UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number: 000-24612
ADTRAN, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 63-0918200 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
901 Explorer Boulevard Huntsville, Alabama | 35806-2807 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (256) 963-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value $0.01 per share | ADTN | The NASDAQ Global Select Market |
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Small reporting company |
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Emerging growth company |
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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 ☒
As of October 26, 2018,November 4, 2019, the registrant had 47,650,24547,826,323 shares of common stock, $0.01 par value per share, outstanding.
ADTRAN, Inc.
Quarterly Report on Form 10-Q
For the Three and Nine Months Ended September 30, 20182019
Table of Contents
2
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN.ADTRAN, Inc. (“ADTRAN”, the “Company”, “we”, “our” or “us”). ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report, our other filings with the Securities and Exchange Commission (SEC)(the “SEC”) and other communications with our stockholders. Any statement that does not directly relate to a historical or current fact is a forward-looking statement. Generally, the words, “believe”, “expect”, “intend���“intend”, “estimate”, “anticipate”, “will”, “may”, “could” and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could affect the accuracy of such statements. The following are some of the risks that could affect our financial performance or could cause such statementsactual results to be wrong. Adiffer materially from those expressed or implied in our forward-looking statements:
• | Our operating results may fluctuate in future periods, which may adversely affect our stock price. |
• | Our revenues for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results. |
• | General economic conditions may reduce our revenues and harm our operating results. |
• | Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could adversely affect our operating results, financial condition and cash flow. |
• | We expect gross margins to vary over time, and our levels of product and services gross margins may not be sustainable. |
• | We must continue to update and improve our products and develop new products to compete and to keep pace with improvements in communications technology. |
• | Our products may not continue to comply with evolving regulations governing their sale, which may harm our business. |
• | We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Violations of these laws and regulations may harm our business. |
• | Material weaknesses in our internal control over financial reporting, such as those identified in Part I, Item 4 of this Form 10-Q, could, if not remediated, result in a loss of investor confidence in the reliability of our financial statements, which in turn could negatively affect the price of our common stock. |
• | Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our global activities could subject us to penalties or other adverse consequences. |
• | Our operating results may be adversely affected due to uncertain global economic and financial market conditions. |
• | Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely impact our results of operations. |
• | If our products do not interoperate with our customers’ networks, installations may be delayed or cancelled, which could harm our business. |
• | The lengthy sales and approval process required by major and other service providers for new products could result in fluctuations in our revenue. |
• | Although we engage in research and development activities to develop new, innovative solutions and improve the application of developed technologies, we may miss certain market opportunities enjoyed by larger companies with substantially greater research and development resources. |
• | We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income. |
• | If we are unable to integrate recent and future acquisitions successfully, it could adversely affect our operating results, financial condition and cash flow. |
• | Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international regions may result in us not meeting our cost, quality or performance standards. |
• | Our dependence on a limited number of suppliers for certain raw materials and key components may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results. |
• | We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share. |
• | Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment volumes, field service repair obligations and other rework costs incurred in correcting product failures. If our estimates change, the liability for warranty obligations may be increased or decreased, impacting future cost of goods sold. |
• | Managing our inventory is complex and may include write-downs of excess or obsolete inventory. |
• | The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely affect our operating results, financial condition and cash flow. |
• | We may be adversely affected by fluctuations in currency exchange rates. |
• | Our success depends on our ability to reduce the selling prices of succeeding generations of our products. |
• | Breaches in our information systems and cyber-attacks could compromise our intellectual property and cause significant damage to our business and reputation. |
• | Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality and commercial value of our products. |
3
• | Software under license from third parties for use in certain of our products may not continue to be available to us on commercially reasonable terms. |
• | Our use of open source software could impose limitations on our ability to commercialize our products. |
• | We may incur liabilities or become subject to litigation that would have a material effect on our business. |
• | Consolidation and deterioration in the Competitive Local Exchange Carrier market could result in a significant decrease in our revenue. |
• | We depend on distributors who maintain inventories of our products. If the distributors reduce their inventories of these products, our sales could be adversely affected. |
• | If we are unable to successfully develop and maintain relationships with system integrators, service providers and enterprise value-added resellers, our sales may be negatively affected. |
• | If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted. |
• | New or revised tax regulations, changes in our effective tax rate or assessments arising from tax audits may have an adverse impact on our results. |
• | We are required to periodically evaluate the value of our deferred tax assets and long-lived assets, including the value of intangibles acquired and goodwill resulting from business acquisitions. Any future valuation allowances or impairment charges required may adversely affect our operating results. |
• | We may not fully realize the anticipated benefits of our restructuring plans. Our restructuring efforts may adversely affect our business and our operating results. |
• | Our success depends on attracting and retaining key personnel. |
• | Regulatory and potential physical impacts of climate change and other natural events may affect our customers and our production operations, resulting in adverse effects on our operating results. |
• | The price of our common stock has been volatile and may continue to fluctuate significantly. |
The foregoing list of risks is not exclusive. For a more detailed description of the risk factors that could materially affectassociated with 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 ofsee 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 with the SEC on February 23, 2018 with28, 2019 (as amended on September 20, 2019, the SEC. Though we have attempted to list comprehensively these important“2018 Form 10-K”), as well as the risk factors weset forth in Part II, Item 1A of this Form 10-Q. 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.
24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADTRAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
|
| September 30, |
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| December 31, |
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| September 30, |
|
| December 31, |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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ASSETS |
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Current Assets |
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| |
Cash and cash equivalents |
| $ | 94,173 |
|
| $ | 86,433 |
|
| $ | 96,407 |
|
| $ | 105,504 |
| |
Short-term investments |
|
| 5,912 |
|
|
| 16,129 |
|
|
| 28,754 |
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|
| 3,246 |
| |
Accounts receivable, less allowance for doubtful accounts of $— at September 30, 2018 and December 31, 2017 |
|
| 101,865 |
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|
| 144,150 |
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Accounts receivable, less allowance for doubtful accounts of $81 and $128 at September 30, 2019 and December 31, 2018, respectively |
|
| 90,647 |
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|
| 99,385 |
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Other receivables |
|
| 30,084 |
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|
| 26,578 |
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|
| 18,927 |
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|
| 36,699 |
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Inventory, net |
|
| 106,060 |
|
|
| 122,542 |
|
|
| 104,941 |
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|
| 99,848 |
| |
Prepaid expenses and other current assets |
|
| 10,428 |
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|
| 17,282 |
|
|
| 10,327 |
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|
| 10,744 |
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Total Current Assets |
|
| 348,522 |
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|
| 413,114 |
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|
| 350,003 |
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| 355,426 |
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Property, plant and equipment, net |
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| 81,457 |
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| 85,079 |
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| 73,384 |
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| 80,635 |
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Deferred tax assets, net |
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| 39,595 |
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| 23,428 |
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| 6,492 |
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| 37,187 |
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Goodwill |
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| 3,492 |
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| 3,492 |
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| 6,968 |
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|
| 7,106 |
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Intangibles, net |
|
| 29,113 |
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| 33,183 |
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Other assets |
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| 31,523 |
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| 13,725 |
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| 23,283 |
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| 5,668 |
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Long-term investments |
|
| 144,241 |
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| 130,256 |
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| 90,632 |
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|
| 108,822 |
| |
Total Assets |
| $ | 648,830 |
|
| $ | 669,094 |
|
| $ | 579,875 |
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| $ | 628,027 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
| $ | 65,032 |
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| $ | 60,632 |
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| $ | 52,842 |
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| $ | 60,054 |
| |
Bonds payable |
|
| 25,600 |
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|
| 1,000 |
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Unearned revenue |
|
| 17,004 |
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|
| 13,070 |
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|
| 14,022 |
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|
| 17,940 |
| |
Accrued expenses |
|
| 14,548 |
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|
| 13,232 |
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|
| 15,697 |
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|
| 11,746 |
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Accrued wages and benefits |
|
| 12,604 |
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| 15,948 |
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| 16,569 |
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| 14,752 |
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Income tax payable |
|
| 14,340 |
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| 3,936 |
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Income tax payable, net |
|
| 3,420 |
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|
| 12,518 |
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Total Current Liabilities |
|
| 123,528 |
|
|
| 106,818 |
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| 128,150 |
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| 118,010 |
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Non-current unearned revenue |
|
| 3,846 |
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| 4,556 |
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|
| 4,581 |
|
|
| 5,296 |
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Other non-current liabilities |
|
| 32,255 |
|
|
| 34,209 |
|
|
| 52,189 |
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|
| 33,842 |
| |
Bonds payable |
|
| 25,600 |
|
|
| 25,600 |
|
|
| — |
|
|
| 24,600 |
| |
Total Liabilities |
|
| 185,229 |
|
|
| 171,183 |
|
|
| 184,920 |
|
|
| 181,748 |
| |
Commitments and contingencies (see Note 15) |
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Commitments and contingencies (see Note 16) |
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Stockholders’ Equity |
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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 47,826 shares outstanding at September 30, 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 |
|
|
| 272,854 |
|
|
| 267,670 |
| |
Accumulated other comprehensive loss |
|
| (9,564 | ) |
|
| (3,295 | ) |
|
| (16,506 | ) |
|
| (14,416 | ) | |
Retained earnings |
|
| 900,324 |
|
|
| 922,178 |
|
|
| 827,783 |
|
|
| 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 | ) | |||||||||
Treasury stock at cost: 31,826 and 31,901 shares at September 30, 2019 and December 31, 2018, respectively |
|
| (689,973 | ) |
|
| (691,747 | ) | |||||||||
Total Stockholders’ Equity |
|
| 463,601 |
|
|
| 497,911 |
|
|
| 394,955 |
|
|
| 446,279 |
| |
Total Liabilities and Stockholders’ Equity |
| $ | 648,830 |
|
| $ | 669,094 |
|
| $ | 579,875 |
|
| $ | 628,027 |
|
See accompanying notes to condensed consolidated financial statements.
35
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
|
| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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| Nine Months Ended |
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|
| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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|
| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Sales |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Products |
| $ | 121,043 |
|
| $ | 145,467 |
|
| $ | 341,359 |
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| $ | 444,607 |
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Services |
|
| 19,292 |
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|
| 39,645 |
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| 47,830 |
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|
| 95,457 |
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Network Solutions |
| $ | 94,018 |
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| $ | 121,043 |
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| $ | 359,007 |
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| $ | 341,359 |
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Services & Support |
|
| 20,074 |
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| 19,292 |
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|
| 55,267 |
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|
| 47,830 |
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Total Sales |
|
| 140,335 |
|
|
| 185,112 |
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|
| 389,189 |
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|
| 540,064 |
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|
| 114,092 |
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|
| 140,335 |
|
|
| 414,274 |
|
|
| 389,189 |
|
Cost of Sales |
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|
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|
|
|
|
|
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Products |
|
| 69,943 |
|
|
| 73,534 |
|
|
| 208,184 |
|
|
| 229,861 |
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Services |
|
| 11,944 |
|
|
| 25,087 |
|
|
| 32,828 |
|
|
| 65,377 |
| ||||||||||||||||
Network Solutions |
|
| 56,444 |
|
|
| 69,943 |
|
|
| 207,353 |
|
|
| 208,184 |
| ||||||||||||||||
Services & Support |
|
| 11,317 |
|
|
| 11,944 |
|
|
| 34,963 |
|
|
| 32,828 |
| ||||||||||||||||
Total Cost of Sales |
|
| 81,887 |
|
|
| 98,621 |
|
|
| 241,012 |
|
|
| 295,238 |
|
|
| 67,761 |
|
|
| 81,887 |
|
|
| 242,316 |
|
|
| 241,012 |
|
Gross Profit |
|
| 58,448 |
|
|
| 86,491 |
|
|
| 148,177 |
|
|
| 244,826 |
|
|
| 46,331 |
|
|
| 58,448 |
|
|
| 171,958 |
|
|
| 148,177 |
|
Selling, general and administrative expenses |
|
| 30,750 |
|
|
| 34,676 |
|
|
| 96,361 |
|
|
| 104,171 |
|
|
| 30,912 |
|
|
| 30,750 |
|
|
| 99,663 |
|
|
| 96,361 |
|
Research and development expenses |
|
| 29,877 |
|
|
| 33,588 |
|
|
| 93,455 |
|
|
| 99,116 |
|
|
| 31,835 |
|
|
| 29,877 |
|
|
| 95,546 |
|
|
| 93,455 |
|
Operating Income (Loss) |
|
| (2,179 | ) |
|
| 18,227 |
|
|
| (41,639 | ) |
|
| 41,539 |
| ||||||||||||||||
Asset impairments |
|
| 3,872 |
|
|
| — |
|
|
| 3,872 |
|
|
| — |
| ||||||||||||||||
Gain on contingency |
|
| — |
|
|
| — |
|
|
| (1,230 | ) |
|
| — |
| ||||||||||||||||
Operating Loss |
|
| (20,288 | ) |
|
| (2,179 | ) |
|
| (25,893 | ) |
|
| (41,639 | ) | ||||||||||||||||
Interest and dividend income |
|
| 825 |
|
|
| 952 |
|
|
| 2,604 |
|
|
| 2,857 |
|
|
| 610 |
|
|
| 825 |
|
|
| 1,893 |
|
|
| 2,604 |
|
Interest expense |
|
| (134 | ) |
|
| (139 | ) |
|
| (398 | ) |
|
| (417 | ) |
|
| (128 | ) |
|
| (134 | ) |
|
| (382 | ) |
|
| (398 | ) |
Net investment gain |
|
| 4,507 |
|
|
| 1,009 |
|
|
| 5,400 |
|
|
| 2,869 |
| ||||||||||||||||
Net investment gain (loss) |
|
| (216 | ) |
|
| 4,507 |
|
|
| 8,195 |
|
|
| 5,400 |
| ||||||||||||||||
Other income (expense), net |
|
| 201 |
|
|
| (842 | ) |
|
| (73 | ) |
|
| (1,427 | ) |
|
| 1,616 |
|
|
| 201 |
|
|
| 2,266 |
|
|
| (73 | ) |
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 | ) | ||||||||||||||||
Gain on bargain purchase of a business, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,322 |
| ||||||||||||||||
Income (Loss) Before Income Taxes |
|
| (18,406 | ) |
|
| 3,220 |
|
|
| (13,921 | ) |
|
| (22,784 | ) | ||||||||||||||||
Income tax (expense) benefit |
|
| (27,717 | ) |
|
| 4,369 |
|
|
| (27,437 | ) |
|
| 11,889 |
| ||||||||||||||||
Net Income (Loss) |
| $ | 7,589 |
|
| $ | 15,898 |
|
| $ | (10,895 | ) |
| $ | 34,950 |
|
| $ | (46,123 | ) |
| $ | 7,589 |
|
| $ | (41,358 | ) |
| $ | (10,895 | ) |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic |
|
| 47,710 |
|
|
| 47,870 |
|
|
| 47,927 |
|
|
| 48,110 |
|
|
| 47,824 |
|
|
| 47,710 |
|
|
| 47,803 |
|
|
| 47,927 |
|
Weighted average shares outstanding – diluted |
|
| 47,834 |
|
|
| 48,531 |
|
|
| 47,927 |
|
|
| 48,618 |
|
|
| 47,824 |
|
|
| 47,834 |
|
|
| 47,803 |
|
|
| 47,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share – basic |
| $ | 0.16 |
|
| $ | 0.33 |
|
| $ | (0.23 | ) |
| $ | 0.73 |
|
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
Earnings (loss) per common share – diluted |
| $ | 0.16 |
|
| $ | 0.33 |
|
| $ | (0.23 | ) |
| $ | 0.72 |
|
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
Dividend per share |
| $ | 0.09 |
|
| $ | 0.09 |
|
| $ | 0.27 |
|
| $ | 0.27 |
|
See accompanying notes to condensed consolidated financial statements.
46
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net Income (Loss) |
| $ | 7,589 |
|
| $ | 15,898 |
|
| $ | (10,895 | ) |
| $ | 34,950 |
|
| $ | (46,123 | ) |
| $ | 7,589 |
|
| $ | (41,358 | ) |
| $ | (10,895 | ) |
Other Comprehensive Income (Loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other Comprehensive Loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net unrealized gains (losses) on available-for-sale securities |
|
| (32 | ) |
|
| 804 |
|
|
| (3,340 | ) |
|
| 2,512 |
|
|
| (15 | ) |
|
| (32 | ) |
|
| 277 |
|
|
| (3,340 | ) |
Net unrealized gains (losses) on cash flow hedges |
|
| — |
|
|
| 142 |
|
|
| — |
|
|
| (196 | ) | ||||||||||||||||
Defined benefit plan adjustments |
|
| 37 |
|
|
| 73 |
|
|
| 104 |
|
|
| 214 |
|
|
| 90 |
|
|
| 37 |
|
|
| 361 |
|
|
| 104 |
|
Foreign currency translation |
|
| (451 | ) |
|
| 1,541 |
|
|
| (3,033 | ) |
|
| 5,402 |
|
|
| (2,486 | ) |
|
| (451 | ) |
|
| (3,113 | ) |
|
| (3,033 | ) |
Other Comprehensive Income (Loss), net of tax |
|
| (446 | ) |
|
| 2,560 |
|
|
| (6,269 | ) |
|
| 7,932 |
| ||||||||||||||||
Other Comprehensive Loss, net of tax |
|
| (2,411 | ) |
|
| (446 | ) |
|
| (2,475 | ) |
|
| (6,269 | ) | ||||||||||||||||
Comprehensive Income (Loss), net of tax |
| $ | 7,143 |
|
| $ | 18,458 |
|
| $ | (17,164 | ) |
| $ | 42,882 |
|
| $ | (48,534 | ) |
| $ | 7,143 |
|
| $ | (43,833 | ) |
| $ | (17,164 | ) |
See accompanying notes to condensed consolidated financial statements.
