ADTRAN INC, 10-Q filed on 5/7/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
May 01, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Trading Symbol ADTN  
Entity Registrant Name ADTRAN INC  
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   47,809,152
v3.19.1
Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current Assets    
Cash and cash equivalents $ 109,119 $ 105,504
Short-term investments 31,290 3,246
Accounts receivable, less allowance for doubtful accounts of $82 and $128 at March 31, 2019 and December 31, 2018, respectively 99,032 99,385
Other receivables 34,583 36,699
Inventory, net 93,609 99,848
Prepaid expenses and other current assets 9,683 10,744
Total Current Assets 377,316 355,426
Property, plant and equipment, net 79,505 80,635
Deferred tax assets, net 36,891 37,187
Goodwill 6,982 7,106
Intangibles, net 31,817 33,183
Other assets 14,885 5,668
Long-term investments 85,227 108,822
Total Assets 632,623 628,027
Current Liabilities    
Accounts payable 60,116 60,054
Bonds payable 25,600 1,000
Unearned revenue 15,230 17,940
Accrued expenses 14,039 11,746
Accrued wages and benefits 15,105 14,752
Income tax payable, net 11,785 12,518
Total Current Liabilities 141,875 118,010
Non-current unearned revenue 4,514 5,296
Other non-current liabilities 42,687 33,842
Bonds payable   24,600
Total Liabilities 189,076 181,748
Commitments and contingencies (see Note 17)
Stockholders’ Equity    
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,777 shares outstanding at March 31, 2019 and 79,652 shares issued and 47,751 shares outstanding at December 31, 2018 797 797
Additional paid-in capital 269,529 267,670
Accumulated other comprehensive loss (14,885) (14,416)
Retained earnings 879,180 883,975
Less treasury stock at cost: 31,875 and 31,901 shares at March 31, 2019 and December 31, 2018, respectively (691,074) (691,747)
Total Stockholders’ Equity 443,547 446,279
Total Liabilities and Stockholders’ Equity $ 632,623 $ 628,027
v3.19.1
Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Allowance for doubtful accounts $ 82 $ 128
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares issued 79,652,000 79,652,000
Common stock, shares outstanding 47,777,000 47,751,000
Treasury stock, shares 31,875,000 31,901,000
v3.19.1
Consolidated Statements of Income (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Sales    
Total Sales $ 143,791 $ 120,806
Cost of Sales    
Total Cost of Sales 83,179 81,073
Gross Profit 60,612 39,733
Selling, general and administrative expenses 35,132 33,531
Research and development expenses 31,647 32,849
Operating Loss (6,167) (26,647)
Interest and dividend income 591 866
Interest expense (127) (132)
Net investment gain (loss) 5,926 (97)
Other income (expense), net 855 (57)
Gain on bargain purchase of a business, net   11,322
Income (Loss) Before Provision for Income Taxes 1,078 (14,745)
(Provision) benefit for income taxes (308) 3,931
Net Income (Loss) $ 770 $ (10,814)
Weighted average shares outstanding – basic 47,782 48,232
Weighted average shares outstanding – diluted 47,853 48,232
Earnings (loss) per common share – basic $ 0.02 $ (0.22)
Earnings (loss) per common share – diluted 0.02 (0.22)
Dividend per share $ 0.09 $ 0.09
Product [Member]    
Sales    
Total Sales $ 125,822 $ 105,253
Cost of Sales    
Total Cost of Sales 70,734 68,612
Service [Member]    
Sales    
Total Sales 17,969 15,553
Cost of Sales    
Total Cost of Sales $ 12,445 $ 12,461
v3.19.1
Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement Of Income And Comprehensive Income [Abstract]    
Net Income (Loss) $ 770 $ (10,814)
Other Comprehensive Loss, net of tax    
