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

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

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

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

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

Title of each classTrading SymbolName of exchange on which registered
Common Stock, Par Value $0.01 ADTNThe NASDAQ Global Select Market

As of ~~October 26, 2018,~~May 1, 2019, the registrant had ~~47,650,245~~47,809,152 shares of common stock, $0.01 par value per share, outstanding.

For the ~~Three and Nine Months Ended September 30, 2018~~three months ended March 31, 2019

Item Number		Page Number		Page Number
	PART I. FINANCIAL INFORMATION		PART I. FINANCIAL INFORMATION

1	Financial Statements:		Financial Statements:
			Consolidated Balance Sheets as of March 31, 2019 – (Unaudited) and December 31, 2018 – (Audited)	3
	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 – (Unaudited)	3	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 – (Unaudited)	4
	Consolidated Statements of Income for the – (Unaudited)	4	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018 – (Unaudited)	5
	Consolidated Statements of Comprehensive Income for the – (Unaudited)	5	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018	6
	Consolidated Statements of Cash Flows for the – (Unaudited)	6	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 – (Unaudited)	7
	Notes to Consolidated Financial Statements – (Unaudited)	7	Notes to Consolidated Financial Statements – (Unaudited)	8
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
3	Quantitative and Qualitative Disclosures About Market Risk	39	Quantitative and Qualitative Disclosures About Market Risk	37
4	Controls and Procedures	40	Controls and Procedures	38

	PART II. OTHER INFORMATION		PART II. OTHER INFORMATION
1A	Risk Factors	41	Risk Factors	39
2	Unregistered Sales of Equity Securities and Use of Proceeds	41	Unregistered Sales of Equity Securities and Use of Proceeds	39
6	Exhibits	42	Exhibits	40

	SIGNATURE	43	SIGNATURE	41

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN. ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report, our other filings with the Securities and Exchange Commission (SEC) and other communications with our stockholders. Generally, the words, “believe”, “expect”, ~~“intend��~~“intend”, “estimate”, “anticipate”, “will”, “may”, “could” and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors that Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. They have also been discussed in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed on February ~~23, 2018~~28, 2019 with the SEC. Though we have attempted to list comprehensively these important factors, we caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or a combination of factors may have on our business.

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

							March 31,			December 31,
	September 30,			December 31,			2019			2018
	2018			2017			(Unaudited)			(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	94,173		$	86,433		$	109,119		$	105,504
Short-term investments		5,912			16,129			31,290			3,246
Accounts receivable, less allowance for doubtful accounts of $— at September 30, 2018 and December 31, 2017		101,865			144,150
Accounts receivable, less allowance for doubtful accounts of $82 and $128 at March 31, 2019 and December 31, 2018, respectively								99,032			99,385
Other receivables		30,084			26,578			34,583			36,699
Inventory, net		106,060			122,542			93,609			99,848
Prepaid expenses and other current assets		10,428			17,282			9,683			10,744
Total Current Assets		348,522			413,114			377,316			355,426
Property, plant and equipment, net		81,457			85,079			79,505			80,635
Deferred tax assets, net		39,595			23,428			36,891			37,187
Goodwill		3,492			3,492			6,982			7,106
Intangibles, net								31,817			33,183
Other assets		31,523			13,725			14,885			5,668
Long-term investments		144,241			130,256			85,227			108,822
Total Assets	$	648,830		$	669,094		$	632,623		$	628,027
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	65,032		$	60,632		$	60,116		$	60,054
Bonds payable								25,600			1,000
Unearned revenue		17,004			13,070			15,230			17,940
Accrued expenses		14,548			13,232			14,039			11,746
Accrued wages and benefits		12,604			15,948			15,105			14,752
Income tax payable		14,340			3,936
Income tax payable, net								11,785			12,518
Total Current Liabilities		123,528			106,818			141,875			118,010
Non-current unearned revenue		3,846			4,556			4,514			5,296
Other non-current liabilities		32,255			34,209			42,687			33,842
Bonds payable		25,600			25,600			—			24,600
Total Liabilities		185,229			171,183			189,076			181,748
Commitments and contingencies (see Note 15)
Commitments and contingencies (see Note 17)
Stockholders’ Equity
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,711 shares outstanding at September 30, 2018 and 79,652 shares issued and 48,485 shares outstanding at December 31, 2017		797			797
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,777 shares outstanding at March 31, 2019 and 79,652 shares issued and 47,751 shares outstanding at December 31, 2018								797			797
Additional paid-in capital		265,757			260,515			269,529			267,670
Accumulated other comprehensive loss		(9,564	)		(3,295	)		(14,885	)		(14,416	)
Retained earnings		900,324			922,178			879,180			883,975
Less treasury stock at cost: 31,941 and 31,167 shares at September 30, 2018 and December 31, 2017, respectively		(693,713	)		(682,284	)
Less treasury stock at cost: 31,875 and 31,901 shares at March 31, 2019 and December 31, 2018, respectively								(691,074	)		(691,747	)
Total Stockholders’ Equity		463,601			497,911			443,547			446,279
Total Liabilities and Stockholders’ Equity	$	648,830		$	669,094		$	632,623		$	628,027

Three Months Ended

Nine Months Ended

September 30,

September 30,

2018

2017

2018

2017

Sales

Products

$
121,043

$
145,467

$
341,359

$
444,607

Services

19,292

39,645

47,830

95,457

Total Sales

140,335

185,112

389,189

540,064

Cost of Sales

Products

69,943

73,534

208,184

229,861

Services

11,944

25,087

32,828

65,377

Total Cost of Sales

81,887

98,621

241,012

295,238

Gross Profit

58,448

86,491

148,177

244,826

Selling, general and administrative expenses

30,750

34,676

96,361

104,171

Research and development expenses

29,877

33,588

93,455

99,116

Operating Income (Loss)

(2,179
)

18,227

(41,639
)

41,539

Interest and dividend income

825

952

2,604

2,857

Interest expense

(134
)

(139
)

(398
)

(417
)
Net investment gain

4,507

1,009

5,400

2,869

Other income (expense), net

201

(842
)

(73
)

(1,427
)
Gain on bargain purchase of a business

—

—

11,322

—

Income (Loss) Before Provision for Income Taxes

3,220

19,207

(22,784
)

45,421

(Provision) benefit for income taxes

4,369

(3,309
)

11,889

(10,471
)
Net Income (Loss)

$
7,589

$
15,898

$
(10,895
)

$
34,950

Weighted average shares outstanding – basic

47,710

47,870

47,927

48,110

Weighted average shares outstanding – diluted

47,834

48,531

47,927

48,618

Earnings (loss) per common share – basic

$
0.16

$
0.33

$
(0.23
)

$
0.73

Earnings (loss) per common share – diluted

$
0.16

$
0.33

$
(0.23
)

$
0.72

Dividend per share

$
0.09

$
0.09

$
0.27

$
0.27

Three Months Ended

Nine Months Ended

September 30,

September 30,

2018

2017

2018

2017

Net Income (Loss)

$
7,589

$
15,898

$
(10,895
)

$
34,950

Other Comprehensive Income (Loss), net of tax

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

(32
)

804

(3,340
)

2,512

Net unrealized gains (losses) on cash flow hedges

—

142

—

(196
)
Defined benefit plan adjustments

37

73

104

214

Foreign currency translation

(451
)

1,541

(3,033
)

5,402

Other Comprehensive Income (Loss), net of tax

(446
)

2,560

(6,269
)

7,932

Comprehensive Income (Loss), net of tax

$
7,143

$
18,458

$
(17,164
)

$
42,882

	Three Months Ended
	March 31,
	2019			2018
Sales
Products	$	125,822		$	105,253
Services		17,969			15,553
Total Sales		143,791			120,806
Cost of Sales
Products		70,734			68,612
Services		12,445			12,461
Total Cost of Sales		83,179			81,073
Gross Profit		60,612			39,733
Selling, general and administrative expenses		35,132			33,531
Research and development expenses		31,647			32,849
Operating Loss		(6,167	)		(26,647	)
Interest and dividend income		591			866
Interest expense		(127	)		(132	)
Net investment gain (loss)		5,926			(97	)
Other income (expense), net		855			(57	)
Gain on bargain purchase of a business, net		—			11,322
Income (Loss) Before Provision for Income Taxes		1,078			(14,745	)
(Provision) benefit for income taxes		(308	)		3,931
Net Income (Loss)	$	770		$	(10,814	)

Weighted average shares outstanding – basic		47,782			48,232
Weighted average shares outstanding – diluted		47,853			48,232

Earnings (loss) per common share – basic	$	0.02		$	(0.22	)
Earnings (loss) per common share – diluted	$	0.02		$	(0.22	)
Dividend per share	$	0.09		$	0.09

	Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at January 1, 2018		79,652	$	797	$	260,515	$	922,178		$	(682,284	)	$	(3,295	)	$	497,911
Net loss								(10,814	)								(10,814	)
Adoption of new accounting standards								3,499									3,499
Other comprehensive loss, net of tax														(2,508	)		(2,508	)
Dividend payments								(4,367	)								(4,367	)
Dividends accrued on unvested restricted stock units								(2	)								(2	)
Stock options exercised								(150	)		519						369
PSUs, RSUs and restricted stock vested								(733	)		733						—
Purchase of treasury stock											(10,171	)					(10,171	)
Stock-based compensation expense						1,819											1,819
Balance at March 31, 2018		79,652	$	797	$	262,334	$	909,611		$	(691,203	)	$	(5,803	)	$	475,736

	Common Shares		Common Stock		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at January 1, 2019		79,652	$	797	$	267,670	$	883,975		$	(691,747	)	$	(14,416	)	$	446,279
Net income								770									770
Adoption of new accounting standards (See Note 1)								(381	)					385			4
Other comprehensive loss, net of tax														(854	)		(854	)
Dividend payments								(4,301	)								(4,301	)
Dividends accrued on unvested restricted stock units								(18	)								(18	)
PSUs, RSUs and restricted stock vested								(865	)		857						(8	)
Purchase of treasury stock											(184	)					(184	)
Stock-based compensation expense						1,859											1,859
Balance at March 31, 2019		79,652	$	797	$	269,529	$	879,180		$	(691,074	)	$	(14,885	)	$	443,547

	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income (loss)	$	(10,895	)	$	34,950		$	770		$	(10,814	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		11,952			12,034			4,496			3,614
Amortization of net premium on available-for-sale investments		(14	)		352			6			42
Net gain on long-term investments		(5,400	)		(2,869	)
Net (gain) loss on long-term investments								(5,926	)		97
Net (gain) loss on disposal of property, plant and equipment		68			(10	)		(6	)		67
Gain on bargain purchase of a business		(11,322	)		—			—			(11,322	)
Stock-based compensation expense		5,243			5,573			1,859			1,819
Deferred income taxes		(20,368	)		—			235			(1,877	)
Changes in operating assets and liabilities:
Accounts receivable, net		41,166			(6,975	)		170			63,904
Other receivables		(1,842	)		(2,924	)		2,001			(6,598	)
Inventory		16,543			(9,483	)
Inventory, net								5,974			3,368
Prepaid expenses and other assets		8,722			(9,647	)		2,809			10,583
Accounts payable		5,223			(4,727	)
Accounts payable, net								166			(10,233	)
Accrued expenses and other liabilities		156			(2,820	)		(2,355	)		826
Income tax payable		9,461			8,571			(487	)		2,753
Net cash provided by operating activities		48,693			22,025			9,712			46,229

Cash flows from investing activities:
Purchases of property, plant and equipment		(5,695	)		(12,304	)		(1,872	)		(1,950	)
Proceeds from disposals of property, plant and equipment		—			16
Proceeds from sales and maturities of available-for-sale investments		116,757			137,272
Purchases of available-for-sale investments		(115,271	)		(79,713	)
Proceeds from sales and maturities of debt and equity investments								17,039			49,074
Purchases of debt and equity investments								(15,318	)		(75,960	)
Acquisition of business		(7,806	)		—			—			(7,806	)
Net cash provided by (used in) investing activities		(12,015	)		45,271
Net cash used in investing activities								(151	)		(36,642	)

Cash flows from financing activities:
Proceeds from stock option exercises		1,321			6,606			—			369
Purchases of treasury stock		(14,185	)		(17,348	)		(184	)		(10,171	)
Dividend payments		(12,976	)		(13,031	)		(4,301	)		(4,367	)
Net cash used in financing activities		(25,840	)		(23,773	)		(4,485	)		(14,169	)

Net increase in cash and cash equivalents		10,838			43,523
Net increase (decrease) in cash and cash equivalents								5,076			(4,582	)
Effect of exchange rate changes		(3,098	)		4,835			(1,461	)		772
Cash and cash equivalents, beginning of period		86,433			79,895			105,504			86,433
Cash and cash equivalents, end of period	$	94,173		$	128,253		$	109,119		$	82,623

Supplemental disclosure of non-cash investing activities:
Purchases of property, plant and equipment included in accounts payable	$	355		$	272		$	273		$	95

The accompanying unaudited consolidated financial statements of ADTRAN^®, Inc. and its subsidiaries ~~(ADTRAN)~~(“ADTRAN” or the “Company”) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, ~~2017~~2018 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, all adjustments necessary to fairly state these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed on February ~~23, 2018~~28, 2019 with the SEC.

