ADTRAN INC, 10-Q filed on 5/8/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 07, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Entity Registrant Name ADTRAN, Inc.  
Trading Symbol ADTN  
Entity Central Index Key 0000926282  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   47,957,531
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
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 Quarterly Report true  
Document Transition Report false  
Title of 12(b) Security Common Stock, Par Value $0.01 per share  
Security Exchange Name NASDAQ  
v3.20.1
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current Assets    
Cash and cash equivalents $ 71,285 $ 73,773
Short-term investments 5,984 33,243
Accounts receivable, less allowance for doubtful accounts of $38 as of March 31, 2020 and December 31, 2019 86,465 90,531
Other receivables 23,121 16,566
Inventory, net 99,515 98,305
Prepaid expenses and other current assets 7,419 7,892
Total Current Assets 293,789 320,310
Property, plant and equipment, net 66,500 68,086
Deferred tax assets, net 7,447 7,561
Goodwill 6,968 6,968
Intangibles, net 26,472 27,821
Other assets 17,958 19,883
Long-term investments 79,136 94,489
Total Assets 498,270 545,118
Current Liabilities    
Accounts payable 47,685 44,870
Bonds payable   24,600
Unearned revenue 12,465 11,963
Accrued expenses and other liabilities 12,748 13,876
Accrued wages and benefits 13,247 13,890
Income tax payable, net 3,273 3,512
Total Current Liabilities 89,418 112,711
Non-current unearned revenue 4,476 6,012
Pension liability 15,546 15,886
Deferred compensation liability 18,321 21,698
Other non-current liabilities 6,794 8,385
Total Liabilities 134,555 164,692
Commitments and contingencies (see Note 17)
Stockholders’ Equity    
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,957 shares outstanding as of March 31, 2020 and 79,652 shares issued and 48,020 shares outstanding as of December 31, 2019 797 797
Additional paid-in capital 276,423 274,632
Accumulated other comprehensive loss (17,809) (16,417)
Retained earnings 790,849 806,702
Treasury stock at cost: 31,697 and 31,638 shares at March 31, 2020 and December 31, 2019, respectively (686,545) (685,288)
Total Stockholders’ Equity 363,715 380,426
Total Liabilities and Stockholders’ Equity $ 498,270 $ 545,118
v3.20.1
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts $ 38 $ 38
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 47,957,000 48,020,000
Treasury stock, shares 31,697,000 31,638,000
v3.20.1
Condensed Consolidated Statements of Income (Loss) (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Sales    
Total Sales $ 114,523 $ 143,791
Cost of Sales    
Total Cost of Sales 62,923 83,179
Gross Profit 51,600 60,612
Selling, general and administrative expenses 26,620 35,132
Research and development expenses 29,859 31,647
Asset impairments 65  
Operating Loss (4,944) (6,167)
Interest and dividend income 356 591
Interest expense (1) (127)
Net investment gain (loss) (10,877) 5,926
Other income, net 1,129 855
Income (Loss) Before Income Taxes (14,337) 1,078
Income tax (expense) benefit 4,368 (308)
Net Income (Loss) $ (9,969) $ 770
Weighted average shares outstanding – basic 47,957 47,782
Weighted average shares outstanding – diluted 47,957 47,853
Earnings (loss) per common share – basic $ (0.21) $ 0.02
Earnings (loss) per common share – diluted $ (0.21) $ 0.02
Network Solutions [Member]    
Sales    
Total Sales $ 97,372 $ 125,822
Cost of Sales    
Total Cost of Sales 51,626 70,734
Gross Profit 45,746 55,088
Services & Support [Member]    
Sales    
Total Sales 17,151 17,969
Cost of Sales    
Total Cost of Sales 11,297 12,445
Gross Profit $ 5,854 $ 5,524
v3.20.1
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement Of Income And Comprehensive Income [Abstract]    
Net Income (Loss) $ (9,969) $ 770
Other Comprehensive Loss, net of tax    
Net unrealized gains on available-for-sale securities 117 185
Defined benefit plan adjustments 141 121
Foreign currency translation (1,650) (1,160)
