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.

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

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

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

As of ~~May 1,~~November 4, 2019, the registrant had ~~47,809,152~~47,826,323 shares of common stock, $0.01 par value per share, outstanding.

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

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

1	Financial Statements:		Financial Statements:
	Consolidated Balance Sheets as of March 31, 2019 – (Unaudited) and December 31, 2018 – (Audited)	3	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 – (Unaudited)	5
	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 – (Unaudited)	4	Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2019 and 2018 – (Unaudited)	6
	Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018 – (Unaudited)	5	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018 – (Unaudited)	7
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018	6	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2019, June 30, 2019, March 31, 2019, September 30, 2018, June 30, 2018 and March 31, 2018 (Unaudited)	8
	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 – (Unaudited)	7	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 – (Unaudited)	10
	Notes to Consolidated Financial Statements – (Unaudited)	8	Notes to Condensed Consolidated Financial Statements – (Unaudited)	11
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
3	Quantitative and Qualitative Disclosures About Market Risk	37	Quantitative and Qualitative Disclosures About Market Risk	45
4	Controls and Procedures	38	Controls and Procedures	46

	PART II. OTHER INFORMATION		PART II. OTHER INFORMATION
1			Legal Proceedings	48
1A	Risk Factors	39	Risk Factors	48
2	Unregistered Sales of Equity Securities and Use of Proceeds	39	Unregistered Sales of Equity Securities and Use of Proceeds	49
6	Exhibits	40	Exhibits	50

	SIGNATURE	41	SIGNATURE	51

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”, “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 statements~~actual results to ~~be wrong. A~~differ materially from those expressed or implied in our forward-looking statements:

The foregoing list of risks is not exclusive. For a more detailed description of the risk factors ~~that could materially affect~~associated 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, 2018, filed with the SEC on February 28, 2019 ~~with~~(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.

March 31,

December 31,

2019

2018

(Unaudited)

(Audited)

ASSETS

Current Assets

Cash and cash equivalents

$
109,119

$
105,504

Short-term investments

31,290

3,246

Accounts receivable, less allowance for doubtful accounts of $82 and $128 at   March 31, 2019 and December 31, 2018, respectively

99,032

99,385

Other receivables

34,583

36,699

Inventory, net

93,609

99,848

Prepaid expenses and other current assets

9,683

10,744

Total Current Assets

377,316

355,426

Property, plant and equipment, net

79,505

80,635

Deferred tax assets, net

36,891

37,187

Goodwill

6,982

7,106

Intangibles, net

31,817

33,183

Other assets

14,885

5,668

Long-term investments

85,227

108,822

Total Assets

$
632,623

$
628,027

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities

Accounts payable

$
60,116

$
60,054

Bonds payable

25,600

1,000

Unearned revenue

15,230

17,940

Accrued expenses

14,039

11,746

Accrued wages and benefits

15,105

14,752

Income tax payable, net

11,785

12,518

Total Current Liabilities

141,875

118,010

Non-current unearned revenue

4,514

5,296

Other non-current liabilities

42,687

33,842

Bonds payable

—

24,600

Total Liabilities

189,076

181,748

Commitments and contingencies (see Note 17)

Stockholders’ Equity

Common stock, par value $0.01 per share; 200,000 shares authorized;
      79,652 shares issued and 47,777 shares outstanding at March 31, 2019 and
      79,652 shares issued and 47,751 shares outstanding at December 31, 2018

797

797

Additional paid-in capital

269,529

267,670

Accumulated other comprehensive loss

(14,885
)

(14,416
)
Retained earnings

879,180

883,975

Less treasury stock at cost: 31,875 and 31,901 shares at March 31, 2019 and
   December 31, 2018, respectively

(691,074
)

