adtn-10q_20180630.htm

 

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 June 30, 2018

OR

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

 

For the transition period from _______ to _______

 

Commission File Number: 000-24612

 

ADTRAN, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

63-0918200

( State or other jurisdiction of

incorporation or organization)

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

901 Explorer Boulevard

Huntsville, Alabama

35806-2807

(Address of principal executive offices)

(Zip Code)

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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of July 20, 2018, the registrant had 47,739,170 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 

 

 


ADTRAN, Inc.

Quarterly Report on Form 10-Q

For the Three and Six Months Ended June 30, 2018

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 – (Unaudited)

 

3

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 – (Unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 – (Unaudited)

 

5

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 – (Unaudited)

 

6

 

 

Notes to Consolidated Financial Statements – (Unaudited)

 

7

2

 

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

 

30

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

4

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

1A

 

Risk Factors

 

39

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

6

 

Exhibits

 

40

 

 

 

 

 

 

 

SIGNATURE

 

41

 

 

 

 

 

FORWARD LOOKING STATEMENTS

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

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

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADTRAN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

100,319

 

 

$

86,433

 

Short-term investments

 

 

6,069

 

 

 

16,129

 

Accounts receivable, less allowance for doubtful accounts of $— at June 30, 2018 and December 31, 2017

 

 

76,135

 

 

 

144,150

 

Other receivables

 

 

28,163

 

 

 

26,578

 

Inventory, net

 

 

120,537

 

 

 

122,542

 

Prepaid expenses and other current assets

 

 

9,464

 

 

 

17,282

 

Total Current Assets

 

 

340,687

 

 

 

413,114

 

Property, plant and equipment, net

 

 

82,910

 

 

 

85,079

 

Deferred tax assets, net

 

 

35,615

 

 

 

23,428

 

Goodwill

 

 

3,492

 

 

 

3,492

 

Other assets

 

 

32,429

 

 

 

13,725

 

Long-term investments

 

 

144,437

 

 

 

130,256

 

Total Assets

 

$

639,570

 

 

$

669,094

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

60,150

 

 

$

60,632

 

Unearned revenue

 

 

14,307

 

 

 

13,070

 

Accrued expenses

 

 

14,785

 

 

 

13,232

 

Accrued wages and benefits

 

 

14,913

 

 

 

15,948

 

Income tax payable

 

 

11,948

 

 

 

3,936

 

Total Current Liabilities

 

 

116,103

 

 

 

106,818

 

Non-current unearned revenue

 

 

3,639

 

 

 

4,556

 

Other non-current liabilities

 

 

34,601

 

 

 

34,209

 

Bonds payable

 

 

25,600

 

 

 

25,600

 

Total Liabilities

 

 

179,943

 

 

 

171,183

 

Commitments and contingencies (see Note 15)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares

   issued and 47,733 shares outstanding at June 30, 2018 and 79,652 shares

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

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

264,118

 

 

 

260,515

 

Accumulated other comprehensive loss

 

 

(9,118

)

 

 

(3,295

)

Retained earnings

 

 

897,586

 

 

 

922,178

 

Less treasury stock at cost: 31,919 and 31,167 shares at June 30, 2018 and

   December 31, 2017, respectively

 

 

(693,756

)

 

 

(682,284

)

Total Stockholders’ Equity

 

 

459,627

 

 

 

497,911

 

Total Liabilities and Stockholders’ Equity

 

$

639,570

 

 

$

669,094

 

 

 

See notes to consolidated financial statements

 

3


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

115,063

 

 

$

155,543

 

 

$

220,316

 

 

$

299,140

 

Services

 

 

12,985

 

 

 

29,130

 

 

 

28,538

 

 

 

55,812

 

Total Sales

 

 

128,048

 

 

 

184,673

 

 

 

248,854

 

 

 

354,952

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

69,629

 

 

 

79,663

 

 

 

138,241

 

 

 

156,327

 

Services

 

 

8,423

 

 

 

20,384

 

 

 

20,884

 

 

 

40,290

 

Total Cost of Sales

 

 

78,052

 

 

 

100,047

 

 

 

159,125

 

 

 

196,617

 

Gross Profit

 

 

49,996

 

 

 

84,626

 

 

 

89,729

 

 

 

158,335

 

Selling, general and administrative expenses

 

 

32,080

 

 

 

34,706

 

 

 

65,611

 

 

 

