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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

☒

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

For the quarterly period ended September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer

 

☒

  

Accelerated filer

 

☐

 

 

 

 

Non-accelerated filer

 

☐  

  

Small reporting company

 

☐

 

 

 

 

 

 

 

Emerging growth company

 

☐

 

 

 

 

 

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

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

As of October 26, 2018, the registrant had 47,650,245 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, 2018

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements:

 

 

 

 

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

 

3

 

 

Consolidated Statements of Income for the – (Unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Income for the – (Unaudited)

 

5

 

 

Consolidated Statements of Cash Flows for the – (Unaudited)

 

6

 

 

Notes to Consolidated Financial Statements – (Unaudited)

 

7

2

 

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

 

31

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

4

 

Controls and Procedures

 

40

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

1A

 

Risk Factors

 

41

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

6

 

Exhibits

 

42

 

 

 

 

 

 

 

SIGNATURE

 

43

 

 

 

 

 

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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

94,173

 

 

$

86,433

 

Short-term investments

 

 

5,912

 

 

 

16,129

 

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

 

 

101,865

 

 

 

144,150

 

Other receivables

 

 

30,084

 

 

 

26,578

 

Inventory, net

 

 

106,060

 

 

 

122,542

 

Prepaid expenses and other current assets

 

 

10,428

 

 

 

17,282

 

Total Current Assets

 

 

348,522

 

 

 

413,114

 

Property, plant and equipment, net

 

 

81,457

 

 

 

85,079

 

Deferred tax assets, net

 

 

39,595

 

 

 

23,428

 

Goodwill

 

 

3,492

 

 

 

3,492

 

Other assets

 

 

31,523

 

 

 

13,725

 

Long-term investments

 

 

144,241

 

 

 

130,256

 

Total Assets

 

$

648,830

 

 

$

669,094

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

65,032

 

 

$

60,632

 

Unearned revenue

 

 

17,004

 

 

 

13,070

 

Accrued expenses

 

 

14,548

 

 

 

13,232

 

Accrued wages and benefits

 

 

12,604

 

 

 

15,948

 

Income tax payable

 

 

14,340

 

 

 

3,936

 

Total Current Liabilities

 

 

123,528

 

 

 

106,818

 

Non-current unearned revenue

 

 

3,846

 

 

 

4,556

 

Other non-current liabilities

 

 

32,255

 

 

 

34,209

 

Bonds payable

 

 

25,600

 

 

 

25,600

 

Total Liabilities

 

 

185,229

 

 

 

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 47,711 shares outstanding at September 30, 2018 and 79,652 shares

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

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

265,757

 

 

 

260,515

 

Accumulated other comprehensive loss

 

 

(9,564

)

 

 

(3,295

)

Retained earnings

 

 

900,324

 

 

 

922,178

 

Less treasury stock at cost: 31,941 and 31,167 shares at September 30, 2018 and

   December 31, 2017, respectively

 

 

(693,713

)

 

 

(682,284

)

Total Stockholders’ Equity

 

 

463,601

 

 

 

497,911

 

Total Liabilities and Stockholders’ Equity

 

$

648,830

 

 

$

669,094

 

 

 

See accompanying notes to consolidated financial statements.

 

3

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

121,043

 

 

$

145,467

 

 

$

341,359

 

 

$

444,607

 

Services

 

 

19,292

 

 

 

39,645

 

 

 

47,830

 

 

 

95,457

 

Total Sales

 

 

140,335

 

 

 

185,112

 

 

 

389,189

 

 

 

540,064

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

69,943

 

 

 

73,534

 

 

 

208,184

 

 

 

229,861

 

Services

 

 

11,944

 

 

 

25,087

 

 

 

32,828

 

 

 

65,377

 

Total Cost of Sales

 

 

81,887

 

 

 

98,621

 

 

 

241,012

 

 

 

295,238

 

Gross Profit

 

 

58,448

 

 

 

86,491

 

 

 

148,177

 

 

 

244,826

 

Selling, general and administrative expenses

 

 

30,750

 

 

 

34,676

 

 

 

96,361

 

 

 

104,171

 

Research and development expenses

 

 

29,877

 

 

 

33,588

 

 

 

93,455

 

 

 

99,116

 

Operating Income (Loss)

 

 

(2,179

)

 

 

18,227

 

 

 

(41,639

)

 

 

41,539

 

Interest and dividend income

 

 

825

 

 

 

952

 

 

 

2,604

 

 

 

2,857

 

Interest expense

 

 

(134

)

 

 

(139

)

 

 

(398

)

 

 

(417

)

Net investment gain

 

 

4,507

 

 

 

1,009

 

 

 

