loss) (19,342)     (19,342)    
ASU adoption (see Note 1) | ASU 2014-09 [member] 278     278    
ASU adoption (see Note 1) | ASU 2016-01 [Member] 3,220     3,220    
Other comprehensive income (loss), net of tax (11,121)         (11,121)
Dividend payments ($0.09 per share) (17,267)     (17,267)    
Dividends accrued on unvested restricted stock units (7)     (7)    
Stock options exercised 1,483     (603) 2,086  
PSUs, RSUs and restricted stock vested (499)     (4,482) 3,983  
Purchase of treasury stock (15,532)       (15,532)  
Stock-based compensation expense 7,155   7,155      
Ending Balance at Dec. 31, 2018 $ 446,279 $ 797 267,670 883,975 (691,747) (14,416)
Ending Balance, Shares at Dec. 31, 2018 79,652 79,652        
Net income (loss) $ (52,982)     (52,982)    
ASU adoption (see Note 1) | ASU 2016-02 [member] 4     4    
ASU adoption (see Note 1) | ASU 2018-02 [Member]       (385)   385
Other comprehensive income (loss), net of tax (2,386)         (2,386)
Dividend payments ($0.09 per share) (17,212)     (17,212)    
Dividends accrued on unvested restricted stock units (10)     (10)    
Stock options exercised 526     (208) 734  
PSUs, RSUs and restricted stock vested (571)     (6,480) 5,909  
Purchase of treasury stock (184)       (184)  
Stock-based compensation expense 6,962   6,962      
Ending Balance at Dec. 31, 2019 380,426 $ 797 $ 274,632 $ 806,702 $ (685,288) $ (16,417)
Ending Balance (ASU 2018-02 [Member]) at Dec. 31, 2019 $ 385          
Ending Balance, Shares at Dec. 31, 2019 79,652 79,652        
v3.19.3.a.u2
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - $ / shares
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement Of Stockholders Equity [Abstract]      
Dividend payments $ 0.09 $ 0.09 $ 0.09
v3.19.3.a.u2
Consolidated Statements of Cash Flows - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities:      
Net income (loss) $ (52,982,000) $ (19,342,000) $ 23,840,000
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 17,771,000 15,891,000 15,692,000
Asset impairments 3,872,000 0 0
Amortization of net premium (discount) on available-for-sale investments (100,000) (50,000) 425,000
Net (gain) loss on long-term investments (11,434,000) 4,050,000 (4,685,000)
Net (gain) loss on disposal of property, plant and equipment 67,000 67,000 (145,000)
Gain on bargain purchase of a business   (11,322,000)  
Gain on contingency payment (1,230,000)    
Gain on life insurance proceeds (1,000,000)    
Stock-based compensation expense 6,962,000 7,155,000 7,433,000
Deferred income taxes 30,070,000 (17,257,000) 14,073,000
Change in operating assets and liabilities:      
Accounts receivable, net 8,282,000 49,200,000 (49,103,000)
Other receivables 20,046,000 (8,522,000) (10,222,000)
Inventory, net 1,252,000 24,192,000 (15,518,000)
Prepaid expenses and other assets 2,749,000 10,727,000 (4,830,000)
Accounts payable, net (13,494,000) (3,799,000) (17,742,000)
Accrued expenses and other liabilities (4,598,000) (3,226,000) (5,455,000)
Income taxes payable (8,705,000) 7,690,000 3,858,000
Net cash provided by (used in) operating activities (2,472,000) 55,454,000 (42,379,000)
Cash flows from investing activities:      
Purchases of property, plant and equipment (9,494,000) (8,110,000) (14,720,000)
Proceeds from disposals of property, plant and equipment     151,000
Proceeds from sales and maturities of available-for-sale investments 47,268,000 153,649,000 173,752,000
Purchases of available-for-sale investments (48,578,000) (123,209,000) (93,141,000)
Life insurance proceeds received 1,000,000    
Acquisition of business, net of cash acquired 13,000 (22,045,000)  
Net cash provided by (used in) investing activities (9,791,000) 285,000 66,042,000
Cash flows from financing activities:      
Proceeds from stock option exercises 526,000 1,483,000 13,412,000
Purchases of treasury stock (184,000) (15,532,000) (17,348,000)
Dividend payments (17,212,000) (17,267,000) (17,368,000)
Payments on long-term debt (1,000,000) (1,100,000) (1,100,000)
Net cash used in financing activities (17,870,000) (32,416,000) (22,404,000)
Net increase (decrease) in cash and cash equivalents (30,133,000) 23,323,000 1,259,000
Effect of exchange rate changes (1,598,000) (4,252,000) 5,279,000
Cash and cash equivalents, beginning of year 105,504,000 86,433,000 79,895,000
Cash and cash equivalents, end of year 73,773,000 105,504,000 86,433,000
Supplemental disclosure of cash flow information      
Cash paid during the year for interest 512,000 534,000 555,000
Cash paid during the year for income taxes 9,357,000 4,104,000 2,988,000
Supplemental disclosure of non-cash investing activities      
Purchases of property, plant and equipment included in accounts payable $ 90,000 62,000 $ 408,000
Contingent payment   $ 1,230,000  
v3.19.3.a.u2
Nature of Business
12 Months Ended
Dec. 31, 2019
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Nature of Business