Other Comprehensive Loss, net of tax (1,392) (854)
Comprehensive Loss, net of tax $ (11,361) $ (84)
v3.20.1
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - 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, 2018 $ 446,279 $ 797 $ 267,670 $ 883,975 $ (691,747) $ (14,416)
Beginning Balance, Shares at Dec. 31, 2018   79,652        
Net income (loss) 770     770    
Adoption of new accounting standards 4     (381)   385
Other comprehensive income (loss), net of tax (854)         (854)
Dividend payments ($0.09 per share) (4,301)     (4,301)    
Dividends accrued on unvested RSUs (18)     (18)    
PSUs, RSUs and restricted stock vested (8)     (865) 857  
Purchases of treasury stock (184)       (184)  
Stock-based compensation expense 1,859   1,859      
Ending Balance at Mar. 31, 2019 443,547 $ 797 269,529 879,180 (691,074) (14,885)
Ending Balance, Shares at Mar. 31, 2019   79,652        
Beginning Balance at Dec. 31, 2019 $ 380,426 $ 797 274,632 806,702 (685,288) (16,417)
Beginning Balance, Shares at Dec. 31, 2019 79,652 79,652        
Net income (loss) $ (9,969)     (9,969)    
Other comprehensive income (loss), net of tax (1,392)         (1,392)
Dividend payments ($0.09 per share) (4,328)     (4,328)    
Dividends accrued on unvested RSUs (32)     (32)    
Deferred compensation adjustments, net of tax (2,758)       (2,758)  
PSUs, RSUs and restricted stock vested (23)     (1,524) 1,501  
Stock-based compensation expense 1,791   1,791      
Ending Balance at Mar. 31, 2020 $ 363,715 $ 797 $ 276,423 $ 790,849 $ (686,545) $ (17,809)
Ending Balance, Shares at Mar. 31, 2020 79,652 79,652        
v3.20.1
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (Parenthetical) - $ / shares
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement Of Stockholders Equity [Abstract]    
Dividend payments $ 0.09 $ 0.09
v3.20.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Cash flows from operating activities:    
Net income (loss) $ (9,969) $ 770
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation and amortization 4,365 4,496
Asset impairments 65  
Amortization of net premium on available-for-sale investments 61 6
Net (gain) loss on long-term investments 10,877 (5,926)
Net (gain) loss on disposal of property, plant and equipment 52 (6)
Stock-based compensation expense 1,791 1,859
Deferred income taxes (63) 235
Changes in operating assets and liabilities:    
Accounts receivable, net 3,052 170
Other receivables (6,707) 2,001
Inventory, net (1,598) 5,974
Prepaid expenses and other assets 2,206 2,809
Accounts payable, net 2,712 166
Accrued expenses and other liabilities (6,680) (2,355)
Income taxes payable (188) (487)
Net cash provided by (used in) operating activities (24) 9,712
Cash flows from investing activities:    
Purchases of property, plant and equipment (1,406) (1,872)
Proceeds from sales and maturities of available-for-sale investments 46,440 17,039
Purchases of available-for-sale investments (16,879) (15,318)
Acquisition of note receivable (523)  
Net cash provided by (used in) investing activities 27,632 (151)
Cash flows from financing activities:    
Purchases of treasury stock   (184)
Dividend payments (4,328) (4,301)
Repayment of bonds payable (24,600)  
Net cash used in financing activities (28,928) (4,485)
Net increase (decrease) in cash and cash equivalents (1,320) 5,076
Effect of exchange rate changes (1,168) (1,461)
Cash and cash equivalents, beginning of period 73,773 105,504
Cash and cash equivalents, end of period 71,285 109,119
Supplemental disclosure of non-cash investing activities:    
Purchases of property, plant and equipment included in accounts payable $ 302 $ 273
v3.20.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (“ADTRAN”, the “Company”, “we”, “our” or “us”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information presented in Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements are not included herein. The December 31, 2019 Condensed Consolidated Balance Sheet is derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

