ADTN ADTRAN Holdings Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

Amendment No. 1

 

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

OR

Commission file number 000-24612

 

ADTRAN, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware		63-0918200
(State of Incorporation)		(I.R.S. Employer Identification Number)
901 Explorer Boulevard
Huntsville, Alabama 35806-2807		(256) 963-8000
(Address of principal executive offices, including zip code)		(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.01 per share		ADTN		NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Securities Exchange Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the Registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large Accelerated Filer		☒		Accelerated Filer		☐
Non-accelerated Filer		☐		Smaller Reporting Company		☐
Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The aggregate market value of the registrant's outstanding common stock held by non-affiliates of the registrant on June 30, 2018 was $704,932,782 based on a closing market price of $14.85 as quoted on the NASDAQ Global Select Market. There were 47,777,043 shares of common stock outstanding as of February 15, 2019.

 

 

 

 

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EXPLANATORY NOTE

 

ADTRAN, Inc. (“ADTRAN,” the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment No. 1”) to amend and restate certain portions of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2019 (the “Original Filing”) as a result of the identification of the material weaknesses described below. Specifically, the Company is filing this Amendment No. 1 to (i) revise the disclosure on the effectiveness of our disclosure controls and procedures and restate management’s report on internal control over financial reporting in Part II, Item 9A of the Original Filing to reflect management’s conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective at December 31, 2018, and (ii) reissue the Report of the Independent Registered Public Accounting Firm of PricewaterhouseCoopers LLP (“PwC”) regarding the effectiveness of our internal control over financial reporting, which appears in Part II, Item 8 of the Original Filing.

 

Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, we have included the entire text of Part II, Item 8 and Part II, Item 9A of the Original Filing in this Amendment No. 1.  There have been no changes to the text of Part II, Item 8 or Part II, Item 9A other than the changes stated in the immediately preceding paragraph.  Furthermore, there have been no changes to the XBRL data filed in Exhibit 101 of the Original Filing.  Other than as described above and through the inclusion with this Amendment No. 1 of new certifications by management, a new consent of PwC, and related amendments to the list of exhibits contained in Part IV, Item 15 of the Original Filing, this Amendment No. 1 speaks only as of the date of the Original Filing and does not amend, supplement, or update any information contained in the Original Filing to give effect to any subsequent events (including with respect to the cover page of the Original Filing, which has been updated only to present this filing as Amendment No. 1 and to delete the reference to documents incorporated by reference into the Original Filing). Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and our reports filed with the SEC subsequent to the Original Filing.

 

This Amendment No. 1 does not change our consolidated financial statements as set forth in the Original Filing.

 

Material Weaknesses

 

On August 8, 2019, the Company’s management, in consultation with the Audit Committee of the Board of Directors, concluded that there were two material weaknesses related to internal control deficiencies that existed as of December 31, 2018 and that continued through the end of the second quarter of 2019. Specifically, the Company’s management determined that the Company did not design and maintain effective internal control over certain aspects of the existence and valuation of inventory:

 

 

 

Despite the existence of these material weaknesses, we believe that the consolidated financial statements included in the Original Filing present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States of America.

MANAGEMENT’S REMEDIATION EFFORTS

Management has been working to further strengthen the Company’s internal controls relating to inventory. Specifically, the Company has begun redesigning and enhancing additional controls and procedures to ensure the completeness of our cycle count program and the completeness and accuracy of key reports and related data used to monitor the results of this cycle count program. Additionally, the Company has begun redesigning and implementing enhanced controls and procedures related to the review of significant inputs and assumptions used to determine our excess and obsolete inventory reserve, and to ensure the completeness and accuracy of key reports and related data used in the calculation of the excess and obsolete inventory reserve. We believe that the foregoing actions will support the improvement of our internal control over financial reporting, and, through our efforts to identify, design, and implement the necessary control activities, will be effective in remediating the material weaknesses described above. We will continue to devote significant time and attention to these remediation efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address the material weaknesses or determine to modify the remediation plan described above. Until the remediation steps set forth above, including the efforts to implement the necessary control activities that we identify, are fully completed, the material weaknesses described above will continue to exist.

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Table of Contents

 

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of ADTRAN, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of ADTRAN, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) controls over the existence of inventories subject to the Company’s cycle count program, and (ii) controls over the Company’s determination of its estimated  reserve for excess and obsolete inventory.  

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2018 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.  

Restatement of Management’s Conclusion Regarding Internal Control over Financial Reporting

 

Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018. However, management has subsequently determined that material weaknesses in internal control over financial reporting related to (i) controls over the existence of inventories subject to the Company’s cycle count program, and (ii) controls over the Company’s determination of its estimated reserve for excess and obsolete inventory existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.

Basis for Opinions

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.  

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.  

 

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Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/PricewaterhouseCoopers LLP

Birmingham, Alabama

February 28, 2019, except with respect to our opinion on internal control over financial reporting insofar as it relates to the effects of the matter described in the penultimate paragraph of Management’s Report on Internal Control over Financial Reporting, as to which the date is September 20, 2019

 

We have served as the Company’s auditor since 1986.

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Financial Statements

ADTRAN, INC.

Consolidated Balance Sheets

(In thousands, except per share amounts)

December 31, 2018 and 2017

 

ASSETS		2018				2017
Current Assets
Cash and cash equivalents		$	105,504			$	86,433
Short-term investments			3,246				16,129
Accounts receivable, less allowance for doubtful accounts of $128 and $— at December 31, 2018 and 2017, respectively			99,385				144,150
Other receivables			36,699				26,578
Inventory, net			99,848				122,542
Prepaid expenses and other current assets			10,744				17,282
Total Current Assets			355,426				413,114
Property, plant and equipment, net			80,635				85,079
Deferred tax assets, net			37,187				23,428
Goodwill			7,106				3,492
Intangibles, net			33,183				4,661
Other assets			5,668				9,064
Long-term investments			108,822				130,256
Total Assets		$	628,027			$	669,094
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	61,054			$	60,632
Unearned revenue			17,940				13,070
Accrued expenses			11,746				13,232
Accrued wages and benefits			14,752				15,948
Income tax payable, net			12,518				3,936
Total Current Liabilities			118,010				106,818
Non-current unearned revenue			5,296				4,556
Other non-current liabilities			33,842				34,209
Bonds payable			24,600				25,600
Total Liabilities			181,748				171,183
Commitments and contingencies (see Note 15)
Stockholders' Equity
Common stock, par value $0.01 per share; 200,000 shares authorized;    79,652 shares issued and 47,751 shares outstanding at December 31, 2018 and    79,652 shares issued and 48,485 shares outstanding at December 31, 2017			797				797
Additional paid-in capital			267,670				260,515
Accumulated other comprehensive loss			(14,416	)			(3,295	)
Retained earnings			883,975				922,178
Less treasury stock at cost: 31,901 and 31,167 shares at December 31, 2018 and 2017,    respectively			(691,747	)			(682,284	)
Total Stockholders' Equity			446,279				497,911
Total Liabilities and Stockholders' Equity		$	628,027			$	669,094

 

See accompanying notes to consolidated financial statements.

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ADTRAN, INC.

Consolidated Statements of Income (Loss)

(In thousands, except per share amounts)

Years ended December 31, 2018, 2017 and 2016

 

		2018				2017				2016
Sales
Products		$	458,232			$	540,396			$	525,502
Services			71,045				126,504				111,279
Total Sales			529,277				666,900				636,781
Cost of Sales
Products			278,929				279,563				270,705
Services			46,783				83,702				74,746
Total Cost of Sales			325,712				363,265				345,451
Gross Profit			203,565				303,635				291,330
Selling, general and administrative expenses			124,440				135,583				131,848
Research and development expenses			124,547				130,666				124,909
Operating Income (Loss)			(45,422	)			37,386				34,573
Interest and dividend income			4,026				4,380				3,918
Interest expense			(533	)			(556	)			(572	)
Net investment gain (loss)			(4,050	)			4,685				5,923
Other income (expense), net			1,286				(1,208	)			(489	)
Gain on bargain purchase of a business			11,322				—				3,542
Income (Loss) before (Provision) Benefit for Income Taxes			(33,371	)			44,687				46,895
(Provision) benefit for income taxes			14,029				(20,847	)			(11,666	)
Net Income (Loss)		$	(19,342	)		$	23,840			$	35,229
Weighted average shares outstanding – basic			47,880				48,153				48,724
Weighted average shares outstanding – diluted			47,880				48,699				48,949
Earnings (loss) per common share – basic		$	(0.40	)		$	0.50			$	0.72
Earnings (loss) per common share – diluted		$	(0.40	)		$	0.49			$	0.72

 

See accompanying notes to consolidated financial statements.

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ADTRAN, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

Years ended December 31, 2018, 2017 and 2016

 

		2018				2017				2016
Net Income (Loss)		$	(19,342	)		$	23,840			$	35,229
Other Comprehensive Income (Loss), net of tax
Net unrealized gains (losses) on available-for-sale securities			(3,130	)			2,163				(1,528	)
Defined benefit plan adjustments			(3,755	)			731				(1,122	)
Foreign currency translation			(4,236	)			5,999				(569	)
Other Comprehensive Income (Loss), net of tax			(11,121	)			8,893				(3,219	)
Comprehensive Income (Loss), net of tax		$	(30,463	)		$	32,733			$	32,010

 

See accompanying notes to consolidated financial statements.

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ADTRAN, INC.

