ADTRAN INC, 10-K filed on 2/28/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Feb. 15, 2019
Jun. 30, 2018
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol ADTN    
Entity Registrant Name ADTRAN INC    
Entity Central Index Key 0000926282    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Filer Category Large Accelerated Filer    
Entity Shell Company false    
Entity Emerging Growth Company false    
Entity Small Business false    
Entity Common Stock, Shares Outstanding   47,777,043  
Entity Public Float     $ 704,932,782
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current Assets    
Cash and cash equivalents $ 105,504 $ 86,433
Short-term investments 3,246 16,129
Accounts receivable, less allowance for doubtful accounts of $128 and $— at December 31, 2018 and 2017, respectively 99,385 144,150
Other receivables 36,699 26,578
Inventory, net 99,848 122,542
Prepaid expenses and other current assets 10,744 17,282
Total Current Assets 355,426 413,114
Property, plant and equipment, net 80,635 85,079
Deferred tax assets, net 37,187 23,428
Goodwill 7,106 3,492
Intangibles, net 33,183 4,661
Other assets 5,668 9,064
Long-term investments 108,822 130,256
Total Assets 628,027 669,094
Current Liabilities    
Accounts payable 61,054 60,632
Unearned revenue 17,940 13,070
Accrued expenses 11,746 13,232
Accrued wages and benefits 14,752 15,948
Income tax payable, net 12,518 3,936
Total Current Liabilities 118,010 106,818
Non-current unearned revenue 5,296 4,556
Other non-current liabilities 33,842 34,209
Bonds payable 24,600 25,600
Total Liabilities 181,748 171,183
Commitments and contingencies (see Note 15)
Stockholders' Equity    
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,751 shares outstanding at December 31, 2018 and 79,652 shares issued and 48,485 shares outstanding at December 31, 2017 797 797
Additional paid-in capital 267,670 260,515
Accumulated other comprehensive loss (14,416) (3,295)
Retained earnings 883,975 922,178
Less treasury stock at cost: 31,901 and 31,167 shares at December 31, 2018 and 2017, respectively (691,747) (682,284)
Total Stockholders' Equity 446,279 497,911
Total Liabilities and Stockholders' Equity $ 628,027 $ 669,094
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - USD ($)
Dec. 31, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts $ 128,000 $ 0
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 47,751,000 48,485,000
Treasury stock, shares 31,901,000 31,167,000
v3.10.0.1
Consolidated Statements of Income (Loss) - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Sales      
Total Sales $ 529,277 $ 666,900 $ 636,781
Cost of Sales      
Total Cost of Sales 325,712 363,265 345,451
Gross Profit 203,565 303,635 291,330
Selling, general and administrative expenses 124,440 135,583 131,848
Research and development expenses 124,547 130,666 124,909
Operating Income (Loss) (45,422) 37,386 34,573
Interest and dividend income 4,026 4,380 3,918
Interest expense (533) (556) (572)
Net investment gain (loss) (4,050) 4,685 5,923
Other income (expense), net 1,286 (1,208) (489)
Gain on bargain purchase of a business 11,322   3,542
Income (Loss) before (Provision) Benefit for Income Taxes (33,371) 44,687 46,895
(Provision) benefit for income taxes 14,029 (20,847) (11,666)
Net Income (Loss) $ (19,342) $ 23,840 $ 35,229
Weighted average shares outstanding – basic 47,880 48,153 48,724
Weighted average shares outstanding – diluted 47,880 48,699 48,949
Earnings (loss) per common share – basic $ (0.40) $ 0.50 $ 0.72
Earnings (loss) per common share – diluted $ (0.40) $ 0.49 $ 0.72
Product [Member]      
Sales      
Total Sales $ 458,232 $ 540,396 $ 525,502
Cost of Sales      
Total Cost of Sales 278,929 279,563 270,705
Service [Member]      
Sales      
Total Sales 71,045 126,504 111,279
Cost of Sales      
Total Cost of Sales $ 46,783 $ 83,702 $ 74,746
v3.10.0.1
Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement Of Income And Comprehensive Income [Abstract]      
Net Income (Loss) $ (19,342) $ 23,840 $ 35,229
Other Comprehensive Income (Loss), net of tax      
Net unrealized gains (losses) on available-for-sale securities (3,130) 2,163 (1,528)
Defined benefit plan adjustments (3,755) 731 (1,122)
Foreign currency translation (4,236) 5,999 (569)
Other Comprehensive Income (Loss), net of tax (11,121) 8,893 (3,219)
Comprehensive Income (Loss), net of tax $ (30,463) $ 32,733 $ 32,010
v3.10.0.1
Consolidated Statements of Changes in Stockholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Loss [Member]
Beginning Balance at Dec. 31, 2015 $ 480,160 $ 797 $ 246,879 $ 906,772 $ (665,319) $ (8,969)
Beginning Balance, Shares at Dec. 31, 2015   79,652        
Net income (loss) 35,229     35,229    
Other comprehensive income (loss), net of tax (3,219)         (3,219)