(691,747
)
Total Stockholders’ Equity

443,547

446,279

Total Liabilities and Stockholders’ Equity

$
632,623

$
628,027

Three Months Ended

March 31,

2019

2018

Sales

Products

$
125,822

$
105,253

Services

17,969

15,553

Total Sales

143,791

120,806

Cost of Sales

Products

70,734

68,612

Services

12,445

12,461

Total Cost of Sales

83,179

81,073

Gross Profit

60,612

39,733

Selling, general and administrative expenses

35,132

33,531

Research and development expenses

31,647

32,849

Operating Loss

(6,167
)

(26,647
)
Interest and dividend income

591

866

Interest expense

(127
)

(132
)
Net investment gain (loss)

5,926

(97
)
Other income (expense), net

855

(57
)
Gain on bargain purchase of a business, net

—

11,322

Income (Loss) Before Provision for Income Taxes

1,078

(14,745
)
(Provision) benefit for income taxes

(308
)

3,931

Net Income (Loss)

$
770

$
(10,814
)

Weighted average shares outstanding – basic

47,782

48,232

Weighted average shares outstanding – diluted

47,853

48,232

Earnings (loss) per common share – basic

$
0.02

$
(0.22
)
Earnings (loss) per common share – diluted

$
0.02

$
(0.22
)
Dividend per share

$
0.09

$
0.09

	September 30,			December 31,
	2019			2018
ASSETS
Current Assets
Cash and cash equivalents	$	96,407		$	105,504
Short-term investments		28,754			3,246
Accounts receivable, less allowance for doubtful accounts of $81 and $128 at September 30, 2019 and December 31, 2018, respectively		90,647			99,385
Other receivables		18,927			36,699
Inventory, net		104,941			99,848
Prepaid expenses and other current assets		10,327			10,744
Total Current Assets		350,003			355,426
Property, plant and equipment, net		73,384			80,635
Deferred tax assets, net		6,492			37,187
Goodwill		6,968			7,106
Intangibles, net		29,113			33,183
Other assets		23,283			5,668
Long-term investments		90,632			108,822
Total Assets	$	579,875		$	628,027
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	52,842		$	60,054
Bonds payable		25,600			1,000
Unearned revenue		14,022			17,940
Accrued expenses		15,697			11,746
Accrued wages and benefits		16,569			14,752
Income tax payable, net		3,420			12,518
Total Current Liabilities		128,150			118,010
Non-current unearned revenue		4,581			5,296
Other non-current liabilities		52,189			33,842
Bonds payable		—			24,600
Total Liabilities		184,920			181,748
Commitments and contingencies (see Note 16)
Stockholders’ Equity
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 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		272,854			267,670
Accumulated other comprehensive loss		(16,506	)		(14,416	)
Retained earnings		827,783			883,975
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		394,955			446,279
Total Liabilities and Stockholders’ Equity	$	579,875		$	628,027

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Sales
Network Solutions	$	94,018		$	121,043		$	359,007		$	341,359
Services & Support		20,074			19,292			55,267			47,830
Total Sales		114,092			140,335			414,274			389,189
Cost of Sales
Network Solutions		56,444			69,943			207,353			208,184
Services & Support		11,317			11,944			34,963			32,828
Total Cost of Sales		67,761			81,887			242,316			241,012
Gross Profit		46,331			58,448			171,958			148,177
Selling, general and administrative expenses		30,912			30,750			99,663			96,361
Research and development expenses		31,835			29,877			95,546			93,455
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		610			825			1,893			2,604
Interest expense		(128	)		(134	)		(382	)		(398	)
Net investment gain (loss)		(216	)		4,507			8,195			5,400
Other income (expense), net		1,616			201			2,266			(73	)
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)	$	(46,123	)	$	7,589		$	(41,358	)	$	(10,895	)

Weighted average shares outstanding – basic		47,824			47,710			47,803			47,927
Weighted average shares outstanding – diluted		47,824			47,834			47,803			47,927

Earnings (loss) per common share – basic	$	(0.96	)	$	0.16		$	(0.87	)	$	(0.23	)
Earnings (loss) per common share – diluted	$	(0.96	)	$	0.16		$	(0.87	)	$	(0.23	)