5,400

 

 

 

2,869

 

Other income (expense), net

 

 

201

 

 

 

(842

)

 

 

(73

)

 

 

(1,427

)

Gain on bargain purchase of a business

 

 

—

 

 

 

—

 

 

 

11,322

 

 

 

—

 

Income (Loss) Before Provision for Income Taxes

 

 

3,220

 

 

 

19,207

 

 

 

(22,784

)

 

 

45,421

 

(Provision) benefit for income taxes

 

 

4,369

 

 

 

(3,309

)

 

 

11,889

 

 

 

(10,471

)

Net Income (Loss)

 

$

7,589

 

 

$

15,898

 

 

$

(10,895

)

 

$

34,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

47,710

 

 

 

47,870

 

 

 

47,927

 

 

 

48,110

 

Weighted average shares outstanding – diluted

 

 

47,834

 

 

 

48,531

 

 

 

47,927

 

 

 

48,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share – basic

 

$

0.16

 

 

$

0.33

 

 

$

(0.23

)

 

$

0.73

 

Earnings (loss) per common share – diluted

 

$

0.16

 

 

$

0.33

 

 

$

(0.23

)

 

$

0.72

 

Dividend per share

 

$

0.09

 

 

$

0.09

 

 

$

0.27

 

 

$

0.27

 

 

See accompanying notes to consolidated financial statements.

 

 

4

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net Income (Loss)

 

$

7,589

 

 

$

15,898

 

 

$

(10,895

)

 

$

34,950

 

Other Comprehensive Income (Loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(32

)

 

 

804

 

 

 

(3,340

)

 

 

2,512

 

Net unrealized gains (losses) on cash flow hedges

 

 

—

 

 

 

142

 

 

 

—

 

 

 

(196

)

Defined benefit plan adjustments

 

 

37

 

 

 

73

 

 

 

104

 

 

 

214

 

Foreign currency translation

 

 

(451

)

 

 

1,541

 

 

 

(3,033

)

 

 

5,402

 

Other Comprehensive Income (Loss), net of tax

 

 

(446

)

 

 

2,560

 

 

 

(6,269

)

 

 

7,932

 

Comprehensive Income (Loss), net of tax

 

$

7,143

 

 

$

18,458

 

 

$

(17,164

)

 

$

42,882

 

 

See accompanying notes to consolidated financial statements.

 

 

 

5

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

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:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,952

 

 

 

12,034

 

Amortization of net premium on available-for-sale investments

 

 

(14

)

 

 

352

 

Net gain on long-term investments

 

 

(5,400

)

 

 

(2,869

)

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

 

 

68

 

 

 

(10

)

Gain on bargain purchase of a business

 

 

(11,322

)

 

 

—

 

Stock-based compensation expense

 

 

5,243

 

 

 

5,573

 

Deferred income taxes

 

 

(20,368

)

 

 

—

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

41,166

 

 

 

(6,975

)

Other receivables

 

 

(1,842

)

 

 

(2,924

)

Inventory

 

 

16,543

 

 

 

(9,483

)

Prepaid expenses and other assets

 

 

8,722

 

 

 

(9,647

)

Accounts payable

 

 

5,223

 

 

 

(4,727

)

Accrued expenses and other liabilities

 

 

156

 

 

 

(2,820

)

Income tax payable

 

 

9,461

 

 

 

8,571

 

Net cash provided by operating activities

 

 

48,693

 

 

 

22,025

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(5,695

)

 

 

(12,304

)

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

)

Acquisition of business

 

 

(7,806

)

 

 

—

 

Net cash provided by (used in) investing activities

 

 

(12,015

)

 

 

45,271

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

1,321

 

 

 

6,606

 

Purchases of treasury stock

 

 

(14,185

)

 

 

(17,348

)

Dividend payments

 

 

(12,976

)

 

 

(13,031

)

Net cash used in financing activities

 

 

(25,840

)

 

 

(23,773

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

10,838

 

 

 

43,523

 

Effect of exchange rate changes

 

 

(3,098

)

 

 

4,835

 

Cash and cash equivalents, beginning of period

 

 

86,433

 

 

 

79,895

 

Cash and cash equivalents, end of period

 

$

94,173

 

 

$

128,253

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

355

 

 

$

272

 

 

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for financial instruments held at amortized cost. 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.

 

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) and fair value of plan assets for pension plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with ABOs in excess of plan assets. ASU 2018-14 is effective for public business entities for fiscal years ending after December 15, 2020. We are currently evaluating the effect of ASU 2018-14, but we do not expect it will have a material effect on our financial statement disclosures.

 

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, but we do not expect it 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

 

 

 

9

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 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