Net unrealized gains (losses) on available-for-sale securities 185 (3,412)
Defined benefit plan adjustments 121 62
Foreign currency translation (1,160) 842
Other Comprehensive Loss, net of tax (854) (2,508)
Comprehensive Loss, net of tax $ (84) $ (13,322)
v3.19.1
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Loss [Member]
Beginning Balance at Dec. 31, 2017 $ 497,911 $ 797 $ 260,515 $ 922,178 $ (682,284) $ (3,295)
Beginning Balance, Shares at Dec. 31, 2017   79,652        
Net income (loss) (10,814)     (10,814)    
Adoption of new accounting standards 3,499     3,499    
Other comprehensive loss, net of tax (2,508)         (2,508)
Dividend payments (4,367)     (4,367)    
Dividends accrued on unvested restricted stock units (2)     (2)    
Stock options exercised 369     (150) 519  
PSUs, RSUs and restricted stock vested       (733) 733  
Purchase of treasury stock (10,171)       (10,171)  
Stock-based compensation expense 1,819   1,819      
Ending Balance at Mar. 31, 2018 475,736 $ 797 262,334 909,611 (691,203) (5,803)
Ending Balance, Shares at Mar. 31, 2018   79,652        
Beginning Balance at Dec. 31, 2018 $ 446,279 $ 797 267,670 883,975 (691,747) (14,416)
Beginning Balance, Shares at Dec. 31, 2018 79,652 79,652        
Net income (loss) $ 770     770    
Adoption of new accounting standards 4     (381)   385
Other comprehensive loss, net of tax (854)         (854)
Dividend payments (4,301)     (4,301)    
Dividends accrued on unvested restricted stock units (18)     (18)    
PSUs, RSUs and restricted stock vested (8)     (865) 857  
Purchase 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 79,652        
v3.19.1
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities:    
Net income (loss) $ 770 $ (10,814)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation and amortization 4,496 3,614
Amortization of net premium on available-for-sale investments 6 42
Net (gain) loss on long-term investments (5,926) 97
Net (gain) loss on disposal of property, plant and equipment (6) 67
Gain on bargain purchase of a business   (11,322)
Stock-based compensation expense 1,859 1,819
Deferred income taxes 235 (1,877)
Changes in operating assets and liabilities:    
Accounts receivable, net 170 63,904
Other receivables 2,001 (6,598)
Inventory, net 5,974 3,368
Prepaid expenses and other assets 2,809 10,583
Accounts payable, net 166 (10,233)
Accrued expenses and other liabilities (2,355) 826
Income tax payable (487) 2,753
Net cash provided by operating activities 9,712 46,229
Cash flows from investing activities:    
Purchases of property, plant and equipment (1,872) (1,950)
Proceeds from sales and maturities of debt and equity investments 17,039 49,074
Purchases of debt and equity investments (15,318) (75,960)
Acquisition of business   (7,806)
Net cash used in investing activities (151) (36,642)
Cash flows from financing activities:    
Proceeds from stock option exercises   369
Purchases of treasury stock (184) (10,171)
Dividend payments (4,301) (4,367)
Net cash used in financing activities (4,485) (14,169)
Net increase (decrease) in cash and cash equivalents 5,076 (4,582)
Effect of exchange rate changes (1,461) 772
Cash and cash equivalents, beginning of period 105,504 86,433
Cash and cash equivalents, end of period 109,119 82,623
Supplemental disclosure of non-cash investing activities:    
Purchases of property, plant and equipment included in accounts payable $ 273 $ 95
v3.19.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (“ADTRAN” or the “Company”) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2018 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

