Quarterly Report (10-q)

Date : 05/07/2019 @ 3:03PM
Source : Edgar (US Regulatory)
Stock : ADTRAN Inc (ADTN)
Quote : 9.16  0.03 (0.33%) @ 7:55PM

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number: 000-24612

 

ADTRAN, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

63-0918200

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

901 Explorer Boulevard

Huntsville, Alabama

35806-2807

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (256) 963-8000

 

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 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  

  

Small 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  

Title of each class Trading Symbol Name of exchange on which registered
  Common Stock, Par Value $0.01         ADTN    The NASDAQ Global Select Market

As of May 1, 2019, the registrant had 47,809,152 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 

 

 


ADTRAN, Inc.

Quarterly Report on Form 10-Q

For the three months ended March 31, 2019

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of March 31, 2019 – (Unaudited) and December 31, 2018 – (Audited)

 

3

 

 

Consolidated Statements of Income for the  three months ended March 31, 2019 and 2018 – (Unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018 – (Unaudited)

 

5

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the  three months ended March 31, 2019 and 2018 

 

6

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 – (Unaudited)

 

7

 

 

Notes to Consolidated Financial Statements – (Unaudited)

 

8

2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

4

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

1A

 

Risk Factors

 

39

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

6

 

Exhibits

 

40

 

 

 

 

 

 

 

SIGNATURE

 

41

 

 

 

 

 

FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN. ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report, our other filings with the Securities and Exchange Commission (SEC) and other communications with our stockholders. Generally, the words, “believe”, “expect”, “intend”, “estimate”, “anticipate”, “will”, “may”, “could” and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors that Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. They have also been discussed in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 28, 2019 with the SEC. Though we have attempted to list comprehensively these important factors, we caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or a combination of factors may have on our business.

You are further cautioned not to place undue reliance on these forward-looking statements because they speak only of our views as of the date that the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADTRAN, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

109,119

 

 

$

105,504

 

Short-term investments

 

 

31,290

 

 

 

3,246

 

Accounts receivable, less allowance for doubtful accounts of $82 and $128 at   March 31, 2019 and December 31, 2018, respectively

 

 

99,032

 

 

 

99,385

 

Other receivables

 

 

34,583

 

 

 

36,699

 

Inventory, net

 

 

93,609

 

 

 

99,848

 

Prepaid expenses and other current assets

 

 

9,683

 

 

 

10,744

 

Total Current Assets

 

 

377,316

 

 

 

355,426

 

Property, plant and equipment, net

 

 

79,505

 

 

 

80,635

 

Deferred tax assets, net

 

 

36,891

 

 

 

37,187

 

Goodwill

 

 

6,982

 

 

 

7,106

 

Intangibles, net

 

 

31,817

 

 

 

33,183

 

Other assets

 

 

14,885

 

 

 

5,668

 

Long-term investments

 

 

85,227

 

 

 

108,822

 

Total Assets

 

$

632,623

 

 

$

628,027

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

60,116

 

 

$

60,054

 

Bonds payable

 

 

25,600

 

 

 

1,000

 

Unearned revenue

 

 

15,230

 

 

 

17,940

 

Accrued expenses

 

 

14,039

 

 

 

11,746

 

Accrued wages and benefits

 

 

15,105

 

 

 

14,752

 

Income tax payable, net

 

 

11,785

 

 

 

12,518

 

Total Current Liabilities

 

 

141,875

 

 

 

118,010

 

Non-current unearned revenue

 

 

4,514

 

 

 

5,296

 

Other non-current liabilities

 

 

42,687

 

 

 

33,842

 

Bonds payable

 

 

 

 

 

24,600

 

Total Liabilities

 

 

189,076

 

 

 

181,748

 

Commitments and contingencies (see Note 17)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 200,000 shares authorized;

      79,652 shares issued and 47,777 shares outstanding at March 31, 2019 and

      79,652 shares issued and 47,751 shares outstanding at December 31, 2018

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

269,529

 

 

 

267,670

 

Accumulated other comprehensive loss

 

 

(14,885

)

 

 

(14,416

)

Retained earnings

 

 

879,180

 

 

 

883,975

 

Less treasury stock at cost: 31,875 and 31,901 shares at March 31, 2019 and

   December 31, 2018, respectively

 

 

(691,074

)

 

 

(691,747

)

Total Stockholders’ Equity

 

 

443,547

 

 

 

446,279

 

Total Liabilities and Stockholders’ Equity

 

$

632,623

 

 

$

628,027

 

 

See accompanying notes to consolidated financial statements.

