ADTRAN INC, 10-Q filed on 11/6/2020
Quarterly Report
v3.20.2
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2020
Nov. 05, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
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   47,956,220
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 $0.01 per share  
Security Exchange Name NASDAQ  
v3.20.2
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Sep. 30, 2020
Dec. 31, 2019
Current Assets    
Cash and cash equivalents $ 71,081 $ 73,773
Restricted cash 322  
Short-term investments 6,180 33,243
Accounts receivable, less allowance for doubtful accounts of $38 as of September 30, 2020 and December 31, 2019 100,223 90,531
Other receivables 22,899 16,566
Inventory 120,260 98,305
Prepaid expenses and other current assets 8,374 7,892
Total Current Assets 329,339 320,310
Property, plant and equipment, net 64,353 68,086
Deferred tax assets, net 7,865 7,561
Goodwill 6,968 6,968
Intangibles, net 24,465 27,821
Other assets 20,409 19,883
Long-term investments 78,016 94,489
Total Assets 531,415 545,118
Current Liabilities    
Accounts payable 59,886 44,870
Bonds payable   24,600
Unearned revenue 13,379 11,963
Accrued expenses and other liabilities 13,173 13,876
Accrued wages and benefits 17,228 13,890
Income tax payable, net 3,346 3,512
Total Current Liabilities 107,012 112,711
Non-current unearned revenue 6,694 6,012
Pension liability 16,282 15,886
Deferred compensation liability 22,957 21,698
Other non-current liabilities 8,877 8,385
Total Liabilities 161,822 164,692
Commitments and contingencies (see Note 18)
Stockholders’ Equity    
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,956 shares outstanding as of September 30, 2020 and 79,652 shares issued and 48,020 shares outstanding as of December 31, 2019 797 797
Additional paid-in capital 279,688 274,632
Accumulated other comprehensive loss (12,678) (16,417)
Retained earnings 788,294 806,702
Treasury stock at cost: 31,565 and 31,636 shares at September 30, 2020 and December 31, 2019, respectively (686,508) (685,288)
Total Stockholders’ Equity 369,593 380,426
Total Liabilities and Stockholders’ Equity $ 531,415 $ 545,118
v3.20.2
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 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 47,956,000 48,020,000
Treasury stock, shares 31,565,000 31,636,000
v3.20.2
Condensed Consolidated Statements of Income (Loss) (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Sales        
Total Sales $ 133,143 $ 114,092 $ 376,381 $ 414,274
Cost of Sales        
Total Cost of Sales 74,181 67,761 212,347 242,316
Gross Profit 58,962 46,331 164,034 171,958
Selling, general and administrative expenses 27,205 30,912 84,624 99,663
Research and development expenses 27,223 31,835 85,794 95,546
Asset impairments   3,872 65 3,872
Gain on contingency       (1,230)
Operating Income (Loss) 4,534 (20,288) (6,449) (25,893)
Interest and dividend income 344 610 1,031 1,893
Interest expense   (128) (1) (382)
Net investment gain (loss) 2,844 (216) 1,819 8,195
Other income (expense), net (1,679) 1,616 (2,307) 2,266
Income (Loss) Before Income Taxes 6,043 (18,406) (5,907) (13,921)
Income tax (expense) benefit (562) (27,717) 2,171 (27,437)
Net Income (Loss) $ 5,481 $ (46,123) $ (3,736) $ (41,358)
Weighted average shares outstanding – basic 47,957 47,824 47,957 47,803
Weighted average shares outstanding – diluted 48,424 47,824 47,957 47,803
Earnings (loss) per common share – basic $ 0.11 $ (0.96) $ (0.08) $ (0.87)
Earnings (loss) per common share – diluted $ 0.11 $ (0.96) $ (0.08) $ (0.87)
Network Solutions [Member]        
Sales        
Total Sales $ 115,229 $ 94,018 $ 323,924 $ 359,007
Cost of Sales        
Total Cost of Sales 62,795 56,444 178,492 207,353
Gross Profit 52,434 37,574 145,432 151,654
Services & Support [Member]        
Sales        
Total Sales 17,914 20,074 52,457 55,267
Cost of Sales        
Total Cost of Sales 11,386 11,317 33,855 34,963
Gross Profit $ 6,528 $ 8,757 $ 18,602 $ 20,304
v3.20.2
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Statement Of Income And Comprehensive Income [Abstract]        
Net Income (Loss) $ 5,481 $ (46,123) $ (3,736) $ (41,358)
