ADTRAN INC, 10-Q filed on 5/9/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
Apr. 24, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2018  
Document Fiscal Year Focus 2018  
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 Common Stock, Shares Outstanding   47,914,242
v3.8.0.1
Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current Assets    
Cash and cash equivalents $ 82,623 $ 86,433
Short-term investments 16,402 16,129
Accounts receivable, less allowance for doubtful accounts of $— at March 31, 2018 and December 31, 2017 80,883 144,150
Other receivables 35,124 26,578
Inventory, net 120,021 122,542
Prepaid expenses and other current assets 9,693 17,282
Total Current Assets 344,746 413,114
Property, plant and equipment, net 83,875 85,079
Deferred tax assets, net 21,427 23,428
Goodwill 3,492 3,492
Other assets 32,635 13,725
Long-term investments 156,472 130,256
Total Assets 642,647 669,094
Current Liabilities    
Accounts payable 50,653 60,632
Unearned revenue 13,948 13,070
Accrued expenses 13,826 13,232
Accrued wages and benefits 15,863 15,948
Income tax payable 8,277 3,936
Total Current Liabilities 102,567 106,818
Non-current unearned revenue 4,154 4,556
Other non-current liabilities 34,590 34,209
Bonds payable 25,600 25,600
Total Liabilities 166,911 171,183
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 47,914 shares outstanding at March 31, 2018 and 79,652 shares issued and 48,485 shares outstanding at December 31, 2017 797 797
Additional paid-in capital 262,333 260,515
Accumulated other comprehensive loss (5,803) (3,295)
Retained earnings 909,611 922,178
Less treasury stock at cost: 31,738 and 31,167 shares at March 31, 2018 and December 31, 2017, respectively (691,202) (682,284)
Total Stockholders’ Equity 475,736 497,911
Total Liabilities and Stockholders’ Equity $ 642,647 $ 669,094
v3.8.0.1
Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares
Mar. 31, 2018
Dec. 31, 2017
Statement Of Financial Position [Abstract]    
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 47,914,000 48,485,000
Treasury stock, shares 31,738,000 31,167,000
v3.8.0.1
Consolidated Statements of Income (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Sales    
Products $ 105,253 $ 143,597
Services 15,553 26,682
Total Sales 120,806 170,279
Cost of Sales    
Products 68,612 76,664
Services 12,461 19,906
Total Cost of Sales 81,073 96,570
Gross Profit 39,733 73,709
Selling, general and administrative expenses 33,531 34,789
Research and development expenses 32,849 31,971
Operating Income (Loss) (26,647) 6,949
Interest and dividend income 866 933
Interest expense (132) (141)
Net realized investment gain (97) 470
Other income (expense), net (57) 134
Gain on bargain purchase of a business 11,322  
Income (loss) before provision for income taxes (14,745) 8,345
(Provision) benefit for income taxes 3,931 (1,694)
Net Income (Loss) $ (10,814) $ 6,651
Weighted average shares outstanding – basic 48,232 48,430
Weighted average shares outstanding – diluted 48,292 48,939
Earnings (loss) per common share – basic $ (0.22) $ 0.14
Earnings (loss) per common share – diluted (0.22) 0.14
Dividend per share $ 0.09 $ 0.09
v3.8.0.1
Consolidated Statements of Comprehensive Income (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Statement Of Income And Comprehensive Income [Abstract]    
Net Income (Loss) $ (10,814) $ 6,651
Other Comprehensive Income (Loss), net of tax    
Net unrealized gains (losses) on available-for-sale securities (3,412) 1,335
Net unrealized gains (losses) on cash flow hedges   79
Defined benefit plan adjustments 62 55
Foreign currency translation 842 1,242
Other Comprehensive Income (Loss), net of tax (2,508) 2,711
Comprehensive Income (Loss), net of tax $ (13,322) $ 9,362
v3.8.0.1
Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities:    
Net Income (Loss) $ (10,814) $ 6,651
Adjustments to reconcile net income (loss) to net cash provided by operating activities:    
Depreciation and amortization 3,614 4,323
Amortization of net premium on available-for-sale investments 42 124
Net realized (gain) loss on long-term investments 97 (470)
Net (gain) loss on disposal of property, plant and equipment 67 (16)
Gain on bargain purchase of a business (11,322)  
Stock-based compensation expense 1,819 1,883
Deferred income taxes (1,877) (1,947)
Changes in operating assets and liabilities:    
Accounts receivable, net 63,904 7,247
Other receivables (6,598) 1,884
Inventory 3,368 (7,399)
Prepaid expenses and other assets 10,583 (2,413)
Accounts payable (10,233) (1,713)
Accrued expenses and other liabilities 826 (3,166)
Income tax payable 2,753 4,049
Net cash provided by operating activities 46,229 9,037
Cash flows from investing activities:    
Purchases of property, plant and equipment (1,950) (3,872)
Proceeds from disposals of property, plant and equipment   16
Proceeds from sales and maturities of available-for-sale investments 49,074 24,471
Purchases of available-for-sale investments (75,960) (29,517)
Acquisition of business (7,806)  
Net cash used in investing activities (36,642) (8,902)
Cash flows from financing activities:    
Proceeds from stock option exercises 369 1,377
Purchases of treasury stock (10,171) (5,559)
Dividend payments (4,367) (4,369)
Net cash used in financing activities (14,169) (8,551)
Net decrease in cash and cash equivalents (4,582) (8,416)
Effect of exchange rate changes 772 1,079
Cash and cash equivalents, beginning of period 86,433 79,895
Cash and cash equivalents, end of period 82,623 72,558
Supplemental disclosure of non-cash investing activities:    
Purchases of property, plant and equipment included in accounts payable $ 95 $ 509
v3.8.0.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
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) 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, 2017 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, 2017, filed on February 23, 2018 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 revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, 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 February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). 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 impact on our financial position, results of operations or cash flows.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). 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. We are currently evaluating the impact ASU 2017-12 will have on our financial position, results of operations and cash flows.