69,495

 

Research and development expenses

 

 

30,729

 

 

 

33,557

 

 

 

63,578

 

 

 

65,528

 

Operating Income (Loss)

 

 

(12,813

)

 

 

16,363

 

 

 

(39,460

)

 

 

23,312

 

Interest and dividend income

 

 

913

 

 

 

972

 

 

 

1,779

 

 

 

1,905

 

Interest expense

 

 

(132

)

 

 

(137

)

 

 

(264

)

 

 

(278

)

Net realized investment gain

 

 

990

 

 

 

1,390

 

 

 

893

 

 

 

1,860

 

Other expense, net

 

 

(217

)

 

 

(719

)

 

 

(274

)

 

 

(585

)

Gain on bargain purchase of a business

 

 

 

 

 

 

 

 

11,322

 

 

 

 

Income (Loss) Before Provision for Income Taxes

 

 

(11,259

)

 

 

17,869

 

 

 

(26,004

)

 

 

26,214

 

(Provision) benefit for income taxes

 

 

3,589

 

 

 

(5,468

)

 

 

7,520

 

 

 

(7,162

)

Net Income (Loss)

 

$

(7,670

)

 

$

12,401

 

 

$

(18,484

)

 

$

19,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

47,856

 

 

 

48,036

 

 

 

48,043

 

 

 

48,232

 

Weighted average shares outstanding – diluted

 

 

47,902

 

 

 

48,413

 

 

 

48,091

 

 

 

48,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share – basic

 

$

(0.16

)

 

$

0.26

 

 

$

(0.38

)

 

$

0.40

 

Earnings (loss) per common share – diluted

 

$

(0.16

)

 

$

0.26

 

 

$

(0.38

)

 

$

0.39

 

Dividend per share

 

$

0.09

 

 

$

0.09

 

 

$

0.18

 

 

$

0.18

 

 

See notes to consolidated financial statements

 

 

4


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net Income (Loss)

 

$

(7,670

)

 

$

12,401

 

 

$

(18,484

)

 

$

19,052

 

Other Comprehensive Income (Loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

104

 

 

 

373

 

 

 

(3,308

)

 

 

1,708

 

Net unrealized losses on cash flow hedges

 

 

 

 

 

(417

)

 

 

 

 

 

(338

)

Defined benefit plan adjustments

 

 

5

 

 

 

86

 

 

 

67

 

 

 

141

 

Foreign currency translation

 

 

(3,424

)

 

 

2,619

 

 

 

(2,582

)

 

 

3,861

 

Other Comprehensive Income (Loss), net of tax

 

 

(3,315

)

 

 

2,661

 

 

 

(5,823

)

 

 

5,372

 

Comprehensive Income (Loss), net of tax

 

$

(10,985

)

 

$

15,062

 

 

$

(24,307

)

 

$

24,424

 

 

See notes to consolidated financial statements

 

 

 

5


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(18,484

)

 

$

19,052

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,526

 

 

 

8,377

 

Amortization of net premium on available-for-sale investments

 

 

20

 

 

 

238

 

Net realized gain on long-term investments

 

 

(893

)

 

 

(1,860

)

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

 

 

68

 

 

 

(11

)

Gain on bargain purchase of a business

 

 

(11,322

)

 

 

 

Stock-based compensation expense

 

 

3,603

 

 

 

3,739

 

Deferred income taxes

 

 

(16,384

)

 

 

(2,772

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

66,931

 

 

 

13,911

 

Other receivables

 

 

9

 

 

 

571

 

Inventory

 

 

2,063

 

 

 

(7,547

)

Prepaid expenses and other assets

 

 

10,157

 

 

 

(9,853

)

Accounts payable

 

 

683

 

 

 

(10,910

)

Accrued expenses and other liabilities

 

 

2,008

 

 

 

(2,629

)

Income tax payable

 

 

6,945

 

 

 

10,273

 

Net cash provided by operating activities

 

 

52,930

 

 

 

20,579

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(4,183

)

 

 

(7,509

)

Proceeds from disposals of property, plant and equipment

 

 

 

 

 

16

 

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

 

 

86,436

 

 

 

81,891

 

Purchases of available-for-sale investments

 

 

(89,801

)

 

 

(65,140

)

Acquisition of business

 

 

(7,806

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(15,354

)

 

 

9,258

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

369

 

 

 

1,722

 

Purchases of treasury stock

 