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

In ~~February~~June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. In July 2018, the FASB issued ASU 2018-10, ~~Codification Improvements to Topic 842, Leases,~~ ~~which clarified certain aspects of ASU 2016-02, as well as, ASU 2018-11,~~ ~~Leases (Topic 842), Targeted Improvements,~~ which provides for an optional transition method that allows for the application of current legacy guidance, including its disclosure requirements, in the comparative periods presented in the year of adoption. Otherwise, ~~Topic 842~~ must be adopted by a modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. The Company plans to use the optional transition method when adopting the new standard. ASU 2016-02, ASU 2018-10 and ASU 2018-11 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We anticipate the adoption of these ASUs will have a material increase in the assets and liabilities of our consolidated balance sheets; however, we do not believe adoption will have a material effect on our results of operations. We believe the most significant effect relates to our accounting for operating leases for office space.

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

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

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

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~. ASU 2017-12 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 effect ASU 2017-12 will have on our consolidated financial statements.

~~Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income.~~ ASU 2018-02 allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating whether to reclassify stranded tax effects related to the Tax Cuts and Jobs Act of 2017, but we do not expect ASU 2018-02 will have a material effect on our consolidated financial statements.

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

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

During ~~2018,~~2019, we adopted the following accounting standards, which had the following effects on our consolidated financial statements:

In ~~May 2014,~~February 2016, the FASB issued ASU ~~2014-09,~~ ~~Revenue from Contracts with Customers~~2016-02, Leases (Topic ~~606), which supersedes the revenue recognition requirements in Topic 605,~~ ~~Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of~~842). ASU ~~2014-09 is~~2016-02 requires an entity to recognize ~~revenues when promised goods or services are transferred~~right-of-use assets and lease liabilities on the balance sheet and to ~~customers in an amount that reflects~~disclose key information about the ~~consideration that is expected to be received for those goods or services.~~entity’s leasing arrangements. In ~~August 2015,~~July 2018, the FASB issued ASU ~~2015-14,~~2018-10, Codification Improvements to Topic 842, Leases, which ~~deferred~~clarified certain aspects of ASU 2016-02, as well as, ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided for an optional transition method which allowed for the ~~effective~~application of the legacy lease guidance, including its disclosure requirements, for the comparative periods presented in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the date of adoption. In March 2019, the FASB issued ASU ~~2014-09~~2019-01, Leases (Topic 824) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December ~~31,~~15, 2018, and interim periods within those fiscal years.

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

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

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

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortened the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU 2017-08 was effective for fiscal years and interim periods within those fiscal years, ~~with early adoption permitted for reporting periods~~ beginning after December 15, ~~2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related~~2018. The amendments were required 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 isintended~~be applied through a modified-retrospective transition approach that required a cumulative-effect adjustment directly to ~~improve the operability and understandability~~retained earnings as 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~~beginning of ~~Topic 606: identifying performance obligations and~~ the ~~licensing implementation guidance; ASU 2016-12,~~ ~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients~~,~~which contains certain provisions and practical expedients in response to identified implementation issues; and ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,~~ ~~which is intended to clarify the Codification and/or to correct unintended application~~period of ~~guidance. ASU 2014-09 allows for either full retrospective or modified retrospective~~ adoption. WeThe Company adopted ASU ~~2014-09 and the related ASUs~~2017-08 on January 1, ~~2018 using the modified retrospective method, which was applied to all contracts on the date of initial adoption.~~

~~These ASUs primarily affected our network implementation service revenue performance obligations~~2019, and contract costs. We are using the “output method” to measure network implementation services progress, which 1) accelerates revenue recognition for certain performance obligations related to service revenue arrangements that were previously deferred until customer acceptance and 2) requires capitalization and amortization of the incremental costs of obtaining a contract as described below.

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

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

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

For the three months ended September 30, 2018

(In thousands)

As Reported

Balances Without Adoption of ASC 606

Effect of Adoption of ASC 606

Sales

Products

$
121,043

$
120,588

$
455

Services

$
19,292

$
17,932

$
1,360

Cost of Sales

Products

$
69,943

$
69,754

$
189

Services

$
11,944

$
11,046

$
898

Income before benefit for income taxes

$
3,220

$
2,492

$
728

Benefit for income taxes

$
4,369

$
3,382

$
987

Net income

$
7,589

$
5,874

$
1,715

For the nine months ended September 30, 2018

(In thousands)

As Reported

Balances Without Adoption of ASC 606

Effect of Adoption of ASC 606

Sales

Products

$
341,359

$
341,464

$
(105
)
Services

$
47,830

$
46,062

$
1,768

Cost of Sales

Products

$
208,184

$
208,480

$
(296
)
Services

$
32,828

$
31,743

$
1,085

Loss before benefit for income taxes

$
(22,784
)

$
(23,658
)

$
874

Benefit for income taxes

$
11,889

$
10,938

$
951

Net loss

$
(10,895
)

$
(12,720
)

$
1,825

In ~~January 2016,~~August 2017, the FASB issued ASU ~~2016-01,~~2017-12, ~~Financial Instruments — Overall: Recognition~~Derivatives and ~~Measurement of Financial Assets~~Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expanded and ~~Financial Liabilities,~~ ~~which addresses certain aspects~~refined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the ~~recognition, measurement, presentation~~effects of hedging instruments and ~~disclosure~~hedge items in the financial statements, and included certain targeted improvements to ease the application of ~~financial instruments. Subsequently,~~current guidance related to the assessment of hedge effectiveness. In October 2018, the FASB issued ASU ~~2018-03,~~2018-16, ~~Technical Corrections~~Derivatives and ~~Improvements to Financial Instruments – Overall (Subtopic 825-10)~~Hedging (Topic 815): ~~Recognition and Measurement~~Inclusion of ~~Financial Assets and Financial Liabilities,~~the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting, which ~~issued technical corrections~~permits the OIS rate based on SOFR as a U.S. benchmark interest rate. Both ASU 2017-12 and ~~improvements intended to clarify certain aspects of~~ ASU ~~2016-01. ASU 2016-01 was~~2018-16 were effective for fiscal years, and interim periods within those fiscal years, beginning ~~January 1, 2018 and we now recognize any changes in the fair value of certain equity investments in net income as prescribed by the new standard rather than in other comprehensive income. We~~after December 15, 2018. The Company adopted ASU ~~2016-01~~2017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements as we currently do not have any hedging instruments.

In February 2018, ~~using~~ the ~~modified retrospective method, which resulted in a $3.2 million~~FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. ASU 2018-02 allowed for an optional reclassification ~~of net unrealized gains~~ from accumulated other comprehensive income to ~~opening~~retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2018-02 on January 1, 2019, and upon adoption reclassified $0.4 million of stranded tax effects created by rate changes related to the Tax Cuts and Jobs Act of 2017 to retained earnings. ~~ASU 2018-03 is effective for us with the interim period beginning after June 15, 2018.~~ See Note ~~7 of Notes to Consolidated Financial Statements~~13 for additional information.

~~In March 2017, the FASB issued ASU 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 amends ASC 715,~~ ~~Compensation — Retirement Benefits~~, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. We adopted ASU 2017-07 on January 1, 2018. We retrospectively adopted the presentation of service cost separate from other components of net periodic pension costs. As a result, $0.1 million and $0.3 million have been reclassified from cost of sales, selling, general and administrative expenses, and research and development expense to other income (expense), net for the three and nine months ended September 30, 2017, respectively.

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

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

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

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

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

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

The ~~preliminary~~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 Sumitomo are as follows:

~~(In thousands)~~
~~Assets~~
~~Other receivables~~	$	~~104~~
~~Inventory~~		~~510~~
~~Property, plant and equipment~~		~~392~~
~~Intangible assets~~		~~22,100~~
~~Total assets acquired~~		~~23,106~~

~~Liabilities~~
~~Deferred income taxes~~		~~(3,978~~	)
~~Total liabilities assumed~~		~~(3,978~~	)

~~Total net assets~~		~~19,128~~
~~Gain on bargain purchase of a business, net of tax~~		~~(11,322~~	)
~~Total purchase price~~	$	~~7,806~~

(In thousands)	SmartRG			Sumitomo
Assets
Tangible assets acquired	$	8,594		$	1,006
Intangible assets		9,960			22,100
Goodwill		3,489			—
Total assets acquired		22,043			23,106
Liabilities
Liabilities assumed		(6,001	)		(3,978	)
Total liabilities assumed		(6,001	)		(3,978	)
Total net assets		16,042			19,128
Gain on bargain purchase of a business, net of tax		—			(11,322	)
Total purchase price	$	16,042		$	7,806

The actual revenue and net loss included in ~~our~~the Consolidated Statements of Income for SmartRG and Sumitomo for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~the period~~from March 19, 2018 to ~~September 30,~~March 31, 2018 are as follows:

	Three Months Ended		March 19, 2018 to			Three Months Ended			March 19 to
(In thousands)	September 30, 2018		September 30, 2018			March 31, 2019			March 31, 2018
Revenue	$	1,021	$	2,218		$	7,348		$	—
Net income (loss)	$	564	$	(322	)
Net loss						$	(1,684	)	$	(77	)

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

(In thousands)	Value		Life (years)		Value		Life (years)
Customer relationships	$	13,400		12.0	$	15,190	3 – 12
Developed technology						7,400	7
Licensed technology		5,900		9.0		5,900	9
Supplier relationship		2,800		2.0		2,800	2
Licensing agreements						560	5 – 10
Trade name						210	3
Total	$	22,100			$	32,060

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

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles of ~~$0.7~~$1.3 million and ~~$1.6~~$0.2 million respectively, related to ~~this acquisition.~~

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 typically 30 days. 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 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 and is recognized when control is transferred to our customers, which is generally when we ship the products. Shipping terms are generally FOB shipping point. Revenue is recorded net of 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.

sales. 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.~~equipment. These arrangements typically include network equipment, network implementation services and maintenance services. ~~Product revenue~~See Note 12 for these leases is generally recorded when we transfer control of the product to our customers. Revenue for network implementation and maintenance services is recognized as described below. Customers are typically invoiced and pay in equal installments over the lease term. In relation to these lease agreements, during the three months ended September 30, 2018 and 2017, we recognized revenue of $4.2 million and $8.4 million, respectively, and during the nine months ended September 30, 2018 and 2017 we recognized revenue of $10.5 million and $15.4 million, respectively.additional information.

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.

~~Our maintenance service periods range from one month~~In addition to ~~five years. Customers are typically invoiced and pay for maintenance services at the beginning of the maintenance period. We recognize~~our reporting segments, we also report revenue for maintenance services on a straight-line basis over the maintenance period in services revenue as our customers benefit evenly throughout the contract term and deferred revenues are recorded in current and non-current unearned revenue.

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

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

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

As of ~~September 30, 2018,~~March 31, 2019, we did not have any significant performance obligations related to customer contracts that had an original expected duration of one year or more, other than maintenance services, which are satisfied over time.

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

(In thousands)	September 30, 2018		January 1, 2018		March 31, 2019		December 31, 2018
Accounts receivable	$	101,865	$	144,150
Accounts receivable, net					$	99,032	$	99,385
Contract assets	$	4,564	$	374	$	2,333	$	3,766
Unearned revenue	$	17,004	$	13,070	$	15,230	$	17,940
Non-current unearned revenue	$	3,846	$	4,556	$	4,514	$	5,296

~~The decrease in accounts receivable is due to~~$6.9 million of the collection of customer specific payment terms that became due in the first quarter of 2018. The increase in the contract asset balance for the nine months ended September 30, 2018 is primarily attributable to revenue recognized that has not yet been billed to the customer during the period. The increase in theoutstanding unearned revenue balance as of nine months ended September 30, 2018 is primarily attributable to cash payments received or due in advance of satisfying our performance obligations, offset by $8.9 million of revenues recognized that were included in the unearned revenue balance as ofat December 31, ~~2017.~~

~~The following table disaggregates our~~2018 was recognized as revenue ~~by major source for~~during the three months ended ~~September 30, 2018:~~

~~The following table disaggregates our revenue by major source for the nine months ended September 30, 2018:~~

Our effective tax rate ~~decreased~~increased from an expense of ~~23.1% in the nine months ended September 30, 2017, to a benefit of 34.9%~~15.1%, excluding the tax effect of the bargain purchase gain, in the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2018, to an expense of 28.6% in the three months ended March 31, 2019. The ~~decrease~~increase in the effective tax rate between the two periods is primarily driven by the ~~completion of other tax projects,~~shift to profitability in the current ~~year net losses in our domestic business and~~quarter.