In the opinion of management, all adjustments necessary to fairly state these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 25, 2020.

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 expense during the reporting period. The more significant estimates include excess and obsolete inventory reserves, warranty reserves, customer rebates, determination and accrual of deferred revenue components of element sales agreements, estimated costs to complete obligations associated with deferred and accrued 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 and fair value of investments. Actual amounts could differ significantly from these estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the novel coronavirus (“COVID-19”) as of March 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the allowance for doubtful accounts, stock-based compensation, carrying value of goodwill, intangibles and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While there was not a material impact to our consolidated financial statements as of and for the quarter ended March 31, 2020 resulting from these assessments, future assessments of our current expectations at that time of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.

Correction of Immaterial Misstatements

During the three months ended June 30, 2019, it was determined that a $1.0 million cash inflow related to an insurance recovery was incorrectly classified as a cash flow from operations instead of a cash flow from investing activities within the unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019. The Company corrected this misstatement in the unaudited Condensed Consolidated Statement of Cash Flows as an out of period adjustment as of and for the six months ended June 30, 2019 to correctly reflect the $1.0 million insurance recovery as a cash inflow from investing activities. Management had previously determined that this misstatement was not material to any of its previously issued financial statements on either a quantitative or qualitative basis. 

During the three months ended March 31, 2020, it was determined that certain investments held in the Company’s stock for a deferred compensation plan accounted for as a Rabbi trust were incorrectly classified as Long-term investments with the fair value of such investments incorrectly marked to market at each period end rather than classified as Treasury stock held at historical cost. This plan has been in existence since 2011. The Company corrected this misstatement as an out of period adjustment in the three months ended March 31, 2020 by remeasuring the investment assets to their historical cost basis through the recording of a Net investment gain of $1.5 million in the unaudited Condensed Consolidated Statement of Income (Loss) and then correcting the classification by decreasing the Long-term investment balance at its remeasured cost basis of $2.8 million to Treasury stock in the unaudited Condensed Consolidated Balance Sheet as of March 31, 2020. Management has determined that this misstatement was not material to any of its previously issued financial statements and that correction of the misstatement is also not expected to be material to the 2020 annual financial results on either a quantitative or qualitative basis.

Recently Adopted Accounting Pronouncements

During 2020, we adopted the following accounting standards, which had the following impacts on our consolidated financial statements:

 

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 standard for leases. 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 were codified as part of ASC Topic 326 and were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this standard on January 1, 2020, using a modified-retrospective approach and, therefore, elected to carry forward legacy disclosures for comparative periods and did not adjust the comparative period financial information. Additionally, the Company made an accounting policy election, at the class of financing receivable, not to measure the allowance for credit losses for accrued interest receivables, as the Company writes off the uncollectable accrued interest receivable by reversing any previously recorded interest income in a timely manner (as soon as these amounts are determined to be uncollectable). The adoption of this standard did not have a material effect on our consolidated financial statements. See Note 18 for additional information.

 

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 are 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 was effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019. The Company adopted ASU 2017-04 on January 1, 2020, and the amendments were applied prospectively. The adoption of this standard did not 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. The Company adopted ASU 2018-13 on January 1, 2020, and the adoption of this standard did not have a material effect on our consolidated financial statements.

 

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. The Company adopted ASU 2018-15 on January 1, 2020, retrospectively. The adoption of this standard resulted in a reclassification of $5.6 million from property, plant and equipment to other assets for certain previously capitalized costs related to information technology implementation projects that had not yet been placed in service on the consolidated balance sheet as of March 31, 2020 and December 31, 2019. There was minimal impact to previously reported net cash provided by (used in) operations on the statement of cash flows and no impact to the statements of income (loss) as no portion of the capitalized asset was depreciated in prior periods.

 

 

 

The following table illustrates the impact of adoption of ASU 2018-15 on the Condensed Consolidated Balance Sheet as of December 31, 2019:

 

 

 

As of December 31, 2019

 

(In thousands)

 

Pre-Adoption

 

 

Effect of Adoption

 

 

As Presented Now

 

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

  Property, plant and equipment, net

 

$

73,708

 

 

$

(5,622

)

 

$

68,086

 

  Other assets

 

$

14,261

 

 

$

5,622

 

 

$

19,883

 

 

The following table illustrates the impact of adoption of ASU 2018-15 on the Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019:

 

 

 

Three Months Ended March 31, 2019

 

(In thousands)

 

Pre-Adoption

 