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
	2019			2018			2019			2018			2019			2018
Net Income (Loss)	$	770		$	(10,814	)	$	(46,123	)	$	7,589		$	(41,358	)	$	(10,895	)
Other Comprehensive Loss, net of tax
Net unrealized gains (losses) on available-for-sale securities		185			(3,412	)		(15	)		(32	)		277			(3,340	)
Defined benefit plan adjustments		121			62			90			37			361			104
Foreign currency translation		(1,160	)		842			(2,486	)		(451	)		(3,113	)		(3,033	)
Other Comprehensive Loss, net of tax		(854	)		(2,508	)		(2,411	)		(446	)		(2,475	)		(6,269	)
Comprehensive Loss, net of tax	$	(84	)	$	(13,322	)
Comprehensive Income (Loss), net of tax							$	(48,534	)	$	7,143		$	(43,833	)	$	(17,164	)

Common
Shares

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated Other Comprehensive Loss

Total
Stockholders'
Equity

Balance at January 1, 2018

79,652

$
797

$
260,515

$
922,178

$
(682,284
)

$
(3,295
)

$
497,911

Net loss

(10,814
)

(10,814
)
Adoption of new accounting standards

3,499

3,499

Other comprehensive loss, net of tax

(2,508
)

(2,508
)
Dividend payments

(4,367
)

(4,367
)
Dividends accrued on unvested restricted
stock units

(2
)

(2
)
Stock options exercised

(150
)

519

369

PSUs, RSUs and restricted stock vested

(733
)

733

—

Purchase of treasury stock

(10,171
)

(10,171
)
Stock-based compensation expense

1,819

1,819

Balance at March 31, 2018

79,652

$
797

$
262,334

$
909,611

$
(691,203
)

$
(5,803
)

$
475,736

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

	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

	Three Months Ended						Nine Months Ended
	March 31,						September 30,
	2019			2018			2019			2018
Cash flows from operating activities:
Net income (loss)	$	770		$	(10,814	)
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		4,496			3,614			13,315			11,952
Amortization of net premium on available-for-sale investments		6			42
Net (gain) loss on long-term investments		(5,926	)		97
Net (gain) loss on disposal of property, plant and equipment		(6	)		67
Asset impairments								3,872			—
Amortization of net premium (discount) on available-for-sale investments								(86	)		(14	)
Net gain on long-term investments								(8,195	)		(5,400	)
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		1,859			1,819			5,184			5,243
Deferred income taxes		235			(1,877	)		30,421			(20,368	)
Changes in operating assets and liabilities:
Accounts receivable, net		170			63,904			7,603			41,166
Other receivables		2,001			(6,598	)		17,645			(1,842	)
Inventory, net		5,974			3,368			(5,998	)		16,543
Prepaid expenses and other assets		2,809			10,583			(10,071	)		8,722
Accounts payable, net		166			(10,233	)		(5,569	)		5,223
Accrued expenses and other liabilities		(2,355	)		826			10,564			156
Income tax payable		(487	)		2,753			(5,073	)		9,461
Net cash provided by operating activities		9,712			46,229			10,082			48,693

Cash flows from investing activities:
Purchases of property, plant and equipment		(1,872	)		(1,950	)		(6,008	)		(5,695	)
Proceeds from sales and maturities of debt and equity investments		17,039			49,074			38,561			116,757
Purchases of debt and equity investments		(15,318	)		(75,960	)		(37,223	)		(115,271	)
Life insurance proceeds received								1,000			—
Acquisition of business		—			(7,806	)		13			(7,806	)
Net cash used in investing activities		(151	)		(36,642	)		(3,657	)		(12,015	)

Cash flows from financing activities:
Proceeds from stock option exercises		—			369			526			1,321
Purchases of treasury stock		(184	)		(10,171	)		(184	)		(14,185	)
Dividend payments		(4,301	)		(4,367	)		(12,908	)		(12,976	)
Net cash used in financing activities		(4,485	)		(14,169	)		(12,566	)		(25,840	)