Consolidated Statements of Changes in Stockholders' Equity

(In thousands)

Years ended December 31, 2018, 2017 and 2016

 

		Common Shares				Common Stock				Additional Paid-In Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
Balance at December 31, 2015			79,652			$	797			$	246,879			$	906,772			$	(665,319	)		$	(8,969	)		$	480,160
Net income															35,229												35,229
Other comprehensive loss, net of tax																							(3,219	)			(3,219	)
Dividend payments															(17,583	)											(17,583	)
Dividends accrued on unvested restricted    stock units															(48	)											(48	)
Stock options exercised: 283 shares															(1,499	)			6,216								4,717
PSUs, RSUs and restricted stock vested: 42 shares											(142	)			(929	)			929								(142	)
Purchase of treasury stock: 1,411 shares																			(25,817	)							(25,817	)
Income tax effect of stock compensation    arrangements											(475	)															(475	)
Stock-based compensation expense											6,695																6,695
Balance at December 31, 2016			79,652				797				252,957				921,942				(683,991	)			(12,188	)			479,517
Net income															23,840												23,840
Other comprehensive income, net of tax																							8,893				8,893
Dividend payments															(17,368	)											(17,368	)
Dividends accrued on unvested restricted    stock units															(37	)											(37	)
Stock options exercised: 742 shares															(2,827	)			16,239								13,412
PSUs, RSUs and restricted stock vested: 154 shares															(3,257	)			2,816								(441	)
Purchase of treasury stock: 856 shares																			(17,348	)							(17,348	)
Stock-based compensation expense											7,433																7,433
ASU 2016-09 adoption (see Note 1)											125				(115	)											10
Balance at December 31, 2017			79,652				797				260,515				922,178				(682,284	)			(3,295	)			497,911
Net loss															(19,342	)											(19,342	)
ASU 2014-09 adoption (see Note 1)															278												278
ASU 2016-01 adoption (see Note 1)															3,220												3,220
Other comprehensive loss, net of tax																							(11,121	)			(11,121	)
Dividend payments															(17,267	)											(17,267	)
Dividends accrued on unvested restricted    stock units															(7	)											(7	)
Stock options exercised: 96 shares															(603	)			2,086								1,483
PSUs, RSUs and restricted stock vested: 217 shares															(4,482	)			3,983								(499	)
Purchase of treasury stock: 1,001 shares																			(15,532	)							(15,532	)
Stock-based compensation expense											7,155																7,155
Balance at December 31, 2018			79,652			$	797			$	267,670			$	883,975			$	(691,747	)		$	(14,416	)		$	446,279

 

See accompanying notes to consolidated financial statements.

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ADTRAN, INC.

Consolidated Statements of Cash Flows

(In thousands)

Years ended December 31, 2018, 2017 and 2016

 

		2018				2017				2016
Cash flows from operating activities:
Net income (loss)		$	(19,342	)		$	23,840			$	35,229
Adjustments to reconcile net income to net cash provided by operating    activities:
Depreciation and amortization			15,891				15,692				14,407
Amortization of net premium (discount) on available-for-sale investments			(50	)			425				643
Net (gain) loss on long-term investments			4,050				(4,685	)			(5,923	)
Net (gain) loss on disposal of property, plant and equipment			67				(145	)			22
Gain on bargain purchase of a business			(11,322	)			—				(3,542	)
Stock-based compensation expense			7,155				7,433				6,695
Deferred income taxes			(17,257	)			14,073				(2,685	)
Change in operating assets and liabilities:
Accounts receivable, net			49,200				(49,103	)			(21,302	)
Other receivables			(8,522	)			(10,222	)			4,101
Inventory			24,192				(15,518	)			(10,887	)
Prepaid expenses and other assets			10,727				(4,830	)			(7,108	)
Accounts payable			(3,799	)			(17,742	)			26,722
Accrued expenses and other liabilities			(3,226	)			(5,455	)			8,792
Income taxes payable			7,690				3,858				(3,162	)
Net cash provided by (used in) operating activities			55,454				(42,379	)			42,002
Cash flows from investing activities:
Purchases of property, plant and equipment			(8,110	)			(14,720	)			(21,441	)
Proceeds from disposals of property, plant and equipment			—				151				—
Proceeds from sales and maturities of available-for-sale investments			153,649				173,752				225,075
Purchases of available-for-sale investments			(123,209	)			(93,141	)			(209,172	)
Acquisition of business, net of cash acquired			(22,045	)			—				(943	)
Net cash provided by (used in) investing activities			285				66,042				(6,481	)
Cash flows from financing activities:
Proceeds from stock option exercises			1,483				13,412				4,717
Purchases of treasury stock			(15,532	)			(17,348	)			(25,817	)
Dividend payments			(17,267	)			(17,368	)			(17,583	)
Payments on long-term debt			(1,100	)			(1,100	)			(1,100	)
Net cash used in financing activities			(32,416	)			(22,404	)			(39,783	)
Net increase (decrease) in cash and cash equivalents			23,323				1,259				(4,262	)
Effect of exchange rate changes			(4,252	)			5,279				(393	)
Cash and cash equivalents, beginning of year			86,433				79,895				84,550
Cash and cash equivalents, end of year		$	105,504			$	86,433			$	79,895
Supplemental disclosure of cash flow information
Cash paid during the year for interest		$	534			$	555			$	575
Cash paid during the year for income taxes		$	4,104			$	2,988			$	18,689
Supplemental disclosure of non-cash investing activities
Purchases of property, plant and equipment included in accounts payable		$	62			$	408			$	2,103
Contingent payments		$	1,230			$	—			$	—

 

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

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

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

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Financial Instruments

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

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

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

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Accounts Receivable

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

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

Other Receivables

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

Inventory

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

Property, Plant and Equipment

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

Intangible Assets

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

Impairment of Long-Lived Assets and Intangibles

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

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Goodwill

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

Liability for Warranty

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

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

 

Year Ended December 31,		2018				2017				2016
(In thousands)
Balance at beginning of period		$	9,724			$	8,548			$	8,739
Plus: Amounts charged to cost and expenses			7,392				6,951				8,561
Less: Deductions			(8,493	)			(5,775	)			(8,752	)
Balance at end of period		$	8,623			$	9,724			$	8,548

Pension Benefit Plan Obligations

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

Stock-Based Compensation

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

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

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Research and Development Costs

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

Other Comprehensive Income

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

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

 

(In thousands)		Unrealized Gains (Losses) on Available- for-Sale Securities				Unrealized Gains (Losses) on Cash Flow Hedges				Defined Benefit Plan Adjustments				Foreign Currency Adjustments				Total
Balance at December 31, 2015		$	1,932			$	—			$	(3,895	)		$	(7,006	)		$	(8,969	)
Other comprehensive income (loss) before    reclassifications			1,515				—				(1,229	)			(569	)			(283	)
Amounts reclassified from accumulated other    comprehensive income			(3,043	)			—				107				—				(2,936	)
Balance at December 31, 2016			404				—				(5,017	)			(7,575	)			(12,188	)
Other comprehensive income (loss) before    reclassifications			5,020				(619	)			451				5,999				10,851
Amounts reclassified from accumulated other    comprehensive income			(2,857	)			619				280				—				(1,958	)
Balance at December 31, 2017			2,567				—				(4,286	)			(1,576	)			(3,295	)
Other comprehensive income (loss) before    reclassifications			685				—				(3,890	)			(4,236	)			(7,441	)
Amounts reclassified to retained earnings (1)			(3,220	)			—				—				—				(3,220	)
Amounts reclassified from accumulated other    comprehensive income			(595	)			—				135				—				(460	)
Balance at December 31, 2018		$	(563	)		$	—			$	(8,041	)		$	(5,812	)		$	(14,416	)

 

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

 

(In thousands)		2018
Details about Accumulated Other Comprehensive Loss Components		Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income Is Presented
Unrealized gains on available-for-sale securities:
Net realized gain on sales of securities		$	804			Net investment gain (loss)
Defined benefit plan adjustments – actuarial losses			(196	)		(1)
Total reclassifications for the period, before tax			608
Tax expense			(148	)
Total reclassifications for the period, net of tax		$	460

 

 

(In thousands)		2017
Details about Accumulated Other Comprehensive Loss Components		Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income Is Presented
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities		$	4,864			Net investment gain (loss)
Impairment expense			(180	)		Net investment gain (loss)
Net losses on derivatives designated as hedging instruments			(897	)		Cost of sales
Defined benefit plan adjustments – actuarial losses			(406	)		(1)
Total reclassifications for the period, before tax			3,381
Tax expense			(1,423	)
Total reclassifications for the period, net of tax		$	1,958

 

 

(In thousands)		2016
Details about Accumulated Other Comprehensive Income Components		Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income Is Presented
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities		$	5,408			Net investment gain (loss)
Impairment expense			(419	)		Net investment gain (loss)
Defined benefit plan adjustments – actuarial losses			(156	)		(1)
Total reclassifications for the period, before tax			4,833
Tax expense			(1,897	)
Total reclassifications for the period, net of tax		$	2,936

 

 

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

 

		2018
(In thousands)		Before-Tax Amount				Tax (Expense) Benefit				Net-of-Tax Amount
Unrealized gains (losses) on available-for-sale securities		$	926			$	(241	)		$	685
Reclassification adjustment for amounts related to available-for-sale investments included in net loss			(804	)			209				(595	)
Reclassification adjustment for amounts reclassed to retained earnings related to the adoption of ASU 2016-01			(4,351	)			1,131				(3,220	)
Defined benefit plan adjustments			(5,638	)			1,748				(3,890	)
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net loss			196				(61	)			135
Foreign currency translation adjustment			(4,236	)			—				(4,236	)
Total Other Comprehensive Income (Loss)		$	(13,907	)		$	2,786			$	(11,121	)

 

		2017
(In thousands)		Before-Tax Amount				Tax (Expense) Benefit				Net-of-Tax Amount
Unrealized gains (losses) on available-for-sale securities		$	8,230			$	(3,210	)		$	5,020
Reclassification adjustment for amounts related to available-for-sale investments included in net income			(4,684	)			1,827				(2,857	)
Unrealized gains (losses) on cash flow hedges			(897	)			278				(619	)
Reclassification adjustment for amounts related to cash flow hedges included in net income			897				(278	)			619
Defined benefit plan adjustments			654				(203	)			451
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income			406				(126	)			280
Foreign currency translation adjustment			5,999				—				5,999
Total Other Comprehensive Income (Loss)		$	10,605			$	(1,712	)		$	8,893