7
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
| Common Shares |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Loss |
|
| Total Stockholders' Equity |
| |||||||
Balance at January 1, 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 ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,301 | ) |
|
| — |
|
|
| — |
|
|
| (4,301 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| — |
|
|
| — |
|
|
| (18 | ) |
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (865 | ) |
|
| 857 |
|
|
| — |
|
|
| (8 | ) |
Purchases 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 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,995 |
|
|
| — |
|
|
| — |
|
|
| 3,995 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 790 |
|
|
| 790 |
|
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,303 | ) |
|
| — |
|
|
| — |
|
|
| (4,303 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| — |
|
|
| — |
|
|
| (34 | ) |
Stock options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (208 | ) |
|
| 734 |
|
|
| — |
|
|
| 526 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,454 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,454 |
|
Balance at June 30, 2019 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 270,983 |
|
| $ | 878,630 |
|
| $ | (690,340 | ) |
| $ | (14,095 | ) |
| $ | 445,975 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (46,123 | ) |
|
| — |
|
|
| — |
|
|
| (46,123 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,411 | ) |
|
| (2,411 | ) |
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,304 | ) |
|
| — |
|
|
| — |
|
|
| (4,304 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42 |
|
|
| — |
|
|
| — |
|
|
| 42 |
|
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (462 | ) |
|
| 367 |
|
|
| — |
|
|
| (95 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,871 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,871 |
|
Balance at September 30, 2019 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 272,854 |
|
| $ | 827,783 |
|
| $ | (689,973 | ) |
| $ | (16,506 | ) |
| $ | 394,955 |
|
See accompanying notes to condensed consolidated financial statements.
8
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
| Common Shares |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Loss |
|
| Total Stockholders' Equity |
| |||||||
Balance at January 1, 2018 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 260,515 |
|
| $ | 922,178 |
|
| $ | (682,284 | ) |
| $ | (3,295 | ) |
| $ | 497,911 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,814 | ) |
|
| — |
|
|
| — |
|
|
| (10,814 | ) |
Adoption of new accounting standards |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,499 |
|
|
| — |
|
|
| — |
|
|
| 3,499 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,508 | ) |
|
| (2,508 | ) |
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,367 | ) |
|
| — |
|
|
| — |
|
|
| (4,367 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (2 | ) |
Stock options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (150 | ) |
|
| 519 |
|
|
| — |
|
|
| 369 |
|
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (733 | ) |
|
| 733 |
|
|
| — |
|
|
| — |
|
Purchases 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 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,670 | ) |
|
| — |
|
|
| — |
|
|
| (7,670 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,315 | ) |
|
| (3,315 | ) |
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,312 | ) |
|
| — |
|
|
| — |
|
|
| (4,312 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (49 | ) |
|
| 49 |
|
|
| — |
|
|
| — |
|
Purchases of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,603 | ) |
|
| — |
|
|
| (2,603 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,784 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,784 |
|
Balance at June 30, 2018 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 264,118 |
|
| $ | 897,587 |
|
| $ | (693,757 | ) |
| $ | (9,118 | ) |
| $ | 459,627 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,589 |
|
|
| — |
|
|
| — |
|
|
| 7,589 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (446 | ) |
|
| (446 | ) |
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,297 | ) |
|
| — |
|
|
| — |
|
|
| (4,297 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| — |
|
|
| (20 | ) |
Stock options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (385 | ) |
|
| 1,337 |
|
|
| — |
|
|
| 952 |
|
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (150 | ) |
|
| 118 |
|
|
| — |
|
|
| (32 | ) |
Purchases of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,412 | ) |
|
| — |
|
|
| (1,412 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,640 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,640 |
|
Balance at September 30, 2018 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 265,758 |
|
| $ | 900,324 |
|
| $ | (693,714 | ) |
| $ | (9,564 | ) |
| $ | 463,601 |
|
See accompanying notes to condensed consolidated financial statements.
5
9
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (10,895 | ) |
| $ | 34,950 |
| ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net loss |
| $ | (41,358 | ) |
| $ | (10,895 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 11,952 |
|
|
| 12,034 |
|
|
| 13,315 |
|
|
| 11,952 |
|
Amortization of net premium on available-for-sale investments |
|
| (14 | ) |
|
| 352 |
| ||||||||
Asset impairments |
|
| 3,872 |
|
|
| — |
| ||||||||
Amortization of net premium (discount) on available-for-sale investments |
|
| (86 | ) |
|
| (14 | ) | ||||||||
Net gain on long-term investments |
|
| (5,400 | ) |
|
| (2,869 | ) |
|
| (8,195 | ) |
|
| (5,400 | ) |
Net (gain) loss on disposal of property, plant and equipment |
|
| 68 |
|
|
| (10 | ) | ||||||||
Net loss on disposal of property, plant and equipment |
|
| 58 |
|
|
| 68 |
| ||||||||
Gain on contingency |
|
| (1,230 | ) |
|
| — |
| ||||||||
Gain on life insurance proceeds |
|
| (1,000 | ) |
|
| — |
| ||||||||
Gain on bargain purchase of a business |
|
| (11,322 | ) |
|
| — |
|
|
| — |
|
|
| (11,322 | ) |
Stock-based compensation expense |
|
| 5,243 |
|
|
| 5,573 |
|
|
| 5,184 |
|
|
| 5,243 |
|
Deferred income taxes |
|
| (20,368 | ) |
|
| — |
|
|
| 30,421 |
|
|
| (20,368 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 41,166 |
|
|
| (6,975 | ) |
|
| 7,603 |
|
|
| 41,166 |
|
Other receivables |
|
| (1,842 | ) |
|
| (2,924 | ) |
|
| 17,645 |
|
|
| (1,842 | ) |
Inventory |
|
| 16,543 |
|
|
| (9,483 | ) | ||||||||
Inventory, net |
|
| (5,998 | ) |
|
| 16,543 |
| ||||||||
Prepaid expenses and other assets |
|
| 8,722 |
|
|
| (9,647 | ) |
|
| (10,071 | ) |
|
| 8,722 |
|
Accounts payable |
|
| 5,223 |
|
|
| (4,727 | ) | ||||||||
Accounts payable, net |
|
| (5,569 | ) |
|
| 5,223 |
| ||||||||
Accrued expenses and other liabilities |
|
| 156 |
|
|
| (2,820 | ) |
|
| 10,564 |
|
|
| 156 |
|
Income tax payable |
|
| 9,461 |
|
|
| 8,571 |
|
|
| (5,073 | ) |
|
| 9,461 |
|
Net cash provided by operating activities |
|
| 48,693 |
|
|
| 22,025 |
|
|
| 10,082 |
|
|
| 48,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (5,695 | ) |
|
| (12,304 | ) |
|
| (6,008 | ) |
|
| (5,695 | ) |
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 |
|
| 38,561 |
|
|
| 116,757 |
| ||||||||
Purchases of debt and equity investments |
|
| (37,223 | ) |
|
| (115,271 | ) | ||||||||
Life insurance proceeds received |
|
| 1,000 |
|
|
| — |
| ||||||||
Acquisition of business |
|
| (7,806 | ) |
|
| — |
|
|
| 13 |
|
|
| (7,806 | ) |
Net cash provided by (used in) investing activities |
|
| (12,015 | ) |
|
| 45,271 |
| ||||||||
Net cash used in investing activities |
|
| (3,657 | ) |
|
| (12,015 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises |
|
| 1,321 |
|
|
| 6,606 |
|
|
| 526 |
|
|
| 1,321 |
|
Purchases of treasury stock |
|
| (14,185 | ) |
|
| (17,348 | ) |
|
| (184 | ) |
|
| (14,185 | ) |
Dividend payments |
|
| (12,976 | ) |
|
| (13,031 | ) |
|
| (12,908 | ) |
|
| (12,976 | ) |
Net cash used in financing activities |
|
| (25,840 | ) |
|
| (23,773 | ) |
|
| (12,566 | ) |
|
| (25,840 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
| 10,838 |
|
|
| 43,523 |
| ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| (6,141 | ) |
|
| 10,838 |
| ||||||||
Effect of exchange rate changes |
|
| (3,098 | ) |
|
| 4,835 |
|
|
| (2,956 | ) |
|
| (3,098 | ) |
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 |
|
| $ | 96,407 |
|
| $ | 94,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in accounts payable |
| $ | 355 |
|
| $ | 272 |
|
| $ | 135 |
|
| $ | 355 |
|
See accompanying notes to condensed consolidated financial statements.
610
ADTRAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (ADTRAN)(“ADTRAN”, the “Company”, “we”, “our” or “us”) have been prepared pursuant to the rules and regulations for reporting onof the Securities and Exchange Commission (the “SEC”) applicable to interim financial information presented in Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements are not included herein. The December 31, 20172018 Condensed 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.GAAP.
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 financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the SEC on February 23, 2018 with28, 2019 (as amended on September 20, 2019, the SEC.“2018 Form 10-K”).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP 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 obsoleteexcess and excessobsolete inventory reserves, warranty reserves, customer rebates, determination of the deferred and accrued revenue components of multiple elementperformance obligations 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.
During the three months ended June 30, 2019, the Company revised the methodology used in estimating its excess and obsolete inventory reserves. Under the revised methodology, we establish reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on historical usage, known trends, inventory age, and market conditions. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserves. See Note 8 for additional information.
Correction of Immaterial Misstatements
During the three months ended June 30, 2019, the Company determined that there was an immaterial misstatement of its excess and obsolete inventory reserves in its previously issued annual and interim financial statements. The Company corrected this misstatement by recognizing a $0.8 million out-of-period adjustment during the three months ended June 30, 2019, which increased its excess and obsolete inventory reserves and cost of goods sold for the period. For the six months ended June 30, 2019, the out-of-period adjustment was a cumulative $0.2 million reduction in the Company’s excess and obsolete inventory reserves and cost of goods sold. In addition, the Company determined that a $1.0 million cash inflow related to an insurance recovery was incorrectly classified as a cash flow from operations instead of a cash flow from investing activities within the unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019. The Company has corrected this misstatement in the Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2019 to correctly reflect the $1.0 million insurance recovery as a cash inflow from investing activities. Management has determined that these misstatements were not material to any of its previously issued financial statements and that correction of the misstatements is also not material to the current or estimated annual 2019 financial results on either a quantitative and qualitative basis.
11
Recent Accounting Pronouncements Not Yet Adopted
In FebruaryJune 2016, the Financial Accounting Standards Board (FASB)(“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(“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. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments–Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies the accounting for transfers between classifications of debt securities and clarifies that entities should include expected recoveries on financial assets in the calculation of the current expected credit loss allowance. In addition, renewal options that are not unconditionally cancelable should be considered in the determination of expected credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which amends ASU 2016-13 isto allow companies, upon adoption, to elect the fair value option on financial instruments that were previously recorded at amortized cost if they meet certain criteria. All of these ASUs 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 2016-13these ASUs will have on our consolidated financial statements.
7
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.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. ASU 2018-02 allows for an optional reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. 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)(“PBO”) and fair value of plan assets for pension plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO)(“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.
8
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.
12
Recently Adopted Accounting Pronouncements
During 2018,2019, we adopted the following accounting standards, which had the following effectsimpacts on our consolidated financial statements:
In May 2014,February 2016, the FASB issued ASU 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 606)842),, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 isrequires an entity to recognize revenues when promised goods or services are transferredright-of-use assets and lease liabilities on the balance sheet and to customers in an amount that reflectsdisclose 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 deferredclarified certain aspects of ASU 2016-02, as well as ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided for an optional transition method allowing for the effectiveapplication of the legacy lease guidance, Leases (Topic 840), including its disclosure requirements, for the comparative periods presented in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the date of adoption. In March 2019, the FASB issued ASU 2014-092019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and 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. At that time, the Company elected to carry forward the legacy ASC 840 disclosures for comparative periods and, therefore, did not adjust the comparative period financial information prior to January 1, 2019. In addition, the Company elected the package of practical expedients which allows for companies to not reassess whether any expired or existing contracts are or contain leases, not reassess historical lease classifications for expired or existing contracts and not reassess initial direct costs for existing leases. Additionally, the Company elected the practical expedients which allow the use of hindsight when determining the lease term, the short-term lease recognition exemption and the option to not separate lease and 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 Condensed Consolidated Balance Sheet of $10.3 million as of January 1, 2019, primarily related to our operating leases for office space, automobiles and other equipment.
As a lessee, the adoption of this standard did not have a material impact on our Condensed Consolidated Statement of Income or Statement of Cash Flows. See Note 12 for additional information.
As a lessor, the adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Income or Condensed Consolidated Statement of Cash Flows. Prior to and after adoption, all of our leases in which we are the lessor were classified as sales-type leases.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortened the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU 2017-08 was effective for fiscal years and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related2018. 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 isintendedbe applied through a modified-retrospective transition approach that required a cumulative-effect adjustment directly to improve the operability and understandabilityretained 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 aspectsbeginning 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 applicationperiod of guidance. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. WeThe Company adopted ASU 2014-09 and the related ASUs2017-08 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 obligations2019, 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 revenuethis 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 primarya 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:
(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 |
|
9
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 |
|
|
| 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 |
|
statements.
In January 2016,August 2017, the FASB issued ASU 2016-01,2017-12, Financial Instruments — Overall: RecognitionDerivatives and Measurement of Financial AssetsHedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expanded and Financial Liabilities, which addresses certain aspectsrefined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the recognition, measurement, presentationeffects of hedging instruments and disclosurehedge 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 CorrectionsDerivatives and Improvements to Financial Instruments – Overall (Subtopic 825-10)Hedging (Topic 815): Recognition and MeasurementInclusion 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 correctionspermits 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 was2018-16 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. Weafter December 15, 2018. The Company adopted ASU 2016-012017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements as we did not have any hedging instruments as of the date of adoption.
In February 2018, using the modified retrospective method, which resulted in a $3.2 millionFASB 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 openingretained 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 Statements13 for additional information.
1013
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.
2. BUSINESS COMBINATIONS
On March 19,November 30, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON businessSmartRG, Inc. (“SmartRG”), a provider of carrier-class, open connected home platforms 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 leadercloud services for EPON solutionsbroadband service providers in exchange for the cable MSO industry and it will accelerate the MSO market’s adoption of our open, programmable and scalable architectures.cash consideration. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues areThe revenue from the SmartRG portfolio is included in the AccessSubscriber Solutions & Aggregation and Customer Devices categoriesExperience category within the Network Solutions and Services & Support reportable segment.segments.
Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which were dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones during the first half of 2019. The required milestones were not achieved and, therefore, we recognized a gain of $1.2 million upon the reversal of these liabilities during the second quarter of 2019.
An escrow in the amount of $2.8 million was set up at the acquisition date to fund post-closing working capital settlements and to satisfy indemnity obligations to the Company arising from any inaccuracy or breach of representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to arbitration with final settlement expected during the fourth quarter of 2020. The minimum and maximum potential release of funds to the sellers ranges from 0 to $2.8 million.
We recorded goodwill of $3.5 million as a bargain purchase gainresult of $11.3 million during the first quarter of 2018, net of income taxes,this acquisition, which is subject to customary working capital adjustments between the parties. The bargain purchase gain of $11.3 million represents the difference betweenexcess of the purchase price over 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.acquired. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and we have concluded that our valuation procedures and resulting measures were appropriate.
The preliminaryfinal allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:
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| |
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The actual revenue and net loss included in our Consolidated Statements of Income for the three months ended September 30, 2018 and the period March 19, 2018 to September 30, 2018SmartRG are as follows:
| Three Months Ended |
|
| March 19, 2018 to |
| ||
(In thousands) | September 30, 2018 |
|
| September 30, 2018 |
| ||
Revenue | $ | 1,021 |
|
| $ | 2,218 |
|
Net income (loss) | $ | 564 |
|
| $ | (322 | ) |
(In thousands) |
|
|
|
|
Assets |
|
|
|
|
Tangible assets acquired |
| $ | 8,594 |
|
Intangible assets |
|
| 9,960 |
|
Goodwill |
|
| 3,476 |
|
Total assets acquired |
|
| 22,030 |
|
Liabilities |
|
|
|
|
Liabilities assumed |
|
| (6,001 | ) |
Total liabilities assumed |
|
| (6,001 | ) |
Total purchase price |
| $ | 16,029 |
|
11
The details of the acquired intangible assets from the SmartRG acquisition are as follows:
(In thousands) | Value |
|
| Life (years) |
| Value |
|
| Life (in years) | |||
Developed technology | $ | 7,400 |
|
| 7 | |||||||
Customer relationships | $ | 13,400 |
|
|
| 12.0 |
|
| 1,790 |
|
| 3 |
Licensed technology |
| 5,900 |
|
|
| 9.0 |
| |||||
Supplier relationship |
| 2,800 |
|
|
| 2.0 |
| |||||
Licensing agreements |
| 560 |
|
| 5 – 10 | |||||||
Trade name |
| 210 |
|
| 3 | |||||||
Total | $ | 22,100 |
|
|
|
|
| $ | 9,960 |
|
|
|
For the three and nine months ended September 30, 2019, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.5 million and $1.7 million, respectively, related to the SmartRG acquisition. NaN acquisition-related expenses were incurred during the three and nine months ended September 30, 2018 related to the SmartRG acquisition.
On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. This revenue is included in the Access & Aggregation and Subscriber Solutions & Experience categories within the Network Solutions reportable segment.
We recorded a bargain purchase gain, net of income taxes, of $11.3 million during the first quarter of 2018, which represents the difference between the fair value of the net assets acquired over the cash paid. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.
14
The following unaudited supplemental pro forma information presents the financial results of the Company for the nine months ended September 30, 2018 as if the acquisition of the Sumitomo EPON business 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, thereThere were no material, non-recurring adjustments to this unaudited pro forma information.
|
| 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 |
|
| Nine Months Ended |
| |
(In thousands) | September 30, 2018 |
| |
Pro forma revenue | $ | 390,449 |
|
Pro forma net loss | $ | (23,431 | ) |
For3. REVENUE
The following is a description of the principal activities from which we generate our revenue by reportable segment.
Network Solutions Segment
Network Solutions includes hardware products and software-defined next-generation virtualized solutions used in service provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware sales. In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment. These arrangements typically include network equipment, network implementation services and maintenance services. Network implementation services and maintenance services are included in the Services & Support segment discussed below. See Note 12 for additional information.
Services & Support Segment
To complement our Network Solutions segment, we offer a complete portfolio of maintenance, network implementation, solutions integration and managed services, which include hosted cloud services and subscription services.
Sales by Category
In addition to our reporting segments, we also report revenue in the following 3 categories – Access & Aggregation, Subscriber Solutions & Experience and Traditional & Other Products.