Net increase (decrease) in cash and cash equivalents		5,076			(4,582	)		(6,141	)		10,838
Effect of exchange rate changes		(1,461	)		772			(2,956	)		(3,098	)
Cash and cash equivalents, beginning of period		105,504			86,433			105,504			86,433
Cash and cash equivalents, end of period	$	109,119		$	82,623		$	96,407		$	94,173

Supplemental disclosure of non-cash investing activities:
Purchases of property, plant and equipment included in accounts payable	$	273		$	95		$	135		$	355

The accompanying unaudited condensed consolidated financial statements of ADTRAN^®, Inc. and its subsidiaries (“ADTRAN”, the “Company”, “we”, “our” or ~~the “Company”~~“us”) have been prepared pursuant to the rules and regulations ~~for reporting on~~of 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, 2018 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, 2018, filed with the SEC on February 28, 2019 ~~with~~(as amended on September 20, 2019, the ~~SEC.~~“2018 Form 10-K”).

The preparation of financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the ~~obsolete~~excess and ~~excess~~obsolete inventory reserves, warranty reserves, customer rebates, determination of the deferred and accrued revenue components of multiple ~~element~~performance obligations sales agreements, estimated costs to complete obligations associated with deferred 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.

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.

In June 2016, the Financial Accounting Standards Board ~~(FASB)~~(“FASB”) issued Accounting Standards Update ~~(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 ~~and ASU 2018-19~~to allow companies, upon adoption, to elect the fair value option on financial instruments that were previously recorded at amortized cost if they meet certain criteria. 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 2016-13 and ASU 2018-19~~these ASUs 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 do not expect it 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 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 do not expect it will have a material effect on our financial statement disclosures.

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

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842)~~. ASU 2016-02~~, which requires an entity to recognize right-of-use assets and lease liabilities on the balance sheet and to disclose key information about the entity’s leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarified certain aspects of ASU 2016-02, as well as ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provided for an optional transition method ~~which allowed~~allowing for the application of the legacy lease guidance,Leases (Topic 840), including its disclosure requirements, for the comparative periods presented in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as an adjustment to retained earnings as of the date of adoption. In March 2019, the FASB issued ASU 2019-01, Leases (Topic ~~824)~~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 a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

The Company adopted the new standard on January 1, 2019, the effective date of our initial application, using the optional transition method. ~~The~~At that time, the Company ~~has~~ elected to carry forward the legacy ~~(ASC 840)~~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 ~~mainly~~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 ~~Flow.~~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 ~~Flow.~~Flows. Prior to and after adoption, all of our leases in which we are the lessor were classified as ~~sales-types~~sales-type leases.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortened the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU 2017-08 was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. The amendments were required to be applied through a modified-retrospective transition approach that required a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2017-08 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial 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 expanded and refined hedge accounting for both financial and non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and included certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate ~~(SOFR)~~(“SOFR”) Overnight Index Swap ~~(OIS)~~(“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting, which permits the OIS rate based on SOFR as a U.S. benchmark interest rate. Both ASU 2017-12 and ASU 2018-16 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU 2017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on our consolidated financial statements as we ~~currently do~~did not have any hedging ~~instruments.~~instruments as of the date of adoption.

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 allowed 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 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. See Note 13 for additional information.

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

Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which ~~are~~were dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones during the first half of 2019. The ~~contingent payments are subject to arbitration~~required milestones were not achieved and, therefore, we recognized a gain of $1.2 million upon the ~~final payouts, if applicable, are expected to occur~~reversal of these liabilities during the ~~third~~second quarter of 2019. The minimum and maximum potential payment under the total of the contingent liabilities ranges from no payment to $1.5 million. As of March 31, 2019, the fair value of the contingent liability was re-assessed and was determined to be $1.2 million, based on the expected probable outcomes. No change in fair value was recognized during the three months ended March 31, 2019.