The Company continually reviews the ~~effect~~adequacy of the ~~U.S. Tax Cuts~~valuation allowance and ~~Jobs Act,~~recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance with ASC 740, Income Taxes (ASC 740). As of March 31, 2019, we had net deferred tax assets of $36.9 million. Since management continues to assess the realization of these deferred tax assets and related valuation allowance(s), as such, we may release a portion of the valuation allowance or establish a new valuation allowance based on operations in the jurisdictions in which ~~was signed into law~~these assets arose. Our assessment includes the evaluation of evidence, some of which requires significant judgment, including historical operating results, the evaluation of three-year cumulative income, future taxable income and tax planning strategies. Should management determine a valuation allowance is needed in the future due to not being able to absorb loss carryforwards, it could have a material effect on ~~December 22, 2017.~~

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

The following table summarizes the components of net periodic pension cost for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In thousands)	2018			2017			2018			2017			2019			2018
Service cost	$	294		$	327		$	905		$	930		$	375		$	308
Interest cost		179			158			551			448			162			187
Expected return on plan assets		(381	)		(329	)		(1,174	)		(935	)		(355	)		(399	)
Amortization of actuarial losses		61			80			188			228			203			64
Net periodic pension cost	$	153		$	236		$	470		$	671		$	385		$	160

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

The following table summarizes ~~the~~ stock-based compensation expense related to stock options, performance stock units (PSUs), restricted stock units (RSUs) and restricted stock for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ which was recognized as follows:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In thousands)	2018			2017			2018			2017			2019			2018
Stock-based compensation expense included in cost of sales	$	101		$	97		$	298		$	281		$	104		$	95
Selling, general and administrative expense		894			994			2,924			3,018			1,063			1,035
Research and development expense		645			743			2,021			2,274			692			689
Stock-based compensation expense included in operating expenses		1,539			1,737			4,945			5,292			1,755			1,724
Total stock-based compensation expense		1,640			1,834			5,243			5,573			1,859			1,819
Tax benefit for expense associated with non-qualified options, PSUs, RSUs and restricted stock		(292	)		(402	)		(1,016	)		(1,215	)		(443	)		(384	)
Total stock-based compensation expense, net of tax	$	1,348		$	1,432		$	4,227		$	4,358		$	1,416		$	1,435

The following table is a summary of our stock options outstanding as of December 31, ~~2017~~2018 and ~~September 30, 2018~~March 31, 2019, and the changes that occurred during the ~~nine~~three months ended ~~September 30, 2018:~~March 31, 2019:

(In thousands, except per share amounts)

Number of
Stock Options

Weighted Avg.
Exercise Price

Weighted Avg.
Remaining
Contractual
Life In Years

Aggregate
Intrinsic Value

Stock options outstanding, December 31, 2017

5,148

$
22.65

4.87

$
6,109

Stock options granted

—

$
—

Stock options exercised

(85
)

$
15.48

Stock options forfeited

(71
)

$
16.50

Stock options expired

(331
)

$
25.87

Stock options outstanding, September 30, 2018

4,661

$
22.64

4.12

$
2,730

Stock options vested and expected to vest, September 30, 2018

4,661

$
22.64

4.12

$
2,730

Stock options exercisable, September 30, 2018

3,952

$
23.75

3.63

$
1,600

	Number of Stock Options (in thousands)			Weighted Avg. Exercise Price (per share)		Weighted Avg. Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Stock options outstanding, December 31, 2018		4,382		$	22.91		4.10	$	—
Stock options granted		—		$	—
Stock options exercised		—		$	—
Stock options forfeited		(8	)	$	15.33
Stock options expired		(33	)	$	23.13
Stock options outstanding, March 31, 2019		4,341		$	22.93		3.80	$	—
Stock options exercisable, March 31, 2019		4,098		$	23.37		3.63	$	—

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

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

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ~~the~~ADTRAN’s closing stock price ~~of our stock~~ on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money ~~stock~~ options) that would have been received by the option holders had all option holders exercised their options on ~~September 30, 2018.~~March 31, 2019. The amount of aggregate intrinsic value will change based on the fair market value of ~~our~~ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 was ~~$0.1 million and $0.2 million, respectively.~~

As of September 30, 2018, there was $1.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over an average remaining recognition period of 1.0 years.zero.

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

There were no stock options granted during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 or ~~2017.~~2018.

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, ~~2017~~2018 and the changes that occurred during the ~~nine~~three months ended ~~September 30, 2018:~~March 31, 2019:

(In thousands, except per share amounts)	Number of Shares			Weighted Avg. Grant Date Fair Value
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2017		1,292		$	21.33
						Number of Shares (in thousands)			Weighted Avg. Grant Date Fair Value (per share)
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2018							1,570		$	18.52
PSUs, RSUs and restricted stock granted		22		$	17.84		59		$	12.54
PSUs, RSUs and restricted stock vested		(14	)	$	20.19		(1	)	$	18.86
PSUs, RSUs and restricted stock forfeited		(165	)	$	21.66		(44	)	$	17.88
Unvested PSUs, RSUs and restricted stock outstanding, September 30, 2018		1,135		$	21.23
Unvested PSUs, RSUs and restricted stock outstanding, March 31, 2019							1,584		$	18.32

The fair value of our PSUs with market conditions is calculated using a Monte Carlo simulation valuation method. The fair value of RSUs and restricted stock is equal to the closing price of our stock on the ~~date of grant. During~~business day immediately preceding the ~~first quarter of 2017, the Compensation Committee of the Board of Directors approved a PSU~~ grant ~~of 0.5 million shares that contain performance conditions. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant.~~date.

~~As of September 30, 2018, there was $9.8 million of~~At March 31, 2019, total unrecognized compensation expense related to ~~unvested~~the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $16.1 million, which is expected to be recognized over an average remaining recognition period of ~~2.6~~2.8 years. In addition, there was ~~$9.4~~$9.0 million of unrecognized compensation expense related to the unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period of ~~three~~0.8 years ~~as the~~if achievement of the performance ~~objective~~obligation becomes probable. For the three ~~and nine~~ months ~~ended September 30,~~ending March 31, 2019 and 2018, no compensation expense was recognized related to these performance-based ~~PSU awards.~~

At ~~September 30,~~March 31, 2019, we held the following debt securities and other investments, recorded at either fair value or cost:

	Amortized		Gross Unrealized					Carrying
(In thousands)	Cost		Gains		Losses			Value
Corporate bonds	$	15,964	$	69	$	(24	)	$	16,009
Municipal fixed-rate bonds		951		—		(13	)		938
Asset-backed bonds		7,171		13		(9	)		7,175
Mortgage/Agency-backed bonds		4,561		6		(26	)		4,541
U.S. government bonds		4,238		—		(11	)		4,227
Foreign government bonds		2,159		—		(2	)		2,157
Available-for-sale debt securities held at fair value	$	35,044	$	88	$	(85	)	$	35,047
Restricted investment held at cost									25,600
Other investments held at cost									1,180
Total carrying value of available-for-sale investments								$	61,827

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

	Amortized		Gross Unrealized					Carrying		Amortized		Gross Unrealized					Carrying
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Corporate bonds	$	25,758	$	13	$	(209	)	$	25,562	$	20,777	$	19	$	(112	)	$	20,684
Municipal fixed-rate bonds		1,451		—		(36	)		1,415		1,339		—		(26	)		1,313
Asset-backed bonds		8,384		—		(29	)		8,355		5,230		5		(14	)		5,221
Mortgage/Agency-backed bonds		5,450		—		(87	)		5,363		3,833		2		(44	)		3,791
U.S. government bonds		19,957		—		(184	)		19,773		9,271		1		(66	)		9,206
Foreign government bonds		593		2		—			595		592		—		(8	)		584
Available-for-sale debt securities held at fair value	$	61,593	$	15	$	(545	)	$	61,063	$	41,042	$	27	$	(270	)	$	40,799
Restricted investment held at cost									26,700									25,600
Other investments held at cost									520									397
Total carrying value of available-for-sale investments								$	88,283								$	66,796

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

Amortized

Gross Unrealized

Carrying

(In thousands)

Cost

Gains

Losses

Value

Corporate bonds

$
32,654

$
44

$
(155
)

$
32,543

Municipal fixed-rate bonds

2,902

2

(22
)

2,882

Asset-backed bonds

6,545

1

(20
)

6,526

Mortgage/Agency-backed bonds

5,554

1

(46
)

5,509

U.S. government bonds

14,477

—

(174
)

14,303

Foreign government bonds

725

5

—

730

Available-for-sale debt securities held at fair value

$
62,857

$
53

$
(417
)

$
62,493

Restricted investment held at cost

27,800

Other investments held at cost

547

Total carrying value of available-for-sale investments

$
90,840

As of ~~September 30, 2018~~March 31, 2019, our debt securities had the following contractual maturities:

(In thousands)	Corporate bonds		Municipal fixed-rate bonds		Asset- backed bonds		Mortgage / Agency- backed bonds		U.S. government bonds		Foreign government bonds		Corporate bonds		Municipal fixed-rate bonds		Asset- backed bonds		Mortgage / Agency- backed bonds		U.S. government bonds		Foreign government bonds
Less than one year	$	2,800	$	—	$	3,112	$	—	$	—	$	—	$	3,127	$	—	$	872	$	—	$	1,691	$	—
One to two years		10,122		287		657		—		11,716		285		8,389		—		387		289		—		1,196
Two to three years		9,898		1,128		714		425		5,565		310		4,493		938		976		—		1,324		961
Three to five years		2,742		—		2,244		1,561		2,492		—		—		—		3,105		827		1,212		—
Five to ten years		—		—		445		525		—		—		—		—		1,038		303		—		—
More than ten years		—		—		1,183		2,852		—		—		—		—		797		3,122		—		—
Total	$	25,562	$	1,415	$	8,355	$	5,363	$	19,773	$	595	$	16,009	$	938	$	7,175	$	4,541	$	4,227	$	2,157

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

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

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In thousands)	2018			2017			2018			2017			2019			2018
Gross realized gains on debt securities	$	24		$	91		$	49		$	148		$	41		$	—
Gross realized losses on debt securities		(50	)		(28	)		(365	)		(179	)		(19	)		(73	)
Total gain (loss) recognized, net	$	(26	)	$	63		$	(316	)	$	(31	)	$	22		$	(73	)

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

At ~~September 30, 2018,~~March 31, 2019, we held a ~~$26.7~~$25.6 million restricted certificate of deposit that is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond), which totaled ~~$26.7~~$25.6 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. At ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the estimated fair value of the Bond using a level 2 valuation technique was approximately ~~$26.5~~$25.5 million and ~~$26.7~~$25.4 million, respectively, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due.

The restricted funds held as collateral against the principal amount of the Bond will be used to pay the outstanding principal and interest upon the Bond’s maturity on January 1, 2020.

Our marketable equity securities consist of publicly traded ~~stocks or~~stock, funds and certain other investments 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)~~value or cost (where appropriate). ~~Unrealized gains and losses were recognized in accumulated other comprehensive income, net of deferred taxes, on the balance sheet.~~

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

17ASU 2016-01 also provides a measurement alternative for equity investments that do not have a readily determinable fair value in which investments can be recorded at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment. We elected to record our equity investment that does not have a readily determinable fair value using the measurement alternative method. The carrying value of this investment was $3.4 million and $0 as of March 31, 2019 and December 31, 2018, respectively.

Realized and unrealized gains and losses for our marketable equity securities for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 were as follows:

	Three Months Ended		Nine Months Ended		Three Months Ended
	September 30,		September 30,		March 31,
(In thousands)	2018		2018		2019			2018
Realized gains (losses) on equity securities sold	$	1,240	$	1,587	$	(14	)	$	398
Unrealized gains (losses) on equity securities held		3,293		4,129		5,918			(422	)
Total gain (loss) recognized, net	$	4,533	$	5,716	$	5,904		$	(24	)

As of ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ gross unrealized losses related to individual investments in a continuous loss position for twelve months or longer were not significant.