Other Comprehensive Income (Loss), net of tax        
Net unrealized gains (losses) on available-for-sale securities (45) (15) 445 277
Defined benefit plan adjustments 244 90 576 361
Foreign currency translation 2,469 (2,486) 2,718 (3,113)
Other Comprehensive Income (Loss), net of tax 2,668 (2,411) 3,739 (2,475)
Comprehensive Income (Loss), net of tax $ 8,149 $ (48,534) $ 3 $ (43,833)
v3.20.2
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
Total
Cumulative Effect, Period of Adoption, Adjustment [Member]
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Retained Earnings [Member]
Cumulative Effect, Period of Adoption, Adjustment [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Loss [Member]
Accumulated Other Comprehensive Loss [Member]
Cumulative Effect, Period of Adoption, Adjustment [Member]
Beginning Balance at Dec. 31, 2018 $ 446,279 $ 4 $ 797 $ 267,670 $ 883,975 $ (381) $ (691,747) $ (14,416) $ 385
Beginning Balance, Shares at Dec. 31, 2018     79,652            
Net income (loss) 770       770        
Other comprehensive income (loss), net of tax (854)             (854)  
Dividend payments ($0.09 per share) (4,301)       (4,301)        
Dividends accrued on unvested PSUs (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, 2018 446,279 $ 4 $ 797 267,670 883,975 $ (381) (691,747) (14,416) $ 385
Beginning Balance, Shares at Dec. 31, 2018     79,652            
Net income (loss) (41,358)                
Other comprehensive income (loss), net of tax (2,475)                
Ending Balance at Sep. 30, 2019 394,955   $ 797 272,854 827,783   (689,973) (16,506)  
Ending Balance, Shares at Sep. 30, 2019     79,652            
Beginning Balance at Mar. 31, 2019 443,547   $ 797 269,529 879,180   (691,074) (14,885)  
Beginning Balance, Shares at Mar. 31, 2019     79,652            
Net income (loss) 3,995       3,995        
Other comprehensive income (loss), net of tax 790             790  
Dividend payments ($0.09 per share) (4,303)       (4,303)        
Dividends accrued on unvested PSUs (34)       (34)        
Stock options exercised 526       (208)   734    
Stock-based compensation expense 1,454     1,454          
Ending Balance at Jun. 30, 2019 445,975   $ 797 270,983 878,630   (690,340) (14,095)  
Ending Balance, Shares at Jun. 30, 2019     79,652            
Net income (loss) (46,123)       (46,123)        
Other comprehensive income (loss), net of tax (2,411)             (2,411)  
Dividend payments ($0.09 per share) (4,304)       (4,304)        
Dividends accrued on unvested PSUs 42       42        
PSUs, RSUs and restricted stock vested (95)       (462)   367    
Stock-based compensation expense 1,871     1,871          
Ending Balance at Sep. 30, 2019 394,955   $ 797 272,854 827,783   (689,973) (16,506)  
Ending Balance, Shares at Sep. 30, 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 PSUs (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            
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) $ (3,736)                
Other comprehensive income (loss), net of tax 3,739                
Ending Balance at Sep. 30, 2020 $ 369,593   $ 797 279,688 788,294   (686,508) (12,678)  
Ending Balance, Shares at Sep. 30, 2020 79,652   79,652            
Beginning Balance at Mar. 31, 2020 $ 363,715   $ 797 276,423 790,849   (686,545) (17,809)  
Beginning Balance, Shares at Mar. 31, 2020     79,652            
Net income (loss) 752       752        
Other comprehensive income (loss), net of tax 2,463             2,463  
Dividend payments ($0.09 per share) (4,337)       (4,337)        
Dividends accrued on unvested PSUs (28)       (28)        
Deferred compensation adjustments, net of tax (24)           (24)    
PSUs, RSUs and restricted stock vested (2)       (16)   14    
Stock-based compensation expense 1,655     1,655          
Ending Balance at Jun. 30, 2020 364,194   $ 797 278,078 787,220   (686,555) (15,346)  
Ending Balance, Shares at Jun. 30, 2020     79,652            
Net income (loss) 5,481       5,481        
Other comprehensive income (loss), net of tax 2,668             2,668  
