UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

SECURITIES EXCHANGE ACT OF 1934

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

For the Fiscal Year Ended December 31, 20172019

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 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:each class

 

Trading Symbol(s)

Name of Each Exchangeeach exchange on which Registeredregistered

Common Stock, par valuePar Value $0.01 per share

 

ADTN

The 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

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, 20172019 was $979,857,575$724,323,806 based on a closing market price of $20.65$15.25 as quotedreported on the NASDAQ Global Select Market.Market (as of June 28, 2019, the most recent trading day prior to June 30, 2019). There were 48,424,08948,086,618 shares of common stock outstanding as of February 8, 2018.21, 2020.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 201813, 2020 are incorporated herein by reference in Part III.

 

 

 


 

ADTRAN, Inc.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 20172019

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

1.

 

Business

 

2

 

 

 

 

 

1A.

 

Risk Factors

 

11

 

 

 

 

 

1B.

 

Unresolved Staff Comments

 

25

 

 

 

 

 

2.

 

Properties

 

25

 

 

 

 

 

3.

 

Legal Proceedings

 

25

 

 

 

 

 

4.

 

Mine Safety Disclosures

 

25

 

 

 

 

 

4A.

 

Executive Officers of the Registrant

 

26

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

27

 

 

 

 

 

6.

 

Selected Financial Data

 

28

 

 

 

 

 

7.

 

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

 

29

 

 

 

 

 

7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

44

 

 

 

 

 

8.

 

Financial Statements and Supplementary Data

 

45

 

 

 

 

 

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

84

 

 

 

 

 

9A.

 

Controls and Procedures

 

84

 

 

 

 

 

9B.

 

Other Information

 

84

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

10.

 

Directors, Executive Officers and Corporate Governance

 

85

 

 

 

 

 

11.

 

Executive Compensation

 

85

 

 

 

 

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

85

 

 

 

 

 

13.

 

Certain Relationships and Related Transactions and Director Independence

 

85

 

 

 

 

 

14.

 

Principal Accountant Fees and Services

 

85

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

15.

 

Exhibits and Financial Statement Schedules

 

86

 

 

 

 

 

16.

 

Form 10-K Summary

 

88

 

 

 

 

 

 

 

SIGNATURES

 

89

 

 

 

 

 

 

 

 

 

 

Page

Number

Cautionary Note Regarding Forward-Looking Statements

2

Glossary of Selected Terms

3

PART I

Item 1.

Business

6

Item 1A.

Risk Factors

17

Item 1B.

Unresolved Staff Comments

33

Item 2.

Properties

33

Item 3.

Legal Proceedings

33

Item 4.

Mine Safety Disclosures

33

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

34

Item 6.

Selected Financial Data

35

Item 7.

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

36

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

49

Item 8.

Financial Statements and Supplementary Data

50

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

96

Item 9A.

Controls and Procedures

96

Item 9B.

Other Information

98

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

99

Item 11.

Executive Compensation

99

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

99

Item 13.

Certain Relationships and Related Transactions and Director Independence

99

Item 14.

Principal Accountant Fees and Services

99

PART IV

Item 15.

Exhibits and Financial Statement Schedules

100

Item 16.

Form 10-K Summary

102

SIGNATURES

103

 


PARTCAUTIONARY NOTE REGARDING 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, Inc. (“ADTRAN”, the “Company”, “we”, “our” or “us”). 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 (the “SEC”) and other communications with our stockholders. Any statement that does not directly relate to a historical or current fact is a forward-looking statement. 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 affect the accuracy of such statements. For a detailed description of the risk factors associated with our business, see Part I, Item 1A of this report. 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.


GLOSSARY OF SELECTED TERMS

Below are certain acronyms, concepts and defined terms commonly used in our industry and in this Annual Report on Form 10-K, along with their meanings:

Acronym/Concept/

Defined Term

Meaning

10G EPON

10-Gigabit EPON (as defined below)

10G PON

10-Gigabit PON (as defined below)

ADSL

Asymmetric Digital Subscriber Line

APAC

Asia Pacific

ATIS

Alliance for Telecommunications Industry Solutions; Standards organization that develops technical and operational standards and solutions for the information and technology industry

ATM

Asynchronous Transfer Mode

BBF

Broadband Forum

CAD/CAM

Computer-Aided Design/Computer-Aided Manufacturing

carrier

Entity that provides voice, data or video services to consumers and businesses

CLEC

Competitive Local Exchange Carrier

CPE

Customer-Premises Equipment

CSP

Communication Service Provider

C-TPAT

U.S. Customs Trade Partnership Against Terrorism

DOCSIS

Data Over Cable Service Interface Specification

DPU

Distribution Point Unit

DSL

Digital Subscriber Line

EMEA

Europe, Middle East and Africa

EPON

Ethernet Passive Optical Network

Ethernet

Means of connecting computers over a LAN (as defined below)

ETSI

European Telecommunications Standards Institute

EU

European Union

FCC

Federal Communications Commission

FSAN

Full Service Access Network

FTTB

Fiber to the Building

FTTdp

Fiber to the Distribution Point

FTTH

Fiber to the Home

FTTN

Fiber to the Node

FTTP

Fiber to the Premises

FTTx

Fiber to the x; Any broadband network architecture using optical fiber to provide all or part of the local loop used for last mile telecommunications

GDPR

General Data Protection Regulation

Gfast

A digital subscriber line protocol standard for local loops (telephone lines) shorter than 500 meters with performance targets between 100 Mbps (as defined below) and 1 gigabit per second, depending on loop length

GPON

Gigabit Passive Optical Network

HDSL

High-bit-rate Digital Subscriber Line

hiX

ADTRAN Multiservice Access Platform sold in the EU

ICT

Information and Communications Technology


IoT

Internet of Things

IP

Internet Protocol

ISO

International Organization for Standardization

ITU-T

International Telecommunication Union – Telecommunication Standardization Sector

LAN

Local Area Network

LATAM

Latin America

LTE

4G mobile communications standard; Long-Term Evolution

Mbps

Megabits per second

MDU

Multi-Dwelling Unit (apartment building, condominium, etc.)

MEF

Metro Ethernet Forum

micro-node

Small fixed access nodes that use VDSL2 and Gfast to deliver ultra-broadband services to a small number of end users

mmWave

Millimeter wave

MSAN

Multi-Service Access Network

MSO

Multiple System Operator

MSP

Managed Service Provider

NFV

Network Functions Virtualization

NG-PON2

Next-Generation Passive Optical Network 2

OCP

Open Compute Project

ODM

Original Design Manufacturer

OEM

Original Equipment Manufacturer

OLT

Optical Line Terminal

ONE

Optical Networking Edge

ONF

Open Networking Foundation

ONT

Optical Network Terminal

Operator

An entity that provides voice, data or video services to consumers and businesses

OS

Operating System

OSP

Outside Plant

OTT

Over the Top

PON

Passive Optical Network

QSFP

Quad Small Form-factor Pluggable

REACH

Registration, Evaluation, Authorization, and Restriction of Chemicals

RFoG

Radio Frequency over Glass

RoHS

Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment

RSP

Regional Service Provider

SaaS

Software-as-a-Service

SD-Access

Software Defined Access

SDN

Software Defined Networking

SDX

Software Defined Everything

SDO

Standards Developing Organizations

SEBA

SDN-Enabled Broadband Access

SEC

Securities and Exchange Commission

Service Provider

An entity that provides voice, data or video services to consumers and businesses


SFP

Small Form-factor Pluggable

SFP+

Enhanced Small Form-factor Pluggable

SI

System Integrator

SLA

Service Level Agreement

SmartOS

Smart Operating System used on SmartRG, Inc. devices

SP

Service Provider

Symmetrical

The ability to carry traffic both upstream and downstream simultaneously.

System Integrator

Person or company that specializes in bringing together component subsystems into a whole and ensuring that those subsystems function together

TDM

Time Division Multiplexed

TIA

Telecommunications Industry Association

TIP

Telecom Infra-Project

TL 9000

Standard developed by and for the ICT industry to drive consistency in the quality of products and services down the supply chain through the implementation of a common body of QMS requirements and defined performance-based measurements

U.K.

United Kingdom

U.S.

United States

VAR

Value-Added Reseller

VDSL2

Very high-speed Digital Subscriber Line 2

vWLAN

Virtual Wireless Local Area Network

VoIP

Voice over Internet Protocol

WAN

Wide Area Network

web-scale

The ability of large cloud software-based service firms, such as Google, Amazon, Netflix, Facebook, to achieve extreme levels of network agility and scalability when developing and delivering new features and services to their own operations or their customer base

WEEE

Waste Electrical and Electronic Equipment; European Community Directive 2012/19/EU on waste electrical and electronic equipment

WFA

Wi-Fi Alliance

xDSL

All types of digital subscriber lines

XFP

10 Gigabit Small Form-factor Pluggable

XGS-PON

Updated standard for Passive Optical Networks that can support 10 Gbps symmetrical data transfer


PART I

ITEM 1.

BUSINESS

 

Company Overview

ADTRAN, Inc. (ADTRAN)(“ADTRAN” or the “Company”) is a leading global provider of networking and communications equipment.solutions and services. Our vision is to enable a fully connected world where the power to communicate is available to everyone, everywhere. Our unique approach, unmatched industry expertise and innovative solutions enable us to address almost any customer need. Our products and services are utilized by a diverse global customer base of network operators that range from those having national or regional reach, operating as telephone or cable television network operators, to alternative network providers such as municipalities or utilities, as well as managed service providers who serve small- and medium-sized businesses and distributed enterprises.

We operate in two business segments: (1) Network Solutions, which includes hardware and software products, and (2) Services & Support, which includes a portfolio of services that complement our product portfolio. These two segments span across our three revenue categories: (1) Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products. A revenue category is distinguished by the types of products and services offered. Access & Aggregation is focused on solutions that are used by service providers to connect their network infrastructure to subscribers; Subscriber Solutions & Experience is concentrated on subscriber solutions that terminate broadband access in the home and/or business; and Traditional & Other Products encompasses prior-generation technologies, products and services and certain other offerings. See below for a detailed discussion of these reportable segments and revenue categories.

Our innovative solutions and services enable voice, data video and Internetvideo communications across a variety of network infrastructures. TheseThey are currently in use by millions of end users worldwide, making us a top supplier of broadband access solutions are deployed by many ofin both the United States’North American and the world’s largest communications service providers (CSPs), distributed enterprises and small and medium-sized businesses, public and private enterprises, and millions of individual users worldwide.

We were incorporated under the laws of Delaware in November 1985, and commenced operations in January 1986. We are headquartered in Cummings Research Park in Huntsville, Alabama. The mailing address at our headquarters is 901 Explorer Boulevard, Huntsville, Alabama, 35806. The telephone number at this location is (256) 963-8000.

Network Solutions

Network Solutions includes software and hardware products that enable CSPs and enterprise customers to realize a fully connected world. CSPs are now being challenged to deliver Gigabit-enabled residential services, widely available high-bandwidth cloud connectivity services for enterprise customers, and scalable Ethernet and optical networking for mobile backhaul and data center connectivity. These needs are driving CSPs to transition their networks to a fiber-rich, cloud-controlled and software-defined future state for large-scale converged service delivery.EMEA regions.

 

We are focused on being a top global supplier of Accesscommunications infrastructure and related value-added solutionsspanning from the Cloud Edgecloud edge (data center) to the Subscriber Edge.subscriber edge (subscriber device) serving both the residential internet and enterprise cloud services markets. We offer a broad portfolio of flexible network infrastructure solutions, customer premises equipment software, management and orchestration solutions and global services and support including network implementation, system integration and network maintenance and management services that enable service providers to meet their service demands now and in the future. These products and services enable service providers to transition to a common network supporting the simplified delivery of high-capacity services, regardless of subscriber density, network topology and infrastructure diversity.

ADTRAN was incorporated in Delaware in November 1985 and began operations in January 1986. Headquartered in Huntsville, Alabama, ADTRAN anchors Cummings Research Park—the second largest high-tech center in the U.S. and fourth largest in the world. The mailing address is 901 Explorer Boulevard, Huntsville, Alabama, 35806. Our telephone number at that location is (256) 963-8000. Our website is www.adtran.com. No information contained on our website is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K.


Industry Overview

Communications solution providers are investing in their networks for growth in subscriber acquisition and retention, while streamlining their operations to reduce costs and complexity. Drivers for this network investment include the evolution of government funding programs, regulatory broadband policies, competition, increasing subscriber demand for broadband and merger obligations.

Subscriber demand for higher bandwidth continues to increase due to increasing numbers of connected devices, OTT video, the prevalence of IoT and cloud services and the increasing use of internet applications. Today, practically everything is or can be “connected.” Performance is directly related to bandwidth availability. As the demand for high-definition video streaming services, low-latency cloud gaming services and smart home video surveillance applications continues to increase, so too does the need for higher bandwidth to the home and business. ADTRAN serves as a trusted partner to our customers. Working side-by-side with our customers, we enable them to glean the maximum performance from their network, providing a flexible path for their networks to evolve cost effectively, and to further monetize their investments.

Our Strategy

Our strategy is to provide innovative and cost-effective solutions for SPs that enable them to address their increasing broadband demands. Our solutions focus on technology transformations that are happening in broadband network infrastructure, home and business CPE and software solutions, and services needed to help our customers address increasing complexity while scaling to meet increasing consumer demands. We aspire to be one of the top communication technology players in the world and plan to achieve this goal through innovation in network, home and business technology, leadership in open source solutions, disruptive and unique products timed to market use, diversifying our customer base, delivering end to end product and service solutions, evolving our organization to be more flexible and agile, effective cost management, expanding our global scale and growing our share of home and business devices during Wi-Fi and cloud service technology transformations.

Reportable Segments

Our business operates under two reportable segments: (1) Network Solutions and (2) Services & Support. We review our financial performance, specifically revenue and gross profit, based on these two segments.

Network Solutions Segment

Our Network Solutions segment includes hardware and software products that support fiber optic-, copper- and coaxial-based infrastructures as well as a growing number of fixed wireless solutions. We offer traditional chassis-based network solutions, that enable CSPs to meet today’s service demands, while enabling them to transition tosuch as the fully converged, scalable, highly automated, cloud-controlled voice, data, InternetADTRAN Total Access 5000 and video network of the future.

ADTRAN hiX 5600.  We are also accelerating the industry’s transition to open, programmable and scalable networks. TheSD-Access networks by providing CSPs with open and disaggregated network elements leveraging open-source software and reference designs that we have helped drive over the last several years.

Our SD-Access architecture consists of the ADTRAN MosaicTM Software-Defined Access (SD-Access) architecture combines modern Web-scale technologies with open-source platforms to facilitate rapid innovation in multi-technology, multi-vendor environments. The Mosaic cloud platformCloud Platform and Mosaic OS, combined withthe ADTRAN SDX Series of programmable network elements,elements. Together, these solutions provide network operators with a highly agile open-servicesand scalable networking architecture. This allows operators to better compete with Web-scale competition by reducing the time and cost to on-board new service, technologies and best-of-breed suppliers as they strive to reduce operational costs while creating and deploying differentiated product offerings. Our products and services provide solutions supporting fiber- and copper-based infrastructures and a growing number of wireless and coax-based solutions, lowering the overall cost to deploy advanced services across a wide range of applications.

 

To furtherAlso included in this segment are our subscriber solutions that terminate fiber optic, copper and coaxial cable access networks in the goalhome and/or business and that extend access through our delivery of accelerating the industry’s path to SD-Access, we launched our Mosaic Open Networking Alliance to foster the widespread developmentwhole-home Wi-Fi solutions. These solutions also include connected home and industry adoption of Software Defined Networking (SDN) and Network Function Virtualization (NFV) solutions based on open standards. The Alliance includes two levels of engagement, the first of which comprises Collaboration Members committed to joint innovation, collaboration,enterprise software platforms that improve in-home visibility while leveraging subscriber insight and knowledge sharing. The second tier includes Integration Members, a community of partners who will integrate with or work withinnetwork analytics. These solutions are designed to elevate subscriber experience and empower customer care personnel, all leading to improving overall customer satisfaction and creating added revenue streams for the Mosaic framework. This involves Technology Partners focused on delivering innovative programmable network functions and service partners delivering managed services, system integration and other network operation requirements.operator.

 

Services & Support Segment

To complement our Network Solutions product portfolio and to enable our service provider customers to accelerate time to market, reduce costs and improve customer satisfaction, we offer a complete portfolio of maintenance, turnkeyservices. These services include consulting, solutions integration, network implementation, maintenance solutions integrationand professional and managed services.services as described below.

Our consulting services allow service providers to leverage ADTRAN’s network engineering expertise to build and deploy best-of-breed networks. Our NetAssure Program offers a variety of ways to leverage ADTRAN Professional Servicesnetworking expertise applied to networks.  One aspect of this program, resident engineering services, provides an on-site ADTRAN engineer, whose goal is to drive customer success by serving as the single point of contact for product knowledge, on-going network troubleshooting and technical expertise, enabling network operators to gain a strategic competitive advantage from our products.


Our solution integration services enable network operators to design and build the open distributed access networks of the future. Our offerings in this area include the SD-Access Accelerator, which enables CSPsservice providers to increaseexplore the benefits of SD-Access without impacting their service velocity, while providing higher customer satisfaction. Our proven nationwidenetwork. The SD-Access Accelerator includes system integration services with a compact pod that includes all of resources effectively addresses our customers’ unique requirements. the equipment needed to evaluate a SEBA solution. This fully functional SD-Access system enables network operators to cost-effectively perform functional testing, develop transition plans, access a variety of applications and environments and evaluate fully functional disaggregated solutions.

Our network implementation services offerenable network operators to increase service delivery velocity and improve their return on investment while increasing customer satisfaction. ADTRAN offers a full spectrumturn-key suite of services related to engineering (pre-construction), installation/turn-up (construction), and provisioning (post-construction), partneringhelp network operators accelerate network deployment. We partner with our customers to tailor a program to each specific service deliveryservice-delivery need.

 


We also offer a full spectrum of professional services under the ProServices® umbrella. ADTRAN ProServices is a comprehensive and flexible service program designed to offer complete networking lifecycle support. The ProServices portfolio consists of three distinct service offerings: ProStart® (planning and implementation), ProCare® (maintenance and support), and ProCloud® (cloud-based managed services). Our maintenance services are specifically designed to protect customers' networks from unnecessary downtime through SLA services, such as managed spares and remote or on-site technical support beyond our standard warranty coverage. Our ProCare® program, which is available to all of our customers, guarantees priority access to technical support engineers. Five different maintenance programs ranging from five-days-a-week, eight-hours-a-day and next business day equipment replacement to seven-days-a-week, 24-hours-a-day, and equipment replacement within four hours of notification are offered. In addition to protecting our customers’ network, ProCare provides resalable service value designed for the end-user customer. ProCloud offers the same maintenance benefits of ProCare, as well as a full suite of cloud-based network solutions that are easily deployable. These offerings have enabled us to provide resalable service offerings to help build a successful recurring revenue model with exceptional flexibility. Our Network Care Plans provide peace of mind, knowing that any issues will be identified, addressed and rectified as quickly as possible. Network Care Plans offer prioritized remote or on-site support, after-hours emergency support, advanced replacement, early access to software patches and upgrades, as well as bundled training and network management vouchers with thevouchers. Element management is an option of Element Managementand can be included as part of the support plan.

 

ADTRAN’s ProServices include a full spectrum of professional services for end-user customers or network operators reselling to end-user customers. This is a comprehensive and flexible service program designed to offer complete networking lifecycle support. The ProServices portfolio consists of three distinct service offerings: ProStart (end-user network implementation), ProCare (maintenance and support), and ProCloud (cloud-based Wi-Fi services). Our Solutions Integration offerings includeProCare program, which is available to all customers, is geared towards equipment located at the new SD-Access Acceleratorcustomer premises. It offers advanced hardware replacement and Resident Engineering services. These solutions enable service providerspriority access to explore the benefits of SD-Access without impacting their network. Simply stated, the SD-Access Accelerator includes system integration services with a compact, R-CORD pod. This fully functional SD-Access system enables service providers to cost-effectively perform functional testing, develop transition plans, access a variety of applications and environments and evaluate fully functional disaggregated solutions. Our resident engineering services provide an on-site ADTRAN engineer, whose goal is to drive customer success by serving as the single point of contact forour product knowledge, on-going network troubleshooting, and technical expertise enabling service providers to gain a strategic competitive advantage from our products.support engineers.

 

Revenue Categories

In addition to these professional services, we offer managed services to help customers manage their network components on a day-to- day basis. Our EliteCloud Plus service provides managed Wi-Fi with configuration changes, outage alerts, and on-site support with SLAs. For our Tier-3 service providers, we offer cloud-based device management services for day-to-day control of residential gateways and subscriber home analytics. In December 2019, we released a Network Performance Testing service to assist any network operator with FCC-mandated testing and reporting in support of the Connect America programs.

Revenue Categories

In addition to classifying our Network Solutions and Services & Supportoperations into two reportable segments, we report revenue across three categories of products and services: (1) Access & Aggregation, (2) Subscriber Solutions & Experience (formerly Customer Devices,Devices) and (3) Traditional & Other Products.

Our Access & Aggregation solutions are used by CSPscommunications service providers to connect their network infrastructure to their subscribers. This revenue category includes softwarehardware- and hardware-basedsoftware-based products and services that aggregate and/or originate access technologies. The portfolio of ADTRAN solutions within this category includesinclude a wide array of modular or fixed physical form factorsplatforms designed to deliver the best technology and economic fiteconomy based on the target subscriber density and environmental conditions.

The Access & Aggregation category includes the following product and service families such as:families:

 

Mosaic branded network management and subscriber services control and orchestration software within a SD-Access architecture

SDX series of SDN-controlled programmable network elements that form the hardware components within a SD-Access architecture

Total Access® 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)

hiX 5600 Series fiber aggregation and FTTN MSAN

Fiber to the Distribution Point (FTTdp) Gfast Optical Network Units (ONU)

GPON, EPON and 10G PON Optical Line Terminals (OLT)

Optical Networking Edge (ONE) aggregation

IP-based Digital Subscriber Line Access Multiplexers (DSLAMs)

Cabinet and Outside-Plant (OSP) enclosures and services

Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials

Planning, engineering, program management, maintenance, installation and commissioning services to implement customer network solutions

Other products and services that are generally applicable to Access & Aggregation

Total Access 5000 Series FTTP and FTTN MSANs

SDX Series of SDN-controlled programmable network elements that form the hardware components within SD-Access architectures

hiX 5600 Series fiber aggregation and FTTN MSANs

ADTRAN ONE branded packet optical transport solutions used for broadband and Ethernet services aggregation and/or metro transport.

FTTdp Gfast DPUs

IP-based DSLAMs

Mosaic-branded network management and subscriber services control and orchestration software within SD-Access architectures

Cabinet and OSP enclosures and services

Planning, engineering, program management, maintenance, installation and commissioning services to implement customer network solutions

SFP, SFP+, XFP, QSFP transceivers, cables and other miscellaneous materials

All technology varieties of PON OLTs used in conjunction with the ADTRAN family of ONTs or select third-party ONTs.

Other products and services that are generally applicable to Access & Aggregation

 


Customer DevicesincludesOur Subscriber Solutions & Experienceportfolio is used by service providers to terminate their access services infrastructure at the customer premises while providing an immersive and interactive experience for the subscriber. These solutions include copper and fiber WAN termination, LAN switching, Wi-Fi access and cloud software services for both residential and business markets.

In alignment with our productsincreased focus on enhancing the customer experience for both business and services that provideconsumer broadband customers as well as the addition of SmartRG, Inc. (“SmartRG”) at the end users access to CSP networks. Our Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.

The2018, what was previously known as our Customer Devices category became our Subscriber Solutions & Experience category in 2019, as this more accurately represents this revenue category and our vision moving forward.

The Subscriber Solutions & Experience category includes the following products, software and services such as:services:

Broadband customer premises solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical Network Terminals (ONTs)

Radio Frequency over Glass (RFoG) MicroNodes

Residential and business gateways

Wi-Fi access points and associated powering and switching infrastructure

Enterprise Session Border Controllers (eSBC)

Branch office and access routers

Carrier Ethernet services termination devices

Voice over Internet Protocol (VoIP) media gateways

ProServices pre-sale and post-sale technical support

Planning, engineering, program management, maintenance, installation and commissioning services to implement customer devices solutions into consumer, small business and enterprise locations

Other products and services that are generally applicable to customer devices

Broadband customer premises solutions, including GPON, XGS-PON, NG-PON2, EPON and 10G EPON and point-to-point Ethernet ONTs

SmartRG Wi-Fi-enabled residential gateway products and accessories across xDSL, Ethernet, DOCSIS, LTE, and fiber technologies

NetVanta Ethernet switches for reliable multi-gigabit local area networking

Intellifi (access points working together to form one unified, whole-home Wi-Fi network)

SmartOS-branded embedded software licensing for residential gateway and Wi-Fi devices

Bluesocket access points and vWLANs for business-class Wi-Fi and management

Mosaic cloud-based SaaS management platform for service providers to manage residential and enterprise networks

ProServices pre-sale and post-sale technical support

RFoG micro-nodes

Planning, engineering, program management, maintenance, installation and commissioning services to implement customer devices solutions into consumer, small business and enterprise locations

Mosaic cloud-based SaaS management platform for subscriber and network analytics collection used to enhance network operations and customer experience

NetVanta Ethernet switches for reliable multi-gigabit local area networking

Other products, software and services applicable to Subscriber Solutions & Experience

Our Traditional & Other Products category generally includes a mix of prior-generation technologies’ products and services, as well as other products and services that do not fit within the Access & Aggregation or Customer Devicesother revenue categories.

The Traditional & Other Products category includes products and services such as:

Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM)-based aggregation systems and customer devices

HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and customer networks

Other products and services that do not fit within the Access & Aggregation and Customer Devices categories

 

Access & Aggregation

We have more than 30 years of expert domain experience in the access network. We understand the transformative effects of broadband. We have seen time and time again how this technology transforms communities, rebuilds urban centers, revitalizes schools, stimulates economic growth and delivers innovative residential and business services. We have enabled hundreds of Gigabit communities across the United States. These communities are now seeing the true benefits of this technology and its impact on education, health care and economic development.

Simply stated, our Access & Aggregation solutions enable CSPs to connect to their customers. It was not that long ago that just having Internet connection was enough. Now that the Internet has become engrained in all aspects of our everyday lives, customers want high-speed broadband connectivity everywhere, all the time. We are enabling CSPs to meet this demand with a unique portfolio of innovative solutions. These products enable CSPs to maximize their current network investment while transitioning to next-generation virtualized networks.

Our market leadership is exemplified by our leading global position in hardened OSPs and our serving as a key provider for the world’s largest vectoring deployments. We are leading the introduction of industry-leading technology innovations like NGPON2 and XGS-PON, supporting multi-Gigabit per second services over fiber, and Gfast, supporting Gigabit services over existing phone lines and TV cabling, all supporting the enablement of Gigabit communities.

TDM and ATM-based aggregation systems and customer devices

HDSL, ADSL and other mature technologies used to deliver business and residential services over service provider access and customer networks

Other products and services outside the Access & Aggregation and Subscriber Solutions & Experience categories

 

 


Next-Gen Passive Optical Network (PON) technologies will enable access speeds up to 10 times that of existing FTTP technologies, providing the network scale and agility needed to support a Web-scale world. The primary value of Next-Gen PON technologies like NG-PON2 and XGS-PON is the ability to serve a mix of residential, business and backhaul services over a common network. Next-Gen PON enables operators to double the life of their fiber investment.Customers

 

Gfast is quickly gaining momentum among CSPs for its ability to enable Gigabit speeds over existing phone and TV infrastructure. We are a leader in the development of this technology and have been selected for five nationwide Gfast commercial deployments across six continents.

VDSL2 vectoring has become the fastest growing product in our company’s history, shipping over 10 million ports in less than three years. This advanced broadband technology supports the world’s regulatory goals for broadband penetration including ultra-fast broadband speeds over existing infrastructure. This drastically reduces zoning issues, build delays and tenant disruption, helping to advance the Gigabit Society. Super-Vectoring offers three times the broadband capacity of vectoring.

SDN and NFV are two key network architectural approaches that are enabling service providers and enterprises to create more agile, programmable networks. SDN enables highly scalable network programmability to facilitate service automation. NFV virtualizes functions typically performed in proprietary hardware and moves them into software functions that run on general-purpose hardware. The combination of these two technologies enables user-driven networks where subscribers can self-activate a wide range of sophisticated on-demand services without having to engage the CSP.

ADTRAN Mosaic™ is the industry’s most open and complete Software Defined Access (SD-Access) solution that natively integrates a complete FTTx portfolio with an open-source SDN controller. It is also the most awarded SD-Access solution in the industry with 13 industry awards. This breakthrough innovation is the first to market and supports the rapid service creation and delivery of broadband and business services at Web-scale. This solution is anchored by the Mosaic Cloud Platform (CP) and the Mosaic Operating System (OS). The Mosaic CP is built on an open, micro-services architecture that provides network management and SDN orchestration for the entire access network, from the cloud edge to the subscriber edge. It unlocks control and management functions from the underlying network elements, enabling a more flexible, agile services delivery environment. This provides a framework to support user-driven service models and a platform to deploy new network applications. Our Mosaic OS provides a consistent and field-proven feature set across a broad spectrum of network elements and access technologies. Its modular software architecture enables service providers to rapidly on-board new access technologies and introduce disruptive operational efficiencies while creating revenue-generating, on-demand applications across their entire access network.

We are focused on building next-generation access components with open, programmable application programming interfaces (APIs) allowing them to be natively integrated into any leading open source SDN control and orchestration system. To facilitate this approach, We are co-chairing the Broadband Forum’s SDN and NFV Work Area which is in the process of defining a common set of APIs for broadband access equipment.

The cable/multiple-service operator (cable/MSO) market represents a growing portion of the fixed broadband access industry. In September 2016, we acquired key fiber access products, technologies and service relationships from a third party. These solutions, combined with our organic fiber access product portfolio and our distributed access expertise, present new opportunities in the cable/MSO market. As cable/MSOs define their technology future, the concept of fiber deep and distributed access take on more prominence. Fiber deep is a strategy of pushing fiber deeper into the access network. This approach hinges on distributing broadband access electronics in the outdoors, hanging from poles, overhead lines or in small pits along walkways. Over 20 years of telco market fiber-to-the-node deployment experience has allowed us to become an expert in deploying these challenging distributed access architectures. Fiber deep and distributed access architectures are all centered on giving cable/MSOs the technology architectures required for their relevancy in the Gigabit age and laying the path to a software-defined future.

Customer Devices

The Customer Devices portfolio includes a comprehensive array of CSP and enterprise hardware and software products and services typically found at the end-user premises that are used to terminate services from a CSP. Products in this category include our broadband fiber ONTs, RFoG micronodes, routers, switches, Wi-Fi access points and enterprise session border controllers. This category also includes our ProServices offerings that are discussed in detail under Services & Support.


We provide a unique advantage in that we are one of the only companies in the information and communications technology industry that offer products spanning from the CSP demarcation point to the desktop and beyond. We offer a broad array of business networking solutions, from appliance-based to virtualized, including optical fiber, copper and coax, which enable service differentiation and network monetization, while reducing operating expenses for our customers.

Our portfolio includes solutions, such as IP business gateways and access routers that provide businesses access to CSP networks, and enterprise communications solutions that enable businesses to construct voice, data and video networks at a single site or among distributed sites. These products are sold through CSPs as part of bundled business services or through our network of Value-Added-Resellers (VARs), managed service providers (MSPs) and system integrators.

Our ONTs are designed to address the fiber access market with industry-leading voice, data and video capabilities. These ONTs include both indoor and outdoor models for residential and business applications. With several different series of GPON, EPON and Active Ethernet ONTs, carriers can benefit from high data rates of fiber optic transmission and the flexibility offered by our portfolio of Ethernet-based systems that can be easily configured for new, customized service offerings.

Traditional & Other Products

These products generally utilize legacy technologies such as HDSL, ADSL, TDM, or ATM, and represent a prior generation of a current product or are products that do not fit under either Access & Aggregation or Customer Devices.

Customers

We have a diverse global customer base that includes Tier 1, 2Tier-1, -2 and 3 CSPs, cable -3 service providers, alternative service providers, such as utilities, municipalities and fiber overbuilders, cable/MSOs, SMBs and distributed enterprises. Major CSPs and many smaller providers typicallyMany network operators require product approval prior to adoptingbefore the purchase or installation of a vendor's products for use in their networks. We are involved inproduct. The nature of our business involves a constantdynamic process of submitting new and succeeding generations of products for approval.approval prior to orders being placed.

 

TwoThree customers, CenturyLink, Inc. and, Deutsche Telekom, AG and Telmex, individually comprised more than 10 percent10% of our revenue in 2017.2019. Additionally, our revenues in Germany and Mexico comprised more than 10% of our revenue in 2019. The revenues from these customers are reported in both theour Network Solutions and Services & Support segments.

For a discussion of risks associated with customers, CSPsservice providers and approval processes, see “Risk Factors – The lengthy sales and approvalapproval process required by major and other CSPsservice providers for new products could result in fluctuations in our revenue,” “Risk Factors – We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income,” and “Risk Factors – Consolidation and deterioration in the Competitive Local Exchange Carrier (CLEC)CLEC market could result in a significant decrease in our revenue,” in Part I, Item 1A of this report.

Distribution, Sales and Marketing

We sell our products globally through our direct sales organization and our distribution network. Our direct sales organization supports major accounts and has offices in a number ofmany domestic and international locations. Sales to most competitive CSPsservice providers and independent telephone companies are fulfilled through a combination of direct sales and major technologydistributors. Our services offerings can be purchased directly from us, or through one of our service providers, channel partners or distribution companies.partners.

 

Before placing any orders, CSPsan order, service providers typically require lengthy product qualification and standardization processes that can extend for several months or even years. Once approved, product orders are typically placed under single or multi-year supply agreements that are generally not subject to minimum volume commitments. CSPsService providers generally prefer having two or more suppliers for most products, soproducts. Therefore, individual orders are usually subject to competition based on some combination of total value, service, price, delivery and other terms.

 

End-user focusedOrders for end-user products are fulfilled through a combination of direct sales and major technology distribution companies.distributors. This is supported by a direct sales organization for major accounts and a channel-based sales organization to facilitate sales to our partners. MSPs, VARs and system integratorsSIs may be affiliated with the company as a channel partner,partners, or they may purchase from a distributor in an unaffiliated fashion. Affiliated partners participate with us at various program levels, based on sales volume and other factors, to receive benefits such as product discounts, market development funds, technical support and training. We maintain field offices worldwide to support direct sales, distributors, MSPs, VARs and system integrators.SIs.

Outside of the United States,U.S., most CSPservice provider products are sold through our direct sales organization and end-user products are sold direct or through distribution arrangements customized for each region. Each region is supported by a field office that offers sales and support functions, and in some cases, warehousing and manufacturing support.


Our field sales organizations, distributors and CSPservice provider customers receive support from regional-based marketing, sales and customer support groups. Under certain circumstances, other headquarters personnel may be involved in sales and other activities.

 

Our marketing organization promotes all brands associated with ADTRAN to key stakeholders, including customers, partners and prospects throughout the world. Marketing is complemented by product marketing and management teams that work with our engineering teams to develop and promote new products and services offerings can be purchased directly from us, or through one of our CSPs, channel partners or distribution partners.as well as product enhancements.

 

Research and Development

Rapidly changing technologies, evolving industry standards, changing customer requirements and continuing developments in communications service offerings characterize the markets for our products. Our on-going ability to adapt to these changes and to develop new and enhanced products that meet or anticipate market demand is a significant factor influencing our competitive position and our prospects for growth.ability to grow.

During 2017, 2016 and 2015, product development expenditures totaled $130.4 million, $124.8 million and $129.9 million, respectively. Our product development activities are an important part of our strategy. We plan to maintain anour emphasis on product development each yearto enable us to respond to rapidly changing technology and evolving industry standards. Our research and development and engineering functions are global. We maintain research and development functions at our Huntsville, Alabama headquarters and in Germany, India and other locations worldwide. During the years ended December 31, 2019, 2018 and 2017, research and development expenditures totaled $126.2 million, $124.5 million and $130.7 million, respectively.

 


We strive to deliver innovative network access solutions that lower the total cost of deploying services, increase the level of performance achievable with established infrastructures, reduce operating and capital expense for our customers, increase network bandwidth and functionality, and extend network reach. Our development process is conducted in accordance with ISO 9001, TL 9000, and ISO 14001, which are international standards for quality and environmental management systems.

While we develop most of our products internally, in some cases, we license intellectual property, (IP)use ODM partners or use Original Design Manufacturer (ODM) partners across certain products.acquire technologies. Internal development on advanced technology products gives us more control over design and manufacturing issues, while for traditional designs, ODM and/or licensed IP givesintellectual property provides us with the ability to leverage the economies of scale of our technology partners. This balanced approach to product development ensures we provide a “best-in-class” approach tobest-in-class products for our customers.

 

As we continue to create more software-based IP,intellectual property, such as our SDN/NFV portfolio, our use of “Lean Agile Enterprise”lean agile practices in research and development ensures we remain responsive and customer-focused. This enables continuous delivery so we canus to deliver products faster and more economically to our customers and the market.market on a continuous basis.

 

Our ability to continually reduce product costs, is anwhile focusing on delivery and quality, are important partparts of our overall business strategy. Our product development efforts are often centered on entering a market with improved technology, allowing us to offer products at competitive prices. We then compete for market share. We continually re-engineer successive generations of the productexisting products to improve our product costs.performance, costs and value.

 

Product developmentDevelopment activities focus on products tosolutions that support both existing and emerging communications industry technologies in segments of our markets that we consider viable revenue opportunities. We are actively engaged in developing and refining technologies to support data, voice and video transport primarily over IP/Ethernet network architectures. This includes Ethernet aggregation, fiber opticfiber-optic transport and access, DSL, access, access routing, Ethernet switching, wireless LANs, integrated access, converged services, VoIP, network management and professional services.

 

A centralized research function supports product development efforts throughout the company. This group provides guidance toguides our various product design and engineering teams in digital signal processing technologies, computer simulation and modeling, CAD/CAM tool sets,toolsets, custom semiconductor design, optical transceiver design, industry standards, technological forecasting, product development methods and technological forecasting.emerging networks standards.

 

Many communications issues,communication requirements, processes and technologies are governed by Standards Development Organizations (SDOs).SDOs. These SDOs consist of representatives from various manufacturers, CSPsservice providers and testing laboratories workingwho work to establish specifications and compliance guidelines for emerging communications technologies. We are an active participant in several SDOs and have assisted with the development of worldwide standards in many technologies.

 


Our SDO activities are primarily in the area of broadband access. This includes involvement with the ITU-Telecommunications sector (ITU-T),ITU-T, ATIS, ETSI NICC (UK Interoperability Standards), and the Broadband Forum (BBF).BBF. We are involved in the evolution of optical access technologies, participating in activities in the ITU-T, FSAN IEEE and BBF on next-generation PON. We are also involved in standards development efforts related to maximizing the bandwidth potential of the copper pair to enable new applications.applications in the ITU-T. We continue to be involved with the industry-wide interoperability, performance testing,performance-testing and system-level projects related to those standards in the BBF and are leading the work in the BBF to specify the application of SDN and NFV in the access network.BBF. We are also members of ATIS, MEF, Open Compute Project, Wi-Fi Alliance (WFA)OCP, WFA, TIA, CableLabs, Quest Forum and the ETSI Network Functions Virtualization Industry Specification Group (NFV-ISG).TIP.

 

For a discussion of risks associated with our research and development activities, see “Risk Factors – We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in communications technology” and “Risk Factors – We engage in research and development activities to develop new, innovative solutions and to improve the application of developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts whoeffort and which may focus on more leading edge development,” in Part I, Item 1A of this report.

Manufacturing and Operations

The principal steps in our manufacturing process include the purchase and management of materials, assembly, testing, final inspection, packing and shipping. We purchase parts and components for the assembly of some products from a large number of suppliers through a worldwide sourcing program. Additionally, we manage a process whichthat identifies the components that are best purchased directly by contract manufacturers for use in the assembly of our products to achieve manufacturing efficiency, quality and cost objectives. Certain key components used in our products are currently available from a single source, and other key components are available from only a limited number of sources. In the past, we have experienced delays in the receipt of certain key components, which has resulted in delays in related product deliveries. We attempt to manage these risks through developing alternative sources, by staging inventories at strategic locations, through engineering efforts designed to obviateprevent the necessity of certain components and by maintaining close contact and building long-term relationships with our suppliers.

 


We rely on subcontractors for assembly and testing of certain printed circuit board assemblies, sub-assemblies, chassis, enclosures and equipment shelves, and to purchase some of the raw materials used in such assemblies. We typically manufacture our lower-volume, higher-mix product assemblies at our manufacturing site in Huntsville, Alabama. Weproducts and build and test new product prototypes and many of our initial production units forat our productsmanufacturing site in Huntsville, and weAlabama. We later transfer the production of higher-volume, lower-mix assemblies to our subcontractors. Subcontract assembly operations can lengthen fulfillment cycle times, but we believe we can respond more rapidly to uncertainties in incoming order rates by selecting assembly subcontractors that have significant reserve capacity and flexibility. Our subcontractors have proven to be flexible and able to meet our quality requirements. We conduct the majority of transactions with our foreign suppliers in United States currency.U.S. dollars.

 

We ship the majority of products to our U.S. customers from our facilities in Huntsville, Alabama, although we also fulfill customer orders from other locations near our customers' sites.sites, when possible. The majority of our products shipped to EMEA customers come from locations in that region. We also ship directly from subcontractors to a number of customers in the U.S. and international locations. Most of our facilities are certified pursuant to the most current releases of ISO 9001, TL 9000, ISO 14001 and ISO 14001.27001. Our Huntsville, Alabama facilities and many of our key suppliers are U.S. Customs-Trade Partnership Against Terrorism (C-TPAT)C-TPAT certified. Our products are also certified to certain other telephone companycustomer, industry and privacy standards, including those relating to emission of electromagnetic energy and safety specifications.specifications as well as GDPR.

 

For a discussion of risks associated with manufacturing activities, see “Risk Factors – Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international regions may result in us not meeting our cost, quality or performance standards” and “Risk Factors – Our dependence on a limited number of suppliers for certain raw materials and key components may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results,” in Part I, Item 1A of this report.

Competition

Competition

We compete in markets for networking and communications services and solutions for CSPs,service providers, businesses, government agencies and other organizations worldwide. Our products and services provide solutions supporting voice, data and video communications across fiber-, copper-, coaxial- and wireless-based infrastructure, as well as across wide area networks, local area networks and the Internet.internet.

 


The markets for our products are intensely competitive and numerous competitors exist in each of our product segments. These competitive conditions have resulted in competitor consolidations, bankruptcies and liquidations. Consumer acceptance of alternative communications technologies such as coaxial cable through cable/MSOs and cellular-based wireless services that compete with our products has grown in recent years. Our development of 10G EPON and RFoG products better positions us to compete in the MSO market. Competition might further increase if new technologies emerge, new companies enter the market or existing competitors expand their product lines.

 

We compete with a number of companies in the markets we serve. KeyIn our Access & Aggregation category, key competitors in our core broadband access market include Arris, Calix, Inc.,Casa Systems, Ciena, Corporation, Huawei Technologies, Nokia,CommScope, DASAN Zhone Solutions, Huawei, Nokia and ZTE Corporation.ZTE. In the customer devices market,Subscriber Solutions & Experience category, our primary competitors include Arris, Calix, Inc., Cisco, Edgewater Networks,CommScope, Hewlett Packard Enterprise, Ribbon Communications, Technicolor and Ubiquiti Networks. In addition to these OEM vendors, we face increasing competition from various ODM vendors who are being engaged directly by some of our service provider customers. Some of these companies compete in a single product segment, while others compete across multiple product lines.