 

(12,774

)

 

 

(17,311

)

Dividend payments

 

 

(8,679

)

 

 

(8,719

)

Net cash used in financing activities

 

 

(21,084

)

 

 

(24,308

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

16,492

 

 

 

5,529

 

Effect of exchange rate changes

 

 

(2,606

)

 

 

3,374

 

Cash and cash equivalents, beginning of period

 

 

86,433

 

 

 

79,895

 

Cash and cash equivalents, end of period

 

$

100,319

 

 

$

88,798

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

209

 

 

$

454

 

 

See notes to consolidated financial statements

 

 

 

6


ADTRAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

Use of Estimates

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

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. Subsequently, in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarified certain aspects of ASU 2016-02. ASU 2016-02 and ASU 2018-10 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of 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 and equipment.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for financial instruments held at amortized cost. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect ASU 2016-13 will have on our consolidated financial statements.

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

 

7


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.

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

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

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

 

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

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

 

 

8


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

 

 

 

For the three months ended June 30, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Adoption of ASC 606

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

115,063

 

 

 

115,437

 

 

$

(374

)

Services

 

$

12,985

 

 

 

13,430

 

 

$

(445

)

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

69,629

 

 

 

70,003

 

 

$

(374

)

Services

 

$

8,423

 

 

 

8,772

 

 

$

(349

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before benefit for income taxes

 

$

(11,259

)

 

 

(11,163

)

 

$

(96

)

Benefit for income taxes

 

$

3,589

 

 

 

3,558

 

 

$

31

 

Net loss

 

$

(7,670

)

 

 

(7,605

)

 

$

(65

)

 

 

 

For the six months ended June 30, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Adoption of ASC 606

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

220,316

 

 

 

220,876

 

 

$

(560

)

Services

 

$

28,538

 

 

 

28,130

 

 

$

408

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

138,241

 

 

 

138,726

 

 

$

(485

)

Services

 

$

20,884

 

 

 

20,697

 

 

$

187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before benefit for income taxes

 

$

(26,004

)

 

 

(26,150

)

 

$

146

 

Benefit for income taxes

 

$

7,520

 

 

 

7,556

 

 

$

(36

)

Net loss

 

$

(18,484

)

 

 

(18,594

)

 

$

110

 

 

 

 

As of  June 30, 2018

 

(In thousands)

 

As Reported

 

 

Balances Without Adoption of ASC 606

 

 

Effect of Adoption of ASC 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables

 

$

28,163

 

 

 

28,164

 

 

$

(1

)

Inventory

 

$

120,537

 

 

 

120,426

 

 

$

111

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

897,586

 

 

 

897,476

 

 

$

110

 

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

 

9


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 $0.2 million have been reclassified from cost of sales, selling, general and administrative expenses, and research and development expense to other expense, net for the three and six months ended June 30, 2017, respectively.

 

2.  BUSINESS COMBINATIONS

 

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

 

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

 

The preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:

 

(In thousands)

 

 

 

Assets

 

 

 

  Other receivables

$

104

 

  Inventory

 

510

 

  Property, plant and equipment

 

392

 

  Intangible assets

 

22,100

 

Total assets acquired

 

23,106

 

 

 

 

 

Liabilities

 

 

 

  Deferred income taxes

 

(3,978

)

Total liabilities assumed

 

(3,978

)

 

 

 

 

Total net assets

 

19,128

 

  Gain on bargain purchase of a business, net of tax

 

(11,322

)

Total purchase price

$

7,806

 

 

The actual revenue and net loss included in our Consolidated Statements of Income for the three months ended June 30, 2018 and the period March 19, 2018 to June 30, 2018 are as follows:

 

 

Three Months Ended

 

 

March 19, 2018 to

 

(In thousands)

June 30, 2018

 

 

June 30, 2018

 

Revenue

$

1,197

 

 

$

1,197

 

Net loss

$

(809

)

 

$

(886

)

 

10


 

The details of the acquired intangible assets are as follows:

 

(In thousands)

Value

 

 

Life (years)

 

Customer relationships

$

13,400

 

 

 

12.0

 

Licensed technology

 

5,900

 

 

 

9.0

 

Supplier relationship

 

2,800

 

 

 

2.0

 

Total

$

22,100

 

 

 

 

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2017

 

 

2018

 

 

2017

 

Pro forma revenue

 

$

187,987

 

 

$

250,114

 

 

$

358,679

 

Pro forma net income (loss)

 

$

11,628

 

 

$

(31,020

)

 

$

28,829

 

Pro forma earnings per share - basic

 

$

0.24

 

 

$

(0.65

)

 

$

0.60

 

Pro forma earnings per share - diluted

 

$

0.24

 

 

$

(0.65

)

 

$

0.59

 

 

For the three and six months ended June 30, 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.8 million and $1.0 million, respectively, related to this acquisition.