 

		2016
(In thousands)		Before-Tax Amount				Tax (Expense) Benefit				Net-of-Tax Amount
Unrealized gains (losses) on available-for-sale securities		$	2,484			$	(969	)		$	1,515
Reclassification adjustment for amounts related to available-for-sale investments included in net income			(4,989	)			1,946				(3,043	)
Defined benefit plan adjustments			(1,782	)			553				(1,229	)
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income			156				(49	)			107
Foreign currency translation adjustment			(569	)			—				(569	)
Total Other Comprehensive Income (Loss)		$	(4,700	)		$	1,481			$	(3,219	)

 

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Income Taxes

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

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

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

Foreign Currency

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

Revenue Recognition

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

Accounting Policy under Topic 606

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

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

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

Accounting Policy under Topic 605

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

 

Unearned Revenue

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

Other Income (Expense), Net

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

Earnings (Loss) per Share

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

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Dividends

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

 

 

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

Business Combinations

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

Recently Issued Accounting Standards

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

(In thousands)		Balance at December 31, 2017						Adjustments due to ASU 2014-09							Balance at January 1, 2018
Other receivables		$	26,578						$	374						$	26,952
Deferred tax assets, net		$	23,428						$	(96		)				$	23,332
Retained earnings		$	922,178						$	278						$	922,456

 

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

 

		As of  December 31, 2018
(In thousands)		As Reported				Balances Without Adoption of ASC 606				Effect of Adoption of ASC 606
Sales
Products		$	458,232			$	458,182			$	50
Services		$	71,045			$	67,329			$	3,716
Cost of Sales
Products		$	278,929			$	278,904			$	25
Services		$	46,783			$	44,788			$	1,995
Loss before benefit for income taxes		$	(33,371	)		$	(35,117	)		$	1,746
Benefit for income taxes		$	14,029			$	14,763			$	(734	)
Net loss		$	(19,342	)		$	(20,354	)		$	1,012

 

		As of  December 31, 2018
(In thousands)		As Reported				Balances Without Adoption of ASC 606				Effect of Adoption of ASC 606
Assets
Other receivables		$	36,699			$	32,933			$	3,766
Prepaid expenses and other current assets		$	10,744			$	12,739			$	(1,995	)
Inventory		$	99,848			$	99,873			$	(25	)
Liabilities
Income tax payable		$	12,518			$	13,252			$	(734	)
Equity
Retained earnings		$	883,975			$	882,963			$	1,012

 

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

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

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

Note 2 – Business Combinations

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

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

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

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

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

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

 

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

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

 

(In Thousands)		Sumitomo				SmartRG
Assets
Tangible assets acquired		$	1,006			$	8,594
Intangible assets			22,100				9,960
Goodwill			—				3,614
Total assets acquired			23,106				22,168
Liabilities
Liabilities assumed			(3,978	)			(6,126	)
Total liabilities assumed			(3,978	)			(6,126	)
Total net assets			19,128				16,042
Gain on bargain purchase of a business, net of tax			(11,322	)			—
Total purchase price		$	7,806			$	16,042

 

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

 

(In thousands)		March 19, 2018 to December 31, 2018
Revenue		$	9,186
Net loss		$	(1,297	)

 

The details of the acquired intangible assets are as follows:

 

(In thousands)		Value				Life (years)
Customer relationships		$	15,190			3 – 12
Developed technology			7,400				7
Licensed technology			5,900				9
Supplier relationship			2,800				2
Licensing agreements			560			5 – 10
Trade name			210				3
Total		$	32,060

The following unaudited supplemental pro forma information presents the financial results as if the acquisition of SmartRG and Sumitomo 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 net income for the effect of the bargain purchase gains, there were no material, non-recurring adjustments to this unaudited pro forma information.

 

(In thousands)		2018				2017
Pro forma revenue		$	559,050			$	702,573
Pro forma net income (loss)		$	(33,862	)		$	33,206
Pro forma earnings (loss) per share – basic		$	(0.71	)		$	0.69
Pro forma earnings (loss) per share – diluted		$	(0.71	)		$	0.68

 

For the year ended December 31, 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles related to these acquisitions of $2.9 million.

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Note 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. The stand-alone selling prices are determined based on the prices at which we sell the separate products and services and are allocated based on each item’s relative value to the total value of the products and services in the arrangement. For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment terms are generally 30 days in the U.S. and typically longer in many geographic markets outside the U.S. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales, value-added, and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of obtaining a contract are capitalized and amortized over the period that the related revenue is recognized if greater than one year. We have elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.

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.

Hardware and Software Revenue

Revenue from hardware sales is recognized when control is transferred to our customers, which is generally when we ship the products. Shipping terms are generally FOB shipping point. This segment also includes revenues from software license sales which is recognized at delivery and transfer of control to the customer. Revenue is recorded net of estimated discounts and rebates using historical trends. 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 that 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. In relation to these lease agreements, during the years ended December 31, 2018, 2017 and 2016 we recognized revenue of $13.7 million, $16.5 million and $2.7 million, respectively.

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.

Maintenance Revenue

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. We recognize revenue for maintenance services on a straight-line basis over the maintenance period in services revenue as our customers benefit evenly throughout the contract term and deferred revenues are recorded in current and non-current unearned revenue.

Network Implementation Revenue

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

 

As of December 31, 2018, 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.

 

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

 

(In thousands)		December 31, 2018				January 1, 2018
Accounts receivable		$	99,385			$	144,150
Contract assets		$	3,766			$	374
Unearned revenue		$	17,940			$	13,070
Non-current unearned revenue		$	5,296			$	4,556

The decrease in accounts receivable is due to the collection of customer-specific payment terms that became due in the first quarter of 2018. The increase in the contract asset balance for the year ended December 31, 2018 is primarily attributable to revenue recognized that has not yet been billed to the customer during the period. The increase in the unearned revenue balance as of the year ended December 31, 2018 is primarily attributable to cash payments received or due in advance of satisfying our performance obligations, offset by $9.9 million of revenues recognized that were included in the unearned revenue balance as of December 31, 2017.

 

The following table disaggregates our revenue by major source for the year ended December 31, 2018.

 

(In thousands)		Network Solutions				Services & Support				Total
Access & Aggregation		$	301,801			$	57,069			$	358,870
Subscriber Solutions & Experience (1)			129,067				5,393				134,460
Traditional & Other Products			27,364				8,583				35,947
Total		$	458,232			$	71,045			$	529,277

 

 

Note 4 – Stock-Based Compensation

Stock Incentive Program Descriptions

On January 23, 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (2006 Plan), which authorized 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs, and restricted stock. The 2006 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 2006 Plan was replaced on May 13, 2015 by the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan). Expiration dates of options outstanding as of December 31, 2018 under the 2006 Plan range from 2019 to 2024.

On January 20, 2015, the Board of Directors adopted the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan), which authorized 7.7 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, PSUs, RSUs, and restricted stock. The 2015 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 13, 2015. PSUs, RSUs, and restricted stock granted under the 2015 Plan reduce the shares authorized for issuance under the 2015 Plan by 2.5 shares of common stock for each share underlying the award. Options granted under the 2015 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding as of December 31, 2018 under the 2015 Plan range from 2025 to 2026.

Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. Under the 2010 Directors Plan, the Company may issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan have a ten-year contractual term. All remaining options outstanding as of December 31, 2018 under the 2010 Directors Plan will expire in 2019.   

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The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the years ended December 31, 2018, 2017 and 2016, which was recognized as follows:

 

(In thousands)		2018				2017				2016
Stock-based compensation expense included in cost of sales		$	418			$	379			$	389
Selling, general and administrative expense			3,989				4,063				3,341
Research and development expense			2,748				2,991				2,965
Stock-based compensation expense included in operating expenses			6,737				7,054				6,306
Total stock-based compensation expense			7,155				7,433				6,695
Tax benefit for expense associated with non-qualified options, PSUs, RSUs and restricted stock			(1,432	)			(1,699	)			(963	)
Total stock-based compensation expense, net of tax		$	5,723			$	5,734			$	5,732

 

With our adoption of ASU 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in January 2017, we elected to discontinue our past practice of estimating forfeitures and now account for forfeitures as they occur.

Stock Options

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

 

		Number of Options (in thousands)				Weighted Average Exercise Price (per share)				Weighted Avg. Remaining Contractual Life in Years				Aggregate Intrinsic Value (in thousands)
Stock options outstanding, December 31, 2017			5,148			$	22.65				4.87			$	6,109
Stock options granted			—			$	—
Stock options exercised			(96	)		$	15.46
Stock options forfeited			(73	)		$	16.49
Stock options expired			(597	)		$	22.58
Stock options outstanding, December 31, 2018			4,382			$	22.91				4.10			$	—
Stock options exercisable, December 31, 2018			4,131			$	23.37				3.93			$	—

At December 31, 2018, total unrecognized compensation expense related to non-vested stock options was approximately $0.8 million, which is expected to be recognized over an average remaining recognition period of one year.

 

All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At December 31, 2018, 2.5 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 2018 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 December 31, 2018. 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 2018, 2017 and 2016 was $0.2 million, $3.4 million and $1.1 million, respectively. The fair value of options fully vesting during 2018, 2017 and 2016 was $2.5 million, $4.3 million and $5.7 million, respectively.

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The following table further describes our stock options outstanding as of December 31, 2018:

 

		Options Outstanding												Options Exercisable
Range of Exercise Prices		Options Outstanding at 12/31/18 (In thousands)				Weighted Avg. Remaining Contractual Life in Years				Weighted Average Exercise Price				Options Exercisable at 12/31/18 (In thousands)				Weighted Average Exercise Price
$14.88 – $18.96			1,257				5.93			$	15.87				1,006			$	15.99
$18.97 – $23.45			739				5.68			$	19.12				739			$	19.12
$23.46 – $30.35			1,223				3.18			$	23.87				1,223			$	23.87
$30.36 – $41.92			1,163				2.29			$	31.93				1,163			$	31.93
			4,382												4,131

 

We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair value of stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options.