Competitors of our Services & Support business include Calix, Ericsson, Fujitsu Network Communications Nokia and Calix, Inc.Nokia.

 

For further discussion of risks associated with our competition, see “Risk Factors – We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in communications technology” and “Risk Factors – We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share,” in Part I, Item 1A of this report.

Seasonality

Seasonality

We have experienced quarterly fluctuations in customer activity due to seasonal considerations. We typically experience reductions in order volume toward the beginning and end of the calendar year, which may result in lower revenues in the first and fourth quarters of our fiscal year. These seasonal effects may continue to vary and do not always correlate to our operating results. Accordingly, they should not be considered a reliable indicator of our future revenue or operating results.

 


Foreign Currency

We record transactions

Transactions with customers that are denominated in foreign currencies on a monthly basisare recorded using the appropriate 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 and our Australian subsidiary, whose functional currency is the Australian dollar, and our Mexican subsidiary, whose functional currency is the United States dollar. Adjustments resulting from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

 

Backlog and Inventory

A substantial portion of our shipments in any fiscal period relaterelates to orders received and shipped within that fiscal period for customers under agreements containing non-bindingnonbinding purchase commitments. Further, a significant percentage of orders require delivery within a few days. These factors normally result in very little order backlog or order flow visibility. Additionally, backlog levels may vary because of seasonal trends, the timing of customer projects and other factors that affect customer order lead times. We believe that because we fill a substantial portion of customer orders within the fiscal quarter of receipt, backlog is not a meaningful indicator of actual sales for any succeeding period.

 

To meet this type of demand, we have implemented supply chain management systems to manage the production process. We maintain substantial inventories of raw materials for long lead-timelead time components to support this demand and avoid expedite fees. We also maintain substantial finished goods inventories. Our practice of maintaining sufficient inventory levels to assure prompt delivery of our products and services increases the amount of inventory that may becomebe considered excess and/or obsolete. The obsolescence of thisThis excess and obsolete inventory may require us to write down the value of the obsolete inventory, which may have an adverse effect on our operating results.

 

For further discussion of risks associated with managing our inventory, see “Risk Factors – Managing our inventory is complex and may include write-downs of excess or obsolete inventory,” in Part I, Item 1A of this report.


Government Regulation

Our products must comply with various regulations and standards established by communications authorities in various countries, as well as those of certain international bodies. For instance, environmental legislation within the European Union (EU)EU may increase our cost of doing business as we amend our products to comply with these requirements. The EU issued directives on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS), Waste Electrical and Electronic Equipment (WEEE), and the Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH). We continue to implement measures to comply with the RoHS directive, the WEEE directive and the REACH regulation as individual countries issue their implementation guidance.regulation. We continue to implement measures to comply with these directives and other similar directives and regulations from additional countries.

 

We strive to deliver innovative network access solutions that lower the total cost and reduce the time of deploying services, increase the level of performance achievable with established infrastructures, reduce operating and capital expenses for our customers, increase network bandwidth and functionality, and extend network reach. Our development process is conducted in accordance with ISO 9001, TL 9000, ISO 14001, and ISO 27001, all of which are international standards for quality and environmental management systems. Our corporate practices also conform to GDPR requirements, which protect digital data for all EU citizens, and to other applicable data protection laws. Additionally, ADTRAN holds a Privacy Shield certification providing adequate protection for the transfer of personal data from the EU to the U.S.

For further discussion of risks associated with government regulation, see “Risk Factors – Our products may not continue to comply with evolving regulations governing their sale, which may harm our business”business,” and “Risk Factors – Regulatory and potential physical impacts of climate change and other natural events may affect our customers and our production operations, resulting in adverse effects on our operating results,results.” and “Risk Factors – We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Violations of these laws and regulations may harm our business.” in Part I, Item 1A of this report.

 


Employees

As of December 31, 2017,2019, we had 2,0601,790 full-time employees in the U.S. and in our international subsidiaries located in North America, Latin America, EMEA and the Asia-Pacific region. The majorityAPAC regions. Approximately 76% of employees of ADTRAN GmbH employees, our subsidiary in Germany, are subject to collective bargaining agreements of either the Association of Metal and Electrical Industry in Berlin and Brandenburg e.V. or NORDMETALL Association of Metal and Electrical Industry e.V. In addition,Additionally, a small number of our ADTRAN GmbH employees are represented by other collective bargaining agreements. WeAlthough these collective bargaining agreements expire during the next twelve months, we have never experienced a work stoppage and we believe that our relationship with our employees is good.

 

We also utilize contractors and temporary employees domestically and internationally in various manufacturing, engineering, sales, and general and administrative capacities, as needed.

 

Intellectual Property

The ADTRAN corporate logo is a registered trademark of ADTRAN. TheADTRAN, as is the name "ADTRAN" is a registered trademark of ADTRAN. A number of our product identifiers“ADTRAN” and namesthe “SmartRG” trademark. We also are registered. We claim rights to a number of unregistered trademarks as well.trademarks.

 

We have ownership ofown over 580600 patents worldwide related to our products and have over 13390 additional pending patent applications pending.applications. Our patents expire at various dates between January 20182020 and October 2036.2038. We will continue to seek additional patents from time to timetime-to-time related to our research and development activities. We do not derive any material amount of revenue from the licensing of our patents.

 

We protect our intellectual property and proprietary rights in accordance with good legal and business practices. We believe, however, that our competitive success will not depend on the ownership of intellectual property, but instead will depend primarily on the innovative skills, technical competence and marketing abilities of our personnel.

The communications industry is characterized by the existence of an ever-increasing volume of patent litigation and licensing activities. From time to time we receiveWe have received, and may continue to receive, notices of claims alleging that we are infringing upon patents or other intellectual property. We cannot predict whether we will prevail in any claims or litigation over alleged infringements, or whether we will be able to license any valid and infringed patents, or other intellectual property, on commercially reasonable terms. It is possible that such litigation may result in significant legal costs and judgments. Anyjudgments and that intellectual property infringement claims, or related litigation against or by us could have a material adverse effect on our business and operating results.

 

For a discussion of risks associated with our intellectual property and proprietary rights, see “Risk Factors – Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality, and commercial value of our products,products.” in Part I, Item 1A of this report.

 

 


Available Information about our Executive Officers

A copySet forth below, in accordance with General Instruction G(3) of this Annual ReportForm 10-K and the Instruction to Item 401 of Regulation S-K, is certain information regarding the executive officers of ADTRAN. Unless otherwise indicated, the information set forth is as of December 31, 2019.

Thomas R. Stanton

Age 55

2007 to present

Chief Executive Officer and Chairman of the Board

Michael K. Foliano

Age 59

2019 to present

Senior Vice President of Finance and Chief Financial Officer

2006 to 2019

Senior Vice President of Operations

Ronald D. Centis

Age 57

2019 to present

Senior Vice President of Operations

2018 – 2019

President and Chief Operating Officer – Fastback Networks

2015 – 2017

Executive Vice President and General Manager CenturyLink – Ericsson

Raymond Harris

Age 56

2018 to present

Chief Information Officer

2017 – 2018

Director High-Performance Computing – Johns Hopkins University Applied Physics Lab

2010 – 2017

Vice President and Chief Information Officer – Iron Bow Technologies LLC

2008 – 2010

Chief Information Security Engineer – Johns Hopkins University Applied Physics Lab

Marc Kimpe

Age 50

2019 to present

Senior Vice President of Research and Development

2014 – 2019

Vice President of Research and Development

Jeffery F. McInnis

Age 53

2018 to present

Senior Vice President of Subscriber Solutions & Experience

2012 – 2018

President and Chief Executive Officer – SmartRG, Inc.

2011 – 2012

Vice President - ClearAccess

Eduard Scheiterer

Age 66

2015 to present

Senior Vice President of Research and Development

2014 – 2015

Senior Vice President and Managing Director of International Markets

2012 – 2014

Managing Director – ADTRAN GmbH, a German wholly owned subsidiary of ADTRAN, Inc.

2009 – 2012

Head of Broadband Access – Nokia (formerly Nokia Siemens Networks), Germany

Daniel T. Whalen

Age 51

2019 to present

Chief Product Officer

2016 – 2019

President of Network and Cloud - ARRIS

2013 – 2016

Senior Vice President and General Manager of Global Sales - ARRIS

James D. Wilson, Jr.

Age 49

2019 to present

Chief Revenue Officer

2015 – 2019

Senior Vice President of Technology and Strategy

2006 – 2015

Senior Vice President and General Manager of Carrier Networks

There are no family relationships among our directors or executive officers.


Availability of Information

We file annual reports on Form 10-K, as well as our Quarterly Reportsquarterly reports on Form 10-Q, Current Reportscurrent reports on Form 8-K, proxy statements and other information as required with the SEC. The SEC maintains an Internet website, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including ADTRAN, that file electronically with them. Additionally, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to thesethose reports, if applicable, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, are available free of charge onunder the Internet atInvestor Relations section of our Web site, website, www.adtran.com,, as soon as reasonably practicable (generally, within one day) after we electronically file these reportsthem with, or furnish these reportsthem to, the Securities and Exchange Commission (SEC).SEC. The reference to our Web sitewebsite address does not constitute incorporation by reference of the information contained on the Web site,website, which information should not be considered part of this document. You may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains our reports, proxy and information statements, and other information that we have filed electronically with the SEC.report.


ITEM 1A.

RISK FACTORS

The Private Securities Litigation Reform ActOur business involves substantial risks. Any of 1995 provides a safe harbor for forward-looking statements made bythe risk factors described below or on behalf of ADTRAN. ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements containedelsewhere in this report could significantly and adversely affect our other filings withbusiness prospects, financial condition and results of operations. The risks described below are not the SEConly ones facing us. Additional risks 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 byuncertainties not presently known to us or on our behalf are subject to uncertainties and other factors that could cause these statementswe currently deem to be wrong. Some of these uncertainties and other factors are listed below. Though we have attempted to list comprehensively these important factors, we caution investors that other factorsimmaterial 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 combination of factors may have on our business.

You are further cautioned not to place undue reliance on those forward-looking statements because they speak only of our views as of the date 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. The following are some of the risks that couldalso adversely affect our financial performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements:us.

Our operating results may fluctuate in future periods, which may adversely affect our stock price.

Our operating results have been, and will continue to be, subject to quarterly and annual fluctuations as a result of numerous factors. These factors include, but are not limited to:

Fluctuations in demand for our products and services, especially with respect to significant network expansion projects undertaken by CSPs;

Continued growth of communications network traffic and the adoption of communication services and applications by enterprise and consumer end users;

Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue;

Reductions in demand for our traditional products as new technologies gain acceptance;

Our ability to maintain appropriate inventory levels and purchase commitments;

Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation;

The overall movement toward industry consolidation among both our competitors and our customers;

Our dependence on sales of our products by channel partners, the timing of their replenishment orders, the potential for conflicts and competition involving our channel partners and large end-user customers and the potential for consolidation among our channel partners;

Variations in sales channels, product cost or mix of products and services sold;

Delays in receiving acceptance from certain customers as defined under contract, for shipments or services performed near the end of a reporting period;

Our ability to maintain high levels of product support and professional services;


fluctuations in demand for our products and services, especially with respect to significant network expansion projects undertaken by service providers;

 

Manufacturingcontinued growth of communications network traffic and the adoption of communication services and applications by enterprise and consumer end users;

changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue;

reductions in demand for our traditional products as new technologies gain acceptance;

our ability to maintain appropriate inventory levels and related purchase commitments;

price and product competition in the communications and networking industries, which can change rapidly due to technological innovation;

the overall movement toward industry consolidation among both our competitors and our customers;

our dependence on sales of our products by channel partners, the timing of their replenishment orders, the potential for conflicts and competition involving our channel partners and large end-user customers and the potential for consolidation among our channel partners;

variations in sales channels, product cost or mix of products and services sold;

delays in receiving acceptance from certain customers as defined under contract, for shipments or services performed near the end of a reporting period;

our ability to maintain high levels of product support and professional services;

manufacturing and customer order lead times;times, and potential restrictions in the supply of key components;

Fluctuations in our gross margin, and the factors that contribute to this as described below;

fluctuations in our gross margin and the factors that contribute to this (as described below);

Our ability to achieve cost reductions;

our ability to achieve cost reductions;

The ability of our customers, channel partners, and suppliers to obtain financing or to fund capital expenditures;

the ability of our customers, channel partners and suppliers to obtain financing or to fund capital expenditures;

Our ability to execute on our strategy and operating plans;

our ability to execute on our strategy and operating plans;

Benefits anticipated from our investments in engineering, sales and marketing activities;

benefits anticipated from our investments in engineering, sales and marketing activities;

The effects of climate change and other natural events;

the effects of climate change and other natural events;

The effect of political or economic conditions, terrorist attacks, acts of war, or other unrest in certain international markets; and

the effect of political or economic conditions, including the effect of tariffs or so-called “trade wars” on us and our supply chain, acts of war, terrorist attacks or other unrest in certain international markets; and

Changes in tax laws and regulations, or accounting pronouncements.

changes in tax laws and regulations or accounting pronouncements.

As a result, operating results for a particular future period are difficult to predict, and prior results are not necessarily indicative of results to be expected in future periods. Any of the above mentionedabove-mentioned factors, or other factors discussed elsewhere in this document,report, could have a material adverse effect on our business, results of operations, financial condition and cash flowflows that could adversely affect our stock price.


Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.

As a result of the many factors discussed in this report, our revenue for a particular quarter is difficult to predict and will fluctuate from quarter to quarter. Our typical pattern of customer orders requests product delivery within a short period following receipt of an order. Consequently, we do not typically carry a significant order backlog and are dependent upon obtaining orders and completing delivery in accordance with shipping terms that are predominantly within each quarter to achieve our targeted revenues. Our net sales may grow at a slower rate than in previous quarters or may decline. Our deployment/installation cycle can vary depending on the customer’s schedule, site readiness, network size and complexity and other factors, which can cause our revenue to fluctuate from period to period. Our ability to meet financial expectations could also be affected if the variable sales patterns seen in prior quarters recur in future quarters. We have experienced periods of time during which manufacturing issues have delayed shipments, leading to variable shipping patterns. In addition, to the extent that manufacturing issues and any related component shortages result in delayed shipments in the future, and particularly in quarters in which we and our subcontractors are operating at higher levels of capacity, it is possible that revenue for a quarter could be adversely affected, and we may not be able to remediate the conditions within the same quarter.

In the past, under certain market conditions, long manufacturing lead times have caused our customers to place the same order multiple times. When this multiple ordering occurs, along with other factors, it may cause difficulty in predicting our sales and, as a result, could impair our ability to manage parts inventory effectively.

We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.

General economic conditions may reduce our revenues and harm our operating results.

Economic conditions may contribute to a slowdown in communications industry spending, including in the specific market segments in which we operate. The potential reoccurrence of these trends and their duration and depth are difficult to predict. Capital spending for network infrastructure projects of our largest customers could be delayed or cancelledcanceled in response to reduced consumer spending, tight capital markets or declining liquidity trends. Sustained trends of this nature could have a material, adverse effect on our revenues, results of operations, financial condition and cash flow.flows.


Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could adversely affect our operating results, financial condition and cash flow.flows.

Most of our sales are made on an open credit basis, frequentlygenerally with payment terms of 30 to 45 days in the U.S. and typically longer in many geographic markets outside the U.S. As our international sales grow, our total accounts receivable balance will likely increase. Our days sales outstanding (DSO)(“DSO”) could also increase as a result of a greater mix of international sales. Additionally, international laws may not provide the same degree of protection against defaults on accounts receivable as provided under U.S. laws governing domestic transactions; therefore, as our international business grows, we may be subject to higher bad debt expense compared to historical trends. Overall, we monitor individual customer payment capability in granting such open credit arrangements, seek to limit such open credit to amounts that we believe customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable.receivable due to various reasons, including potential declining operating cash flows or bankruptcy filings of our customers. We may be exposed to similar credit risks relating to collections from distributors of our products, and we apply similar processes to monitor and reserve for any exposures. Turmoil in the financial markets could impact certain of our customers’ ability to maintain adequate credit facilities with financial institutions, thereby potentially impacting their ability to pay their debts. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, there are no assurances we can avoid accounts receivable write-downs or write-offs of doubtful accounts.accounts as a result of declining financial conditions for our customers, including bankruptcy. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could potentially have a material adverse effect on our results of operations, financial condition and cash flow.flows.


We expect gross margins to vary over time, and our levels of product and services gross margins may not be sustainable.

Our level of gross margins may not be sustainable and may be adversely affected by numerous factors, including:

Changes in customer, geographic, or product mix, including software and the mix of configurations and professional services revenue within each product group;

changes in customer, geographic or product or services mix, including software and the mix of configurations and professional services revenue within each product group;

Introduction of new products by competitors, including products with price-performance advantages;

mix of domestic versus foreign sales;

Our ability to reduce product cost;

introduction of new products by competitors, including products with price-performance advantages;

Increases in material or labor cost;

our ability to reduce product cost;

Foreign currency exchange rate movements;

increases in labor or material cost, including increases in material costs resulting from tariffs;

Expediting costs incurred to meet customer delivery requirements;

foreign currency exchange rate movements;

Excess inventory and inventory holding charges;

expediting costs incurred to meet customer delivery requirements;

Obsolescence charges;

excess inventory and inventory holding charges;

Changes in shipment volume;

excess and obsolescence charges;

Our ability to absorb fixed manufacturing costs during short-term fluctuations in customer demand;

changes in shipment volume;

Loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;

our ability to absorb fixed manufacturing costs during short-term fluctuations in customer demand;

Lower than expected benefits from value engineering;

loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;

Increased price competition, including competitors from Asia, especially China;

lower than expected benefits from value engineering;

Changes in distribution channels;

increased price competition, including competitors from Asia, specifically China;

Increased warranty cost;

changes in distribution channels;

Liquidated damages costs relating to customer contractual terms; and

increased warranty cost;

liquidated damages costs relating to customer contractual terms; and

Our ability to manage the impact of foreign currency exchange rate fluctuations relating to our accounts receivable and accounts payable.

our ability to manage the impact of foreign currency exchange rate fluctuations relating to our accounts receivable and accounts payable.


We must continue to update and improve our products and develop new products to compete and to keep pace with improvements in communications technology.

The markets for our products are characterized by rapidly changing technology, evolving industry standards and continuing improvements in the communications service offerings of CSPs.service providers. If technologies or standards applicable to our products, or CSPservice provider offerings based on our products, become obsolete or fail to gain widespread commercial acceptance, our existing products or products under development may become obsolete or unmarketable. Moreover, the introduction of products embodying new technologies, the emergence of new industry standards, or changes in CSPservice provider offerings could adversely affect our ability to sell our products. For instance, we offer a large number of products that apply primarily to the delivery of high-speed digital communications over the local loop utilizing copper wire. We compete favorably with our competitors by developing a high-performance line of these products. We market products that apply to fiber optic transport in the local loop. We expect, however, that use of coaxial cable and fixed and mobile wireless access in place of local loop access will increase. Also, MSOs are increasing their presence in the local loop. To meet the requirements of these new delivery systems and to maintain our market position, we expect to continue to develop new products and/or modify existing products. We expect that our recent acquisitionthe addition of fiber-based products focused on the cable MSO operators, using EPON and RFoG products from a third partytechnologies, and fixed wireless access solutions will better position us to competebenefit from spending in thisthese adjacent market.markets.


Our sales and profitability in the past have, to a significant extent, resulted from our ability to anticipate changes in technology, industry standards and CSPservice provider offerings, and to develop and introduce new and enhanced products. Our continued ability to adapt will be a significant factor in maintaining or improving our competitive position and our prospects for growth. We cannot assure that we will be able to respond effectively to changes in technology, industry standards, CSPservice provider offerings or new product announcements by our competitors. We also cannot assure that we will be able to successfully develop and market new products or product enhancements, or that these products or enhancements will achieve market acceptance. Should the rate of decline in sales of certain traditional TDM based products exceed the rate of market acceptance and growth in sales of our newer IP-based products, our revenues may be adversely affected. Any failure by us to continue to anticipate or respond in a cost-effective and timely manner to changes in technology, industry standards, CSPservice provider offerings or new product announcements by our competitors, or any significant delays in product development or introduction, could have a material adverse effect on our ability to competitively market our products and on our revenues, results of operations, financial condition and cash flow.flows.

Our products may not continue to comply with evolving regulations governing their sale, which may harm our business.

Our products must comply with various regulations, regional standards established by communications authorities, import/export control authorities or other authorities who control the execution of trade agreements in various countries, as well as those of certain international bodies. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, there can be no assurance that we will be able to design our products to comply with evolving standards and regulations in the future. Changes in domestic or international communications regulations, tariffs, potential changes in trade policies by the U.S. and other nations, application requirements, import/export controls or expansion of regulation to new areas, including access, communications or commerce over the Internet, may affect customer demand for our products or slow the adoption of new technologies which may affect our sales. Further, the cost of complying with the evolving standards and regulations, or the failure to obtain timely domestic or foreign regulatory approvals or certification such that we may not be able to sell our products where these standards or regulations apply, may adversely affect our revenues, results of operations, financial condition and cash flow.flows.


We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Violations of these laws and regulations may harm our business.

A wide variety of provincial, state, national and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of data, including personal data. Foreign data protection, privacy and other laws and regulations, including the EU’s General Data Protection Regulation, are often more restrictive than those in the U.S. These data protection and privacy-related laws and regulations are varied, evolving, can be subject to significant change, may be augmented or replaced by new or additional laws and regulations and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. For example, California’s Consumer Privacy Act becomes effective in 2020, proving new data privacy rights for consumers and new operational requirements for companies. New and changing laws, regulations and industry practices regarding our employees’ and users’ data could require us to modify our business, products or services offered, potentially in a material manner, and may limit our ability to develop new products, services and features. There is also a risk that we, directly or as the result of a third-party service provider we use, could be found to have failed to comply with the laws and regulations applicable in a jurisdiction regarding the collection, consent, handling, transfer or disposal of personal data. If we violate these laws and regulations, governmental authorities in the U.S., the EU and elsewhere could seek to impose civil and/or criminal fines and penalties which could have an adverse effect on our reputation, as well as, our results of operations, financial condition and cash flows.

A material weakness in our internal control over financial reporting could, if not remediated, materially adversely affect us.

Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires us to include in our Annual Reports on Form 10-K an assessment by the Company’s management 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 our internal control over financial reporting. We must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404. Our compliance with Section 404 may require that we incur substantial accounting expense and expend significant management efforts. In addition, if management or our independent registered public accounting firm is unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial statements, which could have an adverse effect on our stock price.

 


As further described in Part II, Item 9A of this report, and as reported in our Annual Report on Form 10-K for the year ended December 31, 2018 (as amended) and our Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2019 and September 30, 2019, management previously concluded that certain material weaknesses in our internal control over financial reporting existed as of December 31, 2018 and continued through September 30, 2019. Specifically, 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 the Company’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. Furthermore, 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.

Management has been working to further strengthen the Company’s internal controls relating to inventory. Specifically, as discussed in Item 9A of this Annual Report on Form 10-K, the Company has redesigned, enhanced and added certain 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. As a result of these remediation efforts, management has determined that, as of December 31, 2019, our controls related to our cycle count program were effectively designed, documented and maintained, and the material weakness related to these controls no longer existed.

Additionally, as discussed in Item 9A of this Annual Report on Form 10-K, the Company has been working to redesign and implement 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. The implementation of these measures is ongoing, and, while we believe that they will ultimately be effective in remediating the material weakness, management has concluded that, as of December 31, 2019, our controls related to our excess and obsolete inventory reserve were not effectively designed and maintained, and the material weakness related to these controls continued to exist.

Our initiatives to remediate this material weakness related to our excess and obsolete inventory reserve or any other material weakness in our internal control over financial reporting identified in the future may not prove successful, and management may not be able to conclude that our internal control over financial reporting is effective. Furthermore, even if management were to reach a conclusion that our internal control over financial reporting is effective, if our independent registered public accounting firm is not satisfied with the adequacy of our controls, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then they in the future may decline to issue a report on our internal control over financial reporting or may issue a report that is qualified. Any of these events could result in a loss of investor confidence in the reliability of our financial statements, which in turn could negatively affect the price of our common stock.

Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our global activities could subject us to penalties or other adverse consequences.

A significant portion of our total revenues is generated from sales outside of the U.S. As a result, we are subject to the U.S. Foreign Corrupt Practices Act (FCPA)(“FCPA”), which prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of directing, obtaining or keeping business, and requires companies to maintain reasonable books and records and a system of internal accounting controls. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local partners or other representatives. If we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the U.S. and elsewhere could seek to impose civil and/or criminal fines and penalties which could have an adverse effect on our results of operations, financial condition and cash flow.flows. To help ensure that we remain compliant with FCPA, we have proactively implemented internally and externally focused measures and controls to address this risk. We help ensure that our employees understand the key requirements of FCPA compliance and the consequences of non-compliance through training courses and detective controls. ADTRAN senior management and employees whose responsibilities include international activities are required to complete an online training program and pass an exam every two years. We have put processes in place to help detect non-compliance through providing our employees access to a worldwide reporting “hotline”,“hotline,” available by phone and online, that is maintained by a third partythird-party provider. Finally, we perform annual reviews of our employees’ expense reports and corporate credit card activity to identify possible corruption concerns. We have also implemented controls to help ensure our third partythird-party partners and customers observe FCPA requirements. Prior to selling to new international distributors, resellers or agents, we review third partythird-party data and check them against over 200 denied party lists from government institutions worldwide for potential FCPA concerns. We also require international distributors, resellers and agents to complete an Anti-Corruption Due Diligence Questionnaire, which is reviewed and assessed by a cross-functional compliance committee and our export complianceexport-compliance function.

We are


Our operating results may be adversely affected due to uncertain global economic and financial market conditions.

The global macroeconomic environment has been challenging and inconsistent due to uncertainty in the global central bank monetary policy and uncertainty in global credit markets and the geopolitical environment in many areas of the world. In June 2016, the UK held a referendum, commonly referred to as “Brexit,” in which the majority of voters elected to withdraw from the EU. The UK formally departed from the EU on Friday, January 31, 2020, subject to complex and evolving U.S. and foreign lawsa transition period expected to last until December 31, 2020 (the “Transition Period”). During the Transition Period, most EU rules and regulations regarding privacy, data protection and other matters. Violations of these laws and regulations may harm our business.

A wide variety of provincial, state, national and international laws and regulationswill continue to apply to the collection, use, retention, protection, disclosure, transferUK as negotiations between the UK and the EU take place regarding the customs and trading relationship between the UK and the EU. Such negotiations are expected to continue after the expiration of the Transition Period. Although the terms of withdrawal remain in negotiation, the referendum has created global economic uncertainty, including anticipation of a possible slowdown in the global economy. Brexit has resulted in, and likely will continue to result in, significant volatility in the value of the British Pound Sterling and Euro currencies. In addition, economic and trade and tariff challenges in China, and the global economic ramifications of these challenges, may continue to put pressure on global economic conditions. The past year has been challenging for the credit markets due to going from a time of quantitative easing to a time of quantitative tightening by central banks around the world.  If global economic and market conditions, or economic conditions in key markets, remain uncertain or further deteriorate, we may experience material impacts on our business and operating results. We may also be adversely affected by Brexit, and other processing of data, including personal data. Foreign data protection, privacy and other laws and regulations, including the European Union’s (EU) recently enacted General Data Protection Regulation, are often more restrictive than thoseglobal economic challenges, in the U.S. These data protection and privacy-related laws and regulations are varied, evolving, can be subject to significant change, may be augmented or replaced by new or additional laws and regulations, and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. Ifways that we violate these laws and regulations, governmental authorities in the U.S., the EU and elsewhere could seek to impose civil and/or criminal fines and penalties which could have an adverse effect on our results of operations, financial condition and cash flow.do not currently anticipate.

Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely impact our results of operations.

The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental, health and safety regulations. Our failure or the failure of our contract manufacturers to comply with any of these applicable requirements could result in regulatory penalties, legal claims or disruption of production. In addition, our failure or the failure of our contract manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or liabilities. Existing and future environmental regulations may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.

If our products do not interoperate with our customers’ networks, installations may be delayed or cancelled,canceled, which could harm our business.

Our products must interface with existing networks, each of which may have different specifications, utilize multiple protocol standards and incorporate products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products may be required to interoperate with many or all of the products within these networks, as well as future products to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our products will interoperate with the existing software and hardware. Implementation of product corrections involving interoperability issues could increase our costs and adversely affect our results of operations. Such issues may affect our ability to obtain product acceptance from other customers.


The lengthy sales and approval process required by major and other CSPsservice providers for new products could result in fluctuations in our revenue.

In the industry in which we compete, sales and approval cycles are often lengthy. Selling efforts often involve a significant commitment of time and resources by us and our customers that may include extensive product testing, laboratory or network certification, or region-specific product certification and homologation requirements for deployment in networks. Additionally, a supplier must first obtain product approval from a major or other CSPservice provider to sell its products to them. This process can last from six to 18eighteen months, or longer, depending on the technology, the CSP,service provider and the demand for the product from the CSP’sservice provider’s subscribers. Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well as products that deploy new technology or respond to new technology demands from a major or other CSP.service provider. We have been successful in the past in obtaining these approvals; however, we cannot be certain that we will obtain these approvals in the future or that sales of these products will continue to occur. Any attempt by a major or other CSPservice provider to seek out additional or alternative suppliers, or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material adverse effect on our operating results. Furthermore, the delay in sales until the completion of the approval process, the length of which is difficult to predict, could result in fluctuations of revenue and uneven operating results from quarter to quarter or year to year. Further, once customer approval or certifications are met, our supply chain customers typically do not guarantee us a minimum, or any, volume of sales. We are dependent on individual purchase orders as discussed elsewhere in this report.


We engage in research and development activities to develop new, innovative solutions and to improve the application of developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development effortseffort and which may focus on more leading-edgeleading edge development.

We engage in research and development activities to develop new, innovative solutions and to improve the application of developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts. A portion of our research and development activities are focused on the refinement and redefinitioncontinued innovation of currently accepted access technologies that are currently acceptedin order to deliver faster internet speeds, more capacity, better quality of service and commonly practiced, which may include emerging technologies not yet widely distributed across all networks.operational efficiency. These research and development efforts result in improved applications of technologies for which demand already exists or is latent. We also focus our research and development efforts on developing software, solutions and platforms that enable service providers to increase revenue-generating service velocity, reducing operational costs, increasing scale and providing service agility. We rarely engage in research projects that represent a vast departure from the current business practices of our key customers. This includes pioneering new services and participating in leading-edge field trials or demonstration projects for new technologies. While we believe our strategy provides a higher likelihood of producing nearer term or more sustainable revenue streams, this strategy could reduce our ability to influence industry standards and share in the establishment of intellectual property rights associated with new technologies, and could result in lost revenue opportunities should a new technology achieve rapid and widespread market acceptance. When we do engage in research and development activities for new, leading-edge technologies and market approaches, there is no guarantee that those technologies or market approaches will be successful or that they will be adopted and purchased by our customers.

We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income.

Historically, a large percentage of our sales have been made to major CSPsservice providers and larger independent communications companies. In 2017,2019, these customers continued to comprise over half of our revenue. As long as the major and larger independent communications companies represent such a substantial percentage of our total sales, our future success will significantly depend upon certain factors which are not within our control, including:

the timing and size of future purchase orders, if any, from these customers;

the timing and size of future purchase orders, if any, from these customers;

changes in strategic plans of these customers;

changes in strategic plans and capital budgets of these customers;

the product requirements of these customers;

the product requirements of these customers;

the financial and operational success of these customers;

the subscriber take rate, including subscriber loss or churn, of our customers;

the impact of legislative and regulatory changes on these customers;

the financial and operational success of these customers;

the success of these customers' services deployed using our products; and

the impact of legislative and regulatory changes on these customers;

consolidation, acquisition of, or corporate reorganization among these customers;

the impact of work stoppages at these customers.

the success of these customers' services deployed using our products; and

the impact of work stoppages at these customers.

In the past, sales to our large customers have fluctuated, and may fluctuate in the future, significantly from quarter to quarter and year to year. The loss of, or a significant reduction or delay in, sales to any such customer or the occurrence of sales fluctuations could have a material adverse effect on our business and results of operations. Further, any attempt by a major or other CSPservice provider to seek out additional or alternative suppliers or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material adverse effect on our operating results.



There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to strengthen or hold their market positions and as companies are acquired or are unable to continue operations. This could lead to variability in our operating results and could have a material adverse effect on our business, operating results, financial condition and cash flow. In addition, particularly in the CSPservice provider market, rapid consolidation will lead to fewer customers, with the effect that a loss of a major customer could have a material impact on our results that we would not have anticipated in a marketplace composed of more numerous participants.


If we are unable to integrate recent and future acquisitions successfully, it could adversely affect our operating results, financial condition and cash flow.flows.

We may make acquisitions to improve or expand our product offerings, customer base, talent or intellectual property. Our current and future acquisition strategy will depend on our ability to identify, negotiate, complete and integrate acquisitions. Acquisitions involve numerous risks, including, but not limited to:

Difficulties integrating and managing the operations, technologies and products of the companies we acquire;

Our inability to maintain the key business relationships and the brand equity of businesses we acquire;

Our inability to retain key personnel of the acquired business; and

Our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate.

 

difficulties integrating and managing the operations, technologies and products of the companies we acquire;

our inability to maintain the key business relationships and the brand equity of businesses we acquire;

our inability to retain key personnel of the acquired business; and

our responsibility for the liabilities of the businesses we acquire, some of which we may not anticipate, including costs of third-party advisors to resolve disputes.

Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international regions may result in us not meeting our cost, quality or performance standards.

We are heavily dependent on subcontractors for the assembly and testing of certain printed circuit board assemblies, subassemblies, chassis, enclosures and equipment shelves, and the purchase of some raw materials used in such assemblies. This reliance involves several risks, including the unavailability of, or interruptions in, access to certain process technologies and reduced control over product quality, delivery schedules, transportation, manufacturing yields and costs. We may not be able to provide product order volumes to our subcontractors that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased costs or be required to take ownership of excess inventory. Changes in international tariff structures could adversely impact our product costs. In addition, a significant component of maintaining cost competitiveness is the ability of our subcontractors to adjust their costs to compensate for possible adverse exchange rate movements. To the extent that the subcontractors are unable to do so, and we are unable to procure alternative product supplies, then our competitiveness and results of operations could be adversely impaired. These risks may be exacerbated by economic, regulatory or political changes or uncertainties, terrorist actions, the effects of climate change, natural disasters or pandemics in the foreign countries in which our subcontractors are located. We do not utilize contract manufacturing for our products in China, though we do source some ODM products from China which are, or may become, subject to import tariffs. Additionally, concerns and additional costs associated with imports tariffs imposed on certain products from China has resulted in manufacturers seeking to secure production capabilities outside of China, including in countries where we currently utilize contract manufacturing.

To date, we believe that we have successfully managed the risks of our dependence on these subcontractors through a variety of efforts, which include seeking and developing alternative subcontractors while maintaining existing relationships; however, we cannot be assured that delays in product deliveries will not occur in the future because of shortages resulting from this limited number of subcontractors or from the financial or other difficulties of these parties. Our inability to develop alternative subcontractors if and as required in the future, or the need to undertake required retraining and other activities related to establishing and developing a new subcontractor relationship, could result in delays or reductions in product shipments which, in turn, could have a negative effect on our customer relationships and operating results.


 


Changes in trade policy in the United States and other countries, specifically China, including the imposition of additional tariffs and the resulting consequences, may adversely impact our gross profits, gross margins, results of operations and financial condition.

The U.S. government has imposed tariffs on a wide-range of products and goods manufactured in China and imported into the U.S. These tariffs are intended to address trade imbalances, which include decreasing imports from China and encouraging increased production of these products in the U.S. These proposals have, and could continue to, result in increased customs duties and tariffs. We import an increasing percentage of our products into the U.S from China and an increase in customs duties and tariffs with respect to these imports could negatively impact our gross profit, gross margins and results of operations. These customs duties and tariffs may also cause other U.S. trading partners to take certain actions with respect to U.S. imports in their respective countries. Any potential changes in trade policies in the U.S. and the potential actions by other countries in which we do business could adversely impact our financial performance.

Our dependence on a limited number of suppliers for certain raw materials, and key components and ODM products may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results.

Certain raw materials and key components used in our products are currently available from only one source, and others are available from only a limited number of sources. The availability of these raw materials and supplies may be subject to market forces beyond our control, such as merger and acquisition activity of our suppliers and consolidation in some segments of our supplier base. From time to time, there may not be sufficient quantities of raw materials and supplies in the marketplace to meet customer demand. Many companies utilize the same raw materials and supplies that we do in the production of their products. Companies with more resources than our own may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. These factors can result in reduced supply, higher prices of raw materials and delays in the receipt of certain of our key components, which in turn may generate increased costs, lower margins and delays in product delivery, with a corresponding adverse effect on revenues and customer relationships. Furthermore, due to general economic conditions in the U.S. and globally, our suppliers may experience financial difficulties, which could result in increased delays, additional costs or loss of a supplier. We attempt to manage these risks through developing alternative sources, by staging inventories at strategic locations, through engineering efforts designed to obviate the necessity of certain components and by building long-term relationships and close contact with each of our key suppliers; however, we cannot assure you that delays in or failures of deliveries of key components, either to us or to our contract manufacturers, and consequent delays in product deliveries, will not occur in the future.

In particular, if the current novel coronavirus outbreak continues and results in a prolonged period of travel, commercial and other similar restrictions, we could experience global supply disruptions. These restrictions could disrupt our ability to receive ODM products from China and may disrupt our suppliers located elsewhere who rely on products from China. Although we have not experienced material effects from the disruptions through the date of this Annual Report on Form 10-K, if we experience additional supply disruptions, we may become dependent on alternative sources outside the region. We may not be able to develop such alternate sourcing quickly enough to avoid production delays. Any disruption of our production schedule caused by an unexpected shortage of ODM products could cause us to alter production schedules, which could cause a loss of revenues, which would adversely affect our operations.

In addition, the SEC has adopted disclosure requirements regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries and procedures to identify the source of such minerals included in manufactured products. The disclosures will require us to incur additional costs to verify the origins of the identified minerals used and comply with disclosure requirements. These requirements could affect the availability of minerals used in the manufacture of a limited number of parts contained in our products. This may reduce the number of suppliers who provide conflict-free minerals and may affect our ability to obtain products in sufficient quantities or at competitive prices. Our material sourcing is broad-based and multi-tiered. While we are taking steps to identify sourcing based on recommended standards for our industry, we may not be able to conclusively verify the origins for all minerals used in our products. An inability to make a sourcing determination of minerals in our products could impact our revenues and harm our financial condition should our customers require that we certify that all components used in our products are free of minerals from this region.


We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share.

The markets for our products are intensely competitive. Additional manufacturers have entered the markets in recent years to offer products in competition with us. Additionally, certain companies have, in recent years, developed the ability to deliver competing products using coaxial cable and cellular transmission, especially in high-density metropolitan areas. Competition will further increase if new companies enter the market or existing competitors expand their product lines. Some of these potential competitors may have greater financial, technological, manufacturing, sales and marketing, and personnel resources than we have. As a result, these competitors may be able to respond more rapidly or effectively to new or emerging technologies and changes in customer requirements, withstand significant price decreases, or devote greater resources to the development, promotion and sale of their products than we can.

In addition, our present and future competitors may be able to enter our existing or future markets with products or technologies comparable or superior to those that we offer. An increase in competition could cause us to reduce prices, decrease our market share, require increased spending by us on product development and sales and marketing, or cause delays or cancellations in customer orders, any one of which could reduce our gross profit margins and adversely affect our business and results of operations.


Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment volumes, field service repair obligations and other rework costs incurred in correcting product failures. If our estimates change, theour liability for warranty obligations may be increasedincrease or decreased,decrease, impacting future cost of goods sold.

Our products are highly complex, and we cannot ensure that our extensive product development, manufacturing and integration testing will be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty could adversely impact our reputation and negatively affect our operating results, financial position and cash flow.flows. The development and production of new products with high complexity often involves problems with software, components and manufacturing methods. If significant warranty obligations arise due to reliability or quality issues arising from defects in software, faulty components or manufacturing methods, our operating results, financial position and cash flowflows could be negatively impacted by:

costs associated with fixing software or hardware defects;

costs associated with fixing software or hardware defects;

costs associated with internal or third-party installation errors;

costs associated with internal or third-party installation errors;

high service and warranty expenses;

high service and warranty expenses;

high inventory obsolescence expense;

costs associated with recalling and replacing products with software or hardware defects, including costs from writing-off defective products recalled;

delays in collecting accounts receivable;

high inventory obsolescence expense;

payment of liquidated damages for performance failures; and

delays in collecting accounts receivable;

payment of liquidated damages for performance failures; and

a decline in sales to existing customers.

a decline in sales to existing customers.

Managing our inventory is complex and may include write-downs of excess or obsolete inventory.

Managing our inventory of components and finished products is complicated by a number of factors, including the need to maintain a significant inventory of certain components that are in short supply, that have been discontinued by the component manufacturer, that must be purchased in bulk to obtain favorable pricing or that require long lead times. These issues may result in our purchasing and maintaining significant amounts of inventory, which if not used or expected to be used based on anticipated production requirements, may become excess or obsolete. Any excess or obsolete inventory could also result in sales price reductions and/or inventory write- downs, which could adversely affect our business and results of operations.


The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely affect our operating results, financial condition and cash flow.flows.

We are expanding our presence in international markets, which represented 24.0%43.2% of our net sales for 2017,2019, and as a result, we anticipate increased sales and operating costs in these markets. This international expansion may increase our operational risks and impact our results of operations, including:

Exposure to unfavorable commercial terms in certain countries;

The time and cost to staff and manage foreign operations;

The time and cost to maintain good relationships with employee associations and works councils;

The time and cost to ensure adequate business interruption controls, processes and facilities;

The time and cost to manage and evolve financial reporting systems, maintain effective financial disclosure controls and procedures, and comply with corporate governance requirements in multiple jurisdictions;

The cost to collect accounts receivable and extension of collection periods;

The cost and potential disruption of facilities transitions required in some business acquisitions;

Less regulation of patents or other safeguards of intellectual property in certain countries;

Potential impact of adverse tax, customs regulations and transfer-pricing issues;

Exposure to global social, political and economic instability, changes in economic conditions, and foreign currency exchange rate movements;

Potential exposure to liability or damage of reputation resulting from a higher incidence of corruption or unethical business practices in some countries;

Potential regulations on data protection, regarding the collection, use, disclosure and security of data;


exposure to unfavorable commercial terms in certain countries;

 

Potentialthe time and cost to staff and manage foreign operations;

the time and cost to maintain good relationships with employee associations and works councils;

the time and cost to ensure adequate business interruption controls, processes and facilities;

the time and cost to manage and evolve financial reporting systems, maintain effective financial disclosure controls and procedures, and comply with corporate governance requirements in multiple jurisdictions;

the cost to collect accounts receivable and extension of collection periods;

the cost and potential disruption of facilities transitions required in some business acquisitions;

less regulation of patents or other safeguards of intellectual property in certain countries;

the potential impact of adverse tax, customs regulations and transfer-pricing issues;

exposure to increased price competition from additional competitors in some countries;

exposure to global social, political and economic instability, changes in economic conditions and foreign currency exchange rate movements;

potential exposure to liability or damage of reputation resulting from a higher incidence of corruption or unethical business practices in some countries;

potential regulations on data protection, regarding the collection, use, disclosure and security of data;

potential trade protection measures, export compliance issues, domestic preference procurement requirements, qualification to transact business and additional regulatory requirements; and

Potential exposure to natural disasters, epidemics and acts of war or terrorism.

potential exposure to natural disasters, epidemics and acts of war or terrorism.