Note 1 – Nature of Business

ADTRAN, Inc. (“ADTRAN” or the “Company”) is a leading global provider of networking and communications solutions. Our vision is to enable a fully connected world where the power to communicate is available to everyone, everywhere. Our unique approach, unmatched industry expertise and innovative solutions enable us to address almost any customer need. Our products and services are utilized by a diverse global customer base of network operators that range from those having national or regional reach, operating as telephone or cable television network operators, to alternative network providers such as municipalities or utilities, as well as managed service providers who serve small- and medium-sized businesses and distributed enterprises.

Principles of Consolidation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the financial position, results of operations, comprehensive income (loss), changes in equity and cash flows of ADTRAN and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Our more significant estimates include excess and obsolete inventory reserves, warranty reserves, customer rebates, determination and accrual of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues and network installations, estimated income tax provision and income tax contingencies, fair value of stock-based compensation, assessment of goodwill and other intangibles for impairment, estimated lives of intangible assets, estimated pension liability, fair value of investments and evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Correction of Immaterial Misstatement

During the three months ended June 30, 2019, the Company determined that there was an immaterial misstatement of its excess and obsolete inventory reserves in its previously issued annual and interim financial statements. The Company corrected this misstatement by recognizing a $0.8 million out-of-period adjustment during the three months ended June 30, 2019, which increased its excess and obsolete inventory reserves and cost of goods sold for the period. For the six months ended June 30, 2019, the out-of-period adjustment was a cumulative $0.2 million reduction in the Company’s excess and obsolete inventory reserves and cost of goods sold.   

Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds and short-term investments classified as available-for-sale with original maturities of three months or less. We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions and determined the risk of material financial loss due to the exposure of such credit risk to be minimal. As of December 31, 2019, $71.6 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits.

Financial Instruments

The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $24.6 million, which was its fair value as of December 31, 2019.

Investments with contractual maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe we have the ability to quickly sell them to the remarketing agent, tender agent or issuer at par value plus accrued interest in the event we decide to liquidate our investment in a particular variable rate demand note. All income generated from these investments was recorded as interest income. We have not recorded any losses relating to variable rate demand notes.

Long-term investments is comprised of deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. and foreign government bonds, marketable equity securities and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Any changes in fair value are recognized in net investment gain (loss). Realized gains and losses on sales of debt securities are computed under the specific identification method and are included in other income (expense). See Note 5 for additional information.

Accounts Receivable

We record accounts receivable at net realizable value. Prior to establishing payment terms for a new customer, we evaluate the credit risk of the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection experience and other financial factors. As of December 31, 2019, single customers comprising more than 10% of our total accounts receivable balance included four customers, which accounted for 53.2% of our total accounts receivable. As of December 31, 2018, single customers comprising more than 10% of our total accounts receivable balance included two customers, which accounted for 36.9% of our total accounts receivable.

We regularly review the need to maintain an allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events impacting these customers and our historical experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, we may be required to record an allowance for doubtful accounts. If circumstances change with regard to individual receivable balances that have previously been determined to be uncollectible, and for which a specific reserve has been established, a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was $38 thousand and $0.1 million as of December 31, 2019 and December 31, 2018, respectively.

Inventory

Inventory is carried at the lower of cost and estimated net realizable value, with cost being determined using the first-in, first-out method. Standard costs for material, labor and manufacturing overhead are used to value inventory and are updated at least quarterly. We establish reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known trends, inventory age and market conditions. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserve. See Note 7 for additional information.

Property, Plant and Equipment

Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven years, engineering machinery and equipment from three to seven years, and computer software from three to five years. Expenditures for repairs and maintenance are charged to expense as incurred. Major improvements that materially prolong the lives of the assets are capitalized. Gains and losses on the disposal of property, plant and equipment are recorded in operating income (loss). See Note 8 for additional information.

Intangible Assets

Purchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is recorded over the estimated useful lives of the respective assets, which is two to 14 years. See Note 11 for additional information.