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

	Fair Value Measurements at September 30, 2018 Using										Fair Value Measurements at March 31, 2019 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)		Cost or Fair Value		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	1,423	$	1,423	$	—	$	—	$	1,279	$	1,279	$	—	$	—
Foreign government securities		600		—		600		—
Commercial paper										6,547		—		6,547		—
Cash equivalents		2,023		1,423		600		—		7,826		1,279		6,547		—
Available-for-sale debt securities
Corporate bonds		25,562		—		25,562		—		16,009		—		16,009		—
Municipal fixed-rate bonds		1,415		—		1,415		—		938		—		938		—
Asset-backed bonds		8,355		—		8,355		—		7,175		—		7,175		—
Mortgage/Agency-backed bonds		5,363		—		5,363		—		4,541		—		4,541		—
U.S. government bonds		19,773		19,773		—		—		4,227		4,227		—		—
Foreign government bonds		595		—		595		—		2,157		—		2,157		—
Marketable equity securities								—								—
Marketable equity securities – various industries		40,645		40,645		—		—		30,725		30,725		—		—
Equity in escrow		277		277		—		—		174		174		—		—
Deferred compensation plan assets		20,948		20,948		—		—		20,416		20,416		—		—
Available-for-sale securities		122,933		81,643		41,290		—
Total debt and equity securities at fair value										86,362		55,542		30,820		—
Other investments held at cost
Other investments										3,375		—		—		—
Total other investments held at cost										3,375		—		—		—
Total	$	124,956	$	83,066	$	41,890	$	—	$	97,563	$	56,821	$	37,367	$	—

	Fair Value Measurements at December 31, 2017 Using										Fair Value Measurements at December 31, 2018 Using
(In thousands)	Fair Value		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Cost or Fair Value		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents
Money market funds	$	5,851	$	5,851	$	—	$	—	$	1,554	$	1,554	$	—	$	—
Commercial paper		3,999		—		3,999		—
Cash equivalents		9,850		5,851		3,999		—		1,554		1,554		—		—
Available-for-sale debt securities
Corporate bonds		32,543		—		32,543		—		20,684		—		20,684		—
Municipal fixed-rate bonds		2,882		—		2,882		—		1,313		—		1,313		—
Asset-backed bonds		6,526		—		6,526		—		5,221		—		5,221		—
Mortgage/Agency-backed bonds		5,509		—		5,509		—		3,791		—		3,791		—
U.S. government bonds		14,303		14,303		—		—		9,206		9,206		—		—
Foreign government bonds		730		—		730		—		584		—		584		—
Marketable equity securities
Marketable equity securities – various industries		35,662		35,662		—		—		26,763		26,763		—		—
Equity in escrow										253		253		—		—
Deferred compensation plan assets		19,883		19,883		—		—		18,256		18,256		—		—
Available-for-sale securities		118,038		69,848		48,190		—
Total debt and equity securities at fair value										86,071		54,478		31,593		—
Total	$	127,888	$	75,699	$	52,189	$	—	$	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.

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

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 cost of sales, the same line item of the Consolidated Statements of Income at which the effects of the hedged item are recorded.

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

As of ~~September 30, 2018,~~March 31, 2019, we had no foreign exchange forward contracts.

The changes in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows:

The changes in our derivatives designated as hedging instruments recorded in other comprehensive income (OCI) and reclassified to income, net of tax, during the three and nine months ended September 30, 2018 and 2017, were as follows:

	Amount of Gains (Losses) Recognized in						Amount of Gains (Losses) Reclassified
	OCI on Derivatives						from AOCI into Income
						Location of Gains							Three Months Ended
	Nine Months Ended September 30,					(Losses) Reclassified	Nine Months Ended September 30,					Income Statement	March 31,
(In thousands)	2018		2017			from AOCI into Income	2018		2017			Location	2019		2018
Derivatives Designated as Hedging Instruments:
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	—	$	(619	)	Cost of Sales	$	—	$	(423	)	Other income (expense), net	$	—	$	13

At ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, inventory consisted of the following:

	September 30,		December 31,		March 31,		December 31,
(In thousands)	2018		2017		2019		2018
Raw materials	$	47,664	$	44,185	$	40,841	$	45,333
Work in process		1,289		1,939		1,513		1,638
Finished goods		57,107		76,418		51,255		52,877
Total	$	106,060	$	122,542	$	93,609	$	99,848

We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, raw materials reserves totaled ~~$17.2~~$17.1 million and ~~$15.0~~$17.6 million, respectively, and finished goods inventory reserves totaled ~~$10.6~~$12.8 million and ~~$8.3~~$12.4 million, respectively.

Goodwill, all of which relates to our ~~acquisition~~acquisitions of Bluesocket, Inc., and SmartRG, was ~~$3.5~~$7.0 million and $7.1 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, of which ~~$3.1~~$6.6 million and $0.4 million is allocated to our Network Solutions and Services & Support reportable segments, ~~respectively.~~respectively, as of March 31, 2019, and of which $6.7 million and $0.4 million was allocated to our Network Solutions and Services & Support reportable segments, respectively, as of December 31, 2018. Goodwill related to our SmartRG acquisition was adjusted during the three months ended March 31, 2019, as a result of filing the SmartRG income tax returns during the quarter.

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,~~2018, we concluded that it was not necessary to perform the two-step impairment test. ~~There have been no impairment losses recognized since the acquisition in 2011.~~

Intangible assets ~~are included in other assets in the accompanying Consolidated Balance Sheets and~~ include intangibles acquired in conjunction with ~~our~~several acquisitions ~~of Bluesocket,~~since 2011, with the most recent being SmartRG, Inc. ~~on August 4, 2011, the NSN BBA business on May 4, 2012, CommScope’s active fiber access business on September 13, 2016~~in November 2018 and ~~Sumitomo Electric Lightwave Corp.’s~~SEI’s North American EPON business and technology license and OEM supply agreement with ~~Sumitomo Electric Industries, Ltd. on~~SEI in March ~~19,~~ 2018.

The following table presents our intangible assets as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017. Fully amortized intangible assets have been removed from prior year balances for comparability.~~2018:

															March 31, 2019							December 31, 2018
(In thousands)	September 30, 2018							December 31, 2017							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	$	20,724	$	(5,072	)	$	15,652	$	7,474	$	(4,283	)	$	3,191	$	22,363	$	(5,797	)	$	16,566	$	22,455	$	(5,380	)	$	17,075
Developed technology																10,170		(2,526	)		7,644		12,801		(4,867	)		7,934
Licensed technology		5,900		(355	)		5,545		—		—			—		5,900		(683	)		5,217		5,900		(520	)		5,380
Developed technology		5,435		(4,799	)		636		5,524		(4,663	)		861
Supplier relationship		2,800		(758	)		2,042		—		—			—
Intellectual property		930		(930	)		—		930		(852	)		78
Patent		500		(140	)		360		500		(89	)		411
Non-compete		200		(181	)		19		200		(115	)		85
Supplier relationships																2,800		(1,458	)		1,342		2,800		(1,108	)		1,692
Licensing agreements																560		(24	)		536		560		(5	)		555
Patents																500		(174	)		326		500		(157	)		343
Trade names		100		(100	)		—		100		(65	)		35		310		(124	)		186		310		(106	)		204
Total	$	36,589	$	(12,335	)	$	24,254	$	14,728	$	(10,067	)	$	4,661	$	42,603	$	(10,786	)	$	31,817	$	45,326	$	(12,143	)	$	33,183

Amortization expense ~~all of which relates to business acquisitions,~~ was ~~$0.9~~$1.3 million and ~~$0.5~~$0.4 million for the three months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017, respectively, and $2.4 million for the nine months ended September 30, 2018 and 2017.~~respectively.

As of ~~September 30, 2018,~~March 31, 2019, the estimated future amortization expense of our intangible assets is as follows:

(In thousands)	Amount		Amount
Remainder of 2018	$	859
2019		3,540
Remainder of 2019			$	3,994
2020		2,657		4,444
2021		2,364		4,096
2022		2,350		3,472
2023				3,320
Thereafter		12,484		12,491
Total	$	24,254	$	31,817

We have operating leases for office space, automobiles, and other equipment in the United States and in various international locations in which we do business. We also have other contracts such as, manufacturing agreements and service agreements, which we review to determine if they contain an embedded lease. We specifically review 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.

As of March 31, 2019, our leases have remaining lease terms of one month to six years, some of which include options to extend the leases for up to 3 years, and some of which include options to terminate the leases within 3 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 right of use liability included on the Consolidated Balance Sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. Lease expense related to these short-term leases was $0.2 million for the three months ended March 31, 2019, and is included in selling, general and administrative expenses on the Consolidated Statement of Income. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected the practical expedient which allows us to not separate lease and non-lease components. None of our lease agreements contain any material residual value guarantees or material restrictive covenants.

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

The components of lease expense included in the Consolidated Statement of Income for the three months ended March 31, 2019 are as follows:

As of March 31, 2019, the maturity of lease liabilities included on the Consolidated Balance Sheet are as follows:

Operating lease payments include $1.2 million related to options to extend lease terms that are reasonably certain of being exercised and 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 are as follows:

~~11.~~Our leases do not provide an implicit borrowing 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 is then determined based on a credit spread over LIBOR as well as the Bloomberg Curve Matrix for the U.S. Communications section.

We are the lessor in sales-type lease arrangements for network equipment, which have initial terms of up 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. 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 non-lease components is determined by standalone sales 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 at an individual customer level. At March 31, 2019 and December 31, 2018, we had no allowance for credit losses for our net investment in sales-type leases. As of March 31, 2019 and December 31, 2018, the components of the net investment in sales-type leases were as follows:

The components of sales-type lease gross profit recognized at the lease commencement date and interest income, included in the Consolidated Statement of Income for the three months ended March 31, 2019 are as follows:

Future minimum lease payments to be received from sales-type leases as of March 31, 2019 are as follows:

~~A summary of the changes in stockholders’ equity for the nine months ended September 30, 2018 is as follows:~~

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, ~~that~~which are implemented through open market or private purchases from time to time as conditions warrant. During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we repurchased ~~0.9 million~~13,000 shares of our common stock at an average price of ~~$15.75~~$14.06 per share. As of ~~September 30, 2018,~~March 31, 2019, we have the authority to purchase an additional ~~2.7~~2.5 million shares of our common stock under the current ~~plans approved by the Board~~authorization of ~~Directors.~~

~~We issued 0.1~~up to 5.0 million shares of treasury stock during the nine months ended September 30, 2018 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $18.97. We received proceeds totaling $1.3 million from the exercise of these stock options during the nine months ended September 30, 2018.

~~During the nine months ended September 30, 2018, we paid cash dividends as follows (in thousands except per share amounts):~~

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

The following tables present the changes in accumulated other comprehensive income (loss), net of tax, by component for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

	Three Months Ended September 30, 2018												Three Months Ended March 31, 2019
(In thousands)	Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			Total			Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			ASU 2018-02 Adoption		Total
Beginning balance	$	(741	)	$	(4,219	)	$	(4,158	)	$	(9,118	)	$	(563	)	$	(8,041	)	$	(5,812	)	$	—	$	(14,416	)
Other comprehensive income (loss) before reclassifications		1,208			—			(451	)		757			231			—			(1,160	)		—		(929	)
Amounts reclassified from accumulated other comprehensive income (loss)		(1,240	)		37			—			(1,203	)		(46	)		121			—			—		75
Amounts reclassified to retained earnings ⁽¹⁾														—			—			—			385		385
Net current period other comprehensive income (loss)		(32	)		37			(451	)		(446	)		185			121			(1,160	)		385		(469	)
Ending balance	$	(773	)	$	(4,182	)	$	(4,609	)	$	(9,564	)	$	(378	)	$	(7,920	)	$	(6,972	)	$	385	$	(14,885	)

Three Months Ended September 30, 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

Beginning balance

$
2,112

$
(338
)

$
(4,876
)

$
(3,714
)

$
(6,816
)
Other comprehensive income (loss) before
reclassifications

1,420

(127
)

—

1,541

2,834

Amounts reclassified from accumulated other
comprehensive income (loss)

(616
)

269

73

—

(274
)
Net current period other comprehensive income (loss)

804

142

73

1,541

2,560

Ending balance

$
2,916

$
(196
)

$
(4,803
)

$
(2,173
)

$
(4,256
)

⁽¹⁾

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

~~The following tables present the changes in accumulated other comprehensive income (loss), net of tax, by component for the nine months ended September 30, 2018 and 2017:~~

	Nine Months Ended September 30, 2018												Three Months Ended March 31, 2018
(In thousands)	Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			Total			Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			Total
Beginning balance	$	2,567		$	(4,286	)	$	(1,576	)	$	(3,295	)	$	2,567		$	(4,286	)	$	(1,576	)	$	(3,295	)
Other comprehensive income (loss) before reclassifications		869			—			(3,033	)		(2,164	)		(257	)		—			842			585
Amounts reclassified from accumulated other comprehensive income (loss)		(989	)		104			—			(885	)		65			62			—			127
Amounts reclassified to retained earnings ⁽¹⁾		(3,220	)		—			—			(3,220	)		(3,220	)		—			—			(3,220	)
Net current period other comprehensive income (loss)		(3,340	)		104			(3,033	)		(6,269	)		(3,412	)		62			842			(2,508	)
Ending balance	$	(773	)	$	(4,182	)	$	(4,609	)	$	(9,564	)	$	(845	)	$	(4,224	)	$	(734	)	$	(5,803	)

Nine Months Ended September 30, 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

Beginning balance

$
404

$
—

$
(5,017
)

$
(7,575
)

$
(12,188
)
Other comprehensive income (loss) before
reclassifications

4,262

(619
)

—

5,402

9,045

Amounts reclassified from accumulated other
comprehensive income (loss)

(1,750
)

423

214

—

(1,113
)
Net current period other comprehensive income (loss)

2,512

(196
)