Dividend payments (17,583)     (17,583)    
Dividends accrued on unvested restricted stock units (48)     (48)    
Stock options exercised 4,717     (1,499) 6,216  
PSUs, RSUs and restricted stock vested (142)   (142) (929) 929  
Purchase of treasury stock (25,817)       (25,817)  
Income tax effect of stock compensation arrangements (475)   (475)      
Stock-based compensation expense 6,695   6,695      
Ending Balance at Dec. 31, 2016 479,517 $ 797 252,957 921,942 (683,991) (12,188)
Ending Balance, Shares at Dec. 31, 2016   79,652        
Net income (loss) 23,840     23,840    
Other comprehensive income (loss), net of tax 8,893         8,893
Dividend payments (17,368)     (17,368)    
Dividends accrued on unvested restricted stock units (37)     (37)    
Stock options exercised 13,412     (2,827) 16,239  
PSUs, RSUs and restricted stock vested (441)     (3,257) 2,816  
Purchase of treasury stock (17,348)       (17,348)  
Income tax effect of stock compensation arrangements 10   125 (115)    
Stock-based compensation expense 7,433   7,433      
Ending Balance at Dec. 31, 2017 $ 497,911 $ 797 260,515 922,178 (682,284) (3,295)
Ending Balance, Shares at Dec. 31, 2017 79,652 79,652        
Net income (loss) $ (19,342)     (19,342)    
ASU adoption (3,220)          
ASU adoption | ASU 2014-09 [member] 278     278    
ASU adoption | ASU 2016-01 [Member] 3,220     3,220    
Other comprehensive income (loss), net of tax (11,121)         (11,121)
Dividend payments (17,267)     (17,267)    
Dividends accrued on unvested restricted stock units (7)     (7)    
Stock options exercised 1,483     (603) 2,086  
PSUs, RSUs and restricted stock vested (499)     (4,482) 3,983  
Purchase of treasury stock (15,532)       (15,532)  
Stock-based compensation expense 7,155   7,155      
Ending Balance at Dec. 31, 2018 $ 446,279 $ 797 $ 267,670 $ 883,975 $ (691,747) $ (14,416)
Ending Balance, Shares at Dec. 31, 2018 79,652 79,652        
v3.10.0.1
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical) - shares
shares in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Stock options exercised, shares 96 742 283
PSUs, RSUs and restricted stock vested, shares 217 154 42
Treasury Stock [Member]      
Purchase of treasury stock, shares 1,001 856 1,411
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities:      
Net income (loss) $ (19,342) $ 23,840 $ 35,229
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 15,891 15,692 14,407
Amortization of net premium (discount) on available-for-sale investments (50) 425 643
Net (gain) loss on long-term investments 4,050 (4,685) (5,923)
Net (gain) loss on disposal of property, plant and equipment 67 (145) 22
Gain on bargain purchase of a business (11,322)   (3,542)
Stock-based compensation expense 7,155 7,433 6,695
Deferred income taxes (17,257) 14,073 (2,685)
Change in operating assets and liabilities:      
Accounts receivable, net 49,200 (49,103) (21,302)
Other receivables (8,522) (10,222) 4,101
Inventory 24,192 (15,518) (10,887)
Prepaid expenses and other assets 10,727 (4,830) (7,108)
Accounts payable (3,799) (17,742) 26,722
Accrued expenses and other liabilities (3,226) (5,455) 8,792
Income taxes payable 7,690 3,858 (3,162)
Net cash provided by (used in) operating activities 55,454 (42,379) 42,002
Cash flows from investing activities:      
Purchases of property, plant and equipment (8,110) (14,720) (21,441)
Proceeds from disposals of property, plant and equipment   151  
Proceeds from sales and maturities of available-for-sale investments 153,649 173,752 225,075
Purchases of available-for-sale investments (123,209) (93,141) (209,172)
Acquisition of business, net of cash acquired (22,045)   (943)
Net cash provided by (used in) investing activities 285 66,042 (6,481)
Cash flows from financing activities:      
Proceeds from stock option exercises 1,483 13,412 4,717
Purchases of treasury stock (15,532) (17,348) (25,817)
Dividend payments (17,267) (17,368) (17,583)
Payments on long-term debt (1,100) (1,100) (1,100)
Net cash used in financing activities (32,416) (22,404) (39,783)
Net increase (decrease) in cash and cash equivalents 23,323 1,259 (4,262)
Effect of exchange rate changes (4,252) 5,279 (393)
Cash and cash equivalents, beginning of year 86,433 79,895 84,550
Cash and cash equivalents, end of year 105,504 86,433 79,895
Supplemental disclosure of cash flow information      
Cash paid during the year for interest 534 555 575
Cash paid during the year for income taxes 4,104 2,988 18,689
Supplemental disclosure of non-cash investing activities      
Purchases of property, plant and equipment included in accounts payable 62 $ 408 $ 2,103
Contingent payments $ 1,230    
v3.10.0.1
Nature of Business and Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Nature of Business and Summary of Significant Accounting Policies