 

Effect of Adoption

 

 

As Presented Now

 

Condensed Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

 

$

770

 

 

$

 

 

$

770

 

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

  Net cash provided by operating activities

 

$

9,712

 

 

$

 

 

$

9,712

 

 

 

Recent Accounting Pronouncements Not Yet Adopted

 

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. The Company is currently evaluating the impact this guidance will have on its related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies 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 require 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. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

v3.20.1
Revenue
3 Months Ended
Mar. 31, 2020
Revenue From Contract With Customer [Abstract]  
Revenue

2. REVENUE

The following is a description of the principal activities from which revenue is generated by reportable segment:

Network Solutions Segment - Includes hardware products and software-defined next-generation virtualized solutions used in service provider or business networks, as well as prior generation products.

Services & Support Segment - Includes maintenance, network implementation, solutions integration and managed services, which include hosted cloud services and subscription services.    

See Note 15 for additional information on reportable segments.

Sales by Category

 

In addition to our reporting segments, revenue is also reported for the following three categories – Access & Aggregation, Subscriber Solutions & Experience and Traditional & Other Products.  

 

The following table disaggregates revenue by reportable segment and revenue category for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

53,055

 

 

$

12,911

 

 

$

65,966

 

 

$

85,673

 

 

$

14,105

 

 

$

99,778

 

Subscriber Solutions & Experience

 

 

39,983

 

 

 

2,196

 

 

 

42,179

 

 

 

34,719

 

 

 

2,034

 

 

 

36,753

 

Traditional & Other Products

 

 

4,334

 

 

 

2,044

 

 

 

6,378

 

 

 

5,430

 

 

 

1,830

 

 

 

7,260

 

Total

 

$

97,372

 

 

$

17,151

 

 

$

114,523

 

 

$

125,822

 

 

$

17,969

 

 

$

143,791

 

 

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 March 31, 2020, 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 certain contracts we recognize revenue equal to the amounts we are entitled to invoice which correspond to the value of completed performance obligations to date. The amount related to these performance obligations was $14.3 million and $13.6 million as of March 31, 2020 and December 31, 2019, respectively. The Company expects to recognize 69% of the $14.3 million as of March 31, 2020 over the next 12 months with the remainder to be recognized thereafter.

The following table provides information about receivables, contract assets and unearned revenue from contracts with customers:

 

(In thousands)

 

March 31, 2020

 

 

December 31, 2019

 

Accounts receivable, net

 

$

86,465

 

 

$

90,531

 

Contract assets(1)

 

$

1,354

 

 

$

2,812

 

Unearned revenue

 

$

12,465

 

 

$

11,963

 

Non-current unearned revenue

 

$

4,476

 

 

$

6,012

 

 

 

(1)

Included in other receivables on the Condensed Consolidated Balance Sheets.

 

Of the outstanding unearned revenue balances as of December 31, 2019 and December 31, 2018, $5.7 million and $6.9 million was recognized as revenue during the three months ended March 31, 2020 and March 31, 2019, respectively.

v3.20.1
Income Taxes
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

3. INCOME TAXES

Our effective tax rate decreased from an expense of 28.6% for the three months ended March 31, 2019, to a benefit of 30.5% for the three months ended March 31, 2020. The decrease in the effective tax rate between the two periods was primarily driven by a tax benefit of $7.4 million recognized during the three months ended March 31, 2020 as a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, which allowed for the carryback of federal net operating losses, partially offset with tax expense in our international operations and changes in our valuation allowance related to our domestic operations. The increase in the valuation allowance against our domestic deferred tax assets was recorded in the amount of $6.1 million during the three months ended March 31, 2020.

 

The Company continually reviews the adequacy of its valuation allowance and recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance with ASC 740, Income Taxes. As of March 31, 2020, the Company had deferred tax assets totaling $62.2 million, and a valuation allowance totaling $54.7 million had been established against those deferred tax assets. The remaining $7.4 million in deferred tax assets not offset by a valuation allowance is located in various foreign jurisdictions where the Company believes it is more likely than not we will realize these deferred tax assets. Our assessment of the realizability of our deferred tax assets includes the evaluation of evidence, some of which requires significant judgement, including historical operating results, the evaluation of our three-year cumulative income position, future taxable income projections and tax planning strategies. Should management’s conclusion change in the future and additional valuation allowance or a partial or full release of the valuation allowance is necessary, it could have a material effect on our consolidated financial statements.