The following table disaggregates our revenue by reportable segment and revenue category for the three months ended September 30, 2019 and 2018:
|
| Three Months Ended |
| |||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
| ||||||
Access & Aggregation |
| $ | 48,902 |
|
| $ | 16,212 |
|
| $ | 65,114 |
|
| $ | 76,046 |
|
| $ | 15,855 |
|
| $ | 91,901 |
|
Subscriber Solutions & Experience(1) |
|
| 40,382 |
|
|
| 2,094 |
|
|
| 42,476 |
|
|
| 37,313 |
|
|
| 1,239 |
|
|
| 38,552 |
|
Traditional & Other Products |
|
| 4,734 |
|
|
| 1,768 |
|
|
| 6,502 |
|
|
| 7,684 |
|
|
| 2,198 |
|
|
| 9,882 |
|
Total |
| $ | 94,018 |
|
| $ | 20,074 |
|
| $ | 114,092 |
|
| $ | 121,043 |
|
| $ | 19,292 |
|
| $ | 140,335 |
|
(1) | Subscriber Solutions & Experience was formerly reported as Customer Devices. With the increasing focus on enhancing the customer experience for both our business and consumer broadband customers and the addition of SmartRG during the fourth quarter of 2018, Subscriber Solutions & Experience more accurately represents this revenue category. |
15
The following table disaggregates our revenue by reportable segment and revenue category for the nine months ended September 30, 2018, we incurred acquisition2019 and integration related expenses and amortization of acquired intangibles of $0.7 million and $1.6 million, respectively, related to this acquisition.2018:
|
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
| ||||||
Access & Aggregation |
| $ | 230,837 |
|
| $ | 43,476 |
|
| $ | 274,313 |
|
| $ | 220,653 |
|
| $ | 37,670 |
|
| $ | 258,323 |
|
Subscriber Solutions & Experience(1) |
|
| 113,545 |
|
|
| 6,186 |
|
|
| 119,731 |
|
|
| 99,396 |
|
|
| 3,817 |
|
|
| 103,213 |
|
Traditional & Other Products |
|
| 14,625 |
|
|
| 5,605 |
|
|
| 20,230 |
|
|
| 21,310 |
|
|
| 6,343 |
|
|
| 27,653 |
|
Total |
| $ | 359,007 |
|
| $ | 55,267 |
|
| $ | 414,274 |
|
| $ | 341,359 |
|
| $ | 47,830 |
|
| $ | 389,189 |
|
3. REVENUE
(1) | Subscriber Solutions & Experience was formerly reported as Customer Devices. With the increasing focus on enhancing the customer experience for both our business and consumer broadband customers and the addition of SmartRG during the fourth quarter of 2018, Subscriber Solutions & Experience more accurately represents this revenue category. |
Revenue 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 Segment
Network Solutions includes hardware products and next-generation virtualized solutions used in service provider or business networks, as well as prior generation products.
12
Hardware
The majority of the revenue from this segment is from hardware sales and is recognized when control is transferred to our customers, which is generally when we ship the products. Shipping terms are generally FOB shipping point. Revenue is recorded net of estimated discounts and rebates using historical trends. Customers are typically invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days to five years for product defects, which are accrued at the time revenue is recognized.
In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment that have terms of 18 months to five years. These arrangements typically include network equipment, network implementation services and maintenance services. Product revenue for these leases is generally recorded when we transfer control of the product to our customers. Revenue for network implementation and maintenance services is recognized as described below. Customers are typically invoiced and pay in equal installments over the lease term. In relation to these lease agreements, during the 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.
Services & Support Segment
To complement our Network Solutions segment, we offer a complete portfolio of maintenance, network implementation, and solutions integration and managed services, which include hosted cloud services and subscription services.
Maintenance
Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services at the beginning of the maintenance period. We recognize revenue for maintenance services on a straight-line basis over the maintenance period in services revenue as our customers benefit evenly throughout the contract term and deferred revenues are recorded in current and non-current unearned revenue.
Network Implementation
We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement services, at a point in time when each performance obligation is complete. If we have recognized revenue, but have not billed the customer, the right to consideration is recognized as a contract asset that is included in other receivables in the Consolidated Balance Sheet. The contract asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.
As of September 30, 2018,2019, we did not0t 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 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||
Accounts receivable |
| $ | 101,865 |
|
| $ | 144,150 |
| ||||||||
Accounts receivable, net |
| $ | 90,647 |
|
| $ | 99,385 |
| ||||||||
Contract assets |
| $ | 4,564 |
|
| $ | 374 |
|
| $ | 2,434 |
|
| $ | 3,766 |
|
Unearned revenue |
| $ | 17,004 |
|
| $ | 13,070 |
|
| $ | 14,022 |
|
| $ | 17,940 |
|
Non-current unearned revenue |
| $ | 3,846 |
|
| $ | 4,556 |
|
| $ | 4,581 |
|
| $ | 5,296 |
|
(1) | Included in other receivables on the Condensed Consolidated Balance Sheet. |
The decrease in accounts receivable is due toOf the collection of customer specific payment terms that became due inoutstanding unearned revenue balance at December 31, 2018, $1.2 million and $11.7 million was recognized as revenue during the first quarter of 2018. The increase in the contract asset balance for thethree and 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 the 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 of December 31, 2017.
13
The following table disaggregates our revenue by major source for the three months ended September 30, 2018:
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
| |||
Access & Aggregation |
| $ | 76,046 |
|
| $ | 15,855 |
|
| $ | 91,901 |
|
Customer Devices |
|
| 37,313 |
|
|
| 1,239 |
|
|
| 38,552 |
|
Traditional & Other Products |
|
| 7,684 |
|
|
| 2,198 |
|
|
| 9,882 |
|
Total |
| $ | 121,043 |
|
| $ | 19,292 |
|
| $ | 140,335 |
|
The following table disaggregates our revenue by major source for the nine months ended September 30, 2018:
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
| |||
Access & Aggregation |
| $ | 220,653 |
|
| $ | 37,670 |
|
| $ | 258,323 |
|
Customer Devices |
|
| 99,396 |
|
|
| 3,817 |
|
|
| 103,213 |
|
Traditional & Other Products |
|
| 21,310 |
|
|
| 6,343 |
|
|
| 27,653 |
|
Total |
| $ | 341,359 |
|
| $ | 47,830 |
|
| $ | 389,189 |
|
2019, respectively.
4. INCOME TAXES
Our effective tax rate decreasedincreased from an expense of 23.1% in the nine months ended September 30, 2017, to a benefit of 34.9%, excluding the tax effect of the bargain purchase gain, in the nine months ended September 30, 2018.2018, to an expense of 197.1% in the nine months ended September 30, 2019. The decreaseincrease in the effective tax rate between the two periods iswas primarily driven by the completionestablishment of other tax projects, current year net losses ina valuation allowance against our domestic businessdeferred tax assets in the amount of $37.1 million during the three months ended September 30, 2019, offset by a 9.38% rate reduction related to a transfer pricing study completed during the second quarter of 2019 that resulted in the assignment of operating expenditures to specific company locations, and the effecteffective income tax rates among the respective jurisdictions.
As of September 30, 2019, the Company had deferred tax assets totaling $49.4 million. As of September 30, 2019, a valuation allowance totaling $42.9 million has been established against our deferred tax assets. Of this amount, $37.1 million was established during the third quarter of 2019 relating to our domestic deferred tax assets. The remaining $5.8 million that was established in prior periods relates to state research and development credit carryforwards, and foreign net operating loss and research and development credit carryforwards, where we lack sufficient activity to realize those deferred tax assets. The remaining $6.5 million in deferred tax assets not offset by a valuation allowance are located in various foreign jurisdictions where the Company believes it is more likely than not we will realize these deferred tax assets.
16
Supplemental balance sheet information related to deferred tax assets is as follows:
|
| September 30, 2019 |
| |||||||||
(In thousands) |
| Deferred Tax Assets |
|
| Valuation Allowance |
|
| Deferred Tax Assets, net |
| |||
Domestic |
| $ | 40,496 |
|
| $ | (40,496 | ) |
| $ | — |
|
International |
|
| 8,909 |
|
|
| (2,417 | ) |
|
| 6,492 |
|
Total |
| $ | 49,405 |
|
| $ | (42,913 | ) |
| $ | 6,492 |
|
The Company continually reviews the adequacy of our valuation allowance and recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be realized in accordance with ASC 740, Income Taxes. Due to our recent decrease in revenue and profitability for the third quarter of 2019, management’s current expectations for revenue for the remainder of 2019, and all other positive and negative objective evidence considered as part of our analysis, our ability to consider other subjective evidence such as projections for future growth is limited when evaluating whether our deferred tax assets will be realized. As such, the Company is no longer able to conclude that it is more likely than not that our domestic deferred tax assets will be realized. The amount of the U.S. Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.
deferred tax assets considered realizable, however, could be adjusted in future periods in the event sufficient evidence is present to support a conclusion that it is more likely than not that all or a portion of our domestic deferred tax assets will be realized.
5. PENSION BENEFIT PLAN
We maintain a defined benefit pension plan covering employees in certain foreign countries.
The following table summarizes the components of net periodic pension cost for the three and nine months ended September 30, 20182019 and 2017:2018:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Service cost |
| $ | 294 |
|
| $ | 327 |
|
| $ | 905 |
|
| $ | 930 |
|
| $ | 366 |
|
| $ | 294 |
|
| $ | 1,109 |
|
| $ | 905 |
|
Interest cost |
|
| 179 |
|
|
| 158 |
|
|
| 551 |
|
|
| 448 |
|
|
| 158 |
|
|
| 179 |
|
|
| 479 |
|
|
| 551 |
|
Expected return on plan assets |
|
| (381 | ) |
|
| (329 | ) |
|
| (1,174 | ) |
|
| (935 | ) |
|
| (346 | ) |
|
| (381 | ) |
|
| (1,049 | ) |
|
| (1,174 | ) |
Amortization of actuarial losses |
|
| 61 |
|
|
| 80 |
|
|
| 188 |
|
|
| 228 |
|
|
| 198 |
|
|
| 61 |
|
|
| 600 |
|
|
| 188 |
|
Net periodic pension cost |
| $ | 153 |
|
| $ | 236 |
|
| $ | 470 |
|
| $ | 671 |
|
| $ | 376 |
|
| $ | 153 |
|
| $ | 1,139 |
|
| $ | 470 |
|
The components of net periodic pension cost, other than the service cost component, are included in the line item “Otherother income (expense), net”net in the Condensed Consolidated Statements of Income. Service cost are included in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income.
14
6. STOCK-BASED COMPENSATION
The following table summarizes the stock-based compensation expense related to stock options, performance stock units (PSUs)(“PSUs”), restricted stock units (RSUs)(“RSUs”) and restricted stock for the three and nine months ended September 30, 20182019 and 2017, which was recognized as follows:2018:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Stock-based compensation expense included in cost of sales |
| $ | 101 |
|
| $ | 97 |
|
| $ | 298 |
|
| $ | 281 |
|
| $ | 83 |
|
| $ | 101 |
|
| $ | 272 |
|
| $ | 298 |
|
Selling, general and administrative expense |
|
| 894 |
|
|
| 994 |
|
|
| 2,924 |
|
|
| 3,018 |
|
|
| 1,142 |
|
|
| 894 |
|
|
| 2,867 |
|
|
| 2,924 |
|
Research and development expense |
|
| 645 |
|
|
| 743 |
|
|
| 2,021 |
|
|
| 2,274 |
|
|
| 646 |
|
|
| 645 |
|
|
| 2,045 |
|
|
| 2,021 |
|
Stock-based compensation expense included in operating expenses |
|
| 1,539 |
|
|
| 1,737 |
|
|
| 4,945 |
|
|
| 5,292 |
|
|
| 1,788 |
|
|
| 1,539 |
|
|
| 4,912 |
|
|
| 4,945 |
|
Total stock-based compensation expense |
|
| 1,640 |
|
|
| 1,834 |
|
|
| 5,243 |
|
|
| 5,573 |
|
|
| 1,871 |
|
|
| 1,640 |
|
|
| 5,184 |
|
|
| 5,243 |
|
Tax benefit for expense associated with non-qualified options, PSUs, RSUs and restricted stock |
|
| (292 | ) |
|
| (402 | ) |
|
| (1,016 | ) |
|
| (1,215 | ) | ||||||||||||||||
Tax benefit for expense associated with stock options, PSUs, RSUs and restricted stock |
|
| (446 | ) |
|
| (292 | ) |
|
| (1,235 | ) |
|
| (1,016 | ) | ||||||||||||||||
Total stock-based compensation expense, net of tax |
| $ | 1,348 |
|
| $ | 1,432 |
|
| $ | 4,227 |
|
| $ | 4,358 |
|
| $ | 1,425 |
|
| $ | 1,348 |
|
| $ | 3,949 |
|
| $ | 4,227 |
|
17
Stock Options
The following table is a summary of our stock options outstanding as of December 31, 20172018 and September 30, 20182019, and the changes that occurred during the nine months ended September 30, 2018:2019:
(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 exercised |
|
| (34 | ) |
| $ | 15.53 |
|
|
|
|
|
|
|
|
|
Stock options forfeited |
|
| (28 | ) |
| $ | 15.53 |
|
|
|
|
|
|
|
|
|
Stock options expired |
|
| (183 | ) |
| $ | 24.41 |
|
|
|
|
|
|
|
|
|
Stock options outstanding, September 30, 2019 |
|
| 4,137 |
|
| $ | 22.96 |
|
|
| 3.27 |
|
| $ | — |
|
Stock options exercisable, September 30, 2019 |
|
| 3,915 |
|
| $ | 23.39 |
|
|
| 3.11 |
|
| $ | — |
|
At September 30, 2019, total unrecognized compensation expense related to non-vested stock options was approximately $0.1 million, which is expected to be recognized over an average remaining recognition period of 0.3 years. Unrecognized compensation expense will be adjusted for actual forfeitures.
All of the options above were issued at exercise prices that approximated fair market value at the date of grant.
The aggregate intrinsic values in the table above representvalue of stock options represents the total pre-tax intrinsic value (the difference between theADTRAN’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, 2018.2019. The amount of aggregate intrinsic value will change based on the fair market value of our stock.
ADTRAN’s stock and was 0 as of September 30, 2019. The total pre-tax intrinsic value of options exercised during the three and nine months ended September 30, 20182019 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.million.
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. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors.
There were no0 stock options granted during the three and nine months ended September 30, 2018 or 2017.2019 and 2018.
15
PSUs, RSUs and restricted stockRestricted Stock
The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 20172018 and September 30, 2019 and the changes that occurred during the nine months ended September 30, 2018:2019.
(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 |
|
|
| 63 |
|
| $ | 12.81 |
|
PSUs, RSUs and restricted stock vested |
|
| (14 | ) |
| $ | 20.19 |
|
|
| (22 | ) |
| $ | 17.13 |
|
PSUs, RSUs and restricted stock forfeited |
|
| (165 | ) |
| $ | 21.66 |
|
|
| (175 | ) |
| $ | 18.69 |
|
Unvested PSUs, RSUs and restricted stock outstanding, September 30, 2018 |
|
| 1,135 |
|
| $ | 21.23 |
| ||||||||
Unvested PSUs, RSUs and restricted stock outstanding, September 30, 2019 |
|
| 1,436 |
|
| $ | 18.27 |
|
The fair value of our PSUs with market and performance 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. Duringbusiness 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 of18
At September 30, 2018, there was $9.8 million of2019, total unrecognized compensation expense related to unvestedthe non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $11.6 million, which is expected to be recognized over an average remaining recognition period of 2.62.4 years. In addition, there was $9.4$8.2 million of unrecognized compensation expense related to unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period of three0.3 years as theif achievement of the performance objectiveobligation becomes probable. For the three and nine months ended September 30, 2019 and 2018, no0 compensation expense was recognized related to these 2017 performance-based PSU awards.PSUs. Unrecognized compensation expense will be adjusted for actual forfeitures.
At September 30, 2019, 2.7 million shares were available for issuance under shareholder-approved equity plans in connection with the grant and exercise of stock options, PSUs, RSUs or restricted stock.
7. INVESTMENTS
Debt Securities and Other Investments
At September 30, 2019, we held the following debt securities and other investments, recorded at fair value:
|
| Amortized |
|
| Gross Unrealized |
|
| Fair |
| |||||||
(In thousands) |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
Corporate bonds |
| $ | 10,733 |
|
| $ | 95 |
|
| $ | — |
|
| $ | 10,828 |
|
Municipal fixed-rate bonds |
|
| 931 |
|
|
| — |
|
|
| (1 | ) |
|
| 930 |
|
Asset-backed bonds |
|
| 7,222 |
|
|
| 35 |
|
|
| (2 | ) |
|
| 7,255 |
|
Mortgage/Agency-backed bonds |
|
| 7,366 |
|
|
| 29 |
|
|
| (7 | ) |
|
| 7,388 |
|
U.S. government bonds |
|
| 9,160 |
|
|
| 4 |
|
|
| (21 | ) |
|
| 9,143 |
|
Foreign government bonds |
|
| 372 |
|
|
| — |
|
|
| (3 | ) |
|
| 369 |
|
Available-for-sale debt securities held at fair value |
| $ | 35,784 |
|
| $ | 163 |
|
| $ | (34 | ) |
| $ | 35,913 |
|
At December 31, 2018, we held the following debt securities and other investments, recorded at either fair value or cost:value:
|
| Amortized |
|
| Gross Unrealized |
|
| Carrying |
|
| Amortized |
|
| Gross Unrealized |
|
| Fair |
| ||||||||||||||
(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 |
| ||||||||||||||||
Other investments held at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 520 |
| ||||||||||||||||
Total carrying value of available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 88,283 |
|
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 |
|
16
As of September 30, 20182019, 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 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 3,154 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
One to two years |
|
| 10,122 |
|
|
| 287 |
|
|
| 657 |
|
|
| — |
|
|
| 11,716 |
|
|
| 285 |
|
|
| 4,316 |
|
|
| 930 |
|
|
| 941 |
|
|
| 215 |
|
|
| — |
|
|
| — |
|
Two to three years |
|
| 9,898 |
|
|
| 1,128 |
|
|
| 714 |
|
|
| 425 |
|
|
| 5,565 |
|
|
| 310 |
|
|
| 3,068 |
|
|
| — |
|
|
| 2,475 |
|
|
| 1,072 |
|
|
| 7,528 |
|
|
| — |
|
Three to five years |
|
| 2,742 |
|
|
| — |
|
|
| 2,244 |
|
|
| 1,561 |
|
|
| 2,492 |
|
|
| — |
|
|
| 290 |
|
|
| — |
|
|
| 1,593 |
|
|
| 920 |
|
|
| 1,615 |
|
|
| 369 |
|
Five to ten years |
|
| — |
|
|
| — |
|
|
| 445 |
|
|
| 525 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,666 |
|
|
| 680 |
|
|
| — |
|
|
| — |
|
More than ten years |
|
| — |
|
|
| — |
|
|
| 1,183 |
|
|
| 2,852 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 580 |
|
|
| 4,501 |
|
|
| — |
|
|
| — |
|
Total |
| $ | 25,562 |
|
| $ | 1,415 |
|
| $ | 8,355 |
|
| $ | 5,363 |
|
| $ | 19,773 |
|
| $ | 595 |
|
| $ | 10,828 |
|
| $ | 930 |
|
| $ | 7,255 |
|
| $ | 7,388 |
|
| $ | 9,143 |
|
| $ | 369 |
|
Actual maturities may differ from contractual maturities becauseas some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
19
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 |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Gross realized gains on debt securities |
| $ | 24 |
|
| $ | 91 |
|
| $ | 49 |
|
| $ | 148 |
|
| $ | 36 |
|
| $ | 24 |
|
| $ | 85 |
|
| $ | 49 |
|
Gross realized losses on debt securities |
|
| (50 | ) |
|
| (28 | ) |
|
| (365 | ) |
|
| (179 | ) |
|
| (7 | ) |
|
| (50 | ) |
|
| (40 | ) |
|
| (365 | ) |
Total gain (loss) recognized, net |
| $ | (26 | ) |
| $ | 63 |
|
| $ | (316 | ) |
| $ | (31 | ) |
| $ | 29 |
|
| $ | (26 | ) |
| $ | 45 |
|
| $ | (316 | ) |
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, 2018,2019, we held a $26.7$25.6 million restricted certificate of deposit that is carried at cost.cost and matures on January 8, 2020. 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)“Bond”), which totaled $26.7$25.6 million at September 30, 20182019 and December 31, 2017.2018. At September 30, 20182019 and December 31, 2017,2018, the estimated fair value of the Bond using a level 2 valuation technique was approximately $26.5$25.6 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.AA+. We have the right to set-offoffset 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 stateState 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 makeWe have made annual principal payments in addition to the interest amounts that are due.