Note 1 – Nature of Business and Summary of Significant Accounting Policies

At ADTRAN, Inc., we believe amazing things happen when people connect. From the cloud edge to the subscriber edge, we help service providers around the world manage and scale services that connect people, places and things to advance human progress. Whether rural or urban, domestic or international, telco or cable, enterprise or residential—ADTRAN solutions optimize existing technology infrastructures and create new, multi-gigabit platforms that leverage cloud economics, data analytics, machine learning and open ecosystems—the future of global networking.

Principles of Consolidation

The consolidated financial statements include ADTRAN and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (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. Our more significant estimates include obsolete and excess inventory reserves, warranty reserves, customer rebates, determination and accrual of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues and network installations, estimated income tax provision and income tax contingencies, fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated pension liability, fair value of investments, and evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions, and determined the risk of material financial loss due to the exposure of such credit risk to be minimal. As of December 31, 2018, $102.2 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $25.6 million, compared to an estimated fair value of $25.4 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.

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

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

Accounts Receivable

We record accounts receivable at net realizable value. Prior to establishing payment terms for a new customer, we evaluate the credit risk of the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection experience and other financial factors. At December 31, 2018, single customers comprising more than 10% of our total accounts receivable balance included three customers, which accounted for 45.8% of our total accounts receivable. As of December 31, 2017, single customers comprising more than 10% of our total accounts receivable balance included two customers, which accounted for 63.8% of our total accounts receivable.

We regularly review the need to maintain an allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events and our historical experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, we may be required to record an allowance for doubtful accounts. If circumstances change with regard to individual receivable balances that have previously been determined to be uncollectible (and for which a specific reserve has been established), a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was $0.1 million and zero as of December 31, 2018 and December 31, 2017, respectively.

Other Receivables

Other receivables are comprised primarily of lease receivables, amounts due from subcontract manufacturers for product component transfers, unbilled receivables, investment loan, amounts due from various jurisdictions for value-added tax, and income tax receivable.

Inventory

Inventory is carried at the lower of cost and net realizable value, with cost being determined using the first-in, first-out method. Standard costs for material, labor and manufacturing overhead are used to value inventory. Standard costs are updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period. We establish reserves for estimated excess, obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand, market conditions and life. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserve. See Note 7 of Notes to Consolidated Financial Statements for additional information.

Property, Plant and Equipment

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

Intangible Assets

Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is recorded over the estimated useful lives of the respective assets, which is two to 14 years. See Note 10 of Notes to Consolidated Financial Statements for additional information.