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 statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 28, 2019 with the SEC.

Use of Estimates

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

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for financial instruments held at amortized cost. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, that clarifies receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. 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 do not expect it will have a material effect on our consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of ASC 820, Fair Value Measurement. The amendments in this ASU are the result of a broader disclosure project 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 do not expect it will have a material effect on our financial statement disclosures.

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

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

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

 

In February 2016, the FASB issued 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 provided for an optional transition method which allowed 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. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 824) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as 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 were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

 

The Company adopted the new standard on January 1, 2019, the effective date of our initial application, using the optional transition method. The Company has elected to carry forward the legacy (ASC 840) disclosures for comparative periods and therefore, did not adjust the comparative period financial information prior to January 1, 2019. In addition, the Company elected the package of practical expedients which allows for companies to not reassess whether any expired or existing contracts are or contain leases, not reassess historical lease classifications for expired or existing contracts and not reassess initial direct costs for existing leases. Additionally, the Company elected the practical expedients which allow the use of hindsight when determining the lease term, the short-term lease recognition exemption and the option to not separate lease and 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 $10.3 million, mainly related to our operating leases for office space, automobiles and other equipment.  

 

 

As a lessee, the adoption of this standard did not have a material impact on our Consolidated Statement of Income or Statement of Cash Flow. See Note 12 for additional information.

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

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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expanded and refined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and included certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness.  In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting, which permits the OIS rate based on SOFR as a U.S. benchmark interest rate. Both ASU 2017-12 and ASU 2018-16 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements as we 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 allowed for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-02 on January 1, 2019, and upon adoption reclassified $0.4 million of stranded tax effects created by rate changes related to the Tax Cuts and Jobs Act of 2017 to retained earnings. See Note 13 for additional information.

v3.19.1
Business Combinations
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Business Combinations

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 in exchange for cash consideration. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. This revenue is included in the Subscriber Solutions & Experience category within the Network Solutions and Services & Support reportable segments.  

Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which are dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones during the first half of 2019. The contingent payments are subject to arbitration and the final payouts, if applicable, are expected to occur during the third quarter of 2019. The minimum and maximum potential payment under the total of the contingent liabilities ranges from no payment to $1.5 million. As of March 31, 2019, 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 during the three months ended March 31, 2019.

An escrow in the amount of $2.8 million was set up at the acquisition date, to fund post-closing working capital settlements and to 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 recorded goodwill of $3.5 million as a result of this acquisition, which represents the excess of the purchase price over the fair value of net assets acquired. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.

 

 

On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This 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. This revenue is included in the Access & Aggregation and Subscriber Solutions & Experience categories within the Network Solutions reportable segment.

 

We recorded a bargain purchase gain, net of income taxes, of $11.3 million during the first quarter of 2018, which represents the difference between the fair value of the net assets acquired over the cash paid. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.

 

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

 

(In thousands)

 

SmartRG

 

 

Sumitomo

 

Assets

 

 

 

 

 

 

 

 

  Tangible assets acquired

 

$

8,594

 

 

$

1,006

 

  Intangible assets

 

 

9,960

 

 

 

22,100

 

  Goodwill

 

 

3,489

 

 

 

 

Total assets acquired

 

 

22,043

 

 

 

23,106

 

Liabilities

 

 

 

 

 

 

 

 

  Liabilities assumed

 

 

(6,001

)

 

 

(3,978

)

Total liabilities assumed

 

 

(6,001

)

 

 

(3,978

)

Total net assets

 

 

16,042

 

 

 

19,128

 

  Gain on bargain purchase of a business, net of tax

 

 

 

 

 

(11,322

)

Total purchase price

 

$

16,042

 

 

$

7,806

 

 

The actual revenue and net loss included in the Consolidated Statements of Income for SmartRG and Sumitomo for the three months ended March 31, 2019 and from March 19, 2018 to March 31, 2018 are as follows:

 

 

 

Three Months Ended

 

 

March 19 to

 

(In thousands)

 

March 31, 2019

 

 

March 31, 2018

 

Revenue

 

$

7,348

 

 

$

 

Net loss

 

$

(1,684

)

 

$

(77

)

 

The details of the acquired intangible assets from these acquisitions 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

 

 

2

Licensing agreements

 

560

 

 

5 – 10

Trade name

 

210

 

 

3

Total

$

32,060

 

 

 

 

The following unaudited supplemental pro forma information presents the financial results of the Company as if the acquisition of SmartRG and Sumitomo had occurred on January 1, 2018. This unaudited supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on January 1, 2018, nor is it indicative of any future results. Aside from revising the 2018 net income for the effect of the bargain purchase gain, there were no material, non-recurring adjustments to this unaudited pro forma information.

 

(In thousands)

 

For the Three Months Ended March 31, 2018

 

Pro forma revenue

 

$

129,584

 

Pro forma net loss

 

$

(23,400

)

Pro forma loss per share - basic

 

$

(0.49

)

Pro forma loss per share - diluted

 

$

(0.49

)

For the three months ended March 31, 2019 and 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $1.3 million and $0.2 million respectively, related to these acquisitions.

v3.19.1
Revenue
3 Months Ended
Mar. 31, 2019
Revenue From Contract With Customer [Abstract]  
Revenue

3. REVENUE

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

Network Solutions Segment

Network Solutions includes hardware products and software-defined next-generation virtualized solutions used in service provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware sales. In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment. These arrangements typically include network equipment, network implementation services and maintenance services. See Note 12 for additional information.