The restricted funds held as collateral against the outstanding principal amount of the Bond will be used to pay the outstanding principal and interest upon the Bond’s maturity.
Marketable Equity Securities
Our marketable equity securities consist of publicly traded stocks orstock, 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. As of December 31, 2018, the Company had a note receivable of approximately $4.3 million, which was included in other receivables on the Condensed Consolidated Balance Sheet. During the three months ended March 31, 2019, this amount was repaid and reissued in the form of debt and equity. Approximately $3.4 million was issued as an equity investment, which represented a non-cash investing activity. The carrying value of this investment under the measurement alternative was $3.4 million as of September 30, 2019. The remaining amount, approximately $0.9 million, was converted into a new note receivable, which is included in other receivables on the Condensed Consolidated Balance Sheet and represents a non-cash operating activity.
Realized and unrealized gains and losses for our marketable equity securities for the three and nine months ended September 30, 2019 and 2018 were as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||
(In thousands) |
| 2018 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||
Realized gains (losses) on equity securities sold |
| $ | 1,240 |
|
| $ | 1,587 |
|
| $ | (20 | ) |
| $ | 1,240 |
|
| $ | (83 | ) |
| $ | 1,587 |
|
Unrealized gains (losses) on equity securities held |
|
| 3,293 |
|
|
| 4,129 |
|
|
| (225 | ) |
|
| 3,293 |
|
|
| 8,233 |
|
|
| 4,129 |
|
Total gain (loss) recognized, net |
| $ | 4,533 |
|
| $ | 5,716 |
|
| $ | (245 | ) |
| $ | 4,533 |
|
| $ | 8,150 |
|
| $ | 5,716 |
|
As of September 30, 20182019 and 2017,2018, gross unrealized losses related to individual investments in a continuous loss position for twelve months or longer were not significant.material.
20
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 September 30, 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) |
|
| 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 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,817 |
|
| $ | 1,817 |
|
| $ | — |
|
| $ | — |
|
Foreign government securities |
|
| 600 |
|
|
| — |
|
|
| 600 |
|
|
| — |
| ||||||||||||||||
Commercial paper |
|
| 1,295 |
|
|
| — |
|
|
| 1,295 |
|
|
| — |
| ||||||||||||||||
Cash equivalents |
|
| 2,023 |
|
|
| 1,423 |
|
|
| 600 |
|
|
| — |
|
|
| 3,112 |
|
|
| 1,817 |
|
|
| 1,295 |
|
|
| — |
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
| 25,562 |
|
|
| — |
|
|
| 25,562 |
|
|
| — |
|
|
| 10,828 |
|
|
| — |
|
|
| 10,828 |
|
|
| — |
|
Municipal fixed-rate bonds |
|
| 1,415 |
|
|
| — |
|
|
| 1,415 |
|
|
| — |
|
|
| 930 |
|
|
| — |
|
|
| 930 |
|
|
| — |
|
Asset-backed bonds |
|
| 8,355 |
|
|
| — |
|
|
| 8,355 |
|
|
| — |
|
|
| 7,255 |
|
|
| — |
|
|
| 7,255 |
|
|
| — |
|
Mortgage/Agency-backed bonds |
|
| 5,363 |
|
|
| — |
|
|
| 5,363 |
|
|
| — |
|
|
| 7,388 |
|
|
| — |
|
|
| 7,388 |
|
|
| — |
|
U.S. government bonds |
|
| 19,773 |
|
|
| 19,773 |
|
|
| — |
|
|
| — |
|
|
| 9,143 |
|
|
| 9,143 |
|
|
| — |
|
|
| — |
|
Foreign government bonds |
|
| 595 |
|
|
| — |
|
|
| 595 |
|
|
| — |
|
|
| 369 |
|
|
| — |
|
|
| 369 |
|
|
| — |
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities – various industries |
|
| 40,645 |
|
|
| 40,645 |
|
|
| — |
|
|
| — |
|
|
| 32,543 |
|
|
| 32,543 |
|
|
| — |
|
|
| — |
|
Equity in escrow |
|
| 277 |
|
|
| 277 |
|
|
| — |
|
|
| — |
|
|
| 165 |
|
|
| 165 |
|
|
| — |
|
|
| — |
|
Deferred compensation plan assets |
|
| 20,948 |
|
|
| 20,948 |
|
|
| — |
|
|
| — |
|
|
| 20,580 |
|
|
| 20,580 |
|
|
| — |
|
|
| — |
|
Available-for-sale securities |
|
| 122,933 |
|
|
| 81,643 |
|
|
| 41,290 |
|
|
| — |
| ||||||||||||||||
Total debt and equity securities at fair value |
|
| 89,201 |
|
|
| 62,431 |
|
|
| 26,770 |
|
|
| — |
| ||||||||||||||||
Total |
| $ | 124,956 |
|
| $ | 83,066 |
|
| $ | 41,890 |
|
| $ | — |
|
| $ | 92,313 |
|
| $ | 64,248 |
|
| $ | 28,065 |
|
| $ | — |
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2018 Using |
| |||||||||
(In thousands) |
| Fair Value |
|
| Quoted Prices in Active Market for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 1,554 |
|
| $ | 1,554 |
|
| $ | — |
|
| $ | — |
|
Cash equivalents |
|
| 1,554 |
|
|
| 1,554 |
|
|
| — |
|
|
| — |
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
| 20,684 |
|
|
| — |
|
|
| 20,684 |
|
|
| — |
|
Municipal fixed-rate bonds |
|
| 1,313 |
|
|
| — |
|
|
| 1,313 |
|
|
| — |
|
Asset-backed bonds |
|
| 5,221 |
|
|
| — |
|
|
| 5,221 |
|
|
| — |
|
Mortgage/Agency-backed bonds |
|
| 3,791 |
|
|
| — |
|
|
| 3,791 |
|
|
| — |
|
U.S. government bonds |
|
| 9,206 |
|
|
| 9,206 |
|
|
| — |
|
|
| — |
|
Foreign government bonds |
|
| 584 |
|
|
| — |
|
|
| 584 |
|
|
| — |
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities – various industries |
|
| 26,763 |
|
|
| 26,763 |
|
|
| — |
|
|
| — |
|
Equity in escrow |
|
| 253 |
|
|
| 253 |
|
|
| — |
|
|
| — |
|
Deferred compensation plan assets |
|
| 18,256 |
|
|
| 18,256 |
|
|
| — |
|
|
| — |
|
Total debt and equity securities at fair value |
|
| 86,071 |
|
|
| 54,478 |
|
|
| 31,593 |
|
|
| — |
|
Total |
| $ | 87,625 |
|
| $ | 56,032 |
|
| $ | 31,593 |
|
| $ | — |
|
1821
|
| Fair Value Measurements at December 31, 2017 Using |
| |||||||||||||
(In thousands) |
| Fair Value |
|
| Quoted Prices in Active Market for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 5,851 |
|
| $ | 5,851 |
|
| $ | — |
|
| $ | — |
|
Commercial paper |
|
| 3,999 |
|
|
| — |
|
|
| 3,999 |
|
|
| — |
|
Cash equivalents |
|
| 9,850 |
|
|
| 5,851 |
|
|
| 3,999 |
|
|
| — |
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
| 32,543 |
|
|
| — |
|
|
| 32,543 |
|
|
| — |
|
Municipal fixed-rate bonds |
|
| 2,882 |
|
|
| — |
|
|
| 2,882 |
|
|
| — |
|
Asset-backed bonds |
|
| 6,526 |
|
|
| — |
|
|
| 6,526 |
|
|
| — |
|
Mortgage/Agency-backed bonds |
|
| 5,509 |
|
|
| — |
|
|
| 5,509 |
|
|
| — |
|
U.S. government bonds |
|
| 14,303 |
|
|
| 14,303 |
|
|
| — |
|
|
| — |
|
Foreign government bonds |
|
| 730 |
|
|
| — |
|
|
| 730 |
|
|
| — |
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities – various industries |
|
| 35,662 |
|
|
| 35,662 |
|
|
| — |
|
|
| — |
|
Deferred compensation plan assets |
|
| 19,883 |
|
|
| 19,883 |
|
|
| — |
|
|
| — |
|
Available-for-sale securities |
|
| 118,038 |
|
|
| 69,848 |
|
|
| 48,190 |
|
|
| — |
|
Total |
| $ | 127,888 |
|
| $ | 75,699 |
|
| $ | 52,189 |
|
| $ | — |
|
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.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We participate in foreign exchange forward contracts in connection with the management of exposure to fluctuations in foreign exchange rates.
Cash Flow Hedges
Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the planned purchase of products from foreign suppliers. Purchases of U.S. denominated inventory by our European subsidiary represent our primary exposure. Changes in the fair value of derivatives designated as cash flow hedges are not recognized in current operating results, but are recorded in accumulated other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other comprehensive income when the underlying hedged item impacts earnings. This reclassification is recorded in cost of sales, the same line item of the Consolidated Statements of Income at which the effects of the hedged item are recorded.
Undesignated Hedges
We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as outstanding non-functional balances are revalued to the functional currency through profit and loss. When appropriate, we utilize foreign exchange forward contracts to help manage the volatility relating to these valuation exposures. All changes in the fair value of our derivative instruments that do not qualify for or are not designated for hedged accounting transactions are recognized as other income (expense), net in the Consolidated Statements of Income.
We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments are not subject to master netting arrangements and are not offset in the Consolidated Balance Sheets.
As of September 30, 2018, we had no foreign exchange forward contracts.
19
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, 2018 and 2017 were as follows:
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| Income Statement |
| September 30, |
|
| September 30, |
| ||||||||||
(In thousands) |
| Location |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Derivatives Not Designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| Other income (expense), net |
| $ | — |
|
| $ | (334 | ) |
| $ | 13 |
|
| $ | (819 | ) |
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 September 30, |
|
| (Losses) Reclassified |
| Three Months Ended September 30, |
| ||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| from AOCI into Income |
| 2018 |
|
| 2017 |
| ||||
Derivatives Designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| $ | — |
|
| $ | (127 | ) |
| Cost of Sales |
| $ | — | �� |
| $ | (269 | ) |
|
| Amount of Gains (Losses) Recognized in |
|
|
|
| Amount of Gains (Losses) Reclassified |
| ||||||||||
|
| OCI on Derivatives |
|
|
|
| from AOCI into Income |
| ||||||||||
|
|
|
|
| Location of Gains |
|
|
| ||||||||||
|
| Nine Months Ended September 30, |
|
| (Losses) Reclassified |
| Nine Months Ended September 30, |
| ||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| from AOCI into Income |
| 2018 |
|
| 2017 |
| ||||
Derivatives Designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
| $ | — |
|
| $ | (619 | ) |
| Cost of Sales |
| $ | — |
|
| $ | (423 | ) |
9.8. INVENTORY
At September 30, 20182019 and December 31, 2017,2018, inventory consisted of the following:
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Raw materials |
| $ | 47,664 |
|
| $ | 44,185 |
|
| $ | 39,133 |
|
| $ | 45,333 |
|
Work in process |
|
| 1,289 |
|
|
| 1,939 |
|
|
| 1,083 |
|
|
| 1,638 |
|
Finished goods |
|
| 57,107 |
|
|
| 76,418 |
|
|
| 64,725 |
|
|
| 52,877 |
|
Total |
| $ | 106,060 |
|
| $ | 122,542 |
|
| $ | 104,941 |
|
| $ | 99,848 |
|
We establishInventory reserves are established for estimated excess and obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fairnet realizable value of the inventory based upon assumptions about future demandon historical usage, known trends, inventory age, and market conditions. At September 30, 20182019 and December 31, 2017, raw materials reserves totaled $17.22018, our inventory reserve was $32.0 million and $15.0$30.0 million, respectively,respectively.
9. PROPERTY, PLANT AND EQUIPMENT
At September 30, 2019 and finished goods inventory reserves totaled $10.6December 31, 2018, property, plant and equipment consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
(In thousands) |
| 2019 |
|
| 2018 |
| ||
Land |
| $ | 4,575 |
|
| $ | 4,575 |
|
Building and land improvements |
|
| 34,634 |
|
|
| 34,379 |
|
Building |
|
| 68,247 |
|
|
| 68,183 |
|
Furniture and fixtures |
|
| 19,878 |
|
|
| 19,831 |
|
Computer hardware and software |
|
| 72,390 |
|
|
| 92,071 |
|
Engineering and other equipment |
|
| 129,479 |
|
|
| 127,060 |
|
Total Property, Plant and Equipment |
|
| 329,203 |
|
|
| 346,099 |
|
Less accumulated depreciation |
|
| (255,819 | ) |
|
| (265,464 | ) |
Total Property, Plant and Equipment, net |
| $ | 73,384 |
|
| $ | 80,635 |
|
Depreciation expense was $3.1 million for the three months ended September 30, 2019 and 2018 and was $9.3 million and $8.3$9.5 million respectively.for the nine months ended September 30, 2019 and 2018, respectively, which is recorded in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income.
We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. During the three and nine months ended September 30, 2019, the Company recognized impairment charges of $3.9 million related to the abandonment of certain information technology projects in which we had previously capitalized costs related to these projects. The impairment charges were determined based on actual costs incurred as part of the projects.
20
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill, all of which relates to our acquisitionacquisitions of Bluesocket, Inc., in 2011 and SmartRG in 2018, was $3.5$7.0 million and $7.1 million at September 30, 20182019 and December 31, 2017,2018, respectively, of which $3.1$6.6 million and $0.4 million iswas allocated to our Network Solutions and Services & Support reportable segments, respectively.respectively, as of September 30, 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 reduced by $0.1 million during the nine months ended September 30, 2019 as a result of a measurement period adjustment.
22
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,the fourth quarter of 2018, we concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses recognized sinceNo events or circumstances occurred during the acquisition in 2011.nine months ended September 30, 2019 that would more likely than not reduce the fair value of goodwill below its carrying value.
11.INTANGIBLE ASSETS
Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangiblesthose acquired in conjunction with ourseveral 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 and Sumitomo Electric Lightwave Corp.’s North American EPON business and technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. on March 19,in November 2018.
The following table presents our intangible assets as of September 30, 20182019 and December 31, 2017. Fully amortized intangible assets have been removed from prior year balances for comparability.2018:
|
| September 30, 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 |
|
| $ | 22,235 |
|
| $ | (6,671 | ) |
| $ | 15,564 |
|
| $ | 22,455 |
|
| $ | (5,380 | ) |
| $ | 17,075 |
|
Developed technology |
|
| 10,170 |
|
|
| (3,094 | ) |
|
| 7,076 |
|
|
| 12,801 |
|
|
| (4,867 | ) |
|
| 7,934 |
| ||||||||||||||||||||||||
Licensed technology |
|
| 5,900 |
|
|
| (355 | ) |
|
| 5,545 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,900 |
|
|
| (1,011 | ) |
|
| 4,889 |
|
|
| 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 |
|
|
| (2,158 | ) |
|
| 642 |
|
|
| 2,800 |
|
|
| (1,108 | ) |
|
| 1,692 |
| ||||||||||||||||||||||||
Licensing agreements |
|
| 560 |
|
|
| (61 | ) |
|
| 499 |
|
|
| 560 |
|
|
| (5 | ) |
|
| 555 |
| ||||||||||||||||||||||||
Patents |
|
| 500 |
|
|
| (209 | ) |
|
| 291 |
|
|
| 500 |
|
|
| (157 | ) |
|
| 343 |
| ||||||||||||||||||||||||
Trade names |
|
| 100 |
|
|
| (100 | ) |
|
| — |
|
|
| 100 |
|
|
| (65 | ) |
|
| 35 |
|
|
| 310 |
|
|
| (158 | ) |
|
| 152 |
|
|
| 310 |
|
|
| (106 | ) |
|
| 204 |
|
Total |
| $ | 36,589 |
|
| $ | (12,335 | ) |
| $ | 24,254 |
|
| $ | 14,728 |
|
| $ | (10,067 | ) |
| $ | 4,661 |
|
| $ | 42,475 |
|
| $ | (13,362 | ) |
| $ | 29,113 |
|
| $ | 45,326 |
|
| $ | (12,143 | ) |
| $ | 33,183 |
|
Amortization expense all of which relates to business acquisitions, was $0.9$1.3 million and $0.5$0.9 million for the three months ended September 30, 2019 and 2018, respectively, and 2017, respectively,$4.0 million and $2.4 million for the nine months ended September 30, 2019 and 2018, and 2017.respectively.