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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), 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 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.

The two primary areas of impact of these ASUs were network implementation service revenue performance obligations and contract costs. The output method will be used to measure network implementation services progress. The primary impact will be accelerated revenue recognition for certain performance obligations related to service revenue arrangements that were previously deferred until customer acceptance and capitalization and amortization of 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 will need to be capitalized, including sales commissions, 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 impact was 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.

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

 

 

 

For the three months ended March 31, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Change Higher/(Lower)

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

105,253

 

 

 

105,439

 

 

$

(186

)

Services

 

$

15,553

 

 

 

14,700

 

 

$

853

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

68,612

 

 

 

68,723

 

 

$

(111

)

Services

 

$

12,461

 

 

 

11,925

 

 

$

536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before benefit for income taxes

 

$

(14,745

)

 

 

(14,987

)

 

$

242

 

Benefit for income taxes

 

$

3,931

 

 

 

3,998

 

 

$

(67

)

Net loss

 

$

(10,814

)

 

 

(10,989

)

 

$

175

 

 

 

 

As of  March 31, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Change Higher/(Lower)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables

 

$

35,124

 

 

 

35,060

 

 

$

64

 

Inventory

 

$

120,021

 

 

 

119,910

 

 

$

111

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

909,611

 

 

 

909,436

 

 

$

175

 

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 was effective beginning January 1, 2018 and we are now recognizing 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 $3.2 million reclassification of net unrealized gains from accumulated other comprehensive income to opening retained earnings. 

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). 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, $0.1 million was reclassified from cost of sales, selling, general and administrative expenses, and research and development expense to other income (expense), net for the three months ended March 31, 2017.

v3.8.0.1
Business Combinations
3 Months Ended
Mar. 31, 2018
Business Combinations [Abstract]  
Business Combinations

2.  BUSINESS COMBINATIONS

 

On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This acquisition establishes ADTRAN as the North American market leader for EPON solutions for the cable MSO industry and 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 Customer Devices 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 a market leader in EPON. SEI’s Broadband Networks Division through its SEL subsidiary operated a North American EPON business including 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 slower 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 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 have concluded that our valuation procedures and resulting measures were appropriate.