If we are unable to successfully address the potential risks associated with our overall international expansion, our operating results, financial condition and cash flowflows may be negatively impacted.

We may be adversely affected by fluctuations in currency exchange rates.

As our international sales increase or as utilization of international suppliers expands, we may transact additional business in currencies other than U.S. currency. As a result, we will be subject to the possibility of greater effects of foreign currency exchange translation on our financial statements. Sales contract commitments and accounts receivable balances based on foreign currency expose us to the potential risk of loss as the value of the U.S. dollar fluctuates over time. In addition, for those countries outside the U.S. where we have significant sales or significant purchases of supplies, devaluation in the local currency could make our products more expensive for customers to purchase or increase our costs, thereby adversely affecting our competitiveness or results of operation. When appropriate, we may enter into various derivative transactions to enhance our ability to manage the volatility relating to these typical business exposures. If used, the derivative transactions will be intended to reduce, but not eliminate, the impact of foreign currency exchange rate movements; therefore, we generally would not anticipate hedging all outstanding foreign currency risk. There can be no assurance that exchange rate fluctuations in the future will not have a material adverse effect on our revenue from international sales, manufacturing costs, results of operations, financial condition and cash flow.flows.


Our success depends on our ability to reduce the selling prices of succeeding generations of our products.

Our strategy is to increase unit sales volumes and market share each year by introducing succeeding generations of products having lower selling prices and increased functionality as compared to prior generations of products. To maintain or increase our revenues and margins while continuing this strategy, we must continue, in some combination, to increase sales volumes of existing products, introduce and sell new products, or reduce our per unit costs at rates sufficient to compensate for the reduced revenue effect of continuing reductions in the average sales prices of our products. We cannot ensure that we will be able to maintain or increase revenues or margins by increasing unit sales volumes of our products, introducing and selling new products or reducing unit costs of our products.

We are currently evaluating the implementation of a new enterprise resource planning (ERP)(“ERP”) software solution. If we do not appropriately manageeffectively implement this project, our operations could be significantly disrupted.

We are currently evaluating the implementation of a new ERP software solution. This project could have a significant impact on our business processes, financial reporting, information systems and internal controls, and will require significant change management, meaningful investment in capital and personnel resources and coordination of numerous software and system providers and internal business teams. We may experience difficulties as we manage these changes and transition to a new ERP solution, including loss or corruption of data, delayed shipments, delayed financial reporting, decreases in productivity as our personnel implement and become familiar with the new systems and processes, unanticipated expenses (including increased costs of implementation, or costs of conducting business),business or the potential impairment of previously capitalized ERP implementation costs) and lost revenues. Difficulties in implementing a new ERP solution could disrupt our operations, divert management’s attention from key strategic initiatives and have an adverse effect on our results of operations, financial condition and cash flow.flows.



Breaches of our information systems and cyber-attacks could compromise our intellectual property and cause significant damage to our business and reputation.

We maintain sensitive data on our information systems and the networks of third-party providers, including intellectual property, financial data and proprietary or confidential business information relating to our business, customers, suppliers and business partners. We also produce networking equipment solutions and software used by network operators to ensure security and reliability in their management and transmission of data. Our customers, particularly those in regulated industries, are increasingly focused on the security features of our technology solutions and maintaining the security of information sensitive to us and our business partners is critical to our business and reputation. We rely upon a number of internal business processes and information systems to support key operations and financial functions, and the efficient operation of these processes and systems is critical. Companies are increasingly subjected to cyber-attacks and other attempts to gain unauthorized access. We have multiple layers of access control and devote significant resources to data encryption and other security measures to protect our information technology and communications systems. We test our vulnerability periodically and take action to further secure our networks, yet our network and storage applications and those systems and storage applications maintained by our third-party providers may be subject to unauthorized access by cyber-attack or breached due to operator error, fraudulent activity or other system disruptions. In some cases, it is difficult to anticipate or immediately detect damage caused by such incidents. Unauthorized access or disclosure of our information could compromise our intellectual property and expose sensitive business information. Our information systems are designed to appropriate industry standards to reduce downtime in the event of power outages, weather or climate events and cyber-security issues. A significant failure of our systems due to these issues could result in significant remediation costs, disrupt business operations and divert management attention, which could result in harm to our business reputation, operating results, financial condition and cash flow.

Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality and commercial value of our products.

Our future success depends in part upon our proprietary technology. Although we attempt to protect our proprietary technology by contract, trademark, copyright and patent registration, and internal security, including trade secret protection, these protections may not be adequate. Furthermore, our competitors can develop similar technology independently without violating our proprietary rights. From time to time, we receive and may continue to receive notices of claims alleging that we are infringing upon patents or other intellectual property. Any of these claims, whether with or without merit, could result in significant legal fees;fees, divert our management’s time, attention and resources;resources, delay our product shipments;shipments or require us to enter into royalty or licensing agreements. We cannot predict whether we will prevail in any claims or litigation over alleged infringements, or whether we will be able to license any valid and infringed patents, or other intellectual property, on commercially reasonable terms. If a claim of intellectual property infringement against us is successful and we fail to obtain a license or develop or license non-infringing technology, our business, operating results, financial condition and cash flowflows could be affected adversely.


Software under license from third-parties for use in certain of our products may not continue to be available to us on commercially reasonable terms.

We integrate third-party software into certain of our products. Licenses for this technology may not be available or continue to be available to us on commercially reasonable terms. Difficulties with third-party technology licensors could result in the termination of such licenses, which may result in increased costs or require us to purchase or develop a substitute technology. Difficulty obtaining and maintaining third-party technology licenses may disrupt the development of our products and increase our costs, which could harm our business.

Our use of open source software could impose limitations on our ability to commercialize our products.

Several of our solutions utilize elements of open source or publicly available software. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by the courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third-parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenues and operating expenses.


We may incur liabilities or become subject to litigation that would have a material effect on our business.

In the ordinary course of business, we accept purchase orders, and enter into sales and other related contracts, for the marketing, sale, manufacture, distribution or use of our products and services. We may incur liabilities relating to our performance under such agreements, or which result from damage claims arising from certain events as outlined within the particular contract. While we attempt to structureinclude reasonable limitations of liability and other protective measures to all agreements, to include normal protection clauses, such agreements may not always contain, or be subject to, maximum loss clauses and liabilities arising from them may result in significant adverse changes to our results of operations, financial condition and cash flow.flows.

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,monetary recovery, or other relief, including damages such as royalty payments related to patents, lost profits or injunctive relief, which, if granted, could require significant expenditures. Any such disputes may be resolved before trial, or if litigated,tried, may be resolved in our favor; however, the cost of claims sustained in litigation, and costs associated with the litigation process, may not be covered by our insurance. Such costs, and the demands on management time during such an event, could harm our business and have a material adverse effect on our liquidity, results of operations, financial condition and cash flow.flows.

Consolidation and deterioration in the Competitive Local Exchange Carrier (CLEC)CLEC market could result in a significant decrease in our revenue.

We sell a moderate volume of products directly or indirectly to CLECs who compete with the established ILECs.Incumbent Local Exchange Carriers (“ILEC”). The CLEC market is experiencing a process of consolidation. Many of our CLEC customers do not have a strong financial position and have limited ability to access the public financial markets for additional funding for growth and operations. If one or more of these CLECs fail, we could face a loss in revenue and an increased bad debt expense, due to their inability to pay outstanding invoices, as well as the corresponding decrease in customer base and future revenue. Furthermore, significant portions of our sales to CLECs are made through independent distributors. The failure of one or more CLECs could also negatively affect the financial position of a distributor to the point that the distributor could also experience business failure and/or default on payments to us.

We depend on distributors who maintain inventories of our products. If the distributors reduce their inventories of these products, our sales could be adversely affected.

We work closely with our distributors to monitor channel inventory levels and ensure that appropriate levels of productour products are available to resellers and end users. If our distributors reduce their levels of inventory of our products, our sales would be negatively impacted during the period of change.


If we are unable to successfully develop and maintain relationships with system integrators, CSPs,SIs, service providers and enterprise VARs, our sales may be negatively affected.

As part of our sales strategy, we are targeting system integrators (SIs), CSPs,SIs, service providers and enterprise VARs. In addition to specialized technical expertise, SIs, CSPsservice providers and VARs typically offer sophisticated service capabilities that are frequently desired by enterprise customers. To expand our distribution channel to include resellers with such capabilities, we must be able to provide effective support to these resellers. If our sales, marketing or service capabilities are not sufficient to provide effective support to such SIs, CSPsservice providers and VARs, our sales may be negatively affected, and current SI, CSPservice provider and VAR partners may terminate their relationships with us, which would adversely impact our sales and overall results of operations.

If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted.

We are exposed to financial market risks, including changes in interest rates and prices of marketable equity and fixed-income securities. The primary objective of the large majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective, a majority of our marketable securities are investment grade corporate and municipal fixed-rate bonds, U.S. government bonds and municipal money market instruments denominated in U.S. dollars. While we do invest a portion of our investment portfolio in equities, which are subject to market risks, including the loss of principal, our equity investments are generally invested in professionally-managed portfolios with the objective of exceeding the performance of their underlying benchmarks. All of our fixed income and equity portfolios are reviewed regularly for performance and policy compliance. 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.


We have significant investments in corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds and foreign government bonds. Through December 31, 2017,2019, we have not been required to impair any of these investments; however, we may experience a reduction in value or loss of liquidity in these investments, which may have an adverse effect on our results of operations, liquidity and financial condition. Fixed-rate interest securities may have their fair value adversely impacted due to a rise in interest rates, while variable-rate securities may produce less income than expected if interest rates fall. Our investments are subject to general credit, liquidity, market and interest rate risks, which may increase because of conditions in the financial markets and related credit liquidity issues. Consequently, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in fair value due to changes in interest rates.

At December 31, 2017, our long-term investments included $35.7 million of marketable equity securities, which included 346 unique securities, and had total net unrealized gains of $2.2 million. If market conditions deteriorate in 2018, we may be required to record impairment charges related to our marketable equity securities.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Part II,  Item 7 Part II of this report, and “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this report and Note 5 of Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for more information about our investments.


New or revised tax regulations, changes in our effective tax rate, recognition of a valuation allowance or assessments arising from tax audits may have an adverse impact on our results.

We are subject to taxation in various jurisdictions, both domestically and internationally, in which we conduct business. Significant judgment is required in the determination of our provision for income taxes, and this determination requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. Many of these jurisdictions have made changes to their tax policies or are contemplating changes, or have unpredictable enforcement activity. Increases in applicable tax rates, implementation of new taxes, changes in applicable tax laws and interpretations of these tax laws and actions by tax authorities in jurisdictions in which we operate could reduce our after-tax income and have an adverse effect on our results of operations. Our effective tax rate may be adversely impacted by changes in the mix of earnings between jurisdictions with different statutory tax rates, in the valuation of our deferred tax assets, and by changes in tax rules and regulations. For instance, the accounting of uncertainWe continually monitor our deferred tax positionsassets and the amount of our estimatedwhen it becomes more likely than not that a tax deduction for manufacturer’s domestic production activities under Internal Revenue Code Section 199 may add more variability to our future effective tax rates. We currently receivebenefit will not be recognized a valuation allowance is recorded against those assets. During 2019, we received corporate income tax credits under a program administered by the Alabama State Industrial Development Authority in connection with revenue bonds issued to provide funding for the expansion of our corporate facilities. We cannot be certain thatThe credit program administered by the stateAlabama State Industrial Development Authority ended on January 2, 2020 with the repayment of Alabamathe revenue bonds, which will continue to make these corporate income tax credits available; therefore, we may not realize the full benefit of these incentives, which would increase ourresult in an increased effective tax rate. Also,rate in the future. These employment-related tax benefits are currently accounted for in our effective tax rate. In addition, we are subject to examination of our income tax returns by the Internal Revenue Service and various other jurisdictions in which we conduct business. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations, financial condition and cash flow.

On December 22, 2017, Additionally, we continually review the Tax Cuts and Jobs Act (the Act) was signed into law. As a resultadequacy of the Act, we have recognized an estimated expense of $11.9 million invaluation allowance and recognize the fourth quarter of 2017, of which $9.2 million related to the write-downbenefits of deferred tax assets and $2.7 million related toonly as the reassessment indicates that it is more likely than not that the deferred tax on unrepatriated foreign earnings. We have calculated our best estimateassets will be recognized. As such, we may release a portion of the impact of the Act in our 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 whenvaluation allowance or establish 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 is necessary to do a more detailed analysis of historical foreign earnings, as well as the full impact relating to the write-down of deferred tax assets. Any subsequent adjustments to these amounts will be recorded as income tax expensenew valuation allowance based on operations in the quarterjurisdictions in which these assets arose. Management continues to evaluate all evidence including historical operating results, the analysisexistence of losses in the most recent year, forecasted earnings, future taxable income and tax planning strategies. Should management determine that a valuation allowance is complete.needed in the future due to not being able to absorb loss carryforwards, it would have a material impact on our consolidated financial statements.

We are required to periodically evaluate the value of our long-lived assets, including the value of intangibles assets acquired and goodwill resulting from business acquisitions. Any future impairment charges required may adversely affect our operating results.

Valuation of our long-lived assets requires us to make assumptions about future sales prices and sales volumes for our products. These assumptions are used to forecast future, undiscounted cash flows. Forecasting future business trends is difficult and subject to modification. Should actual market conditions differ, or our forecasts change, we may be required to reassess long-lived assets and could record an impairment charge. Any impairment charge relating to long-lived assets would have the effect of decreasing our earnings or increasing our losses in such period.


We may not fully realize the anticipated benefits of our ongoing restructuring plans. Our restructuring efforts may adversely affect our business and our operating results.

We have undertaken restructuring efforts to realign our organization to better match our market opportunities, technology development initiatives and improve efficiencies. There can be no assurance that we will fully realize the anticipated benefits to future financial results from our efforts. This realignment could adversely affect our ability to execute our business strategy by diverting management’s attention from normal daily operations, decreasing cash flowflows and operating results due to severance payments and facility termination costs, and could be disruptive to our business. If we fail to realize some or all of the expected benefits of this realignment, it could have an adverse effect on our results of operations, financial condition and cash flow.flows.

Our success depends on attracting and retaining key personnel.

Our business has grown significantly since its inception. Our success is dependent in large part on the continued employment of our executive officers, including Thomas R. Stanton, our Chief Executive Officer, and other key management personnel. The unplanned departure of one or more of these individuals could adversely affect our business. In addition, for ADTRAN to continue as a successful entity we must also be able to attract and retain key engineers and technicianssoftware developers and architects whose expertise helps us maintain competitive advantages. We believe that our future success will depend, in large part, upon our ability to continue to attract, retain, train and motivate highly-skilled employees who are in great demand. Stock awards are designed to reward employees for their long-term contributions and to provide incentives for them to remain with us. Changes to our overall compensation program, including our stock incentive program, may adversely affect our ability to retain key employees. Properly managing our continued growth, avoiding the problems often resulting from such growth and expansion and continuing to operate in the manner which has proven successful to us to date will be critical to the future success of our business.


Regulatory and potential physical impacts of climate change and other natural events may affect our customers and our production operations, resulting in adverse effects on our operating results.

There is a growing political and scientific consensus that emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns and the global climate. It appears that some form of U.S. federal regulation related to greenhouse gas emissions may occur, and any such regulation could result in the creation of additional costs in the form of taxes or emission allowances. The impact of any future legislation, regulations or product specification requirements on our products and business operations is dependent on the design of the final mandate or standard, so we are unable to predict its significance at this time.

The potential physical impacts of climate change and other natural events on our customers, suppliers and on our operations are highly uncertain, and will be particular to the circumstances developing in various geographical regions. These events may include changes in weather patterns (including drought and rainfall levels), water availability, storm patterns and intensities, ocean levels, temperature levels, earthquakes and tsunamis. These potential physical effects may adversely affect our revenues, costs, production and delivery schedules, and cause harm to our results of operations, financial condition and cash flow.

While we believe our internal control over financial reporting is adequate, a failure to maintain effective internal control over financial reporting as our business expands could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we assess the effectiveness of our internal control over financial reporting as of the end of our fiscal year, and issue a report that states whether or not such internal control is effective. Compliance with these requirements requires significant cost and the commitment of time and staff resources. Expansion of our business, particularly in international geographies, necessitates ongoing changes to our internal control systems, processes and information systems. We cannot be certain that as this expansion occurs, our current design for internal control over financial reporting will be sufficient to enable management or our independent registered public accounting firm to determine that our internal control is effective for any period, or on an ongoing basis. If we or our independent registered public accounting firm are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial statements, which could have an adverse effect on our stock price.flows.

The price of our common stock has been volatile and may continue to fluctuate significantly.

Our common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. Since our initial public offering in August 1994, there has been, and may continue to be, significant volatility in the market for our common stock, based on a variety of factors, including factors listed in this section, some of which are beyond our control.

 


ITEM 1B.

UNRESOLVEDUNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our headquarters and principal administrative, engineering and manufacturing facilities are located on an 82-acre campus in Cummings Research Park in Huntsville, Alabama. Two office buildings serve both our Network Solutions and our Services & Support segments. We lease engineering facilities in the U.S., Europe and India that are used to develop products sold by our Network Solutions segment.

In addition, we lease office space in North America, Latin America, EMEA and the Asia-Pacific region,APAC, providing sales and service support for both of our segments.

These cancelable and non-cancelable leases expire at various times through 2025. For more information, see Note 149 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

We also have numerous sales and support staff operating from home-based offices serving both our Network Solutions and our Services & Support segments, which are located within the United StatesU.S. and abroad.

ITEM 3.

Securities Class Action Lawsuit

On October 17, 2019, a purported stockholder class action lawsuit, captioned Burbridge v. ADTRAN, Inc. et al., Docket No. 19-cv-09619, was filed in the United States District Court for the Southern District of New York against the Company, two of its current executive officers and one of its former executive officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages on behalf of purported purchasers of ADTRAN securities between February 28, 2019 and October 9, 2019. The lawsuit claims that the defendants made materially false and misleading statements regarding, and/or failed to disclose material adverse facts about, the Company’s business, operations and prospects, specifically relating to the Company’s internal control over financial reporting, excess and obsolete inventory reserves, financial results and shipments to a Latin American customer.  Investors in ADTRAN securities had until December 16, 2019 to move the court to serve as lead plaintiff in this action. 

On December 16, 2019, two purported investors in ADTRAN securities filed motions seeking to be appointed lead plaintiff in the case. On January 6, 2020, the United States District Court for the Southern District of New York granted Defendants’ unopposed request to transfer the case to the United States District Court for the Northern District of Alabama, where the case is now pending as Burbridge v. ADTRAN, Inc. et al., Docket No. 5:20-cv-00050-LCB. On January 27, 2020, the two prospective lead plaintiff movants filed a stipulation among plaintiffs seeking to be appointed as co-lead plaintiffs in the case.

We have been involveddisagree with the claims made in the complaint and intend to vigorously defend against this lawsuit. At this time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with this lawsuit.

Other Legal Matters

In addition to the litigation described above, from time to time we are subject to or otherwise involved in litigationvarious lawsuits, claims, investigations and legal proceedings that arise out of or are incidental to the conduct of our business (collectively, “Legal Matters”), including those relating to employment matters, patent rights, regulatory compliance matters, stockholder claims, and contractual and other commercial disputes. Such Legal Matters, even if not meritorious, could result in the normal courseexpenditure of our business. We aresignificant financial and managerial resources. Additionally, an unfavorable outcome in a legal matter, including in a patent dispute, could require the Company to pay damages, entitle claimants to other relief, such as royalties, or could prevent the Company from selling some of its products in certain jurisdictions. While the Company cannot predict with certainty the results of the Legal Matters in which it is currently involved, the Company does not awareexpect that the ultimate outcome of any pendingsuch Legal Matters will individually or threatened litigation matters that couldin the aggregate have a material adverse effect on us.its business, results of operations, financial condition or cash flows.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 


ITEM 4A.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below, in accordance with General Instruction G(3) of Form 10-K and Instruction 3 of Item 401(b) of Regulation S-K, is certain information regarding the executive officers of ADTRAN. Unless otherwise indicated, the information set forth is as of December 31, 2017.

Thomas R. Stanton

Age 53

2007 to present

Chief Executive Officer and Chairman of the Board

Roger D. Shannon

Age 52

2015 to present

Senior Vice President of Finance, Chief Financial Officer, Corporate Secretary and Treasurer

2006 – 2015

Chief Financial Officer and Treasurer – Steel Technologies LLC

Michael K. Foliano

Age 57

2006 to present

Senior Vice President of Operations

Kevin P. Heering

Age 46

2017 to present

Senior Vice President, Services and Support

2014 – 2017

Senior Vice President, Quality and Administration

2010 – 2014

Vice President, Quality

Charles Marsh

Age 51

2017 to present

Senior Vice President, Sales

2016 – 2017

Managing Director, Americas – XURA

2016

Vice President Sales, Americas – Hewlett Packard Enterprise

2012 – 2016

President, America Sales – Alcatel Lucent

2009 – 2012

Vice President, North American Sales – Alcatel Lucent

Eduard Scheiterer

Age 64

2015 to present

Senior Vice President, Research and Development

2014 – 2015

Senior Vice President and Managing Director, International Markets

2012 – 2014

Managing Director – Adtran GmbH, a German wholly owned subsidiary of Adtran, Inc.

2009 – 2012

Head of Broadband Access – Nokia (formerly Nokia Siemens Networks), Germany

James D. Wilson, Jr.

Age 47

2015 to present

Senior Vice President of Technology and Strategy

2006 – 2015

Senior Vice President and General Manager, Carrier Networks

There are no family relationships among our directors or executive officers. All officers are elected annually by, and serve at the discretion of, the Board of Directors of ADTRAN.

 


PART II

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

ADTRAN's common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. As of January 31, 2018,February 19, 2020, ADTRAN had 176163 stockholders of record and approximately 7,2026,972 beneficial owners of shares held in street name. The following table shows the high and low closing prices per share for our common stock as reported by NASDAQ for the periods indicated.

 

Common Stock Prices

Common Stock Prices

 

Common Stock Prices

 

 

High

 

 

Low

 

 

High

 

 

Low

 

2017

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

First Quarter

 

$

23.20

 

 

$

20.75

 

 

$

15.40

 

 

$

10.49

 

Second Quarter

 

$

20.65

 

 

$

19.10

 

 

$

17.81

 

 

$

13.76

 

Third Quarter

 

$

24.00

 

 

$

20.05

 

 

$

16.40

 

 

$

9.92

 

Fourth Quarter

 

$

24.50

 

 

$

19.35

 

 

$

11.59

 

 

$

8.09

 

2016

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

First Quarter

 

$

20.47

 

 

$

16.60

 

 

$

20.00

 

 

$

15.35

 

Second Quarter

 

$

20.43

 

 

$

17.14

 

 

$

16.05

 

 

$

13.95

 

Third Quarter

 

$

19.74

 

 

$

17.81

 

 

$

18.80

 

 

$

14.95

 

Fourth Quarter

 

$

23.15

 

 

$

17.90

 

 

$

18.12

 

 

$

10.43

 

The following table shows the shareholder dividends paid in each quarter of 2017 and 2016. 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.

Dividends per Common Share

 

 

 

2017

 

 

2016

 

First Quarter

 

$

0.09

 

 

$

0.09

 

Second Quarter

 

$

0.09

 

 

$

0.09

 

Third Quarter

 

$

0.09

 

 

$

0.09

 

Fourth Quarter

 

$

0.09

 

 

$

0.09

 

Stock Repurchases

The following table sets forth repurchases of our common stock for the months indicated.

 

Period

 

Total

Number of

Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs (1)

 

 

Maximum Number of

Shares that May Yet Be

Purchased Under the

Plans or Programs

 

October 1, 20172019 – October 31, 20172019

 

 

 

 

$

 

 

 

 

 

 

3,559,0682,545,430

 

November 1, 20172019 – November 30, 20172019

 

 

 

 

$

 

 

 

 

 

 

3,559,0682,545,430

 

December 1, 20172019 – December 31, 20172019

 

 

 

 

$

 

 

 

 

 

 

3,559,0682,545,430

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 50.0 million shares of our common stock, which will beare implemented through open market or private purchases from time to time as conditions warrant. We currently have authorization to repurchase an additional 2.5 million shares of our common stock under the current authorization of up to 5.0 million shares.

 


ITEM 6.

SELECTEDSELECTED FINANCIAL DATA

Income Statement Data

(In thousands, except per share amounts)

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Sales

 

$

666,900

 

 

$

636,781

 

 

$

600,064

 

 

$

630,007

 

 

$

641,744

 

 

$

530,061

 

 

$

529,277

 

 

$

666,900

 

 

$

636,781

 

 

$

600,064

 

Cost of sales

 

 

363,240

 

 

 

345,437

 

 

 

333,167

 

 

 

318,680

 

 

 

332,858

 

 

 

310,894

 

 

 

325,712

 

 

 

363,265

 

 

 

345,451

 

 

 

333,166

 

Gross profit

 

 

303,660

 

 

 

291,344

 

 

 

266,897

 

 

 

311,327

 

 

 

308,886

 

Gross Profit

 

 

219,167

 

 

 

203,565

 

 

 

303,635

 

 

 

291,330

 

 

 

266,898

 

Selling, general and administrative expenses

 

 

135,489

 

 

 

131,805

 

 

 

123,542

 

 

 

131,958

 

 

 

129,366

 

 

 

130,288

 

 

 

124,440

 

 

 

135,583

 

 

 

131,848

 

 

 

123,540

 

Research and development expenses

 

 

130,434

 

 

 

124,804

 

 

 

129,876

 

 

 

132,258

 

 

 

131,055

 

 

 

126,200

 

 

 

124,547

 

 

 

130,666

 

 

 

124,909

 

 

 

129,868

 

Operating income

 

 

37,737

 

 

 

34,735

 

 

 

13,479

 

 

 

47,111

 

 

 

48,465

 

Asset impairments

 

 

3,872

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on contingency

 

 

(1,230

)

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

(39,963

)

 

 

(45,422

)

 

 

37,386

 

 

 

34,573

 

 

 

13,490

 

Interest and dividend income

 

 

4,380

 

 

 

3,918

 

 

 

3,953

 

 

 

5,019

 

 

 

7,012

 

 

 

2,765

 

 

 

4,026

 

 

 

4,380

 

 

 

3,918

 

 

 

3,953

 

Interest expense

 

 

(556

)

 

 

(572

)

 

 

(596

)

 

 

(677

)

 

 

(2,325

)

 

 

(511

)

 

 

(533

)

 

 

(556

)

 

 

(572

)

 

 

(596

)

Net realized investment gain

 

 

4,685

 

 

 

5,923

 

 

 

10,337

 

 

 

7,278

 

 

 

8,614

 

Net investment gain (loss)

 

 

11,434

 

 

 

(4,050

)

 

 

4,685

 

 

 

5,923

 

 

 

10,337

 

Other income (expense), net

 

 

(1,559

)

 

 

(651

)

 

 

(1,465

)

 

 

1,175

 

 

 

(911

)

 

 

1,498

 

 

 

1,286

 

 

 

(1,208

)

 

 

(489

)

 

 

(1,476

)

Gain on bargain purchase of a business

 

 

 

 

 

3,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,322

 

 

 

 

 

 

3,542

 

 

 

 

Income before provision for income taxes

 

 

44,687

 

 

 

46,895

 

 

 

25,708

 

 

 

59,906

 

 

 

60,855

 

Provision for income taxes (1)

 

 

(20,847

)

 

 

(11,666

)

 

 

(7,062

)

 

 

(15,286

)

 

 

(15,061

)

Net income

 

$

23,840

 

 

$

35,229

 

 

$

18,646

 

 

$

44,620

 

 

$

45,794

 

Income (Loss) Before Income Taxes

 

 

(24,777

)

 

 

(33,371

)

 

 

44,687

 

 

 

46,895

 

 

 

25,708

 

Income tax (expense) benefit

 

 

(28,205

)

(1)

 

14,029

 

 

 

(20,847

)

(2)

 

(11,666

)

 

 

(7,062

)

Net Income (Loss)

 

$

(52,982

)

 

$

(19,342

)

 

$

23,840

 

 

$

35,229

 

 

$

18,646

 

 

Weighted average shares outstanding – basic

 

 

48,153

 

 

 

48,724

 

 

 

51,145

 

 

 

55,120

 

 

 

59,001

 

 

 

47,836

 

 

 

47,880

 

 

 

48,153

 

 

 

48,724

 

 

 

51,145

 

Weighted average shares outstanding – assuming dilution (2)(3)

 

 

48,699

 

 

 

48,949

 

 

 

51,267

 

 

 

55,482

 

 

 

59,424

 

 

 

47,836

 

 

 

47,880

 

 

 

48,699

 

 

 

48,949

 

 

 

51,267

 

Earnings per common share – basic

 

$

0.50

 

 

$

0.72

 

 

$

0.36

 

 

$

0.81

 

 

$

0.78

 

Earnings per common share – assuming dilution (2)

 

$

0.49

 

 

$

0.72

 

 

$

0.36

 

 

$

0.80

 

 

$

0.77

 

Earnings (loss) per common share – basic

 

$

(1.11

)

 

$

(0.40

)

 

$

0.50

 

 

$

0.72

 

 

$

0.36

 

Earnings (loss) per common share – assuming dilution (3)

 

$

(1.11

)

 

$

(0.40

)

 

$

0.49

 

 

$

0.72

 

 

$

0.36

 

Dividends declared and paid per common share

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

 

$

0.36

 

Balance Sheet Data (In

(In thousands)

At December 31,

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

As of December 31,

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Working capital (3)(4)

 

$

306,296

 

 

$

226,367

 

 

$

219,219

 

 

$

214,985

 

 

$

260,252

 

 

$

207,599

 

 

$

237,416

 

 

$

306,296

 

 

$

226,367

 

 

$

219,219

 

Total assets

 

$

669,094

 

 

$

667,235

 

 

$

632,904

 

 

$

738,694

 

 

$

789,898

 

 

$

545,118

 

 

$

628,027

 

 

$

669,094

 

 

$

667,235

 

 

$

632,904

 

Total debt(5)

 

$

26,700

 

 

$

27,800

 

 

$

28,900

 

 

$

30,000

 

 

$

46,500

 

 

$

24,600

 

 

$

25,600

 

 

$

26,700

 

 

$

27,800

 

 

$

28,900

 

Stockholders' equity

 

$

497,911

 

 

$

479,517

 

 

$

480,160

 

 

$

549,013

 

 

$

604,606

 

 

$

380,426

 

 

$

446,279

 

 

$

497,911

 

 

$

479,517

 

 

$

480,160

 

 

(1)

Provision for income taxes in 2019 reflected a valuation allowance of $42.8 million is primarily related to our domestic deferred tax assets with respect to which the Company is no longer able to conclude that it is more likely than not that these deferred tax assets will be realized. See Note 13 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report, for additional information.

(2)

Provision for income taxes in 2017 reflectsreflected an estimated expense of $11.9 million related to the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. See Note 1113 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report, for additional information.

(2)(3)

Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 1516 of Notes to Consolidated Financial Statements.Statements, included in Part II, Item 8 of this report.  As a result of the net loss for each of the years ended December 31, 2019 and 2018, we excluded 0.1 million of unvested stock options, PSUs, RSUs and restricted stock from the calculation of diluted EPS due to their anti-dilutive effect.

(3)(4)

Working capital consists of current assets less current liabilities. Amounts prior to 2016 have been recast to conform to the current period’s presentation as a result of our adoption of Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes. See Note 1 of Notes to Consolidated Financial Statements.Statements, included in Part II, Item 8 of this report for additional information.

(5)

Total debt outstanding consisted of taxable revenue bonds due to the State of Alabama Industrial Development Authority. The bonds matured on January 1, 2020 and were repaid in full on January 2, 2020. See Note 12 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report for additional information.

 


ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OFOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K. We have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 28, 2019, which is available free of charge on the SEC's website at sec.gov and on our website at www.adtran.com.

Overview

ADTRAN Inc. (ADTRAN) is a leading global provider of networking and communications equipment.equipment, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and -3 service providers, cable/MSOs and distributed enterprises. Our innovative solutions and services enable voice, data, video and Internetinternet communications across a variety of network infrastructures. These solutionsinfrastructures and are deployedcurrently in use by many of the United States’millions worldwide. We support our customers through our direct global sales organization and the world’s largest communications service providers (CSPs), distributed enterprises and small and medium-sized businesses, public and private enterprises, and millions of individual users worldwide.

our distribution networks. Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. In order to service our customers and grow revenue, we are constantly conducting research and development of new products addressing customer needs and testing those products for the particular specifications of the particular customers. We are focused on being a top global supplier of access infrastructure and related value-added solutions from the cloud edge to the subscriber edge. We offer a broad portfolio of flexible software and hardware network solutions and services that enable service providers to meet today’s service demands, while enabling them to transition to the fully-converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. In addition to our corporate headquarters in Huntsville, Alabama, we have research and development facilities in strategic global locations.

An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, and in most instances the low-cost, provider of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.

We ended the first half of 2019 with 20.6% year-over-year revenue growth and good geographical diversity with 50.8% of our revenue coming from international markets.  During the third quarter of 2019, we experienced a slowdown in capital spending by a Tier-1 customer in Europe and an unforeseen pause in spending from a LATAM Tier-1 customer. While shipments to the LATAM customer resumed in the fourth quarter, these delays, combined with seasonality, resulted in a softer than expected second half of the year. During 2019, we had three 10% revenue customers geographically diversified with one each in the U.S., Europe and LATAM. Our domestic revenue growth of 4.2% year-over-year was driven by an increase in sales to RSPs and additional fiber deployments across all customers. In addition, we saw an increase in sales to a Tier-1 customer with diversified business among our fiber access and CPE, service provider CPE and services as well as sales to a Tier-2 customer. Our LATAM Tier-1 customer expanded their FTTx deployments in 2019 with ADTRAN solutions. In Europe, a Tier-1 customer continued expansion of their vectoring and super-vectoring VDSL2 solutions. We also experienced increases in our service provider CPE business in 2019. Among our customers, we made progress with our fiber and fiber-extension solutions, including Gfast and PON, while also continuing to engage various Services & Support opportunities that we expect will contribute in 2020 and beyond. In addition, we believe we are at the beginning of a significant investment cycle for fiber deployment driven by technology advancements, regulatory influences and vendor disruption. The transition to next-generation network architectures is beginning, and we are seeing demand for our next-generation SD-Access solutions. In the latter part of 2020, we anticipate that payments to service providers under government funding programs such as the FCC Rural Digital Opportunity Fund will begin and continue into 2021.

We made two acquisitions in 2018, strengthening our position in both the cable/MSOs and connected home markets. In the first quarter of 2018, we acquired Sumitomo Electric Lightwave Corp.’s North American EPON business and certain assets for North America and entered into a technology license and original equipment manufacturer supply agreement with Sumitomo Electric Industries, Ltd. These solutions, combined with our organic fiber access product portfolio and our distributed access expertise, present new opportunities in the cable/MSO market. Also, in the fourth quarter of 2018, we acquired U.S.-based SmartRG, an industry-leading provider of carrier-class, connected-home software platforms and cloud services for broadband service providers. With this acquisition, ADTRAN now offers a complete cloud-to-consumer portfolio of virtualized management, data analytics, Wi-Fi-enabled residential gateways and software platforms.


In addition to reportingclassifying our Network Solutions and Services & Supportoperations into two reportable segments, we report revenue across three categories of products and services (1) Access & Aggregation, (2) Subscriber Solutions & Experience (formerly Customer Devices,Devices) and (3) Traditional & Other Products.Products.

OurAccess & Aggregationsolutions are used by CSPs to connect their network infrastructure to their subscribers. This revenue category includes softwarehardware- and hardware-basedsoftware-based products and services that aggregate and/or originate access technologies. The portfolio of ADTRAN solutions within this category includesinclude a wide array of modular or fixed physical form factorsplatforms designed to deliver the best technology and economic fiteconomy based on the target subscriber density and environmental conditions.

The AccessOurSubscriber Solutions & Aggregation category includes productExperience portfolio is used by service providers to terminate their infrastructure at the customers premises while providing an immersive and service families such as:interactive experience for the subscriber. These solutions include copper and fiber WAN termination, LAN switching, Wi-Fi access, and cloud software services, for both residential and business markets.

Mosaic branded network managementIn alignment with our increased focus on enhancing the customer experience for both business and subscriber services control and orchestration software within a SD-Access architecture

SDX seriesconsumer broadband customers as well as the addition of SDN-controlled programmable network elements that form the hardware components within a SD-Access architecture

Total Access® 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)

hiX 5600 Series fiber aggregation and FTTN MSAN

Fiber to the Distribution Point (FTTdp) Gfast Optical Network Units (ONU)

GPON, EPON and 10G PON Optical Line Terminals (OLT)

Optical Networking Edge (ONE) aggregation

IP-based Digital Subscriber Line Access Multiplexers (DSLAMs)

Cabinet and Outside-Plant (OSP) enclosures and services

Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials

Planning, engineering, program management, maintenance, installation and commissioning services to implement customer network solutions

Other products and services that are generally applicable to Access & Aggregation



Customer Devices includesSmartRG during 2018, what was previously known as our products and services that provide end users access to CSP networks. Our Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.

The Customer Devices category includes productsbecame our Subscriber Solutions & Experience category, as this more accurately represents this revenue category and services such as:

Broadband customer premises solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical Network Terminals (ONTs)

Radio Frequency over Glass (RFoG) MicroNodes

Residential and business gateways

Wi-Fi access points and associated powering and switching infrastructure

Enterprise Session Border Controllers (eSBC)

Branch office and access routers

Carrier Ethernet services termination devices

Voice over Internet Protocol (VoIP) media gateways

ProServices pre-sale and post-sale technical support

Planning, engineering, program management, maintenance, installation and commissioning services to implement customer devices solutions into consumer, small business and enterprise locations

Other products and services that are generally applicable to customer devices

our vision moving forward.

Our Traditional & Other Products category generally includes a mix of prior generationprior-generation technologies’ products and services, as well as other products and services that do not fit within the Access & Aggregation or Customer Devicesother revenue categories.

The Traditional & Other Products category includes products and services such as:

Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM)-based aggregation systems and customer devices

HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and customer networks

Other products and services that do not fit within the Access & Aggregation and Customer Devices categories

Sales were $666.9 million in 2017, compared to $636.8 million in 2016 and $600.1 million in 2015. Our gross profit margin was 45.5% in 2017, compared to 45.8% in 2016 and 44.5% in 2015. Net income was $23.8 million in 2017, compared to $35.2 million in 2016 and $18.6 million in 2015. Earnings per share, assuming dilution, were $0.49 in 2017, compared to $0.72 in 2016 and $0.36 in 2015. Earnings per share in 2017, 2016 and 2015 include the effect of the repurchase of 0.9 million, 1.4 million and 4.0 million shares of our stock in those years, respectively.

Our operating results have fluctuated, and may continue to fluctuate, on a quarterly basis in the past, and may vary significantly in future periods due to a number of factors, including customer order activity and backlog. BacklogA substantial portion of our shipments in any fiscal period relates to orders received and shipped within that fiscal period for customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require delivery within a few days. These factors normally result in a varying order backlog and limited order flow visibility. Additionally, backlog levels may vary because of seasonal trends, the timing of customer projects, and other factors that affect customer order lead times. ManyBecause many of our customers require prompt delivery of products. This requires usproducts, we are required to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for our products declines, or if potential sales in any quarter do not occur as anticipated, our financial results could be adversely affected. Operating expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results in a given quarter.

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, foreign currency exchange rate movements, increased competition, customer order patterns, changes in product and services mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs, tariffs and announcements of new products by us or our competitors. Additionally, maintaining sufficient inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of this inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements, which may negatively impact our operating results in a given quarter. During 2019, the Company implemented restructuring plans to realign its expense structure with the reduction in revenue experienced in recent years and with overall Company objectives. Management assessed the efficiency of our operations and consolidated locations and personnel, among other things, and has implemented certain cost savings initiatives, where possible. We expect to see a reduction in our operating expenses, both in the U.S. and internationally, as a result of our implementation of these restructuring plans.

 


Accordingly, ourOur historical financial performance is not necessarily a meaningful indicator of future results, and, in general, management expects that our financial results may vary from period to period. See Note 1619 of Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report, for additional information. information on quarterly results for 2018 and 2019. For a discussion of risks associated with our operating results, see Part I, Item 1A of this report.


Results of Operations

The following table presents selected financial information derived from our Consolidated Statements of Income (Loss) expressed as a percentage of sales for the years indicated. Amounts may not foot due to rounding.

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Network Solutions

 

 

85.9

%

 

 

86.6

%

 

 

81.0

%

Services & Support

 

 

14.1

 

 

 

13.4

 

 

 

19.0

 

Total sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

Network Solutions

 

 

49.7

 

 

 

52.7

 

 

 

41.9

 

Services & Support

 

 

8.9

 

 

 

8.8

 

 

 

12.6

 

Total cost of sales

 

 

58.7

 

 

 

61.5

 

 

 

54.5

 

Gross profit

 

 

41.3

 

 

 

38.5

 

 

 

45.5

 

Selling, general and administrative expenses

 

 

24.6

 

 

 

23.5

 

 

 

20.3

 

Research and development expenses

 

 

23.8

 

 

 

23.5

 

 

 

19.6

 

Asset impairments

 

 

0.7

 

 

 

 

 

 

 

Gain on contingency

 

 

(0.2

)

 

 

 

 

 

 

Operating income (loss)

 

 

(7.5

)

 

 

(8.6

)

 

 

5.6

 

Interest and dividend income

 

 

0.5

 

 

 

0.8

 

 

 

0.7

 

Interest expense

 

 

(0.1

)

 

 

(0.1

)

 

 

(0.1

)

Net investment gain (loss)

 

 

2.2

 

 

 

(0.8

)

 

 

0.7

 

Other income (expense), net

 

 

0.3

 

 

 

0.2

 

 

 

(0.2

)

Gain on bargain purchase of a business

 

 

 

 

 

2.1

 

 

 

 

Income (Loss) Before Income Taxes

 

 

(4.7

)

 

 

(6.3

)

 

 

6.7

 

Income tax (expense) benefit

 

 

(5.3

)

 

 

2.7

 

 

 

(3.1

)

Net income (loss)

 

 

(10.0

)%

 

 

(3.7

)%

 

 

3.6

%

The following discussion and financial information are presented to aid in an understanding of our current consolidated financial position, changes in financial position, results of operations and cash flows and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included herein. The emphasis of the discussion is a comparison of the years ended December 31, 2019 and December 31, 2018.  For a discussion of a comparison of the years ended December 31, 2018 and December 31, 2017, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.