Impairment of Long-Lived Assets and Intangibles

We review long-lived assets used in operations and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no impairment losses for long-lived assets or intangible assets recognized during the years ended December 31, 2018, 2017 or 2016.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired. We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in 2018, we concluded that it was not necessary to perform the two-step impairment test. There were no impairment losses on goodwill recognized during the years ended December 31, 2018, 2017 and 2016.

Liability for Warranty

Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time revenue is recognized based on our historical return rate and estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $8.6 million and $9.7 million as of December 31, 2018 and 2017, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets. During 2017, we recorded a reduction in warranty expense related to a settlement with a third party supplier for a defective component, the impact of which is reflected in the following table.

A summary of warranty expense and write-off activity for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

Year Ended December 31,

 

2018

 

 

2017

 

 

2016

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

9,724

 

 

$

8,548

 

 

$

8,739

 

Plus: Amounts charged to cost and expenses

 

 

7,392

 

 

 

6,951

 

 

 

8,561

 

Less: Deductions

 

 

(8,493

)

 

 

(5,775

)

 

 

(8,752

)

Balance at end of period

 

$

8,623

 

 

$

9,724

 

 

$

8,548

 

Pension Benefit Plan Obligations

We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future expenses and obligations. Our net pension liability totaled $13.1 million and $8.3 million at December 31, 2018 and 2017, respectively. This liability is included in other non-current liabilities in the accompanying consolidated balance sheets.

Stock-Based Compensation

We have two Board and stockholder-approved stock incentive plans from which stock options, performance stock units (PSUs), restricted stock units (RSUs) and restricted stock are available for grant to employees and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. All of our outstanding stock option awards are classified as equity awards.

Stock-based compensation expense recognized for the years ended December 31, 2018, 2017 and 2016 was approximately $7.2 million, $7.4 million and $6.7 million, respectively. As of December 31, 2018, total compensation cost related to non-vested stock options, PSUs, RSUs and restricted stock not yet recognized was approximately $18.6 million, which is expected to be recognized over an average remaining recognition period of 2.9 years. In addition, there was $9.1 million of unrecognized compensation expense related to unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period if achievement of the performance obligation becomes probable. See Note 4 of Notes to Consolidated Financial Statements for additional information.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, enhancement of current products and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $124.5 million, $130.7 million and $124.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Other Comprehensive Income

Other comprehensive income consists of unrealized gains (losses) on available-for-sale debt securities, unrealized gains (losses) on cash flow hedges, reclassification adjustments for amounts included in net income related to impairments of available-for-sale securities, realized gains (losses) on debt securities, realized gains (losses) on cash flow hedges, and amortization of actuarial gains (losses) related to our defined benefit plan, defined benefit plan adjustments, and foreign currency translation adjustments.

The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2018, 2017 and 2016:

 

(In thousands)

 

Unrealized

Gains (Losses)

on Available-

for-Sale

Securities

 

 

Unrealized Gains (Losses) on Cash Flow Hedges

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

Total

 

Balance at December 31, 2015

 

$

1,932

 

 

$

 

 

$

(3,895

)

 

$

(7,006

)

 

$

(8,969

)

Other comprehensive income (loss) before

   reclassifications

 

 

1,515

 

 

 

 

 

 

(1,229

)

 

 

(569

)

 

 

(283

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(3,043

)

 

 

 

 

 

107

 

 

 

 

 

 

(2,936

)

Balance at December 31, 2016

 

 

404

 

 

 

 

 

 

(5,017

)

 

 

(7,575

)

 

 

(12,188

)

Other comprehensive income (loss) before

   reclassifications

 

 

5,020

 

 

 

(619

)

 

 

451

 

 

 

5,999

 

 

 

10,851

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

(2,857

)

 

 

619

 

 

 

280

 

 

 

 

 

 

(1,958

)

Balance at December 31, 2017

 

 

2,567

 

 

 

 

 

 

(4,286

)

 

 

(1,576

)

 

 

(3,295

)

Other comprehensive income (loss) before

   reclassifications

 

 

685

 

 

 

 

 

 

(3,890

)

 

 

(4,236

)

 

 

(7,441

)

Amounts reclassified to retained earnings (1)

 

 

(3,220

)

 

 

 

 

 

 

 

 

 

 

 

(3,220

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(595

)

 

 

 

 

 

135

 

 

 

 

 

 

(460

)

Balance at December 31, 2018

 

$

(563

)

 

$

 

 

$

(8,041

)

 

$

(5,812

)

 

$

(14,416

)

 

(1)

With the adoption of ASU 2016-01, the unrealized gains on our equity investments were reclassified to retained earnings.  See Recently Issued Accounting Standards later in Note 1 for more information.