 

The preliminary allocation of the purchase price to the estimated fair value of the assets acquired at the acquisition date is as follows:

 

(In Thousands)

 

 

 

Assets

 

 

 

  Other receivables

$

104

 

  Inventory

 

510

 

  Property, plant and equipment

 

392

 

  Intangible assets

 

22,100

 

Total assets acquired

 

23,106

 

 

 

 

 

Liabilities

 

 

 

  Deferred income taxes

 

(3,978

)

Total liabilities assumed

 

(3,978

)

 

 

 

 

Total net assets

 

19,128

 

  Gain on bargain purchase of a business, net of tax

 

(11,322

)

Total purchase price

$

7,806

 

 

The actual revenue and net loss included in our Consolidated Statements of Income for the period March 19, 2018 to March 31, 2018 are as follows:

 

 

March 19 to

 

(In thousands)

March 31, 2018

 

Revenue

$

 

Net loss

$

(77

)

 

The details of the acquired intangible assets are as follows:

 

In thousands

Value

 

 

Life (years)

 

Customer relationships

$

13,400

 

 

 

12.0

 

Licensed technology

 

5,900

 

 

 

9.0

 

Supplier relationship

 

2,800

 

 

 

2.0

 

Total

$

22,100

 

 

 

 

 

 

The following unaudited supplemental pro forma information presents the financial results as if the acquisition had occurred on January 1, 2017. This unaudited supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on January 1, 2017, nor is it indicative of any future results. Aside from revising the 2017 and 2018 net income for the effect of the bargain purchase gain, there were no material, non-recurring adjustments to this unaudited pro forma information.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2018

 

 

2017

 

Pro forma revenue

 

$

122,066

 

 

$

170,692

 

Pro forma net income

 

$

(22,720

)

 

$

17,201

 

Pro forma earnings per share - basic

 

$

(0.47

)

 

$

0.36

 

Pro forma earnings per share - diluted

 

$

(0.47

)

 

$

0.35

 

 

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

v3.8.0.1
Revenue
3 Months Ended
Mar. 31, 2018
Revenue From Contract With Customer [Abstract]  
Revenue

3. REVENUE

Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services to a customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control of a product or service to the customer. 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 using the most likely amount. The stand-alone selling prices are determined based on the prices at which we sell the separate products and services. For items that are not sold separately, we estimate stand-alone selling prices primarily using reasonable internal analysis. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales, value added, and other taxes collected concurrent 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. We have elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those costs as expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.

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

Network Solutions Segment

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

Hardware

The majority of the revenue from this segment is from hardware sales and is recognized when control is transferred to our customers, which is generally when we ship the products. Shipping terms are generally FOB shipping point. Revenue is recorded net of discounts and rebates using the most likely amount. Customers are typically invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days to five years for product defects, which are accrued at the time revenue is recognized.

In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment, which have terms of 18 months to five years. These arrangements typically include network equipment, network implementation services and maintenance services. Product revenue for these leases is generally recorded when we transfer control of the product to our customers. Revenue for network implementation and maintenance services is recognized as described below. Customers are typically invoiced and pay in equal installments over the lease term.

Services & Support Segment

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

Maintenance

Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services at the beginning of the maintenance period, which is recorded in current or non-current unearned revenue depending on the length of the service period. Maintenance services are provided on an as-needed basis and our customers benefit evenly throughout the contract term. Accordingly, we recognize revenue for maintenance services on a straight-line basis over the maintenance period in services revenue.

Network Implementation

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

 

As of March 31, 2018, we did not have any remaining 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, 2018

 

 

December 31, 2017

 

Accounts receivable

 

$

80,883

 

 

$

144,150

 

Contract assets

 

 

1,442

 

 

 

 

Unearned revenue

 

 

13,948

 

 

 

13,070

 

Non-current unearned revenue

 

 

4,154

 

 

 

4,556

 

 

During the three months ended March 31, 2018, we recognized $3.5 million of revenue that was included in unearned revenue at the beginning of the period.

 

The following table disaggregates our revenue by major source:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

69,385

 

 

$

12,295

 

 

$

81,680

 

Customer Devices

 

 

28,777

 

 

 

1,324

 

 

 

30,101

 

Traditional & Other Products

 

 

7,091

 

 

 

1,934

 

 

 

9,025

 

Total

 

$

105,253

 

 

$

15,553

 

 

$

120,806

 

 

v3.8.0.1
Income Taxes
3 Months Ended
Mar. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

4. INCOME TAXES

Our effective tax rate decreased from 20.3% in the three months ended March 31, 2017, to 15.1%, excluding the tax impact of the bargain purchase gain, in the three months ended March 31, 2018. The decrease in the effective tax rate between the two periods is primarily attributable to the impact of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.

v3.8.0.1
Pension Benefit Plan
3 Months Ended
Mar. 31, 2018
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, 2018 and 2017:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2018

 

 

2017

 

Service cost

 

$

308

 

 

$

297

 

Interest cost

 

 

187

 

 

 

143

 

Expected return on plan assets

 

 

(399

)

 

 

(299

)

Amortization of actuarial losses

 

 

64

 

 

 

73

 

Net periodic pension cost

 

$

160

 

 

$

214

 

 

The components of net periodic pension cost other than the service cost component are included in the line item “Other income (expense), net” in the Consolidated Statements of Income.