214

5,402

7,932

Ending balance

$
2,916

$
(196
)

$
(4,803
)

$
(2,173
)

$
(4,256
)

The following tables present the details of reclassifications out of accumulated other comprehensive income (loss) for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

(In thousands)	Three Months Ended September 30, 2018
					Three Months Ended March 31, 2019
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income Is Presented	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income Is Presented
Unrealized gains (losses) on available-for-sale securities:
Net realized gain (loss) on sales of securities	$	1,676		Net investment gain
Unrealized gains on available-for-sale securities:
Net realized gain on sales of securities					$	62		Net investment gain (loss)
Defined benefit plan adjustments – actuarial losses		(54	)	⁽¹⁾		(175	)	⁽¹⁾
Total reclassifications for the period, before tax		1,622				(113	)
Tax (expense) benefit		(419	)
Tax benefit						38
Total reclassifications for the period, net of tax	$	1,203			$	(75	)

(In thousands)

Three Months Ended September 30, 2017
Details about Accumulated Other Comprehensive Income (Loss) Components

Amount
Reclassified
from
Accumulated
Other
Comprehensive
Income (Loss)

Affected Line Item in the
Statement Where Net
Income Is Presented
Unrealized gains (losses) on available-for-sale securities:

Net realized gain (loss) on sales of securities

$
1,066

Net investment gain
Impairment expense

(57
)

Net investment gain
Net losses on derivatives designated as hedging instruments

(385
)

Cost of sales
Defined benefit plan adjustments – actuarial losses

(106
)

⁽¹⁾
Total reclassifications for the period, before tax

518

Tax (expense) benefit

(244
)

Total reclassifications for the period, net of tax

$
274

	Three Months Ended March 31, 2018
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income Is Presented
Unrealized losses on available-for-sale securities:
Net realized loss on sales of securities	$	(73	)	Net investment gain (loss)
Defined benefit plan adjustments – actuarial losses		(90	)	⁽¹⁾
Total reclassifications for the period, before tax		(163	)
Tax benefit		36
Total reclassifications for the period, net of tax	$	(127	)

~~The following tables present the details of reclassifications out of accumulated other comprehensive income (loss) for the nine months ended September 30, 2018 and 2017:~~

The following table presents the tax effects related to the change in each component of other comprehensive income (loss) for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

	Three Months Ended									Three Months Ended									Three Months Ended									Three Months Ended
	September 30, 2018									September 30, 2017									March 31, 2019									March 31, 2018
(In thousands)	Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount
Unrealized gains (losses) on available-for-sale securities	$	1,632		$	(424	)	$	1,208		$	2,328		$	(908	)	$	1,420		$	312		$	(81	)	$	231		$	(347	)	$	90		$	(257	)
Unrealized gains (losses) on cash flow hedges		—			—			—			(184	)		57			(127	)
Reclassification adjustment for amounts related to available-for-sale investments included in net income		(1,676	)		436			(1,240	)		(1,009	)		393			(616	)		(62	)		16			(46	)		73			(8	)		65
Reclassification adjustment for amounts related to cash flow hedges included in net income		—			—			—			385			(116	)		269			—			—			—			(3,220	)		—			(3,220	)
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income		54			(17	)		37			106			(33	)		73			175			(54	)		121			90			(28	)		62
Foreign currency translation adjustment		(451	)		—			(451	)		1,541			—			1,541			(1,160	)		—			(1,160	)		842			—			842
Total Other Comprehensive Income (Loss)	$	(441	)	$	(5	)	$	(446	)	$	3,167		$	(607	)	$	2,560		$	(735	)	$	(119	)	$	(854	)	$	(2,562	)	$	54		$	(2,508	)

~~The following table presents the tax effects related to the change in each component of other comprehensive income for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended

Nine Months Ended

September 30, 2018

September 30, 2017

(In thousands)

Before-Tax
Amount

Tax
(Expense)
Benefit

Net-of-Tax
Amount

Before-Tax
Amount

Tax
(Expense)
Benefit

Net-of-Tax
Amount

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

$
1,174

$
(305
)

$
869

$
6,987

$
(2,725
)

$
4,262

Unrealized gains (losses) on cash flow hedges

—

—

—

(897
)

278

(619
)
Reclassification adjustment for amounts related to
   available-for-sale investments included in net
   income

(1,352
)

363

(989
)

(2,869
)

1,119

(1,750
)
Reclassification adjustment for amounts reclassed
   to retained earnings related to the adoption of
   ASU 2016-01

(3,220
)

—

(3,220
)

—

—

—

Reclassification adjustment for amounts related to
   cash flow hedges included in net income

—

—

—

539

(116
)

423

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

151

(47
)

104

310

(96
)

214

Foreign currency translation adjustment

(3,033
)

—

(3,033
)

5,402

—

5,402

Total Other Comprehensive Income (Loss)

$
(6,280
)

$
11

$
(6,269
)

$
9,472

$
(1,540
)

$
7,932

A summary of the calculation of basic and diluted earnings (loss) per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ is as follows:

	Three Months Ended				Nine Months Ended					Three Months Ended
	September 30,				September 30,					March 31,
(In thousands, except per share amounts)	2018		2017		2018			2017		2019		2018
Numerator
Net income (loss)	$	7,589	$	15,898	$	(10,895	)	$	34,950	$	770	$	(10,814	)
Denominator
Weighted average number of shares – basic		47,710		47,870		47,927			48,110		47,782		48,232
Effect of dilutive securities
Stock options		27		487		—			385		—		—
PSUs, RSUs and restricted stock		97		174		—			123		71		—
Weighted average number of shares – diluted		47,834		48,531		47,927			48,618		47,853		48,232
Net income (loss) per share – basic	$	0.16	$	0.33	$	(0.23	)	$	0.73
Net income (loss) per share – diluted	$	0.16	$	0.33	$	(0.23	)	$	0.72
Earnings (loss) per share – basic										$	0.02	$	(0.22	)
Earnings (loss) per share – diluted										$	0.02	$	(0.22	)

~~Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 3.9 million and 3.2 million for~~For the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017, respectively,~~2.9 million and 4.8 million ~~and 3.9 million for~~stock options were outstanding but were not included in the ~~nine months ended September 30, 2018 and 2017. As a result~~computation of diluted earnings (loss) per share because the stock options’ exercise prices were greater than the average market price of the ~~net loss for~~common shares, therefore making them anti-dilutive under the ~~nine months ended September 30, 2018, we excluded 0.1 million of unvested~~treasury stock ~~options, PSUs, RSUs and restricted stock from the calculation of diluted EPS due to their anti-dilutive effect.~~method.

We operate in two reportable segments: (1) Network Solutions and (2) Services & Support. 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. Services & Support includes our suite of ProCloud^® managed services, network installation, engineering and maintenance services and fee-based technical support and equipment repair/replacement plans.

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

The following table presents information about the reported sales and gross profit of our reportable segments for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. We do not produce asset information by reportable segment; therefore, it is not reported.

									Three Months Ended
	Nine Months Ended								March 31,
	September 30, 2018				September 30, 2017				2019				2018
(In thousands)	Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit
Network Solutions	$	341,359	$	133,175	$	444,607	$	214,746	$	125,822	$	55,088	$	105,253	$	36,641
Services & Support		47,830		15,002		95,457		30,080		17,969		5,524		15,553		3,092
Total	$	389,189	$	148,177	$	540,064	$	244,826	$	143,791	$	60,612	$	120,806	$	39,733

In addition to our reporting segments, we also report revenue for the following three categories – Access & Aggregation, Subscriber Solutions & Experience (formerly Customer ~~Devices,~~Devices) and Traditional & Other Products.

The table below presents sales information by category for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(In thousands)	2018		2017		2018		2017		2019		2018
Access & Aggregation	$	91,901	$	135,959	$	258,323	$	394,741	$	99,778	$	81,680
Customer Devices		38,552		35,582		103,213		105,683
Subscriber Solutions & Experience										36,753		30,101
Traditional & Other Products		9,882		13,571		27,653		39,640		7,260		9,025
Total	$	140,335	$	185,112	$	389,189	$	540,064	$	143,791	$	120,806

~~14.~~The following table represents sales information by geographic area for the three months ended March 31, 2019 and 2018:

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 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 ~~$9.0~~$8.8 million and ~~$9.7~~$8.6 million at ~~September 30, 2018~~March 31, 2019 and December 31, 2017. During the three months ended March 31, 2017, we recorded a receivable and a reduction in warranty expense related to a settlement with a third party supplier for a defective component, the impact of2018, which ~~is reflected in the table below. During the three months ended September 30, 2018, we had a reversal of prior provisions, the impact of which is reflected in the table below. These liabilities~~ are included in accrued expenses in the accompanying Consolidated Balance ~~Sheets.~~Sheet.

A summary of warranty expense and write-off activity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ is as follows:

	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(In thousands)	2018			2017			2018			2017			2019			2018
Balance at beginning of period	$	10,111		$	9,180		$	9,724		$	8,548		$	8,623		$	9,724
Plus: Amounts charged to cost and expenses		(34	)		4,087			6,649			6,401			1,131			1,822
Less: Deductions		(1,053	)		(2,328	)		(7,349	)		(4,010	)		(952	)		(1,859	)
Balance at end of period	$	9,024		$	10,939		$	9,024		$	10,939		$	8,802		$	9,687

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

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of ~~September 30, 2018,~~March 31, 2019, of which $7.7 million has been applied to these commitments.

In February 2019, we announced the restructuring of our workforce predominantly in Germany, which included the closure of the office location in Munich, Germany accompanied by relocation or severance benefits for the affected employees. The restructuring is expected to be completed in the fourth quarter of 2019. The cumulative amount incurred during the three months ended March 31, 2019 related to this restructuring program is $1.8 million. We also offered a voluntary early retirement offering to certain other employees which was announced to employees in March 2019. As of March 31, 2019, we did not have sufficient information on which to estimate an additional liability associated with the voluntary early retirement program.

In January 2018, we announced an early retirement incentive program for employees that met certain requirements. The cumulative amount incurred during the year ended December 31, 2018 related to this restructuring program was $7.3 million, of which $6.0 million was incurred during the three months ended March 31, 2018. We do not expect to incur any additional expenses related to this restructuring program.

A reconciliation of the beginning and ending restructuring liability, which is included in accrued wages and benefits on the Consolidated Balance Sheet, is as follows:

The components of restructuring expense in the Consolidated Statements of Income are as follows:

On ~~October 16, 2018,~~April 17, 2019, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on ~~October 31, 2018.~~May 2, 2019. The payment date will be ~~November 14, 2018.~~May 16, 2019. The quarterly dividend payment will be 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~~A voluntary early retirement offering was communicated to certain of our employees in Germany in March 2019. These employees were given until April 28, 2019 to accept the 4^th ~~quarter and~~early retirement offering. Therefore, as of ~~November 6, 2018,~~March 31, 2019, we did not have ~~repurchased 0.1~~sufficient information on which to estimate the liability associated with this program. The Company expects to incur approximately $0.8 million ~~shares~~in restructuring expense during the second quarter of ~~our common stock through open market purchases at an average cost of $13.60 per share. We currently have~~2019 related to the ~~authority to purchase an additional 2.6 million shares of our common stock under the current plan approved by the Board of Directors.~~early retirement program.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear ~~elsewhere~~ in Item 1 of this document.

ADTRAN ~~Inc.~~ is a leading global provider of networking and communications ~~equipment.~~equipment, serving a diverse domestic and international customer base in 68 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 ~~Internet~~internet communications across a variety of network ~~infrastructures. These solutions~~infrastructures and are ~~deployed~~currently 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 build revenue, we are constantly conducting research and development (R&D) of new products addressing customer needs and testing those products for the particular specifications of the particular customers. In addition to our corporate headquarters in Huntsville, Alabama, we have R&D facilities in strategic global locations.

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.

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.

Our business is global. We supply different sets of products to different customers in different regions around the world. Our financial results in any period reflect the activities of our various customers in their respective regions at any given time. In order to service our customers and build 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. The lead times to ~~revenues~~revenue for ~~these~~new products vary.

~~As previously reported,~~ The Company made two acquisitions in 2018, strengthening its position in both the Cable/MSO and connected home markets. In the first quarter of 2018, we ~~experienced a significant negative impact on~~acquired the market-leading EPON business and certain assets for North America from Sumitomo Electric Industries Ltd. These solutions, combined with our ~~North American revenue as a result of a decision in mid-fourth quarter 2017 by a major customer to suspend a~~organic fiber access product ~~rollout following a merger. While we continue to sell to that customer, the project in question has not yet resumed~~portfolio and ~~we are unsure when, if ever, it will. During the periods covered in this report,~~ our ~~North American revenue was also impacted by slower-than-expected orders of an ultra-broadband product by a large domestic customer.~~

During the same period, however, we have seen a modest expansion of our revenues from much of the customer base and have brought to fruition our participation in a number of large customer projects which in some cases have begun to produce some revenue and in all cases we anticipate represent significant revenuedistributed access expertise, present new opportunities in the ~~future. These include next generation PON projects with large carriers, both domestically and internationally, the beginnings of deployment for a large project~~Cable/MSO market. Also, in the ~~APAC region,~~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 ~~significant network upgrade by~~complete cloud-to-consumer portfolio of virtualized management, data analytics, Wi-Fi-enabled residential gateways and software platforms. For more information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 1 of this report.