The following tables present the details of reclassifications out of accumulated other comprehensive income for the years ended December 31, 2018, 2017 and 2016:

 

(In thousands)

 

2018

Details about Accumulated Other Comprehensive

Loss Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Income

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

804

 

 

Net investment gain (loss)

Defined benefit plan adjustments – actuarial losses

 

 

(196

)

 

(1)

Total reclassifications for the period, before tax

 

 

608

 

 

 

Tax expense

 

 

(148

)

 

 

Total reclassifications for the period, net of tax

 

$

460

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 13 of Notes to Consolidated Financial Statements.

 

(In thousands)

 

2017

Details about Accumulated Other Comprehensive

Loss Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Income

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

4,864

 

 

Net investment gain (loss)

Impairment expense

 

 

(180

)

 

Net investment gain (loss)

Net losses on derivatives designated as hedging instruments

 

 

(897

)

 

Cost of sales

Defined benefit plan adjustments – actuarial losses

 

 

(406

)

 

(1)

Total reclassifications for the period, before tax

 

 

3,381

 

 

 

Tax expense

 

 

(1,423

)

 

 

Total reclassifications for the period, net of tax

 

$

1,958

 

 

 

 

 

(0)

Included in the computation of net periodic pension cost. See Note 13 of Notes to Consolidated Financial Statements.

 

(In thousands)

 

2016

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Income

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

5,408

 

 

Net investment gain (loss)

Impairment expense

 

 

(419

)

 

Net investment gain (loss)

Defined benefit plan adjustments – actuarial losses

 

 

(156

)

 

(1)

Total reclassifications for the period, before tax

 

 

4,833

 

 

 

Tax expense

 

 

(1,897

)

 

 

Total reclassifications for the period, net of tax

 

$

2,936

 

 

 

 

 

(0)

Included in the computation of net periodic pension cost. See Note 13 of Notes to Consolidated Financial Statements.

 

The following tables present the tax effects related to the change in each component of other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016:

 

 

 

2018

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

926

 

 

$

(241

)

 

$

685

 

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

 

 

(804

)

 

 

209

 

 

 

(595

)

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

 

 

(4,351

)

 

 

1,131

 

 

 

(3,220

)

Defined benefit plan adjustments

 

 

(5,638

)

 

 

1,748

 

 

 

(3,890

)

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

 

 

196

 

 

 

(61

)

 

 

135

 

Foreign currency translation adjustment

 

 

(4,236

)

 

 

 

 

 

(4,236

)

Total Other Comprehensive Income (Loss)

 

$

(13,907

)

 

$

2,786

 

 

$

(11,121

)

 

 

 

2017

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

8,230

 

 

$

(3,210

)

 

$

5,020

 

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

 

 

(4,684

)

 

 

1,827

 

 

 

(2,857

)

Unrealized gains (losses) on cash flow hedges

 

 

(897

)

 

 

278

 

 

 

(619

)

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

 

 

897

 

 

 

(278

)

 

 

619

 

Defined benefit plan adjustments

 

 

654

 

 

 

(203

)

 

 

451

 

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

 

 

406

 

 

 

(126

)

 

 

280

 

Foreign currency translation adjustment

 

 

5,999

 

 

 

 

 

 

5,999

 

Total Other Comprehensive Income (Loss)

 

$

10,605

 

 

$

(1,712

)

 

$

8,893

 

 

 

 

2016

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

2,484

 

 

$

(969

)

 

$

1,515

 

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

 

 

(4,989

)

 

 

1,946

 

 

 

(3,043

)

Defined benefit plan adjustments

 

 

(1,782

)

 

 

553

 

 

 

(1,229

)

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

 

 

156

 

 

 

(49

)

 

 

107

 

Foreign currency translation adjustment

 

 

(569

)

 

 

 

 

 

(569

)

Total Other Comprehensive Income (Loss)

 