Dividend payments ($0.09 per share) (4,328)       (4,328)        
Dividends accrued on unvested PSUs (12)       (12)        
Deferred compensation adjustments, net of tax (12)           (12)    
PSUs, RSUs and restricted stock vested (8)       (67)   59    
Stock-based compensation expense 1,610     1,610          
Ending Balance at Sep. 30, 2020 $ 369,593   $ 797 $ 279,688 $ 788,294   $ (686,508) $ (12,678)  
Ending Balance, Shares at Sep. 30, 2020 79,652   79,652            
v3.20.2
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (Parenthetical) - $ / shares
3 Months Ended
Sep. 30, 2020
Jun. 30, 2020
Mar. 31, 2020
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Statement Of Stockholders Equity [Abstract]            
Dividend payments $ 0.09 $ 0.09 $ 0.09 $ 0.09 $ 0.09 $ 0.09
v3.20.2
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Cash flows from operating activities:    
Net loss $ (3,736) $ (41,358)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 12,525 13,315
Asset impairments 65 3,872
Amortization of net premium on available-for-sale investments 90 (86)
Net gain on long-term investments (1,819) (8,195)
Net loss on disposal of property, plant and equipment 105 58
Gain on contingency   (1,230)
Gain on life insurance proceeds   (1,000)
Stock-based compensation expense 5,056 5,184
Deferred income taxes (1) 30,421
Changes in operating assets and liabilities:    
Accounts receivable, net (9,131) 7,603
Other receivables (6,224) 17,645
Inventory (21,170) (5,998)
Prepaid expenses and other assets (672) (10,071)
Accounts payable, net 14,204 (5,569)
Accrued expenses and other liabilities 5,618 10,564
Income taxes payable (227) (5,073)
Net cash provided by (used in) operating activities (5,317) 10,082
Cash flows from investing activities:    
Purchases of property, plant and equipment (5,082) (6,008)
Proceeds from sales and maturities of available-for-sale investments 86,145 38,561
Purchases of available-for-sale investments (42,641) (37,223)
Acquisition of note receivable (523)  
Life insurance proceeds received   1,000
Acquisition of business   13
Net cash provided by (used in) investing activities 37,899 (3,657)
Cash flows from financing activities:    
Dividend payments (12,993) (12,908)
Repayment of bonds payable (24,600)  
Proceeds from stock option exercises   526
Purchases of treasury stock   (184)
Net cash used in financing activities (37,593) (12,566)
Net decrease in cash, cash equivalents and restricted cash (5,011) (6,141)
Effect of exchange rate changes 2,641 (2,956)
Cash, cash equivalents and restricted cash, beginning of period 73,773 105,504
Cash, cash equivalents and restricted cash, end of period 71,403 96,407
Supplemental disclosure of non-cash investing activities:    
Purchases of property, plant and equipment included in accounts payable $ 442 $ 135
v3.20.2
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 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 Condensed Consolidated Balance Sheet as of December 31, 2019 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 multi-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 September 30, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the allowance for doubtful accounts, current estimated credit losses, stock-based compensation, excess and obsolete inventory reserves, 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 condensed consolidated financial statements as of and for the three and nine month periods ended September 30, 2020 resulting from these assessments, future conditions related to 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, 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 reserve 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 its excess and obsolete inventory reserve and cost of goods sold. In addition, the Company 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 for the nine months ended September 30, 2019 to correctly reflect the $1.0 million insurance recovery as a cash inflow from investing activities. Management determined that these misstatements were not material to any of its previously issued financial statements on both a quantitative and qualitative basis.