Comparison of Years Ended December 31, 2019 and December 31, 2018

Sales

Our sales increased 0.1% from $529.3 million for the year ended December 31, 2018 to $530.1 million for the year ended December 31, 2019. Our Services & Support sales increased $3.8 million compared to 2018 and our Network Solutions sales decreased $3.0 million versus the prior year. The increase in our 2019 sales was primarily attributable to an increase in Subscriber Solutions & Experience sales of $18.5 million, partially offset by decreases in Access & Aggregation sales of $10.0 million and Traditional & Other Products sales of $7.7 million.  

Network Solutions sales decreased by 0.7% from $458.2 million in 2018 to $455.2 million in 2019, due primarily to a decrease in sales of our Access & Aggregation products and Traditional & Other Products. The decrease in sales of 3.9% of our Access & Aggregation products for 2019 was primarily attributable to decreased FTTN products, offset by an increase in sales of Gfast DPUs. The increase of 12.1% in 2019 for sales of our Subscriber Solutions & Experience products was primarily attributable to increased residential CPE and fiber CPE sales, partially offset by a decrease in sales of SP Business CPE and WiFi access points and infrastructure. While we expect that revenues from Traditional & Other Products will continue to decline over time, these revenues may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.


Services & Support sales increased by 5.3% from $71.0 million in 2018 to $74.8 million in 2019. The increase in sales for 2019 was primarily attributable to an increase in network installation and maintenance services for Access & Aggregation products and Subscriber Solutions & Experience.

Domestic sales increased 4.2% from $288.8 million in 2018 to $300.9 million in 2019. Our domestic growth was driven by an increase in sales to the RSP market segment and additional fiber deployments across all customers. In addition, such growth was driven by an increase in sales to a Tier-1 customer with diversified business among our fiber access and CPE, service provider CPE and services, as well as increased sales to a Tier-2 customer.

International sales, which are included in the amounts for the Network Solutions and Services & Support segments amounts discussed above, decreased 4.7% from $240.4 million for the year ended December 31, 2018 to $229.2 for the year ended December 31, 2019. International sales, as a percentage of total sales, decreased from 45.4% for the year ended December 31, 2018 to 43.2% for the year ended December 31, 2019.  The decrease in international sales for 2019 was primarily attributable to the slowdown in shipments to two international Tier-1 customers.  

Our international revenue is largely focused on broadband infrastructure and is affected by the decisions of our customers as to timing for installation of new technologies, expansion of their networks and/or network upgrades. Our international customers must make these decisions in the regulatory and political environment in which they operate – both nationally and in some instances, regionally – whether of a multi-country region or a more local region within a country. The competitive landscape in certain international markets is also affected by the increased presence of Asian manufacturers that seek to compete aggressively on price. Our revenue and operating income in some international markets can be negatively impacted by a strengthening U.S. dollar. Consequently, while we expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market opportunities for us, the factors described above may result in negative pressure on revenue and operating income.

Cost of Sales

As a percentage of sales, cost of sales decreased from 61.5% for the year ended December 31, 2018 to 58.7% for the year ended December 31, 2019. The decrease was primarily attributable to regional revenue shifts, changes in customer and product mix, changes in services and support mix and a decrease in labor expense as a result of restructuring programs which were initiated in 2018 and continued throughout 2019.

Network Solutions cost of sales, as a percent of that segment’s sales, decreased from 60.9% of sales in 2018 to 57.9% of sales in 2019. The decrease in Network Solutions cost of sales as a percentage of that segment’s sales was primarily attributable to regional revenue shifts, changes in customer and product mix and a decrease in labor expense due to restructuring programs which were initiated in 2018 and continued throughout 2019, offset by an increase in freight and shipping charges.

An important part of our strategy is to reduce the cost of each succeeding generation of product and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. This may cause variations in our gross profit percentage due to timing differences between the recognition of cost reductions and the lowering of product selling prices.

Services & Support cost of sales, as a percent of that segment’s sales, decreased from 65.8% of sales in 2018 to 63.1% of sales in 2019. The decrease in Services & Support cost of sales as a percentage of that segment’s sales in 2019 was primarily attributable to lower fixed personnel costs due to restructuring programs which were initiated in 2018 and continued throughout 2019, changes in customer mix, changes in services support mix and an increase in volume.

Our Services & Support revenue is comprised of network planning and implementation, maintenance, support and cloud-based management services, with network planning and implementation being the largest and fastest growing component in the long-term. Compared to our other services, such as maintenance, support and cloud-based management services, our network planning and implementation services typically utilize a higher percentage of internal and subcontracted engineers, professionals and contractors to perform the work for customers. The additional costs incurred to perform these infrastructure and labor-intensive services inherently result in lower average gross margins as compared to maintenance and support services.

As our network planning and implementation revenue grew to become the largest component of our Services & Support segment business, our Services & Support segment gross margins decreased versus those reported when maintenance and support comprised the majority of the business. Further, because the growth in our network planning and implementation services has resulted in our Services & Support segment revenue comprising a larger percentage of our overall revenue, and because our Services & Support segment gross margins are generally below those of the Network Solutions segment, our overall corporate gross margins may decline as that business continues to grow. Within the Services & Support segment, we do expect variability in gross margins from quarter-to-quarter based on the mix of the services recognized.


Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of sales increased from 23.5% for the year ended December 31, 2018 to 24.6% for the year ended December 31, 2019. Selling, general and administrative expenses as a percentage of sales will generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared as these costs are relatively fixed in the short term.

Selling, general and administrative expenses increased by 4.7% from $124.4 million for the year ended December 31, 2018 to $130.3 million for the year ended December 31, 2019. Selling, general and administrative expenses include personnel costs for administration, finance, information technology, human resources, sales and marketing and general management, as well as rent, utilities, legal and accounting expenses, advertising, promotional material, trade show expenses and related travel costs. The increase in selling, general and administrative expenses was primarily attributable to deferred compensation related costs, incremental expenses as a result of the SmartRG acquisition, IP litigation and other legal related costs, partially offset by decreases in labor expense and use tax expense.

Research and Development Expenses

Research and development expenses as a percentage of sales increased from 23.5% for the year ended December 31, 2018 to 23.8% for the year ended December 31, 2019. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or significant fluctuations in revenues for the periods being compared.

Research and development expenses increased by 1.3% from $124.5 million for the year ended December 31, 2018 to $126.2 million for the year ended December 31, 2019. The increase in research and development expenses was primarily attributable to increases in incremental expenses as a result of the SmartRG acquisition and lease expense offset by a decrease in labor expense, certain material engineering costs and contract services.

We expect to continue to incur research and development expenses in connection with our new and existing products and our expansion into international markets. We continually evaluate new product and market opportunities and engage in significant research and development efforts which provide for new product development, enhancement of existing products and product cost reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new product group.

Asset Impairments

Asset impairments, which were $3.9 million for the year ended December 31, 2019, relate to the abandonment of certain information technology implementation projects which we had previously capitalized costs for these projects. There were no asset impairments recognized during the year ended December 31, 2018. See Note 1 and Note 8 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Gain on Contingency

Gain on contingency, which was $1.2 million for the year ended December 31, 2019, relates to the reversal of contingent liabilities which were initially recognized upon the acquisition of SmartRG in the fourth quarter of 2018. See Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information. There was no gain on contingency recognized during the year ended December 31, 2018.

Interest and Dividend Income

Interest and dividend income decreased by 31.3% from $4.0 million for the year ended December 31, 2018 to $2.8 million for the year ended December 31, 2019. The decrease in interest and dividend income was primarily attributable to a decrease in interest income. Our investments increased from $112.1 million as of December 31, 2018 to $127.7 million as of December 31, 2019.

Interest Expense

Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.5 million for the years ended December 31, 2019 and 2018, as we had no substantial change in our fixed-rate borrowing. See “Financing Activities” in “Liquidity and Capital Resources” below for additional information on our taxable revenue bond.


Net Investment Gain (Loss)

We recognized a net investment loss of $4.0 million for the year ended December 31, 2018 and a net investment gain of $11.4 million for the year ended December 31, 2019. The fluctuation in our net investment gain was primarily attributable to changes in fair value of equity securities recognized during the period. We expect that any future equity market volatility will result in continued volatility in gains or losses from our equity investment portfolios. See “Investing Activities” in “Liquidity and Capital Resources” and Note 1 and Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Other Income (Expense), net

Other income (expense), net, which is comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, net periodic pension costs, investment account management fees and gains and losses on foreign exchange forward contracts, increased 16.5% from income of $1.3 million for the year ended December 31, 2018 to income of $1.5 million for the year ended December 31, 2019. The change was primarily attributable to a gain on a life insurance recovery recognized in 2019 partially offset by losses on foreign exchange contracts and transactions in 2019 as compared to foreign exchange gains in 2018.

Gain on Bargain Purchase of a Business

Gain on bargain purchase of a business is related to our acquisition of Sumitomo Electric Lightwave Corp.’s North American EPON business and entry into a technology license and supply agreement with Sumitomo Electric Industries, Ltd. in March 2018. See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Income Tax (Expense) Benefit

Our effective tax rate increased from a benefit of 42.0%, excluding the tax effect of the bargain purchase gain, for the year ended December 31, 2018 to an expense of (113.9%) for the year ended December 31, 2019. The increase in the effective tax rate between the two periods was primarily driven by the establishment of a valuation allowance against our domestic deferred tax assets in the amount of $42.8 million during the year ended December 31, 2019, offset by a 15.5% rate reduction related to the generation of federal research and development credits, and a 16.7% rate reduction for the generation of foreign tax credits. See Note 13 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Net Loss

As a result of the above factors, our net loss increased from $19.3 million for the year ended December 31, 2018 to a net loss of $53.0 million for the year ended December 31, 2019. As a percentage of sales, net loss increased from 3.7% for the year ended December 31, 2018 to 10.0% for the year ended December 31, 2019.

Liquidity and Capital Resources

Liquidity

We have historically and we currently expect to finance our ongoing business with existing cash and cash flow from operations. We have used, and expect to continue to use, existing cash and cash generated from operations for working capital, business acquisitions, purchases of treasury stock, shareholder dividends and other general corporate purposes, including product development activities to enhance our existing products and develop new products, expansion of our sales and marketing activities and capital expenditures. We believe our cash and cash equivalents, investments and cash generated from operations to be adequate to meet our operating and capital needs for at least the next 12 months.

As of December 31, 2019, cash on hand was $73.8 million and short-term investments were $33.2 million, which resulted in available short-term liquidity of $107.0 million, of which $52.3 million was held by our foreign subsidiaries. As of December 31, 2018, cash on hand was $105.5 million and short-term investments were $3.2 million, which resulted in available short-term liquidity of $108.7 million, of which $87.1 million was held by our foreign subsidiaries. The decrease in short-term liquidity from December 31, 2018 to December 31, 2019 was primarily attributable to the use of cash for operating, investing and financing activities and income tax payments, offset by the reclassification of our certificate of deposit from long-term to short-term investments.


Operating Activities

Our working capital, which consists of current assets less current liabilities, decreased 12.6% from $237.4 million as of December 31, 2018 to $207.6 million as of December 31, 2019. The current ratio, defined as current assets divided by current liabilities, decreased from 3.01 as of December 31, 2018 to 2.84 as of December 31, 2019. The decrease in our working capital and current ratio was primarily attributable to a decrease in cash and cash equivalents, net accounts receivable and other receivables as described below. The quick ratio, defined as cash and cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 1.76 as of December 31, 2018 to 1.75 as of December 31, 2019. The decrease in the quick ratio was primarily attributable to a decrease in cash and cash equivalents and net accounts receivable.  This decrease was offset by an increase in short-term investments.

Net accounts receivable decreased 8.91% from $99.4 million as of December 31, 2018 to $90.5 million as of December 31, 2019. Our allowance for doubtful accounts was $0.1 million as of December 31, 2018 and $38 thousand as of December 31, 2019. Quarterly accounts receivable DSO increased from 65 days as of December 31, 2018 to 72 days as of December 31, 2019. The decrease in net accounts receivable and increase in DSO was attributable to the timing of sales in the fourth quarter, customer specific payment terms and other collections during the quarter.

Other receivables decreased 54.9% from $36.7 million as of December 31, 2018 to $16.6 million as of December 31, 2019. The decrease in other receivables was primarily attributable to a decrease in current lease payments receivable related to our sales-type leases, income tax receivables and purchasing shipments.

Annual inventory turnover increased from 2.93 turns as of December 31, 2018 to 3.14 turns as of December 31, 2019. Inventory decreased 1.6% from $99.8 million as of December 31, 2018 to $98.3 million as of December 31, 2019. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to seasonal cycles of our business ensuring competitive lead times while managing the risk of excess inventory.

Accounts payable decreased 25.3% from $60.1 million as of December 31, 2018 to $44.9 million as of December 31, 2019. Accounts payable will fluctuate due to variations in the timing of the receipt of supplies, inventory and services and our subsequent payments for these purchases.

Investing Activities

Capital expenditures totaled approximately $9.5 million, $8.1 million and $14.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. These expenditures were primarily used to purchase computer hardware, software, manufacturing and test equipment and for building improvements.

Our combined short-term and long-term investments increased $15.7 million from $112.1 million as of December 31, 2018 to $127.7 million as of December 31, 2019. This increase reflects the increase in fair market value of our equity investments.

We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal risk of loss. See Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information. As of December 31, 2019, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, and foreign government bonds were classified as available-for-sale and had a combined duration of 1.71 years with an average credit rating of AA. Because our bond portfolio has a high-quality rating and contractual maturities of short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.

Our long-term investments decreased 16.5% from $108.8 million as of December 31, 2018 to $94.5 million as of December 31, 2019. Long-term investments as of December 31, 2018 included an investment in a certificate of deposit of $25.6 million, which served as collateral for our revenue bonds. This certificate of deposit was included in short-term investments as of December 31, 2019, as these bonds matured on January 1, 2020, and were repaid in full on January 2, 2020. We also have investments in various marketable equity securities classified as long-term investments with a fair market value of $35.8 million and $27.0 million, as of December 31, 2019 and December 31, 2018, respectively. Long-term investments as of December 31, 2019 and 2018 also included $21.7 million and $18.3 million, respectively, related to our deferred compensation plan, and $0.3 million and $0.4 million, respectively, of other investments, consisting of interests in two private equity funds.

No businesses were acquired during the year ended December 31, 2019. Acquisition of businesses, net of cash acquired, totaled $22.0 million for the year ended December 31, 2018. See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.


Financing Activities

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 (the “Taxable Revenue Bonds”) and loaned the proceeds from the sale of the Taxable Revenue Bonds to ADTRAN. Further advances on the Taxable Revenue Bonds were made by the Authority, bringing the total amount outstanding to $50.0 million. The bonds matured on January 1, 2020, and the current outstanding balance of $24.6 million was repaid in full on January 2, 2020. We were required to make payments to the Authority in amounts necessary to pay the interest on the Taxable Revenue Bonds which totaled $1.0 million, $1.1 million and $1.1 million, respectively, for the years ended December 31, 2019, 2018 and 2017. See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Dividends

During 2019, 2018 and 2017, we paid shareholder dividends totaling $17.2 million, $17.3 million and $17.4 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 per common share paid to our shareholders in each quarter of 2019, 2018 and 2017.

Dividends per Common Share

 

 

 

2019

 

 

2018

 

 

2017

 

First Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Second Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Third Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Fourth Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of our common stock, which are implemented through open market or private purchases from time to time as conditions warrant. For the years ended December 31, 2019, 2018 and 2017, we repurchased 13 thousand shares, 1.0 million shares and 0.9 million shares, respectively, for $0.2 million, $15.5 million and $17.3 million, respectively, at an average price of $14.06, $15.52 and $20.27 per share, respectively. We currently have authorization to repurchase an additional 2.5 million shares of our common stock under the current authorization of up to 5.0 million shares.

Stock Option Exercises

To accommodate employee stock option exercises, we issued 34 thousand shares of treasury stock for $0.5 million during the year ended December 31, 2019, 0.1 million shares of treasury stock for $1.5 million during the year ended December 31, 2018 and 0.7 million shares of treasury stock for $13.4 million during the year ended December 31, 2017.

Employee Pension Plan

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 defined benefit plan assets consist of a balanced portfolio of equity funds, bond funds, real estate funds and managed futures. 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. At December 31, 2019, the estimated fair market value of our defined benefit pension plans assets increased to $28.0 million from $24.2 million at December 31, 2018.


The defined benefit pension plan is accounted for on an actuarial basis, which requires the use 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. 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 projected benefit obligation for our defined benefit pension plans was $43.9 million and $37.2 million as of December 31, 2019 and 2018, respectively.

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, 2019, 2018 and 2017 was $3.2 million, $6.1 million and $(0.2) million, respectively.

Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). 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 net periodic pension cost over the remaining service period of active participants. We estimate that $0.8 million will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in 2020 for the net actuarial loss. The net actuarial loss recognized in accumulated other comprehensive income (loss) as of December 2019 and 2018 was $(13.0) million and $(11.3) million, respectively.

See Note 14 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of, or requirements for, capital resources.

Contractual Obligations

We have various contractual obligations and commercial commitments. The following table sets forth the annual payments we are required to make under contractual cash obligations and other commercial commitments as of December 31, 2019:

(In thousands)

 

Total

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

After 2024

 

Bonds payable(1)

 

$

24,600

 

 

$

24,600

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Purchase obligations(2)

 

 

99,210

 

 

 

98,324

 

 

 

759

 

 

 

83

 

 

 

28

 

 

 

16

 

 

 

 

Operating lease obligations(3)

 

 

8,879

 

 

 

2,856

 

 

 

2,412

 

 

 

1,705

 

 

 

1,160

 

 

 

482

 

 

 

264

 

Totals

 

$

132,689

 

 

$

125,780

 

 

$

3,171

 

 

$

1,788

 

 

$

1,188

 

 

$

498

 

 

$

264

 

(1)As of December 31, 2019, we were required to make payments necessary to pay the interest on the Taxable Revenue Bonds, which were outstanding in the aggregate principal amount of $24.6 million as of December 31, 2019. The bonds had an interest rate of 2% per annum and matured on January 1, 2020. Included in short-term investments as of December 31, 2019 was a certificate of deposit of $25.6 million, which served a collateral deposit against the principal amount of the bonds. See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

(2) Primarily relates to open purchase orders to our contract manufacturers, component suppliers, service partners and other vendors.

(3) Primarily relates to future minimum rental payments under non-cancelable operating leases, including renewals determined to be reasonably assured, with original maturities of greater than 12 months.

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, of which $7.7 million has been applied to these commitments. The additional $0.2 million commitment has been excluded from the table above due to the uncertainty of when it will be applied.


Certain contracts, customers and/or jurisdictions in which we do business require us to provide various guarantees of performance such as bid bonds, performance bonds and customs bonds. As of December 31, 2019, we had commitments related to these bonds totaling $9.3 million, which expire at various dates through August 2024. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default in our performance under each contract, the probability of which we believe is remote.

We also have obligations related to uncertain income tax positions that have been excluded from the table above due to the uncertainty of when the related expense will be recognized. See Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Critical Accounting Policies and Estimates

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used or if changes in the accounting estimate that are reasonably likely to occur could materially impact the results of financial operations. Several accounting policies, as described in Note 1 of Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report, require material subjective or complex judgment and have a significant impact on our financial condition and results of operations, as applicable. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. These policies have been consistently applied across our two reportable segments: (1) Network Solutions and (2) Services & Support.Consolidated Financial Statements:

Revenue Recognition

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 software and 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 persuasive evidencecontrol 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 an arrangement exists, delivery has occurred,control to the product pricecustomer. Revenue is fixed or determinable, collectionrecorded net of the resulting receivableestimated discounts and rebates using historical trends. Customers are typically invoiced when control is reasonably assured,transferred and product returns are reasonably estimable. For product sales, revenue is recognized. Our products generally recognized upon shipmentinclude 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 customercustomers. Revenue for network implementation and maintenance services is recognized as described below. Customers are typically invoiced and pay in accordance withequal installments over the title transfer termslease term. In relation to these lease agreements, during the years ended December 31, 2019, 2018 and 2017 we recognized revenue of $1.7 million, $13.7 million and $16.5 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 sales agreement, generally Ex Works, per International Commercial Terms. Inmaintenance period. We recognize revenue for maintenance services on a straight-line basis over the case of consigned inventory,maintenance period in services revenue is recognized whenas our customers benefit evenly throughout the end customer assumes ownership of the product. Contracts that contain multiple deliverables are evaluated to determine the units of accounting,contract term and the consideration from the arrangement is allocated to each unit of accounting based on the relative selling price and corresponding terms of the contract. When this is not available, we are 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 use best estimates to allocate consideration to each respective unit of accounting. These estimates include analysis of respective bills of material and review and analysis of similar product and service offerings. We record revenue associated with installation services when respective contractual obligations are complete. In instances where customer acceptance is required, revenue is deferred until respective acceptance criteria have been met. Contracts that include both installation services and product sales are evaluated for revenue recognition in accordance with contract terms. As a result, installation services may be considered a separate deliverable or may be considered a combined single unit of accounting with the delivered product. Generally, either the purchaser, ADTRAN, or a third party can perform the installation of our products. Sales taxes invoiced to customers are included in revenue, and represent less than one percent of total revenues. The corresponding sales taxes paid are included in cost of goods sold. Value added taxes collected from customers in international jurisdictionsrevenues are recorded in accrued expensescurrent 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 liability. Revenuecontract asset that is recorded net of discounts. Sales returns are recorded as a reduction of revenue and accrued based on historical sales return experience, which we believe provides a reasonable estimate of future returns.

A significant portion of our products are soldincluded in other receivables in the U.S. through a non-exclusive distribution network of major technology distributors. These organizations then distribute or provide fulfillment servicesConsolidated Balance Sheets. The contract asset is transferred to an extensive network of VARs and SIs. VARs and SIs may be affiliated with us as a channel partner, or they may purchase fromaccounts receivable when the distributor on an unaffiliated basis. Additionally, with certain limitations, our distributors may return unused and unopened product for stock-balancing purposes when these returns are accompanied by offsetting orders for products of equal or greater value.completed performance obligation is invoiced to the customer.

Inventory

We carry our inventory at the lower of cost and net realizable value, with cost being determined using the first-in, first-out method. We use standardStandard costs for material, labor, and manufacturing overhead are used to value our inventory. Our standard costsinventory and are updated on at least a quarterly basis and anyquarterly. Any variances are expensed in the current period;period, therefore, our inventory costs approximate actual costs at the end of each reporting period. We write down our inventoryestablish reserves for estimated obsolescence or unmarketableexcess and obsolete inventory by an amount equal to the difference between the cost of the inventory and the estimated fairnet realizable value of the inventory based upon assumptions about future demandon estimated reserve percentages, which consider historical usage, known trends, inventory age and marketmarketing conditions. If actual future demand ortrends and market conditions are less favorable than those projected by management, we may be required to make additional inventory write-downs. Our reserve for excess and obsolete inventory was $23.4$34.1 million and $25.2$30.0 million at December 31, 20172019 and 2016,2018, respectively. Inventory disposals charged against the reserve were $8.3$1.8 million, $4.7$0.4 million and $0.2$8.3 million for the years ended December 31, 2019, 2018 and 2017, 2016respectively.

Stock-Based Compensation

For purposes of determining the estimated fair value of our stock option awards on the date of grant, we use the Black-Scholes Model. This model requires the input of certain assumptions that require subjective judgment. These assumptions include, but are not limited to, expected stock price volatility over the term of the awards and 2015, respectively.actual and projected employee stock option exercise behaviors. Because our stock option awards have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not provide a reliable, single measure of the fair value of our stock option awards. For purposes of determining the estimated fair value of our market-based performance stock unit (PSU) awards on the date of grant, we use a Monte Carlo Simulation valuation method. These PSUs are subject to a market condition based on the relative total shareholder return of ADTRAN against all of the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The fair value of performance-based PSUs, restricted stock units (RSUs) and restricted stock is equal to the closing price of our stock on the business day immediately preceding the grant date. Compensation expense related to unvested performance-based PSUs will be recognized over the requisite service period of three years as the achievement of the performance obligation becomes probable. Management will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.

 


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 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.

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 by-pass a qualitative assessment 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 and, in turn, performed a step-1 analysis of goodwill. Based on the results of our step-1 analysis, no impairment charges on goodwill were recognized during the years ended December 31, 2019, 2018 and 2017.

Income Taxes

 

For purposes of determining the estimated fair value of our stock option awards on the date of grant, we use the Black-Scholes Model. This model requires the input of certain assumptions that require subjective judgment. These assumptions include, but are not limited to, expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Because our stock option awards have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not provide a reliable, single measure of the fair value of our stock option awards. For purposes of determining the estimated fair value of our market-based performance stock unit (PSU) awards on the date of grant, we use a Monte Carlo Simulation valuation method. The PSUs are subject to a market condition based on the relative total shareholder return of ADTRAN against all of the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The fair value of performance-based PSUs, restricted stock units (RSUs) and restricted stock is equal to the closing price of our stock on the business day immediately preceding the grant date. Compensation expense related to unvested performance-based PSUs will be recognized over the requisite service period of three years as achievement of the performance obligation becomes probable. Management will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.

We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We also make judgments regarding the realization of deferred tax assets and establish valuation allowances where we believe it is more likely than not that future taxable income in certain jurisdictions will be insufficient to realize these deferred tax assets. Our estimates regarding future taxable income and income tax provision or benefit may vary due to changes in market conditions, changes in tax laws, or other factors. If our assumptions, and consequently our estimates, change in the future, the valuation allowances we have established may be increased or decreased, impacting future income tax expense. At December 31, 2017 and 2016 respectively,We continually review the adequacy of our valuation allowance was $6.0 million and $6.1 million. Asrecognize the benefits of December 31, 2017, we have state research tax credit carry-forwards of $3.8 million, which will expire between 2018 and 2030. These carry-forwards were caused by tax credits in excess of our annual tax liabilities to an individual state where we no longer generate sufficient state income. In addition, as of December 31, 2017, we have a deferred tax asset of $5.2 million relating to net operating loss carry-forwards which will expire between 2018 and 2030. These carry-forwards areassets only as the result of acquisitions in 2009 and in 2011. The acquired net operating losses are in excess of the amount of estimated earnings. We believereassessment indicates that it is more likely than not that wethe deferred tax assets will not realize the full benefitsbe realized in accordance with ASC 740, Income Taxes (ASC 740). Due to our recent decrease in revenue and profitability for 2019, and all other positive and negative objective evidence considered as part of our analysis, our ability to consider other subjective evidence such as projections for future growth is limited when evaluating whether our deferred tax asset arising from these creditsassets will be realized. As such, the Company is no longer able to conclude that it is more likely than not that our domestic deferred tax assets will be realized and net operating losses, and accordingly, have provided a valuation allowance against our Domestic deferred tax assets was established in the third quarter of 2019. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods in the event sufficient evidence is present to support a conclusion that piece.it is more likely than not that all or a portion of our domestic deferred tax assets will 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.

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 an 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 $9.7$8.4 million and $8.5$8.6 million at December 31, 20172019 and 2016,2018, respectively. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.consolidated balance sheets.


Pension Benefit Obligations

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 $8.3$15.9 million and $10.0$13.1 million at December 31, 20172019 and 2016,2018, respectively. This liability is included in other non-current liabilitiespension liability in the accompanying Consolidated Balance Sheets.

Recently Issued Accounting Pronouncements


ResultsFor a discussion of Operations

The following table presents selected financial information derived from our consolidated statements of income expressed as a percentage of sales for the years indicated. Amounts may not foot due to rounding.

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

81.0

%

 

 

82.5

%

 

 

87.9

%

Services

 

 

19.0

 

 

 

17.5

 

 

 

12.1

 

Total sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

41.9

 

 

 

42.5

 

 

 

49.0

 

Services

 

 

12.6

 

 

 

11.7

 

 

 

6.6

 

Gross profit

 

 

45.5

 

 

 

45.8

 

 

 

44.5

 

Selling, general and administrative expenses

 

 

20.3

 

 

 

20.7

 

 

 

20.6

 

Research and development expenses

 

 

19.6

 

 

 

19.6

 

 

 

21.6

 

Operating income

 

 

5.7

 

 

 

5.5

 

 

 

2.2

 

Interest and dividend income

 

 

0.7

 

 

 

0.6

 

 

 

0.7

 

Interest expense

 

 

(0.1

)

 

 

(0.1

)

 

 

(0.1

)

Net realized investment gain

 

 

0.7

 

 

 

0.9

 

 

 

1.7

 

Other expense, net

 

 

(0.2

)

 

 

(0.1

)

 

 

(0.2

)

Gain on bargain purchase of a business

 

 

 

 

 

0.6

 

 

 

 

Income before provision for income taxes

 

 

6.7

 

 

 

7.4

 

 

 

4.3

 

Provision for income taxes

 

 

(3.1

)

 

 

(1.8

)

 

 

(1.2

)

Net income

 

 

3.6

%

 

 

5.5

%

 

 

3.1

%

2017 Compared to 2016

Sales

Our sales increased 4.7% from $636.8 million in 2016 to $666.9 million in 2017. The increase in sales is attributable to a $14.9 million increase in Network Solutions sales and a $15.2 million increase in Services & Support sales.

Network Solutions sales increased 2.8% from $525.5 million in 2016 to $540.4 million in 2017. The increase in sales in 2017 is primarily attributable to an increase in sales of our Access & Aggregation products, partially offset by a decrease in sales of our Traditional & Other products. The increase in sales of our Access & Aggregation products is primarily attributable to increased VDSL2 vectoring product sales in the U.S. and European carrier markets. While we expect that revenues from Traditional & Other products will continue to decline over time, these revenues may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.

Services & Support sales increased 13.7% from $111.3 million in 2016 to $126.5 million in 2017. The increase in sales in 2017 is primarily attributable to an increase in network installation services for Access & Aggregation products.

International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased 17.2% from $135.4 million in 2016 to $158.7 million in 2017. International sales, as a percentage of total sales, increased from 21.3% in 2016 to 23.8% in 2017. The increase in international sales in 2017 is primarily attributable to an increase in sales in EMEA, partially offset by a decrease in sales in Latin America and the APAC region.


Our international revenues are largely focused on broadband infrastructure and are impacted by the decisions of our customers as to timing for installation of new technologies, expansion of their networks and/or network upgrades. Our international customers must make these decisions in the regulatory and political environment in which they operate – both nationally and in some instances, regionally – whether of a multi-country region or a more local region within a country. For example, the European Commission launched a Gigabit Society initiative, and before that, the Digital Agenda, which has provided a favorable market environment for the deployment of ultra-broadband and Gigabit network solutions. Although the overall environment and market demand for broadband service deployment in the European Union has improved, some new broadband technologies are still being reviewed for regulatory and standards completion, which may affect the timing of those technologies. In Mexico, regulatory changes have created uncertainty for customers, which have resulted in slowdowns in network buying patterns. The competitive landscape in certain international markets is also impacted by the increased presence of Asian manufacturers that seek to compete aggressively on price. A strengthening U.S. dollar can also negatively impact our revenues in regions such as Latin America, where our products are traditionally priced in U.S. dollars, while in regions where our products are sold in local currency, such as Europe, a stronger U.S. dollar can negatively impact operating income. Consequently, while we expect the global trend towards deployment of more robust broadband speeds and access to continue to create expanded market opportunities for us, the factors described above may result in pressure on revenues and operating income. However, we do not presently foresee a significant negative impact to our financial condition based on our strong liquidity and the generally positive environment described above.

We recognized a positive impact to our revenues in the first half of 2017 due to our being awarded a network expansion program by a large European tier-1 customer. We anticipate that as our European and Latin American customers resume their network upgrade projects, we may experience further enhancement to our revenues. We have recently announced receipt of a new nationwide award in the Pacific region, as well as additional awards based on new ADTRAN technologies in the EMEA region that we believe will likely result in a positive impact to our revenues. Further, we expect that a resolution of the regulatory changes in Mexico may result in business with our major customer in that region returning to a more normal level.

Cost of Sales

As a percentage of sales, cost of sales increased from 54.2% in 2016 to 54.5% in 2017. The increase is primarily attributable to a regional revenue shift, customer and product mix and services and support mix.

Network Solutions cost of sales, as a percent of that segment’s sales, increased from 51.5% of sales in 2016 to 51.7% of sales in 2017. The increase in Network Solutions cost of sales as a percentage of that segment’s sales is primarily attributable to customer and product mix.

An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differences between the recognition of cost reductions and the lowering of product selling prices.

Services & Support cost of sales, as a percent of that segment’s sales, decreased from 67.2% of sales in 2016 to 66.2% of sales in 2017. The decrease in Services & Support cost of sales as a percentage of that segment’s sales is primarily attributable to the mix of network installation programs and support.

Our Services business has experienced significant growth since 2015 as competitive pressures to expand broadband access and speeds have strained carriers’ ability to respond to customer demand. Our Services & Support revenues are comprised of network planning and implementation, maintenance, support and cloud-based management services, with network planning and implementation being the largest and fastest growing component. Compared to our other services such as maintenance, support and cloud-based management services, our network planning and implementation services typically utilize a higher percentage of internal and subcontracted engineers, professionals and contractors to perform the work for customers. The additional costs incurred to perform these infrastructure and labor intensive services inherently result in lower average gross margins as compared to maintenance and support services.

As our network planning and implementation revenues have grown and are now the largest component of our Services & Support business, our Services & Support segment gross margins have decreased versus those reported when maintenance and support comprised the majority of the business. Further, because the growth in our network planning and implementation services has resulted in our Services & Support revenues comprising a larger percentage of our overall revenues, and because our Services & Support gross margins are below those of the Network Solutions segment, our overall corporate gross margins have declined as that business has continued to grow. Within the Services & Support segment, we do expect variability in gross margins from quarter-to-quarter based on the mix of the services recognized.


Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 2.8% from $131.8 million in 2016 to $135.5 million in 2017. Selling, general and administrative expenses include personnel costs for administration, finance, information technology, human resources, sales and marketing, and general management, as well as rent, utilities, legal andissued accounting expenses, bad debt expense, advertising, promotional material, trade show expenses, and related travel costs. The increase in selling, general and administrative expenses is primarily attributable to increases in ERP implementation expense, deferred compensation expense, travel expense, and equity-based compensation expense, partially offset by a decrease in performance-based compensation expense.

Selling, general and administrative expenses as a percentage of sales decreased from 20.7% for the year ended December 31, 2016 to 20.3% for the year ended December 31, 2017. Selling, general and administrative expenses as a percentage of sales will generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.

Research and Development Expenses

Research and development expenses increased 4.5% from $124.8 million in 2016 to $130.4 million in 2017. The increase in research and development expenses is primarily attributable to an increase in labor and engineering materials related to customer specific projects, contract services and amortization of intangibles acquired in the third quarter of 2016.

Research and development expenses as a percentage of sales remained constant at 19.6% for the years ended December 31, 2016 and 2017. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.

We expect to continue to incur research and development expenses in connection with our new and existing products and our expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and product development efforts which provide for new product development, enhancement of existing products and product cost reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new product group.

Interest and Dividend Income

Interest and dividend income increased 11.8% from $3.9 million in 2016 to $4.4 million in 2017. The increase in interest and dividend income is primarily attributable to an increase in the rate of return on investments.

Interest Expense

Interest expense, which is primarily related to our taxable revenue bond, remained consistent at $0.6 million in 2016 and 2017, as we had no substantial change in our fixed-rate borrowing. See “Financing Activities” in “Liquidity and Capital Resources” below for additional information on our taxable revenue bond.

Net Realized Investment Gain

Net realized investment gain decreased 20.9% from $5.9 million in 2016 to $4.7 million in 2017. The decrease in realized investment gains is primarily attributable to decreased gains from the sale of equity securities. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other Income (Expense), net

Other income (expense), net, comprised primarily of miscellaneous income and expense, gains and losses on foreign currency transactions, gains and losses on foreign exchange forward contracts, investment account management fees, and scrap raw material sales, increased 139.5% from $0.7 million of expense in 2016 to $1.6 million of expense in 2017. The change is primarily attributable to increased losses on our foreign exchange contracts.


Gain on Bargain Purchase of a Business

Gain on bargain purchase of a business in 2016 is related to our acquisition of key fiber access products, technologies and service relationships from a third party on September 13, 2016. Seepronouncements, see Note 21 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Subsequent Events

 

Income Taxes

Our effective tax rate increased from 24.9% in 2016 to 46.7% in 2017. The increase inOn January 2, 2020, we paid off the effective tax rate between the two periods is primarily attributable to the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. As a resultoutstanding balance of $24.6 million of the new law, 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. See Note 11 of Notes to Consolidated Financial Statements for additional information.

Net Income

As a result of the above factors, net income decreased from $35.2 million in 2016 to $23.8 million in 2017. As a percentage of sales, net income decreased from 5.5% in 2016 to 3.6% in 2017.

2016 Compared to 2015

Sales

Our sales increased 6.1% from $600.1 million in 2015 to $636.8 million in 2016. The increase in sales is primarily attributable to a $38.6 million increase in Services & Support sales, partially offset by a $1.9 million decrease in Network Solutions sales.

Network Solutions sales decreased 0.4% from $527.4 million in 2015 to $525.5 million in 2016. The decrease in sales in 2016 is primarily attributable to a decrease in sales of our Access & Aggregation products and Traditional & Other products, partially offset by an increase in sales of our Customer Devices products. The decrease in sales of our Access & Aggregation products is primarily attributable to a decrease in international hiX product sales, partially offset by an increase in OSP DSLAM sales. The increase in sales of our Customer Devices products is primarily attributable to increased sales of our FTTP ONT products. While we expect that revenues from Traditional & Other products will continue to decline over time, these revenues may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.

Services & Support sales increased 53.2% from $72.6 million in 2015 to $111.3 million in 2016. The increase in sales in 2016 is primarily attributable to an increase in network installation services for Access & Aggregation products.

International sales, which are included in the Network Solutions and Services & Support amounts discussed above, decreased 25.0% from $180.7 million in 2015 to $135.4 million in 2016. International sales, as a percentage of total sales, decreased from 30.1% in 2015 to 21.3% in 2016. Our international revenues are affected to a great extent by the timing of network upgrade projects at our larger European and Latin American customers and by changes in foreign exchange rates in territories in which we sell our products and services. Throughout 2016, our largest European customer focused on completing network upgrade activities in regions outside of our footprint with them. However, we expect that once current projects are completed, future network upgrades will resume in the second half of 2017 within our geographic footprint with this customer. Additionally, after reaching a cyclical high in the second quarter of 2014, the value of the Euro currency relative to the U.S. dollar declined significantly throughout the second half of 2014 and in 2015. Though the Euro-USD exchange rate appears to have stabilized since reaching a low in the fourth quarter of 2015, it remains approximately 20% below the highs of 2014. This decline in the value of the Euro throughout 2015 and into 2016 significantly reduced the U.S. dollar value of revenue from our European sales.

Cost of Sales

As a percentage of sales, cost of sales decreased from 55.5% in 2015 to 54.2% in 2016. The decrease is primarily attributable to a regional revenue shift and customer and product mix, partially offset by a change in services mix, restructuring expenses and an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.


Network Solutions cost of sales, as a percent of that segment’s sales, decreased from 55.7% of sales in 2015 to 51.5% of sales in 2016. The decrease in Network Solutions cost of sales as a percentage of that segment’s sales is primarily attributable to a regional revenue shift and customer and product mix, partially offset by restructuring expenses and an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.

Services & Support cost of sales, as a percent of that segment’s sales, increased from 54.1% of sales in 2015 to 67.2% of sales in 2016. The increase in Services & Support cost of sales as a percentage of that segment’s sales is primarily attributable to an increase in network installation services, which have higher costs than maintenance and support services, and in restructuring expenses.

An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differences between the recognition of cost reductions and the lowering of product selling prices.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 6.7% from $123.5 million in 2015 to $131.8 million in 2016. Selling, general and administrative expenses include personnel costs for administration, finance, information systems, human resources, sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, bad debt expense, advertising, promotional material, trade show expenses, and related travel costs. The increase in selling, general and administrative expenses is primarily attributable to an increase in variable incentive compensation expense and use tax expense, partially offset by a decrease in professional services.

Selling, general and administrative expenses as a percentage of sales increased from 20.6% for the year ended December 31, 2015 to 20.7% for the year ended December 31, 2016. Selling, general and administrative expenses as a percentage of sales will generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.

Research and Development Expenses

Research and development expenses decreased 3.9% from $129.9 million in 2015 to $124.8 million in 2016. The decrease in research and development expenses is primarily attributable to a decrease in compensation expense, lease expense and testing expense, partially offset by an increase in contract services. The decrease in compensation expense and lease expense in 2016 was primarily attributable to the consolidation of engineering resources that occurred during the second quarter of 2015.

Research and development expenses as a percentage of sales decreased from 21.6% for the year ended December 31, 2015 to 19.6% for the year ended December 31, 2016. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.

Taxable Revenue Bonds upon their maturity. We expect to continue to incur research and development expenses in connection with our new and existing products and our expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and product development efforts which provide for new product development, enhancement of existing products and product cost reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new product group.

Interest and Dividend Income

Interest and dividend income remained constant at $3.95 million in 2015 and $3.92 million in 2016.

Interest Expense

Interest expense, which is primarily related to our taxable revenue bond, remained consistent at $0.6 million in 2015 and 2016, as we had no substantial change in our fixed-rate borrowing. See “Financing Activities” in “Liquidity and Capital Resources” below for additional information on our taxable revenue bond.


Net Realized Investment Gain

Net realized investment gain decreased from $10.3 million in 2015 to $5.9 million in 2016. The decrease in realized investment gains is primarily attributable to fewer gains from the sale of equity securities in 2016. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other Income (Expense), net

Other income (expense), net, comprised primarily of miscellaneous income, gains and losses resulting from foreign currency exchange rate movements, and investment account management fees, decreased from $1.5 million of expense in 2015 to $0.7 million of expense in 2016. The change is primarily attributable to gains on forward currency contracts during the fourth quarter of 2016.

Gain on Bargain Purchase of a Business

Gain on bargain purchase of a business is related to our acquisition of key fiber access products, technologies and service relationships from a third party on September 13, 2016. See Note 2 of Notes to Consolidated Financial Statements for additional information.

Income Taxes

Our effective tax rate decreased from 27.5% in 2015 to 24.9% in 2016. The decrease in the effective tax rate between the two periods is primarily attributable to the benefit associated with the bargain purchase gain.

Net Income

As a result of the above factors, net income increased from $18.6 million in 2015 to $35.2 million in 2016. As a percentage of sales, net income increased from 3.1% in 2015 to 5.5% in 2016.

Liquidity and Capital Resources

Liquidity

We intend to finance our operations with cash flow from operations. We have used and expect to continue to use, the cash generated from operations for working capital, purchases of treasury stock, shareholder dividends, and other general corporate purposes, including (i) product development activities to enhance our existing products and develop new products and (ii) expansion of sales and marketing activities. We believe our cash and cash equivalents, investments and cash generated from operations to be adequate to meet our operating and capital needs for at least the next 12 months.

At December 31, 2017, cash on hand was $86.4 million and short-term investments were $16.1 million, which resulted in available short-term liquidity of $102.6 million, of which $56.8 million was held by our foreign subsidiaries. At December 31, 2016, cash on hand was $79.9 million and short-term investments were $43.2 million, which resulted in available short-term liquidity of $123.1 million, of which $42.1 million was held by our foreign subsidiaries. The decrease in short-term liquidity from December 31, 2016 to December 31, 2017 is primarily attributable to shifts among available investment option tenures to provide funds for our short-term cash needs.