$

(4,700

)

 

$

1,481

 

 

$

(3,219

)

 

Income Taxes

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

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

On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. As a result of the Act, we recognized an estimated expense of $11.9 million in the fourth quarter of 2017, of which $9.2 million related to the write-down of deferred tax assets and $2.7 million related to tax on unrepatriated foreign earnings. We calculated our best estimate of the impact of the Act in our 2017 year-end income tax provision, in accordance with Staff Accounting Bulletin No. 118, which was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed to finalize the accounting for certain income tax effects of the Act. Additional work to complete a more detailed analysis of historical foreign earnings, as well as the full impact relating to the write-down of deferred tax assets, was completed in the third quarter of 2018 and resulted in a tax benefit of $4.0 million.

Foreign Currency

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

Revenue Recognition

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

Accounting Policy under Topic 606

Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services to a customer and as performance obligations under the terms of the contract are satisfied. For transactions where there are multiple performance obligations, we account for individual products and services separately if they are distinct (if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales, value-added, and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of obtaining a contract are capitalized and amortized over the period that the related revenue is recognized if greater than one year. We have elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general, and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.

A portion of our products is sold to a non-exclusive distribution network of major technology distributors in the United States. These large organizations then distribute or provide fulfillment services to an extensive network of VARs and Sis. VARs and Sis may be affiliated with us as a channel partner, or they may purchase from the distributor in an unaffiliated fashion. Additionally, with certain limitations our distributors may return unused and unopened product for stock-balancing purposes when such returns are accompanied by offsetting orders for products of equal or greater value.

We participate in cooperative advertising and market development programs with certain customers. We use these programs to reimburse customers for certain forms of advertising, and in general, to allow our customers credits up to a specified percentage of their net purchases. Our costs associated with these programs are estimated and included in marketing expenses in our consolidated statements of income. We also participate in rebate programs to provide sales incentives for certain products. Our costs associated with these programs are estimated and accrued at the time of sale, and are recorded as a reduction of sales in our consolidated statements of income.

Accounting Policy under Topic 605

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

 

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and leases and unearned revenues related to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one month to five years. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to customers under contracts with terms up to ten years. When we defer revenue related to multiple-element contracts where we still have contractual obligations, we also defer the related costs. Current deferred costs are included in prepaid expenses and other assets and totaled $2.4 million and $11.4 million as of December 31, 2018 and 2017, respectively. Non-current deferred costs are included in other assets and totaled $0.8 million and $2.8 million as of December 31, 2018 and 2017, respectively.

Other Income (Expense), Net

Other income (expense), net, is comprised primarily of gains and losses on foreign currency transactions, net periodic pension costs, scrap raw material sales, investment account management fees, gains and losses on foreign exchange forward contracts and miscellaneous income and expense.

Earnings (Loss) per Share

Earnings (loss) per common share and earnings (loss) per common share assuming dilution, are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 16 of Notes to Consolidated Financial Statements for additional information.

Dividends

During 2018, 2017 and 2016, we paid shareholder dividends totaling $17.3 million, $17.4 million and $17.6 million, respectively. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and adequate levels of liquidity are maintained. The following table shows dividends paid to our shareholders in each quarter of 2018, 2017 and 2016.

 

Dividends per Common Share

 

 

 

2018

 

 

2017

 

 

2016

 

First Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Second Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Third Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Fourth Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

 

On January 23, 2019, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the close of business on February 7, 2019. The ex-dividend date was February 6, 2019 and the payment date was February 21, 2019. The quarterly dividend payment was $4.3 million.

Business Combinations

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

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on the balance sheet and to disclose key information about the entity’s leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarified certain aspects of ASU 2016-02, as well as, ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provides for an optional transition method that allows for the application of the legacy lease guidance, including its disclosure requirements, for the comparative periods presented in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the date of adoption. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

The Company adopted the new standard on January 1, 2019, the effective date of our initial application, using the optional transition method. The Company will not adjust the comparative period financial information prior to January 1, 2019 and will carry forward the legacy (ASC 840) disclosures for comparative periods. In addition, the Company elected the package of practical expedients which allows for companies to not reassess historical lease classifications and initial direct costs for existing leases. Additionally, the Company elected the practical expedients which allow the use of hindsight when determining the lease term, the short-term lease recognition exemption and the option to not separate lease and non-lease components. The adoption of this standard resulted in the recognition of a right-of-use asset and corresponding right-of-use liability on our consolidated balance sheet of less than 3% of total assets, mainly related to our operating leases for office space.  The adoption of this standard did not have a material impact on our consolidated statement of income or statement of cash flow.