During the first quarter of 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, which clarifies that 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 Accounting Standards Codifications (“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 19 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 Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019. There was no 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

 

 

There was no impact upon adoption of ASU 2018-15 on the Condensed Consolidated Statement of Loss for the three and nine months ended September 30, 2019 and the Condensed Consolidated Statement of Cash Flows for nine months ended September 30, 2019 as outlined in the following tables:

 

 

 

Three months ended September 30, 2019

 

(In thousands)

 

Pre-Adoption

 

 

Effect of Adoption

 

 

As Presented Now

 

Condensed Consolidated Statement of Loss

 

 

 

 

 

 

 

 

 

 

 

 

  Net loss

 

$

(46,123

)

 

$

 

 

$

(46,123

)

 

 

 

Nine months ended September 30, 2019

 

(In thousands)

 

Pre-Adoption

 

 

Effect of Adoption

 

 

As Presented Now

 

Condensed Consolidated Statement of Loss

 

 

 

 

 

 

 

 

 

 

 

 

  Net loss

 

$

(41,358

)

 

$

 

 

$

(41,358

)

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

  Net cash provided by operating activities

 

$

10,082

 

 

$

 

 

$

10,082

 

 

The following table presents the capitalized implementation costs incurred with hosting arrangements, included in other assets on the Condensed Consolidated Balance Sheet, as of September 30, 2020:

 

(In thousands)

 

September 30, 2020

 

Implementation costs - hosting arrangements

 

$

10,455

 

Less: accumulated amortization

 

 

 

Implementation costs - hosting arrangements, net

 

$

10,455

 

 

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. The Company early adopted ASU 2019-12 on April 1, 2020, which was applied on a prospective basis as if the Company adopted the standard on January 1, 2020. The Company early adopted the standard to take advantage of the simplification of rules for income taxes on intra-period tax allocations. Specifically, the adoption of this standard resulted in the recognition of approximately $0.1 million of tax benefit in other comprehensive income (loss), that otherwise would have been recognized in continuing operations had the intra-period tax allocation been completed. There were no other impacts from this standard on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income (Loss) or Condensed Consolidated Statements of Cash Flows.

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.

v3.20.2
Cash, Cash Equivalents and Restricted Cash
9 Months Ended
Sep. 30, 2020
Cash And Cash Equivalents [Abstract]  
Cash, Cash Equivalents and Restricted Cash

2. CASH, CASH EQUIVALENTS AND RESTRICTED CASH

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Condensed Consolidated Statement of Cash Flows:

 

(In thousands)

 

September 30, 2020

 

Cash and cash equivalents

 

$

71,081

 

Restricted cash

 

 

322

 

Cash, cash equivalents and restricted cash

 

$

71,403

 

The Company did not have any restricted cash as of December 31, 2019.

See Note 18 for additional information regarding restricted cash.

v3.20.2
Revenue
9 Months Ended
Sep. 30, 2020
Revenue From Contract With Customer [Abstract]  
Revenue

3. REVENUE

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

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

Sales by Category

 

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

 

The following tables disaggregate revenue by reportable segment and revenue category for the three and nine months ended September 30, 2020 and 2019:

 

 

 

Three Months Ended

 

 

 

September 30, 2020

 

 

September 30, 2019

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

71,919

 

 

$

13,504

 

 

$

85,423

 

 

$

48,902

 

 

$

16,212

 

 

$

65,114

 

Subscriber Solutions & Experience

 

 

40,843

 

 

 

2,282

 

 

 

43,125

 

 

 

40,382

 

 

 

2,094

 

 

 

42,476

 

Traditional & Other Products

 

 

2,467

 

 

 

2,128

 

 

 

4,595

 

 

 

4,734

 

 

 

1,768

 

 

 

6,502

 

Total

 

$

115,229

 

 

$

17,914

 