Services & Support Segment

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

 

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

 

The following table disaggregates our revenue by major source for the three months ended March 31, 2019:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

85,673

 

 

$

14,105

 

 

$

99,778

 

Subscriber Solutions & Experience(1)

 

 

34,719

 

 

 

2,034

 

 

 

36,753

 

Traditional & Other Products

 

 

5,430

 

 

 

1,830

 

 

 

7,260

 

Total

 

$

125,822

 

 

$

17,969

 

 

$

143,791

 

 

 

(1)

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

The following table disaggregates our revenue by major source for the three months ended March 31, 2018:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

69,385

 

 

$

12,295

 

 

$

81,680

 

Subscriber Solutions & Experience(1)

 

 

28,777

 

 

 

1,324

 

 

 

30,101

 

Traditional & Other Products

 

 

7,091

 

 

 

1,934

 

 

 

9,025

 

Total

 

$

105,253

 

 

$

15,553

 

 

$

120,806

 

 

 

(1)

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

 

 

As of March 31, 2019, we did not have any significant performance obligations related to customer contracts that had an original expected duration of one year or more, other than maintenance services, which are satisfied over time.

 

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

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Accounts receivable, net

 

$

99,032

 

 

$

99,385

 

Contract assets

 

$

2,333

 

 

$

3,766

 

Unearned revenue

 

$

15,230

 

 

$

17,940

 

Non-current unearned revenue

 

$

4,514

 

 

$

5,296

 

 

$6.9 million of the outstanding unearned revenue balance at December 31, 2018 was recognized as revenue during the three months ended March 31, 2019.

v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

4. INCOME TAXES

Our effective tax rate increased from an expense of 15.1%, excluding the tax effect of the bargain purchase gain, in the three months ended March 31, 2018, to an expense of 28.6% in the three months ended March 31, 2019. The increase in the effective tax rate between the two periods is primarily driven by the shift to profitability in the current quarter.

 

The Company continually reviews the adequacy of the 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 (ASC 740). As of March 31, 2019, we had net deferred tax assets of $36.9 million. Since management continues to assess the realization of these deferred tax assets and related valuation allowance(s), as such, we may release a portion of the valuation allowance or establish a new valuation allowance based on operations in the jurisdictions in which these assets arose. Our assessment includes the evaluation of evidence, some of which requires significant judgment, including historical operating results, the evaluation of three-year cumulative income, future taxable income and tax planning strategies. Should management determine a valuation allowance is needed in the future due to not being able to absorb loss carryforwards, it could have a material effect on our consolidated financial statements.

v3.19.1
Pension Benefit Plan
3 Months Ended
Mar. 31, 2019
Compensation And Retirement Disclosure [Abstract]  
Pension Benefit Plan

5. PENSION BENEFIT PLAN

We maintain a defined benefit pension plan covering employees in certain foreign countries.

The following table summarizes the components of net periodic pension cost for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Service cost

 

$

375

 

 

$

308

 

Interest cost

 

 

162

 

 

 

187

 

Expected return on plan assets

 

 

(355

)

 

 

(399

)

Amortization of actuarial losses

 

 

203

 

 

 

64

 

Net periodic pension cost

 

$

385

 

 

$

160

 

 

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

v3.19.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2019
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 months ended March 31, 2019 and 2018, which was recognized as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Stock-based compensation expense included in cost of sales

 

$

104

 

 

$

95

 

Selling, general and administrative expense

 

 

1,063

 

 

 

1,035

 

Research and development expense

 

 

692

 

 

 

689

 

Stock-based compensation expense included in operating expenses

 

 

1,755

 

 

 

1,724

 

Total stock-based compensation expense

 

 

1,859

 

 

 

1,819

 

Tax benefit for expense associated with non-qualified options, PSUs, RSUs and

   restricted stock

 

 