 

The adoption of this standard from a lessor perspective did not have a material impact on the Company’s consolidated balance sheet, consolidated statement of income or statement of cash flow. Prior to adoption, all of our leases in which we are the lessor were classified as sales-types leases and will continue after adoption of the new standard. 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for financial instruments held at amortized cost. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, that clarifies receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard.  ASU 2016-13 and ASU 2018-19 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect ASU 2016-13 and ASU 2018-19 will have on our consolidated financial statements.

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

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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted ASU 2017-12 on January 1, 2019 and the adoption of this standard did not have a material impact on our consolidated financial statements as we currently do not have any hedging instruments.

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

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

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

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

During 2018, we adopted the following accounting standards, which had no material effect on our financial position, results of operations or cash flows:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identified implementation issues; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is intended to clarify the Codification and/or to correct unintended application of guidance. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We adopted ASU 2014-09 and the related ASUs on January 1, 2018 using the modified retrospective method, which was applied to all contracts on the date of initial adoption.

These ASUs primarily affected our network implementation service revenue performance obligations and contract costs. We are using the “output method” to measure network implementation services progress, which 1) accelerates revenue recognition for certain performance obligations related to service revenue arrangements that were previously deferred until customer acceptance and 2) requires capitalization and amortization of the incremental costs of obtaining a contract as described below. 

 

In connection with the adoption of the new revenue standard, effective January 1, 2018, we adopted ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers, with respect to capitalization and amortization of incremental costs of obtaining a contract. As a result, certain costs of obtaining a contract, including sales commissions, will be capitalized, as the guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided the costs are recoverable. The primary effect was the capitalization of certain sales commissions for our extended maintenance and support contracts in excess of one year and amortization of those costs over the period that the related revenue is recognized. Those costs that will be amortized within the next 12 months are included in prepaid expenses and other current assets and those costs that will be amortized after the next 12 months are included in other assets on the consolidated balance sheets.

The cumulative effect of the changes made to our Consolidated Balance Sheet on January 1, 2018 for the adoption of ASU 2014-09 and the related ASUs was as follows:

(In thousands)

 

Balance at

December 31, 2017

 

 

Adjustments due to ASU 2014-09

 

 

Balance at

January 1, 2018

 

Other receivables

 

$

26,578

 

 

$

374

 

 

$

26,952

 

Deferred tax assets, net

 

$

23,428

 

 

$

(96

)

 

$

23,332

 

Retained earnings

 

$

922,178

 

 

$

278

 

 

$

922,456

 

 

The effect of the adoption of ASU 2014-09 and the related ASUs on our financial statements was as follows:

 

 

 

As of  December 31, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Adoption of ASC 606

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

458,232

 

 

$

458,182

 

 

$

50

 

Services

 

$

71,045

 

 

$

67,329

 

 

$

3,716

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

278,929

 

 

$

278,904

 

 

$

25

 

Services

 

$

46,783

 

 

$

44,788

 

 

$

1,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before benefit for income taxes

 

$

(33,371

)

 

$

(35,117

)

 

$

1,746

 

Benefit for income taxes

 

$

14,029

 

 

$

14,763

 

 

$

(734

)

Net loss

 

$

(19,342

)

 

$

(20,354

)

 

$

1,012

 

 

 

 

As of  December 31, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Adoption of ASC 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables

 

$

36,699

 

 

$

32,933

 

 

$

3,766

 

Prepaid expenses and other current assets

 

$

10,744

 

 

$

12,739

 

 

$

(1,995

)

Inventory

 

$

99,848

 

 

$

99,873

 

 

$

(25

)

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Income tax payable

 

$

12,518

 

 

$

13,252

 

 

$

(734

)

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

883,975

 

 

$

882,963

 

 

$

1,012

 