 

$

133,143

 

 

$

94,018

 

 

$

20,074

 

 

$

114,092

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2020

 

 

September 30, 2019

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

194,695

 

 

$

39,470

 

 

$

234,165

 

 

$

230,837

 

 

$

43,476

 

 

$

274,313

 

Subscriber Solutions & Experience

 

 

118,907

 

 

 

6,790

 

 

 

125,697

 

 

 

113,545

 

 

 

6,186

 

 

 

119,731

 

Traditional & Other Products

 

 

10,322

 

 

 

6,197

 

 

 

16,519

 

 

 

14,625

 

 

 

5,605

 

 

 

20,230

 

Total

 

$

323,924

 

 

$

52,457

 

 

$

376,381

 

 

$

359,007

 

 

$

55,267

 

 

$

414,274

 

 

Revenue allocated to remaining performance obligations represents contract revenue that have not yet been recognized for contracts with a duration of greater than one year. As of September 30, 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 that we are entitled to invoice, which correspond to the value of completed performance obligations to date. The amount related to these performance obligations was $16.5 million and $13.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company expects to recognize 59% of the $16.5 million as of September 30, 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)

 

September 30, 2020

 

 

December 31, 2019

 

Accounts receivable, net

 

$

100,223

 

 

$

90,531

 

Contract assets(1)

 

$

1,015

 

 

$

2,812

 

Unearned revenue

 

$

13,379

 

 

$

11,963

 

Non-current unearned revenue

 

$

6,694

 

 

$

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, $1.5 million and $1.2 million were recognized as revenue during the three months ended September 30, 2020 and 2019 and $9.6 million and $11.7 million were recognized as revenue during the nine months ended September 30, 2020 and 2019, respectively.

v3.20.2
Income Taxes
9 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

4. INCOME TAXES

Our effective tax rate decreased from an expense of 150.6% of pre-tax loss for the three months ended September 30, 2019 to an expense of 9.3% of pre-tax income for the three months ended September 30, 2020 and decreased from an expense of 197.1% of pre-tax loss for the nine months ended September 30, 2019 to a benefit of 36.8% of pre-tax loss for the nine months ended September 30, 2020. The change in the effective tax rate for the three months ended September 30, 2020 was impacted by tax expense in our international operations, offset by additional changes in the valuation allowance related to our domestic operations of $1.0 million and by additional benefits recognized during the quarter of $0.4 million as a result of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act signed into law on March 27, 2020 in conjunction with the Internal Revenue Service’s release of its final Global Intangible Low Tax Income (“GILTI”) regulations on July 9th, 2020. The change in the effective tax rate for the three and nine months ended September 30, 2019 was primarily driven by the establishment of the valuation allowance against our domestic deferred tax assets in the amount of $37.1 million, with tax expense being offset by a 7.1% rate reduction related to a transfer pricing study completed during the second quarter of 2019 that resulted in the assignment of operating expenditures to specific company locations, and the effective income tax rates among the respective jurisdictions. The decrease in the effective tax rate for the nine months ended September 30, 2020 was primarily driven by a tax benefit of $7.8 million recognized during the nine months ended September 30, 2020 as a result of the CARES Act, 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. An increase in the valuation allowance against our domestic deferred tax assets was recorded in the amount of $2.6 million during the nine months ended September 30, 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 September 30, 2020, the Company had deferred tax assets totaling $59.1 million, and a valuation allowance totaling $51.2 million had been established against those deferred tax assets. The remaining $7.9 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 September 30, 2020 and December 31, 2019 is as follows:

 

 

 

September 30, 2020

 

(In thousands)

 

Deferred Tax Assets

 

 

Valuation Allowance

 

 

Deferred Tax Assets, net

 

Domestic

 

$

49,212

 

 

$

(49,212

)

 

$

 

International

 

 

9,892

 

 

 

(2,027

)

 

 

7,865

 

Total

 

$

59,104

 

 

$

(51,239

)

 

$

7,865

 

 

 

 

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

 