Impairment of Long-Lived Assets and Intangibles

Long-lived assets used in operations and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. During the year ended December 31, 2019, we recognized an impairment loss of approximately $3.9 million related to the abandonment of certain information technology implementation projects which we had previously capitalized expenses related to these projects. There were no impairment losses for long-lived assets during the years ended December 31, 2018 or 2017, or for intangible assets recognized during the years ended December 31, 2019, 2018 or 2017.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired. We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to by-pass a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount and, in turn, performed a step-1 analysis of goodwill. Based on the results of our step-1 analysis, no impairment charges on goodwill were recognized during the years ended December 31, 2019, 2018 and 2017.

Liability for Warranty

Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time revenue is recognized based on our historical return rate and estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $8.4 million and $8.6 million as of December 31, 2019 and 2018, respectively. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets. During 2017, we recorded a reduction in warranty expense related to a settlement with a third-party supplier for a defective component, the impact of which is reflected in the following table.

A summary of warranty expense and write-off activity for the years ended December 31, 2019, 2018 and 2017 is as follows:

 

(In thousands)

 

2019

 

 

2018

 

 

2017

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

8,623

 

 

$

9,724

 

 

$

8,548

 

Plus: Amounts charged to cost and expenses

 

 

4,569

 

 

 

7,392

 

 

 

6,951

 

Less: Deductions

 

 

(4,798

)

 

 

(8,493

)

 

 

(5,775

)

Balance at end of period

 

$

8,394

 

 

$

8,623

 

 

$

9,724

 

 

Pension Benefit Plan Obligations

We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future expenses and obligations. Our net pension liability totaled $15.9 million and $13.1 million as of December 31, 2019 and 2018, respectively.

Stock-Based Compensation

We have two stock incentive plans from which stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and restricted stock are available for grant to employees and directors. Costs related to these awards are recognized over their vesting periods. All employee and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. All of our outstanding stock option awards are classified as equity awards and therefore are measured at fair value on their grant date.

Stock-based compensation expense recognized for the years ended December 31, 2019, 2018 and 2017 was approximately $7.0 million, $7.2 million and $7.4 million, respectively. As of December 31, 2019, total unrecognized compensation cost related to non-vested stock options, PSUs, RSUs and restricted stock was approximately $17.2 million, which is expected to be recognized over an average remaining recognition period of 3.0 years. See Note 4 for additional information.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, enhancement of current products and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $126.2 million, $124.5 million and $130.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss), net of tax, by components of accumulated other comprehensive income (loss) for the years ended December 31, 2019 2018 and 2017:

 

 

(In thousands)

 

Unrealized

Gains (Losses)

on Available-

for-Sale

Securities

 

 

Unrealized Gains (Losses) on Cash Flow Hedges

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

ASU 2018-02 Adoption (2)

 

 

Total

 

Balance as of December 31, 2016

 

$

404

 

 

$

 

 

$

(5,017

)

 

$

(7,575

)

 

$

 

 

$

(12,188

)

Other comprehensive income before

   reclassifications

 

 

5,020

 

 

 

(619

)

 

 

451

 

 

 

5,999

 

 

 

 

 

 

10,851

 

Amounts reclassified from accumulated other

   comprehensive loss

 

 

(2,857

)

 

 

619

 

 

 

280

 

 

 

 

 

 

 

 

 

(1,958

)

Balance as of December 31, 2017

 

 

2,567

 

 

 

 

 

 

(4,286

)

 

 

(1,576

)

 

 

 

 

 

(3,295

)

Other comprehensive loss before

   reclassifications

 

 

685

 

 

 

 

 

 

(3,890

)

 

 

(4,236

)

 

 

 

 

 

(7,441

)

Amounts reclassified to retained earnings (1)

 

 

(3,220

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,220

)

Amounts reclassified from accumulated other

   comprehensive loss

 

 

(595

)

 

 

 

 

 

135

 

 

 

 

 

 

 

 

 

(460

)

Balance as of December 31, 2018

 

 

(563

)

 

 

 

 

 

(8,041

)

 

 

(5,812

)

 

 

 

 

 

(14,416

)

Other comprehensive loss before

   reclassifications

 

 

573

 

 

 

 

 

 

(1,717

)

 

 

(1,480

)

 

 

 

 

 

(2,624

)

Amounts reclassified to retained earnings (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

385

 

 

 

385

 

Amounts reclassified from accumulated other

   comprehensive loss

 

 

(294

)

 

 

 

 

 

532

 

 

 

 

 

 

 

 

 

238

 

Balance as of December 31, 2019

 

$

(284

)

 

$

 

 

$

(9,226

)

 

$

(7,292

)

 

$

385

 

 

$

(16,417

)

 

 

(1)

With the adoption of ASU 2016-01, the unrealized gains on our equity investments were reclassified to retained earnings.  See Recently Issued Accounting Standards below for more information.