 

v3.8.0.1
Stock-Based Compensation
3 Months Ended
Mar. 31, 2018
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Stock-Based Compensation

6. STOCK-BASED COMPENSATION

The following table summarizes the 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, 2018 and 2017, which was recognized as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2018

 

 

2017

 

Stock-based compensation expense included in cost of sales

 

$

95

 

 

$

91

 

Selling, general and administrative expense

 

 

1,035

 

 

 

1,016

 

Research and development expense

 

 

689

 

 

 

776

 

Stock-based compensation expense included in operating expenses

 

 

1,724

 

 

 

1,792

 

Total stock-based compensation expense

 

 

1,819

 

 

 

1,883

 

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

   restricted stock

 

 

(384

)

 

 

(380

)

Total stock-based compensation expense, net of tax

 

$

1,435

 

 

$

1,503

 

 

Stock Options

The following table is a summary of our stock options outstanding as of December 31, 2017 and March 31, 2018 and the changes that occurred during the three months ended March 31, 2018:

 

(In thousands, except per share amounts)

 

Number of

Stock Options

 

 

Weighted Avg.

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual

Life In Years

 

 

Aggregate

Intrinsic Value

 

Stock options outstanding, December 31, 2017

 

 

5,148

 

 

$

22.65

 

 

 

4.87

 

 

$

6,109

 

Stock options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

(24

)

 

$

15.48

 

 

 

 

 

 

 

 

 

Stock options forfeited

 

 

(27

)

 

$

16.59

 

 

 

 

 

 

 

 

 

Stock options expired

 

 

(58

)

 

$

26.87

 

 

 

 

 

 

 

 

 

Stock options outstanding, March 31, 2018

 

 

5,039

 

 

$

22.66

 

 

 

4.50

 

 

$

271

 

Stock options vested and expected to vest, March 31, 2018

 

 

5,039

 

 

$

22.66

 

 

 

4.50

 

 

$

271

 

Stock options exercisable, March 31, 2018

 

 

4,286

 

 

$

23.75

 

 

 

4.00

 

 

$

157

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing price of our stock on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on March 31, 2018. The aggregate intrinsic value will change based on the fair market value of our stock.

The total pre-tax intrinsic value of options exercised during the three months ended March 31, 2018 was $33 thousand.

As of March 31, 2018, there was $2.5 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over an average remaining recognition period of 1.3 years.

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.

There were no stock options granted during the three months ended March 31, 2018 or 2017.

 PSUs, RSUs and restricted stock

 

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2017 and the changes that occurred during the three months ended March 31, 2018:

 

(In thousands, except per share amounts)

 

Number of

Shares

 

 

Weighted Avg. Grant Date Fair Value

 

Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2017

 

 

1,292

 

 

$

21.33

 

PSUs, RSUs and restricted stock granted

 

 

8

 

 

$

20.71

 

PSUs, RSUs and restricted stock vested

 

 

(5

)

 

$

20.00

 

PSUs, RSUs and restricted stock forfeited

 

 

(62

)

 

$

21.50

 

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

 

 

1,233

 

 

$

21.31

 

 

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 date of grant. During the first quarter of 2017, the Compensation Committee of the Board of Directors approved a PSU grant of 0.5 million shares that contain performance conditions. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant.

As of March 31, 2018, there was $12.9 million of unrecognized compensation expense related to unvested market-based PSUs, RSUs and restricted stock, which is expected to be recognized over an average remaining recognition period of 2.9 years. In addition, there was $10.7 million of unrecognized compensation expense related to unvested performance-based PSUs, which will be recognized over the requisite service period of three years as achievement of the performance objective becomes probable. For the three months ended March 31, 2018, no compensation expense was recognized related to these performance-based PSU awards.

v3.8.0.1
Investments
3 Months Ended
Mar. 31, 2018
Investments Debt And Equity Securities [Abstract]  
Investments

7. INVESTMENTS

Debt Securities and Other Investments

At March 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

 

 

49,109

 

 

 

43

 

 

 

(333

)

 

 

48,819

 

Municipal fixed-rate bonds

 