An escrow in the amount of $2.8 million was set up at the acquisition date to fund post-closing working capital settlements and to ~~indemnify~~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 ~~seller~~sellers ranges from ~~no payment~~0 to $2.8 million.

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

The final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date for SmartRG are as follows:

The details of the acquired intangible assets from the SmartRG acquisition are as follows:

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 ~~(SEL)~~ North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. ~~(SEI).~~ 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.

~~The final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date for SmartRG and Sumitomo are as follows:~~

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

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

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 ~~SmartRG and~~the Sumitomo EPON business had occurred on January 1, 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, 2018, nor is it indicative of any future results. ~~Aside from revising the 2018 net income for the effect of the bargain purchase gain, there~~There were no material, non-recurring adjustments to this unaudited pro forma information.

				Nine Months Ended
(In thousands)	For the Three Months Ended March 31, 2018			September 30, 2018
Pro forma revenue	$	129,584		$	390,449
Pro forma net loss	$	(23,400	)	$	(23,431	)
Pro forma loss per share - basic	$	(0.49	)
Pro forma loss per share - diluted	$	(0.49	)

For the three months ended March 31, 2019 and 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $1.3 million and $0.2 million respectively, related to these acquisitions.

The following is a description of the principal activities from which we generate our revenue by reportable segment.

Network Solutions includes hardware products and software-defined next-generation virtualized solutions used in service provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware sales. 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.

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.

In addition to our reporting segments, we also report revenue in the following ~~three~~3 categories – Access & Aggregation, Subscriber Solutions & Experience and Traditional & Other Products.

The following table disaggregates our revenue by ~~major source~~reportable segment and revenue category for the three months ended ~~March 31, 2019:~~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		Network Solutions		Services & Support		Total
Access & Aggregation	$	85,673	$	14,105	$	99,778	$	48,902	$	16,212	$	65,114	$	76,046	$	15,855	$	91,901
Subscriber Solutions & Experience⁽¹⁾		34,719		2,034		36,753		40,382		2,094		42,476		37,313		1,239		38,552
Traditional & Other Products		5,430		1,830		7,260		4,734		1,768		6,502		7,684		2,198		9,882
Total	$	125,822	$	17,969	$	143,791	$	94,018	$	20,074	$	114,092	$	121,043	$	19,292	$	140,335

The following table disaggregates our revenue by ~~major source~~reportable segment and revenue category for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018:

(In thousands)	Network Solutions		Services & Support		Total
							Nine Months Ended
							September 30, 2019						September 30, 2018
(In thousands)							Network Solutions		Services & Support		Total		Network Solutions		Services & Support		Total
Access & Aggregation	$	69,385	$	12,295	$	81,680	$	230,837	$	43,476	$	274,313	$	220,653	$	37,670	$	258,323
Subscriber Solutions & Experience⁽¹⁾		28,777		1,324		30,101		113,545		6,186		119,731		99,396		3,817		103,213
Traditional & Other Products		7,091		1,934		9,025		14,625		5,605		20,230		21,310		6,343		27,653
Total	$	105,253	$	15,553	$	120,806	$	359,007	$	55,267	$	414,274	$	341,359	$	47,830	$	389,189

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. 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). As of ~~March 31,~~September 30, 2019, we did ~~not~~0t have any significant performance obligations related to customer contracts that had an original expected duration of one year or more, other than maintenance services, which are satisfied over time.

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

(In thousands)	March 31, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Accounts receivable, net	$	99,032	$	99,385	$	90,647	$	99,385
Contract assets(1)	$	2,333	$	3,766	$	2,434	$	3,766
Unearned revenue	$	15,230	$	17,940	$	14,022	$	17,940
Non-current unearned revenue	$	4,514	$	5,296	$	4,581	$	5,296

~~$6.9 million of~~Of the outstanding unearned revenue balance at December 31, 2018, $1.2 million and $11.7 million was recognized as revenue during the three and nine months ended ~~March 31, 2019.~~September 30, 2019, respectively.