We review our financial performance, specifically revenue and gross profit, based on two reportable segments – Network Solutions and Services & Support. Network Solutions software and hardware products provide solutions supporting fiber-, copper- and coaxial-based infrastructures and a ~~Tier 1 European customer,~~growing number of wireless solutions, lowering the overall cost to deploy advanced services across a wide range of applications for Carrier, Cable/MSO networks and business networks, as well as ~~continued expansion~~for prior-generation products. Our Services & Support enables our customers to accelerate time to market, reduce costs and ~~opportunities for our EPON products to two of the top North American cable MSO operators.~~

While our Services business did not increase at the rate that it did in 2016 and 2017, and has decreased from the record levels we achieved in 2017 due to the above-mentioned merger-related disruption, we continue to develop our Services business around the world, and we anticipate that it will continue to expand and remain an increasingly important part of our revenue streams across the world. Margins on services revenue vary depending upon the typesimprove customer satisfaction through a complete portfolio of services, ~~performed.~~including maintenance, turnkey network implementation, solutions integration, and managed services. ADTRAN’s comprehensive network implementation services include engineering design and documentation (pre-construction), construction and installation (construction), and test, turn-up and provisioning (post-construction). Additionally, we partner with customers to tailor a program to each specific service-delivery need.

We report revenue for the following three categories – Access & Aggregation, Subscriber Solutions & Experience (formerly Customer ~~Devices,~~Devices) and Traditional & Other Products.

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

Subscriber Solutions & Experience (formerly Customer ~~Devices~~Devices) includes open-source connected home platforms, cloud services and any of our ~~products~~solutions and services that ~~provide end users~~deliver residential and/or enterprise subscribers an immersive and interactive broadband experience from the service provider’s access ~~to CSP networks. Our Customer Devices~~network. These products, software and services include SmartRG solutions and applications, NetVanta Enterprise IP business gateways, access routers, Ethernet switches, ProCloud service offerings, residential and enterprise operating systems (such as SmartOS and AOS), Bluesocket Wi-Fi portfolio, ~~includes a comprehensive array of~~ service provider and ~~enterprise~~ ~~hardware~~Cable/MSO Optical Network Terminals (ONTs), as well as related software applications and ~~software products~~services. In alignment with our increased focus on enhancing customer experience for both business and ~~services.~~consumer broadband customers as well as the addition of SmartRG during 2018, Customer Devices is now known as Subscriber Solutions & Experience, as this more accurately represents this revenue category and our vision moving forward.

Traditional & Other Products 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 Devices~~Subscriber Solutions & Experience categories.

See Note 1315 of Notes to Consolidated Financial Statements in Item 1 of this ~~report~~Form 10-Q for further information regarding these product categories.

Sales were $140.3 million and $389.2 million for the three and nine months ended September 30, 2018, compared to $185.1 million and $540.1 million for the three and nine months ended September 30, 2017. Our gross margin decreased to 41.6% and 38.1% in the three and nine months ended September 30, 2018, from 46.7% and 45.3% in the three and nine months ended September 30, 2017. Our operating income margin decreased to (1.6)% and (10.7)% for the three and nine months ended September 30, 2018, from 9.8% and 7.7% for the three and nine months ended September 30, 2017. Net income (loss) was $7.6 million and $(10.9) million for the three and nine months ended September 30, 2018, compared to $15.9 million and $35.0 million for the three and nine months ended September 30, 2017. Our effective tax rate, excluding the effect of the bargain purchase gain in 2018, was a benefit of 135.7% and 52.2% for the three and nine months ended September 30, 2018, compared to a provision of 17.2% and 23.1% for the three and nine months ended September 30, 2017. Earnings (loss) per share, assuming dilution, was $0.16 and $(0.23) for the three and nine months ended September 30, 2018, compared to $0.33 and $0.72 for the three and nine months ended September 30, 2017.

Our operating results have fluctuated 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. Backlog levels vary because of seasonal trends, the timing of customer projects and other factors that affect customer order lead times. Many of our customers require prompt delivery of products. This requires us 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~~revenue 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 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.

Accordingly, our 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. Factors that could materially affect our business, financial condition or operating results are included in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed on February ~~23, 2018~~28, 2019, with the SEC and in Part II Item 1A herein.

Our critical accounting policies and estimates have not changed significantly from those detailed in our most recent Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed on February ~~23, 2018~~28, 2019, with the SEC.

See Note 1 of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

RESULTS OF OPERATIONS – THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2018~~MARCH 31, 2019 COMPARED TO THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2018

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

	Three Months Ended
	March 31,
	2019				2018
Sales
Products		87.5		%		87.1		%
Services		12.5				12.9
Total Sales		100.0				100.0
Cost of Sales
Products		49.2				56.8
Services		8.7				10.3
Total Cost of Sales		57.8				67.1
Gross Profit		42.2				32.9
Selling, general and administrative expenses		24.4				27.8
Research and development expenses		22.0				27.2
Operating Income		(4.3	)			(22.1	)
Interest and dividend income		0.4				0.7
Interest expense		(0.1	)			(0.1	)
Net investment gain (loss)		4.1				(0.1	)
Other income (expense), net		0.6				—
Gain on bargain purchase of a business, net		—				9.4
Income (Loss) Before Provision for Income Taxes		0.7				(12.2	)
(Provision) benefit for income taxes		(0.2	)			3.3
Net Income (Loss)		0.5		%		(9.0	)	%

Our sales ~~decreased 24.2%~~increased 19.0% from ~~$185.1~~$120.8 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$140.3~~$143.8 million in the three months ended ~~September 30, 2018, and decreased 27.9% from $540.1 million in the nine months ended September 30, 2017 to $389.2 million in the nine months ended September 30, 2018.~~March 31, 2019. The ~~decrease~~increase in sales for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to ~~a merger-related review and slowdown~~an $18.1 million increase in ~~spending at a domestic Tier 1 customer that particularly affected our~~ Access & Aggregation products, ~~and services, which decreased $44.1~~a $6.7 million ~~and $136.4 million over the same three and nine month periods last year. The decline~~increase in sales ~~to the previously mentioned domestic Tier 1 customer was~~of our Subscriber Solutions & Experience products, partially offset by ~~an increase~~a $1.8 million decrease in sales ~~to international customers. Compared to the same three and nine month periods last year, our Customer Devices products increased $3.0 million and decreased $2.5 million, respectively, and~~of our Traditional & Other ~~Products decreased $3.7 million and $12.0 million, respectively.~~products.

Network Solutions sales ~~decreased 16.8%~~increased 19.5% from ~~$145.5~~$105.3 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$121.0~~$125.8 million in the three months ended ~~September 30, 2018, and decreased 23.2% from $444.6 million~~March 31, 2019. The increase in sales for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 is primarily attributable to ~~$341.4 million~~an increase in ~~the nine months ended September 30, 2018.~~sales of Access & Aggregation products and Subscriber Solutions & Experience products, partially offset by a decrease in sales of our Traditional & Other products. The ~~decrease~~increase in sales of our Access & Aggregation products for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to ~~a merger-related review~~increased fiber to the premises (FTTN) products, Gfast distribution point units (DPUs) and ~~slowdown in spending at a domestic Tier 1 customer, partially offset by an~~fiber access and aggregation. The increase ~~in sales to an international Tier 1 customer as discussed further below. The changes for the three and nine months ended September 30, 2018~~ in sales of our ~~Customer Devices products are~~Subscriber Solutions & Experience is primarily attributable to ~~the changes in sales of~~increased fiber CPE ~~products.~~and network termination. While we expect that ~~revenues~~revenue from Traditional & Other Products will continue to decline over time, ~~these revenues~~this revenue may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.

Services & Support sales ~~decreased 51.3%~~increased 15.5% from ~~$39.6~~$15.6 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$19.3~~$18.0 million in the three months ended ~~September 30, 2018, and decreased 49.9% from $95.5 million in the nine months ended September 30, 2017 to $47.8 million in the nine months ended September 30, 2018.~~March 31, 2019. The ~~decrease~~increase in sales for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to ~~a decrease~~an increase in network installation services for Access & Aggregation ~~products related to the above mentioned merger-related review and slowdown in spending at a domestic Tier 1 customer.~~products.

International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased ~~52.0%~~21.4% from ~~$37.2~~$58.7 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$56.6~~$71.3 million in the three months ended ~~September 30, 2018, and increased 38.8% from $126.2 million in the nine months ended September 30, 2017 to $175.2 million in the nine months ended September 30, 2018.~~March 31, 2019. International sales, as a percentage of total sales, increased from ~~20.1%~~48.6% for the three months ended ~~September 30, 2017~~March 31, 2018 to ~~40.3%~~49.6% for the three months ended ~~September 30, 2018, and increased from 23.4% for the nine months ended September 30, 2017 to 45.0% in the nine months ended September 30, 2018.~~March 31, 2019. The increase in sales for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to an increase in sales in ~~EMEA~~LATAM and ~~APAC.~~APAC regions. The increase in sales in ~~EMEA~~LATAM for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to a network expansion program ~~and~~of a ~~Services award by a~~ large ~~European~~ Tier-1 customer. The increase in sales in APAC for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to a network expansion program in Australia.

Our international ~~revenues are~~revenue is largely focused on broadband infrastructure and ~~are impacted~~is effected 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 have improved, some new broadband technologies are still being reviewed for regulatory and standards compliance, which may affect the timing of those technologies. ~~In Mexico, regulatory changes have created uncertainty for customers resulting in slowdowns in their network buying patterns.~~ The competitive landscape in certain international markets is also ~~impacted~~effected by the increased presence of Asian manufacturers that seek to compete aggressively on price. AOur revenue and operating income in our international markets can be negatively impacted by 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.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 pressure on ~~revenues~~revenue 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 revenue impact in the first half of 2017 due to our being awarded a network expansion program by a large European Tier-1 customer. During 2018, this European Tier 1 customer undertook an additional network expansion project. We anticipate that as our Latin American customers resume their network upgrade projects, we may experience further enhancement to our revenues. As announced, we received of a new nationwide award in the APAC region, as well as additional awards based on new ADTRAN technologies in the EMEA region that have, and we believe will continue to have, a positive impact to our revenues. However, a resolution of the regulatory changes affecting a major customer in Mexico has been slower than anticipated, and business with one of our customers in that region has not yet returned to normal levels. We are continuing to pursue opportunities with new customers in this region.

As a percentage of sales, cost of sales ~~increased~~decreased from ~~53.3%~~67.1% in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~58.4%~~57.8% in the three months ended ~~September 30, 2018, and increased from 54.7% in the nine months ended September 30, 2017 to 61.9% in the nine months ended September 30, 2018.~~March 31, 2019. The ~~increase~~decrease in cost of sales as a percentage of sales for the three months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to a regional revenue shift, customer and product mix, and services and support mix. The increase in cost of sales as a percentage of sales for the nine months ended September 30, 2018 is primarily attributable to a regional revenue shift, customer and product mix, and services and support mix and a decrease in labor expense as a result of a restructuring ~~expenses and an increase~~program in ~~warranty replacements.~~the first quarter of 2018.

Network Solutions cost of sales, as a percent of that segment’s sales, ~~increased~~decreased from ~~50.6%~~65.2% in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~57.8%~~56.2% in the three months ended ~~September 30, 2018, and increased from 51.7% in the nine months ended September 30, 2017 to 61.0% in the nine months ended September 30, 2018.~~March 31, 2019. The ~~increase~~decrease in cost of sales as a percentage of sales for the three months ended September 30, 2018 is primarily attributable to a regional revenue shift and customer and product mix. The increase in cost of sales as a percentage of sales for the nine months ended September 30, 2018March 31, 2019 is primarily attributable to a regional revenue shift, customer and product mix ~~an increase~~and a decrease in ~~warranty~~labor expense due to a ~~settlement in first quarter of 2017 with a third party supplier for a defective component and purchase discounts received from a contract manufacturer~~restructuring program in the first quarter of ~~2017 and restructuring expenses.~~2018.

An important part of our strategy is to reduce the ~~product~~ cost of each succeeding product generation and then to lower the product’s selling price based on the cost savings ~~achieved.~~ 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 ~~63.3%~~80.1% in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~61.9%~~69.3% in the three months ended ~~September 30, 2018, and increased from 68.5% in the nine months ended September 30, 2017 to 68.6% in the nine months ended September 30, 2018.~~March 31, 2019. The decrease in cost of sales as a percentage of sales for the three months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to customer mix, services and support mix and cost reductions. The increase in cost of sales as a percentage of sales for the nine months ended September 30, 2018 is primarily attributable to services and support mix and an increase in labor expenselower fixed personnel costs due to a restructuring ~~program.~~program in the first quarter of 2081, customer mix and services and support mix.