 

v3.20.2
Pension Benefit Plan
9 Months Ended
Sep. 30, 2020
Compensation And Retirement Disclosure [Abstract]  
Pension Benefit Plan

5. 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 and nine months ended September 30, 2020 and 2019:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

 

$

325

 

 

$

366

 

 

$

942

 

 

$

1,109

 

Interest cost

 

 

113

 

 

 

158

 

 

 

329

 

 

 

479

 

Expected return on plan assets

 

 

(429

)

 

 

(346

)

 

 

(1,246

)

 

 

(1,049

)

Amortization of actuarial losses

 

 

248

 

 

 

198

 

 

 

720

 

 

 

600

 

Net periodic pension cost

 

$

257

 

 

$

376

 

 

$

745

 

 

$

1,139

 

 

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).

v3.20.2
Stock-Based Compensation
9 Months Ended
Sep. 30, 2020
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Stock-Based Compensation

6. 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 and nine months ended September 30, 2020 and 2019:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Stock-based compensation expense included in cost of sales

 

$

101

 

 

$

83

 

 

$

303

 

 

$

272

 

Selling, general and administrative expense

 

 

953

 

 

 

1,142

 

 

 

2,999

 

 

 

2,867

 

Research and development expense

 

 

556

 

 

 

646

 

 

 

1,754

 

 

 

2,045

 

Stock-based compensation expense included in operating expenses

 

 

1,509

 

 

 

1,788

 

 

 

4,753

 

 

 

4,912

 

Total stock-based compensation expense

 

 

1,610

 

 

 

1,871

 

 

 

5,056

 

 

 

5,184

 

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

 

 

(384

)

 

 

(446

)

 

 

(1,205

)

 

 

(1,235

)

Total stock-based compensation expense, net of tax

 

$

1,226

 

 

$

1,425

 

 

$

3,851

 

 

$

3,949

 

 

PSUs, RSUs and Restricted Stock

 

The following table summarizes PSUs, RSUs and restricted stock outstanding as of December 31, 2019 and September 30, 2020 and the changes that occurred during the nine months ended September 30, 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

 

 

399

 

 

$

8.21

 

PSUs, RSUs and restricted stock vested

 

 

(15

)

 

$

12.76

 

PSUs, RSUs and restricted stock forfeited

 

 

(586

)

 

$

18.24

 

Unvested PSUs, RSUs and restricted stock outstanding, September 30, 2020

 

 

1,689

 

 

$

11.83

 

 

During the nine months ended September 30, 2020, the Company issued 0.3 million performance-based PSUs under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (the “2015 Employee Plan”) 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. Subject to the grantee’s continued employment, the grantee has the ability to earn shares in a range of 0% to 142.8% of the awarded number of PSUs based on the achievement of a defined performance target at the end of a three-year period. If the Company achieves the performance target at the end of the first or second year during the vesting period, the grantee will be entitled to the target number of performance shares, which will not be issued until the end of the three-year period. Equity-based compensation expense with respect to these awards will be adjusted over the vesting period to reflect the probability of achievement of the performance target defined in the award agreements.

 

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

As of September 30, 2020, total unrecognized compensation expense related to unvested market-based PSUs, RSUs and restricted stock was approximately $10.6 million, which will be recognized over the remaining weighted-average period of 2.3 years. In addition, there was $2.3 million of unrecognized compensation expense related to unvested 2020 performance-based PSUs, which will be recognized over the remaining requisite service period of 2.3 years if achievement of the performance obligation becomes probable. Unrecognized compensation expense will be adjusted for actual forfeitures.


At the annual meeting of stockholders held on May 13, 2020, the Company’s stockholders approved, upon recommendation of the Board of Directors, the adoption of the ADTRAN, Inc. 2020 Employee Stock Incentive Plan (the “2020 Employee Plan”) as well as the ADTRAN, Inc. 2020 Directors Stock Plan (the “2020 Directors Plan”). No additional awards will be granted under the 2015 Employee Plan or the 2010 Directors Stock Plan subsequent to the stockholders’ approval of these new stock plans. Outstanding awards granted under the 2015 Employee Plan and the 2010 Directors Stock Plan will remain subject to the terms of such plans, and shares underlying awards granted under such plans that are cancelled or forfeited will be available for issuance under the 2020 Employee Plan or the 2020 Directors Plan, as applicable.