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. Subsequently, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which issued technical corrections and improvements intended to clarify certain aspects of ASU 2016-01. ASU 2016-01 was effective beginning January 1, 2018 and we now recognize any changes in the fair value of certain equity investments in net income as prescribed by the new standard rather than in other comprehensive income. We adopted ASU 2016-01 on January 1, 2018 using the modified retrospective method, which resulted in a $3.2 million reclassification of net unrealized gains from accumulated other comprehensive income to opening retained earnings. ASU 2018-03 is effective for us with the interim period beginning after June 15, 2018. See Note 5 of Notes to Consolidated Financial Statements for additional information.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which clarifies how to classify cash receipts and cash payments on the statement of cash flows.  The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows.  We adopted ASU 2016-15 on January 1, 2018, which has been applied retrospectively.  The adoption of this guidance did not have a material effect on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. We adopted ASU 2017-07 on January 1, 2018. We retrospectively adopted the presentation of service cost separate from other components of net periodic pension costs. As a result, $0.4 million and $0.2 million have been reclassified from cost of sales, selling, general and administrative expenses, and research and development expense to other income (expense), net for the years ended December 31, 2017 and 2016, respectively.     

v3.10.0.1
Business Combinations
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Business Combinations

Note 2 – Business Combinations

On November 30, 2018, we acquired SmartRG, Inc., a provider of carrier-class, open-source connected home platforms and cloud services for broadband service providers for cash consideration. Together, ADTRAN Mosaic and SmartOS provide full end-to-end management and orchestration solutions from cloud edge to subscriber edge. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Subscriber Solutions & Experience category within the Network Solutions and Services & Support reportable segments.  

As of the acquisition date, we acquired accounts receivables with a fair value of $4.9 million all of which we estimate will be collected under the respective terms of each agreement.

Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which are dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones. The contingent payments are subject to arbitration and the final payouts are expected to occur during the first quarter of 2020. The minimum and maximum potential payment under the total of the contingent liabilities ranges from no payment to $1.5 million. As of December 31, 2018, the fair value of the contingent liability was re-assessed and was determined to be $1.2 million, based on the expected probable outcomes. No change in fair value was recognized.

An escrow in the amount of $2.8 million was set up at the acquisition date, to fund post-closing working capital settlements and to indemnify the Company from any inaccuracy or breach of representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to arbitration with final settlement expected during the fourth quarter of 2020.  The minimum and maximum potential release of funds to the seller ranges from no payment to $2.8 million.  

We have made preliminary allocations of the purchase price to the assets acquired and liabilities assumed based on estimated fair value assessments; however, we are still completing those assessments, including an analysis of the discounted cash flows. Once we finalize the fair values, we may have changes in the following areas: tangible and intangible assets, goodwill, commitments and contingencies, and deferred taxes. We recorded goodwill of $3.6 million during the year ended December 31, 2018. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and we have concluded that our valuation procedures and resulting measures were appropriate.

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

 

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

 

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

 

(In Thousands)

 

Sumitomo

 

 

SmartRG

 

Assets

 

 

 

 

 

 

 

 

Tangible assets acquired

 

$

1,006

 

 

$

8,594

 

Intangible assets

 

 

22,100

 

 

 

9,960

 

Goodwill

 

 

 

 

 

3,614

 

Total assets acquired

 

 

23,106

 

 

 

22,168

 

Liabilities

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

(3,978

)

 

 

(6,126

)

Total liabilities assumed

 

 

(3,978

)

 

 

(6,126

)

Total net assets

 

 

19,128

 

 

 

16,042

 

Gain on bargain purchase of a business, net of tax

 

 

(11,322

)

 

 

 

Total purchase price

 

$

7,806

 

 

$

16,042

 

 

Our consolidated income statements include the following revenue and net loss attributable to SmartRG and Sumitomo since the date of acquisition:

 

(In thousands)

 

March 19, 2018 to

December 31,

2018

 

Revenue

 

$

9,186

 

Net loss

 

$

(1,297

)

 

The details of the acquired intangible assets are as follows:

 

(In thousands)

 

Value

 

 

Life (years)

 

Customer relationships

 

$

15,190

 

 

3 – 12

 

Developed technology

 

 

7,400

 

 

 

7

 

Licensed technology

 

 

5,900

 

 

 

9

 

Supplier relationship

 

 

2,800