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 in 2017 or 2018. The weighted-average estimated fair value of stock options granted to employees during the year ended December 31, 2016 was $5.22 per share, with the following weighted-average assumptions:

 

		2016
Expected volatility			34.79	%
Risk-free interest rate			1.36	%
Expected dividend yield			1.98	%
Expected life (in years)			6.25

 

We based our estimate of expected volatility for the year ended December 31, 2016 on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility method was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is our implied volatility. The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our historical and expected dividend payouts. The expected life of our stock options is based upon historical exercise and forfeiture activity of our previous stock-based grants with a ten-year contractual term.

 

PSUs, RSUs and restricted stock

Under the 2015 Plan, awards other than stock options, including PSUs, RSUs, and restricted stock, may be granted to certain employees and officers.

Under our market-based PSU program, the number of shares of common stock earned by a recipient pursuant to the PSUs is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the PSUs, with the shares earned distributed upon the vesting of the PSUs at the end of the three-year performance period. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. A portion of the granted PSUs vests and the underlying shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2015 Plan. The recipients of the PSUs receive dividend credits based on the shares of common stock underlying the PSUs. The dividend credits are vested and earned in the same manner as the PSUs and are paid in cash upon the issuance of common stock for the PSUs.

During the first quarter of 2017, the Compensation Committee of the Board of Directors approved a one-time PSU grant of 0.5 million shares that contain performance conditions and vest at the end of a three-year period if such performance conditions are met. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant.

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. RSUs and restricted stock vest ratably over four-year and one-year periods, respectively.

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We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which may materially impact our fair value determination.

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2017 and 2018 and the changes that occurred during 2018. The unvested awards outstanding as of December 31, 2017 have been adjusted for the actual shares vested in 2018 for our market-based PSUs.

 

(In thousands, except per share amounts)		Number of shares				Weighted Average Grant Date Fair Value
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2017			1,292			$	21.33
PSUs, RSUs and restricted stock granted			690			$	14.48
PSUs, RSUs and restricted stock vested			(217	)		$	19.94
PSUs, RSUs and restricted stock forfeited			(195	)		$	21.29
Unvested RSUs and restricted stock outstanding, December 31, 2018			1,570			$	18.52

 

At December 31, 2018, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $17.8 million, which is expected to be recognized over an average remaining recognition period of 3.0 years. In addition, there was $9.1 million of unrecognized compensation expense related to the unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period if achievement of the performance obligation becomes probable. For the years ended December 31, 2018 and 2017, no compensation expense was recognized related to these performance-based PSUs.

 

The market based PSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated fair value of the PSUs granted to employees during the year ended December 31, 2018, 2017 and 2016 was $16.59 per share, $24.17 per share and $23.50 per share, respectively, with the following assumptions:

 

		2018		2017				2016
Expected volatility		27.98% to 31.58%			27.03	%			29.79	%
Risk-free interest rate		2.11% to 2.99%			1.78	%			1.17	%
Expected dividend yield		1.83% to 2.49%			1.74	%			1.80	%

 

Note 5 – Investments

Debt securities and Other Investments

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

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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 December 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		$	2,127			$	176			$	943			$	—			$	—			$	—
One to two years			11,557				208				401				—				6,714				285
Two to three years			6,831				929				193				425				—				299
Three to five years			169				—				2,433				853				2,492				—
Five to ten years			—				—				260				6				—				—
More than ten years			—				—				991				2,507				—				—
Total		$	20,684			$	1,313			$	5,221			$	3,791			$	9,206			$	584

 

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

Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our debt securities for the years ended December 31, 2018, 2017 and 2016:

 

Year Ended December 31, (In thousands)		2018				2017				2016
Gross realized gains on debt securities		$	57			$	169			$	341
Gross realized losses on debt securities			(592	)			(226	)			(222	)
Total gain (loss) recognized, net		$	(535	)		$	(57	)		$	119

 

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.

 

The following table presents the breakdown of debt securities and other investments with unrealized losses at December 31, 2018:

 

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The following table presents the breakdown of debt securities and other investments with unrealized losses at December 31, 2017:

 

The decrease in unrealized losses during 2018, as reflected in the table above, results from changes in market positions associated with our fixed income portfolio.

 

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 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 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 opening retained earnings.

 

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

 

(In thousands)		2018
Realized gains on equity securities sold		$	1,306
Unrealized losses on equity securities held			(4,821	)
Total loss recognized, net		$	(3,515	)

 

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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 could include information supplied by investees.

 

		Fair Value Measurements at December 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		$	1,554			$	1,554			$	—			$	—
Cash equivalents			1,554				1,554				—				—
Available-for-sale debt securities
Corporate bonds			20,684				—				20,684				—
Municipal fixed-rate bonds			1,313				—				1,313				—
Asset-backed bonds			5,221				—				5,221				—
Mortgage/Agency-backed bonds			3,791				—				3,791				—
U.S. government bonds			9,206				9,206				—				—
Foreign government bonds			584				—				584				—
Marketable equity securities															—
Marketable equity securities – various industries			26,763				26,763				—				—
Equity in escrow			253				253				—				—
Deferred compensation plan assets			18,256				18,256				—				—
Available-for-sale securities			86,071				54,478				31,593				—
Total		$	87,625			$	56,032			$	31,593			$	—

 

		Fair Value Measurements at December 31, 2017 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		$	5,851			$	5,851			$	—			$	—
Commercial paper			3,999				—				3,999				—
Cash equivalents			9,850				5,851				3,999				—
Available-for-sale debt securities
Corporate bonds			32,543				—				32,543				—
Municipal fixed-rate bonds			2,882				—				2,882				—
Asset-backed bonds			6,526				—				6,526				—
Mortgage/Agency-backed bonds			5,509				—				5,509				—
U.S. government bonds			14,303				14,303				—				—
Foreign government bonds			730				—				730				—
Marketable equity securities
Marketable equity securities – various industries			35,662				35,662				—				—
Deferred compensation plan assets			19,883				19,883				—				—
Available-for-sale securities			118,038				69,848				48,190				—
Total		$	127,888			$	75,699			$	52,189			$	—

 

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The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are obtained from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.

Note 6 – Derivative Instruments and Hedging Activities

We participate in foreign exchange forward contracts in connection with the management of exposure to fluctuations in foreign exchange rates.

Cash Flow Hedges

 

Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the planned purchase of products from foreign suppliers. Purchases of U.S. denominated inventory by our European subsidiary represent our primary exposure. Changes in the fair value of derivatives designated as cash flow hedges are not recognized in current operating results, but are recorded in accumulated other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other comprehensive income when the underlying hedged item impacts earnings. This reclassification is recorded in the same line item of the consolidated statements of income as where the effects of the hedged item are recorded, which is cost of sales.

Undesignated Hedges

We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as outstanding non-functional balances are revalued to the functional currency through profit and loss. When appropriate, we utilize foreign exchange forward contracts to help manage the volatility relating to these valuation exposures. All changes in the fair value of our derivative instruments that do not qualify for or are not designated for hedged accounting transactions are recognized as other income (expense), net in the Consolidated Statements of Income.

We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments are not subject to master netting arrangements and are not offset in the Consolidated Balance Sheets.

As of December 31, 2018 and 2017, we had no foreign exchange forward contracts.    

 

The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the years ended December 31, 2018, 2017 and 2016 were as follows:

 

(In thousands)		Income Statement Location		2018				2017				2016
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts		Other income (expense)		$	13			$	(754	)		$	724

 

The change in our derivatives designated as hedging instruments recorded in other comprehensive income (OCI) and reclassified to income, net of tax, during the twelve months ended December 31, 2018, 2017 and 2016 were as follows:

 

		Location of		Amount of  Losses Reclassified
		Losses Reclassified		from AOCI into Income
(In thousands)		from AOCI into Income		2018				2017				2016
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts		Cost of Sales		$	—			$	(897	)		$	—

 

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Note 7 – Inventory

At December 31, 2018 and 2017, inventory was comprised of the following:

 

(In thousands)		2018				2017
Raw materials		$	45,333			$	44,185
Work in process			1,638				1,939
Finished goods			52,877				76,418
Total Inventory, net		$	99,848			$	122,542

 

We establish reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on historical usage, known trends, inventory age, and market conditions. At December 31, 2018 and 2017, raw materials reserves totaled $17.6 million and $15.0 million, respectively, and finished goods inventory reserves totaled $12.4 million and $8.3 million, respectively.

Note 8 – Property, Plant and Equipment

At December 31, 2018 and 2017, property, plant and equipment were comprised of the following:

 

(In thousands)		2018				2017
Land		$	4,575			$	4,575
Building and land improvements			34,379				32,470
Building			68,183				68,301
Furniture and fixtures			19,831				19,489
Computer hardware and software			92,071				90,726
Engineering and other equipment			127,060				123,363
Total Property, Plant and Equipment			346,099				338,924
Less accumulated depreciation			(265,464	)			(253,845	)
Total Property, Plant and Equipment, net		$	80,635			$	85,079

 

Depreciation expense was $12.7 million, $12.8 million and $12.0 million for the years ended December 31, 2018, 2017 and 2016, respectively, which is recorded in cost of sales, selling, general and administrative expense and research and development expense in the consolidated statements of income.