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~~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.~~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 ~~revenues~~revenue grew and ~~are~~is now the largest component of our Services & Support 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 ~~revenues~~revenue comprising a larger percentage of our overall ~~revenues,~~revenue, 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 ~~decreased 11.3%~~increased 4.8% from ~~$34.7~~$33.5 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$30.8~~$35.1 million in the three months ended ~~September 30, 2018, and decreased 7.5% from $104.2 million in the nine months ended September 30, 2017 to $96.4 million in the nine months ended September 30, 2018.~~March 31, 2019. The ~~decrease~~increase in selling, general and administrative expenses for the three months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to ~~decreases~~increases in deferred compensation ~~and labor expense, travel~~ expense and ~~independent contractor expense, partially offset by an increase in restructuring expense. The decrease in selling, general and administrative~~incremental expenses ~~for~~as a result of the nine months ended September 30, 2018 is primarily attributable to a decrease in compensation and labor expense, independent contractor expense, and travel expense, partially offset by an increase in restructuring expense.SmartRG acquisition.

As a percentage of sales, selling, general and administrative expenses ~~increased~~decreased from ~~18.7%~~27.8% in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~21.9%~~24.4% in the three months ended ~~September 30, 2018, and increased from 19.3% in the nine months ended September 30, 2017 to 24.8% in the nine months ended September 30, 2018.~~March 31, 2019. Selling, general and administrative expenses as a percentage of sales may fluctuate whenever there is a significant fluctuation in ~~revenues~~revenue for the periods being compared.

Research and development expenses decreased ~~11.0%~~3.7% from ~~$33.6~~$32.8 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$29.9~~$31.6 million in the three months ended ~~September 30, 2018, and decreased 5.7% from $99.1 million in the nine months ended September 30, 2017 to $93.5 million in the nine months ended September 30, 2018.~~March 31, 2019. The decrease in research and development expenses for the three months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to decreases in restructuring and labor ~~engineering materials and independent contractor expense. The decrease in research and development~~ expenses, for the nine months ended September 30, 2018 is primarily attributable to decreases in engineering materials and independent contractor expense and amortization of intangibles acquired in the third quarter of 2016 that were fully amortized in 2017, partially offset by an increase in ~~restructuring expense.~~incremental expenses as a result of the SmartRG and Sumitomo acquisitions.

As a percentage of sales, research and development expenses ~~increased~~decreased from ~~18.1%~~27.2% in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~21.3%~~22.0% in the three months ended ~~September 30, 2018, and increased from 18.4% in the nine months ended September 30, 2017 to 24.0% in the nine months ended September 30, 2018.~~March 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~~revenue 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 continued expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and product development efforts, which provides 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~~revenue from a major new product group.

Interest and dividend income decreased ~~13.3%~~31.8% from ~~$1.0~~$0.9 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$0.8~~$0.6 million in the three months ended ~~September 30, 2018, and decreased 8.9% from $2.9 million in the nine months ended September 30, 2017 to $2.6 million in the nine months ended September 30, 2018.~~March 31, 2019. The decrease in interest and dividend income for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to fluctuations in investment ~~balances and a decrease in the rate of return on those investments due to interest rate movements.~~balances.

Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.1 million infor both the three months ended ~~September 30, 2017 and~~March 31, 2018 and ~~$0.4 million in the nine months ended September 30, 2017 and 2018,~~2019, as we had no substantial change in our fixed-rate borrowing. See “Liquidity and Capital Resources” below for additional information on our revenue bond.

Net investment ~~gains~~gain (loss) increased ~~346.7%~~ from ~~$1.0~~a loss of $(0.1) million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$4.5~~a gain of $5.9 million in the three months ended ~~September 30, 2018, and increased 88.2% from $2.9 million~~March 31, 2019. The fluctuation in ~~the nine months ended September 30, 2017 to $5.4 million in the nine months ended September 30, 2018. The increase in~~our net investment ~~gains for the three and nine months ended September 30, 2018~~gain (loss) is primarily attributable to changes in fair value on equity securities recognized during the ~~period under ASC 2016-01. Prior to January 1, 2018, changes in fair value were recognized in accumulated other comprehensive income, net of deferred taxes, on the balance sheet.~~period. See Note 7 of Notes to Consolidated Financial Statements, included in Item 1 ~~Note 7~~of this report, and “Investing Activities” in “Liquidity and Capital Resources” for additional information.

Other income (expense), net, is comprised primarily of miscellaneous income, gains and losses on foreign currency transactions and gains and losses on foreign exchange forward ~~contracts, investment account management fees, and scrap raw material sales.~~contracts. Other income (expense), net increased ~~123.9%~~ from ~~$0.8~~$0.1 million of expense in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$0.2~~$0.9 million of income in the three months ended September 30, 2018. Other income (expense), net decreased 94.9% from $1.4 million of expense in the nine months ended September 30, 2017 to $0.1 million of expense in the nine months ended September 30, 2018.March 31, 2019. The change in other income (expense), net for the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 is primarily attributable to ~~higher losses on foreign exchange contracts and transactions in 2017.~~the receipt of insurance proceeds from a life insurance policy.

Gain on bargain purchase of a business was $11.3 million during the three months ended March 31, 2018 and 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. onin March ~~19,~~ 2018. No gain on bargain purchase of a business was recorded during the three months ended March 31, 2019. See Note 2 of Notes to Consolidated Financial Statements included in Item 1 of this report for additional information.

Our effective tax rate ~~decreased~~increased from ~~an expense of 23.1% in the nine months ended September 30, 2017 to~~ a benefit of ~~34.9%~~15.1%, excluding the tax effect of the bargain purchase gain, in the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2018 to an expense of 28.6% three months ended March 31, 2019. The ~~decrease~~increase in the effective tax rate between the two periods is primarily driven by the ~~completion of other tax projects,~~shift to profitability in the current ~~year net losses in our domestic business and the effect of the U.S. Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.~~quarter.

As a result of the above factors, net income ~~(loss) decreased $8.3~~increased $11.6 million from ~~$15.9~~a net loss of $10.8 million in the three months ended ~~September 30, 2017~~March 31, 2018 to ~~$7.6~~net income of $0.8 million in the three months ended ~~September 30, 2018, and decreased $45.8 million from $35.0 million in the nine months ended September 30, 2017 to $(10.9) million in the nine months ended September 30, 2018.~~March 31, 2019.

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, business acquisitions 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 ~~September 30, 2018,~~March 31, 2019, cash on hand was ~~$94.2~~$109.1 million and short-term investments were ~~$5.9~~$31.3 million, which resulted in available short-term liquidity of ~~$100.1~~$140.4 million, of which ~~$70.1~~$70.2 million was held by our foreign subsidiaries. At December 31, ~~2017,~~2018, cash on hand was ~~$86.4~~$105.5 million and short-term investments were ~~$16.1~~$3.2 million, which resulted in available short-term liquidity of ~~$102.6~~$108.7 million, of which ~~$56.8~~$87.1 million was held by our foreign subsidiaries. We intend to permanently reinvest the funds held by our foreign subsidiaries outside the U.S. and our current business plans do not indicate a need to repatriate these funds to finance domestic operations. The ~~decrease~~increase in short-term liquidity from December 31, ~~2017~~2018 to ~~September 30, 2018~~March 31, 2019 is primarily attributable to ~~shifts among available~~the restricted certificate of deposit totaling $25.6 million being reclassified from a long-term investment ~~option tenures~~ to ~~provide funds for our~~a short-term ~~cash needs.~~investment.

Our working capital, which consists of current assets less current liabilities, decreased ~~26.5%~~0.8% from ~~$306.3~~$237.4 million as of December 31, ~~2017~~2018 to ~~$225.0~~$235.4 million as of ~~September 30, 2018,~~March 31, 2019, and our current ratio, defined as current assets divided by current liabilities, decreased from ~~3.87~~3.01 as of December 31, ~~2017~~2018 to ~~2.82~~2.66 as of ~~September 30, 2018.~~March 31, 2019. The decreases in our working capital and current ratio are primarily attributable to ~~decreases~~the reclassification of our bond payable to current liabilities as it matures in ~~accounts receivable and inventory, and an increase~~January 2020 as well as a decrease in ~~income tax payable.~~inventory. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from ~~2.31~~1.76 as of December 31, ~~2017~~2018 to ~~1.63~~1.69 as of ~~September 30, 2018.~~March 31, 2019. The decrease in the quick ratio is primarily attributable to ~~a decrease~~the reclassification of our bond payable to current liabilities as it matures in ~~accounts receivable and~~January 2020, partially offset by an increase in ~~income tax payable.~~cash and cash equivalents and short-term investments, mainly related to the reclassification of our restricted certificate of deposit from a long-term investment to a short-term investment.

~~Accounts~~Net accounts receivable decreased ~~29.3%~~0.4% from ~~$144.2~~$99.4 million at December 31, ~~2017~~2018 to ~~$101.9~~$99.0 million at ~~September 30, 2018. We had no~~March 31, 2019. Our allowance for doubtful accounts was $0.1 million at December 31, ~~2017 or September 30, 2018.~~2018 and March 31, 2019. Quarterly accounts receivable ~~days~~day’s sales outstanding (DSO) decreased from ~~105~~65 days as of December 31, ~~2017~~2018 to 6762 days as of ~~September 30, 2018.~~March 31, 2019. The decrease in net accounts receivable is due to the ~~collection of customer-specific payment terms that became due in the first quarter of 2018 and the~~ timing of ~~sales~~international shipments and ~~collections during the quarter. Additionally, certain international customers may have longer payment terms than U.S. customers.~~customer mix.

Other receivables decreased 5.8% from $36.7 million at December 31, 2018 to $34.6 million at March 31, 2019. The decrease in other receivables is primarily attributable to a decrease in contract assets, leased equipment receivables and income tax receivables partially offset by an increase in contract manufacturers’ receivables.

Quarterly inventory turnover increased from ~~2.28~~3.29 turns as of December 31, ~~2017~~2018 to ~~2.89~~3.44 turns at ~~September 30, 2018.~~March 31, 2019. Inventory decreased ~~13.5%~~6.2% from ~~$122.5~~$99.8 million at December 31, ~~2017~~2018 to ~~$106.1~~$93.6 million at ~~September 30, 2018.~~March 31, 2019. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to services activity and 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 remained consistent at $60.1 million at December 31, ~~2017~~2018 and March 31, 2019. Accounts payable will fluctuate due to ~~$10.4 million at September 30, 2018. The decrease~~variations in ~~prepaid expenses~~the timing of the receipt of supplies, inventory and ~~other current assets is primarily attributable to the recognition of deferred costs related to network installation~~ services ~~that were completed during the first quarter.~~

Income tax payable increased 264.3% from $3.9 million at December 31, 2017 to $14.3 million at September 30, 2018. The increase in income tax payable is primarily attributable to income taxes accruedand our subsequent payments for ~~foreign jurisdictions.~~

Capital expenditures totaled approximately ~~$5.7~~$1.9 million and ~~$12.3~~$2.0 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ 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 increased ~~$3.8~~$4.4 million from ~~$146.4~~$112.1 million at December 31, ~~2017~~2018 to ~~$150.2~~$116.5 million at ~~September 30, 2018.~~March 31, 2019. This increase reflects ~~funds available for investment provided by our operating activities, as well as~~the impact of net realized and unrealized gains and losses ~~and amortization of net premiums~~ on our combined investments plus new investments, partially offset by ~~our~~ cash ~~needs~~used for ~~capital expenditures, purchases of treasury stock,~~share repurchases, shareholder dividends and ~~shareholder dividends.~~property, plant and equipment purchases.

We typically invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal risk of loss. At ~~September 30,~~March 31, 2019, these investments included corporate bonds of $16.0 million, municipal bonds of $0.9 million, asset-backed bonds of $7.2 million, mortgage/agency bonds of $4.5 million, U.S. government bonds of $4.2 million and foreign government bonds of $2.2 million. At December 31, 2018, these investments included corporate bonds of ~~$25.6~~$20.7 million, municipal fixed-rate bonds of ~~$1.4~~$1.3 million, asset-backed bonds of ~~$8.4~~$5.2 million, mortgage/agency-backed bonds of ~~$5.4~~$3.8 million, U.S. government bonds of ~~$19.8~~$9.2 million and foreign government bonds of $0.6 million. 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. As of ~~September 30, 2018,~~March 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 ~~1.7~~0.96 years with an average Standard & Poor’s credit rating of ~~AA-.~~A+. 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 ~~increased 10.7%~~decreased 21.7% from ~~$130.3~~$108.8 million at December 31, ~~2017~~2018 to ~~$144.2~~$85.2 million at ~~September 30, 2018.~~March 31, 2019. Long-term investments at ~~September 30, 2018 and~~ December 31, ~~2017~~2018 included an investment in a certificate of deposit of ~~$26.7~~$25.6 million, ~~and $27.8 million, respectively,~~ which serves as collateral for our revenue bond. This certificate of deposit is now included in short-term investments as of March 31, 2019, as this bond matures on January 1, 2020. See “Debt” below for additional information. We also have investments in various marketable equity ~~investments included in~~securities classified as long-term investments with a fair market value of ~~$40.9~~$30.9 million and ~~$35.7~~$27.0 million, at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Long-term investments at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 also included ~~$20.9~~$20.4 million and ~~$19.9~~$18.3 million, respectively, related to our deferred compensation ~~plans, and $0.5~~plans.