(443

)

 

 

(384

)

Total stock-based compensation expense, net of tax

 

$

1,416

 

 

$

1,435

 

Stock Options

The following table is a summary of our stock options outstanding as of December 31, 2018 and March 31, 2019, and the changes that occurred during the three months ended March 31, 2019:

 

 

 

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, 2018

 

 

4,382

 

 

$

22.91

 

 

 

4.10

 

 

$

 

Stock options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options forfeited

 

 

(8

)

 

$

15.33

 

 

 

 

 

 

 

 

 

Stock options expired

 

 

(33

)

 

$

23.13

 

 

 

 

 

 

 

 

 

Stock options outstanding, March 31, 2019

 

 

4,341

 

 

$

22.93

 

 

 

3.80

 

 

$

 

Stock options exercisable, March 31, 2019

 

 

4,098

 

 

$

23.37

 

 

 

3.63

 

 

$

 

At March 31, 2019, total unrecognized compensation expense related to non-vested stock options was approximately $0.6 million, which is expected to be recognized over an average remaining recognition period of 0.7 years.

 

All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At March 31, 2019, 2.4 million options were available for grant under the shareholder-approved plans.

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2019. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock. The total pre-tax intrinsic value of options exercised during the three months ended March 31, 2019 was zero.  

The fair value of our stock options is estimated using the Black-Scholes model. The determination of the fair value of stock options on the date of grant using the Black-Scholes model is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate. The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors.

There were no stock options granted during the three months ended March 31, 2019 or 2018.

 

 PSUs, RSUs and restricted stock

 

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2018 and the changes that occurred during the three months ended March 31, 2019:

 

 

 

Number of

Shares

(in thousands)

 

 

Weighted Avg. Grant Date Fair Value

(per share)

 

Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2018

 

 

1,570

 

 

$

18.52

 

PSUs, RSUs and restricted stock granted

 

 

59

 

 

$

12.54

 

PSUs, RSUs and restricted stock vested

 

 

(1

)

 

$

18.86

 

PSUs, RSUs and restricted stock forfeited

 

 

(44

)

 

$

17.88

 

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

 

 

1,584

 

 

$

18.32

 

 

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

At March 31, 2019, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $16.1 million, which is expected to be recognized over an average remaining recognition period of 2.8 years. In addition, there was $9.0 million of unrecognized compensation expense related to the unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period of 0.8 years if achievement of the performance obligation becomes probable. For the three months ending March 31, 2019 and 2018, no compensation expense was recognized related to these performance-based PSUs.

v3.19.1
Investments
3 Months Ended
Mar. 31, 2019
Investments Debt And Equity Securities [Abstract]  
Investments

7. INVESTMENTS

Debt Securities and Other Investments

At March 31, 2019, we held the following debt securities and other investments, recorded at either fair value or cost:

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate bonds

 

$

15,964

 

 

$

69

 

 

$

(24

)

 

$

16,009

 

Municipal fixed-rate bonds

 

 

951

 

 

 

 

 

 

(13

)

 

 

938

 

Asset-backed bonds

 

 

7,171

 

 

 

13

 

 

 

(9

)

 

 

7,175

 

Mortgage/Agency-backed bonds

 

 

4,561

 

 

 

6

 

 

 

(26

)

 

 

4,541

 

U.S. government bonds

 

 

4,238

 

 

 

 

 

 

(11

)

 

 

4,227

 

Foreign government bonds

 

 

2,159

 

 

 

 

 

 

(2

)

 

 

2,157

 

Available-for-sale debt securities held at fair value

 

$

35,044

 

 

$

88

 

 

$

(85

)

 

$

35,047

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,600

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,180

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

61,827

 

 

At December 31, 2018, we held the following debt securities and other investments, recorded at either fair value or cost:

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate bonds

 

$

20,777

 

 

$

19

 

 

$

(112

)

 

$

20,684

 

Municipal fixed-rate bonds

 

 

1,339

 

 

 

 

 

 

(26

)

 

 

1,313

 

Asset-backed bonds

 

 

5,230

 

 

 

5

 

 

 

(14

)

 

 

5,221

 

Mortgage/Agency-backed bonds

 

 