 

Note 9 – Lease Arrangements

 

We are the lessor in sales-type lease arrangements for network equipment, which have terms of 18 months to five years. The net investment in sales-type leases consists of lease receivables less unearned income. Collectability of sales-type leases is evaluated periodically at an individual customer level. At December 31, 2018 and 2017, we had no allowance for credit losses for our net investment in sales-type leases. As of December 31, 2018 and 2017, the components of the net investment in sales-type leases were as follows:

 

(In thousands)		2018				2017
Current minimum lease payments receivable (included in other receivables)		$	11,339			$	11,325
Non-current minimum lease payments receivable (included in other assets)			1,670				2,913
Total minimum lease payments receivable			13,009				14,238
Less: Current unearned revenue			631				707
Less: Non-current unearned revenue			473				787
Net investment in sales-type leases		$	11,905			$	12,744

 

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Future minimum lease payments to be received from sales-type leases as of December 31, 2018 are as follows:

 

(In thousands)		Amount (1)
2019		$	11,339
2020			990
2021			431
2022			189
2023			60
Total		$	13,009

 

Note 10 – Goodwill and Intangible Assets

Goodwill, which relates to our acquisitions of Bluesocket, Inc. and SmartRG, were $7.1 million at December 31, 2018 and $3.5 million at December 31, 2017 of which $6.7 million and $0.4 million is allocated to our Network Solutions and Services & Support reportable segments, respectively, for the year ended December 31, 2018 and of which $3.1 million and $0.4 million is allocated to our Network Solutions and Services & Support reportable segments, respectively, for the year ended December 31, 2017.

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

The following table presents our intangible assets as of December 31, 2018 and 2017:

 

		2018												2017
(In thousands)		Gross Value				Accumulated Amortization				Net Value				Gross Value				Accumulated Amortization				Net Value
Customer relationships		$	22,455			$	(5,380	)		$	17,075			$	7,474			$	(4,283	)		$	3,191
Developed technology			12,801				(4,867	)			7,934				5,524				(4,663	)			861
Licensed technology			5,900				(520	)			5,380				—				—				—
Supplier relationships			2,800				(1,108	)			1,692				—				—				—
Patents			500				(157	)			343				500				(89	)			411
Licensing agreements			560				(5	)			555				—				—				—
Intellectual property			930				(930	)			—				930				(852	)			78
Non-compete			200				(200	)			—				200				(115	)			85
Trade names			310				(106	)			204				100				(65	)			35
Total		$	46,456			$	(13,273	)		$	33,183			$	14,728			$	(10,067	)		$	4,661

 

Amortization expense was $2.3 million, $2.9 million and $2.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.

As of December 31, 2018, the estimated future amortization expense of intangible assets is as follows:

 

(In thousands)		Amount
2019		$	5,332
2020			4,450
2021			4,101
2022			3,477
2023			3,325
Thereafter			12,498
Total		$	33,183

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Note 11 – Alabama State Industrial Development Authority Financing and Economic Incentives

In conjunction with the 1995 expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive program offered by the State of Alabama Industrial Development Authority (the Authority). Pursuant to the program, on January 13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of the bonds to ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama (now Regions Bank of Alabama) (the Bank). Wachovia Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of Tennessee) (the Bondholder), which was acquired by Wells Fargo & Company on December 31, 2008, purchased the original bonds from the Bank and made further advances to the Authority, bringing the total amount outstanding to $50.0 million. An Amended and Restated Taxable Revenue Bond (Amended and Restated Bond) was issued and the original financing agreement was amended. The Amended and Restated Bond bears interest, payable monthly. The interest rate is 2% per annum. The Amended and Restated Bond matures on January 1, 2020, and is currently outstanding in the aggregate principal amount of $25.6 million. The estimated fair value of the bond using a level 2 valuation technique at December 31, 2018 was approximately $25.4 million based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. We are required to make payments to the Authority in amounts necessary to pay the interest on the Amended and Restated Bond. Included in long-term investments at December 31, 2018 is $25.6 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit against the principal of this bond, and we have the right to set-off the balance of the Amended and Restated Bond with the collateral deposit in order to reduce the balance of the indebtedness.

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 that we are required to remit to the state for those employment positions that qualify under the program. We realized economic incentives related to payroll withholdings totaling $1.4 million, $1.5 million and $1.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. 

We made principal payments of $1.1 million for each of the years ended December 31, 2018 and 2017, and anticipate making a principal payment in 2019. At December 31, 2018 and 2017, $1.0 million and $1.1 million, respectively of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance Sheets.

Note 12 – Income Taxes

A summary of the components of the provision (benefit) for income taxes for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

(In thousands)		2018				2017				2016
Current
Federal		$	(8,001	)		$	466			$	12,733
State			(476	)			(150	)			1,141
International			11,705				6,458				477
Total Current			3,228				6,774				14,351
Deferred
Federal			(14,448	)			8,024				647
State			(3,390	)			1,882				73
International			581				4,167				(3,405	)
Total Deferred			(17,257	)			14,073				(2,685	)
Total Provision (Benefit) for Income Taxes		$	(14,029	)		$	20,847			$	11,666

 

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Our effective income tax rate differs from the federal statutory rate due to the following:

 

		2018				2017				2016
Tax provision computed at the federal statutory rate			21.00	%			35.00	%			35.00	%
State income tax provision, net of federal benefit			14.53				2.17				3.93
Federal research credits			14.23				(11.88	)			(8.15	)
Foreign taxes			(11.45	)			(2.27	)			(0.34	)
Tax-exempt income			0.45				(0.75	)			(0.53	)
State tax incentives			3.15				(2.71	)			(2.77	)
Stock-based compensation			(2.87	)			1.43				2.53
Domestic production activity deduction			—				(1.13	)			(2.23	)
Bargain purchase			8.82				—				(2.64	)
Impact of U.S. tax reform			12.00				26.70				—
Global intangible low-taxed income (GILTI)			(17.48	)			—				—
Other, net			(0.34	)			0.09				0.08
Effective Tax Rate			42.04	%			46.65	%			24.88	%

 

Income (loss) before provision for income taxes for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

(In thousands)		2018				2017				2016
U.S. entities		$	(74,131	)		$	26,552			$	54,077
International entities			40,760				18,135				(7,182	)
Total		$	(33,371	)		$	44,687			$	46,895

 

Income (loss) before provision (benefit) for income taxes for international entities reflects income (loss) based on statutory transfer pricing agreements. This amount does not correlate to consolidated international revenues, many of which occur from our U.S. entity.

Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The principal components of our current and non-current deferred taxes are as follows:

 

(In thousands)		2018				2017
Deferred tax assets
Inventory		$	6,609			$	7,545
Accrued expenses			2,850				3,103
Investments			1,122				—
Deferred compensation			4,779				5,204
Stock-based compensation			3,069				2,988
Uncertain tax positions related to state taxes and related interest			326				370
Pensions			5,538				4,727
Foreign losses			3,097				3,091
State losses and credit carry-forwards			8,164				3,854
Federal loss and research carry-forwards			17,495				3,058
Valuation allowance			(5,816	)			(6,006	)
Total Deferred Tax Assets			47,233				27,934
Deferred tax liabilities
Property, plant and equipment			(3,515	)			(3,553	)
Intellectual property			(6,531	)			(663	)
Investments			—				(290	)
Total Deferred Tax Liabilities			(10,046	)			(4,506	)
Net Deferred Tax Assets		$	37,187			$	23,428

 

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

At December 31, 2018 and 2017, non-current deferred taxes related to our investments and our defined benefit pension plan reflect deferred taxes on the net unrealized gains and losses on available-for-sale investments and deferred taxes on unrealized losses in our pension plan. The net change in non-current deferred taxes associated with these items, a deferred tax benefit of $2.8 million and $1.7 million in 2018 and 2017, respectively, is recorded as an adjustment to other comprehensive income, presented in the Consolidated Statements of Comprehensive Income.

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 December 31, 2018, we had foreign losses of $3.1 million. A valuation allowance of $2.4 million has been established against the loss carryforwards.  The foreign loss carryforwards primarily resulted from an acquisition in 2009.  As of December 31, 2018, we had $8.2 million of state loss and tax credit carryforwards. We believe it is more likely than not we will not realize the full benefit of the deferred tax asset arising from these losses and credit carryforwards. Therefore, a valuation allowance of $3.4 million has been established against these carryforwards. The valuation allowance relates to a particular state where we no longer generate sufficient state income.  As of December 31, 2018, we had $17.5 million of federal loss and research carryforwards. These carryforwards are the result of acquisitions in 2011 and 2018 as well as domestic operating losses in 2018. Management will continue to assess the realization of our deferred tax assets and related valuation allowance. 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. Management continues to evaluate all evidence including historical operating results, the existence of losses in the most recent year, forecasted earnings, 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 would have a material impact on our consolidated financial statements.

The deferred tax assets for foreign and domestic carry-forwards, research and development tax credits, unamortized research and development costs, and state credit carry-forwards are $28.8 million. Some of these deferred tax assets will expire between 2019 and 2030 and others carryforward indefinitely. We will continue to assess the realization of our deferred tax assets and related valuation allowances. The net change in our valuation allowance from December 31, 2017 to December 31, 2018 was $(0.2) million.

As of December 31, 2018 and 2017, respectively, our cash and cash equivalents were $105.5 million and $86.4 million and short-term investments were $3.2 million and $16.1 million, which provided available short-term liquidity of $108.7 million and $102.6 million. Of these amounts, our foreign subsidiaries held cash of $87.1 million and $56.8 million, respectively, representing approximately 80.1% and 55.4% of available short-term liquidity, which is used to fund on-going liquidity needs of these subsidiaries. We intend to permanently reinvest these funds outside the U.S., except to the extent any of these funds can be repatriated without withholding tax, and our current business plans do not indicate a need to repatriate to fund domestic operations. However, if all these funds were repatriated to the U.S. or used for U.S. operations, certain amounts could be subject to tax. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practical to determine the amount of funds subject to unrecognized deferred tax liability.

During 2018, 2017 and 2016, we recorded no income tax benefit or expense for stock options exercised as an adjustment to equity.  This is calculated on the difference between the exercise price of stock option exercises and the market price of the underlying common stock upon exercise.