As of September 30, 2018, the2019, estimated future amortization expense of our intangible assets was as follows:
(In thousands) |
| Amount |
| |
Remainder of 2019 |
| $ | 1,329 |
|
2020 |
|
| 4,436 |
|
2021 |
|
| 4,088 |
|
2022 |
|
| 3,464 |
|
2023 |
|
| 3,313 |
|
Thereafter |
|
| 12,483 |
|
Total |
| $ | 29,113 |
|
12. LEASES
Operating Leases
We have operating leases for office space, automobiles, and various other equipment in the United States and in certain international locations in which we do business. We also have other contracts, such as manufacturing agreements and service agreements, which we reviewed to determine if they contain any embedded leases. We specifically reviewed these other contracts to determine whether we have the right to substantially all of the economic benefit from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of a lease.
23
As of September 30, 2019, our operating leases have remaining lease terms of two months to six years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within three months. For those leases that are reasonably assured to be renewed, we have included the option to extend as part of our right of use asset and lease liability. Leases with an initial term of 12 months or less 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 $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively, and is included in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income. Lease expense related to variable lease payments that do not depend on an index or rate, such as real estate taxes and insurance reimbursements, was $0.3 million and $0.7 million for the three and nine months ended September 30, 2019. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected 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:
(In thousands) |
| Amount |
| |
Remainder of 2018 |
| $ | 859 |
|
2019 |
|
| 3,540 |
|
2020 |
|
| 2,657 |
|
2021 |
|
| 2,364 |
|
2022 |
|
| 2,350 |
|
Thereafter |
|
| 12,484 |
|
Total |
| $ | 24,254 |
|
|
|
|
| September 30, |
|
| January 1, |
| ||
(In thousands) |
| Classification |
| 2019 |
|
| 2019 (1) |
| ||
Assets |
|
|
|
|
|
|
|
|
|
|
Operating lease asset |
| Other assets |
| $ | 18,529 |
|
| $ | 10,322 |
|
Total lease assets |
|
|
| $ | 18,529 |
|
| $ | 10,322 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Current operating lease liability |
| Accrued expenses |
| $ | 3,063 |
|
| $ | 2,948 |
|
Non-current operating lease liability |
| Other non-current liabilities |
|
| 15,659 |
|
|
| 7,374 |
|
Total lease liability |
|
|
| $ | 18,722 |
|
| $ | 10,322 |
|
(1) | Reflects the adoption of the new lease accounting standard on January 1, 2019. |
21
11. STOCKHOLDERS’ EQUITY
A summaryThe components of lease expense included in the changes in stockholders’ equityCondensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 is2019 were as follows:
(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 |
|
(in thousands) |
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Selling, general and administrative expenses |
| $ | 352 |
|
| $ | 1,050 |
|
Research and development expenses |
|
| 847 |
|
|
| 1,731 |
|
Cost of sales |
|
| 16 |
|
|
| 49 |
|
Total operating lease expense |
| $ | 1,215 |
|
| $ | 2,830 |
|
As of September 30, 2019, operating lease liabilities included on the Condensed Consolidated Balance Sheet by future maturity were as follows:
(In thousands) |
| Amount |
| |
Remainder of 2019 |
| $ | 1,044 |
|
2020 |
|
| 3,417 |
|
2021 |
|
| 3,071 |
|
2022 |
|
| 2,672 |
|
2023 |
|
| 2,350 |
|
Thereafter |
|
| 8,258 |
|
Total lease payments |
|
| 20,812 |
|
Less: Interest |
|
| (2,090 | ) |
Present value of lease liabilities |
| $ | 18,722 |
|
Future operating lease payments include $7.6 million related to options to extend lease terms that are reasonably certain of being exercised. There are no legally binding leases that have not yet commenced.
24
As of December 31, 2018, future minimum rental payments under non-cancelable operating leases, including renewals determined to be reasonably assured as of December 31, 2018, with original maturities of greater than 12 months, were as follows:
(In thousands) |
| Amount (1) |
| |
2019 |
| $ | 3,873 |
|
2020 |
|
| 3,580 |
|
2021 |
|
| 2,771 |
|
2022 |
|
| 2,053 |
|
2023 |
|
| 1,317 |
|
Thereafter |
|
| 762 |
|
Total |
| $ | 14,356 |
|
(1) | Certain renewal options were subsequently determined to not be reasonably assured of renewal upon the Company’s adoption of the new lease accounting standard on January 1, 2019. |
Our leases do not provide an implicit 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. The following table provides information about our weighted average lease terms and weighted average discount rates as of September 30, 2019:
September 30, 2019 | ||||
Weighted average remaining lease term (years) | ||||
Operating leases with USD functional currency | 8.4 | |||
Operating leases with Euro functional currency | 4.6 | |||
Weighted average discount rate | ||||
Operating leases with USD functional currency | 3.22 | % | ||
Operating leases with Euro functional currency | 1.84 | % |
Supplemental cash flow information related to operating leases is as follows:
|
| Nine Months Ended |
| |
(In thousands) |
| September 30, 2019 |
| |
Cash paid for amounts included in the measurement of operating lease assets / liabilities |
|
|
|
|
Cash used in operating activities related to operating leases |
| $ | (775 | ) |
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations |
| $ | 21,418 |
|
25
Sales-Type Leases
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 September 30, 2019 and December 31, 2018, we had 0 allowance for credit losses for our net investment in sales-type leases. As of September 30, 2019 and December 31, 2018, the components of the net investment in sales-type leases were as follows:
|
| September 30, |
|
| December 31, |
| ||
(In thousands) |
| 2019 |
|
| 2018 |
| ||
Current minimum lease payments receivable(1) |
| $ | 3,643 |
|
| $ | 11,339 |
|
Non-current minimum lease payments receivable(2) |
|
| 1,073 |
|
|
| 1,670 |
|
Total minimum lease payments receivable |
|
| 4,716 |
|
|
| 13,009 |
|
Less: Current unearned revenue |
|
| 445 |
|
|
| 631 |
|
Less: Non-current unearned revenue |
|
| 210 |
|
|
| 473 |
|
Net investment in sales-type leases |
| $ | 4,061 |
|
| $ | 11,905 |
|
(1) | Included in other receivables on the Condensed Consolidated Balance Sheet. |
(2) | Included in other assets on the Condensed Consolidated Balance Sheet. |
The components of sales-type lease gross profit recognized at the lease commencement date and interest and dividend income, included in the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019, were as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
(In thousands) |
| September 30, 2019 |
|
| September 30, 2019 |
| ||
Sales - Network Solutions |
| $ | 47 |
|
| $ | 1,668 |
|
Cost of sales - Network Solutions |
|
| 25 |
|
|
| 660 |
|
Gross profit |
| $ | 22 |
|
| $ | 1,008 |
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
| $ | 92 |
|
| $ | 278 |
|
As of September 30, 2019, future minimum lease payments to be received from sales-type leases were as follows:
(In thousands) |
| Amount |
| |
Remainder of 2019 |
| $ | 2,700 |
|
2020 |
|
| 1,162 |
|
2021 |
|
| 542 |
|
2022 |
|
| 225 |
|
2023 |
|
| 83 |
|
Thereafter |
|
| 4 |
|
Total |
| $ | 4,716 |
|
26
13. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 50.0 million sharesrepurchases of our common stock, thatwhich are implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended September 30, 2018,2019, we repurchased 0.9 million13,000 shares of our common stock at an average price of $15.75$14.06 per share. As of September 30, 2018,2019, we havehad the authority to purchase an additional 2.72.5 million shares of our common stock under the current plans approved by the Boardauthorization of Directors.up to 5.0 million shares.
Stock Option Exercises
We issued 0.1 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.
Dividend Payments
During the nine months ended September 30, 2018, we paid cash dividends as follows (in thousands except per share amounts):
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 |
|
22
Other Comprehensive Income
Other comprehensive income consists of unrealized gains (losses) on available-for-sale debt securities; unrealized gains (losses) on cash flow hedges; reclassification adjustments for amounts included in net income related to impairments of available-for-sale 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; defined benefit plan adjustments; and foreign currency translation adjustments. (Loss)
The following tables present the changes in accumulated other comprehensive income (loss), net of tax, by component for the three months ended September 30, 20182019 and 2017:2018:
|
| Three Months Ended September 30, 2018 |
|
| Three Months Ended September 30, 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 (1) |
|
| Total |
| |||||||||
Beginning balance |
| $ | (741 | ) |
| $ | (4,219 | ) |
| $ | (4,158 | ) |
| $ | (9,118 | ) | ||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| 1,208 |
|
|
| — |
|
|
| (451 | ) |
|
| 757 |
| ||||||||||||||||||||
As of June 30, 2019 |
| $ | (271 | ) |
| $ | (7,770 | ) |
| $ | (6,439 | ) |
| $ | 385 |
|
| $ | (14,095 | ) | ||||||||||||||||
Other comprehensive loss before reclassifications |
|
| (39 | ) |
|
| — |
|
|
| (2,486 | ) |
|
| — |
|
|
| (2,525 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (1,240 | ) |
|
| 37 |
|
|
| — |
|
|
| (1,203 | ) |
|
| 24 |
|
|
| 90 |
|
|
| — |
|
|
| — |
|
|
| 114 |
|
Net current period other comprehensive income (loss) |
|
| (32 | ) |
|
| 37 |
|
|
| (451 | ) |
|
| (446 | ) |
|
| (15 | ) |
|
| 90 |
|
|
| (2,486 | ) |
|
| — |
|
|
| (2,411 | ) |
Ending balance |
| $ | (773 | ) |
| $ | (4,182 | ) |
| $ | (4,609 | ) |
| $ | (9,564 | ) | ||||||||||||||||||||
As of September 30, 2019 |
| $ | (286 | ) |
| $ | (7,680 | ) |
| $ | (8,925 | ) |
| $ | 385 |
|
| $ | (16,506 | ) |
|
| 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 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were reclassified to retained earnings. See Note 1. |
|
| Three Months Ended September 30, 2018 |
| |||||||||||||
(In thousands) |
| Unrealized Gains (Losses) on Available- for-Sale Securities |
|
| Defined Benefit Plan Adjustments |
|
| Foreign Currency Adjustments |
|
| Total |
| ||||
As of June 30, 2018 |
| $ | (741 | ) |
| $ | (4,219 | ) |
| $ | (4,158 | ) |
| $ | (9,118 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 1,208 |
|
|
| — |
|
|
| (451 | ) |
|
| 757 |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (1,240 | ) |
|
| 37 |
|
|
| — |
|
|
| (1,203 | ) |
Net current period other comprehensive income (loss) |
|
| (32 | ) |
|
| 37 |
|
|
| (451 | ) |
|
| (446 | ) |
As of September 30, 2018 |
| $ | (773 | ) |
| $ | (4,182 | ) |
| $ | (4,609 | ) |
| $ | (9,564 | ) |
2327
The following tables present the changes in accumulated other comprehensive income (loss), net of tax, by component for the nine months ended September 30, 20182019 and 2017:2018:
|
| Nine Months Ended September 30, 2018 |
|
| Nine Months Ended September 30, 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(1) |
|
| Total |
| |||||||||
Beginning balance |
| $ | 2,567 |
|
| $ | (4,286 | ) |
| $ | (1,576 | ) |
| $ | (3,295 | ) | ||||||||||||||||||||
As of December 31, 2018 |
| $ | (563 | ) |
| $ | (8,041 | ) |
| $ | (5,812 | ) |
| $ | — |
|
| $ | (14,416 | ) | ||||||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| 869 |
|
|
| — |
|
|
| (3,033 | ) |
|
| (2,164 | ) |
|
| 372 |
|
|
| — |
|
|
| (3,113 | ) |
|
| — |
|
|
| (2,741 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (989 | ) |
|
| 104 |
|
|
| — |
|
|
| (885 | ) |
|
| (95 | ) |
|
| 361 |
|
|
| — |
|
|
| — |
|
|
| 266 |
|
Amounts reclassified to retained earnings (1) |
|
| (3,220 | ) |
|
| — |
|
|
| — |
|
|
| (3,220 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 385 |
|
|
| 385 |
|
Net current period other comprehensive income (loss) |
|
| (3,340 | ) |
|
| 104 |
|
|
| (3,033 | ) |
|
| (6,269 | ) |
|
| 277 |
|
|
| 361 |
|
|
| (3,113 | ) |
|
| 385 |
|
|
| (2,090 | ) |
Ending balance |
| $ | (773 | ) |
| $ | (4,182 | ) |
| $ | (4,609 | ) |
| $ | (9,564 | ) | ||||||||||||||||||||
As of September 30, 2019 |
| $ | (286 | ) |
| $ | (7,680 | ) |
| $ | (8,925 | ) |
| $ | 385 |
|
| $ | (16,506 | ) |
| (1) | With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were reclassified to retained earnings. See Note 1. |
|
| Nine Months Ended September 30, 2018 |
| |||||||||||||
(In thousands) |
| Unrealized Gains (Losses) on Available- for-Sale Securities |
|
| Defined Benefit Plan Adjustments |
|
| Foreign Currency Adjustments |
|
| Total |
| ||||
As of December 31, 2017 |
| $ | 2,567 |
|
| $ | (4,286 | ) |
| $ | (1,576 | ) |
| $ | (3,295 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 869 |
|
|
| — |
|
|
| (3,033 | ) |
|
| (2,164 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (989 | ) |
|
| 104 |
|
|
| — |
|
|
| (885 | ) |
Amounts reclassified to retained earnings (1) |
|
| (3,220 | ) |
|
| — |
|
|
| — |
|
|
| (3,220 | ) |
Net current period other comprehensive income (loss) |
|
| (3,340 | ) |
|
| 104 |
|
|
| (3,033 | ) |
|
| (6,269 | ) |
As of September 30, 2018 |
| $ | (773 | ) |
| $ | (4,182 | ) |
| $ | (4,609 | ) |
| $ | (9,564 | ) |
(1) | With the Company’s adoption of ASU 2016-01 |
|
| 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 | ) |
2428
The following tables present the details of reclassifications out of accumulated other comprehensive income (loss) for the three months ended September 30, 20182019 and 2017:2018:
|
| Three Months Ended September 30, 2019 | ||||||||||
(In thousands) |
| Three Months Ended September 30, 2018 |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | |||||
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 |
| $ | 1,676 |
|
| Net investment gain | ||||||
Net realized losses on sales of securities |
| $ | (32 | ) |
| Net investment gain | ||||||
Defined benefit plan adjustments – actuarial losses |
|
| (54 | ) |
| (1) |
|
| (130 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 1,622 |
|
|
|
|
| (162 | ) |
|
|
Tax (expense) benefit |
|
| (419 | ) |
|
| ||||||
Tax benefit |
|
| 48 |
|
|
| ||||||
Total reclassifications for the period, net of tax |
| $ | 1,203 |
|
|
|
| $ | (114 | ) |
|
|
(1) | Included in the computation of net periodic pension cost. See Note 5. |
|
| Three Months Ended September 30, 2018 | ||||
(In thousands) |
| 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 gains on sales of securities |
| $ | 1,676 |
|
| Net investment gain |
Defined benefit plan adjustments – actuarial losses |
|
| (54 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 1,622 |
|
|
|
Tax expense |
|
| (419 | ) |
|
|
Total reclassifications for the period, net of tax |
| $ | 1,203 |
|
|
|
| (1) | Included in the computation of net periodic pension cost. See Note |
The following tables present the details of reclassifications out of accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018:
|
| Nine Months Ended September 30, 2019 | ||||||||||
(In thousands) |
| Three Months Ended September 30, 2017 |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | |||||
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 | ||||||
Net realized gains on sales of securities |
| $ | 128 |
|
| Net investment gain | ||||||
Defined benefit plan adjustments – actuarial losses |
|
| (106 | ) |
| (1) |
|
| (523 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 518 |
|
|
|
|
| (395 | ) |
|
|
Tax (expense) benefit |
|
| (244 | ) |
|
| ||||||
Tax benefit |
|
| 129 |
|
|
| ||||||
Total reclassifications for the period, net of tax |
| $ | 274 |
|
|
|
| $ | (266 | ) |
|
|
| (1) | Included in the computation of net periodic pension cost. See Note |
2529
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:
|
| Nine Months Ended September 30, 2018 | ||||||||||
(In thousands) |
| Nine Months Ended September 30, 2018 |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | |||||
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 |
| $ | 1,352 |
|
| Net investment gain | ||||||
Net realized gains on sales of securities |
| $ | 1,352 |
|
| Net investment gain | ||||||
Defined benefit plan adjustments – actuarial losses |
|
| (151 | ) |
| (1) |
|
| (151 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 1,201 |
|
|
|
|
| 1,201 |
|
|
|
Tax (expense) benefit |
|
| (316 | ) |
|
| ||||||
Tax expense |
|
| (316 | ) |
|
| ||||||
Total reclassifications for the period, net of tax |
| $ | 885 |
|
|
|
| $ | 885 |
|
|
|
| (1) | Included in the computation of net periodic pension cost. See Note |
(In thousands) |
| Nine 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 |
| $ | 3,031 |
|
| Net investment gain |
Impairment expense |
|
| (162 | ) |
| Net investment gain |
Net losses on derivatives designated as hedging instruments |
|
| (539 | ) |
| Cost of sales |
Defined benefit plan adjustments – actuarial losses |
|
| (310 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 2,020 |
|
|
|
Tax (expense) benefit |
|
| (907 | ) |
|
|
Total reclassifications for the period, net of tax |
| $ | 1,113 |
|
|
|
|
|
26
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, 20182019 and 2017:2018:
|
| Three Months Ended |
|
| Three 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 |
| $ | 1,632 |
|
| $ | (424 | ) |
| $ | 1,208 |
|
| $ | 2,328 |
|
| $ | (908 | ) |
| $ | 1,420 |
|
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 | ) |
Reclassification adjustment for amounts related to cash flow hedges included in net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 385 |
|
|
| (116 | ) |
|
| 269 |
|
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income |
|
| 54 |
|
|
| (17 | ) |
|
| 37 |
|
|
| 106 |
|
|
| (33 | ) |
|
| 73 |
|
Foreign currency translation adjustment |
|
| (451 | ) |
|
| — |
|
|
| (451 | ) |
|
| 1,541 |
|
|
| — |
|
|
| 1,541 |
|
Total Other Comprehensive Income (Loss) |
| $ | (441 | ) |
| $ | (5 | ) |
| $ | (446 | ) |
| $ | 3,167 |
|
| $ | (607 | ) |
| $ | 2,560 |
|
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
(In thousands) |
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
| ||||||
Unrealized gain (loss) on available-for-sale securities |
| $ | (53 | ) |
| $ | 14 |
|
| $ | (39 | ) |
| $ | 1,632 |
|
| $ | (424 | ) |
| $ | 1,208 |
|
Reclassification adjustment for amounts related to available-for-sale investments included in net income (loss) |
|
| 32 |
|
|
| (8 | ) |
|
| 24 |
|
|
| (1,676 | ) |
|
| 436 |
|
|
| (1,240 | ) |
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income (loss) |
|
| 130 |
|
|
| (40 | ) |
|
| 90 |
|
|
| 54 |
|
|
| (17 | ) |
|
| 37 |
|
Foreign currency translation adjustment |
|
| (2,486 | ) |
|
| — |
|
|
| (2,486 | ) |
|
| (451 | ) |
|
| — |
|
|
| (451 | ) |
Total Other Comprehensive Loss |
| $ | (2,377 | ) |
| $ | (34 | ) |
| $ | (2,411 | ) |
| $ | (441 | ) |
| $ | (5 | ) |
| $ | (446 | ) |
The following table presents the tax effects related to the change in each component of other comprehensive income (loss) for the nine months ended September 30, 20182019 and 2017:2018:
|
| 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 |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
(In thousands) |
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
| ||||||
Unrealized gain (loss) on available-for-sale securities |
| $ | 503 |
|
| $ | (131 | ) |
| $ | 372 |
|
| $ | 1,174 |
|
| $ | (305 | ) |
| $ | 869 |
|
Reclassification adjustment for amounts related to available-for-sale investments included in net income (loss) |
|
| (128 | ) |
|
| 33 |
|
|
| (95 | ) |
|
| (1,352 | ) |
|
| 363 |
|
|
| (989 | ) |
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 defined benefit plan adjustments included in net income (loss) |
|
| 523 |
|
|
| (162 | ) |
|
| 361 |
|
|
| 151 |
|
|
| (47 | ) |
|
| 104 |
|
Foreign currency translation adjustment |
|
| (3,113 | ) |
|
| — |
|
|
| (3,113 | ) |
|
| (3,033 | ) |
|
| — |
|
|
| (3,033 | ) |
Total Other Comprehensive Income (Loss) |
| $ | (2,215 | ) |
| $ | (260 | ) |
| $ | (2,475 | ) |
| $ | (6,280 | ) |
| $ | 11 |
|
| $ | (6,269 | ) |
2730
12.14. EARNINGS (LOSS) PER SHARE
A summary of the calculation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 20182019 and 20172018 is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
(In thousands, except per share amounts) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 7,589 |
|
| $ | 15,898 |
|
| $ | (10,895 | ) |
| $ | 34,950 |
|
| $ | (46,123 | ) |
| $ | 7,589 |
|
| $ | (41,358 | ) |
| $ | (10,895 | ) |
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares – basic |
|
| 47,710 |
|
|
| 47,870 |
|
|
| 47,927 |
|
|
| 48,110 |
|
|
| 47,824 |
|
|
| 47,710 |
|
|
| 47,803 |
|
|
| 47,927 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
| 27 |
|
|
| 487 |
|
|
| — |
|
|
| 385 |
|
|
| — |
|
|
| 27 |
|
|
| — |
|
|
| — |
|
PSUs, RSUs and restricted stock |
|
| 97 |
|
|
| 174 |
|
|
| — |
|
|
| 123 |
|
|
| — |
|
|
| 97 |
|
|
| — |
|
|
| — |
|
Weighted average number of shares – diluted |
|
| 47,834 |
|
|
| 48,531 |
|
|
| 47,927 |
|
|
| 48,618 |
|
|
| 47,824 |
|
|
| 47,834 |
|
|
| 47,803 |
|
|
| 47,927 |
|
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 |
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) | ||||||||||||||||
Earnings (loss) per share – diluted |
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
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 forFor the three months ended September 30, 2018, and 2017, respectively, and 4.81.8 million and 3.9 million forstock options were outstanding but were not included in the nine months ended September 30, 2018 and 2017. computation of diluted earnings per share. These stock options were excluded because their exercise prices were greater than the average market price of the common shares, during the quarter, therefore making them anti-dilutive under the treasury stock method.