Operating Activities

Our working capital, which consists of current assets less current liabilities, increased 35.3% from $226.4 million as of December 31, 2016 to $306.3 million as of December 31, 2017. The current ratio, defined as current assets divided by current liabilities, increased from 2.79 as of December 31, 2016 to 3.87 as of December 31, 2017. The increase in our working capital and current ratio is primarily attributable to an increase in accounts receivable, inventory, and other receivables, and a decrease in accounts payable and accrued wages and benefits. The quick ratio, defined as cash and cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, increased from 1.70 as of December 31, 2016 to 2.31 as of December 31, 2017. The increase in the quick ratio is primarily attributable to an increase in accounts receivable and a decrease in accounts payable and accrued wages and benefits. The decrease in accrued wages and benefits was primarily attributable to a decrease in accrued variable incentive compensation.


Net accounts receivable increased 56.1% from $92.3 million at December 31, 2016 to $144.2 million at December 31, 2017. We did not have an allowance for doubtful accounts at December 31, 2016 or 2017. Quarterly accounts receivable DSO increased from 52 days as of December 31, 2016 to 105 days as of December 31, 2017. The increase in net accounts receivable and DSO is attributable to customer specific payment terms that will become due early in the first quarter of 2018 and the timing of sales and collections during the quarter. Additionally, certain international customers can have longer payment terms than U.S. customers.

Other receivables increased 67.2% from $15.9 million at December 31, 2016 to $26.6 million at December 31, 2017. The increase in other receivables is primarily attributable to an increase in lease receivables and income tax receivables.

Annual inventory turnover decreased from 3.51 turns as of December 31, 2016 to 3.19 turns as of December 31, 2017. Inventory increased 16.6% from $105.1 million at December 31, 2016 to $122.5 million at December 31, 2017. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to seasonal cycles of our business ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.

Accounts payable decreased 21.6% from $77.3 million at December 31, 2016 to $60.6 million at December 31, 2017. Accounts payable will fluctuate due to variations in the timing of the receipt of supplies, inventory and services and our subsequent payments for these purchases.

Investing Activities

Capital expenditures totaled approximately $14.7 million, $21.4 million and $11.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. These expenditures were primarily used to purchase computer hardware, software, manufacturing and test equipment, and building improvements.

Our combined short-term and long-term investments decreased $72.9 million from $219.3 million at December 31, 2016 to $146.4 million at December 31, 2017. This decrease reflects the impact of our cash used by our operating activities, cash needs for share repurchases, shareholder dividends, equipment acquisitions, as well as net realized and unrealized losses, and amortization of net premiums on our combined investments, partially offset by funds provided by stock option exercises by our employees.

We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal risk of loss. At December 31, 2017, these investments included corporate bonds of $32.5 million, municipal fixed-rate bonds of $2.9 million, asset-backed bonds of $6.5 million, mortgage/agency-backed bonds of $5.5 million, U.S. government bonds of $14.3 million, and foreign government bonds of $0.7 million. At December 31, 2016, these investments included corporate bonds of $66.4 million, municipal fixed-rate bonds of $11.8 million, asset-backed bonds of $10.2 million, mortgage/agency-backed bonds of $13.0 million, U.S. government bonds of $29.8 million, foreign government bonds of $3.7 million, and variable rate demand notes of $11.9 million. As of December 31, 2017, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, and foreign government bonds were classified as available-for-sale and had a combined duration of 1.15 years with an average credit rating of A+. Because our bond portfolio has a high quality rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.

Our long-term investments decreased 26.0% from $176.1 million at December 31, 2016 to $130.3 million at December 31, 2017. Long-term investments at December 31, 2017 and December 31, 2016 included an investment in a certificate of deposit of $27.8 million, which serveswas held as collateral for our revenue bond, as discussed below. We have investments in various marketable equity securities classified as long-term investments at a cost of $33.5 million and $30.6 million, and with a fair value of $35.7 million and $29.4 million, at December 31, 2017 and December 31, 2016, respectively.to repay the outstanding balance.

 

Long-term investments at December 31, 2017 and 2016 also included $19.9 million and $14.6 million, respectively, related to our deferred compensation plan, and $0.5 million and $0.8 million, respectively, of other investments, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer.


We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the years ended December 31, 2017, 2016, and 2015, we recorded charges of $0.2 million, $0.8 million and $0.2 million, respectively, related to the other-than-temporary impairment of certain publicly traded equity securities, our deferred compensation plan assets, and our investments in two private equity funds.

Financing Activities

In conjunction with an 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 (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,On February 5, 2020, and is currently outstanding in the aggregate principal amount of $26.7 million. The estimated fair value of the bond using a level 2 valuation technique at December 31, 2017 was approximately $26.7 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, 2017 is $27.8 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 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 $1.5 million for the year ended December 31, 2017 and $1.3 million for each of the years ended December 31, 2016 and 2015.

We made principal payments of $1.1 million for each of the years ended December 31, 2017 and 2016, and we anticipate making a principal payment in 2018. At December 31, 2017, $1.1 million of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance Sheets.

Dividends

During 2017, 2016 and 2015, we paid shareholder dividends totaling $17.4 million, $17.6 million and $18.4 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 per common share paid to our shareholders in each quarter of 2017, 2016 and 2015.

Dividends per Common Share

 

 

 

2017

 

 

2016

 

 

2015

 

First Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Second Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Third Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Fourth Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 


Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 50.0 million shares of our common stock, which will be implemented through open market or private purchases from time to time as conditions warrant. For the years 2017, 2016 and 2015, we repurchased 0.9 million shares, 1.4 million shares and 4.0 million shares, respectively, for a cost of $17.3 million, $25.8 million and $66.2 million, respectively, at an average price of $20.27, $18.29 and $16.68 per share, respectively. We currently have the authority to purchase an additional 3.6 million shares of our common stock under the current plans approved by the Board of Directors.

Stock Option Exercises

To accommodate employee stock option exercises, we issued 0.7 million shares of treasury stock for $13.4 million during the year ended December 31, 2017, 0.3 million shares of treasury stock for $4.7 million during the year ended December 31, 2016, and 0.1 million shares of treasury stock for $1.0 million during the year ended December 31, 2015.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources.

We have various contractual obligations and commercial commitments. The following table sets forth, in millions, the annual payments we are required to make under contractual cash obligations and other commercial commitments at December 31, 2017.

Contractual Obligations

(In millions)

 

Total

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

After 2021

 

Long-term debt

 

$

26.7

 

 

$

1.1

 

 

$

 

 

$

25.6

 

 

$

 

 

$

 

Interest on long-term debt

 

 

1.0

 

 

 

0.5

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

Purchase obligations

 

 

140.0

 

 

 

139.1

 

 

 

0.8

 

 

 

0.1

 

 

 

 

 

 

 

Operating lease obligations

 

 

8.5

 

 

 

3.1

 

 

 

0.9

 

 

 

0.8

 

 

 

0.8

 

 

 

2.9

 

Tax Cuts and Jobs Act toll charge

 

 

2.7

 

 

 

0.5

 

 

 

0.2

 

 

 

0.2

 

 

 

0.2

 

 

 

1.6

 

Totals

 

$

178.9

 

 

$

144.3

 

 

$

2.4

 

 

$

26.7

 

 

$

1.0

 

 

$

4.5

 

We are required to make payments necessary to pay the interest on the Amended and Restated Bond, currently outstanding in the aggregate principal amount of $26.7 million. The bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. Included in long-term investments are $27.8 million of restricted funds, which is a collateral deposit against the principal amount of this bond. We made principal payments of $1.1 million for each of the years ended December 31, 2017 and 2016. We anticipate making a principal payment in 2018. At December 31, 2017, $1.1 million of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance Sheets. See Note 10 of Notes to Consolidated Financial Statements for additional information.

Purchase obligations primarily relate to open purchase orders to our contract manufacturers, component suppliers, service partners, and other vendors.

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, 2017, of which $7.7 million has been applied to these commitments. The additional $0.2 million commitment has been excluded from the table above due to uncertainty of when it will be applied.

We also have obligations related to uncertain income tax positions that have been excluded from the table above due to the uncertainty of when the related expense will be recognized. See Note 11 of Notes to Consolidated Financial Statements for additional information.


Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identified implementation issues; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We adopted ASU 2014-09 and the related ASUs on January 1, 2018 using the modified retrospective method.

The two areas of impact of these ASUs are network installation service revenue performance obligations and contract costs. The output method will be used to measure network installation services progress. The primary impact will be the timing of revenue recognition for certain performance obligations related to service revenue arrangements that are currently deferred until customer acceptance.  

In connection with the adoption of the new revenue standard, effective January 1, 2018, we adopted ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, with respect to capitalization and amortization of incremental costs of obtaining a contract. As a result, certain costs of obtaining a contract will need to be capitalized, including sales commissions, as the guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided the costs are recoverable. The primary impact will be capitalization of certain sales commissions for our extended maintenance and support contracts in excess of one year and costs associated with our capital lease arrangements that are billed monthly, and amortization of those costs over the period that the related revenue is recognized.

We will recognize the cumulative adjustment for network installation service revenue performance obligations and contract costs to retained earnings during the three months ended March 31, 2018. We do not believe the cumulative adjustment will have a significant impact on our consolidated financial statements during 2018.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after January 1, 2017. The amendments should be applied prospectively. We are currently evaluating whether to early adopt ASU 2017-04, but we do not expect it will have a material impact on our financial position, results of operations or cash flows.


In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We adopted ASU 2017-07 on January 1, 2018 and we do not expect ASU 2017-07 will have a material impact on our financial position, results of operations or cash flows.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact ASU 2017-12 will have on our financial position, results of operations and cash flows.

During 2017, we adopted the following accounting standards, which had no material effect on our financial position, results of operations or cash flows:

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We adopted ASU 2015-11 in the first quarter of 2017, and there was no material impact on our financial position, results of operations or cash flows.

In January 2017, we adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result, beginning in the first quarter of 2017, we began recognizing all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. The treatment of forfeitures has changed as we have elected to discontinue our past practice of estimating forfeitures and now account for forfeitures as they occur. As a result, we recorded an increase in additional paid in capital of $0.1 million, a charge to beginning retained earnings of $0.1 million, and an increase in the deferred tax assets related to non-qualified stock options and RSUs of $10 thousand. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows within operating activities. We elected to retrospectively apply the changes in presentation to the statements of cash flows and no longer classify excess tax benefits as a financing activity, which had an immaterial impact on our cash flows for the years ended December 31, 2017, 2016 and 2015. There was no material impact on our financial position, results of operations or cash flows as a result of these changes.

Subsequent Events

On January 16, 2018, 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 January 31, 2018.February 20, 2020. The quarterly dividend payment was $4.4 million and waswill be paid on February 14, 2018.March 5, 2020 in the aggregate amount of approximately $4.3 million. 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 23, 2018, we have repurchased 0.6 million shares of our common stock through open market purchases at an average cost of $16.18 per share. We currently have the authority to purchase an additional 2.9 million shares of our common stock under the current plan approved by the Board of Directors.

In January 2018, we announced an early retirement incentive program for employees that met certain requirements. The estimated liability associated with this program ranges from $3.6 to $14.3 million.

 


ITEM 7A.

QUANTITATIVE AND QUALITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates, foreign currency rates and prices of marketable equity and fixed-income securities. The primary objective of the large majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective, a majority of our marketable securities are investment grade, fixed-rate bonds and municipal money market instruments denominated in U.S. dollars. 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.

We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthinesscredit-worthiness of these financial institutions and determined the risk of material financial loss due to exposure of such credit risk to be minimal. As of December 31, 2017, $83.72019, $71.6 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.

As of December 31, 2017,2019, approximately $83.5$39.0 million of our cash and investments may be directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (bps) for an entire year, while all other variables remain constant. AtAs of December 31, 2017,2019, we held $34.2$3.7 million of cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bpsbasis points (“bps”) decline in interest rates, assuming all other variables remain constant, as of December 31, 20172019 would reduce annualized interest income on our cash and investments by approximately $0.2 million.$19 thousand. In addition, we held $49.2$35.3 million of fixed-rate bonds whose fair values may be directly affected by a change in interest rates. A hypothetical 50 bps increase in interest rates, assuming all other variables remain constant, as of December 31, 20172019 would reduce the fair value of our fixed-rate bonds by approximately $0.3 million.

As of December 31, 2016, interest income on approximately $166.7 million of our cash and investments was subject to being directly affected by changes in interest rates. We performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 bps for an entire year, while all other variables remain constant. A hypothetical 50 bps decline in interest rates as of December 31, 2016 would have reduced annualized interest income on our cash, money market instruments, floating rate corporate bonds and municipal variable rate demand notes by approximately $0.3 million. In addition, a hypothetical 50 bps increase in interest rates as of December 31, 2016 would have reduced the fair value of our municipal and corporate bonds by approximately $0.6 million.

We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, expenses and assets and liabilities held in non-functional currencies related to our foreign subsidiaries. Our primary exposures to foreign currency exchange rate movements are with our German subsidiary, whose functional currency is the Euro, and our Australian subsidiary, whose functional currency is the Australian dollar, and our Mexican subsidiary, whosedollar. Our revenue is primarily denominated in the respective functional currency of the subsidiary and paid in that subsidiary’s functional currency or certain other local currency, our global supply chain predominately invoices us in the respective functional currency of the subsidiary and is paid in U.S. dollars and some of our operating expenses are invoiced and paid in certain local currencies (approximately 13% of total operating expense for the U.S. dollar. Weyear ended December 31, 2019). Therefore, our revenues, gross margins, operating expense and operating income are exposedall subject to changes in foreign currency exchange rates to the extent of our German subsidiary’s use of contract manufacturers and raw material suppliers whom we predominantly pay in U.S. dollars.fluctuations. As a result, changes in currency exchange rates could cause variations in gross margin in the products that we sell in the EMEA region.our operating income.

We have certain international customers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates used to invoice such customers versus the functional currency of the entity billing such customers may adversely affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures, we may enter into various derivative transactions, when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. All non-functional currencies billed would result in a combined hypothetical gain or loss of $0.1$1.2 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. AnyThis change represents a decrease in the amount of hypothetical gain or loss compared to prior periods and is mainly due to a decrease in U.S. dollar-denominated billings in a non-U.S. dollar denominated subsidiary. Although we do not currently hold any derivative instruments, any gain or loss would be partially mitigated by theseany derivative instruments.instruments held.

As of December 31, 2017,2019, we had nocertain material contracts subject to currency revaluation, other thanincluding accounts receivable, and accounts payable and lease liabilities denominated in foreign currencies. As of December 31, 2017,2019, we had nodid not have any forward contracts outstanding.

For further information about the fair value of our available-for-sale investments and our derivative and hedging activities as of December 31, 2017,2019, see Notes 45 and 56 of Notes to Consolidated Financial Statements.Statements included in Part II, Item 8 of this report.

 


ITEM 8.

FINANCIAL STATEMENTSSTATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements are contained in this report.

 

 

 

 

 

Page

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

4651

 

 

 

 

 

Financial Statements

 

4853

 

 

Consolidated Balance Sheets,

As of December 31, 20172019 and 20162018

 

4853

 

 

 

 

 

 

 

Consolidated Statements of Income (Loss),

Years Ended December 31, 2017, 20162019, 2018 and 20152017

 

4954

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss),

Years Ended December 31, 2017, 20162019, 2018 and 20152017

 

5055

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity,

Years Ended December 31, 2017, 20162019, 2018 and 20152017

 

5156

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows,

Years Ended December 31, 2017, 20162019, 2018 and 20152017

 

5257

 

 

 

 

 

Schedule II - Valuation and Qualifying Accounts,,

Years Ended December 31, 2017, 20162019, 2018 and 20152017

 

90104

 


Report of Independent RegisteredRegistered 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, 20172019 and 2016,2018, and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders'stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, 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, 2017,2019, 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, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.COSO because a material weakness in internal control over financial reporting existed as of that date related to  ineffective 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 weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 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.

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 the accompanying Management's Report on Internal Control over Financial Reporting.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")(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 inin 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.

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.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Excess and Obsolete Inventory Reserve

As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated net inventory and inventory reserves as of December 31, 2019 were $98.3 million and $34.1 million, respectively. Management establishes 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 estimated reserve percentages, which consider historical usage, known trends, inventory age, and market conditions.  

The principal considerations for our determination that performing procedures relating to the excess and obsolete inventory reserve is a critical audit matter are there was significant judgment by management in estimating the excess and obsolete inventory reserve, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the reasonableness of the significant assumptions used in developing the reserve, including the estimated reserve percentages. As described in the "Opinions on the Financial Statements and Internal Control over Financial Reporting" section, a material weakness was identified as of December 31, 2019 related to ineffective controls over the Company’s determination of its estimated reserve for excess and obsolete inventory.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing management’s process for developing the excess and obsolete inventory reserve; evaluating the appropriateness of the approach; testing the completeness and accuracy of underlying data used in the approach, including historical usage and inventory age; and evaluating the reasonableness of the estimated reserve percentages used by management to determine the excess and obsolete inventory reserve. Evaluating the reasonableness of the estimated reserve percentages involved assessing whether they were consistent with the historical data and evidence obtained in other areas of the audit.

 

 

/s/PricewaterhouseCoopers LLP

Birmingham, Alabama

February 23, 2018

25, 2020

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

 


Financial Statements

ADTRAN, INC.

Consolidated Balance Sheets (In

(In thousands, except per share amounts)amount)

December 31, 20172019 and 20162018

 

ASSETS

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Current Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

86,433

 

 

$

79,895

 

 

$

73,773

 

 

$

105,504

 

Short-term investments

 

 

16,129

 

 

 

43,188

 

 

 

33,243

 

 

 

3,246

 

Accounts receivable, less allowance for doubtful accounts of $— at

December 31, 2017 and 2016

 

 

144,150

 

 

 

92,346

 

Accounts receivable, less allowance for doubtful accounts of $38 and $128 as of December 31, 2019 and 2018, respectively

 

 

90,531

 

 

 

99,385

 

Other receivables

 

 

26,578

 

 

 

15,897

 

 

 

16,566

 

 

 

36,699

 

Inventory, net

 

 

122,542

 

 

 

105,117

 

 

 

98,305

 

 

 

99,848

 

Prepaid expenses and other current assets

 

 

17,282

 

 

 

16,459

 

 

 

7,892

 

 

 

10,744

 

Total Current Assets

 

 

413,114

 

 

 

352,902

 

 

 

320,310

 

 

 

355,426

 

Property, plant and equipment, net

 

 

85,079

 

 

 

84,469

 

 

 

73,708

 

 

 

80,635

 

Deferred tax assets, net

 

 

23,428

 

 

 

38,036

 

 

 

7,561

 

 

 

37,187

 

Goodwill

 

 

3,492

 

 

 

3,492

 

 

 

6,968

 

 

 

7,106

 

Intangibles, net

 

 

27,821

 

 

 

33,183

 

Other assets

 

 

13,725

 

 

 

12,234

 

 

 

14,261

 

 

 

5,668

 

Long-term investments

 

 

130,256

 

 

 

176,102

 

 

 

94,489

 

 

 

108,822

 

Total Assets

 

$

669,094

 

 

$

667,235

 

 

$

545,118

 

 

$

628,027

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

60,632

 

 

$

77,342

 

 

$

44,870

 

 

$

60,054

 

Bonds payable

 

 

24,600

 

 

 

1,000

 

Unearned revenue

 

 

13,070

 

 

 

16,326

 

 

 

11,963

 

 

 

17,940

 

Accrued expenses

 

 

13,232

 

 

 

12,434

 

Accrued expenses and other current liabilities

 

 

13,876

 

 

 

11,746

 

Accrued wages and benefits

 

 

15,948

 

 

 

20,433

 

 

 

13,890

 

 

 

14,752

 

Income tax payable

 

 

3,936

 

 

 

 

Income tax payable, net

 

 

3,512

 

 

 

12,518

 

Total Current Liabilities

 

 

106,818

 

 

 

126,535

 

 

 

112,711

 

 

 

118,010

 

Non-current unearned revenue

 

 

4,556

 

 

 

6,333

 

 

 

6,012

 

 

 

5,296

 

Pension liability

 

 

15,886

 

 

 

13,086

 

Deferred compensation liability

 

 

21,698

 

 

 

18,256

 

Other non-current liabilities

 

 

34,209

 

 

 

28,050

 

 

 

8,385

 

 

 

2,500

 

Bonds payable

 

 

25,600

 

 

 

26,800

 

 

 

 

 

 

24,600

 

Total Liabilities

 

 

171,183

 

 

 

187,718

 

 

 

164,692

 

 

 

181,748

 

Commitments and contingencies (see Note 14)

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 16)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

79,652 shares issued and 48,485 shares outstanding at December 31, 2017 and

79,652 shares issued and 48,472 shares outstanding at December 31, 2016

 

 

797

 

 

 

797

 

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

79,652 shares issued and 48,020 shares outstanding as of December 31, 2019 and

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

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

260,515

 

 

 

252,957

 

 

 

274,632

 

 

 

267,670

 

Accumulated other comprehensive loss

 

 

(3,295

)

 

 

(12,188

)

 

 

(16,417

)

 

 

(14,416

)

Retained earnings

 

 

922,178

 

 

 

921,942

 

 

 

806,702

 

 

 

883,975

 

Less treasury stock at cost: 31,167 and 31,180 shares at December 31, 2017 and 2016,

respectively

 

 

(682,284

)

 

 

(683,991

)

Less treasury stock at cost: 31,638 and 31,901 shares as of December 31, 2019 and 2018,

respectively

 

 

(685,288

)

 

 

(691,747

)

Total Stockholders' Equity

 

 

497,911

 

 

 

479,517

 

 

 

380,426

 

 

 

446,279

 

Total Liabilities and Stockholders' Equity

 

$

669,094

 

 

$

667,235

 

 

$

545,118

 

 

$

628,027

 

 

See accompanying notes to consolidated financial statements.

 


ADTRAN, INC.

Consolidated Statements of Income (In(Loss)

(In thousands, except per share amounts)

Years ended December 31, 2017, 20162019, 2018 and 20152017

 

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

540,396

 

 

$

525,502

 

 

$

527,422

 

Services

 

 

126,504

 

 

 

111,279

 

 

 

72,642

 

Network Solutions

 

$

455,226

 

 

$

458,232

 

 

$

540,396

 

Services & Support

 

 

74,835

 

 

 

71,045

 

 

 

126,504

 

Total Sales

 

 

666,900

 

 

 

636,781

 

 

 

600,064

 

 

 

530,061

 

 

 

529,277

 

 

 

666,900

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

279,541

 

 

 

270,695

 

 

 

293,843

 

Services

 

 

83,699

 

 

 

74,742

 

 

 

39,324

 

Network Solutions

 

 

263,677

 

 

 

278,929

 

 

 

279,563

 

Services & Support

 

 

47,217

 

 

 

46,783

 

 

 

83,702

 

Total Cost of Sales

 

 

363,240

 

 

 

345,437

 

 

 

333,167

 

 

 

310,894

 

 

 

325,712

 

 

 

363,265

 

Gross Profit

 

 

303,660

 

 

 

291,344

 

 

 

266,897

 

 

 

219,167

 

 

 

203,565

 

 

 

303,635

 

Selling, general and administrative expenses

 

 

135,489

 

 

 

131,805

 

 

 

123,542

 

 

 

130,288

 

 

 

124,440

 

 

 

135,583

 

Research and development expenses

 

 

130,434

 

 

 

124,804

 

 

 

129,876

 

 

 

126,200

 

 

 

124,547

 

 

 

130,666

 

Operating Income

 

 

37,737

 

 

 

34,735

 

 

 

13,479

 

Asset impairments

 

 

3,872

 

 

 

 

 

 

 

Gain on contingency

 

 

(1,230

)

 

 

 

 

 

 

Operating Income (Loss)

 

 

(39,963

)

 

 

(45,422

)

 

 

37,386

 

Interest and dividend income

 

 

4,380

 

 

 

3,918

 

 

 

3,953

 

 

 

2,765

 

 

 

4,026

 

 

 

4,380

 

Interest expense

 

 

(556

)

 

 

(572

)

 

 

(596

)

 

 

(511

)

 

 

(533

)

 

 

(556

)

Net realized investment gain

 

 

4,685

 

 

 

5,923

 

 

 

10,337

 

Other expense, net

 

 

(1,559

)

 

 

(651

)

 

 

(1,465

)

Net investment gain (loss)

 

 

11,434

 

 

 

(4,050

)

 

 

4,685

 

Other income (expense), net

 

 

1,498

 

 

 

1,286

 

 

 

(1,208

)

Gain on bargain purchase of a business

 

 

 

 

 

3,542

 

 

 

 

 

 

 

 

 

11,322

 

 

 

 

Income before provision for income taxes

 

 

44,687

 

 

 

46,895

 

 

 

25,708

 

Provision for income taxes

 

 

(20,847

)

 

 

(11,666

)

 

 

(7,062

)

Net Income

 

$

23,840

 

 

$

35,229

 

 

$

18,646

 

Income (Loss) Before Income Taxes

 

 

(24,777

)

 

 

(33,371

)

 

 

44,687

 

Income tax (expense) benefit

 

 

(28,205

)

 

 

14,029

 

 

 

(20,847

)

Net Income (Loss)

 

$

(52,982

)

 

$

(19,342

)

 

$

23,840

 

Weighted average shares outstanding – basic

 

 

48,153

 

 

 

48,724

 

 

 

51,145

 

 

 

47,836

 

 

 

47,880

 

 

 

48,153

 

Weighted average shares outstanding – diluted

 

 

48,699

 

 

 

48,949

 

 

 

51,267

 

 

 

47,836

 

 

 

47,880

 

 

 

48,699

 

Earnings per common share – basic

 

$

0.50

 

 

$

0.72

 

 

$

0.36

 

Earnings per common share – diluted

 

$

0.49

 

 

$

0.72

 

 

$

0.36

 

Earnings (loss) per common share – basic

 

$

(1.11

)

 

$

(0.40

)

 

$

0.50

 

Earnings (loss) per common share – diluted

 

$

(1.11

)

 

$

(0.40

)

 

$

0.49

 

 

See accompanying notes to consolidated financial statements.

 


ADTRAN, INC.

Consolidated Statements of Comprehensive Income (In(Loss)

(In thousands)

Years ended December 31, 2017, 20162019, 2018 and 20152017

 

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Net Income

 

$

23,840

 

 

$

35,229

 

 

$

18,646

 

Net Income (loss)

 

$

(52,982

)

 

$

(19,342

)

 

$

23,840

 

Other Comprehensive Income (Loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2,163

 

 

 

(1,528

)

 

 

(7,032

)

 

 

279

 

 

 

(3,130

)

 

 

2,163

 

Defined benefit plan adjustments

 

 

731

 

 

 

(1,122

)

 

 

1,862

 

 

 

(1,185

)

 

 

(3,755

)

 

 

731

 

Foreign currency translation

 

 

5,999

 

 

 

(569

)

 

 

(3,724

)

 

 

(1,480

)

 

 

(4,236

)

 

 

5,999

 

Other Comprehensive Income (Loss), net of tax

 

 

8,893

 

 

 

(3,219

)

 

 

(8,894

)

 

 

(2,386

)

 

 

(11,121

)

 

 

8,893

 

Comprehensive Income, net of tax

 

$

32,733

 

 

$

32,010

 

 

$

9,752

 

Comprehensive Income (Loss), net of tax

 

$

(55,368

)

 

$

(30,463

)

 

$

32,733

 

 

See accompanying notes to consolidated financial statements.

 


ADTRAN, INC.

Consolidated Statements of Changes in Stockholders' Equity (In

(In thousands)

Years ended December 31, 2017, 20162019, 2018 and 20152017

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated Other Comprehensive Loss

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2014

 

 

79,652

 

 

$

797

 

 

$

241,829

 

 

$

907,751

 

 

$

(601,289

)

 

$

(75

)

 

$

549,013

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,646

 

 

 

 

 

 

 

 

 

 

 

18,646

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,894

)

 

 

(8,894

)

Dividend payments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,449

)

 

 

 

 

 

 

 

 

 

 

(18,449

)

Dividends accrued for unvested restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

(7

)

Stock options exercised: 60 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(402

)

 

 

1,363

 

 

 

 

 

 

 

961

 

PSUs, RSUs and restricted stock vested: 34 shares

 

 

 

 

 

 

 

 

 

 

(69

)

 

 

(767

)

 

 

767

 

 

 

 

 

 

 

(69

)

Purchase of treasury stock: 3,967 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66,160

)

 

 

 

 

 

 

(66,160

)

Income tax effect of stock compensation

   arrangements

 

 

 

 

 

 

 

 

 

 

(1,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,593

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

6,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,712

 

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 for 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 for 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

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated Other Comprehensive Loss

 

 

Total

Stockholders'

Equity

 

Balance as of 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 ($0.09 per share)

 

 

 

 

 

 

 

 

 

 

 

(17,368

)

 

 

 

 

 

 

 

 

(17,368

)

Dividends accrued on unvested restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

 

 

 

(37

)

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

(2,827

)

 

 

16,239

 

 

 

 

 

 

13,412

 

PSUs, RSUs and restricted stock vested

 

 

 

 

 

 

 

 

 

 

 

(3,257

)

 

 

2,816

 

 

 

 

 

 

(441

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,348

)

 

 

 

 

 

(17,348

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

7,433

 

 

 

 

 

 

 

 

 

 

 

 

7,433

 

ASU 2016-09 adoption

 

 

 

 

 

 

 

 

125

 

 

 

(115

)

 

 

 

 

 

 

 

 

10

 

Balance as of 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

 

 

 

 

 

 

 

 

 

 

 

278

 

 

 

 

 

 

 

 

 

278

 

ASU 2016-01 adoption

 

 

 

 

 

 

 

 

 

 

 

3,220

 

 

 

 

 

 

 

 

 

3,220

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,121

)

 

 

(11,121

)

Dividend payments ($0.09 per share)

 

 

 

 

 

 

 

 

 

 

 

(17,267

)

 

 

 

 

 

 

 

 

(17,267

)

Dividends accrued on unvested restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

(7

)

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

(603

)

 

 

2,086

 

 

 

 

 

 

1,483

 

PSUs, RSUs and restricted stock vested

 

 

 

 

 

 

 

 

 

 

 

(4,482

)

 

 

3,983

 

 

 

 

 

 

(499

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,532

)

 

 

 

 

 

(15,532

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

7,155

 

 

 

 

 

 

 

 

 

 

 

 

7,155

 

Balance as of December 31, 2018

 

 

79,652

 

 

 

797

 

 

 

267,670

 

 

 

883,975

 

 

 

(691,747

)

 

 

(14,416

)

 

 

446,279

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(52,982

)

 

 

 

 

 

 

 

 

(52,982

)

ASU 2016-02 adoption (see Note 1)

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

ASU 2018-02 adoption (see Note 1)

 

 

 

 

 

 

 

 

 

 

 

(385

)

 

 

 

 

 

385

 

 

 

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,386

)

 

 

(2,386

)

Dividend payments ($0.09 per share)

 

 

 

 

 

 

 

 

 

 

 

(17,212

)

 

 

 

 

 

 

 

 

(17,212

)

Dividends accrued on unvested restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

(10

)

Stock options exercised

 

 

 

 

 

 

 

 

 

 

 

(208

)

 

 

734

 

 

 

 

 

 

526

 

PSUs, RSUs and restricted stock vested

 

 

 

 

 

 

 

 

 

 

 

(6,480

)

 

 

5,909

 

 

 

 

 

 

(571

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(184

)

 

 

 

 

 

(184

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

6,962

 

 

 

 

 

 

 

 

 

 

 

 

6,962

 

Balance as of December 31, 2019

 

 

79,652

 

 

$

797

 

 

$

274,632

 

 

$

806,702

 

 

$

(685,288

)

 

$

(16,417

)

 

$

380,426

 

 

See accompanying notes to consolidated financial statements.

 


ADTRAN, INC.

Consolidated Statements of Cash Flows (In

(In thousands)

Years ended December 31, 2017, 20162019, 2018 and 2015

2017

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,840

 

 

$

35,229

 

 

$

18,646

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(52,982

)

 

$

(19,342

)

 

$

23,840

 

Adjustments to reconcile net income to net cash provided by operating

activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15,692

 

 

 

14,407

 

 

 

14,245

 

 

 

17,771

 

 

 

15,891

 

 

 

15,692

 

Amortization of net premium on available-for-sale investments

 

 

425

 

 

 

643

 

 

 

2,402

 

Net realized gain on long-term investments

 

 

(4,685

)

 

 

(5,923

)

 

 

(10,337

)

Asset impairments

 

 

3,872

 

 

 

 

 

 

 

Amortization of net premium (discount) on available-for-sale investments

 

 

(100

)

 

 

(50

)

 

 

425

 

Net (gain) loss on long-term investments

 

 

(11,434

)

 

 

4,050

 

 

 

(4,685

)

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

 

 

(145

)

 

 

22

 

 

 

644

 

 

 

67

 

 

 

67

 

 

 

(145

)

Gain on bargain purchase of a business

 

 

 

 

 

(3,542

)

 

 

 

 

 

 

 

 

(11,322

)

 

 

 

Gain on contingency payment

 

 

(1,230

)

 

 

 

 

 

 

Gain on life insurance proceeds

 

 

(1,000

)

 

 

 

 

 

 

Stock-based compensation expense

 

 

7,433

 

 

 

6,695

 

 

 

6,712

 

 

 

6,962

 

 

 

7,155

 

 

 

7,433

 

Deferred income taxes

 

 

14,073

 

 

 

(2,685

)

 

 

(692

)

 

 

30,070

 

 

 

(17,257

)

 

 

14,073

 

Tax impact of stock option exercises

 

 

 

 

 

 

 

 

(40

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(49,103

)

 

 

(21,302

)

 

 

14,918

 

 

 

8,282

 

 

 

49,200

 

 

 

(49,103

)

Other receivables

 

 

(10,222

)

 

 

4,101

 

 

 

11,704

 

 

 

20,046

 

 

 

(8,522

)

 

 

(10,222

)

Inventory

 

 

(15,518

)

 

 

(10,887

)

 

 

(6,877

)

Inventory, net

 

 

1,252

 

 

 

24,192

 

 

 

(15,518

)

Prepaid expenses and other assets

 

 

(4,830

)

 

 

(7,108

)

 

 

(5,070

)

 

 

2,749

 

 

 

10,727

 

 

 

(4,830

)

Accounts payable

 

 

(17,742

)

 

 

26,722

 

 

 

(5,826

)

Accounts payable, net

 

 

(13,494

)

 

 

(3,799

)

 

 

(17,742

)

Accrued expenses and other liabilities

 

 

(5,455

)

 

 

8,792

 

 

 

(10,289

)

 

 

(4,598

)

 

 

(3,226

)

 

 

(5,455

)

Income taxes payable

 

 

3,858

 

 

 

(3,162

)

 

 

(11,590

)

 

 

(8,705

)

 

 

7,690

 

 

 

3,858

 

Net cash provided by (used in) operating activities

 

 

(42,379

)

 

 

42,002

 

 

 

18,550

 

 

 

(2,472

)

 

 

55,454

 

 

 

(42,379

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(14,720

)

 

 

(21,441

)

 

 

(11,753

)

 

 

(9,494

)

 

 

(8,110

)

 

 

(14,720

)

Proceeds from disposals of property, plant and equipment

 

 

151

 

 

 

 

 

 

183

 

 

 

 

 

 

 

 

 

151

 

Proceeds from sales and maturities of available-for-sale investments

 

 

173,752

 

 

 

225,075

 

 

 

280,435

 

 

 

47,268

 

 

 

153,649

 

 

 

173,752

 

Purchases of available-for-sale investments

 

 

(93,141

)

 

 

(209,172

)

 

 

(188,921

)

 

 

(48,578

)

 

 

(123,209

)

 

 

(93,141

)

Acquisition of business

 

 

 

 

 

(943

)

 

 

 

Life insurance proceeds received

 

 

1,000

 

 

 

 

 

 

 

Acquisition of business, net of cash acquired

 

 

13

 

 

 

(22,045

)

 

 

 

Net cash provided by (used in) investing activities

 

 

66,042

 

 

 

(6,481

)

 

 

79,944

 

 

 

(9,791

)

 

 

285

 

 

 

66,042

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

13,412

 

 

 

4,717

 

 

 

961

 

 

 

526

 

 

 

1,483

 

 

 

13,412

 

Purchases of treasury stock

 

 

(17,348

)

 

 

(25,817

)

 

 

(66,160

)

 

 

(184

)

 

 

(15,532

)

 

 

(17,348

)

Dividend payments

 

 

(17,368

)

 

 

(17,583

)

 

 

(18,449

)

 

 

(17,212

)

 

 

(17,267

)

 

 

(17,368

)

Payments on long-term debt

 

 

(1,100

)

 

 

(1,100

)

 

 

(1,100

)

 

 

(1,000

)

 

 

(1,100

)

 

 

(1,100

)

Net cash used in financing activities

 

 

(22,404

)

 

 

(39,783

)

 

 

(84,748

)

 

 

(17,870

)

 

 

(32,416

)

 

 

(22,404

)

Net increase (decrease) in cash and cash equivalents

 

 

1,259

 

 

 

(4,262

)

 

 

13,746

 

 

 

(30,133

)

 

 

23,323

 

 

 

1,259

 

Effect of exchange rate changes

 

 

5,279

 

 

 

(393

)

 

 

(2,635

)

 

 

(1,598

)

 

 

(4,252

)

 

 

5,279

 

Cash and cash equivalents, beginning of year

 

 

79,895

 

 

 

84,550

 

 

 

73,439

 

 

 

105,504

 

 

 

86,433

 

 

 

79,895

 

Cash and cash equivalents, end of year

 

$

86,433

 

 

$

79,895

 

 

$

84,550

 

 

$

73,773

 

 

$

105,504

 

 

$

86,433

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

555

 

 

$

575

 

 

$

598

 

 

$

512

 

 

$

534

 

 

$

555

 

Cash paid during the year for income taxes

 

$

2,988

 

 

$

18,689

 

 

$

20,139

 

 

$

9,357

 

 

$

4,104

 

 

$

2,988

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

408

 

 

$

2,103

 

 

$

598

 

 

$

90

 

 

$

62

 

 

$

408

 

Contingent payment

 

$

 

 

$

1,230

 

 

$

 

See accompanying notes to consolidated financial statements.

 


Notes to Consolidated Financial Statements

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

ADTRAN, Inc. (ADTRAN)(“ADTRAN” or the “Company”) is a leading global provider of networking and communications equipment.solutions. Our vision is to enable a fully connected world where the power to communicate is available to everyone, everywhere. Our unique approach, unmatched industry expertise and innovative solutions enable voice, data, videous to address almost any customer need. Our products and Internet communications acrossservices are utilized by a varietydiverse global customer base of network infrastructures. These solutions are deployed by many of the United States’ and the world’s largest communicationsoperators that range from those having national or regional reach, operating as telephone or cable television network operators, to alternative network providers such as municipalities or utilities, as well as managed service providers (CSPs), distributed enterprises and smallwho serve small- and medium-sized businesses public and private enterprises, and millions of individual users worldwide.distributed enterprises.

Principles of Consolidation

Our consolidatedThe accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the financial statements includeposition, results of operations, comprehensive income (loss), changes in equity and cash flows of ADTRAN and its wholly ownedwholly-owned subsidiaries. All inter-companyintercompany 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 AmericaU.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 expenseexpenses during the reporting period. Our more significant estimates include theexcess and 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, the fair value of stock-based compensation, impairmentassessment of goodwill valuation and other intangibles for impairment, 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.

Correction of Immaterial Misstatement

During the three months ended June 30, 2019, the Company determined that there was an immaterial misstatement of its excess and obsolete inventory reserves in its previously issued annual and interim financial statements. The Company corrected this misstatement by recognizing a $0.8 million out-of-period adjustment during the three months ended June 30, 2019, which increased its excess and obsolete inventory reserves and cost of goods sold for the period. For the six months ended June 30, 2019, the out-of-period adjustment was a cumulative $0.2 million reduction in the Company’s excess and obsolete inventory reserves and cost of goods sold.   

Summary of Significant Accounting Policies

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, 2017, $83.72019, $71.6 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 sheetsConsolidated 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 $26.7$24.6 million, compared to an estimatedwhich was its fair value as of $26.7 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.December 31, 2019.

Investments with contractual maturities beyond one year such as our variable rate demand notes, 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 recordrecorded any losses relating to variable rate demand notes.


Long-term investments represent a restricted certificateis comprised of deposit held at cost, deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency backedagency-backed bonds, U.S. and foreign government bonds, variable rate demand notes, 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. Unrealized gains and losses,Any changes in fair value are recognized in net of tax, are reported as a separate component of stockholders’ equity.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. We review our investment portfolio quarterly for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2017 and 2016 are classified as available-for-sale securities.other income (expense). See Note 4 of Notes to Consolidated Financial Statements5 for additional information.


Accounts Receivable

We record accounts receivable at net realizable value. Prior to establishing payment terms for a new customer, we evaluate the credit risk of the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection experience and other financial factors. AtAs of December 31, 2017,2019, single customers comprising more than 10% of our total accounts receivable balance included two4 customers, which accounted for 63.8%53.2% of our total accounts receivable. AtAs of December 31, 2016,2018, single customers comprising more than 10% of our total accounts receivable balance included three2 customers, which accounted for 63.3%36.9% 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 impacting these customers 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, (andand for which a specific reserve has been established),established, a reduction in our allowance for doubtful accounts may be required. We did not have anOur allowance for doubtful accounts atwas $38 thousand and $0.1 million as of December 31, 2017 or2019 and December 31, 2016.

Other Receivables

Other receivables are comprised primarily of lease receivables, amounts due from subcontract manufacturers for product component transfers, unbilled receivables, amounts due from various jurisdictions for value-added tax, income tax receivable, accrued interest on investments and on a restricted certificate of deposit, and amounts due from employee stock option exercises.2018, respectively.

Inventory

Inventory is carried at the lower of cost and estimated 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 costsinventory and are updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period.quarterly. We establish reserves for estimated excess and obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fairnet realizable value of the inventory based upon assumptions about future demand,on estimated reserve percentages, which consider historical usage, known trends, inventory age and market conditions and age.conditions. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserve. See Note 6 of Notes to Consolidated Financial Statements7 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. BettermentsMajor 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.income (loss). See Note 7 of Notes to Consolidated Financial Statements8 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 11 for additional information.


Impairment of Long-Lived Assets and Intangibles

Long-lived assets used in operations and intangible assets are reviewed 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. During the year ended December 31, 2019, we recognized an impairment loss of approximately $3.9 million related to the abandonment of certain information technology implementation projects which we had previously capitalized expenses related to these projects. There were 0 impairment losses for long-lived assets during the years ended December 31, 2018 or 2017, or for intangible assets recognized during the years ended December 31, 2019, 2018 or 2017.

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 by-pass a qualitative assessment 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 and, in turn, performed a step-1 analysis of goodwill. Based on the results of our step-1 analysis, 0 impairment charges on goodwill were recognized during the years ended December 31, 2019, 2018 and 2017.

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 $8.4 million and $8.6 million as of December 31, 2019 and 2018, 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 partythird-party supplier for a defective component, the impact of which is reflected in the following table. The liability for warranty obligations totaled $9.7 million and $8.5 million at December 31, 2017 and 2016, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.