 

3


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Sales

 

 

 

 

 

 

 

 

Products

 

$

125,822

 

 

$

105,253

 

Services

 

 

17,969

 

 

 

15,553

 

Total Sales

 

 

143,791

 

 

 

120,806

 

Cost of Sales

 

 

 

 

 

 

 

 

Products

 

 

70,734

 

 

 

68,612

 

Services

 

 

12,445

 

 

 

12,461

 

Total Cost of Sales

 

 

83,179

 

 

 

81,073

 

Gross Profit

 

 

60,612

 

 

 

39,733

 

Selling, general and administrative expenses

 

 

35,132

 

 

 

33,531

 

Research and development expenses

 

 

31,647

 

 

 

32,849

 

Operating Loss

 

 

(6,167

)

 

 

(26,647

)

Interest and dividend income

 

 

591

 

 

 

866

 

Interest expense

 

 

(127

)

 

 

(132

)

Net investment gain (loss)

 

 

5,926

 

 

 

(97

)

Other income (expense), net

 

 

855

 

 

 

(57

)

Gain on bargain purchase of a business, net

 

 

 

 

 

11,322

 

Income (Loss) Before Provision for Income Taxes

 

 

1,078

 

 

 

(14,745

)

(Provision) benefit for income taxes

 

 

(308

)

 

 

3,931

 

Net Income (Loss)

 

$

770

 

 

$

(10,814

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

47,782

 

 

 

48,232

 

Weighted average shares outstanding – diluted

 

 

47,853

 

 

 

48,232

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share – basic

 

$

0.02

 

 

$

(0.22

)

Earnings (loss) per common share – diluted

 

$

0.02

 

 

$

(0.22

)

Dividend per share

 

$

0.09

 

 

$

0.09

 

 

See accompanying notes to consolidated financial statements.

 

 

 

4


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net Income (Loss)

 

$

770

 

 

$

(10,814

)

Other Comprehensive Loss, net of tax

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale securities

 

 

185

 

 

 

(3,412

)

Defined benefit plan adjustments

 

 

121

 

 

 

62

 

Foreign currency translation

 

 

(1,160

)

 

 

842

 

Other Comprehensive Loss, net of tax

 

 

(854

)

 

 

(2,508

)

Comprehensive Loss, net of tax

 

$

(84

)

 

$

(13,322

)

 

See accompanying notes to consolidated financial statements.

 

 


 

5


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated Other Comprehensive Loss

 

 

Total

Stockholders'

Equity

 

Balance at January 1, 2018

 

 

79,652

 

 

$

797

 

 

$

260,515

 

 

$

922,178

 

 

$

(682,284

)

 

$

(3,295

)

 

$

497,911

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,814

)

 

 

 

 

 

 

 

 

 

 

(10,814

)

Adoption of new accounting standards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,499

 

 

 

 

 

 

 

 

 

 

 

3,499

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,508

)

 

 

(2,508

)

Dividend payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,367

)

 

 

 

 

 

 

 

 

 

 

(4,367

)

Dividends accrued on unvested restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

(2

)

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(150

)

 

 

519

 

 

 

 

 

 

 

369

 

PSUs, RSUs and restricted stock vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(733

)

 

 

733

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,171

)

 

 

 

 

 

 

(10,171

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

1,819

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,819

 

Balance at March 31, 2018

 

 

79,652

 

 

$

797

 

 

$

262,334

 

 

$

909,611

 

 

$

(691,203

)

 

$

(5,803

)

 

$

475,736

 

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated Other Comprehensive Loss

 

 

Total

Stockholders'

Equity

 

Balance at January 1, 2019

 

 

79,652

 

 

$

797

 

 

$

267,670

 

 

$

883,975

 

 

$

(691,747

)

 

$

(14,416

)

 