3,833

 

 

 

2

 

 

 

(44

)

 

 

3,791

 

U.S. government bonds

 

 

9,271

 

 

 

1

 

 

 

(66

)

 

 

9,206

 

Foreign government bonds

 

 

592

 

 

 

 

 

 

(8

)

 

 

584

 

Available-for-sale debt securities held at fair value

 

$

41,042

 

 

$

27

 

 

$

(270

)

 

$

40,799

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,600

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

397

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

66,796

 

 

 

As of March 31, 2019, our debt securities had the following contractual maturities:

 

(In thousands)

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-

backed

bonds

 

 

Mortgage /

Agency-

backed bonds

 

 

U.S. government

bonds

 

 

Foreign government bonds

 

Less than one year

 

$

3,127

 

 

$

 

 

$

872

 

 

$

 

 

$

1,691

 

 

$

 

One to two years

 

 

8,389

 

 

 

 

 

 

387

 

 

 

289

 

 

 

 

 

 

1,196

 

Two to three years

 

 

4,493

 

 

 

938

 

 

 

976

 

 

 

 

 

 

1,324

 

 

 

961

 

Three to five years

 

 

 

 

 

 

 

 

3,105

 

 

 

827

 

 

 

1,212

 

 

 

 

Five to ten years

 

 

 

 

 

 

 

 

1,038

 

 

 

303

 

 

 

 

 

 

 

More than ten years

 

 

 

 

 

 

 

 

797

 

 

 

3,122

 

 

 

 

 

 

 

Total

 

$

16,009

 

 

$

938

 

 

$

7,175

 

 

$

4,541

 

 

$

4,227

 

 

$

2,157

 

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

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Gross realized gains on debt securities

 

$

41

 

 

$

 

Gross realized losses on debt securities

 

 

(19

)

 

 

(73

)

Total gain (loss) recognized, net

 

$

22

 

 

$

(73

)

Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.

At March 31, 2019, we held a $25.6 million restricted certificate of deposit that is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond), which totaled $25.6 million at March 31, 2019 and December 31, 2018. At March 31, 2019 and December 31, 2018, the estimated fair value of the Bond using a level 2 valuation technique was approximately $25.5 million and $25.4 million, respectively, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due. The restricted funds held as collateral against the principal amount of the Bond will be used to pay the outstanding principal and interest upon the Bond’s maturity on January 1, 2020.

Marketable Equity Securities

 

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

 

On January 1, 2018, we adopted ASU 2016-01, which requires us to measure all equity investments that do not result in consolidation and are not accounted for under the equity method at fair value, with any changes in fair value recognized in net investment gain (loss). Upon adoption, we reclassified $3.2 million of net unrealized gains related to marketable equity securities from accumulated other comprehensive income (loss) to retained earnings.

 

ASU 2016-01 also provides a measurement alternative for equity investments that do not have a readily determinable fair value in which investments can be recorded at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment. We elected to record our equity investment that does not have a readily determinable fair value using the measurement alternative method. The carrying value of this investment was $3.4 million and $0 as of March 31, 2019 and December 31, 2018, respectively.

 

Realized and unrealized gains and losses for our marketable equity securities for the three months ended March 31, 2019 and 2018 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Realized gains (losses) on equity securities sold

 

$

(14

)

 

$

398

 

Unrealized gains (losses) on equity securities held

 

 

5,918

 

 

 

(422

)

Total gain (loss) recognized, net

 

$

5,904

 

 

$

(24

)

 

As of March 31, 2019 and 2018, gross unrealized losses related to individual investments in a continuous loss position for twelve months or longer were not significant.

 

We have categorized our cash equivalents and our investments held at fair value into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique for the cash equivalents and investments as follows: Level 1 - Values based on unadjusted quoted prices for identical assets or liabilities in an active market; Level 2 - Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3 - Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees.

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2019 Using

 

(In thousands)

 

Cost or Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,279

 

 

$

1,279

 

 

$

 

 

$

 

Commercial paper

 

 

6,547

 

 

 

 

 

 

6,547

 

 

 

 

Cash equivalents

 

 

7,826

 

 

 

1,279

 

 

 

6,547

 

 

 

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

16,009