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The change in the unrecognized income tax benefits for the years ended December 31, 2018, 2017 and 2016 is reconciled below:

 

(In thousands)		2018				2017				2016
Balance at beginning of period		$	2,366			$	2,226			$	2,537
Increases for tax position related to:
Prior years			3				465				95
Current year			254				285				428
Decreases for tax positions related to:
Prior years			—				(14	)			—
Settlements with taxing authorities			—				—				—
Expiration of applicable statute of limitations			(755	)			(596	)			(834	)
Balance at end of period		$	1,868			$	2,366			$	2,226

 

As of December 31, 2018, 2017 and 2016, our total liability for unrecognized tax benefits was $1.9 million, $2.4 million and $2.2 million, respectively, of which $1.7 million, $2.2 million and $1.7 million, respectively, would reduce our effective tax rate if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2018, 2017 and 2016, the balances of accrued interest and penalties were $0.7 million, $0.8 million and $0.8 million, respectively.

We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions and several foreign jurisdictions. We are not currently under audit by the Internal Revenue Service. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2015.

Note 13 – Employee Benefit Plans

Pension Benefit Plan

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

The pension benefit plan obligations and funded status at December 31, 2018 and 2017, are as follows:

 

(In thousands)		2018				2017
Change in projected benefit obligation:
Projected benefit obligation at beginning of period		$	34,893			$	30,011
Service cost			1,193				1,260
Interest cost			727				607
Actuarial loss - experience			38				47
Actuarial (gain) loss - assumptions			2,139				(1,294	)
Benefit payments			(138	)			(80	)
Effects of foreign currency exchange rate changes			(1,615	)			4,342
Projected benefit obligation at end of period			37,237				34,893
Change in plan assets:
Fair value of plan assets at beginning of period			26,624				20,045
Actual return (loss) on plan assets			(2,024	)			709
Contributions			688				3,001
Effects of foreign currency exchange rate changes			(1,129	)			2,869
Fair value of plan assets at end of period			24,159				26,624
Unfunded status at end of period		$	(13,078	)		$	(8,269	)

 

The accumulated benefit obligation was $37.2 million and $32.9 million at December 31, 2018 and 2017, respectively. The increase in the accumulated benefit obligation and the actuarial loss is primarily attributable to a decrease in the discount rate during 2018.

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The net amounts recognized in the balance sheet for the unfunded pension liability as of December 31, 2018 and 2017 are as follows:

 

(In thousands)		2018				2017
Current liability		$	—			$	—
Non-current liability			13,078				8,269
Total		$	13,078			$	8,269

 

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 (loss). The components of net periodic pension cost and amounts recognized in other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

(In thousands)		2018				2017				2016
Net periodic benefit cost:
Service cost		$	1,193			$	1,260			$	1,211
Interest cost			727				607				720
Expected return on plan assets			(1,548	)			(1,267	)			(1,057	)
Amortization of actuarial losses			247				309				175
Net periodic benefit cost			619				909				1,049
Other changes in plan assets and benefit obligations    recognized in other comprehensive income:
Net actuarial (gain) loss			5,638				(654	)			1,782
Amortization of actuarial losses			(196	)			(406	)			(156	)
Amount recognized in other comprehensive income (loss)			5,442				(1,060	)			1,626
Total recognized in net periodic benefit cost and other    comprehensive income (loss)		$	6,061			$	(151	)		$	2,675

The amounts recognized in accumulated other comprehensive income as of December 31, 2018 and 2017 are as follows:

 

 

The defined benefit pension plan is accounted for on an actuarial basis, which requires the selection of various assumptions, including an expected rate of return on plan assets and a discount rate. The expected return on our German plan assets that is utilized in determining the benefit obligation and net periodic benefit cost is derived from periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks using standard deviations, and correlations of returns among the asset classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return.

Another key assumption in determining net pension expense is the assumed discount rate to be used to discount plan obligations. The discount rate has been derived from the returns of high-quality, corporate bonds denominated in Euro currency with durations close to the duration of our pension obligations.

The weighted-average assumptions that were used to determine the net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

		2018				2017				2016
Discount rates			2.13	%			1.90	%			2.64	%
Rate of compensation increase			2.00	%			2.00	%			2.00	%
Expected long-term rates of return			5.90	%			5.90	%			5.40	%

 

The weighted-average assumptions that were used to determine the benefit obligation at December 31, 2018 and 2017:

 

		2018				2017
Discount rates			1.75	%			2.13	%
Rate of compensation increase			2.00	%			2.00	%

 

Actuarial gains and losses are recorded in accumulated other comprehensive income. To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component of

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net periodic pension cost over the remaining service period of active participants. We estimate that $0.7 million will be amortized from accumulated other comprehensive income into net periodic pension cost in 2019 for the net actuarial loss.

We anticipate making a contribution to the pension plan in 2019 of approximately $1.1 million which reflects the net amount of service costs less expected benefit payments. The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid to participants:

 

(In thousands)
2019		$	400
2020			555
2021			646
2022			704
2023			808
2024 – 2028			5,430
Total		$	8,543

 

We have categorized our cash equivalents and our investments held at fair value that are included in the pension plan 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 December 31, 2018 Using
(In thousands)		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	1,010			$	1,010			$	—			$	—
Available-for-sale securities
Bond funds:
Government bonds			6,268				6,268				—				—
Corporate bonds			4,840				4,840				—				—
Emerging markets bonds			443				443				—				—
Equity funds:
Global equity			7,743				7,743				—				—
Emerging markets			1,188				1,188				—				—
Balanced fund			815				815				—				—
Large-cap value			262				262				—				—
Global real estate fund			926				926				—				—
Managed futures fund			664				664				—				—
Available-for-sale securities			23,149				23,149				—				—
Total		$	24,159			$	24,159			$	—			$	—

 

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		Fair Value Measurements at December 31, 2017 Using
(In thousands)		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Cash and cash equivalents		$	3,005			$	3,005			$	—			$	—
Available-for-sale securities
Bond funds:
Corporate bonds			14,349				14,349				—				—
Government bonds			2,305				2,305				—				—
Equity funds:
Large-cap blend			5,758				5,758				—				—
Balanced fund			898				898				—				—
Large cap value			309				309				—				—
Available-for-sale securities			23,619				23,619				—				—
Total		$	26,624			$	26,624			$	—			$	—

 

Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants, and consider a broad range of economic conditions. Central to the policy are target allocation ranges by asset class, which is currently 50% for bond funds, 40% for equity funds and 10% cash, real estate and managed futures.

The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.

The investment policy is periodically reviewed by us and a designated third-party fiduciary for investment matters. The policy is established and administered in a manner that is compliant at all times with applicable government regulations.

401(k) Savings Plan

We maintain the ADTRAN, Inc. 401(k) Retirement Plan (Savings Plan) for the benefit of our eligible employees. The Savings Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (Code), and is intended to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for retirement by contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to contribute a “safe harbor” amount each year. We match up to 4% of employee contributions (100% of an employee’s first 3% of contributions and 50% of their next 2% of contributions), beginning on the employee’s one-year anniversary date. In calculating our matching contribution, we only use compensation up to the statutory maximum under the Code ($275,000 for 2018). All contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributions and plan administration costs for the Savings Plan amounted to approximately $4.4 million, $4.6 million and $4.1 million in 2018, 2017 and 2016, respectively.

Deferred Compensation Plans

We maintain four deferred compensation programs for certain executive management employees and our Board of Directors.

For our executive management employees, the ADTRAN, Inc. Deferred Compensation Program for Employees is offered as a supplement to our tax-qualified 401(k) plan and is available to certain executive management employees who have been designated by our Board of Directors. This deferred compensation plan allows participants to defer all or a portion of certain specified bonuses and up to 25% of remaining cash compensation, and permits us to make matching contributions on a discretionary basis, without the limitations that apply to the 401(k) plan. To date, we have not made any matching contributions under this plan. We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees. Under this plan, participants may elect to defer all or a portion of their vested PSU’s and RSU’s to the Plan. Such deferrals shall continue to be held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment pursuant to an election made by the Participant.

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For our Board of Directors, we maintain the ADTRAN, Inc. Deferred Compensation Program for Directors. This program allows our Board of Directors to defer all or a portion of monetary remuneration paid to the Director, including, but not limited to, meeting fees and annual retainers. We also maintain the ADTRAN, Inc. Equity Deferral Program for Directors. Under this plan, participants may elect to defer all or a portion of their vested restricted stock awards. Such deferrals shall continue to be held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment pursuant to an election made by the Director.

We have set aside the plan assets for all plans in a rabbi trust (the Trust) and all contributions are credited to bookkeeping accounts for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The assets of the Trust are deemed to be invested in pre-approved mutual funds as directed by each participant, and the participant’s bookkeeping account is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be distributed six months after termination of employment in a single lump sum payment or annual installments paid over a three or ten-year term based on the participant’s election. Distributions will be made on a pro-rata basis from each of the hypothetical investments of the Participant’s account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.

Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money market instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the Trust and the amounts payable to the plan participants at December 31, 2018 and 2017 are as follows:

 

(In thousands)		2018				2017
Fair Value of Plan Assets
Long-term investments		$	18,256			$	19,883
Total Fair Value of Plan Assets		$	18,256			$	19,883
Amounts Payable to Plan Participants
Non-current liabilities		$	18,256			$	19,883
Total Amounts Payable to Plan Participants		$	18,256			$	19,883

 

Interest and dividend income of the Trust have been included in interest and dividend income in the accompanying 2018, 2017 and 2016 Consolidated Statements of Income (Loss). Changes in the fair value of the plan assets held by the Trust have been included in other income (expense) in the accompanying 2018, 2017 and 2016 Consolidated Statements of Income (Loss). Changes in the fair value of the deferred compensation liability are included as selling, general, and administrative expense in the accompanying 2018, 2017 and 2016 Consolidated Statements of Income (Loss). Based on the changes in the total fair value of the Trust’s assets, we recorded deferred compensation income (expense) in 2018, 2017 and 2016 of $2.1 million, $(2.6) million and $(1.3) million, respectively.

Retiree Medical Coverage

We provided medical, dental and prescription drug coverage to one retired former officer and his spouse, for his life, on the same terms as provided to our active officers, and to the spouse of a former deceased officer for up to 30 years. At December 31, 2018 and 2017, this liability totaled $0.1 million.  