 

(2)

With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were reclassified to retained earnings. See Note 13 for additional information.

The following tables present the details of reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018 and 2017:

 

(In thousands)

 

2019

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Loss

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

397

 

 

Net investment gain (loss)

Defined benefit plan adjustments – actuarial losses

 

 

(771

)

 

(1)

Total reclassifications for the period, before tax

 

 

(374

)

 

 

Tax benefit

 

 

136

 

 

 

Total reclassifications for the period, net of tax

 

$

(238

)

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 14 for additional information.

 

 

(In thousands)

 

2018

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Loss

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

804

 

 

Net investment gain (loss)

Defined benefit plan adjustments – actuarial losses

 

 

(196

)

 

(1)

Total reclassifications for the period, before tax

 

 

608

 

 

 

Tax expense

 

 

(148

)

 

 

Total reclassifications for the period, net of tax

 

$

460

 

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 14 for additional information.

 

(In thousands)

 

2017

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Loss

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

Unrealized gains (losses) on available-for-sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

4,864

 

 

Net investment gain (loss)

Impairment expense

 

 

(180

)

 

Net investment gain (loss)

Net losses on derivatives designated as hedging instruments

 

 

(897

)

 

Cost of sales

Defined benefit plan adjustments – actuarial losses

 

 

(406

)

 

(1)

Total reclassifications for the period, before tax

 

 

3,381

 

 

 

Tax expense

 

 

(1,423

)

 

 

Total reclassifications for the period, net of tax

 

$

1,958

 

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 14 for additional information.

 

The following tables present the tax effects related to the change in each component of other comprehensive income (loss) for the years ended December 31, 2019, 2018 and 2017:

 

 

 

2019

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

Unrealized gains (losses) on available-for-sale securities

 

$

774

 

 

$

(201

)

 

$

573

 

Reclassification adjustment for amounts related to available-for-sale investments included in net loss

 

 

(397

)

 

 

103

 

 

 

(294

)

Defined benefit plan adjustments

 

 

(2,488

)

 

 

771

 

 

 

(1,717

)

Reclassification adjustment for amounts related to defined benefit plan adjustments included in net loss

 

 

771

 

 

 

(239

)

 

 

532

 

Foreign currency translation adjustment

 

 

(1,480

)

 

 

 

 

 

(1,480

)

Total Other Comprehensive Income (Loss)

 

$

(2,820

)

 

$

434

 

 

$

(2,386

)

 

 

 

2018

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

Unrealized gains (losses) on available-for-sale securities

 

$

926

 

 

$

(241

)

 

$

685

 

Reclassification adjustment for amounts related to available-for-sale investments included in net loss

 

 

(804

)

 

 

209

 

 

 

(595

)

Reclassification adjustment for amounts reclassed to retained earnings related to the adoption of ASU 2016-01

 

 

(4,351

)

 

 

1,131

 

 

 

(3,220

)

Defined benefit plan adjustments

 

 

(5,638

)

 

 

1,748

 

 

 

(3,890

)

Reclassification adjustment for amounts related to defined benefit plan adjustments included in net loss

 

 

196

 

 

 

(61

)

 

 

135

 

Foreign currency translation adjustment

 

 

(4,236

)

 

 

 

 

 

(4,236

)

Total Other Comprehensive Income (Loss)

 

$

(13,907

)

 

$

2,786

 

 

$

(11,121

)

 

 

 

 

2017

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

Unrealized gains (losses) on available-for-sale securities

 

$

8,230

 

 

$

(3,210

)

 

$

5,020

 

Reclassification adjustment for amounts related to available-for-sale investments included in net income

 

 

(4,684

)

 

 

1,827

 

 

 

(2,857

)

Unrealized gains (losses) on cash flow hedges

 

 

(897

)

 

 

278

 

 

 

(619

)

Reclassification adjustment for amounts related to cash flow hedges included in net income

 

 

897

 

 

 

(278

)

 

 

619

 

Defined benefit plan adjustments

 

 

654

 

 

 

(203

)

 

 

451

 

Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income

 

 

406

 

 

 

(126

)

 

 

280

 

Foreign currency translation adjustment

 

 

5,999

 

 

 

 

 

 

5,999

 

Total Other Comprehensive Income (Loss)

 

$

10,605

 

 

$

(1,712

)

 

$

8,893

 

 

Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and circumstances change.     