As a result of the net loss for the three months ended September 30, 2019, and for the nine months ended September 30, 2019 and 2018, we excluded 0.14.1 million, 3.0 million and 2.3 million, respectively, shares of unvested stock options, PSUs, RSUs and restricted stock were excluded from the calculation of diluted EPS due to their anti-dilutive effect.
13.15. SEGMENT INFORMATION
We operate in two2 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 areis 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, 20182019 and 2017.2018. We do not produce asset information by reportable segment; therefore, it is not reported.
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||||
(In thousands) |
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
| ||||||||
Network Solutions |
| $ | 121,043 |
|
| $ | 51,100 |
|
| $ | 145,467 |
|
| $ | 71,933 |
|
| $ | 94,018 |
|
| $ | 37,574 |
|
| $ | 121,043 |
|
| $ | 51,100 |
|
Services & Support |
|
| 19,292 |
|
|
| 7,348 |
|
|
| 39,645 |
|
|
| 14,558 |
|
|
| 20,074 |
|
|
| 8,757 |
|
|
| 19,292 |
|
|
| 7,348 |
|
Total |
| $ | 140,335 |
|
| $ | 58,448 |
|
| $ | 185,112 |
|
| $ | 86,491 |
|
| $ | 114,092 |
|
| $ | 46,331 |
|
| $ | 140,335 |
|
| $ | 58,448 |
|
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| September 30, 2019 |
|
| September 30, 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 |
|
| $ | 359,007 |
|
| $ | 151,654 |
|
| $ | 341,359 |
|
| $ | 133,175 |
|
Services & Support |
|
| 47,830 |
|
|
| 15,002 |
|
|
| 95,457 |
|
|
| 30,080 |
|
|
| 55,267 |
|
|
| 20,304 |
|
|
| 47,830 |
|
|
| 15,002 |
|
Total |
| $ | 389,189 |
|
| $ | 148,177 |
|
| $ | 540,064 |
|
| $ | 244,826 |
|
| $ | 414,274 |
|
| $ | 171,958 |
|
| $ | 389,189 |
|
| $ | 148,177 |
|
2831
Sales by Category
In addition to our reporting segments, we also report revenue for the following three3 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, 20182019 and 2017:2018:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Access & Aggregation |
| $ | 91,901 |
|
| $ | 135,959 |
|
| $ | 258,323 |
|
| $ | 394,741 |
|
| $ | 65,114 |
|
| $ | 91,901 |
|
| $ | 274,313 |
|
| $ | 258,323 |
|
Customer Devices |
|
| 38,552 |
|
|
| 35,582 |
|
|
| 103,213 |
|
|
| 105,683 |
| ||||||||||||||||
Subscriber Solutions & Experience |
|
| 42,476 |
|
|
| 38,552 |
|
|
| 119,731 |
|
|
| 103,213 |
| ||||||||||||||||
Traditional & Other Products |
|
| 9,882 |
|
|
| 13,571 |
|
|
| 27,653 |
|
|
| 39,640 |
|
|
| 6,502 |
|
|
| 9,882 |
|
|
| 20,230 |
|
|
| 27,653 |
|
Total |
| $ | 140,335 |
|
| $ | 185,112 |
|
| $ | 389,189 |
|
| $ | 540,064 |
|
| $ | 114,092 |
|
| $ | 140,335 |
|
| $ | 414,274 |
|
| $ | 389,189 |
|
14.The following table represents sales information by geographic area for the three and nine months ended September 30, 2019 and 2018:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
United States |
| $ | 83,144 |
|
| $ | 83,730 |
|
| $ | 230,960 |
|
| $ | 214,039 |
|
International |
|
| 30,948 |
|
|
| 56,605 |
|
|
| 183,314 |
|
|
| 175,150 |
|
Total |
| $ | 114,092 |
|
| $ | 140,335 |
|
| $ | 414,274 |
|
| $ | 389,189 |
|
16. LIABILITY FOR WARRANTY RETURNS
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$8.7 million and $9.7$8.6 million at September 30, 20182019 and December 31, 2017. During the three months ended March 31, 2017, we recorded a receivable and a reduction2018, respectively, which amounts are included in warranty expense related to a settlement with a third party supplier for a defective component, the impact of which is reflectedaccrued expenses in the table below.accompanying Condensed Consolidated Balance Sheets. 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.
A summaryreconciliation of the beginning and ending warranty expense and write-off activityaccrual for the three and nine months ended September 30, 20182019 and 20172018 is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
(In thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Balance at beginning of period |
| $ | 10,111 |
|
| $ | 9,180 |
|
| $ | 9,724 |
|
| $ | 8,548 |
|
| $ | 8,972 |
|
| $ | 10,111 |
|
| $ | 8,623 |
|
| $ | 9,724 |
|
Plus: Amounts charged to cost and expenses |
|
| (34 | ) |
|
| 4,087 |
|
|
| 6,649 |
|
|
| 6,401 |
|
|
| 816 |
|
|
| (34 | ) |
|
| 3,796 |
|
|
| 6,649 |
|
Less: Deductions |
|
| (1,053 | ) |
|
| (2,328 | ) |
|
| (7,349 | ) |
|
| (4,010 | ) |
|
| (1,131 | ) |
|
| (1,053 | ) |
|
| (3,762 | ) |
|
| (7,349 | ) |
Balance at end of period |
| $ | 9,024 |
|
| $ | 10,939 |
|
| $ | 9,024 |
|
| $ | 10,939 |
|
| $ | 8,657 |
|
| $ | 9,024 |
|
| $ | 8,657 |
|
| $ | 9,024 |
|
15.32
17. COMMITMENTS AND CONTINGENCIES
Securities Class Action Lawsuit
On October 17, 2019, a purported stockholder class action lawsuit, captioned Burbridge v. ADTRAN, Inc. et al., Docket No. 19-cv-09619, was filed in the United States District Court for the Southern District of New York against the Company, 2 of its current executive officers and 1 of its former executive officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages on behalf of purported purchasers of ADTRAN securities between February 28, 2019 and October 9, 2019. The lawsuit claims that the defendants made materially false and misleading statements regarding, and/or failed to disclose material adverse facts about, the Company’s business, operations and prospects, specifically relating to the Company’s internal control over financial reporting, excess and obsolete inventory reserves, financial results and shipments from a Latin American customer. Investors in ADTRAN securities have until December 16, 2019 to move the court to serve as lead plaintiff in this action. We disagree with the claims made in the complaint and intend to vigorously defend against this lawsuit. At this time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with this lawsuit.
Other Legal Matters
In addition to the ordinary course of business,litigation described above, from time to time we may beare subject to or otherwise involved in various lawsuits, claims, investigations and legal proceedings that arise out of or are incidental to the conduct of our business (collectively, “Legal Matters”), including those relating to employment matters, patent rights, regulatory compliance matters, stockholder claims, and claims, including employment disputes, patent claims, disputes over contract agreementscontractual and other commercial disputes. In some cases,Such Legal Matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Additionally, an unfavorable outcome in a legal matter, including in a patent dispute, could require the Company to pay damages, entitle claimants seek damages orto other relief, such as royalty payments related to patents,royalties, or could prevent the Company from selling some of its products in certain jurisdictions. While the Company cannot predict with certainty the results of the Legal Matters in which if granted, could require significant expenditures. Althoughit is currently involved, the Company does not expect that the ultimate outcome of any claimsuch Legal Matters will individually or litigation can never be certain, it is our opinion thatin the outcomeaggregate have a material adverse effect on its business, results of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.
Investment Commitment
We have committed to invest up to an aggregate of $7.9 million in two2 private equity funds, and we have contributed $8.4 million as of September 30, 2018, of which $7.7 million has been applied as of September 30, 2019.
18. RESTRUCTURING
In October 2019, the Company announced its plans to reduce its operating expenses, including global restructuring. During the three and nine months ended September 30, 2019, the Company incurred approximately $1.1 million and $1.9 million, respectively, related to these commitments.plans.
In February 2019, we announced the restructuring of certain of our workforce predominantly in Germany, which included the closure of our office location in Munich, Germany accompanied by relocation or severance benefits for the affected employees. We also offered voluntary early retirement to certain other employees, which was announced in March 2019. The restructuring is expected to be completed in the fourth quarter of 2019.
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 $0.3 million and $7.2 million was incurred during the three and nine months ended September 30, 2018, respectively. 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 in the Condensed Consolidated Balance Sheets, is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||
(In thousands) |
| September 30, 2019 |
|
| September 30, 2019 |
| ||
Balance at beginning of period |
| $ | 2,655 |
|
| $ | 185 |
|
Plus: Amounts charged to cost and expense |
|
| 1,195 |
|
|
| 4,658 |
|
Less: Amounts paid |
|
| (252 | ) |
|
| (1,245 | ) |
Balance at end of period |
| $ | 3,598 |
|
| $ | 3,598 |
|
33
The components of restructuring expense in the Condensed Consolidated Statements of Income are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Selling, general and administrative expenses |
| $ | 531 |
|
| $ | 261 |
|
| $ | 2,078 |
|
| $ | 2,661 |
|
Research and development expenses |
|
| 602 |
|
|
| — |
|
|
| 1,833 |
|
|
| 1,814 |
|
Cost of sales |
|
| 62 |
|
|
| — |
|
|
| 747 |
|
|
| 2,761 |
|
Total restructuring expenses |
| $ | 1,195 |
|
| $ | 261 |
|
| $ | 4,658 |
|
| $ | 7,236 |
|
The following table represents the components of restructuring expense by geographic area for the three and nine months ended September 30, 2019 and 2018:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Domestic |
| $ | 1,116 |
|
| $ | 256 |
|
| $ | 1,941 |
|
| $ | 7,096 |
|
International |
|
| 79 |
|
|
| 5 |
|
|
| 2,717 |
|
|
| 140 |
|
Total restructuring expenses |
| $ | 1,195 |
|
| $ | 261 |
|
| $ | 4,658 |
|
| $ | 7,236 |
|
29
16.19. SUBSEQUENT EVENTS
On October 16, 2018,30, 2019, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to the Company’s stockholders of record atas of the close of business on October 31, 2018.November 14, 2019. The payment date will be November 14, 2018. The quarterly dividend payment will beDecember 2, 2019 in the aggregate amount of approximately $4.3 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.
During the 4th quarter and as of November 6, 2018, we have repurchased 0.1 million shares of our common stock through open market purchases at an average cost of $13.60 per share. We currently have the authority to purchase an additional 2.6 million shares of our common stock under the current plan approved by the Board of Directors.
3034
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 Statementsconsolidated financial statements and the related notes that appear elsewhere in Part I, Item 1 of this document. In addition, the following discussion should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2018, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1, Business, and Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019 (as amended on September 20, 2019, the “2018
Form 10-K”).
This discussion is designed to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. See “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors, of the 2018 Form 10‑K.
OVERVIEW
ADTRAN Inc. is a leading global provider of networking and communications equipment.equipment, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and -3 service providers, cable/multiple system operators (“MSO”) and distributed enterprises. Our innovative solutions and services enable voice, data, video and Internetinternet communications across a variety of network infrastructures. These solutionsinfrastructures and are deployedcurrently in use by many of the United States’millions worldwide. We support our customers through our direct global sales organization and the world’s largest communications service providers (CSPs), distributed enterprises and small and medium-sized businesses, public and private enterprises, and millions of individual users worldwide.
our distribution networks. Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. In order to service our customers and grow revenue, we are constantly conducting research and development of new products addressing customer needs and testing those products for the particular specifications of the particular customers. We are focused on being a top global supplier of access infrastructure and related value-added solutions from the cloud edge to the subscriber edge. We offer a broad portfolio of flexible software and hardware network solutions and services that enable service providers to meet today’s service demands, while enabling them to transition to the fully-converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. In addition to our corporate headquarters in Huntsville, Alabama, we have research and development facilities in strategic global locations.
An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, and in most instances the low-cost, provider of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.
Our business is global. We supply different setsmade two acquisitions in 2018, strengthening our position in both the cable/MSOs and connected home markets. In the first quarter 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, 2018, 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 for these products vary.
As previously reported, we experienced a significant negative impact on ouracquired Sumitomo Electric Lightwave Corp.’s North American revenue asEPON business and certain assets for North America and entered into a result of a decision in mid-fourth quarter 2017 by a major customer to suspend atechnology license and original equipment manufacturer supply agreement with Sumitomo Electric Industries, Ltd. These solutions, combined with our organic fiber access product rollout following a merger. While we continue to sell to that customer, the project in question has not yet resumedportfolio 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 projectcable/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 bycomplete cloud-to-consumer portfolio of virtualized management, data analytics, Wi-Fi-enabled residential gateways and software platforms.
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 expansionfor prior-generation products. 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.
35
We report revenue for the following three categories – Access & Aggregation, Subscriber Solutions & Experience (formerly Customer Devices,Devices) and Traditional & Other Products.
Access & Aggregationsolutions are used by CSPs to connect their network infrastructure to their subscribers. This category includes 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.
Customer Devicesincludes our products and services that provide end users access to CSP networks. Our Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.
• Access & Aggregationsolutions are used by service providers to connect their network infrastructure to their subscribers. This category includes 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) includes open connected home platforms, cloud services and any of our solutions and services that deliver residential and/or enterprise subscribers an immersive and interactive broadband experience from the service provider’s access 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, service provider and cable/MSO Optical Network Terminals (“ONTs”), as well as related software applications and services. In alignment with our increased focus on enhancing customer experience for both business and 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 Subscriber Solutions & Experience categories. See Note 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 categories.311314 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for further information regarding these productthe Company’s segments and revenue 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 purchase order backlog. BacklogAlthough the timing of our product deliveries in response to customer orders results in very little purchase order backlog, such 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 revenuesrevenue could significantly impact our financial results in a given quarter.
In the third quarter of 2019, we had one customer whose orders accounted for more than 10% of our revenue. Our third quarter 2019 revenue was negatively impacted by a pause in shipments to a Tier 1 customer in Latin America (“LATAM”) and the continued slowdown in spending at another international Tier 1 customer. For the fourth quarter of 2019, our current expectations include a continued impact from a decline in sales related to these two customers. Although we expect sales to the LATAM customer to rebound, our current visibility regarding timing is limited. For the international Tier 1 customer, we believe that normal spending should resume in 2020.