Supplemental balance sheet information related to deferred tax assets as of March 31, 2020 and December 31, 2019 is as follows:

 

 

 

March 31, 2020

 

(In thousands)

 

Deferred Tax Assets

 

 

Valuation Allowance

 

 

Deferred Tax Assets, net

 

Domestic

 

$

52,355

 

 

$

(52,355

)

 

$

 

International

 

 

9,797

 

 

 

(2,350

)

 

 

7,447

 

Total

 

$

62,152

 

 

$

(54,705

)

 

$

7,447

 

 

 

 

December 31, 2019

 

(In thousands)

 

Deferred Tax Assets

 

 

Valuation Allowance

 

 

Deferred Tax Assets, net

 

Domestic

 

$

46,266

 

 

$

(46,266

)

 

$

 

International

 

 

9,911

 

 

 

(2,350

)

 

 

7,561

 

Total

 

$

56,177

 

 

$

(48,616

)

 

$

7,561

 

 

v3.20.1
Pension Benefit Plan
3 Months Ended
Mar. 31, 2020
Compensation And Retirement Disclosure [Abstract]  
Pension Benefit Plan

4. PENSION BENEFIT PLAN

The following table summarizes the components of net periodic pension cost related to a defined benefit pension plan covering employees in certain foreign countries for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2020

 

 

2019

 

Service cost

 

$

310

 

 

$

375

 

Interest cost

 

 

108

 

 

 

162

 

Expected return on plan assets

 

 

(410

)

 

 

(355

)

Amortization of actuarial losses

 

 

237

 

 

 

203

 

Net periodic pension cost

 

$

245

 

 

$

385

 

 

The components of net periodic pension cost, other than the service cost component, are included in other income (expense), net in the Condensed Consolidated Statements of Income (Loss). Service cost is included in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income (Loss).

v3.20.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2020
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Stock-Based Compensation

5. STOCK-BASED COMPENSATION

The following table summarizes stock-based compensation expense related to stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and restricted stock for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2020

 

 

2019

 

Stock-based compensation expense included in cost of sales

 

$

115

 

 

$

104

 

Selling, general and administrative expense

 

 

1,075

 

 

 

1,063

 

Research and development expense

 

 

601

 

 

 

692

 

Stock-based compensation expense included in operating expenses

 

 

1,676

 

 

 

1,755

 

Total stock-based compensation expense

 

 

1,791

 

 

 

1,859

 

Tax benefit for expense associated with stock options, PSUs, RSUs and restricted stock

 

 

(427

)

 

 

(443

)

Total stock-based compensation expense, net of tax

 

$

1,364

 

 

$

1,416

 

 

PSUs, RSUs and Restricted Stock

 

The following table summarizes PSUs, RSUs and restricted stock outstanding as of December 31, 2019 and March 31, 2020 and the changes that occurred during the three months ended March 31, 2020.

 

 

 

Number of

Shares

(in thousands)

 

 

Weighted Avg. Grant Date Fair Value

(per share)

 

Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2019

 

 

1,891

 

 

$

14.58

 

PSUs, RSUs and restricted stock granted

 

 

394

 

 

$

8.18

 

PSUs, RSUs and restricted stock vested

 

 

(13

)

 

$

12.32

 

PSUs, RSUs and restricted stock forfeited

 

 

(422

)

 

$

21.12

 

Unvested PSUs, RSUs and restricted stock outstanding, March 31, 2020

 

 

1,850

 

 

$

11.75

 

 

During the three months ended March 31, 2020, the Company issued 0.3 million performance-based PSUs to its executive officers and certain employees. The grant-date fair value of these performance-based awards is based on the closing price of the Company’s stock on the date of grant. These awards vest over a three-year period, subject to the grantee’s continued employment, with the ability to earn shares in a range of 0% to 142.8% of the awarded number of PSUs based on the achievement of defined performance targets. Equity-based compensation expense with respect to these awards will be adjusted over the vesting period to reflect the probability of achievement of performance targets defined in the award agreements.