Foreign Currency

We record transactions denominated in foreign currencies using appropriate exchange rates from throughout the year. Assets and liabilities denominated in foreign currencies are remeasured at the balance sheet dates using the closing rates of exchange between those foreign currencies and the functional currency with any transaction gains or losses reported in other income (expense). Our primary exposures to foreign currency exchange rate movements are with our German subsidiary, whose functional currency is the Euro, our Australian subsidiary, whose functional currency is the Australian dollar and our Mexican subsidiary, whose functional currency is the U.S. dollar as most invoices are paid in Mexican Pesos. Adjustments resulting from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

Revenue

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition.  

Accounting Policy under Topic 606

Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services to a customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control of a product to the customer. Review of contracts with customers, for both direct customers and distributors, are performed and assessment made regarding principal versus agent considerations to determine primary responsibility for delivery of performance obligation, presumed inventory risk, and discretion in establishing pricing. For transactions where there are multiple performance obligations, we account for individual products and services separately if they are distinct (if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices. Stand-alone selling prices are determined based on the prices at which we sell the separate products and services and are allocated based on each item’s relative value to the total value of the products and services in the arrangement. For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment terms are generally 30 days in the U.S. and typically longer in many geographic markets outside the U.S. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales, value-added and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of obtaining a contract, if material, are capitalized and amortized over the period that the related revenue is recognized if greater than one year. We have elected to account for shipping fees as a cost of fulfilling the related contract. We have also elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.

The following is a description of the principal activities from which we generate our revenue by reportable segment.

Network Solutions Segment

Network Solutions includes hardware products and software defined next-generation virtualized solutions used in service provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware sales.

Hardware and Software Revenue

Revenue from hardware sales is recognized when control is transferred to our customers, which is generally when we ship the products. Shipping terms are generally FOB shipping point. This segment also includes revenues from software license sales which is recognized at delivery and transfer of control to the customer. Revenue is recorded net of estimated discounts and rebates using historical trends. Customers are typically invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days to five years for product defects, which are accrued at the time revenue is recognized.

In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment that have terms of 18 months to five years. These arrangements typically include network equipment, network implementation services and maintenance services.        

Services & Support Segment

To complement our Network Solutions segment, we offer a complete portfolio of maintenance, network implementation and solutions integration and managed services, which include hosted cloud services and subscription services.

Maintenance Revenue

Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services at the beginning of the maintenance period. We recognize revenue for maintenance services on a straight-line basis over the maintenance period as our customers benefit evenly throughout the contract term and deferred revenues, when applicable, are recorded in current and non-current unearned revenue.

Network Implementation Revenue

We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement services at a point in time when each performance obligation is complete. If we have recognized revenue but have not billed the customer, the right to consideration is recognized as a contract asset that is included in other receivables on the Consolidated Balance Sheet. The contract asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.

Accounting Policy under Topic 605

Revenue was generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the product price was fixed or determinable, collection of the resulting receivable was reasonably assured, and product returns were reasonably estimable. For product sales, revenue was generally recognized upon shipment of the product to our customer in accordance with the title transfer terms of the sales agreement, generally Ex Works, per International Commercial Terms. In the case of consigned inventory, revenue was recognized when the end customer assumes ownership of the product. Contracts that contained multiple deliverables were evaluated to determine the units of accounting, and the consideration from the arrangement was allocated to each unit of accounting based on the relative selling price and corresponding terms of the contract. When this was not available, we were generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. In these instances, we used best estimates to allocate consideration to each respective unit of accounting. These estimates included analysis of respective bills of material and review and analysis of similar product and service offerings. We recorded revenue associated with installation services when respective contractual obligations are complete. In instances where customer acceptance was required, revenue was deferred until respective acceptance criteria were met. Contracts that included both installation services and product sales were evaluated for revenue recognition in accordance with contract terms. As a result, installation services may have been considered a separate deliverable or may have been considered a combined single unit of accounting with the delivered product. Generally, either the purchaser, ADTRAN, or a third party would perform the installation of our products. Shipping fees were recorded as revenue and the related costs were included in cost of sales. Sales taxes invoiced to customers were included in revenues and represented less than one percent of total revenues. The corresponding sales taxes paid were included in cost of goods sold. Value-added taxes collected from customers in international jurisdictions were recorded in accrued expenses as a liability. Revenue was recorded net of discounts. Sales returns were recorded as a reduction of revenue and accrued based on historical sales return experience, which we believed provided a reasonable estimate of future returns.