Our operating results may also fluctuate as a result of a number of other factors, including a decline in generalglobal economic and financial market conditions, foreign currency exchange rate movements, changes related to domestic and international tariffs, 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, ourOur historical financial performance is not necessarily a meaningful indicator of future results, and in general, management expects that our financial results may vary from period to period. Factors that could materially affect our business, financial condition or operating results are included in Part I, Item 1A of Part I in our most recent Annual Report onthe 2018 Form 10-K for the year ended December 31, 2017, filed on February 23, 2018 with the SEC and in Part II, Item 1A herein.of this Form 10-Q.
36
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
OurThere have been no material changes to our critical accounting policies and estimates have not changed significantly from those detaileddisclosed in our most recent Annual Report2018 Form 10-K/A, other than as described below.
During the three months ended June 30, 2019, the Company changed the manner in which it estimates its excess and obsolete inventory reserves. Under the new policy, we establish reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on Form 10-Khistorical usage, known trends, inventory age, and market conditions. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserves. See Note 8 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for the year ended December 31, 2017, filed on February 23, 2018 with the SEC.additional information.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Qreport 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.
3237
RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20182019 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20172018
The following table presents selected financial information derived from our Condensed Consolidated Statements of Income expressed as a percentage of sales for the periods indicated. Amounts may not foot due to rounding.
|
| Three Months Ended |
|
| Nine Months Ended |
|
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| ||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Solutions |
|
| 82.4 |
| % |
| 86.3 |
| % |
| 86.7 |
| % |
| 87.7 |
| % |
Services & Support |
|
| 17.6 |
|
|
| 13.7 |
|
|
| 13.3 |
|
|
| 12.3 |
|
|
Total Sales |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
Cost of Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Solutions |
|
| 49.5 |
|
|
| 49.8 |
|
|
| 50.1 |
|
|
| 53.5 |
|
|
Services & Support |
|
| 9.9 |
|
|
| 8.5 |
|
|
| 8.4 |
|
|
| 8.4 |
|
|
Total Cost of Sales |
|
| 59.4 |
|
|
| 58.4 |
|
|
| 58.5 |
|
|
| 61.9 |
|
|
Gross Profit |
|
| 40.6 |
|
|
| 41.6 |
|
|
| 41.5 |
|
|
| 38.1 |
|
|
Selling, general and administrative expenses |
|
| 27.1 |
|
|
| 21.9 |
|
|
| 24.1 |
|
|
| 24.8 |
|
|
Research and development expenses |
|
| 27.9 |
|
|
| 21.3 |
|
|
| 23.1 |
|
|
| 24.0 |
|
|
Asset impairments |
|
| 3.4 |
|
|
| — |
|
|
| 0.9 |
|
|
| — |
|
|
Gain on contingency |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
Operating Loss |
|
| (17.8 | ) |
|
| (1.6 | ) |
|
| (6.3 | ) |
|
| (10.7 | ) |
|
Interest and dividend income |
|
| 0.5 |
|
|
| 0.6 |
|
|
| 0.5 |
|
|
| 0.7 |
|
|
Interest expense |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
Net investment gain (loss) |
|
| (0.2 | ) |
|
| 3.2 |
|
|
| 2.0 |
|
|
| 1.4 |
|
|
Other income (expense), net |
|
| 1.4 |
|
|
| 0.1 |
|
|
| 0.5 |
|
|
| — |
|
|
Gain on bargain purchase of a business, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.9 |
|
|
Income (Loss) Before Income Taxes |
|
| (16.1 | ) |
|
| 2.3 |
|
|
| (3.4 | ) |
|
| (5.9 | ) |
|
Income tax (expense) benefit |
|
| (24.3 | ) |
|
| 3.1 |
|
|
| (6.6 | ) |
|
| 3.1 |
|
|
Net Income (Loss) |
|
| (40.4 | ) | % |
| 5.4 |
| % |
| (10.0 | ) | % |
| (2.8 | ) | % |
SALES
Our sales decreased 24.2%18.7% from $185.1 million in the three months ended September 30, 2017 to $140.3 million infor the three months ended September 30, 2018 to $114.1 million for the three months ended September 30, 2019, and decreased 27.9%increased 6.4% from $540.1$389.2 million infor the nine months ended September 30, 20172018 to $389.2$414.3 million infor the nine months ended September 30, 2018.2019. The decrease in sales for the three months ended September 30, 2019 was primarily attributable to a $26.8 million decrease in Access & Aggregation sales and a $3.4 million decrease in sales of our Traditional & Other Products, partially offset by a $3.9 million increase in Subscriber Solutions & Experience sales. The increase in sales for the nine months ended September 30, 2018 is2019 was primarily attributable to a merger-related review$16.5 million increase in Subscriber Solutions & Experience sales and slowdowna $16.0 million increase in spending at a domestic Tier 1 customer that particularly affected our Access & Aggregation products and services, which decreased $44.1 million and $136.4 million over the same three and nine month periods last year. The decline in sales, to the previously mentioned domestic Tier 1 customer was partially offset by an increasea $7.4 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, andof our Traditional & Other Products decreased $3.7 million and $12.0 million, respectively.Products.
Network Solutions segment sales decreased 16.8%22.3% from $145.5 million in the three months ended September 30, 2017 to $121.0 million infor the three months ended September 30, 2018 to $94.0 million for the three months ended September 30, 2019, and decreased 23.2%increased 5.2% from $444.6$341.4 million infor the nine months ended September 30, 20172018 to $341.4$359.0 million infor the nine months ended September 30, 2018.2019. The decrease in sales of ourfor the three months ended September 30, 2019 was primarily attributable to the slowdown in shipments to two Tier-1 customers as previously discussed. For the three months ended September 30, 2019, sales in the Access & Aggregation productsand Traditional & Other Products categories decreased, partially offset by a increase in Subscriber Solutions & Experience category sales. The decrease in Access & Aggregation sales for the three months ended September 30, 2019 was primarily attributable to decreased fiber to the node (“FTTN”) products, offset by an increase in G.fast DPUs. The increase in Subscriber Solutions & Experience sales for the three months ended September 30, 2019 was primarily attributable to increased Residential CPE, partially offset by a decrease in SP Business CPE and WiFi access points and infrastructure. The increase in sales for the nine months ended September 30, 2018 is2019 was primarily attributable to a merger-related review and slowdown in spending at a domestic Tier 1 customer, partially offset by an increase in sales to an international Tier 1 customer as discussed further below.Access & Aggregation and Subscriber Solutions & Experience sales. The changesincrease in Access & Aggregation sales for the three and nine months ended September 30, 2018 in sales of our Customer Devices products are2019 was primarily attributable to increased FTTN products and G.fast DPUs. The increase in Subscriber Solutions & Experience for the changes in sales ofnine months ended September 30, 2019 was primarily attributable to increased Residential CPE and fiber CPE products.sales, partially offset by a decrease in SP Business CPE and WiFi access points and infrastructure. While we expect that revenuesrevenue from Traditional & Other Products will continue to decline over time, these revenuesthis revenue may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.
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Services & Support segment sales decreased 51.3%increased 4.1% from $39.6 million in the three months ended September 30, 2017 to $19.3 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. The decrease in sales for the three and nine months ended September 30, 2018 is primarily attributable to a decrease 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.
International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased 52.0% from $37.2 million in the three months ended September 30, 2017 to $56.6 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. International sales, as a percentage of total sales, increased from 20.1% for the three months ended September 30, 2017 to 40.3% for the three months ended September 30, 2018 to $20.1 million for the three months ended September 30, 2019, and increased 15.5% from 23.4%$47.8 million for the nine months ended September 30, 20172018 to 45.0% in$55.3 million for the nine months ended September 30, 2018.2019. The increase in sales for the three and nine months ended September 30, 2019 was primarily attributable to an increase in network installation and maintenance services for Access & Aggregation products.
International sales, which are included in the amounts for the Network Solutions and Services & Support segments amounts discussed above, decreased 45.3% from $56.6 million for the three months ended September 30, 2018 isto $30.9 million for the three months ended September 30, 2019 and increased 4.7% from $175.2 million for the nine months ended September 30, 2018 to $183.3 million for the nine months ended September 30, 2019. International sales, as a percentage of total sales, decreased from 40.3% for the three months ended September 30, 2018 to 27.1% for the three months ended September 30, 2019 and decreased from 45.0% for the nine months ended September 30, 2018 to 44.2% for the nine months ended September 30, 2019. The decrease in sales for the three months ended September 30, 2019, was primarily attributable the slowdown in shipments to two international Tier-1 customers. The increase in sales for the nine months ended September 30, 2019, was primarily attributable to an increase in sales in EMEALATAM and APAC. The increase in sales in EMEA for the three and nine months ended September 30, 2018 isAsia Pacific (“APAC”), primarily attributable to a network expansion program and a Services award by aprograms of large European Tier-1 customer. The increase in sales in APAC for the three and nine months ended September 30, 2018 is primarily attributable to a network expansion program in Australia.customers.
Our international revenues arerevenue is largely focused on broadband infrastructure and are impactedis affected by the decisions of our customers as to timing for installation of new technologies, expansion of their networks and/or network upgrades. Our international customers must make these decisions in the regulatory and political environment in which they operate – both nationally and in some instances, regionally – whether of a multi-country region or a more local region within a country. 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 impactedaffected by the increased presence of Asian manufacturers that seek to compete aggressively on price. AOur revenue and operating income in some 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 negative pressure on revenuesrevenue 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.
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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.
COST OF SALES
As a percentage of sales, cost of sales increased from 53.3% in the three months ended September 30, 2017 to 58.4% infor the three months ended September 30, 2018 to 59.4% for the three months ended September 30, 2019 and increaseddecreased from 54.7% in61.9% for the nine months ended September 30, 20172018 to 61.9% in58.5% for the nine months ended September 30, 2018.2019. The increase in cost of sales as a percentage of sales for the three months ended September 30, 2018 is2019 was primarily attributable to a regional revenue shift,decrease in volume, changes in customer and product mix and changes in services and support mix. The increasedecrease in cost of sales as a percentage of sales for the nine months ended September 30, 2018 is2019 was primarily attributable to an increase in volume, a regional revenue shift, changes in customer and product mix, andchanges in services and support mix and a decrease in labor expense as a result of a restructuring expenses and an increaseprogram initiated in warranty replacements.the first quarter of 2018.
Network Solutions segment cost of sales, as a percentpercentage of that segment’s sales, increased from 50.6% in the three months ended September 30, 2017 to 57.8% infor the three months ended September 30, 2018 to 60.0% for the three months ended September 30, 2019 and increaseddecreased from 51.7% in61.0% for the nine months ended September 30, 20172018 to 61.0% in57.8% for the nine months ended September 30, 2018.2019. The increase in cost of sales as a percentage of sales for the three months ended September 30, 2018 is2019 was primarily attributable to a decrease in volume, a regional revenue shift and changes in customer and product mix. The increasedecrease in cost of sales as a percentage of sales for the nine months ended September 30, 2018 is2019 was primarily attributable to an increase in volume, a regional revenue shift, changes in customer and product mix an increaseand a decrease in warrantylabor 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 manufacturerrestructuring program initiated 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 generation of 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 segment cost of sales, as a percentpercentage of that segment’s sales, decreased from 63.3% in the three months ended September 30, 2017 to 61.9% infor the three months ended September 30, 2018 to 56.4% for the three months ended September 30, 2019 and increaseddecreased from 68.5% in68.6% for the nine months ended September 30, 20172018 to 68.6% in63.3% for the nine months ended September 30, 2018.2019. The decrease in cost of sales as a percentage of sales for the three months ended September 30, 2018 is2019 was primarily attributable to an increase in volume, customer mix and changes in services and support mix and cost reductions.mix. The increasedecrease in cost of sales as a percentage of sales for the nine months ended September 30, 2018 is2019 was primarily attributable to services and support mix and an increase in labor expensevolume, lower fixed personnel costs due to a restructuring program.program initiated in the first quarter of 2018, changes in customer mix and changes in services and support mix.
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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 aresegment 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 revenuesrevenue grew and are nowto become the largest component of our Services & Support segment business, our Services & Support segment gross margins decreased versus those reported when maintenance and support comprised the majority of the business. Further, because the growth in our network planning and implementation services has resulted in our Services & Support revenuessegment revenue comprising a larger percentage of our overall revenues,revenue, and because our Services & Support segment gross margins are generally 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.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 11.3%increased 0.5% from $34.7 million in the three months ended September 30, 2017 to $30.8 million infor the three months ended September 30, 2018 to $30.9 million for the three months ended September 30, 2019, and decreased 7.5%increased 3.4% from $104.2$96.4 million infor the nine months ended September 30, 20172018 to $96.4$99.7 million infor the nine months ended September 30, 2018.2019. The decreaseincrease in selling, general and administrative expenses for the three months ended September 30, 2018 is2019 was primarily attributable to incremental expenses as a result of the SmartRG acquisition, IP litigation costs and professional and contract services offset by decreases in compensation and labor expense, travel expense and independent contractor expense, partially offset by anpersonnel-related expenses. The increase in restructuring expense. The decrease in selling, general and administrative expenses for the nine months ended September 30, 2018 is2019 was primarily attributable to incremental expenses as a result of the SmartRG acquisition, IP litigation costs and deferred compensation offset by a decrease in compensation and labor expense, independent contractor expense, and travel expense, partially offset by an increase in restructuring expense.personnel-related expenses.
As a percentage of sales, selling, general and administrative expenses increased from 18.7% in the three months ended September 30, 2017 to 21.9% infor the three months ended September 30, 2018 to 27.1% for the three months ended September 30, 2019, and increaseddecreased from 19.3% in24.8% for the nine months ended September 30, 20172018 to 24.8% in24.1% for the nine months ended September 30, 2018.2019. Selling, general and administrative expenses as a percentage of sales may fluctuate whenever there is a significant fluctuation in revenuesrevenue for the periods being compared.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 11.0%increased 6.6% from $33.6 million in the three months ended September 30, 2017 to $29.9 million infor the three months ended September 30, 2018 to $31.8 million for the three months ended September 30, 2019 and decreased 5.7%increased 2.2% from $99.1$93.5 million infor the nine months ended September 30, 20172018 to $93.5$95.5 million infor the nine months ended September 30, 2018.2019. The decreaseincrease in research and development expenses for the three months ended September 30, 2018 is2019 was primarily attributable to decreasesincreases in labor, engineering materialsincremental expenses as a result of the SmartRG acquisition, personnel-related expenses and independent contractor expense.restructuring expenses. The decreaseincrease in research and development expensesexpense for the nine months ended September 30, 2018 is2019 was primarily attributable to decreasesincreases in engineering materialsincremental expenses as a result of the SmartRG acquisition, contract services and independent contractorlease expense, and amortization of intangibles acquired in the third quarter of 2016 that were fully amortized in 2017, partially offset by an increasea decrease in restructuring expense.personnel-related expenses.
As a percentage of sales, research and development expenses increased from 18.1% in the three months ended September 30, 2017 to 21.3% infor the three months ended September 30, 2018 to 27.9% for the three months ended September 30, 2019, and increaseddecreased from 18.4% in24.0% for the nine months ended September 30, 20172018 to 24.0% in23.1% for the nine months ended September 30, 2018.2019. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or significant fluctuations in revenuesrevenue 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 revenuesrevenue from a major new product group.
ASSET IMPAIRMENTS
Asset impairment, which were $3.9 million for the three and nine months ended September 30, 2019, relate to the abandonment of certain information technology implementation projects which we had previously capitalized costs related to these projects. There were no impairment charges recognized during the three and nine months ended September 30, 2018.
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GAIN ON CONTINGENCY
Gain on contingency, which was $1.2 million for the nine months ended September 30, 2019, relates to the reversal of contingent liabilities which were initially recognized upon the acquisition of SmartRG in the fourth quarter of 2018. See Note 2 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. There was no gain on contingency recognized during the three and nine months ended September 30, 2018.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased 13.3%26.1% from $1.0 million in the three months ended September 30, 2017 to $0.8 million infor the three months ended September 30, 2018 to $0.6 million for the three months ended September 30, 2019, and decreased 8.9%27.3% from $2.9$2.6 million infor the nine months ended September 30, 20172018 to $2.6$1.9 million infor the nine months ended September 30, 2018.2019. The decreasechanges in interest and dividend income for the three and nine months ended September 30, 2018 is2019 were 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
Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.1 million in the three months ended September 30, 20172018 and 2018,2019 and $0.4 million in the nine months ended September 30, 20172018 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 GAIN (LOSS)
Net investment gains increased 346.7%gain decreased from $1.0 million in the three months ended September 30, 2017 toa gain of $4.5 million infor the three months ended September 30, 2018 to a loss of $0.2 million for the three months ended September 30, 2019, and increased 88.2% from $2.9a gain of $5.4 million infor the nine months ended September 30, 20172018 to $5.4a gain of $8.2 million infor the nine months ended September 30, 2018.2019. The increasefluctuation in our net investment gains for the three and nine months ended September 30, 2018 isgain was primarily attributable to changes in fair value onof 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 the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 Note 7of this report, and “Investing Activities” in “Liquidity and Capital Resources” below for additional information.
35
OTHER INCOME (EXPENSE), NET
Other income (expense), net is comprised primarily of miscellaneous income and gains and losses on foreign currency transactions, gains and losses on foreign exchange forward contracts, investment account management fees, and scrap raw material sales.transactions. Other income (expense), net increased 123.9% from $0.8income of $0.2 million of expense infor the three months ended September 30, 20172018 to $0.2income of $1.6 million of income infor the three months ended September 30, 2018. Other income (expense), net decreased 94.9%2019 and increased from $1.4expense of $0.1 million of expense infor the nine months ended September 30, 20172018 to $0.1income of $2.3 million of expense infor the nine months ended September 30, 2018.2019. The changefluctuations in other income (expense), net for the three and nine months ended September 30, 2018 is2019 was primarily attributable to higher lossesgains on foreign exchange contracts and transactions in 2017.currency transactions.
GAIN ON BARGAIN PURCHASE OF A BUSINESS, NET
Gain on bargain purchase of a business, isnet, which was $11.3 million during the nine months ended September 30, 2018, was 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. See Note 2No gain on bargain purchase of Notes to Consolidated Financial Statements for additional information.a business was recorded during the three or nine months ended September 30, 2019.