Note 14 – Segment Information and Major Customers

Our chief operating decision maker regularly reviews our financial performance based on two reportable segments – Network Solutions and Services & Support. Network Solutions includes software and hardware products and next-generation virtualized solutions used in service provider or business networks, as well as prior-generation products. Services & Support includes our suite of ProCloud managed services, network installation, engineering and maintenance services, and fee-based technical support and equipment repair/replacement plans.

We evaluate the performance of our segments based on gross profit. Selling, general, and administrative expenses, research and development expenses, interest and dividend income, interest expense, net investment gain (loss), other income (expense) and provision (benefit) for taxes are reported on a company-wide, functional basis only. There are no inter-segment revenues.

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The following table presents information about the reported sales and gross profit of our reportable segments for each of the years ended December 31, 2018, 2017 and 2016. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

		2018								2017								2016
(In thousands)		Sales				Gross Profit				Sales				Gross Profit				Sales				Gross Profit
Network Solutions		$	458,232			$	179,303			$	540,396			$	260,833			$	525,502			$	254,797
Services & Support			71,045				24,262				126,504				42,802				111,279				36,533
Total		$	529,277			$	203,565			$	666,900			$	303,635			$	636,781			$	291,330

Sales by Category

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

The following tables disaggregates our revenue by major source for the years ended December 31, 2018, 2017 and 2016:

 

		2018
(In thousands)		Network Solutions				Services & Support				Total
Access & Aggregation		$	301,801			$	57,069			$	358,870
Subscriber Solutions & Experience (1)			129,067				5,393				134,460
Traditional & Other Products			27,364				8,583				35,947
Total		$	458,232			$	71,045			$	529,277

 

		2017
(In thousands)		Network Solutions				Services & Support				Total
Access & Aggregation		$	361,955			$	111,989			$	473,944
Subscriber Solutions & Experience (1)			132,294				6,162				138,456
Traditional & Other Products			46,147				8,353				54,500
Total		$	540,396			$	126,504			$	666,900

 

		2016
(In thousands)		Network Solutions				Services & Support				Total
Access & Aggregation		$	339,451			$	96,921			$	436,372
Subscriber Solutions & Experience (1)			130,645				6,963				137,608
Traditional & Other Products			55,406				7,395				62,801
Total		$	525,502			$	111,279			$	636,781

 

 

The following table presents sales information by geographic area for the years ended December 31, 2018, 2017 and 2016:

 

(In thousands)		2018				2017				2016
United States		$	288,843			$	508,178			$	501,337
Germany			167,251				119,502				85,780
Other international			73,183				39,220				49,664
Total		$	529,277			$	666,900			$	636,781

 

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Customers comprising more than 10% of revenue can change from year to year. Single customers comprising more than 10% of our revenue in 2018 included two customers at 27% and 17%. Single customers comprising more than 10% of our revenue in 2017 included two customers at 40% and 16%. Single customers comprising more than 10% of our revenue in 2016 included three customers at 24%, 19% and 12%. Other than those with more than 10 percent of revenues disclosed above, and excluding distributors, our next five largest customers can change from year-to-year. These customers represented 18%, 15% and 13% of total revenue in 2018, 2017 and 2016, respectively.

Additional Segment Information

 

As of December 31, 2018, long-lived assets, net totaled $80.6 million, which includes $77.3 million held in the U.S. and $3.3 million held outside the U.S. As of December 31, 2017, long-lived assets, net totaled $85.1 million, which includes $80.6 million held in the U.S. and $4.5 million held outside the U.S.

 

Note 15 – Commitments and Contingencies

 

In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment disputes, patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek damages or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition, or cash flows.

 

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of December 31, 2018, of which $7.7 million has been applied to these commitments.

 

We lease office space and equipment under operating leases which expire at various dates through 2025. As of December 31, 2018, future minimum rental payments under non-cancelable operating leases, including renewals determined to be reasonably assured, with original maturities of greater than 12 months are as follows:

 

(In thousands)
2019		$	3,873
2020			3,580
2021			2,771
2022			2,053
2023			1,317
Thereafter			762
Total		$	14,356

 

Rental expense was $4.6 million, $4.7 million and $4.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Note 16 – Earnings (Loss) per Share

A summary of the calculation of basic and diluted earnings (loss) per share for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

(In thousands, except for per share amounts)		2018				2017				2016
Numerator
Net Income (Loss)		$	(19,342	)		$	23,840			$	35,229
Denominator
Weighted average number of shares – basic			47,880				48,153				48,724
Effect of dilutive securities:
Stock options			—				406				170
Restricted stock and restricted stock units			—				140				55
Weighted average number of shares – diluted		$	47,880			$	48,699			$	48,949
Earnings (loss)  per share – basic		$	(0.40	)		$	0.50			$	0.72
Earnings (loss) per share – diluted		$	(0.40	)		$	0.49			$	0.72

 

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For each of the years ended December 31, 2018, 2017 and 2016, 2.5 million, 3.2 million and 4.6 million stock options were outstanding but were not included in the computation of diluted earnings (loss) per share because the options’ exercise prices were greater than the average market price of the common shares, therefore making them anti-dilutive under the treasury stock method.  As a result of the net loss for the year ended December 31, 2018, we excluded 0.1 million of unvested stock options, PSU’s, RSU’s and restricted stock from the calculation of diluted EPS due to their anti-dilutive effect.

Note 17 – Summarized Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly operating results for each of our last eight fiscal quarters. This information has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the data.

Unaudited Quarterly Operating Results

(In thousands, except for per share amounts)

 

Three Months Ended		March 31, 2018				June 30, 2018				September 30, 2018				December 31, 2018
Net sales		$	120,806			$	128,048			$	140,335			$	140,088
Gross profit		$	39,733			$	49,996			$	58,448			$	55,388
Operating income (loss)		$	(26,647	)		$	(12,813	)		$	(2,179	)		$	(3,783	)
Net income (loss)		$	(10,814	)		$	(7,670	)		$	7,589			$	(8,447	)
Earnings (loss) per common share - basic		$	(0.22	)		$	(0.16	)		$	0.16			$	(0.18	)
Earnings (loss) per common share – diluted (1)		$	(0.22	)		$	(0.16	)		$	0.16			$	(0.18	)

 

Three Months Ended		March 31, 2017				June 30, 2017				September 30, 2017				December 31, 2017
Net sales		$	170,279			$	184,673			$	185,112			$	126,836
Gross profit		$	73,709			$	84,626			$	86,491			$	58,809
Operating income (loss)		$	6,949			$	16,363			$	18,227			$	(4,153	)
Net income (loss)		$	6,651			$	12,401			$	15,898			$	(11,110	)
Earnings (loss) per common share - basic		$	0.14			$	0.26			$	0.33			$	(0.23	)
Earnings (loss) per common share – diluted (1)		$	0.14			$	0.26			$	0.33			$	(0.23	)

 

Note 18 – Subsequent Events

On January 23, 2019, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the close of business on February 7, 2019. The quarterly dividend payment was $4.3 million and was paid on February 21, 2019. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.

During the first quarter and as of February 26, 2019, we have repurchased 13,000 shares of our common stock through open market purchases at an average cost of $14.06 per share. We currently have the authority to purchase an additional 2.5 million shares of our common stock under the current plan approved by the Board of Directors.

In February 2019, $1.0 million of an outstanding investment loan due to ADTRAN was replaced with a secured loan in that amount. The remaining balance of this investment loan was converted to participating preferred shares of the respective company.

 

In February 2019, we announced the restructuring of our workforce in Germany, which includes the closure of the office location in Munich, Germany accompanied by relocation or severance benefits for the affected employees and a voluntary early retirement offering to certain other employees. The restructuring is expected to be completed in the fourth quarter of 2019. ADTRAN does not have sufficient information currently on which to estimate the liability associated with this restructuring, including costs associated with employee severance and relocation.

 

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On February 25, 2019, one the Company’s customers filed for voluntary Chapter 11 bankruptcy as a result of a court ruling resulting in a substantial legal judgment against the customer. In 2018, this customer accounted for less than 5% of the Company’s revenue. As of December 31, 2018, the Company had $2.6 million related to product and services revenue and $0.3 million related to a leased equipment arrangement included in accounts receivable on the Consolidated Balance Sheet that was due from this customer. As of December 31, 2018, the Company had $9.4 million included in other receivables related to a leased equipment arrangement on its Consolidated Balance Sheet that was due from this customer. Since December 31, 2018, and through the date of this filing, all $2.6 million of the outstanding products and services accounts receivable and $0.1 million of the outstanding accounts receivable related to leased equipment have been collected. Additionally, $1.7 million of the outstanding other receivables related to leased equipment have been collected. Therefore, there is potential risk of uncollectibility up to $7.8 million on the remaining outstanding receivable balances as of December 31 2018. The Company has evaluated the collectibility of the remaining receivable balances with the best available and applicable information as of the date of this filing and the impact was not material to the consolidated financial statements as of December 31, 2018. The Company will continue to evaluate the collectibility of the remaining accounts receivable balances in subsequent reporting periods. Additionally, it is uncertain at this time the impact this voluntary bankruptcy filing might have on the Company’s operating income prospectively; however, the Company believes it will not have a significant impact on the Company’s liquidity and capital resources.

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ITEM 9A.

CONTROLS AND PROCEDURES

(a)

Internal Control over Financial Reporting.  Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include in our Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting, as well as a report from our independent registered public accounting firm on the effectiveness of internal control over financial reporting. Management’s report on internal control over financial reporting is included below, and the related report from our independent registered public accounting firm is located in Part II, Item 8, “Financial Statements and Supplementary Data,” of this report.

(b)

Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated by the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved.

As of the end of the period covered by this report, an evaluation was carried out by management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. At the time of the Original Filing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018. Subsequent to that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses in our internal control over financial reporting described below in Management’s Report on Internal Control over Financial Reporting (Restated), our disclosure controls and procedures were not effective as of December 31, 2018.