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and unearned revenues related to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one month to five years. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to customers under contracts with terms up to ten years. When we defer revenue related to multiple performance obligations where we still have contractual obligations, we also defer the related costs. Current deferred costs are included in prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets and totaled $1.6 million and $2.4 million as of December 31, 2019 and 2018, respectively. Non-current deferred costs are included in other assets on the accompanying Consolidated Balance Sheets and totaled $0.1 million and $0.8 million as of December 31, 2019 and 2018, respectively.

Earnings (Loss) per Share

Earnings (loss) per common share and earnings (loss) per common share assuming dilution, are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 17 for additional information.

Business Combinations

The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets recognized as part of business combinations based on their fair values on the date of acquisition. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities assumed acquired is recorded as goodwill. If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the purchase price, a bargain purchase gain is recorded. The Company’s estimates of fair value are based on historical experience, industry knowledge, certain information obtained from the management of the acquired company and, in some cases, valuations performed by independent third-party firms. The results of operations of acquired companies are included in the accompanying Consolidated Statements of Operations since their dates of acquisition. Costs incurred to complete the business combination, such as legal, accounting or other professional fees are charged to selling, general and administrative expenses as incurred.

Derivative Instruments and Hedging Activities

Historically, we have participated in foreign exchange forward contracts in connection with the management of exposure to fluctuations in foreign exchange rates as outlined below.

Cash Flow Hedges

 

Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the planned purchase of products from foreign suppliers. Purchases of U.S. denominated inventory by our European subsidiary represent our primary exposure. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other comprehensive income to earnings when the underlying hedged item impacts earnings. This reclassification is recorded in the same line item of the consolidated statements of income as where the effects of the hedged item are recorded, which is cost of sales.

Undesignated Hedges

We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as outstanding non-functional balances are revalued to the functional currency through earnings. When appropriate, we utilize foreign exchange forward contracts to help manage the volatility relating to these valuation exposures. All changes in the fair value of our derivative instruments that do not qualify for, or are not designated for, hedged accounting transactions are recognized in other income (expense), net in the Consolidated Statements of Income.

We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded on the Consolidated Balance Sheets at their fair values. Our derivative instruments are not subject to master netting arrangements and are not offset on the Consolidated Balance Sheets.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for financial instruments held at amortized cost. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, that clarifies receivables arising from operating leases are not within the scope of the credit losses standard, but rather should be accounted for in accordance with the leases standard. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies the accounting for transfers between classifications of debt securities and clarifies that entities should include expected recoveries on financial assets in the calculation of the current expected credit loss allowance. In addition, renewal options that are not unconditionally cancelable should be considered in the determination of expected credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which amends ASU 2016-13 to allow companies, upon adoption, to elect the fair value option on financial instruments that were previously recorded at amortized cost if they meet certain criteria. In November 2019, the FASB issued ASU 2019-11, Codification improvements to Topic 326, Financial Instruments – Credit Losses, which makes various narrow-scope amendments to the new credit losses standard, such as, providing disclosure relief for accrued interest receivables. All of these ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect these ASUs will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after January 1, 2017. The amendments should be applied prospectively. We are currently evaluating ASU 2017-04, but do not expect it will have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of ASC 820, Fair Value Measurement. The amendments in this ASU are the result of a broader disclosure project, Concepts Statement No. 8 — Conceptual Framework for Financial Reporting — Chapter 8 — Notes to Financial Statements, which the FASB finalized on August 28, 2018. The FASB used the guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. ASU 2018-13 provides users of financial statements with information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to the financial statements. More specifically, ASU 2018-13 requires disclosures about the valuation techniques and inputs that are used to arrive at measures of fair value, including judgments and assumptions that are made in determining fair value. In addition, ASU 2018-13 requires disclosures regarding the uncertainty in the fair value measurements as of the reporting date and how changes in fair value measurements affect performance and cash flows. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the effect of ASU 2018-13, but do not expect it will have a material effect on our financial statement disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which makes changes to and clarifies the disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 requires additional disclosures related to the reasons for significant gains and losses affecting the benefit obligation and an explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in other disclosures required by ASC 715. ASU 2018-14 also clarifies the guidance in ASC 715 to require disclosure of the projected benefit obligation (“PBO”) and fair value of plan assets for pension plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for pension plans with ABOs in excess of plan assets. ASU 2018-14 is effective for public business entities for fiscal years ending after December 15, 2020. We are currently evaluating the effect of ASU 2018-14, but do not expect it will have a material effect on our financial statement disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.  ASU 2018-15 clarifies certain aspects of ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementations costs incurred to develop or obtain internal use software. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect of ASU 2018-15, but do not expect it will have a material effect on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing various exceptions, such as, the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments in this update, also simplify the accounting for income taxes related to income-based franchise taxes and requiring that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the effect of ASU 2019-12, but do not expect it will have a material effect on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