BENEFIT (EXPENSE) FOR INCOME TAXES
Our effective tax rate decreasedincreased from an expensea benefit of 23.1% in135.7% for the ninethree months ended September 30, 20172018 to an expense of 150.6% for the three months ended September 30, 2019, and increased from a benefit of 34.9%, excluding the tax effect of the bargain purchase gain, infor the nine months ended September 30, 2018.2018 to an expense of 197.1% for the nine months ended September 30, 2019. The decreaseincrease in the effective tax rate between the two periods iswas primarily driven by the completionestablishment of other tax projects, current year net losses ina valuation allowance against our domestic businessdeferred tax assets in the amount of $37.1 million during the three months ending September 30, 2019, offset by a 9.38% rate reduction related to a transfer pricing study completed during the second quarter of 2019 that resulted in the assignment of operating expenditures to specific company locations, and the effecteffective income tax rates among the respective jurisdictions. See Note 4 of the U.S. Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.
Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.
NET INCOME (LOSS)
As a result of the above factors, net income (loss) decreased $8.3 million707.8% from $15.9 million in the three months ended September 30, 2017 tonet income of $7.6 million infor the three months ended September 30, 2018 to a net loss of $46.1 million for the three months ended September 30, 2019, and decreased $45.8279.6% from a net loss of $10.9 million from $35.0 million infor the nine months ended September 30, 20172018 to $(10.9)a net loss of $41.4 million infor the nine months ended September 30, 2018.2019.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We intend to finance our future 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, future 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, 2018,2019, cash on hand was $94.2$96.4 million and short-term investments were $5.9$28.8 million, which resulted in available short-term liquidity of $100.1$125.2 million, of which $70.1$62.5 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 decreaseincrease in short-term liquidity from December 31, 20172018 to September 30, 20182019 is primarily attributable to shifts among available investment option tenures to provide fundsa restricted certificate of deposit of $25.6 million, which serves as collateral for our revenue bond, being reclassified from a long-term investment to a short-term cash needs.investment in 2019 as it matures in January 2020.
Operating Activities
Our working capital, which consists of current assets less current liabilities, decreased 26.5%6.6% from $306.3$237.4 million as of December 31, 20172018 to $225.0$221.9 million as of September 30, 2018,2019, and our current ratio, defined as current assets divided by current liabilities, decreased from 3.873.01 as of December 31, 20172018 to 2.822.73 as of September 30, 2018.2019. The decreasesdecrease in our working capital and our current ratio arewas primarily attributable to decreasesthe reclassification of our bond payable to current liabilities as it matures in accounts receivable and inventory, and an increase in income tax payable.January 2020, as well as the reclassification of the related restricted certificate of deposit from a long-term investment to a short-term investment. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 2.311.76 as of December 31, 20172018 to 1.631.68 as of September 30, 2018.2019. The decrease in the quick ratio was primarily attributable to the reclassification of our bond payable to current liabilities as it matures in January 2020, partially offset by an increase in short-term investments, primarily related to the reclassification of our restricted certificate of deposit from a long-term investment to a short-term investment.
Net accounts receivable decreased 8.8% from $99.4 million at December 31, 2018 to $90.6 million at September 30, 2019. Our allowance for doubtful accounts was $0.1 million at December 31, 2018 and September 30, 2019. The decrease in net accounts receivable was due to a decrease in sales volume. Quarterly accounts receivable day’s sales outstanding (“DSO”) increased from 65 days as of December 31, 2018 to 73 days as of September 30, 2019. The increase in DSO is due the timing of product shipments and customer mix.
Other receivables decreased 48.4% from $36.7 million at December 31, 2018 to $18.9 million at September 30, 2019. The decrease in other receivables was primarily attributable to a decrease in accountsleased equipment receivables, repayment of certain outstanding notes receivable and an increase in income tax payable.
Accounts receivable decreased 29.3% from $144.2 million at December 31, 2017 to $101.9 million at September 30, 2018. We had no allowance for doubtful accounts at December 31, 2017 or September 30, 2018. Quarterly accounts receivable days sales outstanding (DSO) decreased from 105 days as of December 31, 2017 to 67 days as of September 30, 2018. The decrease in net accounts receivable is due to the collection of customer-specific payment terms that became due in the first quarter of 20182019, contract manufacturers’ receivables and the timing of sales and collections during the quarter. Additionally, certain international customers may have longer payment terms than U.S. customers.income tax receivables.
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Quarterly inventory turnover increaseddecreased from 2.283.29 turns as of December 31, 20172018 to 2.892.71 turns at September 30, 2018.2019. Inventory decreased 13.5%increased 5.1% from $122.5$99.8 million at December 31, 20172018 to $106.1$104.9 million at September 30, 2018.2019. 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.
Prepaid expense and other current assetsAccounts payable decreased 39.7%12.0% from $17.3$60.1 million at December 31, 20172018 to $10.4$52.8 million at September 30, 2018. The decrease2019. Accounts payable will fluctuate due to variations in prepaid expensesthe 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.
these purchases.
Investing Activities
Capital expenditures totaled approximately $5.7$6.0 million and $12.3$5.7 million for the nine months ended September 30, 20182019 and 2017,2018, respectively. These expenditures were primarily used to purchase computer hardware, software, manufacturing and test equipment, software, computer hardware and for building improvements.
Our combined short-term and long-term investments increased $3.8$7.3 million from $146.4$112.1 million at December 31, 20172018 to $150.2$119.4 million at September 30, 2018.2019. This increase reflects funds available for investment provided by our operating activities, as well asthe impact of net realized and unrealized gains and losses and amortization of net premiums on our combined investments partially offset by our cash needs for capital expenditures, purchases of treasury stock, and shareholder dividends.as well as new investments.
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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, 2018 these investmentsSee Note 7 of the Notes to Condensed Consolidated Financial Statements included corporate bondsin Part I, Item 1 of $25.6 million, municipal fixed-rate bonds of $1.4 million, asset-backed bonds of $8.4 million, mortgage/agency-backed bonds of $5.4 million, U.S. government bonds of $19.8 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.this report for additional information. As of September 30, 2018,2019, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds and foreign government bonds were classified as available-for-sale and had a combined duration of 1.71.6 years with an average Standard & Poor’sMoody’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% from $130.3 million at December 31, 2017 to $144.2 million at September 30, 2018. Long-term investments at September 30, 2018 and December 31, 2017 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 September 30, 2019, as this bond matures on January 1, 2020. See “Debt”Note 7 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and “Financing Activities: Debt” below for additional information. We also have investments in various marketable equity investments included insecurities classified as long-term investments with a fair market value of $40.9$32.7 million and $35.7$27.0 million, at September 30, 20182019 and December 31, 2017,2018, respectively.
Long-term investments at September 30, 20182019 and December 31, 20172018 also included $20.9$20.6 million and $19.9$18.3 million, respectively, related to our deferred compensation plans, and $0.5plans.
No businesses were acquired during the nine months ended September 30, 2019. Acquisition of businesses, net of cash acquired, totaled $7.8 million for the nine months ended September 30, 2018. See Note 2 of other investments carried at cost, consistingthe Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of interests in two private equity funds.this report for additional information.
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Financing Activities
Dividends
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 months ended September 30, 2019 and 2018, we paid dividends totaling $12.9 million and $13.0 million.million, respectively. The continued payment of dividends is at the discretion of the Company’s Board of Directors and is subject to general business conditions and ongoing financial results of the Company.
Debt
We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond)“Bond”) which totaled $26.7$25.6 million at September 30, 20182019 and December 31, 2017.2018. At September 30, 2018,2019, the estimated fair value of the Bond was approximately $26.5$25.6 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 restrictedAA+. Restricted funds in the amount of $26.7 million and $27.8 million at September 30, 2018 and December 31, 2017, respectively, which isserving as a collateral deposit against the principal amount of the Bond.Bond in the amount of $25.6 million were included in short-term investments at September 30, 2019 and long-term investments at December 31, 2018, respectively. We have the right to set-offoffset 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 annualThe restricted funds held as collateral against the principal payments in addition to the interest amounts that are due. In connection with this decision, $1.1 millionamount of the Bond has been classified as a current liability in accounts payable inwill be used to pay the Consolidated Balance Sheet at September 30, 2018.outstanding principal and interest upon the Bond’s maturity.
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 50.0 million sharesrepurchases of our common stock, thatwhich are implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended September 30, 2018,2019, we repurchased 0.9 million13,000 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, weWe currently have the authorityauthorization to purchaserepurchase an additional 2.72.5 million shares of our common stock under the current plans approved by the Boardauthorization of Directors.up to 5.0 million shares.
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Stock Option Exercises
We issued 0.1 million34,000 shares of treasury stock during the nine months ended September 30, 20182019 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29$15.33 to $18.97.$16.97. We received proceeds totaling $1.3$0.5 million from the exercise of these stock options during the nine months ended September 30, 2018.2019.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. During the nine months ended September 30, 2018,2019, there have been no material changes in contractual obligations and commercial commitments from those discussed in our most recent Annual Report onthe 2018 Form 10-K, except for the year ended December 31, 2017 filed on February 23, 2018 with the SEC.a new operating lease for office space in India. This lease has an initial term of five years and includes an option to renew for an additional five-year period.
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, of which $7.7 million has been applied to these commitments.as of September 30, 2019.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interestforeign currency rates, foreign currencyinterest 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, $91.32019, $93.7 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, 2018,2019, approximately $63.0$38.4 million of our cash and investments maycould 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)(“bps”) for an entire year, while all other variables remain constant. At September 30, 2018,2019, we held $6.6$5.9 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, 20182019 would reduce annualized interest income on our cash and investments by approximately $0.1 million. In addition, we held $56.3$32.5 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, 20182019 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 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 EMEAEurope, Middle East and Africa 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 Condensed 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$1.6 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. AnyAlthough we do not currently hold any derivative instruments, any gain or loss would be partially mitigated by these derivative instruments.
As of September 30, 2018,2019, we had nocertain material contracts, other thanincluding accounts receivable, and accounts payable and lease liabilities, denominated in foreign currencies. As of September 30, 2018,2019, 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, 2018,2019, see NotesNote 7 and 8 of the Notes to Condensed Consolidated Financial Statements.Statements included in Part I, Item 1 of this report.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.We maintain disclosure controls and procedures.procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities OurExchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated by the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining "disclosure controls and procedures" (as defined inas appropriate to allow timely decisions regarding required disclosure. Because of 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 evaluatinginherent limitations to the effectiveness of ourany system of disclosure controls and procedures, asno evaluation of disclosure controls and procedures can provide absolute assurance that all control issues, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved.
As of the end of the period covered by this quarterly report, havean evaluation was carried out by management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.were not effective as of September 30, 2019 due to the material weaknesses in our internal control over financial reporting described below.
(b) ChangesMaterial Weaknesses
A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting.reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. On August 8, 2019, the Company’s management, in consultation with the Audit Committee of the Board of Directors, concluded that there were two material weaknesses related to internal control deficiencies that existed as of December 31, 2018 and that continued through the end of the third quarter of 2019. Specifically, the Company’s management determined that the Company did not design and maintain effective internal control over certain aspects of the existence and valuation of inventory:
• | Management determined that controls were not effectively designed, documented, and maintained to verify that the existence of all inventories subject to our cycle count program were included and counted at the frequency required under the Company’s internal policies, and that the key reports and related data used to monitor the results of this program were not validated to ensure completeness and accuracy. |
• | Management determined that controls were not effectively designed and maintained over the determination of the estimated reserve for excess and obsolete inventory, including the review of significant inputs and assumptions used to determine our excess and obsolete inventory reserve, and to ensure the completeness and accuracy of key reports and related data used in the calculation of this reserve. |
Despite the existence of these material weaknesses, we believe that the consolidated financial statements included in this report (as well as the financial statements included in the 2018 Form 10-K/A and in our Quarterly Reports on form 10-Q for the periods ended March 31, 2019 and June 30, 2019) present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These material weaknesses did not result in any material misstatement to the Company’s financial statements or disclosures but did result in an out-of-period adjustment with the effect of increasing cost of goods sold during the three months ended June 30, 2019 and decreasing cost of goods sold for the six months ended June 30, 2019. See Note 1of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. However, these material weaknesses could result in a misstatement of the Company’s interim or annual consolidated financial statements and disclosures that would result in a material misstatement that would not be prevented or detected.
46
Management’s Remediation Initiatives. Management has been working to further strengthen the Company’s internal controls relating to inventory. Specifically, the Company has begun redesigning and enhancing additional controls and procedures to ensure the completeness of our cycle count program and the completeness and accuracy of key reports and related data used to monitor the results of this cycle count program. Additionally, the Company has begun redesigning and implementing enhanced controls and procedures related to the review of significant inputs and assumptions used to determine our excess and obsolete inventory reserve, and to ensure the completeness and accuracy of key reports and related data used in the calculation of the excess and obsolete inventory reserve. The Company has begun to implement enhancements to these processes and controls to comply with internal policies in order to ensure completeness and accuracy of inventories. For example, the Company has revised the methodology used in estimating its excess and obsolete inventory reserve, as further discussed in Note 1 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. We believe that the foregoing actions will support the improvement of our internal control over financial reporting, and, through our efforts to identify, design, and implement the necessary control activities, will be effective in remediating the material weaknesses described above. We will continue to devote significant time and attention to these remediation efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address the material weaknesses or determine to modify the remediation plan described above. Until the remediation steps set forth above, including the efforts to implement the necessary control activities that we identify, are fully completed, the material weaknesses described above will continue to exist.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 17 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
ITEM 1A. RISK FACTORS
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 onthe 2018 Form 10-K for the year ended December 31, 2017.10-K. There have been no material changes to our risk factors sincefrom those disclosed in Part I, Item 1A, “Risk Factors” in the 2018 Form 10-K, other than as described in the risk factor below.
We have identified certain material weaknesses in our Annual Reportinternal control over financial reporting, which could, if not remediated, materially adversely affect us.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires us to include in our annual reports on Form 10-K an assessment by the Company’s management of the effectiveness of our internal control over financial reporting. We must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent auditors to report on the effectiveness of our internal control over financial reporting, as required by Section 404. Our compliance with Section 404 may require that we incur substantial accounting expense and expend significant management efforts. In addition, if management or our independent auditors are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial statements, which could have an adverse effect on our stock price.
As further described in Part I, Item 4 of this report, management has concluded that certain material weaknesses in our internal control over financial reporting existed as of December 31, 2018 and continued through September 30, 2019. Specifically, management has determined that controls were not effectively designed, documented, and maintained to verify that the existence of all inventories subject to our cycle count program were included and counted at the frequency required under the Company’s internal policies, and that the key reports and related data used to monitor the results of this program were not validated to ensure completeness and accuracy. Furthermore, management has determined that controls were not effectively designed and maintained over the determination of the estimated reserve for excess and obsolete inventory, including the review of significant inputs and assumptions used to determine our excess and obsolete inventory reserve, and to ensure the completeness and accuracy of key reports and related data used in the calculation of this reserve. Despite the existence of these material weaknesses, we believe that the consolidated financial statements included in this report (as well as in the 2018 Form 10-K and in our Quarterly Reports on Form 10-Q for the yearperiods ended DecemberMarch 31, 2017,2019 and June 30, 2019) present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States of America. However, these material weaknesses, if not remediated, could result in a misstatement of the Company’s future interim or annual consolidated financial statements and disclosures that would result in a material misstatement that would not be prevented or detected.
Management has been working to further strengthen the Company’s internal controls relating to inventory. Specifically, the Company has begun redesigning and enhancing additional controls and procedures to ensure the completeness of our cycle count program and the completeness and accuracy of key reports and related data used to monitor the results of this cycle count program. Additionally, the Company has begun redesigning and implementing enhanced controls and procedures related to the review of significant inputs and assumptions used to determine our excess and obsolete inventory reserve, and to ensure the completeness and accuracy of key reports and related data used in the calculation of the excess and obsolete inventory reserve. The implementation of these measures is ongoing, and, while we believe that they will ultimately be effective in remediating the material weaknesses described above, our initiatives may not prove successful, and management may not be able to conclude that our internal control over financial reporting is effective. Furthermore, even if management were to reach such a conclusion, if our independent auditors are not satisfied with the adequacy of our internal control over financial reporting, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they in the future may decline to issue a report on our internal control over financial reporting or may issue a report that is qualified. Any of these events could result in a loss of investor confidence in the reliability of our financial statements, which in turn could negatively affect the price of our common stock.
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Changes in trade policy in the United States and other thancountries, specifically China, including the following risk factor:imposition of additional tariffs and the resulting consequences, may adversely impact our gross profits, gross margins, results of operations and financial condition.
IncreasedThe U.S. government has imposed tariffs caused byon a wide-range of products and goods manufactured in China and imported into the U.S. These tariffs are intended to address trade imbalances, which include decreasing imports from China and encouraging increased production of these products in the U.S. These proposals have, and could continue to, result in increased customs duties and tariffs. We import an increasing percentage of our products into the U.S from China, and an increase in customs duties and tariffs with respect to these imports could negatively impact our gross profit, gross margins and results of operations. These customs duties and tariffs may also cause other U.S. trading partners to take certain actions with respect to U.S. imports in their respective countries. Any potential changes in trade policies ofin the United States orU.S. and the potential actions by 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 increaseadversely impact 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.financial performance.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 | ||||||||||||
July 1, 2019 – July 31, 2019 | — | $ | — | — | 2,545,430 | |||||||||||
August 1, 2019 – August 31, 2019 | — | $ | — | — | 2,545,430 | |||||||||||
September 1, 2019 – September 30, 2019 | — | $ | — | — | 2,545,430 | |||||||||||
Total | — | — |
OnIn 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 under the stock repurchase programs since 1997 to 50.0 million). This authorization will be implemented through open market or private purchases from time to time as conditions warrant. We currently have authorization to repurchase 2.5 million shares of our common stock under the current authorization of up to 5.0 million shares.
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ITEM 6. EXHIBITS
Exhibits.
Exhibit No. |
| Description |
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31 |
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32 |
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| Cover Page Interactive Data File (formatted as Inline XBRL |
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4250
SIGNATURE
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.
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| ADTRAN, Inc. (Registrant) |
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Date: November |
| /s/ |
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| Senior Vice President of Finance and |
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| Chief Financial Officer |
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51
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