A summary of warranty expense and write-off activity for the years ended December 31, 2017, 20162019, 2018 and 20152017 is as follows:

 

(In thousands)

 

2019

 

 

2018

 

 

2017

 

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

8,548

 

 

$

8,739

 

 

$

8,415

 

 

$

8,623

 

 

$

9,724

 

 

$

8,548

 

Plus: Amounts charged to cost and expenses

 

 

6,951

 

 

 

8,561

 

 

 

2,998

 

 

 

4,569

 

 

 

7,392

 

 

 

6,951

 

Less: Deductions

 

 

(5,775

)

 

 

(8,752

)

 

 

(2,674

)

 

 

(4,798

)

 

 

(8,493

)

 

 

(5,775

)

Balance at end of period

 

$

9,724

 

 

$

8,548

 

 

$

8,739

 

 

$

8,394

 

 

$

8,623

 

 

$

9,724

 

 

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 $15.9 million and $13.1 million as of December 31, 2019 and 2018, respectively.


Stock-Based Compensation

We have two Board and stockholder approved2 stock incentive plans from which stock options, performance stock units (PSUs)(“PSUs”), restricted stock units (RSUs)(“RSUs”) and restricted stock are available for grant to employees and directors. Costs related to these awards are recognized over their vesting periods. 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.awards and therefore are measured at fair value on their grant date.

Stock-based compensation expense recognized infor the years ended December 31, 2019, 2018 and 2017 2016 and 2015 was approximately $7.4$7.0 million, $6.7$7.2 million and $6.7$7.4 million, respectively. As of December 31, 2017,2019, total unrecognized compensation cost related to non-vested stock options, market-based PSUs, RSUs and restricted stock not yet recognized was approximately $17.1$17.2 million, which is expected to be recognized over an average remaining recognition period of 2.93.0 years. In addition, there was $11.4 million of unrecognized compensation expense related to unvested performance-based PSUs, which will be recognized over the requisite service period of three years as achievement of the performance obligation becomes probable. See Note 3 of Notes to Consolidated Financial Statements4 for additional information.

Impairment of Long-Lived Assets

We review long-lived assets used in operations 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 recognized during 2017, 2016 or 2015.

Goodwill and Purchased Intangible Assets

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 2017, we concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses recognized since the goodwill was acquired in an acquisition in 2011. 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 9 months to 14 years.

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, the 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 $130.4$126.2 million, $124.8$124.5 million and $129.9$130.7 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.


Other Comprehensive Income

Other comprehensive income consists of unrealized gains (losses) on available-for-sale 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 available-for-sale 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. (Loss)

The following table presents changes in accumulated other comprehensive income (loss), net of tax, by componentcomponents of accumulated other comprehensive income (loss) for the years ended December 31, 2015, 20162019 2018 and 2017:

 

(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, December 31, 2014

 

$

8,964

 

 

$

 

 

$

(5,757

)

 

$

(3,282

)

 

$

(75

)

Other comprehensive income (loss) before

   reclassifications

 

 

(844

)

 

 

 

 

 

1,589

 

 

 

(3,724

)

 

 

(2,979

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(6,188

)

 

 

 

 

 

273

 

 

 

 

 

 

(5,915

)

Balance, 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, 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

)

(In thousands)

 

Unrealized

Gains (Losses)

on Available-

for-Sale

Securities

 

 

Unrealized Gains (Losses) on Cash Flow Hedges

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

ASU 2018-02 Adoption (2)

 

 

Total

 

Balance as of December 31, 2016

 

$

404

 

 

$

 

 

$

(5,017

)

 

$

(7,575

)

 

$

 

 

$

(12,188

)

Other comprehensive income before

   reclassifications

 

 

5,020

 

 

 

(619

)

 

 

451

 

 

 

5,999

 

 

 

 

 

 

10,851

 

Amounts reclassified from accumulated other

   comprehensive loss

 

 

(2,857

)

 

 

619

 

 

 

280

 

 

 

 

 

 

 

 

 

(1,958

)

Balance as of December 31, 2017

 

 

2,567

 

 

 

 

 

 

(4,286

)

 

 

(1,576

)

 

 

 

 

 

(3,295

)

Other comprehensive 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 loss

 

 

(595

)

 

 

 

 

 

135

 

 

 

 

 

 

 

 

 

(460

)

Balance as of December 31, 2018

 

 

(563

)

 

 

 

 

 

(8,041

)

 

 

(5,812

)

 

 

 

 

 

(14,416

)

Other comprehensive loss before

   reclassifications

 

 

573

 

 

 

 

 

 

(1,717

)

 

 

(1,480

)

 

 

 

 

 

(2,624

)

Amounts reclassified to retained earnings (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

385

 

 

 

385

 

Amounts reclassified from accumulated other

   comprehensive loss

 

 

(294

)

 

 

 

 

 

532

 

 

 

 

 

 

 

 

 

238

 

Balance as of December 31, 2019

 

$

(284

)

 

$

 

 

$

(9,226

)

 

$

(7,292

)

 

$

385

 

 

$

(16,417

)

 

 

(1)

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

(2)

With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were reclassified to retained earnings. See Note 13 for additional information.


The following tables present the details of reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2017, 20162019, 2018 and 2015:2017:

 

(In thousands)

 

2017

 

2019

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

 

Amount Reclassified

from Accumulated Other

Comprehensive Loss

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

4,864

 

 

Net realized investment gain

 

$

397

 

 

Net investment gain (loss)

Impairment expense

 

 

(180

)

 

Net realized investment gain

Net losses on derivatives designated as hedging instruments

 

 

(897

)

 

Cost of sales

Defined benefit plan adjustments – actuarial losses

 

 

(406

)

 

(1)

 

 

(771

)

 

(1)

Total reclassifications for the period, before tax

 

 

3,381

 

 

 

 

 

(374

)

 

 

Tax (expense) benefit

 

 

(1,423

)

 

 

Tax benefit

 

 

136

 

 

 

Total reclassifications for the period, net of tax

 

$

1,958

 

 

 

 

$

(238

)

 

 

 

(1)

(1)

Included in the computation of net periodic pension cost. See Note 12 of Notes to Consolidated Financial Statements.14 for additional information.

 


 

(In thousands)

 

2016

 

2018

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

 

Amount Reclassified

from Accumulated Other

Comprehensive Loss

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Unrealized gains on available-for-sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

5,408

 

 

Net realized investment gain

 

$

804

 

 

Net investment gain (loss)

Impairment expense

 

 

(419

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial losses

 

 

(156

)

 

(1)

 

 

(196

)

 

(1)

Total reclassifications for the period, before tax

 

 

4,833

 

 

 

 

 

608

 

 

 

Tax (expense) benefit

 

 

(1,897

)

 

 

Tax expense

 

 

(148

)

 

 

Total reclassifications for the period, net of tax

 

$

2,936

 

 

 

 

$

460

 

 

 

 

(1)

(1)

Included in the computation of net periodic pension cost. See Note 12 of Notes to Consolidated Financial Statements.14 for additional information.

 

(In thousands)

 

2015

 

2017

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

 

Amount Reclassified

from Accumulated Other

Comprehensive Loss

 

 

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

 

$

10,348

 

 

Net realized investment gain

 

$

4,864

 

 

Net investment gain (loss)

Impairment expense

 

 

(203

)

 

Net realized investment gain

 

 

(180

)

 

Net investment gain (loss)

Net losses on derivatives designated as hedging instruments

 

 

(897

)

 

Cost of sales

Defined benefit plan adjustments – actuarial losses

 

 

(396

)

 

(1)

 

 

(406

)

 

(1)

Total reclassifications for the period, before tax

 

 

9,749

 

 

 

 

 

3,381

 

 

 

Tax (expense) benefit

 

 

(3,834

)

 

 

Tax expense

 

 

(1,423

)

 

 

Total reclassifications for the period, net of tax

 

$

5,915

 

 

 

 

$

1,958

 

 

 

 

(1)

(1)

Included in the computation of net periodic pension cost. See Note 12 of Notes to Consolidated Financial Statements.14 for additional information.

 


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, 2017, 20162019, 2018 and 2015:2017:

 

 

2019

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

774

 

 

$

(201

)

 

$

573

 

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

 

 

(397

)

 

 

103

 

 

 

(294

)

Defined benefit plan adjustments

 

 

(2,488

)

 

 

771

 

 

 

(1,717

)

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

 

 

771

 

 

 

(239

)

 

 

532

 

Foreign currency translation adjustment

 

 

(1,480

)

 

 

 

 

 

(1,480

)

Total Other Comprehensive Income (Loss)

 

$

(2,820

)

 

$

434

 

 

$

(2,386

)

 

 

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

)

 

 

 

2015

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

(1,384

)

 

$

540

 

 

$

(844

)

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

 

 

(10,145

)

 

 

3,957

 

 

 

(6,188

)

Defined benefit plan adjustments

 

 

2,303

 

 

 

(714

)

 

 

1,589

 

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

 

 

396

 

 

 

(123

)

 

 

273

 

Foreign currency translation adjustment

 

 

(3,724

)

 

 

 

 

 

(3,724

)

Total Other Comprehensive Income (Loss)

 

$

(12,554

)

 

$

3,660

 

 

$

(8,894

)


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 have 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 have calculated our best estimate of the impact of the Act in our 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 is necessary to do a more detailed analysis of historical foreign earnings, as well as the full impact relating to the write-down of deferred tax assets. Any subsequent adjustments to these amounts will be recorded as income tax expense in the quarter the analysis is complete.

ForeignForeign Currency

We record transactions denominated in foreign currencies on a monthly basis using appropriate 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.dollar as most invoices are paid in Mexican Pesos. Adjustments resulting from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

Revenue

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. Generally, this occurs with the transfer of control of a product to the customer. Review of contracts with customers, for both direct customers and distributors, are performed and assessment made regarding principal versus agent considerations to determine primary responsibility for delivery of performance obligation, presumed inventory risk, and discretion in establishing pricing. 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. 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, if material, are capitalized and amortized over the period that the related revenue is recognized if greater than one year. We have elected to account for shipping fees as a cost of fulfilling the related contract. We have also 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 Recognition

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.        

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 as our customers benefit evenly throughout the contract term and deferred revenues, when applicable, 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 on the Consolidated Balance Sheet. The contract asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.

Accounting Policy under Topic 605

Revenue was generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the product price iswas fixed or determinable, collection of the resulting receivable iswas reasonably assured, and product returns arewere reasonably estimable. For product sales, revenue iswas 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 iswas recognized when the end customer assumes ownership of the product. Contracts that containcontained multiple deliverables arewere evaluated to determine the units of accounting, and the consideration from the arrangement iswas allocated to each unit of accounting based on the relative selling price and corresponding terms of the contract. When this iswas not available, we arewere 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 useused best estimates to allocate consideration to each respective unit of accounting. These estimates includeincluded analysis of respective bills of material and review and analysis of similar product and service offerings. We recordrecorded revenue associated with installation services when respective contractual obligations are complete. In instances where customer acceptance iswas required, revenue iswas deferred until respective acceptance criteria have beenwere met. Contracts that includeincluded both installation services and product sales arewere evaluated for revenue recognition in accordance with contract terms. As a result, installation services may behave been considered a separate deliverable or may behave been considered a combined single unit of accounting with the delivered product. Generally, either the purchaser, ADTRAN, or a third party canwould perform the installation of our products. Shipping fees arewere recorded as revenue and the related cost iscosts were included in cost of sales. Sales taxes invoiced to customers arewere included in revenues and representrepresented less than one1 percent of total revenues. The corresponding sales taxes paid arewere included in cost of goods sold. Value addedValue-added taxes collected from customers in international jurisdictions arewere recorded in accrued expenses as a liability. Revenue iswas recorded net of discounts. Sales returns arewere recorded as a reduction of revenue and accrued based on historical sales return experience, which we believe providesbelieved provided a reasonable estimate of future returns.

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

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


Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and leases and unearned revenues relatingrelated 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 contractsmultiple performance obligations where we still have contractual obligations, we also defer the related costs. Current deferred costs are included in prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets and totaled $11.4$1.6 million and $10.7$2.4 million atas of December 31, 20172019 and 2016,2018, respectively. Non-current deferred costs are included in other assets on the accompanying Consolidated Balance Sheets and totaled $2.8$0.1 million and $0.9$0.8 million atas of December 31, 20172019 and 2016,2018, respectively.

Other Income (Expense), Net

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

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 15 of Notes to Consolidated Financial Statements17 for additional information.


DividendsBusiness Combinations

During 2017, 2016The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and 2015, we paid shareholder dividends totaling $17.4 million, $17.6 million and $18.4 million, respectively. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so longintangible assets recognized 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 2017, 2016 and 2015.

Dividends per Common Share

 

 

 

2017

 

 

2016

 

 

2015

 

First Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Second Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Third Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Fourth Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

On January 16, 2018, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the closepart of business combinations based on January 31, 2018.their fair values on the date of acquisition. The ex-dividend date was January 30, 2018excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities assumed acquired is recorded as goodwill. If the payment date was February 14, 2018. The quarterly dividend payment was $4.4 million.

Business Combinations

We use the acquisition method to account for business combinations. Under the acquisition methodestimated fair values of accounting, we recognize thenet tangible and intangible assets acquired and liabilities assumed at theirexceed 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 acquisition date. Goodwill is measured as the excessmanagement of the consideration transferred overacquired company and, in some cases, valuations performed by independent third-party firms. The results of operations of acquired companies are included in the net assets acquired.accompanying 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 selling, general and administrative expenses as theyincurred.

Derivative Instruments and Hedging Activities

Historically, we have participated in foreign exchange forward contracts in connection with the management of exposure to fluctuations in foreign exchange rates as outlined below.

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 incurred.recorded in accumulated other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other comprehensive income to earnings 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.

Recently IssuedUndesignated 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 earnings. 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 in 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 on the Consolidated Balance Sheets at their fair values. Our derivative instruments are not subject to master netting arrangements and are not offset on the Consolidated Balance Sheets.


Recent Accounting StandardsPronouncements Not Yet Adopted

In May 2014,June 2016, the Financial Accounting Standards Board (FASB)(“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers(“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 606) (ASU 2014-09), which supersedes326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the revenuemeasurement and 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 receivedcredit losses for those goods or services.financial instruments held at amortized cost. In August 2015,November 2018, the FASB issued ASU 2015-14,2018-19, 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. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which deferredclarifies the accounting for transfers between classifications of debt securities and clarifies that entities should include expected recoveries on financial assets in the calculation of the current expected credit loss allowance. In addition, renewal options that are not unconditionally cancelable should be considered in the determination of expected credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which amends ASU 2016-13 to allow companies, upon adoption, to elect the fair value option on financial instruments that were previously recorded at amortized cost if they meet certain criteria. In November 2019, the FASB issued ASU 2019-11, Codification improvements to Topic 326, Financial Instruments – Credit Losses, which makes various narrow-scope amendments to the new credit losses standard, such as, providing disclosure relief for accrued interest receivables. All of these ASUs are effective date of ASU 2014-09 tofor 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,2019, with early adoption permitted. We are currently evaluating the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identified implementation issues; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We adopted ASU 2014-09 and the related ASUs on January 1, 2018 using the modified retrospective method.

The two areas of impact ofeffect these ASUs are network installation service revenue performance obligations and contract costs. The output method will be used to measure network installation services progress. The primary impact will be the timing of revenue recognition for certain performance obligations related to service revenue arrangements that are currently deferred until customer acceptance. 

In connection with the adoption of the new revenue standard, effective January 1, 2018, we adopted ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, with respect to capitalization and amortization of incremental costs of obtaining a contract. As a result, certain costs of obtaining a contract will need to be capitalized, including sales commissions, as the guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided the costs are recoverable. The primary impact will be capitalization of certain sales commissions for our extended maintenance and support contracts in excess of one year and costs associated with our capital lease arrangements that are billed monthly, and amortization of those costs over the period that the related revenue is recognized.


We will recognize the cumulative adjustment for network installation service revenue performance obligations and contract costs to retained earnings during the three months ended March 31, 2018. We do not believe the cumulative adjustment will have a significant impact on our consolidated financial statements during 2018.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.statements.

In January 2017, the FASB issued Accounting Standards Update No.ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment(ASU 2017-04). ASU 2017-04 simplifies the measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after January 1, 2017. The amendments should be applied prospectively. We are currently evaluating whether to early adopt ASU 2017-04, but we do not expect it will have a material impacteffect on our consolidated financial position, results of operations or cash flows.statements.

In March 2017,August 2018, the FASB issued Accounting Standards UpdateASU 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, Concepts Statement No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving8 — Conceptual Framework for Financial Reporting — Chapter 8 — Notes to Financial Statements, which the PresentationFASB finalized on August 28, 2018. The FASB used the guidance in the Concepts Statement to improve the effectiveness of Net Periodic Pension CostASC 820’s disclosure requirements. ASU 2018-13 provides users of financial statements with information about assets and Net Periodic Postretirement Benefit Cost (liabilities measured at fair value in the statement of financial position or disclosed in the notes to the financial statements. More specifically, ASU 2017-07).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 2017-07 amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure2018-13 requires disclosures regarding the uncertainty in the fair value measurements as of operating incomethe reporting date and how changes in their statements of earnings to include only the service cost component of net periodic pension costfair value measurements affect performance 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.cash flows. ASU 2017-072018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.2019. We adoptedare currently evaluating the effect of ASU 2017-07 on January 1, 2018 and we2018-13, 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.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing various exceptions, such as, the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments in this update, also simplify the accounting for income taxes related to income-based franchise taxes and requiring that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the effect of ASU 2019-12, but do not expect it will have a material effect on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which 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 allowing for the application of the legacy lease guidance, Leases (Topic 840), 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 842) 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 sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard, and its 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. At that time, the Company 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 nonlease 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 Sheets of $10.3 million as of January 1, 2019, primarily related to our operating leases for office space, automobiles and other equipment.  

As a lessee, the adoption of this standard did not have a material impact on our Consolidated Statement of Income or Statement of Cash Flows. See Note 9 for additional information.

As a lessor, the adoption of this standard did not have a material impact on our Consolidated Balance Sheet, Consolidated Statement of Income or Consolidated Statement of Cash Flows. Prior to and after adoption, all of our leases in which we are the lessor were classified as sales-type 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 position, results of operations or cash flows.statements.

In August 2017, the FASB issued Accounting Standards Update No.ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities(ASU 2017-12). ASU 2017-12 expandsexpanded and refinesrefined hedge accounting for both financial and non-financial risk components, alignsaligned the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includesincluded 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 isand ASU 2018-16 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact2018. The Company adopted ASU 2017-12 willon January 1, 2019, and the adoption of this standard did not have on our financial position, results of operations and cash flows.

During 2017, we adopted the following accounting standards, which had noa material effect on our consolidated financial position, resultsstatements as we did not have any hedging instruments as of operations or cash flows:the date of adoption.

In July 2015,February 2018, the FASB issued Accounting Standards Update No. 2015-11, InventoryASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 330)220): SimplifyingReclassification 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 MeasurementTax Cuts and Jobs Act of Inventory (2017. ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is2018-02 was effective for annual reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, including interim periods within that reporting period.2018. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. WeCompany adopted ASU 2015-11 in2018-02 on January 1, 2019, and upon adoption reclassified $0.4 million of stranded tax effects created by rate changes related to the first quarterTax Cuts and Jobs Act of 2017 and there was no material impact on our financial position, results of operations or cash flows.


In January 2017, we adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result, beginning in the first quarter of 2017, we began recognizing all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. The treatment of forfeitures has changed as we have elected to discontinue our past practice of estimating forfeitures and now account for forfeitures as they occur. As a result, we recorded an increase in additional paid in capital of $0.1 million, a charge to beginning retained earnings of $0.1 million, and an increase in the deferred tax assets related to non-qualified stock options and RSUs of $10 thousand. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows within operating activities. We elected to retrospectively apply the changes in presentation to the statements of cash flows and no longer classify excess tax benefits as a financing activity, which had an immaterial impact on our cash flows for the years ended December 31, 2017, 2016 and 2015. There was no material impact on our financial position, results of operations or cash flows as a result of these changes. earnings.

Note 2 – Business Combinations

On September 13, 2016,In November 2018, we acquired key fiber access products, technologiesSmartRG, Inc., a provider of carrier-class, open-source connected home platforms and cloud services for broadband service relationships from subsidiaries of CommScope, Inc.providers for $0.9 million in cash. This acquisition enhanced our solutions for the cable MSO industry and provided cable operators with the scalable solutions, services and support they required to compete in the multi-gigabit service delivery market.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. These revenues are included in the Subscriber Solutions & Experience category within the Network Solutions and Services & Support reportable segment,segments.  

Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which were dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones during the first half of 2019. The required milestones were not achieved and therefore, we recognized a gain of $1.2 million upon the reversal of these liabilities during the second quarter of 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 satisfy indemnity obligations to the Company arising from any inaccuracy or breach of representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to arbitration. In December 2019, $1.3 million of the $2.8 million was released from the escrow account pursuant to the agreement, with the final settlement of the remaining balance expected during the fourth quarter of 2020. The remaining minimum and maximum potential release of funds to the seller ranges from 0 payment to $1.5 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 and liabilities assumed. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.

On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This acquisition establishes ADTRAN as the 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 Customer Devices categories.Subscriber Solutions & Experience categories within the Network Solutions reportable segment.


We recorded a bargain purchase gain of $3.5$11.3 million during the year ended December 31, 2016,first quarter of 2018, net of income taxes, which wasis subject to customary working capital adjustments between the parties. The bargain purchase gain of $3.5$11.3 million represents the excess fair valuedifference between the fair-value of the net assets acquired over the consideration exchanged.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 pro formaforecasted 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”Gain on bargain purchase of a business” in the 20162018 Consolidated Statements of Income.

Working capital adjustments were recorded in the fourth quarter of 2016 and resulted in an immaterial reduction in the inventory acquired, accounts payable assumed, deferred income taxes and bargain purchase gain. If these adjustments had been recorded on the date of acquisition, the bargain purchase gain would have been reduced by $8 thousand for the three months ended September 30, 2016. The final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date isfor 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)

 

 

 

 

(In thousands)

 

Sumitomo

 

 

SmartRG

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

$

3,131

 

Property, plant and equipment

 

 

352

 

Tangible assets acquired

 

$

1,006

 

 

$

8,594

 

Intangible assets

 

 

4,700

 

 

 

22,100

 

 

 

9,960

 

Goodwill

 

 

 

 

 

3,476

 

Total assets acquired

 

 

8,183

 

 

 

23,106

 

 

 

22,030

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

(1,250

)

Warranty payable

 

 

(61

)

Accrued wages and benefits

 

 

(122

)

Deferred income taxes

 

 

(2,265

)

Liabilities assumed

 

 

(3,978

)

 

 

(6,001

)

Total liabilities assumed

 

 

(3,698

)

 

 

(3,978

)

 

 

(6,001

)

Total net assets

 

 

4,485

 

 

 

19,128

 

 

 

16,029

 

Gain on bargain purchase of a business, net of tax

 

 

(3,542

)

 

 

(11,322

)

 

 

 

Total purchase price

 

$

943

 

 

$

7,806

 

 

$

16,029

 

 

Our Consolidated Statements of Income 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 from the SmartRG and Sumitomo acquisitions are as follows:

 

In thousands

 

Value

 

 

Life (years)

 

Supply agreement

 

$

1,400

 

 

 

0.8

 

Customer relationships

 

 

1,200

 

 

 

6.0

 

Developed technology

 

 

800

 

 

 

10.0

 

License

 

 

500

 

 

 

1.3

 

Patent

 

 

500

 

 

 

7.3

 

Non-compete

 

 

200

 

 

 

2.3

 

Trade name

 

 

100

 

 

 

2.0

 

Total

 

$

4,700

 

 

 

 

 

(In thousands)

 

Value

 

 

Life (in 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, 2015.2017. 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, 2015,2017, nor is it indicative of any future results. Aside from revising the 20152017 net income for the effect of the bargain purchase gain,gains, there were no material, non-recurring adjustments to this unaudited pro formapro-forma information.

 

(In thousands)

 

2016

 

 

2015

 

Pro forma revenue

 

$

641,170

 

 

$

603,923

 

Pro forma net income

 

$

31,212

 

 

$

22,945

 

Pro forma earnings per share – basic

 

$

0.64

 

 

$

0.45

 

Pro forma earnings per share – diluted

 

$

0.64

 

 

$

0.45

 

(In thousands)

 

2018

 

 

2017

 

Pro forma revenue

 

$

559,050

 

 

$

702,573

 

Pro forma net loss

 

$

(33,862

)

 

$

33,206

 

 

For the years ended December 31, 20172019 and 2016,2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $1.8$5.0 million and $1.0$2.9 million, respectively, related to this acquisition.the SmartRG and Sumitomo acquisitions. NaN acquisition expenses related to the SmartRG and Sumitomo acquisitions were recorded during the year ended December 31, 2017.

Note 3 - Revenue

The following table disaggregates our revenue by major source for the year ended December 31, 2019:

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

289,980

 

 

$

58,894

 

 

$

348,874

 

Subscriber Solutions & Experience(1)

 

 

144,651

 

 

 

8,269

 

 

 

152,920

 

Traditional & Other Products

 

 

20,595

 

 

 

7,672

 

 

 

28,267

 

Total

 

$

455,226

 

 

$

74,835

 

 

$

530,061

 

(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 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

 

(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.

Revenue allocated to remaining performance obligations represents contract revenues that have not yet been recognized for contracts with a duration greater than one year. As of December 31, 2019, we did 0t 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. As a practical expedient, for certain contracts recognize revenue equal to the amounts we are entitled to invoice which correspond to the value of completed performance obligations to date. The amount related to these performance obligations was $13.3 million as of December 31, 2018. The amount related to these performance obligations was $13.6 million as of December 31, 2019, and the Company expects to recognize 64% of such revenue over the next 12 months with the remainder thereafter.


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

(In thousands)

 

December 31, 2019

 

 

December 31, 2018

 

Accounts receivable

 

$

90,531

 

 

$

99,385

 

Contract assets(1)

 

$

2,812

 

 

$

3,766

 

Unearned revenue

 

$

11,963

 

 

$

17,940

 

Non-current unearned revenue

 

$

6,012

 

 

$

5,296

 

(1) Included in other receivables on the Consolidated Balance Sheets

Of the outstanding unearned revenue balance as of December 31, 2018, $12.7 million was recognized as revenue during the year ended December 31, 2019.

Note 34 – Stock-Based Compensation

Stock Incentive Program Descriptions

OnIn January 23, 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (2006 Plan)(the “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 onin 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 havehad a ten-year contractual term. The 2006 Plan was replaced onin May 13, 2015 by the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan)(the “2015 Plan”). Expiration dates of options outstanding atas of December 31, 20172019 under the 2006 Plan range from 20182020 to 2024.

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. Expiration dates of options outstanding at December 31, 2017 under the 2010 Directors Plan range from 2018 to 2019.

OnIn January 20, 2015, the Board of Directors adopted the ADTRAN, Inc. 2015 Employee Stock Incentive Plan, (2015 Plan), which authorizesauthorized 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 onin 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 atas of December 31, 20172019 under the 2015 Plan range from 2025 to 2026.

Our stockholders approved the 2010 Directors Stock Plan (the “2010 Directors Plan”) in May 2010, under which 0.5 million shares of common stock have been reserved for issuance. This plan replaced 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 become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan had a ten-year contractual term. All remaining options under the 2010 Directors Plan expired in 2019.   


The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, which was recognized as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Stock-based compensation expense included in cost of sales

 

$

379

 

 

$

389

 

 

$

280

 

 

$

369

 

 

$

418

 

 

$

379

 

Selling, general and administrative expense

 

 

4,063

 

 

 

3,341

 

 

 

3,261

 

 

 

3,889

 

 

 

3,989

 

 

 

4,063

 

Research and development expense

 

 

2,991

 

 

 

2,965

 

 

 

3,171

 

 

 

2,704

 

 

 

2,748

 

 

 

2,991

 

Stock-based compensation expense included in operating expenses

 

 

7,054

 

 

 

6,306

 

 

 

6,432

 

 

 

6,593

 

 

 

6,737

 

 

 

7,054

 

Total stock-based compensation expense

 

 

7,433

 

 

 

6,695

 

 

 

6,712

 

 

 

6,962

 

 

 

7,155

 

 

 

7,433

 

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

 

 

(1,699

)

 

 

(963

)

 

 

(862

)

 

 

(1,659

)

 

 

(1,432

)

 

 

(1,699

)

Total stock-based compensation expense, net of tax

 

$

5,734

 

 

$

5,732

 

 

$

5,850

 

 

$

5,303

 

 

$

5,723

 

 

$

5,734

 

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, 2016 and 2017 and the changes that occurred during 2017:

(In thousands, except per share amounts)

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual Life

in Years

 

 

Aggregate

Intrinsic Value

 

Stock options outstanding, December 31, 2016

 

 

6,338

 

 

$

22.14

 

 

 

5.63

 

 

$

16,972

 

Stock options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

(742

)

 

$

18.08

 

 

 

 

 

 

 

 

 

Stock options forfeited

 

 

(70

)

 

$

17.29

 

 

 

 

 

 

 

 

 

Stock options expired

 

 

(378

)

 

$

24.14

 

 

 

 

 

 

 

 

 

Stock options outstanding, December 31, 2017

 

 

5,148

 

 

$

22.65

 

 

 

4.87

 

 

$

6,109

 

Stock options vested and expected to vest, December 31, 2017

 

 

5,148

 

 

$

22.65

 

 

 

4.87

 

 

$

6,109

 

Stock options exercisable, December 31, 2017

 

 

4,351

 

 

$

23.78

 

 

 

4.37

 

 

$

3,810

 

At December 31, 2017, total compensation cost related to non-vested stock options not yet recognized was approximately $3.2 million, which is expected to be recognized over an average remaining recognition period of 1.5 years.

All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At December 31, 2017, 3.5 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 2017 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, 2017. 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 2017, 2016 and 2015 was $3.4 million, $1.1 million and $0.1 million, respectively. The fair value of options fully vesting during 2017, 2016 and 2015 was $4.3 million, $5.7 million and $6.6 million, respectively.

 


The following table further describes our stock options outstanding as of December 31, 2017:

 

 

Options Outstanding

 

 

Options Exercisable

 

Range of

Exercise Prices

 

Options

Outstanding at

12/31/17

(In thousands)

 

 

Weighted Avg.

Remaining

Contractual Life

in Years

 

 

Weighted

Average

Exercise

Price

 

 

Options

Exercisable at

12/31/17

(In thousands)

 

 

Weighted

Average

Exercise

Price

 

$14.88 – 18.96

 

 

1,623

 

 

 

6.02

 

 

$

15.77

 

 

 

1,063

 

 

$

15.96

 

$18.97 – 23.45

 

 

801

 

 

 

6.68

 

 

$

19.11

 

 

 

565

 

 

$

19.17

 

$23.46 – 30.35

 

 

1,400

 

 

 

4.16

 

 

$

23.85

 

 

 

1,399

 

 

$

23.85

 

$30.36 – 41.92

 

 

1,324

 

 

 

3.29

 

 

$

31.94

 

 

 

1,324

 

 

$

31.94

 

 

 

 

5,148

 

 

 

 

 

 

 

 

 

 

 

4,351

 

 

 

 

 

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.vesting. 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 also vestvests 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 vest and 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 containcontained performance conditions.conditions and would have vested at the end of a three-year period if such performance conditions were met. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant. These awards were forfeited during the first quarter of 2020 as the performance conditions were not achieved.

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 yearfour-year and one yearone-year periods, respectively.

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, 20162018 and 20172019 and the changes that occurred during 2017. The unvested awards outstanding as2019:    

(In thousands, except per share amounts)

 

Number of

shares

 

 

Weighted

Average Grant

Date Fair Value

 

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

 

 

1,570

 

 

$

18.52

 

PSUs, RSUs and restricted stock granted

 

 

897

 

 

$

9.63

 

PSUs, RSUs and restricted stock vested

 

 

(368

)

 

$

17.23

 

PSUs, RSUs and restricted stock forfeited

 

 

(208

)

 

$

18.24

 

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

 

 

1,891

 

 

$

14.58

 

As of December 31, 2016 have been adjusted for the actual shares vested in 2017 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, 2016

 

 

527

 

 

$

20.53

 

PSUs, RSUs and restricted stock granted

 

 

950

 

 

$

21.69

 

PSUs, RSUs and restricted stock vested

 

 

(154

)

 

$

20.84

 

PSUs, RSUs and restricted stock forfeited

 

 

(31

)

 

$

20.99

 

Unvested RSUs and restricted stock outstanding, December 31, 2017

 

 

1,292

 

 

$

21.33

 

At December 31, 2017,2019, total unrecognized compensation costexpense related to the non-vested portion of market-based PSUs, RSUs and restricted stock not yet recognized was approximately $13.9$17.2 million, which is expected to be recognized over an average remaining recognition period of 3.2 years. In addition, there was $11.42.9 years and adjusted for actual forfeitures as they occur.

The following table details the significant assumptions that impact the fair value estimate of the market-based PSUs:

 

 

2019

 

2018

 

 

2017

 

Estimated fair value per share

 

$9.53 to $18.05

 

$

16.59

 

 

$

24.17

 

Expected volatility

 

32.7% to  38.9%

 

27.98% to 31.58%

 

 

 

27.03

%

Risk-free interest rate

 

1.6% to 2.46%

 

2.11% to 2.99%

 

 

 

1.78

%

Expected dividend yield

 

2.3% to 4.09%

 

1.83% to 2.49%

 

 

 

1.74

%

As of December 31, 2019, 1.0 million shares were available for issuance under shareholder-approved equity plans in connection with the grant and exercise of stock options, PSU’s, RSU’s or restricted stock.


Stock Options

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

 

 

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, 2018

 

 

4,382

 

 

$

22.91

 

 

 

4.10

 

 

$

 

Stock options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

(34

)

 

$

15.53

 

 

 

 

 

 

 

 

 

Stock options forfeited

 

 

(32

)

 

$

15.56

 

 

 

 

 

 

 

 

 

Stock options expired

 

 

(744

)

 

$

23.72

 

 

 

 

 

 

 

 

 

Stock options outstanding, December 31, 2019

 

 

3,572

 

 

$

22.88

 

 

 

3.40

 

 

$

 

Stock options exercisable, December 31, 2019

 

 

3,570

 

 

$

22.89

 

 

 

3.40

 

 

$

 

All of the options above were issued at exercise prices that approximated fair market value at the date of grant. As of December 31, 2019, total unrecognized compensation expense related to unvested performance-based PSUs,non-vested stock options was approximately $11 thousand, which willis expected to be recognized over the requisite servicean average remaining recognition period of three yearsone year and will be adjusted for actual forfeitures as achievementthey occur.

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 2019 and the performance obligation becomes probable. Forexercise price, multiplied by the year endednumber of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2019. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock and was $0 as of December 31, 2019.

The total pre-tax intrinsic value of options exercised during 2019, 2018 and 2017 no compensation expense was recognized related to these performance-based PSUs.$0.1 million, $0.2 million and $3.4 million, respectively. The fair value of options fully vesting during 2019, 2018 and 2017 was $0.9 million, $2.5 million and $4.3 million, respectively.

The following table further describes our stock options outstanding as of December 31, 2019:

 


 

 

Options Outstanding

 

 

Options Exercisable

 

Range of

Exercise Prices

 

Options

Outstanding at

December 31, 2019

(In thousands)

 

 

Weighted Avg.

Remaining

Contractual Life

in Years

 

 

Weighted

Average

Exercise

Price

 

 

Options

Exercisable at

December 31, 2019

(In thousands)

 

 

Weighted

Average

Exercise

Price

 

$14.88 – $18.96

 

 

1,135

 

 

 

4.90

 

 

$

15.89

 

 

 

1,133

 

 

$

15.89

 

$18.97 – $23.45

 

 

685

 

 

 

4.70

 

 

$

19.10

 

 

 

685

 

 

$

19.10

 

$23.46 – $30.35

 

 

686

 

 

 

3.67

 

 

$

24.17

 

 

 

686

 

 

$

24.17

 

$30.36 – $41.92

 

 

1,066

 

 

 

1.29

 

 

$

31.93

 

 

 

1,066

 

 

$

31.93

 

 

 

 

3,572

 

 

 

 

 

 

 

 

 

 

 

3,570

 

 

 

 

 

Valuation and Expense Information

We use theThe Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining(the “Black-Scholes Model”) is used to determine 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. We use a Monte Carlo Simulation valuation method to value our market-based PSUs. The fair value of our performance-based PSUs, RSUs and restricted stock issued is equal to the closing price of our stock on the date of grant. 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 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 option grants in 2017. The weighted-average estimated fair value of0 stock options granted to employeesin during the years ended December 31, 2016 and 2015 was $5.22 per share and $4.28 per share, respectively, with the following weighted-average assumptions:

 

 

2016

 

 

2015

 

Expected volatility

 

 

34.79

%

 

 

34.57

%

Risk-free interest rate

 

 

1.36

%

 

 

1.81

%

Expected dividend yield

 

 

1.98

%

 

 

2.35

%

Expected life (in years)

 

 

6.25

 

 

 

6.23

 

We based our estimate of expected volatility for the years ended December 31, 2016 and 2015 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. We have no reason to believe the future volatility of our stock price is likely to differ from its past 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.

The 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 years ended December 31, 2017, 2016 and 2015 was $24.17 per share, $23.50 per share and $17.64 per share, respectively, with the following assumptions:

 

 

2017

 

 

2016

 

 

2015

 

Expected volatility

 

 

27.03

%

 

 

29.79

%

 

 

31.34

%

Risk-free interest rate

 

 

1.78

%

 

 

1.17

%

 

 

1.20

%

Expected dividend yield

 

 

1.74

%

 

 

1.80

%

 

 

2.35

%

2019, 2018 or 2017.

 


Note 45 – Investments

AtDebt Securities and Other Investments

As of  December 31, 2017,2019, we held the following debt securities and other investments, recorded at either fair value or cost:value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value /

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

17,804

 

 

$

2,175

 

 

$

(96

)

 

$

19,883

 

Corporate bonds

 

 

32,654

 

 

 

44

 

 

 

(155

)

 

 

32,543

 

 

$

9,304

 

 

$

80

 

 

$

 

 

$

9,384

 

Municipal fixed-rate bonds

 

 

2,902

 

 

 

2

 

 

 

(22

)

 

 

2,882

 

 

 

930

 

 

 

 

 

 

 

 

 

930

 

Asset-backed bonds

 

 

6,545

 

 

 

1

 

 

 

(20

)

 

 

6,526

 

 

 

6,867

 

 

 

26

 

 

 

(3

)

 

 

6,890

 

Mortgage/Agency-backed bonds

 

 

5,554

 

 

 

1

 

 

 

(46

)

 

 

5,509

 

 

 

6,944

 

 

 

26

 

 

 

(8

)

 

 

6,962

 

U.S. government bonds

 

 

14,477

 

 

 

 

 

 

(174

)

 

 

14,303

 

 

 

12,311

 

 

 

21

 

 

 

(9

)

 

 

12,323

 

Foreign government bonds

 

 

725

 

 

 

5

 

 

 

 

 

 

730

 

 

 

372

 

 

 

 

 

 

(1

)

 

 

371

 

Marketable equity securities

 

 

33,478

 

 

 

3,034

 

 

 

(850

)

 

 

35,662

 

Available-for-sale securities held at fair value

 

$

114,139

 

 

$

5,262

 

 

$

(1,363

)

 

$

118,038

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,800

 

Other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

547

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

146,385

 

Variable rate demand notes

 

 

800

 

 

 

 

 

 

 

 

 

800

 

Available-for-sale debt securities held at fair value

 

$

37,528

 

 

$

153

 

 

$

(21

)

 

$

37,660

 

AtAs of December 31, 2016,2018, we held the following debt securities and other investments, recorded at either fair value or cost:value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value /

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

12,367

 

 

$

2,271

 

 

$

(42

)

 

$

14,596

 

Corporate bonds

 

 

66,522

 

 

 

64

 

 

 

(174

)

 

 

66,412

 

 

$

20,777

 

 

$

19

 

 

$

(112

)

 

$

20,684

 

Municipal fixed-rate bonds

 

 

11,799

 

 

 

12

 

 

 

(37

)

 

 

11,774

 

 

 

1,339

 

 

 

 

 

 

(26

)

 

 

1,313

 

Asset-backed bonds

 

 

10,201

 

 

 

19

 

 

 

(14

)

 

 

10,206

 

 

 

5,230

 

 

 

5

 

 

 

(14

)

 

 

5,221

 

Mortgage/Agency-backed bonds

 

 

13,080

 

 

 

15

 

 

 

(91

)

 

 

13,004

 

 

 

3,833

 

 

 

2

 

 

 

(44

)

 

 

3,791

 

U.S. government bonds

 

 

30,022

 

 

 

15

 

 

 

(270

)

 

 

29,767

 

 

 

9,271

 

 

 

1

 

 

 

(66

)

 

 

9,206

 

Foreign government bonds

 

 

3,729

 

 

 

2

 

 

 

(1

)

 

 

3,730

 

 

 

592

 

 

 

 

 

 

(8

)

 

 

584

 

Variable rate demand notes

 

 

11,855

 

 

 

 

 

 

 

 

 

11,855

 

Marketable equity securities

 

 

30,571

 

 

 

311

 

 

 

(1,503

)

 

 

29,379

 

Available-for-sale securities held at fair value

 

$

190,146

 

 

$

2,709

 

 

$

(2,132

)

 

$

190,723

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,800

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

767

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

219,290

 

Available-for-sale debt securities held at fair value

 

$

41,042

 

 

$

27

 

 

$

(270

)

 

$

40,799

 

 

As of December 31, 2017, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, and foreign government bonds2019, 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

 

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-backed

bonds

 

 

Mortgage /

Agency-backed

bonds

 

 

U.S.

government

bonds

 

 

Foreign

government

bonds

 

Less than one year

 

$

12,021

 

 

$

891

 

 

$

143

 

 

$

 

 

$

3,073

 

 

$

 

 

$

4,005

 

 

$

 

 

$

396

 

 

$

 

 

$

 

 

$

 

One to two years

 

 

9,145

 

 

 

826

 

 

 

2,367

 

 

 

 

 

 

5,960

 

 

 

 

 

 

4,120

 

 

 

930

 

 

 

760

 

 

 

213

 

 

 

1,347

 

 

 

 

Two to three years

 

 

7,345

 

 

 

212

 

 

 

2,245

 

 

 

 

 

 

3,568

 

 

 

730

 

 

 

967

 

 

 

 

 

 

1,632

 

 

 

1,424

 

 

 

9,344

 

 

 

 

Three to five years

 

 

4,032

 

 

 

953

 

 

 

810

 

 

 

356

 

 

 

1,702

 

 

 

 

 

 

292

 

 

 

 

 

 

2,092

 

 

 

494

 

 

 

1,632

 

 

 

371

 

Five to ten years

 

 

 

 

 

 

 

 

158

 

 

 

1,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,719

 

 

 

792

 

 

 

 

 

 

 

More than ten years

 

 

 

 

 

 

 

 

803

 

 

 

4,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

291

 

 

 

4,039

 

 

 

 

 

 

 

Total

 

$

32,543

 

 

$

2,882

 

 

$

6,526

 

 

$

5,509

 

 

$

14,303

 

 

$

730

 

 

$

9,384

 

 

$

930

 

 

$

6,890

 

 

$

6,962

 

 

$

12,323

 

 

$

371

 

 

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, 2019, 2018 and 2017:

(In thousands)

Year Ended December 31,

 

2019

 

 

2018

 

 

2017

 

Gross realized gains on debt securities

 

$

108

 

 

$

57

 

 

$

169

 

Gross realized losses on debt securities

 

 

(50

)

 

 

(592

)

 

 

(226

)

Total gain (loss) recognized, net

 

$

58

 

 

$

(535

)

 

$

(57

)

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.