 

2,413

 

 

 

 

 

 

(30

)

 

 

2,383

 

Asset-backed bonds

 

 

13,334

 

 

 

 

 

 

(44

)

 

 

13,290

 

Mortgage/Agency-backed bonds

 

 

8,906

 

 

 

2

 

 

 

(72

)

 

 

8,836

 

U.S. government bonds

 

 

14,703

 

 

 

10

 

 

 

(204

)

 

 

14,509

 

Foreign government bonds

 

 

1,228

 

 

 

4

 

 

 

(1

)

 

 

1,231

 

Available-for-sale debt securities held at fair value

 

$

89,693

 

 

$

59

 

 

$

(684

)

 

$

89,068

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,700

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

520

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

116,288

 

 

At December 31, 2017, 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

 

 

32,654

 

 

 

44

 

 

 

(155

)

 

 

32,543

 

Municipal fixed-rate bonds

 

 

2,902

 

 

 

2

 

 

 

(22

)

 

 

2,882

 

Asset-backed bonds

 

 

6,545

 

 

 

1

 

 

 

(20

)

 

 

6,526

 

Mortgage/Agency-backed bonds

 

 

5,554

 

 

 

1

 

 

 

(46

)

 

 

5,509

 

U.S. government bonds

 

 

14,477

 

 

 

 

 

 

(174

)

 

 

14,303

 

Foreign government bonds

 

 

725

 

 

 

5

 

 

 

 

 

 

730

 

Available-for-sale debt securities held at fair value

 

$

62,857

 

 

$

53

 

 

$

(417

)

 

$

62,493

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,800

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

547

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

90,840

 

 

As of March 31, 2018, 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

 

$

11,391

 

 

$

490

 

 

$

4,520

 

 

$

 

 

$

 

 

$

 

One to two years

 

 

18,406

 

 

 

737

 

 

$

2,459

 

 

 

 

 

 

6,149

 

 

 

 

Two to three years

 

 

10,639

 

 

 

210

 

 

 

2,669

 

 

 

 

 

 

2,491

 

 

 

1,231

 

Three to five years

 

 

8,383

 

 

 

946

 

 

 

1,631

 

 

 

2,046

 

 

 

5,869

 

 

 

 

Five to ten years

 

 

 

 

 

 

 

 

 

 

 

974

 

 

 

 

 

 

 

More than ten years

 

 

 

 

 

 

 

 

2,011

 

 

 

5,816

 

 

 

 

 

 

 

Total

 

$

48,819

 

 

$

2,383

 

 

$

13,290

 

 

$

8,836

 

 

$

14,509

 

 

$

1,231

 

 

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)

 

2018

 

 

2017

 

Gross realized gains

 

$

 

 

$

 

Gross realized losses

 

$

(73

)

 

$

(15

)

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, 2018, we held a $26.7 million restricted certificate of deposit, which 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 $26.7 million at March 31, 2018 and December 31, 2017. At March 31, 2018 and December 31, 2017, the estimated fair value of the Bond using a level 2 valuation technique was approximately $26.6 million and $26.7 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.

 Marketable Equity Securities

 

Our marketable equity securities consist of publicly traded stocks or funds measured at fair value.

 

Prior to January 1, 2018, our marketable equity securities were classified as available-for-sale. Realized gains and losses on marketable equity securities were included in net realized investment gain (loss). Unrealized gains and losses were recognized in accumulated other comprehensive income, net of deferred taxes, on the balance sheet.

 

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 realized investment gain (loss). Upon adoption, we reclassified $3.2 million of net unrealized gains related to marketable equity securities from accumulated other comprehensive income to opening retained earnings.

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2018

 

Realized gains (losses) on equity securities sold

 

$

(1

)

Unrealized gains (losses) on equity securities held

 

 

(23

)

Total gain (loss) recognized, net

 

$

(24

)

 

As of March 31, 2018 and 2017, gross unrealized losses related to individual investments in a continuous loss position for 12 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, 2018 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,770

 

 

$

6,770

 

 

$

 

 

$

 

Asset-backed securities

 

 

1,000

 

 

 

 

 

 

1,000

 

 

 

 

Cash equivalents

 

 

7,770

 

 

 

6,770

 

 

 

1,000

 

 

 

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

48,819

 

 

 

 

 

 

48,819

 

 

 

 

Municipal fixed-rate bonds

 

 

2,383

 

 

 

 

 

 

2,383