 

3. REVENUE

Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services to a customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control of a product or service to the customer. For transactions where there are multiple performance obligations, we account for individual products and services separately if they are distinct (if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which we sell the separate products and services and are allocated based on each item’s relative value to the total value of the products and services in the arrangement. For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment terms are 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.

 

11


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 the most likely amount. 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 June 30, 2018 and 2017, we recognized revenue of $4.0 million and $5.2 million, respectively, and during the six months ended June 30, 2018 and 2017 we recognized revenue of $6.3 million and $7.0 million, respectively.

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.

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. Payments received are recorded in current or non-current unearned revenue depending on the length of the service 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.

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 June 30, 2018, we did not have any remaining 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)

 

June 30, 2018

 

 

January 1, 2018

 

Accounts receivable

 

$

76,135

 

 

$

144,150

 

Contract assets

 

 

1,672

 

 

 

374

 

Unearned revenue

 

 

14,307

 

 

 

13,070

 

Non-current unearned revenue

 

 

3,639

 

 

 

4,556

 

 

The decrease in accounts receivable is due to the collection of customer specific payment terms that became due in the first quarter of 2018. The increase in the contract asset balance for the six months ended June 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 June 30, 2018 is primarily attributable to cash payments received or due in advance of satisfying our performance obligations, offset by $7.1 million of revenues recognized that were included in the unearned revenue balance as of December 31, 2017.

 

 

12


The following table disaggregates our revenue by major source for the three months ended June 30, 2018:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

75,222

 

 

$

9,520

 

 

$

84,742

 

Customer Devices

 

 

33,306

 

 

 

1,254

 

 

 

34,560

 

Traditional & Other Products

 

 

6,535

 

 

 

2,211

 

 

 

8,746

 

Total

 

$

115,063

 

 

$

12,985

 

 

$

128,048

 

 

The following table disaggregates our revenue by major source for the six months ended June 30, 2018:

 

(In thousands)

 

Network Solutions

 

 

Services & Support

 

 

Total

 

Access & Aggregation

 

$

144,607

 

 

$

21,815

 

 

$

166,422

 

Customer Devices

 

 

62,083

 

 

 

2,578

 

 

 

64,661

 

Traditional & Other Products

 

 

13,626

 

 

 

4,145

 

 

 

17,771

 

Total

 

$

220,316

 

 

$

28,538

 

 

$

248,854

 

 

4. INCOME TAXES

Our effective tax rate decreased from an expense of 27.3% in the six months ended June 30, 2017, to a benefit of 20.1%, excluding the tax effect of the bargain purchase gain, in the six months ended June 30, 2018. The decrease in the effective tax rate between the two periods is primarily attributable to the change in income and the effect of the U.S. Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.

 

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 six months ended June 30, 2018 and 2017:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

303

 

 

$

306

 

 

$

611

 

 

$

603

 

Interest cost

 

 

185

 

 

 

147

 

 

 

372

 

 

 

290

 

Expected return on plan assets

 

 

(394

)

 

 

(307

)

 

 

(793

)

 

 

(606

)

Amortization of actuarial losses

 

 

63

 

 

 

75

 

 

 

127

 

 

 

148

 

Net periodic pension cost

 

$

157

 

 

$

221

 

 

$

317

 

 

$

435

 

 

The components of net periodic pension cost other than the service cost component are included in the line item “Other expense, net” in the Consolidated Statements of Income.

 

 

13


6. STOCK-BASED COMPENSATION

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock-based compensation expense included in cost of sales

 

$

102

 

 

$

93

 

 

$

197

 

 

$

184

 

Selling, general and administrative expense

 

 

995

 

 

 

1,008

 

 

 

2,030

 

 

 

2,024

 

Research and development expense

 

 

687

 

 

 

755

 

 

 

1,376

 

 

 

1,531

 

Stock-based compensation expense included in operating expenses

 

 

1,682

 

 

 

1,763