 


We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For each of the years ended December 31, 2017, 2016 and 2015, we recorded a charge of $0.2 million, $0.8 million and $0.2 million, respectively, related to the other-than-temporary impairment of certain marketable equity securities and our deferred compensation plan assets.

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 investments for the years ended December 31, 2017, 2016 and 2015:

Year Ended December 31,

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Gross realized gains

 

$

5,258

 

 

$

7,530

 

 

$

10,906

 

Gross realized losses

 

$

(573

)

 

$

(1,607

)

 

$

(569

)

The following table presents the breakdown of debt securities and other investments with unrealized losses atas of December 31, 2017:2019:

 

 

Continuous Unrealized

Loss Position for Less

than 12 Months

 

 

Continuous Unrealized

Loss Position for 12

Months or Greater

 

 

Total

 

(In thousands)

 

Continuous Unrealized

Loss Position for Less

than 12 Months

 

 

Continuous Unrealized

Loss Position for 12

Months or Greater

 

 

Total

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Deferred compensation plan assets

 

$

1,922

 

 

$

(81

)

 

$

262

 

 

$

(15

)

 

$

2,184

 

 

$

(96

)

Corporate bonds

 

 

16,015

 

 

 

(58

)

 

 

6,112

 

 

 

(97

)

 

 

22,127

 

 

 

(155

)

 

 

203

 

 

 

 

 

 

 

 

 

 

 

 

203

 

 

 

 

Municipal fixed-rate bonds

 

 

230

 

 

 

 

 

 

1,165

 

 

 

(22

)

 

 

1,395

 

 

 

(22

)

 

 

930

 

 

 

 

 

 

 

 

 

 

 

 

930

 

 

 

 

Asset-backed bonds

 

 

4,941

 

 

 

(17

)

 

 

179

 

 

 

(3

)

 

 

5,120

 

 

 

(20

)

 

 

797

 

 

 

(3

)

 

 

 

 

 

 

 

 

797

 

 

 

(3

)

Mortgage/Agency-backed bonds

 

 

3,062

 

 

 

(8

)

 

 

1,673

 

 

 

(38

)

 

 

4,735

 

 

 

(46

)

 

 

2,594

 

 

 

(6

)

 

 

136

 

 

 

(2

)

 

 

2,730

 

 

 

(8

)

U.S. government bonds

 

 

2,754

 

 

 

(26

)

 

 

11,549

 

 

 

(148

)

 

 

14,303

 

 

 

(174

)

 

 

4,070

 

 

 

(9

)

 

 

 

 

 

 

 

 

4,070

 

 

 

(9

)

Marketable equity securities

 

 

10,169

 

 

 

(712

)

 

 

544

 

 

 

(138

)

 

 

10,713

 

 

 

(850

)

 

 

371

 

 

 

(1

)

 

 

 

 

 

 

 

 

371

 

 

 

(1

)

Total

 

$

39,093

 

 

$

(902

)

 

$

21,484

 

 

$

(461

)

 

$

60,577

 

 

$

(1,363

)

 

$

8,965

 

 

$

(19

)

 

$

136

 

 

$

(2

)

 

$

9,101

 

 

$

(21

)

 

The following table presents the breakdown of debt securities and other investments with unrealized losses atas of December 31, 2016:2018:

 

 

Continuous Unrealized

Loss Position for Less

than 12 Months

 

 

Continuous Unrealized

Loss Position for 12

Months or Greater

 

 

Total

 

(In thousands)

 

Continuous Unrealized

Loss Position for Less

than 12 Months

 

 

Continuous Unrealized

Loss Position for 12

Months or Greater

 

 

Total

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Deferred compensation plan assets

 

$

294

 

 

$

(12

)

 

$

245

 

 

$

(30

)

 

$

539

 

 

$

(42

)

Corporate bonds

 

 

32,562

 

 

 

(166

)

 

 

2,722

 

 

 

(8

)

 

 

35,284

 

 

 

(174

)

 

$

11,129

 

 

$

(60

)

 

$

3,608

 

 

$

(52

)

 

$

14,737

 

 

$

(112

)

Municipal fixed-rate bonds

 

 

8,936

 

 

 

(37

)

 

 

 

 

 

 

 

 

8,936

 

 

 

(37

)

 

 

 

 

 

 

 

 

1,136

 

 

 

(26

)

 

 

1,136

 

 

 

(26

)

Asset-backed bonds

 

 

2,986

 

 

 

(14

)

 

 

 

 

 

 

 

 

2,986

 

 

 

(14

)

 

 

1,874

 

 

 

(2

)

 

 

1,257

 

 

 

(12

)

 

 

3,131

 

 

 

(14

)

Mortgage/Agency-backed bonds

 

 

7,842

 

 

 

(81

)

 

 

1,239

 

 

 

(10

)

 

 

9,081

 

 

 

(91

)

 

 

1,021

 

 

 

(5

)

 

 

1,918

 

 

 

(39

)

 

 

2,939

 

 

 

(44

)

U.S. government bonds

 

 

26,449

 

 

 

(270

)

 

 

 

 

 

 

 

 

26,449

 

 

 

(270

)

 

 

6,527

 

 

 

(48

)

 

 

537

 

 

 

(18

)

 

 

7,064

 

 

 

(66

)

Foreign government bonds

 

 

924

 

 

 

(1

)

 

 

 

 

 

 

 

 

924

 

 

 

(1

)

 

 

584

 

 

 

(8

)

 

 

 

 

 

 

 

 

584

 

 

 

(8

)

Marketable equity securities

 

 

21,607

 

 

 

(1,200

)

 

 

1,495

 

 

 

(303

)

 

 

23,102

 

 

 

(1,503

)

Total

 

$

101,600

 

 

$

(1,781

)

 

$

5,701

 

 

$

(351

)

 

$

107,301

 

 

$

(2,132

)

 

$

21,135

 

 

$

(123

)

 

$

8,456

 

 

$

(147

)

 

$

29,591

 

 

$

(270

)

 

The decrease in unrealized losses during 2017,2019, as reflected in the table above, results from changes in market positions associated with our fixed income andportfolio.

Marketable Equity Securities

Our marketable equity investment portfolio. At December 31, 2017, a totalsecurities consist of 274 ofpublicly 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 (loss), 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.

ASU 2016-01 also provides a measurement alternative for equity investments that do not have a readily determinable fair value in which investments can be recorded at cost less impairment, if any, adjusted for observable price changes for an unrealized loss position.identical or similar investment. We elected to record our equity investment that does not have a readily determinable fair value using the measurement alternative method. As of December 31, 2018, the Company had a note receivable of approximately $4.3 million, which was included in other receivables on the Consolidated Balance Sheets. During the three months ended March 31, 2019, this amount was repaid and reissued in the form of debt and equity. Approximately $3.4 million was issued as an equity investment, which represented a non-cash investing activity. The carrying value of this investment under the measurement alternative was $3.4 million as of December 31, 2019. The remaining amount, approximately $0.9 million, was converted into a new note receivable, which is included in other receivables on the Consolidated Balance Sheets and represents a non-cash operating activity.

 


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

(In thousands)

 

2019

 

 

2018

 

Realized gains (losses) on equity securities sold

 

$

(96

)

 

$

1,306

 

Unrealized gains (losses) on equity securities held

 

 

11,472

 

 

 

(4,821

)

Total gain (loss) recognized, net

 

$

11,376

 

 

$

(3,515

)

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

U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of financial instruments:

Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly;

Level 3 – Significant unobservable inputs; 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.

We have categorized our cash equivalents and our investments held at fair value into a three-level fair valuethis 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, 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 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 securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

19,883

 

 

 

19,883

 

 

 

 

 

 

 

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

 

 

 

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – various industries

 

 

35,662

 

 

 

35,662

 

 

 

 

 

 

 

Available-for-sale securities

 

 

118,038

 

 

 

69,848

 

 

 

48,190

 

 

 

 

Total

 

$

127,888

 

 

$

75,699

 

 

$

52,189

 

 

$

 

 

Fair Value Measurements at December 31, 2016 Using

 

 

Fair Value Measurements as of December 31, 2019 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)

 

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,878

 

 

$

6,878

 

 

$

 

 

$

 

 

$

1,309

 

 

$

1,309

 

 

$

 

 

$

 

Commercial paper

 

 

17,222

 

 

 

 

 

 

17,222

 

 

 

 

Cash equivalents

 

 

24,100

 

 

 

6,878

 

 

 

17,222

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

14,596

 

 

 

14,596

 

 

 

 

 

 

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

66,412

 

 

 

 

 

 

66,412

 

 

 

 

 

 

9,384

 

 

 

 

 

 

9,384

 

 

 

 

Municipal fixed-rate bonds

 

 

11,774

 

 

 

 

 

 

11,774

 

 

 

 

 

 

930

 

 

 

 

 

 

930

 

 

 

 

Asset-backed bonds

 

 

10,206

 

 

 

 

 

 

10,206

 

 

 

 

 

 

6,890

 

 

 

 

 

 

6,890

 

 

 

 

Mortgage/Agency-backed bonds

 

 

13,004

 

 

 

 

 

 

13,004

 

 

 

 

 

 

6,962

 

 

 

 

 

 

6,962

 

 

 

 

U.S. government bonds

 

 

29,767

 

 

 

29,767

 

 

 

 

 

 

 

 

 

12,323

 

 

 

12,323

 

 

 

 

 

 

 

Foreign government bonds

 

 

3,730

 

 

 

 

 

 

3,730

 

 

 

 

 

 

371

 

 

 

 

 

 

371

 

 

 

 

Variable rate demand notes

 

 

11,855

 

 

 

 

 

 

11,855

 

 

 

 

 

 

800

 

 

 

 

 

 

800

 

 

 

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – various industries

 

 

29,379

 

 

 

29,379

 

 

 

 

 

 

 

 

 

35,501

 

 

 

35,501

 

 

 

 

 

 

 

Available-for-sale securities

 

 

190,723

 

 

 

73,742

 

 

 

116,981

 

 

 

 

Equity in escrow

 

 

298

 

 

 

298

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

21,698

 

 

 

21,698

 

 

 

 

 

 

 

Other investments

 

 

2,442

 

 

 

2,442

 

 

 

 

 

 

 

Total

 

$

214,823

 

 

$

80,620

 

 

$

134,203

 

 

$

 

 

$

98,908

 

 

$

73,571

 

 

$

25,337

 

 

$

 

 


 

 

Fair Value Measurements as of 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

 

 

$

 

 

$

 

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

 

 

 

 

 

 

 

Total

 

$

87,625

 

 

$

56,032

 

 

$

31,593

 

 

$

 

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.

Our municipal variable rate demand notes have a structure that implies a standard expected market price. The frequent interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.

Note 56 – 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) 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 agreements and are not offset in the Consolidated Balance Sheets. As of December 31, 2017,2019 and 2018, we had no0 foreign exchange forward contracts outstanding.    contracts.

The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of December 31, 2017 and 2016 were as follows:

(In thousands)

 

Balance Sheet

Location

 

2017

 

 

2016

 

Derivatives Not Designated as Hedging Instruments (Level 2):

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts – derivative assets

 

Other receivables

 

$

 

 

$

159

 

 

The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income (Loss) during the years ended December 31, 2017, 20162019, 2018 and 20152017 were as follows:

 

(In thousands)

 

Income Statement

Location

 

2017

 

 

2016

 

 

2015

 

 

Income Statement

Location

 

2019

 

 

2018

 

 

2017

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income (expense)

 

$

(754

)

 

$

724

 

 

$

511

 

 

Other income (expense)

 

$

 

 

$

13

 

 

$

(754

)

 


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, 2017, 20162019, 2018 and 20152017 were as follows:

 

 

Amount of Gains (Losses) Recognized in

 

 

Location of Gains

 

Amount of Gains (Losses) Reclassified

 

 

Location of

 

Amount of  Losses Reclassified

 

 

OCI on Derivatives

 

 

(Losses) Reclassified

 

from AOCI into Income

 

 

Losses Reclassified

 

from AOCI into Income

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

from AOCI into Income

 

2017

 

 

2016

 

 

2015

 

 

from AOCI into Income

 

2019

 

 

2018

 

 

2017

 

Derivatives Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

 

 

$

 

 

$

 

 

Cost of Sales

 

$

(897

)

 

$

 

 

$

 

 

Cost of Sales

 

$

 

 

$

 

 

$

(897

)

 


Note 67 – Inventory

AtAs of December 31, 20172019 and 2016,2018, inventory was comprised of the following:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Raw materials

 

$

44,185

 

 

$

40,461

 

 

$

36,987

 

 

$

45,333

 

Work in process

 

 

1,939

 

 

 

4,003

 

 

 

1,085

 

 

 

1,638

 

Finished goods

 

 

76,418

 

 

 

60,653

 

 

 

60,233

 

 

 

52,877

 

Total Inventory, net

 

$

122,542

 

 

$

105,117

 

 

$

98,305

 

 

$

99,848

 

 

We establishInventory reserves are established for estimated excess and obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fairnet realizable value of the inventory based upon assumptions about future demandon estimated reserve percentages, which consider historical usage, known trends, inventory age and market conditions. AtAs of December 31, 20172019 and 2016, raw materials reserves totaled $15.02018, our inventory reserve was $34.1 million and $14.6 million, respectively, and finished goods inventory reserves totaled $8.3 million and $10.6$30.0 million, respectively.

Note 78 – Property, Plant and Equipment

AtAs of December 31, 20172019 and 2016,2018, property, plant and equipment werewas comprised of the following:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Land

 

$

4,575

 

 

$

4,575

 

 

$

4,575

 

 

$

4,575

 

Building and land improvements

 

 

32,470

 

 

 

29,229

 

 

 

34,797

 

 

 

34,379

 

Building

 

 

68,301

 

 

 

68,301

 

 

 

68,157

 

 

 

68,183

 

Furniture and fixtures

 

 

19,489

 

 

 

18,477

 

 

 

19,959

 

 

 

19,831

 

Computer hardware and software

 

 

90,726

 

 

 

87,655

 

 

 

74,399

 

 

 

92,071

 

Engineering and other equipment

 

 

123,363

 

 

 

118,746

 

 

 

130,430

 

 

 

127,060

 

Total Property, Plant and Equipment

 

 

338,924

 

 

 

326,983

 

 

 

332,317

 

 

 

346,099

 

Less accumulated depreciation

 

 

(253,845

)

 

 

(242,514

)

 

 

(258,609

)

 

 

(265,464

)

Total Property, Plant and Equipment, net

 

$

85,079

 

 

$

84,469

 

 

$

73,708

 

 

$

80,635

 

 

Depreciation expense was $12.5 million, $12.7 million and $12.8 million $12.0for the years ended December 31, 2019, 2018 and 2017, respectively, which is recorded in cost of sales, selling, general and administrative expense and research and development expense in the consolidated statements of income.

We assess long-lived assets used in operations for potential 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. During the year ended December 31, 2019, the Company recognized impairment charges of $3.9 million related to the abandonment of certain information technology projects in which we had previously capitalized expenses related to these projects. The impairment charges were determined based on actual costs incurred as part of the projects. NaN impairment charges were recognized during the years ended December 31, 2018 and $12.3 million in 2017, 2016, and 2015, respectively.2017.

Note 9 – Leases

 

We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations. We also reviewed other contracts, such as manufacturing agreements and service agreements, for potential embedded leases. We specifically reviewed these other contracts to determine whether we have the right to substantially all of the economic benefit from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of a lease.

 


Note 8 –As of December 31, 2019, our operating leases had remaining lease terms of one month to six years, some of which included options to extend the leases for up to nine years, and some of which included options to terminate the leases within three months. For those leases that are reasonably assured to be renewed, we have included the option to extend as part of our right of use asset and lease liability. Leases with an initial term of 12 months or less were not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. Lease Arrangementsexpense related to these short-term leases was $0.4 million for the twelve months ended December 31, 2019, and is included in cost of sales, selling, general and administrative expenses and research and development expenses in the Consolidated Statements of Income. Lease expense related to variable lease payments that do not depend on an index or rate, such as real estate taxes and insurance reimbursements, was $0.9 million for the twelve months ended December 31, 2019. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected to not separate lease and nonlease components. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Supplemental balance sheet information related to operating leases is as follows:

 

 

 

 

 

December 31,

 

 

January 1,

 

(In thousands)

 

Classification

 

2019

 

 

2019 (1)

 

Assets

 

 

 

 

 

 

 

 

 

 

Right of use lease assets

 

Other assets

 

$

8,452

 

 

$

10,322

 

Total lease asset

 

 

 

$

8,452

 

 

$

10,322

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current lease liability

 

Accrued expenses

 

$

2,676

 

 

$

2,948

 

Non-current lease liability

 

Other non-current liabilities

 

 

5,818

 

 

 

7,374

 

Total lease liability

 

 

 

$

8,494

 

 

$

10,322

 

(1)

Reflects the adoption of the new lease accounting standard on January 1, 2019.

The components of lease expense included in the Consolidated Statements of Income for the twelve months ended December 31, 2019 were as follows:

 

 

For the Year Ended December 31,

 

(In thousands)

 

2019

 

Research and development expenses

 

$

2,417

 

Selling, general and administrative expenses

 

 

1,400

 

Cost of sales

 

 

64

 

Total operating lease expense

 

$

3,881

 

As of December 31, 2019, operating lease liabilities included on the Consolidated Balance Sheet by future maturity were as follows:

(In thousands)

 

Amount

 

2020

 

$

2,856

 

2021

 

 

2,412

 

2022

 

 

1,705

 

2023

 

 

1,160

 

2024

 

 

482

 

Thereafter

 

 

264

 

Total lease payments

 

 

8,879

 

Less: Interest

 

 

(385

)

Present value of lease liabilities

 

$

8,494

 

Future operating lease payments include $0.7 million related to options to extend lease terms that are reasonably certain of being exercised. There are no legally binding leases that have not yet commenced.  


As of December 31, 2018, future minimum rental payments under non-cancelable operating leases, including renewals determined to be reasonably assured as of December 31, 2018, with original maturities of greater than 12 months, were as follows:

(In thousands)

 

Amount (1)

 

2019

 

$

3,873

 

2020

 

 

3,580

 

2021

 

 

2,771

 

2022

 

 

2,053

��

2023

 

 

1,317

 

Thereafter

 

 

762

 

Total

 

$

14,356

 

(1)

Certain renewal options were subsequently determined to not be reasonably assured of renewal upon the Company’s adoption of the new lease accounting standard on January 1, 2019.

Our leases do not provide an implicit rate and therefore we use an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019, for operating leases that commenced on or prior to that date. The incremental borrowing rate was determined on a portfolio basis by grouping leases with similar terms as well as grouping leases based on a U.S. dollar or Euro functional currency.  The actual rate was then determined based on a credit spread over LIBOR as well as the Bloomberg Curve Matrix for the U.S. Communications section. The following table provides information about our weighted average lease terms and weighted average discount rates as of December 31, 2019:

As of  December 31,

2019

Weighted average remaining lease term (years)

     Operating leases with USD functional currency

2.6

     Operating leases with Euro functional currency

4.4

Weighted average discount rate

     Operating leases with USD functional currency

4.02

%

     Operating leases with Euro functional currency

1.84

%

Supplemental cash flow information related to operating leases is as follows:

 

 

As of  December 31,

 

(In thousands)

 

2019

 

Cash paid for amounts included in the measurement of operating lease assets / liabilities

 

 

 

 

     Cash used in operating activities related to operating leases

 

$

3,439

 

Right-of-use assets obtained in exchange for lease obligations

 

$

11,615

 


Sales-Type Leases

We are the lessor in sales-type lease arrangements for network equipment, which have initial terms of 18 monthsup to five years. Our sales-type lease arrangements contain either a provision whereby the network equipment reverts back to us upon the expiration of the lease or a provision that allows the lessee to purchase the network equipment at a bargain purchase amount at the end of the lease. In addition, our sales-type lease arrangements do not contain any residual value guarantees or material restrictive covenants. The allocation of the consideration between lease and nonlease components is determined by stand-alone selling price by component. The net investment in sales-type leases consists of lease receivables less unearned income. Collectability of sales-type leases is evaluated periodically onat an individual customer level. AtThe Company has elected to exclude taxes related to sales-type leases from revenue and the associated expense of such taxes. As of December 31, 2017,2019 and 2018, we had nodid 0t have an allowance for credit losses for our net investment in sales-type leases. As of December 31, 20172019 and 2016,2018, the components of the net investment in sales-type leases were as follows:

 

 

December 31,

 

 

December 31,

 

(In thousands)

 

2019

 

 

2018

 

Current minimum lease payments receivable(1)

 

$

1,201

 

 

$

11,339

 

Non-current minimum lease payments receivable(2)

 

 

889

 

 

 

1,670

 

Total minimum lease payments receivable

 

 

2,090

 

 

 

13,009

 

Less: Current unearned revenue(1)

 

 

365

 

 

 

631

 

Less: Non-current unearned revenue(2)

 

 

163

 

 

 

473

 

Net investment in sales-type leases

 

$

1,562

 

 

$

11,905

 

 

(In thousands)

 

2017

 

 

2016

 

Current minimum lease payments receivable (included in other receivables)

 

$

11,325

 

 

$

2,141

 

Non-current minimum lease payments receivable (included in other assets)

 

 

2,913

 

 

 

2,912

 

Total minimum lease payments receivable

 

 

14,238

 

 

 

5,053

 

Less: Current unearned revenue

 

 

707

 

 

 

841

 

Less: Non-current unearned revenue

 

 

787

 

 

 

1,153

 

Net investment in sales-type leases

 

$

12,744

 

 

$

3,059

 

(1)

Included in other receivables on the Consolidated Balance Sheet.

(2)

Included in other assets on the Consolidated Balance Sheet.

 

FutureThe components of sales-type lease gross profit recognized at the lease commencement date and interest and dividend income, included in the Consolidated Statements of Income for the twelve months ended December 31, 2019 were as follows:

(In thousands)

 

For the Year Ended December 31, 2019

 

Sales - Network Solutions

 

$

1,723

 

Cost of sales - Network Solutions

 

 

675

 

Gross profit

 

$

1,048

 

 

 

 

 

 

Interest and dividend income

 

$

357

 

As of December 31, 2019 future minimum lease payments to be received from sales-type leases at December 31, 2017 arewere as follows:

(In thousands)

 

Amount

 

 

Amount

 

2018

 

$

11,211

 

2019

 

 

2,172

 

2020

 

 

592

 

 

$

1,201

 

2021

 

 

205

 

 

 

565

 

2022

 

 

58

 

 

 

232

 

2023

 

 

86

 

2024

 

 

6

 

Total

 

$

14,238

 

 

$

2,090

 

 

Note 910 – Goodwill and Intangible Assets

Goodwill, all of which relates to our acquisitionacquisitions of Bluesocket, Inc., in 2011 and SmartRG in 2018, was $3.5$7.0 million atas of December 31, 20172019 and 2016,$7.1 million as of December 31, 2018 of which $3.1$6.6 million and $0.4 million iswas allocated to our Network Solutions and Services & Support reportable segments, respectively.respectively, for the year ended December 31, 2019, and of which $6.7 million and $0.4 million was allocated to our Network Solutions and Services & Support reportable segments, respectively, for the year ended December 31, 2018. Goodwill related to our SmartRG acquisition was reduced by $0.1 million during the twelve months ended December 31, 2019 as a result of a measurement period adjustment.


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 infor the years ended December 31, 2019, 2018 and 2017, we concludedthere were no events or circumstances that it wasoccurred that would more likely than not necessary to performreduce the two-step impairment test. There have been no impairment losses recognized since the acquisition in 2011.fair value of goodwill below its carrying value.

Note 11 – Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets. The following table presentsAssets

As of December 31, 2019 and 2018, our intangible assets aswere comprised of December 31, 2017 and 2016:the following:

 

 

2019

 

 

2018

 

(In thousands)

 

2017

 

 

2016

 

 

Gross Value

 

 

Accumulated

Amortization

 

 

Net Value

 

 

Gross Value

 

 

Accumulated

Amortization

 

 

Net Value

 

 

Gross Value

 

 

Accumulated

Amortization

 

 

Net Value

 

 

Gross Value

 

 

Accumulated

Amortization

 

 

Net Value

 

Customer relationships

 

$

7,474

 

 

$

(4,283

)

 

$

3,191

 

 

$

6,899

 

 

$

(3,208

)

 

$

3,691

 

 

$

22,356

 

 

$

(7,233

)

 

$

15,123

 

 

$

22,455

 

 

$

(5,380

)

 

$

17,075

 

Developed technology

 

 

5,524

 

 

 

(4,663

)

 

 

861

 

 

 

5,184

 

 

 

(3,801

)

 

 

1,383

 

 

 

10,170

 

 

 

(3,379

)

 

 

6,791

 

 

 

12,801

 

 

 

(4,867

)

 

 

7,934

 

Licensed technology

 

 

5,900

 

 

 

(1,174

)

 

 

4,726

 

 

 

5,900

 

 

 

(520

)

 

 

5,380

 

Supplier relationships

 

 

2,800

 

 

 

(2,508

)

 

 

292

 

 

 

2,800

 

 

 

(1,108

)

 

 

1,692

 

Intellectual property

 

 

2,340

 

 

 

(2,262

)

 

 

78

 

 

 

2,340

 

 

 

(2,129

)

 

 

211

 

 

 

 

 

 

 

 

 

 

 

 

930

 

 

 

(930

)

 

 

 

Supply agreement

 

 

1,400

 

 

 

(1,400

)

 

 

 

 

 

1,400

 

 

 

(544

)

 

 

856

 

License

 

 

500

 

 

 

(500

)

 

 

 

 

 

500

 

 

 

(113

)

 

 

387

 

Patent

 

 

500

 

 

 

(89

)

 

 

411

 

 

 

500

 

 

 

(20

)

 

 

480

 

Licensing agreements

 

 

560

 

 

 

(79

)

 

 

481

 

 

 

560

 

 

 

(5

)

 

 

555

 

Patents

 

 

500

 

 

 

(226

)

 

 

274

 

 

 

500

 

 

 

(157

)

 

 

343

 

Trade names

 

 

370

 

 

 

(335

)

 

 

35

 

 

 

370

 

 

 

(285

)

 

 

85

 

 

 

310

 

 

 

(176

)

 

 

134

 

 

 

310

 

 

 

(106

)

 

 

204

 

Non-compete

 

 

200

 

 

 

(115

)

 

 

85

 

 

 

200

 

 

 

(26

)

 

 

174

 

 

 

 

 

 

 

 

 

 

 

 

200

 

 

 

(200

)

 

 

 

Total

 

$

18,308

 

 

$

(13,647

)

 

$

4,661

 

 

$

17,393

 

 

$

(10,126

)

 

$

7,267

 

 

$

42,596

 

 

$

(14,775

)

 

$

27,821

 

 

$

46,456

 

 

$

(13,273

)

 

$

33,183

 

 

Amortization expense was $2.9$5.3 million, $2.5$2.3 million and $1.9$2.9 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.


As of December 31, 2017,2019, the estimated future amortization expense of intangible assets is as follows:

 

(In thousands)

 

Amount

 

 

Amount

 

2018

 

$

1,212

 

2019

 

 

697

 

2020

 

 

659

 

 

$

4,444

 

2021

 

 

603

 

 

 

4,095

 

2022

 

 

567

 

 

 

3,471

 

2023

 

 

3,320

 

2024

 

 

3,226

 

Thereafter

 

 

923

 

 

 

9,265

 

Total

 

$

4,661

 

 

$

27,821

 

 

Note 1012 – Alabama State Industrial Development Authority Financing and Economic Incentives

In conjunction with anthe 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”(“the Authority”). Pursuant to the program, on January 13, 1995, the Authority issued $20.0 million of its taxable revenue bonds (the “Taxable Revenue Bonds”) and loaned the proceeds from the sale of the bondsTaxable Revenue Bonds to ADTRAN. The bondsFurther advances on the Taxable Revenue Bonds were originally purchasedmade by AmSouth Bank of Alabama, Birmingham, 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 RestatedThe Taxable Revenue Bond (“Amended and Restated Bond”) was issued and the original financing agreement was amended. The Amended and Restated Bond bearsBonds bore interest, payable monthly. Themonthly with an interest rate isof 2% per annum. The Amended and Restated Bond maturesTaxable Revenue Bond’s outstanding aggregate principal amount of $24.6 million matured on January 1, 2020 and is currently outstandingwas repaid in the aggregate principal amount of $26.7 million.full on January 2, 2020. The estimated fair value of the bond using a level 2 valuation technique atas of December 31, 20172019 was approximately $26.7 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.$24.6 million. We are required to make payments to the Authority in amounts necessary to pay the interest on the Amended and Restated Bond.Taxable Revenue Bonds. Included in long-termshort-term investments atas of December 31, 20172019 is $27.8$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 BondTaxable Revenue Bonds with the collateral deposit in order to reduce the balance of the indebtedness.


In conjunction with this program, we arewere eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings that we arewere required to remit to the state for those employment positions that qualify under the program. We realized economic incentives related to payroll withholdings totaling $1.2 million, $1.4 million and $1.5 million for the year ended December 31, 2017 and $1.3 million for each of the years ended December 31, 20162019, 2018 and 2015.2017, respectively. This program concluded on January 2, 2020 following the maturity of the Taxable Revenue Bonds. No additional benefits will be received in future periods.

We made principal payments of $1.0 million and $1.1 million for each of the years ended December 31, 20172019 and 2016, and anticipate making a2018. No additional principal paymentpayments will be made in 2018. At December 31, 2017, $1.1 million of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance Sheets.future periods.

Note 1113 – Income Taxes

A summary of the components of the provisionexpense (benefit) for income taxes for the years ended December 31, 2017, 20162019, 2018 and 20152017 is as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

466

 

 

$

12,733

 

 

$

7,504

 

 

$

(518

)

 

$

(8,001

)

 

$

466

 

State

 

 

(150

)

 

 

1,141

 

 

 

279

 

 

 

(1,065

)

 

 

(476

)

 

 

(150

)

International

 

 

6,458

 

 

 

477

 

 

 

(29

)

 

 

(282

)

 

 

11,705

 

 

 

6,458

 

Total Current

 

 

6,774

 

 

 

14,351

 

 

 

7,754

 

 

 

(1,865

)

 

 

3,228

 

 

 

6,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

8,024

 

 

 

647

 

 

 

(585

)

 

 

24,801

 

 

 

(14,448

)

 

 

8,024

 

State

 

 

1,882

 

 

 

73

 

 

 

(66

)

 

 

5,815

 

 

 

(3,390

)

 

 

1,882

 

International

 

 

4,167

 

 

 

(3,405

)

 

 

(41

)

 

 

(546

)

 

 

581

 

 

 

4,167

 

Total Deferred

 

 

14,073

 

 

 

(2,685

)

 

 

(692

)

 

 

30,070

 

 

 

(17,257

)

 

 

14,073

 

Total Provision for Income Taxes

 

$

20,847

 

 

$

11,666

 

 

$

7,062

 

Total Income Tax Expense (Benefit)

 

$

28,205

 

 

$

(14,029

)

 

$

20,847

 

 


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

 

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Tax provision computed at the federal statutory rate

 

 

35.00

%

 

 

35.00

%

 

 

35.00

%

 

 

21.00

%

 

 

21.00

%

 

 

35.00

%

State income tax provision, net of federal benefit

 

 

2.17

 

 

 

3.93

 

 

 

4.86

 

 

 

6.97

 

 

 

14.53

 

 

 

2.17

 

Federal research credits

 

 

(11.88

)

 

 

(8.15

)

 

 

(12.55

)

 

 

15.53

 

 

 

14.23

 

 

 

(11.88

)

Foreign taxes

 

 

(2.27

)

 

 

(0.34

)

 

 

2.10

 

 

 

2.83

 

 

 

(11.45

)

 

 

(2.27

)

Tax-exempt income

 

 

(0.75

)

 

 

(0.53

)

 

 

(1.94

)

 

 

0.49

 

 

 

0.45

 

 

 

(0.75

)

State tax incentives

 

 

(2.71

)

 

 

(2.77

)

 

 

(5.04

)

 

 

3.85

 

 

 

3.15

 

 

 

(2.71

)

Change in valuation allowance

 

 

(172.82

)

 

 

 

 

 

 

Foreign tax credits

 

 

16.69

 

 

 

 

 

 

 

Stock-based compensation

 

 

1.43

 

 

 

2.53

 

 

 

6.91

 

 

 

(6.01

)

 

 

(2.87

)

 

 

1.43

 

Domestic production activity deduction

 

 

(1.13

)

 

 

(2.23

)

 

 

(3.17

)

 

 

 

 

 

 

 

 

(1.13

)

Bargain purchase

 

 

 

 

 

(2.64

)

 

 

 

 

 

 

 

 

8.82

 

 

 

 

Impact of U.S. tax reform

 

 

26.70

 

 

 

 

 

 

 

 

 

 

 

 

12.00

 

 

 

26.70

 

Global intangible low-taxed income ("GILTI")

 

 

(1.87

)

 

 

(17.48

)

 

 

 

Other, net

 

 

0.09

 

 

 

0.08

 

 

 

1.30

 

 

 

(0.49

)

 

 

(0.34

)

 

 

0.09

 

Effective Tax Rate

 

 

46.65

%

 

 

24.88

%

 

 

27.47

%

 

 

(113.83

)%

 

 

42.04

%

 

 

46.65

%

 

Income (loss) before provisionexpense (benefit) for income taxes for the years ended December 31, 2017, 20162019, 2018 and 20152017 is as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

U.S. entities

 

$

26,552

 

 

$

54,077

 

 

$

27,400

 

 

$

(29,829

)

 

$

(74,131

)

 

$

26,552

 

International entities

 

 

18,135

 

 

 

(7,182

)

 

 

(1,692

)

 

 

5,052

 

 

 

40,760

 

 

 

18,135

 

Total

 

$

44,687

 

 

$

46,895

 

 

$

25,708

 

 

$

(24,777

)

 

$

(33,371

)

 

$

44,687

 

 


Income (loss) before provisionexpense (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,revenue, many of which occur from our U.S. entity.

Deferred income taxes on the balance sheetConsolidated Balance Sheets 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 arewere as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Deferred tax assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

$

7,545

 

 

$

12,020

 

 

$

7,144

 

 

$

6,609

 

Accrued expenses

 

 

3,103

 

 

 

5,551

 

 

 

2,330

 

 

 

2,850

 

Investments

 

 

 

 

 

1,062

 

 

 

 

 

 

1,122

 

Deferred compensation

 

 

5,204

 

 

 

5,751

 

 

 

5,660

 

 

 

4,779

 

Stock-based compensation

 

 

2,988

 

 

 

4,724

 

 

 

2,451

 

 

 

3,069

 

Uncertain tax positions related to state taxes and related interest

 

 

370

 

 

 

762

 

 

 

241

 

 

 

326

 

Pensions

 

 

4,727

 

 

 

4,273

 

 

 

7,074

 

 

 

5,538

 

Foreign losses

 

 

3,091

 

 

 

6,486

 

 

 

2,925

 

 

 

3,097

 

State losses and credit carry-forwards

 

 

3,854

 

 

 

4,021

 

 

 

3,995

 

 

 

8,164

 

Federal loss and research carry-forwards

 

 

3,058

 

 

 

5,886

 

 

 

12,171

 

 

 

17,495

 

Lease liabilities

 

 

2,496

 

 

 

 

Capitalized research and development expenditures

 

 

22,230

 

 

 

 

Valuation allowance

 

 

(6,006

)

 

 

(6,149

)

 

 

(48,616

)

 

 

(5,816

)

Total Deferred Tax Assets

 

 

27,934

 

 

 

44,387

 

 

 

20,101

 

 

 

47,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

(3,553

)

 

 

(4,433

)

 

 

(2,815

)

 

 

(3,515

)

Intellectual property

 

 

(663

)

 

 

(1,918

)

 

 

(5,337

)

 

 

(6,531

)

Right of use lease assets

 

 

(2,496

)

 

 

 

Investments

 

 

(290

)

 

 

 

 

 

(1,892

)

 

 

 

Total Deferred Tax Liabilities

 

 

(4,506

)

 

 

(6,351

)

 

 

(12,540

)

 

 

(10,046

)

Net Deferred Tax Assets

 

$

23,428

 

 

$

38,036

 

 

$

7,561

 

 

$

37,187

 

 


OnIn December 22, 2017, the Tax Cuts and Jobs Act (the Act)(“the Act”) was signed into law. As a result of the Act, we have 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 have 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 is necessary to docomplete a more detailed analysis of historical foreign earnings, as well as the full impact relating to the write-down of deferred tax assets. Any subsequent adjustments to these amounts will be recorded as income tax expenseassets, was completed in the third quarter of 2018 and resulted in a tax benefit of $4.0 million for the analysis is complete.

Atyear ended December 31, 20172018.

As of December 31, 2019 and 2016,2018, 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, which resulted in a deferred tax benefit of $1.7$0.4 million and $1.5$2.8 million in 20172019 and 2016,2018, respectively, iswas recorded as an adjustment to other comprehensive income (loss), presented in the Consolidated Statements of Comprehensive Income.Income (Loss).

Based upon

The Company continually reviews the adequacy of our resultsvaluation allowance and recognizes the benefits of operations in 2017 and expected profitability in future years in a certain international jurisdiction, we concludeddeferred tax assets only as the reassessment indicates that it is more likely than not certain foreignthat the deferred tax assets will be realized in accordance with ASC 740, Income Taxes. Due to our recent decrease in revenue and profitability for 2019, and all other positive and negative objective evidence considered as part of our analysis, our ability to consider other subjective evidence such as projections for future growth is limited when evaluating whether our deferred tax assets will be realized. As of December 31, 2017,such, the remaining valuation allowance primarily relatesCompany was no longer able to conclude that it was more likely than not that our domestic deferred tax assets relatedwould be realized and a valuation allowance against our domestic deferred tax assets was established in the third quarter of 2019. The amount of the deferred tax assets considered realizable may be adjusted in future periods in the event that sufficient evidence is present to state credit carry-forwards from tax credits in excess of our annual tax liability to an individual state where we do not generate sufficient state income to offset the credit and net operating losses in foreign jurisdictions. We believesupport a conclusion that it is more likely than not that we will not realize the full benefitsall or a portion of theour domestic deferred tax assets arising from these losses and credits, and accordingly, we have providedwill be realized.


As of December 31, 2019, the Company had gross deferred tax assets totaling $56.2 million offset by a valuation allowance againsttotaling $48.6 million. Of the valuation allowance, $42.8 million was established in the current year primarily related to our domestic deferred tax assets. The remaining $5.8 million established in prior periods related to state research and development credit carryforwards and foreign net operating loss and research and development credit carryforwards where we lack sufficient activity to realize those deferred tax assets. The remaining $7.6 million in deferred tax assets that were not offset by a valuation allowance are located in various foreign jurisdictions where the Company believes it is more likely than not we will realize these deferred tax assets. The

Supplemental balance sheet information related to deferred tax assets is as follows:

 

 

December 31, 2019

 

(In thousands)

 

Deferred Tax Assets

 

 

Valuation Allowance

 

 

Deferred Tax Assets, net

 

Domestic

 

$

46,266

 

 

$

(46,266

)

 

$

 

International

 

 

9,911

 

 

 

(2,350

)

 

 

7,561

 

Total

 

$

56,177

 

 

$

(48,616

)

 

$

7,561

 

As of December 31, 2019 and 2018, the deferred tax assets for foreign and domestic loss carry-forwards, research and development tax credits, unamortized research and development costs and state credit carry-forwards totaled $41.3 million and $28.8 million, respectively. As of $10.0December 31, 2019, $19.1 million will expire between 2018 and 2030. The loss carry-forwards were acquired through acquisitions in 2009 and 2011. We will continue to assess the realization of ourthese deferred tax assets will expire at various times between 2020 and related valuation allowances.2039. The net change in our valuation allowance from December 31, 2016 to December 31, 2017 was $(0.1) million.remaining deferred tax assets will either amortize through 2029 or carryforward indefinitely.

As of December 31, 20172019 and 2016,2018, respectively, our cash and cash equivalents were $86.4$73.8 million and $79.9$105.5 million and short-term investments were $16.1$33.2 million and $43.2$3.2 million, which provided an available short-term liquidity of $102.6$107.0 million and $123.1$108.7 million. Of these amounts, our foreign subsidiaries held cash of $56.8$52.3 million and $42.1$87.1 million, respectively, representing approximately 55.4%48.9% and 34.2%80.1% 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 of 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 2019, 2018 and 2017, and 2016, we recorded no0 income tax benefit or expense was recorded for stock options exercised as an adjustment to equity.  In 2015, we recorded an income tax expense of  $(40) thousand 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.

The change in the unrecognized income tax benefits for the years ended December 31, 2017, 20162019, 2018 and 20152017 is reconciled below:

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Balance at beginning of period

 

$

2,226

 

 

$

2,537

 

 

$

3,334

 

 

$

1,868

 

 

$

2,366

 

 

$

2,226

 

Increases for tax position related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior years

 

 

465

 

 

 

95

 

 

 

 

 

 

 

 

 

3

 

 

 

465

 

Current year

 

 

285

 

 

 

428

 

 

 

280

 

 

 

161

 

 

 

254

 

 

 

285

 

Decreases for tax positions related to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior years

 

 

(14

)

 

 

 

 

 

(29

)

 

 

(71

)

 

 

 

 

 

(14

)

Settlements with taxing authorities

 

 

 

 

 

 

 

 

(103

)

Expiration of applicable statute of limitations

 

 

(596

)

 

 

(834

)

 

 

(945

)

 

 

(471

)

 

 

(755

)

 

 

(596

)

Balance at end of period

 

$

2,366

 

 

$

2,226

 

 

$

2,537

 

 

$

1,487

 

 

$

1,868

 

 

$

2,366

 

 

As of December 31, 2017, 2016,2019, 2018 and 2015,2017, our total liability for unrecognized tax benefits was $2.4$1.5 million, $2.2$1.9 million and $2.5$2.4 million, respectively, of which $2.2$1.4 million, $1.7 million and $1.8$2.2 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, 2017, 20162019, 2018 and 2015,2017, the balances of accrued interest and penalties were $0.8$0.5 million, $0.8$0.7 million and $0.9$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. for 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 2013.2016.


Note 1214 – 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 atas of December 31, 20172019 and 2016, are2018, were as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Change in projected benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of period

 

$

30,011

 

 

$

26,851

 

 

$

37,245

 

 

$

34,893

 

Service cost

 

 

1,260

 

 

 

1,211

 

 

 

1,471

 

 

 

1,193

 

Interest cost

 

 

607

 

 

 

720

 

 

 

634

 

 

 

727

 

Actuarial (gain) loss - experience

 

 

47

 

 

 

(431

)

Actuarial (gain) loss - assumptions

 

 

(1,294

)

 

 

2,628

 

Actuarial loss - experience

 

 

453

 

 

 

38

 

Actuarial loss - assumptions

 

 

5,091

 

 

 

2,139

 

Benefit payments

 

 

(80

)

 

 

(52

)

 

 

(166

)

 

 

(138

)

Effects of foreign currency exchange rate changes

 

 

4,342

 

 

 

(916

)

 

 

(826

)

 

 

(1,607

)

Projected benefit obligation at end of period

 

 

34,893

 

 

 

30,011

 

 

 

43,902

 

 

 

37,245

 

Change in plan assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of period

 

 

20,045

 

 

 

19,213

 

 

 

24,159

 

 

 

26,624

 

Actual return on plan assets

 

 

709

 

 

 

1,494

 

Actual gain (loss) on plan assets

 

 

4,392

 

 

 

(2,024

)

Contributions

 

 

3,001

 

 

 

 

 

 

 

 

 

688

 

Effects of foreign currency exchange rate changes

 

 

2,869

 

 

 

(662

)

 

 

(535

)

 

 

(1,129

)

Fair value of plan assets at end of period

 

 

26,624

 

 

 

20,045

 

 

 

28,016

 

 

 

24,159

 

Funded (unfunded) status at end of period

 

$

(8,269

)

 

$

(9,966

)

Unfunded status at end of period

 

$

(15,886

)

 

$

(13,086

)

 

The accumulated benefit obligation was $32.9$43.9 million and $28.7$37.2 million atas of December 31, 20172019 and 2016,2018, respectively. The increase in the accumulated benefit obligation isand the actuarial loss was primarily attributable to the weakening U.S. dollar to Euro exchange rate during 2017. The change in actuarial gain (loss) is primarily attributable to an increasea decrease in the discount rate used in 2017.during 2019.