During 2019, we adopted the following accounting standards, which had the following impacts on our consolidated financial statements:

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize right-of-use assets and lease liabilities on the balance sheet and to disclose key information about the entity’s leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarified certain aspects of ASU 2016-02, as well as ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided for an optional transition method allowing for the application of the legacy lease guidance, Leases (Topic 840), including its disclosure requirements, for the comparative periods presented in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the date of adoption. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard, and its related updates, were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

 

The Company adopted the new standard on January 1, 2019, the effective date of our initial application, using the optional transition method. At that time, the Company elected to carry forward the legacy ASC 840 disclosures for comparative periods and, therefore, did not adjust the comparative period financial information prior to January 1, 2019. In addition, the Company elected the package of practical expedients which allows for companies to not reassess whether any expired or existing contracts are or contain leases, not reassess historical lease classifications for expired or existing contracts and not reassess initial direct costs for existing leases. Additionally, the Company elected the practical expedients which allow the use of hindsight when determining the lease term, the short-term lease recognition exemption and the option to not separate lease and nonlease components. The adoption of this standard resulted in the recognition of a right-of-use asset and corresponding right-of-use liability on our Consolidated Balance Sheets of $10.3 million as of January 1, 2019, primarily related to our operating leases for office space, automobiles and other equipment.  

 

As a lessee, the adoption of this standard did not have a material impact on our Consolidated Statement of Income or Statement of Cash Flows. See Note 9 for additional information.

As a lessor, the adoption of this standard did not have a material impact on our Consolidated Balance Sheet, Consolidated Statement of Income or Consolidated Statement of Cash Flows. Prior to and after adoption, all of our leases in which we are the lessor were classified as sales-type leases.  

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortened the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU 2017-08 was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. The amendments were required to be applied through a modified-retrospective transition approach that required a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2017-08 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expanded and refined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and included certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness.  In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting, which permits the OIS rate based on SOFR as a U.S. benchmark interest rate. Both ASU 2017-12 and ASU 2018-16 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements as we did not have any hedging instruments as of the date of adoption.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. ASU 2018-02 allowed for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-02 on January 1, 2019, and upon adoption reclassified $0.4 million of stranded tax effects created by rate changes related to the Tax Cuts and Jobs Act of 2017 to retained earnings.

v3.19.3.a.u2
Business Combinations
12 Months Ended
Dec. 31, 2019
Business Combinations [Abstract]  
Business Combinations

Note 2 – Business Combinations

In November 2018, we acquired SmartRG, Inc., a provider of carrier-class, open-source connected home platforms and cloud services for broadband service providers for cash consideration. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Subscriber Solutions & Experience category within the Network Solutions and Services & Support reportable segments.  

Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which were dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones during the first half of 2019. The required milestones were not achieved and therefore, we recognized a gain of $1.2 million upon the reversal of these liabilities during the second quarter of 2019.

An escrow in the amount of $2.8 million was set up at the acquisition date to fund post-closing working capital settlements and to satisfy indemnity obligations to the Company arising from any inaccuracy or breach of representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to arbitration. In December 2019, $1.3 million of the $2.8 million was released from the escrow account pursuant to the agreement, with the final settlement of the remaining balance expected during the fourth quarter of 2020. The remaining minimum and maximum potential release of funds to the seller ranges from no payment to $1.5 million.

We recorded goodwill of $3.5 million as a result of this acquisition, which represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.

 

On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This acquisition establishes ADTRAN as the North American market leader for EPON solutions for the cable MSO industry and it will accelerate the MSO market’s adoption of our open, programmable and scalable architectures. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Access & Aggregation and Subscriber Solutions & Experience categories within the Network Solutions reportable segment.

 

We recorded a bargain purchase gain of $11.3 million during the first quarter of 2018, net of income taxes, which is subject to customary working capital adjustments between the parties. The bargain purchase gain of $11.3 million represents the difference between the fair-value of the net assets acquired over the cash paid. SEI, an OEM supplier based in Japan, is the global market leader in EPON. SEI’s Broadband Networks Division, through its SEL subsidiary, operated a North American EPON business that included sales, marketing, support, and region-specific engineering development. The North American EPON market is primarily driven by the Tier 1 cable MSO operators and has developed more slowly than anticipated. Through the transaction, SEI divested its North American EPON assets and established a relationship with ADTRAN. The transfer of these assets to ADTRAN, which included key customer relationships and a required assumption by ADTRAN of relatively low incremental expenses, along with the value of the technology license and OEM supply agreement, resulted in the bargain purchase gain. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and we have concluded that our valuation procedures and resulting measures were appropriate.  The gain is included in the line item ”Gain on bargain purchase of a business” in the 2018 Consolidated Statements of Income.