Acquisition of businesses, net of cash acquired, totaled $7.8 million for the three months ended March 31, 2018. No businesses were acquired during the three months ended March 31, 2019. See Note 2 of ~~other investments carried at cost, consisting~~Notes to Consolidated Financial Statements included in Item 1 of ~~interests in two private equity funds.~~this report for additional information.

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 ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, we paid dividends totaling ~~$13.0 million.~~$4.3 million and $4.4 million, respectively.

We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond) which totaled ~~$26.7~~$25.6 million at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. At ~~September 30, 2018,~~March 31, 2019, the estimated fair value of the Bond was ~~approximately $26.5~~$25.5 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. ~~Included in long-term investments are restricted~~Restricted funds ~~in the amount of $26.7 million and $27.8 million at September 30, 2018 and December 31, 2017, respectively, which is~~serving as a collateral deposit against the principal amount of the ~~Bond.~~Bond in the amount of $25.6 million were included in short-term and long-term investments at March 31, 2019, and December 31, 2018, respectively. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due. ~~In connection with this decision, $1.1 million~~The restricted funds held as collateral against the principal amount of the Bond ~~has been classified as a current liability in accounts payable in~~will be used to pay the ~~Consolidated Balance Sheet at September 30, 2018.~~outstanding principal and interest upon the Bond’s maturity on January 1, 2020.

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, ~~that~~which are implemented through open market or private purchases from time to time as conditions warrant. During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we repurchased ~~0.9 million~~13,000 shares of our common stock, for $0.2 million at an average price of ~~$15.75~~$14.06 per share. ~~As of September 30, 2018, we~~We currently have ~~the authority~~authorization to ~~purchase~~repurchase an additional ~~2.7~~2.5 million shares of our common stock under the current ~~plans approved by the Board~~authorization of ~~Directors.~~up to 5.0 million shares.

~~We issued 0.1 million shares of treasury~~There were no stock options exercised during the ~~nine~~three months ended September 30, 2018 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $18.97. We received proceeds totaling $1.3 million from the exercise of these stock options during the nine months ended September 30, 2018.March 31, 2019.

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. During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, there have been no material changes in contractual obligations and commercial commitments from those discussed in our most recent Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 filed on February ~~23, 2018~~28, 2019 with the SEC.

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 corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. and foreign government 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-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 ~~September 30, 2018, $91.3~~March 31, 2019, $106.2 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits.

As of ~~September 30, 2018,~~March 31, 2019, approximately ~~$63.0~~$37.1 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. At ~~September 30, 2018,~~March 31, 2019, we held ~~$6.6~~$10.1 million of cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bps decline in interest rates as of ~~September 30, 2018~~March 31, 2019 would reduce annualized interest income on our cash and investments by approximately $0.1 million. In addition, we held ~~$56.3~~$26.9 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 as of ~~September 30, 2018~~March 31, 2019 would reduce the fair value of our fixed-rate bonds by approximately ~~$0.5 million.~~

As of September 30, 2017, approximately $108.1 million of our cash and investments was subject to being directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 bps for the entire year, while all other variables remain constant. At September 30, 2017, we held $39.4 million of cash and variable rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bps decline in interest rates as of September 30, 2017 would have reduced annualized interest income on our cash, money market instruments and variable rate demand notes by approximately $0.2 million. In addition, we held $68.7 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 as of September 30, 2017 would have reduced the fair value of our fixed-rate bonds by approximately $0.3$0.1 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 rates 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. We are exposed 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 predominately pay in U.S. dollars. We may establish cash flow hedges utilizing 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. As a result, changes in currency exchange rates could cause variations in gross margin in the products that we sell in the EMEA region.

We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as outstanding non-functional balances are revalued to the functional currency through profit and loss. When appropriate, we utilize foreign exchange forward contracts to help manage the volatility relating to these valuation exposures. All changes in the fair value of our derivative instruments that do not qualify for or are not designated for hedged accounting transactions are recognized as other income (expense), net in the Consolidated Statements of Income. We do not hold or issue derivative instruments for trading or other speculative purposes. All non-functional currencies billed would result in a combined hypothetical gain or loss of ~~$0.2~~$1.1 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. ~~Any~~The fluctuation compared to prior periods is due to an increase in U.S. dollar-denominated billings in a non-U.S. dollar denominated subsidiary as well as an increase in international sales. Although we do not currently hold any derivative instruments, any gain or loss would be partially mitigated by these derivative instruments.

As of ~~September 30, 2018,~~March 31, 2019, we ~~had no~~have certain material contracts, ~~other than~~including accounts receivable, ~~and~~ accounts payable and lease liabilities, denominated in foreign currencies. As of ~~September 30, 2018,~~March 31, 2019, we did not have any forward contracts outstanding.

For further information about the fair value of our investments and our derivative and hedging activities as of ~~September 30, 2018,~~March 31, 2019, see Notes 7 and 8 of Notes to Consolidated Financial ~~Statements.~~Statements included in Item 1 of this report.

(a) 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 ADTRAN. 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 quarterly report, have concluded that our disclosure controls and procedures are effective.

(b) 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.

A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, ~~2017, other than the following risk factor:~~2018.

Increased tariffs caused by changes in trade policies of the United States or other countries in which we do business, which could trigger retaliatory actions by affected countries resulting in “trade wars”, may increase costs for material imported into the United States and other countries. This in turn may increase our cost of goods and result in reduced profit margins or customer demand for some of our products or in trading partners limiting their trade with the United States.

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

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs

July 1, 2018 – July 31, 2018

—

$
—

—

2,746,655

August 1, 2018 – August 31, 2018

88,139

$
16.02

88,139

2,658,516

September 1, 2018 – September 30, 2018

—

$
—

—

2,658,516

Total

88,139

88,139

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2019 – January 31, 2019		—	$	—		—		2,558,516
February 1, 2019 – February 28, 2019		13,086	$	14.06		13,086		2,545,430
March 1, 2019 – March 31, 2019		—	$	—		—		2,545,430
Total		13,086				13,086

On July 14, 2015, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock (bringing the total shares authorized for repurchase to 50.0 million). This authorization will be implemented through open market or private purchases from time to time as conditions warrant.

Pursuant to the requirements 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.

Delaware	63-0918200
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
901 Explorer Boulevard Huntsville, Alabama	35806-2807
(Address of principal executive offices)	(Zip Code)

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2017		2018			2017
Pro forma revenue	$	187,027	$	390,449		$	545,706
Pro forma net income (loss)	$	14,997	$	(23,431	)	$	43,826
Pro forma earnings per share - basic	$	0.31	$	(0.49	)	$	0.91
Pro forma earnings per share - diluted	$	0.31	$	(0.49	)	$	0.90

(In thousands)	For the Three Months Ended March 31, 2018
Pro forma revenue	$	129,584
Pro forma net loss	$	(23,400	)
Pro forma loss per share - basic	$	(0.49	)
Pro forma loss per share - diluted	$	(0.49	)

		March 31,		January 1,
(In thousands)	Classification	2019		2019
Assets
Operating lease asset	Other assets	$	9,502	$	10,322
Total lease assets		$	9,502	$	10,322

Liabilities
Current operating lease liability	Accrued expenses	$	2,718	$	2,948
Non-current operating lease liability	Other non-current liabilities		6,801		7,374
Total lease liability		$	9,519	$	10,322

	As of March 31, 2019
Weighted average remaining lease term (years)
Operating leases with USD functional currency		3.0
Operating leases with Euro functional currency		5.1
Weighted average discount rate
Operating leases with USD functional currency		4.61	%
Operating leases with Euro functional currency		1.85	%

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

	For the three months ended September 30, 2018
(In thousands)	As Reported		Balances Without Adoption of ASC 606		Effect of Adoption of ASC 606
Sales
Products	$	121,043	$	120,588	$	455
Services	$	19,292	$	17,932	$	1,360
Cost of Sales
Products	$	69,943	$	69,754	$	189
Services	$	11,944	$	11,046	$	898

Income before benefit for income taxes	$	3,220	$	2,492	$	728
Benefit for income taxes	$	4,369	$	3,382	$	987
Net income	$	7,589	$	5,874	$	1,715

	As of September 30, 2018
(In thousands)	As Reported		Balances Without Adoption of ASC 606		Effect of Adoption of ASC 606
Assets
Other receivables	$	30,084	$	27,917	$	2,167
Inventory	$	106,060	$	106,402	$	(342	)
Equity
Retained earnings	$	900,324	$	898,499	$	1,825

(In thousands, except per share amounts)	Number of Stock Options			Weighted Avg. Exercise Price		Weighted Avg. Remaining Contractual Life In Years		Aggregate Intrinsic Value
Stock options outstanding, December 31, 2017		5,148		$	22.65		4.87	$	6,109
Stock options granted		—		$	—
Stock options exercised		(85	)	$	15.48
Stock options forfeited		(71	)	$	16.50
Stock options expired		(331	)	$	25.87
Stock options outstanding, September 30, 2018		4,661		$	22.64		4.12	$	2,730
Stock options vested and expected to vest, September 30, 2018		4,661		$	22.64		4.12	$	2,730
Stock options exercisable, September 30, 2018		3,952		$	23.75		3.63	$	1,600

(In thousands)	Classification	Three Months Ended March 31, 2019
Operating lease expense	Selling, general and administrative expenses	$	349
Operating lease expense	Research and development expenses		454
Operating lease expense	Cost of sales		16
Total lease expense		$	819

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

(In thousands)	As of March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities / assets
Cash used in operating activities related to operating leases		$ (811	)

Right-of-use assets obtained in exchange for lease obligations		$ 10,387

(In thousands)	Amount ⁽¹⁾
Remainder of 2019	$	9,005
2020		1,056
2021		493
2022		209
2023		78
Thereafter		2
Total	$	10,843

(In thousands)	Stockholders’ Equity
Balance, December 31, 2017	$	497,911
Net income (loss)		(10,895	)
Dividend payments		(12,976	)
Dividends accrued for unvested restricted stock units		(15	)
Net unrealized gains (losses) on available-for-sale securities (net of tax)		(3,340	)
Defined benefit plan adjustments (net of tax)		104
Foreign currency translation adjustment		(3,033	)
Proceeds from stock option exercises		1,321
Purchase of treasury stock		(14,185	)
Adoption of new accounting standards (see Note 1)		3,499
Stock-based compensation expense		5,243
RSU's and restricted stock vested		(33	)
Balance, September 30, 2018	$	463,601

Record Date	Payment Date	Per Share Amount		Total Dividend Paid
January 31, 2018	February 14, 2018	$	0.09	$	4,367
May 2, 2018	May 16, 2018	$	0.09	$	4,312
August 1, 2018	August 15, 2018	$	0.09	$	4,297

	Three Months Ended September 30, 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
Beginning balance	$	2,112		$	(338	)	$	(4,876	)	$	(3,714	)	$	(6,816	)
Other comprehensive income (loss) before reclassifications		1,420			(127	)		—			1,541			2,834
Amounts reclassified from accumulated other comprehensive income (loss)		(616	)		269			73			—			(274	)
Net current period other comprehensive income (loss)		804			142			73			1,541			2,560
Ending balance	$	2,916		$	(196	)	$	(4,803	)	$	(2,173	)	$	(4,256	)

	Nine Months Ended September 30, 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
Beginning balance	$	404		$	—		$	(5,017	)	$	(7,575	)	$	(12,188	)
Other comprehensive income (loss) before reclassifications		4,262			(619	)		—			5,402			9,045
Amounts reclassified from accumulated other comprehensive income (loss)		(1,750	)		423			214			—			(1,113	)
Net current period other comprehensive income (loss)		2,512			(196	)		214			5,402			7,932
Ending balance	$	2,916		$	(196	)	$	(4,803	)	$	(2,173	)	$	(4,256	)

Exhibit No.		Description

31		Rule 13a-14(a)/15d-14(a) Certifications

32		Section 1350 Certifications

101.INS		XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

		ADTRAN, Inc. (Registrant)


Date: ~~November 6, 2018~~May 7, 2019		/s/ ~~Roger D. Shannon~~Michael Foliano
		~~Roger D. Shannon~~Michael Foliano
		Senior Vice President of Finance and
		Chief Financial Officer
		~~Corporate Treasurer and Secretary~~
		(Principal ~~Financial~~Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company