$

446,279

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

770

 

 

 

 

 

 

 

 

 

 

 

770

 

Adoption of new accounting standards (See Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(381

)

 

 

 

 

 

 

385

 

 

 

4

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(854

)

 

 

(854

)

Dividend payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,301

)

 

 

 

 

 

 

 

 

 

 

(4,301

)

Dividends accrued on unvested restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

 

 

 

 

 

 

 

 

(18

)

PSUs, RSUs and restricted stock vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(865

)

 

 

857

 

 

 

 

 

 

 

(8

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(184

)

 

 

 

 

 

 

(184

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

1,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,859

 

Balance at March 31, 2019

 

 

79,652

 

 

$

797

 

 

$

269,529

 

 

$

879,180

 

 

$

(691,074

)

 

$

(14,885

)

 

$

443,547

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

6


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

770

 

 

$

(10,814

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,496

 

 

 

3,614

 

Amortization of net premium on available-for-sale investments

 

 

6

 

 

 

42

 

Net (gain) loss on long-term investments

 

 

(5,926

)

 

 

97

 

Net (gain) loss on disposal of property, plant and equipment

 

 

(6

)

 

 

67

 

Gain on bargain purchase of a business

 

 

 

 

 

(11,322

)

Stock-based compensation expense

 

 

1,859

 

 

 

1,819

 

Deferred income taxes

 

 

235

 

 

 

(1,877

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

170

 

 

 

63,904

 

Other receivables

 

 

2,001

 

 

 

(6,598

)

Inventory, net

 

 

5,974

 

 

 

3,368

 

Prepaid expenses and other assets

 

 

2,809

 

 

 

10,583

 

Accounts payable, net

 

 

166

 

 

 

(10,233

)

Accrued expenses and other liabilities

 

 

(2,355

)

 

 

826

 

Income tax payable

 

 

(487

)

 

 

2,753

 

Net cash provided by operating activities

 

 

9,712

 

 

 

46,229

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,872

)

 

 

(1,950

)

Proceeds from sales and maturities of debt and equity investments

 

 

17,039

 

 

 

49,074

 

Purchases of debt and equity investments

 

 

(15,318

)

 

 

(75,960

)

Acquisition of business

 

 

 

 

 

(7,806

)

Net cash used in investing activities

 

 

(151

)

 

 

(36,642

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

 

 

 

369

 

Purchases of treasury stock

 

 

(184

)

 

 

(10,171

)

Dividend payments

 

 

(4,301

)

 

 

(4,367

)

Net cash used in financing activities

 

 

(4,485

)

 

 

(14,169

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

5,076

 

 

 

(4,582

)

Effect of exchange rate changes

 

 

(1,461

)

 

 

772

 

Cash and cash equivalents, beginning of period

 

 

105,504

 

 

 

86,433

 

Cash and cash equivalents, end of period

 

$

109,119

 

 

$

82,623

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

273

 

 

$

95

 

 

See accompanying notes to consolidated financial statements.

 

 

 

7


ADTRAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

In the opinion of management, all adjustments necessary to fairly state these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2018, filed on February 28, 2019 with the SEC.

Use of Estimates

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

Recent Accounting Pronouncements

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

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

 

8


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 not es 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 aff ect performance and cash flows.  ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the effect of ASU 2018-13, but do not expect it will have a material effect on our financial statement disclosures.

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

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

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize right-of-use assets and lease liabilities on the balance sheet and to disclose key information about the entity’s leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarified certain aspects of ASU 2016-02, as well as, ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided for an optional transition method which allowed for the application of the legacy lease guidance, including its disclosure requirements, for the comparative periods presented in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the date of adoption. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 824) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

 

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

 

 

9


As a lessee, t he adoption of this standard did not have a material impact on our Consolidated Statement of Income or Statement of Cash F low. See Note 1 2 for additional information.

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

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

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities . ASU 2017-12 expanded and refined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and included certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness.  In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting, which permits the OIS rate based on SOFR as a U.S. benchmark interest rate. Both ASU 2017-12 and ASU 2018-16 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements as we currently do not have any hedging instruments.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. ASU 2018-02 allowed for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-02 on January 1, 2019, and upon adoption reclassified $0.4 million of stranded tax effects created by rate changes related to the Tax Cuts and Jobs Act of 2017 to retained earnings. See Note 13 for additional information.