 

Under the 2020 Employee Plan, the Company is authorized to issue 2.8 million shares of common stock to certain employees, key service providers and advisors through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs and restricted stock, any of which may be subject to performance-based conditions. Stock options, RSUs and restricted stock granted under the 2020 Employee Plan reduce the shares authorized for issuance under the 2020 Employee Plan by one share of common stock for each share underlying the award. Forfeitures, cancellations or expirations of awards granted under the 2015 Employee Plan increase the shares authorized for issuance under the 2020 Employee Plan, with forfeitures, cancellations or expirations of RSUs and restricted stock increasing the shares authorized for issuance by 2.5 shares of common stock for each share underlying the award. Forfeitures, cancellations or expirations of stock options from the 2015 Employee Plan increase the shares authorized for issuance under the 2020 Employee Plan by one share of common stock for each share underlying the award. RSUs and restricted stock granted under the 2020 Employee Plan will typically vest pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date. Stock options granted under the 2020 Employee Plan will typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date and have a ten-year contractual term.

 

Under the 2020 Directors Plan, the Company is authorized to issue 0.4 million shares of common stock through stock options, restricted stock and RSUs to non-employee directors. Stock awards issued under the 2020 Directors Plan typically will become vested in full on the first anniversary of the grant date. Stock options issued under the 2020 Directors Plan will have a ten-year contractual term. Stock options, restricted stock and RSUs granted under the 2020 Directors Plan reduce the shares authorized for issuance under the 2020 Directors Plan by one share of common stock for each share underlying the award. Forfeitures, cancellations and expirations of awards granted under the 2010 Directors Stock Plan increase the shares authorized for issuance under the 2020 Directors Plan by one share of common stock for each share underlying the award.

As of September 30, 2020, 3.6 million shares, including forfeitures to date under the 2015 Employee Plan and the 2010 Directors Stock Plan, were available for issuance under stockholder-approved equity plans.

Stock Options

The following table summarizes stock options outstanding as of December 31, 2019 and September 30, 2020 and the changes that occurred during the nine months ended September 30, 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

 

 

(352

)

 

$

21.48

 

 

 

 

 

 

 

 

 

Stock options outstanding, September 30, 2020

 

 

3,220

 

 

$

22.94

 

 

 

2.7

 

 

$

 

Stock options exercisable, September 30, 2020

 

 

3,217

 

 

$

22.95

 

 

 

2.7

 

 

$

 

 

As of September 30, 2020, total unrecognized compensation expense related to unvested stock options was approximately $1 thousand, which will be recognized over the remaining weighted-average period of 0.1 years. Unrecognized compensation expense will be adjusted for actual forfeitures.

There were no stock options granted during the three and nine months ended September 30, 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 September 30, 2020. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock and was zero as of September 30, 2020. The total pre-tax intrinsic value of options exercised during the nine months ended September 30, 2020 was zero.

v3.20.2
Investments
9 Months Ended
Sep. 30, 2020
Investments Debt And Equity Securities [Abstract]  
Investments

7. INVESTMENTS

Debt Securities and Other Investments

As of September 30, 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

 

$

12,861

 

 

$

149

 

 

$

 

 

$

13,010

 

Municipal fixed-rate bonds

 

 

3,093

 

 

 

32

 

 

 

(1

)

 

 

3,124

 

Asset-backed bonds

 

 

8,472

 

 

 

115

 

 

 

 

 

 

8,587

 

Mortgage/Agency-backed bonds

 

 

10,964

 

 

 

127

 

 

 

(11

)

 

 

11,080

 

U.S. government bonds

 

 

7,096

 

 

 

174

 

 

 

 

 

 

7,270

 

Foreign government bonds

 

 

1,032