Despite the existence of these material weaknesses (as described below), we believe that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States of America.

(c)

Changes in Internal Control over Financial Reporting.  There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (RESTATED)

Management of ADTRAN, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. ADTRAN’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. ADTRAN’s internal control over financial reporting includes those policies and procedures that:

•

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of ADTRAN;

 

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of ADTRAN are being made only in accordance with authorizations of management and directors of ADTRAN; and

 

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of ADTRAN’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Management assessed the effectiveness of ADTRAN’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

A material weakness is a significant deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2018, management determined that there were deficiencies in ADTRAN’s internal control over financial reporting that constituted material weaknesses. Specifically, management determined that the Company did not design and maintain effective internal control over certain aspects of the existence and valuation of inventory:

 

•

Management determined that controls were not effectively designed, documented, and maintained to verify that the existence of all inventories subject to our cycle count program were included and counted at the frequency required under ADTRAN’s internal policies, and that the key reports and related data used to monitor the results of this program were not validated to ensure completeness and accuracy.

 

•

Management determined that controls were not effectively designed and maintained over the determination of the estimated reserve for excess and obsolete inventory including the review of significant inputs and assumptions used to determine our excess and obsolete inventory reserve, and to ensure the completeness and accuracy of key reports and related data used in the calculation of this reserve.

These material weaknesses did not result in any material misstatements of the Company’s financial statements or disclosures for any period presented in the accompanying consolidated financial statements. While the above material weaknesses did not result in a material misstatement of the Company’s consolidated financial statements, these material weaknesses could result in a misstatement of the Company’s interim or annual consolidated financial statements and disclosures that would result in a material misstatement that would not be prevented or detected.

In Management’s Report on Internal Control over Financial Reporting included in the Original Filing, management previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018. Subsequent to the filing date of the Original Filing, management has concluded that the material weaknesses described above existed as of December 31, 2018. As a result, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2018 based on the criteria in Internal Control-Integrated Framework (2013) issued by COSO. Accordingly, management has restated its Report on Internal Control over Financial Reporting.

The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Part II, Item 8, “Financial Statements and Supplementary Data,” of this report.

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PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this report.

 

(1)

Consolidated Financial Statements

 

The consolidated financial statements of ADTRAN and its subsidiaries, included herein in Item 8, are as follows:

 

•

The consolidated financial statements of ADTRAN and the report of independent registered public accounting firm thereon are set forth under Part II, Item 8 of this report;

•

Consolidated Balance Sheets as of December 31, 2018 and 2017;

•

Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016;

•

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016;

•

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016;

•

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016; and

•

Notes to Consolidated Financial Statements.

(2)

Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts

 

(3)

Exhibits

 

The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses. We will furnish any exhibit upon request to: ADTRAN, Inc., Attn: Investor Relations, 901 Explorer Boulevard, Huntsville, Alabama 35806.  There is a charge of $0.50 per page to cover expenses for copying and mailing.

 

Exhibit Number		Description
2.1		Asset Sale and Purchase Agreement dated 11 December 2011 Regarding the Sale and Purchase of the NSN DSLAM, GPON and ACI Products and the Related Services Businesses (Exhibit 2.1 to ADTRAN’s 2011 Form 10-K/A filed July 26, 2012).
3.1		Certificate of Incorporation, as amended (Exhibit 3.1 to ADTRAN's Registration Statement on Form S-1, No. 33-81062). (P)
3.2		Bylaws, as amended (Exhibit 3.1 to ADTRAN's Form 8-K filed October 13, 2011).
10.1		Documents relative to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) issued by the Alabama State Industrial Development Authority, consisting of the following:
		(a)		First Amended and Restated Financing Agreement dated April 25, 1997, among the State Industrial Development Authority, a public corporation organized under the laws of the State of Alabama (the “Authority”), ADTRAN and First Union National Bank of Tennessee, a national banking corporation (the “Bondholder”) (Exhibit 10.1(a) to ADTRAN's Form 10-Q filed May 9, 1997).
		(b)		First Amended and Restated Loan Agreement dated April 25, 1997, between the Authority and ADTRAN (Exhibit 10.1(b) to ADTRAN’s Form 10-Q filed May 9, 1997).
		(c)		First Amended and Restated Specimen Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) (Exhibit 10.1(c) to ADTRAN’s Form 10-Q filed May 9, 1997).
		(d)		First Amended and Restated Specimen Note from ADTRAN to the Bondholder, dated April 25, 1997 (Exhibit 10.1(d) to ADTRAN’s Form 10-Q filed May 9, 1997).

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Exhibit Number		Description
		(e)		Amended and Restated Investment Agreement dated January 3, 2002 between ADTRAN and First Union National Bank (successor-in-interest to First Union National Bank of Tennessee (the “Successor Bondholder”)) (Exhibit 10.1(e) to ADTRAN’s 2002 Form 10-K filed March 20, 2003).
		(f)		Resolution of the Authority authorizing the amendment of certain documents, dated April 25, 1997, relating to the $50,000,000 Taxable Revenue Bond, Series 1995 (ADTRAN, Inc. Project) (Exhibit 10.1(f) to ADTRAN’s Form 10-Q filed May 9, 1997).
		(g)		Resolution of ADTRAN authorizing the First Amended and Restated Financing Agreement, the First Amended and Restated Loan Agreement, the First Amended and Restated Note, and the Investment Agreement (Exhibit 10.1(g) to ADTRAN’s Form 10-Q filed May 9, 1997).
		(h)		Amendment to First Amended and Restated Financing Agreement and First Amended and Restated Loan Agreement dated January 3, 2002 between ADTRAN and the Successor Bondholder (Exhibit 10.1(h) to ADTRAN’s 2002 Form 10-K filed March 20, 2003).
10.2		Tax Indemnification Agreement dated July 1, 1994 by and among ADTRAN and the stockholders of ADTRAN prior to ADTRAN's initial public offering of Common Stock (Exhibit 10.5 to the 1994 Form 10-K). (P)
10.3		Management Contracts and Compensation Plans:
		(a)		ADTRAN, Inc. Management Incentive Bonus Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed February 3, 2006).
		(b)		ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 4.1 to ADTRAN’s Registration Statement on Form S-8 (File No. 333-133927) filed May 9, 2006).
		(c)		First Amendment to the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.3(h) to ADTRAN’s 2007 Form 10-K filed February 28, 2008).
		(d)		Form of Nonqualified Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed June 8, 2006).
		(e)		Form of Incentive Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.2 to ADTRAN’s Form 8-K filed June 8, 2006).
		(f)		ADTRAN, Inc. 2005 Directors Stock Option Plan and Forms of Nonqualified Stock Option Agreements (Exhibit 10.1 to ADTRAN’s Form 8-K filed on May 20, 2005).
		(g)		Summary of Non-Employee Director Compensation (Exhibit 10.3(k) to ADTRAN’s 2006 Form 10-K filed on February 28, 2007).
		(h)		First Amendment to the ADTRAN, Inc. 2005 Directors Stock Option Plan (Exhibit 10.3(l) to ADTRAN’s 2007 Form 10-K filed February 28, 2008).
		(i)		Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed November 12, 2008).
		(j)		Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed November 9, 2010).
		(k)		ADTRAN, Inc. 2015 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed May 15, 2015).
		(l)		ADTRAN, Inc. Deferred Compensation Program for Employees, as amended and restated as of June 1, 2010 (Exhibit 10.3(n) to ADTRAN’s Form 10-K filed February 24, 2016).
		(m)		ADTRAN, Inc. Deferred Compensation Program for Directors, as amended and restated as of June 1, 2010 (Exhibit 10.3(o) to ADTRAN’s Form 10-K filed February 24, 2016).
		(n)		ADTRAN, Inc. Equity Deferral Program for Employees, as amended and restated as of October 1, 2011 (Exhibit 10.3(p) to ADTRAN’s Form 10-K filed February 24, 2016).
		(o)		ADTRAN, Inc. Equity Deferral Program for Directors, as amended and restated as of October 1, 2011 (Exhibit 10.3(q) to ADTRAN’s Form 10-K filed February 24, 2016).
		(p)		Employment Agreement, dated October 29, 2015, between Roger Shannon and ADTRAN, Inc. (Exhibit 10.3(r) to ADTRAN’s Form 10-K filed February 24, 2016).

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Exhibit Number		Description
21*		Subsidiaries of ADTRAN.
23**		Consent of PricewaterhouseCoopers LLP.
24*		Powers of Attorney.
31**		Rule 13a-14(a)/15d-14(a) Certifications.
32**		Section 1350 Certifications.
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*	Filed with the Annual Report on Form 10-K originally filed on February 28, 2019

**	Filed herewith

 

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ADTRAN, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

 

(In thousands)		Balance at Beginning of Period				Charged to Costs & Expenses				Deductions				Balance at End of Period
Year ended December 31, 2018
Allowance for Doubtful Accounts		$	—				128				—			$	128
Inventory Reserve		$	23,355				7,006				352			$	30,009
Warranty Liability		$	9,724				7,392				8,493			$	8,623
Deferred Tax Asset Valuation Allowance		$	6,006				—				190			$	5,816
Year ended December 31, 2017
Allowance for Doubtful Accounts		$	—				—				—			$	—
Inventory Reserve		$	25,249				6,406				8,300			$	23,355
Warranty Liability		$	8,548				6,951				5,775			$	9,724
Deferred Tax Asset Valuation Allowance		$	6,149				18				161			$	6,006
Year ended December 31, 2016
Allowance for Doubtful Accounts		$	19				—				19			$	—
Inventory Reserve		$	26,675				3,303				4,729			$	25,249
Warranty Liability		$	8,739				8,561				8,752			$	8,548
Deferred Tax Asset Valuation Allowance		$	7,250				69				1,170			$	6,149

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this twentieth day of September, 2019.

 

 

ADTRAN, Inc. (Registrant)
By:		/s/ Michael Foliano
		Michael Foliano
		Senior Vice President of Finance and Chief Financial
		Officer

 

 

 

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