 

The fair value of RSUs and restricted stock is equal to the closing price of our stock on the business day immediately preceding the grant date. The fair value of PSUs with market conditions is calculated using a Monte Carlo simulation valuation method.

As of March 31, 2020, total unrecognized compensation expense related to non-vested market-based PSUs, RSUs and restricted stock was approximately $15.3 million, which will be recognized over the remaining weighted-average period of 2.6 years. Unrecognized compensation expense will be adjusted for actual forfeitures.


As of March 31, 2020, 1.4 million shares were available for issuance under shareholder-approved equity plans in connection with the grant and exercise of stock options, PSUs, RSUs or restricted stock.

Stock Options

The following table summarizes stock options outstanding as of December 31, 2019 and March 31, 2020 and the changes that occurred during the three months ended March 31, 2020:

 

 

 

Number of

Stock Options

(in thousands)

 

 

Weighted Avg.

Exercise Price

(per share)

 

 

Weighted Avg.

Remaining

Contractual

Life

(in years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Stock options outstanding, December 31, 2019

 

 

3,572

 

 

$

22.88

 

 

 

3.4

 

 

$

 

Stock options exercised

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options forfeited

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options expired

 

 

(125

)

 

$

23.49

 

 

 

 

 

 

 

 

 

Stock options outstanding, March 31, 2020

 

 

3,447

 

 

$

22.86

 

 

 

3.1

 

 

$

 

Stock options exercisable, March 31, 2020

 

 

3,444

 

 

$

22.86

 

 

 

3.1

 

 

$

 

As of March 31, 2020, total unrecognized compensation expense related to non-vested stock options was approximately $7 thousand, which will be recognized over the remaining weighted-average period of 0.6 years. Unrecognized compensation expense will be adjusted for actual forfeitures.

There were no stock options granted during the three months ended March 31, 2020 and 2019. All of the options were previously issued at exercise prices that approximated fair market value at the date of grant. 

 

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2020. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock and was zero as of March 31, 2020. The total pre-tax intrinsic value of options exercised during the three months ended March 31, 2020 was zero.

v3.20.1
Investments
3 Months Ended
Mar. 31, 2020
Investments Debt And Equity Securities [Abstract]  
Investments

6. INVESTMENTS

Debt Securities and Other Investments

As of March 31, 2020, the following debt securities and other investments were included on the Condensed Consolidated Balance Sheet and recorded at fair value:

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate bonds

 

$

8,967

 

 

$

43

 

 

$

(87

)

 

$

8,923

 

Municipal fixed-rate bonds

 

 

931

 

 

 

3

 

 

 

 

 

 

934

 

Asset-backed bonds

 

 

6,052

 

 

 

17

 

 

 

(76

)

 

 

5,993

 

Mortgage/Agency-backed bonds

 

 

8,389

 

 

 

140

 

 

 

(62

)

 

 

8,467

 

U.S. government bonds

 

 

12,788

 

 

 

319

 

 

 

(6

)

 

 

13,101

 

Other

 

 

442

 

 

 

 

 

 

 

 

 

442

 

Available-for-sale debt securities held at fair value

 

$

37,569

 

 

$

522

 

 

$

(231

)

 

$

37,860

 

 

As of December 31, 2019, the following debt securities and other investments were included on the Condensed Consolidated Balance sheet and recorded at fair value:

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate bonds

 

$

9,304

 

 

$

80

 

 

$

 

 

$

9,384

 

Municipal fixed-rate bonds

 

 

930

 

 

 

 

 

 

 

 

 

930

 

Asset-backed bonds

 

 

6,867

 

 

 

26

 

 

 

(3

)

 

 

6,890

 

Mortgage/Agency-backed bonds

 

 

6,944

 

 

 

26

 

 

 

(8

)

 

 

6,962

 

U.S. government bonds

 

 

12,311

 

 

 

21

 

 

 

(9

)

 

 

12,323

 

Foreign government bonds

 

 

372

 

 

 

 

 

 

(1

)

 

 

371

 

Variable rate demand notes

 

 

800

 

 

 

 

 