The net amounts recognized in the balance sheet for the unfunded pension liability as of December 31, 20172019 and 2016 are2018 were as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Current liability

 

$

 

 

$

 

 

$

 

 

$

 

Non-current liability

 

 

8,269

 

 

 

9,966

 

Pension liability

 

 

15,886

 

 

 

13,086

 

Total

 

$

8,269

 

 

$

9,966

 

 

$

15,886

 

 

$

13,086

 

 


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, 2019, 2018 and 2017 2016 and 2015 arewere as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,260

 

 

$

1,211

 

 

$

1,314

 

 

$

1,471

 

 

$

1,193

 

 

$

1,260

 

Interest cost

 

 

607

 

 

 

720

 

 

 

615

 

 

 

634

 

 

 

727

 

 

 

607

 

Expected return on plan assets

 

 

(1,267

)

 

 

(1,057

)

 

 

(1,011

)

 

 

(1,392

)

 

 

(1,548

)

 

 

(1,267

)

Amortization of actuarial losses

 

 

309

 

 

 

175

 

 

 

407

 

 

 

795

 

 

 

247

 

 

 

309

 

Net periodic benefit cost

 

 

909

 

 

 

1,049

 

 

 

1,325

 

 

 

1,508

 

 

 

619

 

 

 

909

 

Other changes in plan assets and benefit obligations

recognized in other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial (gain) loss

 

 

(654

)

 

 

1,782

 

 

 

(2,303

)

 

 

2,488

 

 

 

5,638

 

 

 

(654

)

Amortization of actuarial losses

 

 

(406

)

 

 

(156

)

 

 

(396

)

 

 

(771

)

 

 

(196

)

 

 

(406

)

Amount recognized in other comprehensive income

 

 

(1,060

)

 

 

1,626

 

 

 

(2,699

)

Total recognized in net periodic benefit cost and other

comprehensive income

 

$

(151

)

 

$

2,675

 

 

$

(1,374

)

Amount recognized in other comprehensive income (loss)

 

 

1,717

 

 

 

5,442

 

 

 

(1,060

)

Total recognized in net periodic benefit cost and other

comprehensive income (loss)

 

$

3,225

 

 

$

6,061

 

 

$

(151

)

 


The amounts recognized in accumulated other comprehensive income (loss) as of December 31, 20172019 and 2016 are2018 were as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Net actuarial loss

 

$

(5,812

)

 

$

(6,871

)

 

$

(12,973

)

 

$

(11,256

)

 

The defined benefit pension plan is accounted for on an actuarial basis, which requires the selectionuse 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, 2019, 2018 and 2017 2016 and 2015 arewere as follows:

 

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Discount rates

 

 

1.90

%

 

 

2.64

%

 

 

2.20

%

Discount rate

 

 

1.75

%

 

 

2.13

%

 

 

1.90

%

Rate of compensation increase

 

 

2.00

%

 

 

2.00

%

 

 

2.25

%

 

 

2.00

%

 

 

2.00

%

 

 

2.00

%

Expected long-term rates of return

 

 

5.90

%

 

 

5.40

%

 

 

5.40

%

 

 

5.90

%

 

 

5.90

%

 

 

5.90

%

 

The weighted-average assumptions that were used to determine the benefit obligation atas of December 31, 20172019 and 2016:2018:

 

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Discount rates

 

 

2.13

%

 

 

1.90

%

Discount rate

 

 

1.00

%

 

 

1.75

%

Rate of compensation increase

 

 

2.00

%

 

 

2.00

%

 

 

2.00

%

 

 

2.00

%

 

Actuarial gains and losses are recorded in accumulated other comprehensive income.income (loss). 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 net periodic pension cost over the remaining service period of active participants. We estimate that $0.2$0.8 million will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in 20182020 for the net actuarial loss.


We do not anticipate making a contributionany contributions to thisthe pension plan in 2018. 2020.

The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid to participants:

 

(In thousands)

 

 

 

 

 

 

 

 

2018

 

$

549

 

2019

 

 

772

 

2020

 

 

1,090

 

 

$

515

 

2021

 

 

1,225

 

 

 

582

 

2022

 

 

1,315

 

 

 

619

 

2023 – 2027

 

 

6,301

 

2023

 

 

706

 

2024

 

 

789

 

Thereafter

 

 

4,872

 

Total

 

$

11,252

 

 

$

8,083

 

 


U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of financial instruments:

Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly;

Level 3 – Significant unobservable inputs; 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.

We have categorized our cash equivalents and our investments held at fair value into a three-level fair valuethis 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, 2017 Using

 

 

Fair Value Measurements at December 31, 2019 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)

 

 

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

 

 

$

 

 

$

 

 

$

691

 

 

$

691

 

 

$

 

 

$

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government bonds

 

 

6,645

 

 

 

6,645

 

 

 

 

 

 

 

Corporate bonds

 

 

14,349

 

 

 

14,349

 

 

 

 

 

 

 

 

 

5,514

 

 

 

5,514

 

 

 

 

 

 

 

Government bonds

 

 

2,305

 

 

 

2,305

 

 

 

 

 

 

 

Emerging markets bonds

 

 

531

 

 

 

531

 

 

 

 

 

 

 

Equity funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large cap blend

 

 

5,758

 

 

 

5,758

 

 

 

 

 

 

 

Global equity

 

 

11,071

 

 

 

11,071

 

 

 

 

 

 

 

Emerging markets

 

 

956

 

 

 

956

 

 

 

 

 

 

 

Balanced fund

 

 

863

 

 

 

863

 

 

 

 

 

 

 

Large cap value

 

 

309

 

 

 

309

 

 

 

 

 

 

 

 

 

312

 

 

 

312

 

 

 

 

 

 

 

Balanced fund

 

 

898

 

 

 

898

 

 

 

 

 

 

 

Global real estate fund

 

 

902

 

 

 

902

 

 

 

 

 

 

 

Managed futures fund

 

 

531

 

 

 

531

 

 

 

 

 

 

 

Available-for-sale securities

 

 

23,619

 

 

 

23,619

 

 

 

 

 

 

 

 

 

27,325

 

 

 

27,325

 

 

 

 

 

 

 

Total

 

$

26,624

 

 

$

26,624

 

 

$

 

 

$

 

 

$

28,016

 

 

$

28,016

 

 

$

 

 

$

 

 

 

Fair Value Measurements at December 31, 2016 Using

 

 

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)

 

 

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

 

$

6

 

 

$

6

 

 

$

 

 

$

 

 

$

1,010

 

 

$

1,010

 

 

$

 

 

$

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government bonds

 

 

6,268

 

 

 

6,268

 

 

 

 

 

 

 

Corporate bonds

 

 

12,546

 

 

 

12,546

 

 

 

 

 

 

 

 

 

4,840

 

 

 

4,840

 

 

 

 

 

 

 

Government bonds

 

 

2,037

 

 

 

2,037

 

 

 

 

 

 

 

Emerging markets bonds

 

 

443

 

 

 

443

 

 

 

 

 

 

 

Equity funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large cap blend

 

 

4,462

 

 

 

4,462

 

 

 

 

 

 

 

Global equity

 

 

7,743

 

 

 

7,743

 

 

 

 

 

 

 

Emerging markets

 

 

1,188

 

 

 

1,188

 

 

 

 

 

 

 

Balanced fund

 

 

815

 

 

 

815

 

 

 

 

 

 

 

Large cap value

 

 

249

 

 

 

249

 

 

 

 

 

 

 

 

 

262

 

 

 

262

 

 

 

 

 

 

 

Balanced fund

 

 

745

 

 

 

745

 

 

 

 

 

 

 

Global real estate fund

 

 

926

 

 

 

926

 

 

 

 

 

 

 

Managed futures fund

 

 

664

 

 

 

664

 

 

 

 

 

 

 

Available-for-sale securities

 

 

20,039

 

 

 

20,039

 

 

 

 

 

 

 

 

 

23,149

 

 

 

23,149

 

 

 

 

 

 

 

Total

 

$

20,045

 

 

$

20,045

 

 

$

 

 

$

 

 

$

24,159

 

 

$

24,159

 

 

$

 

 

$

 

 


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 75%50% for bond funds, and 25%40% for equity funds.

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)(the “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)(the “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 yearone-year anniversary date. In calculating our matching contribution, we only use compensation up to the statutory maximum under the Code ($270 thousand280,000 for 2017)2019). All matching contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributionsvest immediately. Employer contribution expense and plan administration costs for the Savings Plan amounted to approximately $4.4 million, $4.4 million and $4.6 million $4.1 millionin 2019, 2018 and $4.7 million in 2017, 2016 and 2015, respectively.

Deferred Compensation Plans

We maintain four4 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 PSUs and RSUs to the Plan.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.participant.

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.director.

We have set aside the plan assets for all plans in a rabbi trust (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.ten-year term based on the participant’s election. Distributions will be made on a pro ratapro-rata basis from each of the hypothetical investments of the Participant’sparticipant’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 atas of December 31, 20172019 and 2016 are2018 were as follows:

 

(In thousands)

 

2017

 

 

2016

 

 

2019

 

 

2018

 

Fair Value of Plan Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments

 

$

19,883

 

 

$

14,596

 

Long-term investments

 

$

21,698

 

 

$

18,256

 

Total Fair Value of Plan Assets

 

$

19,883

 

 

$

14,596

 

 

$

21,698

 

 

$

18,256

 

Amounts Payable to Plan Participants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current Liabilities

 

$

19,883

 

 

$

14,596

 

Deferred compensation liability

 

$

21,698

 

 

$

18,256

 

Total Amounts Payable to Plan Participants

 

$

19,883

 

 

$

14,596

 

 

$

21,698

 

 

$

18,256

 

Interest and dividend income of the Trust have beenare included in interest and dividend income in the accompanying 2017, 20162019, 2018 and 20152017 Consolidated Statements of Income.Income (Loss). Changes in the fair value of the plan assets held by the Trust have been included in accumulated other comprehensive income (expense) in the accompanying 2019, 2018 and 2017 and 2016 Consolidated Balance Sheets.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 2017, 20162019, 2018 and 20152017 Consolidated Statements of Income.Income (Loss). Based on the changes in the total fair value of the Trust’s assets, we recorded deferred compensation income (expense) in 2019, 2018 and 2017 2016 and 2015 of $(2.6)$3.6 million, $(1.3)$(2.1) million and $0.3$(2.6) million, respectively.

Retiree Medical Coverage

We provideprovided medical, dental and prescription drug coverage to onetwo spouses of retired former officer and his spouse, for his life,officers on the same terms as provided to our active officers and to the spouse of a former deceased officer for up to 30 years. AtAs of December 31, 20172019 and 2016,2018, this liability totaled $0.1 million and $0.2 million, respectively.million.  

Note 1315 – Segment Information and Major Customers

In 2015, we realigned our organizational structure to better match our market opportunities, technological development initiatives, and improve efficiencies. During the first quarter of 2016, ourOur chief operating decision maker requested changes in the information that he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning with the quarter ended March 31, 2016, we began reporting our financial performance based on two, new2 reportable segments across our segments– (1) Network Solutions and (2) Services & Support. Network Solutions includes hardware and software products and next-generation virtualized solutions used in service provider or business networks, as well as prior-generation products. Services & Support includes our suitea portfolio of ProCloud managedmaintenance, network implementation and solutions integration services, network installation, engineering and maintenancewhich include hosted cloud services and fee-based technical support and equipment repair/replacement plans.subscription services.

We evaluate the performance of our new segments based on gross profit; therefore, selling,profit. Selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss,gain (loss), other income/expenseincome (expense) and provision for taxesincome tax (expense) benefit are reported on a company-wide, functional basis only. Historical financial information by reportable segment and category, as discussed below, has been recast to conform to our new reporting structure. There are no inter-segment revenues.

The following table presents information about the reported sales and gross profit of our reportable segments for each of the years ended December 31, 2017, 20162019, 2018 and 2015.2017. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

Sales and Gross Profit by Market Segment

 

 

 

 

 

 

 

 

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

Network Solutions

 

$

540,396

 

 

$

260,855

 

 

$

525,502

 

 

$

254,807

 

 

$

527,422

 

 

$

233,579

 

 

$

455,226

 

 

$

191,549

 

 

$

458,232

 

 

$

179,303

 

 

$

540,396

 

 

$

260,833

 

Services & Support

 

 

126,504

 

 

 

42,805

 

 

 

111,279

 

 

 

36,537

 

 

 

72,642

 

 

 

33,318

 

 

 

74,835

 

 

 

27,618

 

 

 

71,045

 

 

 

24,262

 

 

 

126,504

 

 

 

42,802

 

Total

 

$

666,900

 

 

$

303,660

 

 

$

636,781

 

 

$

291,344

 

 

$

600,064

 

 

$

266,897

 

 

$

530,061

 

 

$

219,167

 

 

$

529,277

 

 

$

203,565

 

 

$

666,900

 

 

$

303,635

 

 


 


Sales by Category

In addition to our newthe above reporting segments, we will also report revenue for the following three3 categories – (1) Access & Aggregation, Customer Devices,(2) Subscriber Solutions & Experience and (3) Traditional & Other Products.

The following table presents sales informationtables disaggregates our revenue by product categorymajor source for the years ended December 31, 2017, 20162019, 2018 and 2015:2017:

 

 

2019

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

473,943

 

 

$

436,372

 

 

$

405,698

 

 

$

289,980

 

 

$

58,894

 

 

$

348,874

 

Customer Devices

 

 

138,456

 

 

 

137,608

 

 

 

125,565

 

Subscriber Solutions & Experience(1)

 

 

144,651

 

 

 

8,269

 

 

 

152,920

 

Traditional & Other Products

 

 

54,501

 

 

 

62,801

 

 

 

68,801

 

 

 

20,595

 

 

 

7,672

 

 

 

28,267

 

Total

 

$

666,900

 

 

$

636,781

 

 

$

600,064

 

 

$

455,226

 

 

$

74,835

 

 

$

530,061

 

 

 

 

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

 

(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.

Additional Information

The following table presents sales information by geographic area for the years ended December 31, 2017, 20162019, 2018 and 2015. International sales correlate to shipments with a non-U.S. destination.2017:

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

United States

 

$

508,178

 

 

$

501,337

 

 

$

419,366

 

 

$

300,853

 

 

$

288,843

 

 

$

508,178

 

Mexico

 

 

90,795

 

 

 

12,186

 

 

 

2,246

 

Germany

 

 

119,502

 

 

 

85,780

 

 

 

111,666

 

 

 

78,062

 

 

 

167,251

 

 

 

119,502

 

Other international

 

 

39,220

 

 

 

49,664

 

 

 

69,032

 

 

 

60,351

 

 

 

60,997

 

 

 

36,974

 

Total

 

$

666,900

 

 

$

636,781

 

 

$

600,064

 

 

$

530,061

 

 

$

529,277

 

 

$

666,900

 

 

Customers comprising more than 10% of revenue can change from year to year. Single customers comprising more than 10% of our revenue in 20172019 included two3 customers at 40%19%, 17% and 16%13%. Single customers comprising more than 10% of our revenue in 20162018 included three2 customers at 24%, 19%27% and 12%17%. Single customers comprising more than 10% of our revenue in 20152017 included three2 customers at 20%, 17%40% and 14%16%. No other customer accounted for 10% or more of our sales in 2017, 2016 or 2015. Our five largest customers, otherOther than those with more than 10 percent10% of revenues disclosed above, and excluding distributors, our next five largest customers can change, and has historically changed, from year to year.year-to-year. These combined customers represented 15%, 13%,18% and 14%15% of total revenue in 2019, 2018 and 2017, 2016 and 2015, respectively. Revenues in this disclosure do not include distributor agents, who predominantly provide fulfillment services to end users. In such cases where known, that revenue is associated with the end user.

Additional Segment Information

As of December 31, 2017, long-lived assets,2019, property, plant and equipment, net totaled $85.1$73.7 million, which includes $80.6included $69.9 million held in the U.S. and $4.5$3.9 million held outside the U.S. As of December 31, 2016, long-lived assets,2018, property, plant and equipment, net totaled $84.5$80.6 million, which includes $79.9included $77.3 million held in the U.S. and $4.6$3.3 million held outside the U.S. Property, plant and equipment, net is reported on a company-wide, functional basis only.


Note 1416 – Commitments and Contingencies

 

Securities Class Action Lawsuit

On October 17, 2019, a purported stockholder class action lawsuit, captioned Burbridge v. ADTRAN, Inc. et al., Docket No. 19-cv-09619, was filed in the United States District Court for the Southern District of New York against the Company, 2 of its current executive officers and 1 of its former executive officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages on behalf of purported purchasers of ADTRAN securities between February 28, 2019 and October 9, 2019. The lawsuit claims that the defendants made materially false and misleading statements regarding, and/or failed to disclose material adverse facts about, the Company’s business, operations and prospects, specifically relating to the Company’s internal control over financial reporting, excess and obsolete inventory reserves, financial results and shipments to a Latin American customer.  Investors in ADTRAN securities had until December 16, 2019 to move the court to serve as lead plaintiff in this action. 

On December 16, 2019, two purported investors in ADTRAN securities filed motions seeking to be appointed lead plaintiff in the case. On January 6, 2020, the United States District Court for the Southern District of New York granted Defendants’ unopposed request to transfer the case to the United States District Court for the Northern District of Alabama, where the case is now pending as Burbridge v. ADTRAN, Inc. et al., Docket No. 5:20-cv-00050-LCB. On January 27, 2020, the two prospective lead plaintiff movants filed a stipulation among plaintiffs seeking to be appointed as co-lead plaintiffs in the case.

We disagree with the claims made in the complaint and intend to vigorously defend against this lawsuit. At this time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with this lawsuit.

Other Legal Matters

In addition to the ordinary course of business,litigation described above, from time to time we may beare subject to or otherwise involved in various lawsuits, claims, investigations and legal proceedings that arise out of or are incidental to the conduct of our business (collectively, “Legal Matters”), including those relating to employment matters, patent rights, regulatory compliance matters, stockholder claims, and claims, including employment disputes, patent claims, disputes over contract agreementscontractual and other commercial disputes. In some cases,Such Legal Matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Additionally, an unfavorable outcome in a legal matter, including in a patent dispute, could require the Company to pay damages, entitle claimants seek damages orto other relief, such as royalty payments related to patents,royalties, or could prevent the Company from selling some of its products in certain jurisdictions. While the Company cannot predict with certainty the results of the Legal Matters in which if granted, could require significant expenditures. Althoughit is currently involved, the Company does not expect that the ultimate outcome of any claimsuch Legal Matters will individually or litigation can never be certain, it is our opinion thatin the outcomeaggregate have a material adverse effect on its business, results of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.

Investment Commitment

We have committed to invest up to an aggregate of $7.9 million in two2 private equity funds, and we have contributed $8.4 million as of December 31, 2017, of which $7.7 million has been applied to these commitments.commitments as of December 31, 2019.

 

Performance Bonds


We lease office space

Certain contracts, customers and/or jurisdictions in which we do business require us to provide various guarantees of performance such as bid bonds, performance bonds and equipment under operating leasescustoms bonds. As of December 31, 2019, we had commitments related to these bonds totaling $9.3 million which expire at various dates through 2025.August 2024. As of December 31, 2017, future minimum rental payments2018, we had commitments related to these bonds totaling $6.5 million. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default in our under non-cancelable operating leases with original maturitieseach contract, the probability of greater than 12 months are as follows:which we believe is remote.

 

(In thousands)

 

 

 

 

2018

 

$

3,073

 

2019

 

 

927

 

2020

 

 

805

 

2021

 

 

793

 

Thereafter

 

 

2,907

 

Total

 

$

8,505

 


Rental expense was $4.5 million, $4.2 million and $4.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Note 1517 – Earnings (Loss) per Share

A summary of the calculation of basic and diluted earnings (loss) per share (EPS) for the years ended December 31, 2017, 20162019, 2018 and 20152017 is as follows:

 

(In thousands, except for per share amounts)

 

2017

 

 

2016

 

 

2015

 

 

2019

 

 

2018

 

 

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

23,840

 

 

$

35,229

 

 

$

18,646

 

Net Income (Loss)

 

$

(52,982

)

 

$

(19,342

)

 

$

23,840

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares – basic

 

 

48,153

 

 

 

48,724

 

 

 

51,145

 

 

 

47,836

 

 

 

47,880

 

 

 

48,153

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

406

 

 

 

170

 

 

 

81

 

 

 

 

 

 

 

 

 

406

 

Restricted stock and restricted stock units

 

 

140

 

 

 

55

 

 

 

41

 

 

 

 

 

 

 

 

 

140

 

Weighted average number of shares – diluted

 

$

48,699

 

 

$

48,949

 

 

$

51,267

 

 

 

47,836

 

 

 

47,880

 

 

 

48,699

 

Net income per share – basic

 

$

0.50

 

 

$

0.72

 

 

$

0.36

 

Net income per share – diluted

 

$

0.49

 

 

$

0.72

 

 

$

0.36

 

Earnings (loss) per share – basic

 

$

(1.11

)

 

$

(0.40

)

 

$

0.50

 

Earnings (loss) per share – diluted

 

$

(1.11

)

 

$

(0.40

)

 

$

0.49

 

For each of the years ended December 31, 2017, 20162019 and 2015, 3.2 million, 4.62018, 5.7 million and 6.12.5 million, respectively, shares of unvested stock options, PSUs, RSUs and restricted stock were excluded from the calculation of diluted EPS due to their anti-dilutive effect.

For the year ended December 31, 2017, 3.2 million stock options were outstanding but were not included in the computation of that year’s diluted EPSearnings (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.

Note 18 – Restructuring

During the second half of 2019, the Company implemented a restructuring plan to realign its expense structure with the reduction in revenue experienced in recent years and overall Company objectives. Management assessed the efficiency of our operations and consolidated locations and personnel, among other things, where possible. As part of this restructuring plan, the Company announced plans to reduce its overall operating expenses, both in the U.S and internationally.

In February 2019, the Company announced the restructuring of certain of our workforce predominantly in Germany, which included the closure of our office location in Munich, Germany accompanied by relocation or severance benefits for the affected employees. We also offered voluntary early retirement to certain other employees, which was announced in March 2019.  

In January 2018, the Company announced an early retirement incentive program for employees that met certain defined requirements. The cumulative amount incurred during the year ended December 31, 2018 related to this restructuring program was $7.3 million. We did not incur any additional expenses related to this restructuring program during the year ended December 31, 2019.

A reconciliation of the beginning and ending restructuring liability, which is included in accrued wages and benefits in the Consolidated Balance Sheets as of December 31, 2019 and 2018, is as follows:

 

(In thousands)

 

2019

 

 

2018

 

Balance at beginning of period

 

$

185

 

 

$

205

 

Plus: Amounts charged to cost and expense

 

 

6,014

 

 

 

7,261

 

Less: Amounts paid

 

 

(4,631

)

 

 

(7,281

)

Balance at end of period

 

$

1,568

 

 

$

185

 


The components of restructuring expense in the Consolidated Statements of Income are for the years ended December 31, 2019, 2018 and 2017:

(In thousands)

 

2019

 

 

2018

 

 

2017

 

Selling, general and administrative expenses

 

$

2,360

 

 

$

2,655

 

 

$

152

 

Research and development expenses

 

 

2,869

 

 

 

1,831

 

 

 

122

 

Cost of sales

 

 

785

 

 

 

2,775

 

 

 

 

Total restructuring expenses

 

$

6,014

 

 

$

7,261

 

 

$

274

 

 


The following table represents the components of restructuring expense by geographic area for the years ended December 31, 2019, 2018 and 2017:

(In thousands)

 

2019

 

 

2018

 

 

2017

 

United States

 

$

3,336

 

 

$

7,120

 

 

$

274

 

International

 

 

2,678

 

 

 

141

 

 

 

 

Total restructuring expenses

 

$

6,014

 

 

$

7,261

 

 

$

274

 

Note 1619 – 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, 2017

 

 

June 30, 2017

 

 

September 30, 2017

 

 

December 31, 2017

 

Net sales

 

$

170,279

 

 

$

184,673

 

 

$

185,112

 

 

$

126,836

 

Gross profit

 

$

73,715

 

 

$

84,632

 

 

$

86,498

 

 

$

58,815

 

Operating income

 

$

7,032

 

 

$

16,448

 

 

$

18,318

 

 

$

(4,061

)

Net income

 

$

6,651

 

 

$

12,401

 

 

$

15,898

 

 

$

(11,110

)

Earnings per common share

 

$

0.14

 

 

$

0.26

 

 

$

0.33

 

 

$

(0.23

)

Earnings per common share assuming dilution (1)

 

$

0.14

 

 

$

0.26

 

 

$

0.33

 

 

$

(0.23

)

 

 

Three Months Ended

 

(In thousands, except for per share amounts)

 

March 31, 2019

 

 

June 30, 2019

 

 

September 30, 2019

 

 

December 31, 2019

 

Net sales

 

$

143,791

 

 

$

156,391

 

 

$

114,092

 

 

$

115,787

 

Gross profit

 

$

60,612

 

 

$

65,015

 

 

$

46,331

 

 

$

47,209

 

Operating income (loss)

 

$

(6,167

)

 

$

562

 

 

$

(20,288

)

 

$

(14,070

)

Net income (loss)

 

$

770

 

 

$

3,995

 

 

$

(46,123

)

 

$

(11,624

)

Earnings (loss) per common share - basic

 

$

0.02

 

 

$

0.08

 

 

$

(0.96

)

 

$

(0.25

)

Earnings (loss) per common share - diluted

 

$

0.02

 

(1)

$

0.08

 

(1)

$

(0.96

)

 

$

(0.25

)

 

Three Months Ended

 

March 31, 2016

 

 

June 30, 2016

 

 

September 30, 2016

 

 

December 31, 2016

 

Net sales

 

$

142,204

 

 

$

162,701

 

 

$

168,890

 

 

$

162,986

 

Gross profit

 

$

65,794

 

 

$

78,955

 

 

$

75,808

 

 

$

70,787

 

Operating income

 

$

5,521

 

 

$

14,812

 

 

$

10,130

 

 

$

4,272

 

Net income

 

$

5,014

 

 

$

10,228

 

 

$

12,415

 

 

$

7,572

 

Earnings per common share

 

$

0.10

 

 

$

0.21

 

 

$

0.26

 

 

$

0.16

 

Earnings per common share assuming dilution (1)

 

$

0.10

 

 

$

0.21

 

 

$

0.26

 

 

$

0.16

 

 

 

Three Months Ended

 

(In thousands, except for per share amounts)

 

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

 

$

(0.22

)

 

$

(0.16

)

 

$

0.16

 

(1)

$

(0.18

)

 

(1)

(1)

Assumes exercise of dilutive stock optionssecurities calculated under the treasury stock method.

Note 1720 – Subsequent Events

On January 16, 2018,2, 2020, we paid off the outstanding balance of $24.6 million of the Taxable Revenue Bonds upon their maturity. We used a restricted certificate of deposit which was held as collateral to repay the outstanding balance.

On February 5, 2020, 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 January 31, 2018.February 20, 2020. The quarterly dividend payment was $4.4 million and waswill be paid on February 14, 2018.March 5, 2019 payment in the aggregate amount of approximately $4.3 million. 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 23, 2018, we have repurchased 0.6 million shares of our common stock through open market purchases at an average cost of $16.18 per share. We currently have the authority to purchase an additional 2.9 million shares of our common stock under the current plan approved by the Board of Directors.

In January 2018, we announced an early retirement incentive program for employees that met certain requirements. The estimated liability associated with this program ranges from $3.6 to $14.3 million.

 


ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

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 this 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 Item 8 “Financial Statements and Supplementary Data” of this report.

(b)

Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the company. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective.

(c)

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter 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 REPORTINGEvaluation 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 our 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 our 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. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting described below in Management’s Report on Internal Control over Financial Reporting, our disclosure controls and procedures were not effective as of December 31, 2019.

Despite the existence of the material weakness 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.

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 our 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 Annual Report on Form 10-K.

Management’s Report on Internal Control over Financials Reporting

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

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.

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.


Management assessed the effectiveness of ADTRAN’s internal control over financial reporting as of December 31, 2017.2019. 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).

BasedA 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 oura timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2019, management determined that there was a deficiency in ADTRAN’s internal control over financial reporting that constituted a material weakness. Specifically, management determined that the Company did not design and those criteria,maintain effective internal control over the valuation of inventory:

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.

This material weakness 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 weakness did not result in a material misstatement of the Company’s consolidated financial statements, the material weakness 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.  As a result, management has concluded that ADTRAN maintainedthe Company did not maintain effective internal control over financial reporting as of December 31, 2017.2019 based on the criteria in Internal Control-Integrated Framework (2013) issued by COSO.

Remediation of Previously Identified Material Weakness and Continuing Material Weakness.

The Company has redesigned, enhanced and added 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. Key reports and report writing tools have been integrated into our enterprise management system under IT governance to ensure completeness and accuracy of the information. We reconciled all locations under the cycle count program to ensure existence of locations. We performed a full physical inventory count of our raw material warehouse. We verified that all locations were counted at the appropriate frequency to ensure the physical existence of the inventory for accuracy of financial reporting. As a result of these remediation efforts, management has determined that, as of December 31, 2019, our controls related to our cycle count program were effectively designed, documented and maintained, and the material weakness related to these controls no longer existed.

Additionally, the Company has been working to redesign and implement 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. Key reports and calculations have been redesigned and fully integrated into our enterprise resource planning system to ensure completeness and the accuracy of significant inputs. New controls and procedures have also been established by the Company around the consideration of historical usage, known trends, market conditions, and estimated net realizable value of the inventory. The implementation of these measures is ongoing, and, while we believe that they will ultimately be effective in remediating the material weakness, management has concluded that, as of December 31, 2019, our controls related to our excess and obsolete inventory reserve were not effectively designed and maintained, and the material weakness related to these controls continued to exist.

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 herein.under Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting.

Except as noted in the preceding paragraphs, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


ITEM 9B.

OTHER INFORMATION

None.


 


PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information relating to nominees for director of ADTRAN and compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the captions "Proposal 1–Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance," respectively, in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2018. Such information is incorporated herein by reference. The definitive Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017. Information relating to the executive officers of ADTRAN, pursuant to Instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of Form 10-K, is set forth at Part I, Item 4A of this report under the caption "Executive Officers of the Registrant." This information is incorporated herein by reference.

Code of Ethics

We have adopted the ADTRAN, Inc. Code of Business Conduct and Ethics, which applies to all employees, officers and directors of ADTRAN. The Code of Business Conduct and Ethics meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K, and applies to our Chief Executive Officer, Chief Financial Officer (who is both our principal financial and principal accounting officer), as well as all other employees, as indicated above. The Code of Business Conduct and Ethics also meets the requirements of a code of conduct under NASDAQ listing standards. The Code of Business Conduct and Ethics is posted on our website at www.adtran.com under the links "About – Investor Relations – Corporate Governance – Charters and Documents – Code of Business Conduct and Ethics." We intend to disclose any amendments to the Code of Business Conduct and Ethics, as well as any waivers for executive officers or directors, on our website at www.adtran.com.

Certain information required by this Item regarding ADTRAN’s executive officers is included in Part I of this Annual Report on Form 10-K under the caption “Information about our Executive Officers” in accordance with the Instructions to Item 401 of Regulation S-K.

Other information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from ADTRAN’s definitive Proxy Statement for the 2020 Annual Meeting of Stockholders (the “2020 Proxy Statement”) to be filed with the SEC pursuant to Regulation 14A.

ITEM 11.

EXECUTIVE COMPENSATION

InformationThe information required by this Item 11 relatingis incorporated by reference pursuant to executive compensation and other matters is set forth underGeneral Instruction G(3) of Form 10-K from the captions "Executive Compensation," "Director Compensation" and "Corporate Governance" in the2020 Proxy Statement referred to in Item 10. This information is incorporated herein by reference.be filed with the SEC pursuant to Regulation 14A.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information relatingThe information required by this Item is incorporated by reference pursuant to ownershipGeneral Instruction G(3) of common stock of ADTRAN by certain persons is set forth underForm 10-K from the caption "Share Ownership of Principal Stockholders and Management" in the2020 Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference. be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding securities authorized for issuance under our equity compensation plans is incorporated by reference pursuant to General Instruction G(3) of ADTRAN is set forth underForm 10-K from the caption “Equity Compensation Plan Information” in the2020 Proxy Statement referred to in Item 10. This information is incorporated herein by reference.be filed with the SEC pursuant to Regulation 14A.

ITEM 13.

Information relatingThe information required by this Item is incorporated by reference pursuant to existing or proposed relationships or transactions between ADTRAN and any affiliateGeneral Instruction G(3) of ADTRAN is set forth underForm 10-K from the captions "Certain Relationships and Related Transactions" and "Corporate Governance" in the2020 Proxy Statement referred to in Item 10. This information is incorporated herein by reference.be filed with the SEC pursuant to Regulation 14A.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information relatingThe information required by this Item is incorporated by reference pursuant to ADTRAN’s principal accountant’s fees and services is set forth underGeneral Instruction G(3) of Form 10-K from the caption “Principal Accountant Fees and Services” in the2020 Proxy Statement referred to in Item 10. This information is incorporated herein by reference.be filed with the SEC pursuant to Regulation 14A.

 


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 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, 20172019 and 20162018

Consolidated Statements of Income for the years ended December 31, 2017, 20162019, 2018 and 20152017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 20162019, 2018 and 20152017

Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017, 20162019, 2018 and 20152017

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162019, 2018 and 20152017

Notes to Consolidated Financial Statements

2. Consolidated 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).

  4.1

Description of Securities.

 

 

 

 

 

 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).

 

 

 

 

 

 

 

(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).

 


Exhibit

Number

 

Description

 

 

 

 

 

 

 

(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 CompensationCompensatory Plans:

 

 

 

 

 

 

 

(a)

 

ADTRAN, Inc. ManagementVariable Incentive BonusCompensation Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed February 3, 2006)May 9, 2011).

 

 

 

 

 

 

 

(b)*

 

Form of Notice Letter under the ADTRAN, Inc. 2006 Employee StockVariable Incentive Plan (Exhibit 4.1 to ADTRAN’s Registration Statement on Form S-8 (File No. 333-133927) filed May 9, 2006).Compensation Plan.

 

 

 

 

 

 

 

(c)

 

First Amendment to the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.3(h)4.1 to ADTRAN’s 2007Registration Statement on Form 10-KS-8 (File No. 333-133927) filed February 28, 2008)May 9, 2006).

 

 

 

 

 

 

 

(d)

 

Form of Nonqualified Stock Option Agreement underFirst Amendment to the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (Exhibit 10.110.3(h) to ADTRAN’s 2007 Form 8-K10-K filed June 8, 2006)February 28, 2008).

 

 

 

 

 

 

 

(e)

 

Form of IncentiveNonqualified Stock Option Agreement under the 2006 Employee Stock Incentive Plan (Exhibit 10.210.1 to ADTRAN’s Form 8-K filed June 8, 2006).

 

 

 

 

 

 

 

(f)

 

ADTRAN, Inc. 2005 DirectorsForm of Incentive Stock Option Agreement under the 2006 Employee Stock Incentive Plan and Forms of Nonqualified Stock Option Agreements (Exhibit 10.110.2 to ADTRAN’s Form 8-K filed on May 20, 2005)June 8, 2006).

 

 

 

 

 

 

 

(g)

 

SummaryADTRAN, Inc. 2005 Directors Stock Option Plan and Forms of Non-Employee Director CompensationNonqualified Stock Option Agreements (Exhibit 10.3(k)10.1 to ADTRAN’s 2006 Form 10-K8-K filed on February 28, 2007)May 20, 2005).

 

 

 

 

 

 

 

(h)

 

First Amendment to the ADTRAN, Inc. 2005 Directors Stock Option PlanSummary of Non-Employee Director Compensation (Exhibit 10.3(l)10.3(k) to ADTRAN’s 20072006 Form 10-K filed on February 28, 2008)2007).

 

 

 

 

 

 

 

(i)

 

Form of Performance Shares Agreement underFirst Amendment to the ADTRAN, Inc. 2006 Employee2005 Directors Stock IncentiveOption Plan (Exhibit 10.110.3(l) to ADTRAN’s 2007 Form 8-K10-K filed November 12,February 28, 2008).

 

 

 

 

 

 

 

(j)

 

Form of Performance Shares Agreement under the ADTRAN, Inc. 2006 Employee2010 Directors Stock Incentive Plan (Exhibit 10.14.3 to ADTRAN’s Form 8-KS-8 filed November 9,on July 30, 2010).

 

 

 

 

 

 

 

(k)*

 

Form of Stock Option Award Agreement under the ADTRAN, Inc. 2015 Employee2010 Directors Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed May 15, 2015).Plan.

 

 

 

 

 

 

 

(l)*

 

Form of Restricted Stock Award Agreement under the 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).Directors Stock Plan.

 

 

 

 

 

 

 

(m)

 

ADTRAN, Inc. Deferred Compensation Program for Directors, as amended and restated as of June 1, 20102015 Employee Stock Incentive Plan (Exhibit 10.3(o)10.1 to ADTRAN’s Form 10-K8-K filed February 24, 2016)May 15, 2015).

 

 

 

 

 

 

 

(n)

 

Form of Performance Shares Agreement under the ADTRAN, Inc. Equity Deferral Program for Employees, as amended and restated as of October 1, 20112015 Employee Stock Incentive Plan (Exhibit 10.3(p)4.5 to ADTRAN’s Form 10-KS-8 filed February 24,December 21, 2016).

 

 

 

 

 

 

 

(o)

 

Form of Restricted Stock Unit Agreement under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (Exhibit 10.1 to ADTRAN’s Form 8-K filed November 16, 2016).

(p)*

Form of Option Award Agreement under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan.

(q)

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).


Exhibit

Number

Description

(r)

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).

(s)

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).

(t)

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)(u)

 

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).


Exhibit

Number

 

Description

(v)

Separation Agreement and General Release, entered into July 17, 2019, between Roger Shannon and ADTRAN, Inc. (Exhibit 10 to ADTRAN’s Form 10-Q filed September 20, 2019).

(w)*

Service Agreement, entered into effective June 25, 2019, between Eduard Scheiterer and ADTRAN GmbH.

(x)*

Form of Clawback Agreement, entered into between ADTRAN, Inc. and each executive officer of ADTRAN, Inc.

(y)*

Employment Offer Letter, dated September 25, 2018, between Raymond Harris and ADTRAN, Inc.

(z)*

Employment Offer Letter, dated November 29, 2018, between Jeffery F. McInnis and ADTRAN, Inc.

(aa)*

Employment Offer Letter, dated November 26, 2018, between Ronald D. Centis and ADTRAN, Inc.

(ab)*

Employment Offer Letter, dated August 30, 2019, between Daniel T. Whalen and ADTRAN, Inc.

 

 

 

 

 

 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.INS101

 

XBRL Instance DocumentThe following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2019, formatted in inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements, and (vii) Schedule II – Valuation and Qualifying Accounts.

 

 

 

 

 

101.SCH104

 

XBRL Taxonomy Extension Schema DocumentCover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

 

 

 

 

 

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

 

*

Filed herewith

(P)     Indicates a paper filing with the SEC.

 

ITEMITEM 16.

FORM 10-K SUMMARY

None.ADTRAN has elected not to provide a summary of the information contained in this report at this time.

 


SIGNATURESSIGNATURES

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 February 23, 2018.25, 2020.

 

ADTRAN, Inc.

(Registrant)

 

 

 

By:

 

/s/ Roger D. ShannonMichael Foliano

 

 

Roger D. ShannonMichael Foliano

 

 

Senior Vice President of Finance and

 

 

Chief Financial Officer Corporate Secretary and Treasurer

 

 

(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 23, 2018.25, 2020.

 

Signature

 

Title

 

 

 

/s/ Thomas R. Stanton

 

Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

Thomas R. Stanton

/s/ Michael Foliano

Senior Vice President of Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Michael Foliano

 

 

 

 

 

/s/ H. Fenwick Huss*

 

Director

H. Fenwick Huss

/s/ William L. Marks*

Director

William L. Marks

 

 

 

 

 

/s/ Gregory McCray*

 

Director

Gregory McCray

 

 

 

 

 

/s/ Anthony Melone*

 

Director

Anthony Melone

 

 

 

 

 

/s/ Balan Nair*

 

Director

Balan Nair

 

 

 

 

 

/s/ Roy J. Nichols*

Director

Roy J. Nichols

/s/ Jacqueline H. Rice*

 

Director

Jacqueline H. Rice

 

 

 

 

 

/s/ Kathryn A. Walker*

 

Director

Kathryn A. Walker

 

 

 

*By:

 

/s/ Roger D. ShannonMichael Foliano

 

 

Roger D. ShannonMichael Foliano as Attorney in Fact

 

 


ADTRAN, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

 

Column A

 

Column B

 

 

Column C

 

 

Column D

 

 

Column E

 

(In thousands)

 

Balance at

Beginning

of Period

 

 

Charged to

Costs &

Expenses

 

 

Deductions

 

 

Balance at

End of

Period

 

 

Balance at

Beginning

of Period

 

 

Charged to

Costs &

Expenses

 

 

Deductions

 

 

Balance at

End of

Period

 

Year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Doubtful Accounts

 

$

128

 

 

 

38

 

 

 

128

 

 

$

38

 

Inventory Reserve

 

$

30,009

 

 

 

5,893

 

 

 

1,740

 

 

$

34,162

 

Warranty Liability

 

$

8,623

 

 

 

4,569

 

 

 

4,798

 

 

$

8,394

 

Deferred Tax Asset Valuation Allowance

 

$

5,816

 

 

 

43,560

 

 

 

760

 

 

$

48,616

 

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

 

 

$

25,249

 

 

 

6,406

 

 

 

8,300

 

 

$

23,355

 

Warranty Liability

 

$

8,548

 

 

 

6,951

 

 

 

5,775

 

 

$

9,724

 

 

$

8,548

 

 

 

6,951

 

 

 

5,775

 

 

$

9,724

 

Deferred Tax Asset Valuation Allowance

 

$

6,149

 

 

 

18

 

 

 

161

 

 

$

6,006

 

 

$

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

 

Year ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Doubtful Accounts

 

$

136

 

 

 

19

 

 

 

136

 

 

$

19

 

Inventory Reserve

 

$

24,682

 

 

 

2,225

 

 

 

232

 

 

$

26,675

 

Warranty Liability

 

$

8,415

 

 

 

2,998

 

 

 

2,674

 

 

$

8,739

 

Deferred Tax Asset Valuation Allowance

 

$

7,463

 

 

 

81

 

 

 

294

 

 

$

7,250

 

 

 

 

90104