2.  BUSINESS COMBINATIONS

On November 30, 2018, we acquired SmartRG, Inc., a provider of carrier-class, open-source connected home platforms and cloud services for broadband service providers in exchange for cash consideration. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. This revenue is included in the Subscriber Solutions & Experience category within the Network Solutions and Services & Support reportable segments.  

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

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

We recorded goodwill of $3.5 million as a result of this acquisition, which represents the excess of the purchase price over the fair value of net assets acquired. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.

 

 

10


On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. This revenue is included in the Access & Aggregation and Subscriber Solutions & Experience categories within the Network Solutions reportable segment.

 

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

 

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

 

(In thousands)

 

SmartRG

 

 

Sumitomo

 

Assets

 

 

 

 

 

 

 

 

  Tangible assets acquired

 

$

8,594

 

 

$

1,006

 

  Intangible assets

 

 

9,960

 

 

 

22,100

 

  Goodwill

 

 

3,489

 

 

 

 

Total assets acquired

 

 

22,043

 

 

 

23,106

 

Liabilities

 

 

 

 

 

 

 

 

  Liabilities assumed

 

 

(6,001

)

 

 

(3,978

)

Total liabilities assumed

 

 

(6,001

)

 

 

(3,978

)

Total net assets

 

 

16,042

 

 

 

19,128

 

  Gain on bargain purchase of a business, net of tax

 

 

 

 

 

(11,322

)

Total purchase price

 

$

16,042

 

 

$

7,806

 

 

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

 

 

 

Three Months Ended

 

 

March 19 to

 

(In thousands)

 

March 31, 2019

 

 

March 31, 2018

 

Revenue

 

$

7,348

 

 

$

 

Net loss

 

$

(1,684

)

 

$

(77

)

 

The details of the acquired intangible assets from these acquisitions are as follows:

 

(In thousands)

Value

 

 

Life (years)

Customer relationships

$

15,190

 

 

3 – 12

Developed technology

 

7,400

 

 

7

Licensed technology

 

5,900

 

 

9

Supplier relationship

 

2,800

 

 

2

Licensing agreements

 

560

 

 

5 – 10

Trade name

 

210

 

 

3

Total

$

32,060

 

 

 

 

11


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

 

(In thousands)

 

For the Three Months Ended March 31, 2018

 

Pro forma revenue

 

$

129,584

 

Pro forma net loss

 

$

(23,400

)

Pro forma loss per share - basic

 

$

(0.49

)

Pro forma loss per share - diluted

 

$

(0.49

)

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

3. REVENUE

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

Network Solutions Segment

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

Services & Support Segment

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

 

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

 

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

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

85,673

 

 

$

14,105

 

 

$

99,778

 

Subscriber Solutions & Experience (1)

 

 

34,719

 

 

 

2,034

 

 

 

36,753

 

Traditional & Other Products

 

 

5,430

 

 

 

1,830

 

 

 

7,260

 

Total

 

$

125,822

 

 

$

17,969

 

 

$

143,791

 

 

 

(1)

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

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

 

(In thousands )

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

69,385

 

 

$

12,295

 

 

$

81,680

 

Subscriber Solutions & Experience (1)

 

 

28,777

 

 

 

1,324

 

 

 

30,101

 

Traditional & Other Products

 

 

7,091

 

 

 

1,934

 

 

 

9,025

 

Total

 

$

105,253

 

 

$

15,553

 

 

$

120,806

 

 

 

(1)

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

 

 

12


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

 

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

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Accounts receivable, net

 

$

99,032

 

 

$

99,385

 

Contract assets

 

$

2,333

 

 

$

3,766

 

Unearned revenue

 

$

15,230

 

 

$

17,940

 

Non-current unearned revenue

 

$

4,514

 

 

$

5,296

 

 

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

4. INCOME TAXES

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

 

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

5. PENSION BENEFIT PLAN

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

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Service cost

 

$

375

 

 

$

308

 

Interest cost

 

 

162

 

 

 

187

 

Expected return on plan assets