The final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date for SmartRG and the final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date for Sumitomo are as follows:

 

(In thousands)

 

Sumitomo

 

 

SmartRG

 

Assets

 

 

 

 

 

 

 

 

Tangible assets acquired

 

$

1,006

 

 

$

8,594

 

Intangible assets

 

 

22,100

 

 

 

9,960

 

Goodwill

 

 

 

 

 

3,476

 

Total assets acquired

 

 

23,106

 

 

 

22,030

 

Liabilities

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

(3,978

)

 

 

(6,001

)

Total liabilities assumed

 

 

(3,978

)

 

 

(6,001

)

Total net assets

 

 

19,128

 

 

 

16,029

 

Gain on bargain purchase of a business, net of tax

 

 

(11,322

)

 

 

 

Total purchase price

 

$

7,806

 

 

$

16,029

 

 

Our Consolidated Statements of Income include the following revenue and net loss attributable to SmartRG and Sumitomo since the date of acquisition:

 

(In thousands)

 

March 19, 2018 to

December 31,

2018

 

Revenue

 

$

9,186

 

Net loss

 

$

(1,297

)

 

The details of the acquired intangible assets from the SmartRG and Sumitomo acquisitions are as follows:

 

(In thousands)

 

Value

 

 

Life (in years)

Customer relationships

 

$

15,190

 

 

3 - 12

Developed technology

 

 

7,400

 

 

7

Licensed technology

 

 

5,900

 

 

9

Supplier relationship

 

 

2,800

 

 

2

Licensing agreements

 

 

560

 

 

5 - 10

Trade name

 

 

210

 

 

3

Total

 

$

32,060

 

 

 

The following unaudited supplemental pro forma information presents the financial results as if the acquisition of SmartRG and Sumitomo had occurred on January 1, 2017. This unaudited supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on January 1, 2017, nor is it indicative of any future results. Aside from revising the 2017 net income for the effect of the bargain purchase gains, there were no material, non-recurring adjustments to this unaudited pro-forma information.

 

(In thousands)

 

2018

 

 

2017

 

Pro forma revenue

 

$

559,050

 

 

$

702,573

 

Pro forma net loss

 

$

(33,862

)

 

$

33,206

 

 

For the years ended December 31, 2019 and 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $5.0 million and $2.9 million, respectively, related to the SmartRG and Sumitomo acquisitions. No acquisition expenses related to the SmartRG and Sumitomo acquisitions were recorded during the year ended December 31, 2017.

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Revenue
12 Months Ended
Dec. 31, 2019
Revenue From Contract With Customer [Abstract]  
Revenue

Note 3 - Revenue

 

The following table disaggregates our revenue by major source for the year ended December 31, 2019:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

289,980

 

 

$

58,894

 

 

$

348,874

 

Subscriber Solutions & Experience(1)

 

 

144,651

 

 

 

8,269

 

 

 

152,920

 

Traditional & Other Products

 

 

20,595

 

 

 

7,672

 

 

 

28,267

 

Total

 

$

455,226

 

 

$

74,835

 

 

$

530,061

 

 

(1)

Subscriber Solutions & Experience was formerly reported as Customer Devices. With the increasing focus on enhancing the customer experience for both our business and consumer broadband customers and the addition of SmartRG during the fourth quarter of 2018, Subscriber Solutions & Experience more accurately represents this revenue category.

 

The following table disaggregates our revenue by major source for the year ended December 31, 2018:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

301,801

 

 

$

57,069

 

 

$

358,870

 

Subscriber Solutions & Experience(1)

 

 

129,067

 

 

 

5,393

 

 

 

134,460

 

Traditional & Other Products

 

 

27,364

 

 

 

8,583

 

 

 

35,947

 

Total

 

$

458,232

 

 

$

71,045

 

 

$

529,277

 

 

 

(1)

Subscriber Solutions & Experience was formerly reported as Customer Devices. With the increasing focus on enhancing the customer experience for both our business and consumer broadband customers and the addition of SmartRG during the fourth quarter of 2018, Subscriber Solutions & Experience more accurately represents this revenue category.

 

Revenue allocated to remaining performance obligations represents contract revenues that have not yet been recognized for contracts with a duration greater than one year. As of December 31, 2019, we did not have any significant performance obligations related to customer contracts that had an original expected duration of one year or more, other than maintenance services, which are satisfied over time. As a practical expedient, for