 

 

 

 

800

 

Available-for-sale debt securities held at fair value

 

$

37,528

 

 

$

153

 

 

$

(21

)

 

$

37,660

 

 

As of March 31, 2020, contractual maturities related to debt securities and other investments were as follows:

 

(In thousands)

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-

backed

bonds

 

 

Mortgage /

Agency-

backed bonds

 

 

U.S. government

bonds

 

 

Other

 

Less than one year

 

$

3,274

 

 

$

 

 

$

101

 

 

$

 

 

$

61

 

 

$

442

 

One to two years

 

 

3,702

 

 

 

934

 

 

 

389

 

 

 

584

 

 

 

5,376

 

 

 

 

Two to three years

 

 

1,947

 

 

 

 

 

 

1,559

 

 

 

1,769

 

 

 

7,285

 

 

 

 

Three to five years

 

 

 

 

 

 

 

 

2,174

 

 

 

107

 

 

 

379

 

 

 

 

Five to ten years

 

 

 

 

 

 

 

 

1,505

 

 

 

1,655

 

 

 

 

 

 

 

More than ten years

 

 

 

 

 

 

 

 

265

 

 

 

4,352

 

 

 

 

 

 

 

Total

 

$

8,923

 

 

$

934

 

 

$

5,993

 

 

$

8,467

 

 

$

13,101

 

 

$

442

 

Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Realized gains and losses on sales of debt securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our debt securities:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2020

 

 

2019

 

Gross realized gains on debt securities

 

$

43

 

 

$

41

 

Gross realized losses on debt securities

 

 

(20

)

 

 

(19

)

Total gain recognized, net

 

$

23

 

 

$

22

 

The Company’s investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio. The Company did not purchase any available-for-sale debt security with credit deterioration during the three months ended March 31, 2020.

 

Marketable Equity Securities

 

Our marketable equity securities consist of publicly traded stock, funds and certain other investments measured at fair value or cost (where appropriate).

 

During the three months ended March 31, 2019, an outstanding note receivable of $4.3 million was repaid and reissued in the form of debt and equity. Of the outstanding $4.3 million, $3.4 million was issued as an equity investment, which represented a non-cash investing activity. We elected to record this equity investment that does not have a readily determinable fair value using the measurement alternative. Under the measurement alternative, equity investments that do not have a readily determinable fair value can be recorded at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment. The carrying value of this investment under the measurement alternative was $3.4 million as of December 31, 2019. During the three months ended March 31, 2020, an impairment charge of $1.6 million was recorded related to this equity investment, which is included in net investment gain (loss) on the Condensed Consolidated Statement of Income (Loss). As a result, the carrying value of this investment was $1.8 million as of March 31, 2020. The remaining amount, $0.9 million of the original $4.3 million note receivable, was reissued as a new note receivable, which is included in long-term investments on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, and represented a non-cash operating activity during the three months ended March 31, 2019. No impairment charge was recognized related to the note receivable as it is a secured loan. 

Realized and unrealized gains and losses related to marketable equity securities for the three months ended March 31, 2020 and 2019 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2020

 

 

2019

 

Realized losses on equity securities sold

 

$

(2,436

)

 

$

(14

)

Unrealized gains (losses) on equity securities held

 

 

(8,464

)

 

 

5,918

 

Total gain (loss) recognized, net

 

$

(10,900

)

 

$

5,904

 

 

U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of financial instruments:


• Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;

• Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly;

• Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs could include information supplied by investees.

The Company’s cash equivalents and investments held at fair value are categorized into this hierarchy as follows:

 

 

 

 

 

 

 

Fair Value Measurements as of March 31, 2020 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,826

 

 

$

4,826

 

 

$

 

 

$

 

Commercial paper

 

 

500

 

 

 

 

 

 

500

 

 

 

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

8,923

 

 

 

 

 

 

8,923

 

 

 

 

Municipal fixed-rate bonds

 

 

934

 

 

 

 

 

 

934

 

 

 

 

Asset-backed bonds

 

 

5,993

 

 

 

 

 

 

5,993

 

 

 

 

Mortgage/Agency-backed bonds

 

 

8,467

 

 

 

 

 

 

8,467