Our effective tax rate increased from ~~an expense~~a benefit of ~~15.1%~~34.9%, excluding the tax effect of the bargain purchase gain, in the ~~three~~nine months ended ~~March 31,~~September 30, 2018, to an expense of ~~28.6%~~197.1% in the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The increase in the effective tax rate between the two periods iswas primarily driven by the ~~shift to profitability~~establishment of a valuation allowance against our domestic deferred tax assets in the ~~current quarter.~~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 effective 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.

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

The Company continually reviews the adequacy of ~~the~~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 ~~recognized~~realized in accordance with ASC 740, Income Taxes ~~(ASC 740)~~. AsDue to our recent decrease in revenue and profitability for the third quarter of ~~March 31,~~ 2019, ~~we had net~~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 ~~of $36.9 million. Since management continues~~will be realized. As such, the Company is no longer able to ~~assess the realization of these~~conclude that it is more likely than not that our domestic deferred tax assets ~~and related valuation allowance(s), as such, we may release~~will be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods in the event sufficient evidence is present to support a conclusion that it is more likely than not that all or a portion of ~~the valuation allowance or establish a new valuation allowance based on operations in the jurisdictions in which these~~our domestic deferred tax assets arose. Our assessment includes the evaluation of evidence, some of which requires significant judgment, including historical operating results, the evaluation of three-year cumulative income, future taxable income and tax planning strategies. Should management determine a valuation allowance is needed in the future due to not being able to absorb loss carryforwards, it could have a material effect on our consolidated financial statements.will be realized.

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 ~~March 31,~~September 30, 2019 and 2018:

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
(In thousands)	2019			2018			2019			2018			2019			2018
Service cost	$	375		$	308		$	366		$	294		$	1,109		$	905
Interest cost		162			187			158			179			479			551
Expected return on plan assets		(355	)		(399	)		(346	)		(381	)		(1,049	)		(1,174	)
Amortization of actuarial losses		203			64			198			61			600			188
Net periodic pension cost	$	385		$	160		$	376		$	153		$	1,139		$	470

The components of net periodic pension cost, other than the service cost component, are included in other income (expense), 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.

The following table summarizes 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 ~~March 31,~~September 30, 2019 and ~~2018, which was recognized as follows:~~2018:

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
(In thousands)	2019			2018			2019			2018			2019			2018
Stock-based compensation expense included in cost of sales	$	104		$	95		$	83		$	101		$	272		$	298
Selling, general and administrative expense		1,063			1,035			1,142			894			2,867			2,924
Research and development expense		692			689			646			645			2,045			2,021
Stock-based compensation expense included in operating expenses		1,755			1,724			1,788			1,539			4,912			4,945
Total stock-based compensation expense		1,859			1,819			1,871			1,640			5,184			5,243
Tax benefit for expense associated with non-qualified options, PSUs, RSUs and restricted stock		(443	)		(384	)
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	$	1,416		$	1,435		$	1,425		$	1,348		$	3,949		$	4,227

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

	Number of Stock Options (in thousands)			Weighted Avg. Exercise Price (per share)		Weighted Avg. Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)		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	$	—		4,382		$	22.91		4.10	$	—
Stock options granted		—		$	—
Stock options exercised		—		$	—						(34	)	$	15.53
Stock options forfeited		(8	)	$	15.33						(28	)	$	15.53
Stock options expired		(33	)	$	23.13						(183	)	$	24.41
Stock options outstanding, March 31, 2019		4,341		$	22.93		3.80	$	—
Stock options exercisable, March 31, 2019		4,098		$	23.37		3.63	$	—
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 ~~March 31,~~September 30, 2019, total unrecognized compensation expense related to non-vested stock options was approximately ~~$0.6~~$0.1 million, which is expected to be recognized over an average remaining recognition period of ~~0.7~~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. ~~At March 31, 2019, 2.4 million options were available for grant under the shareholder-approved plans.~~

The aggregate intrinsic ~~values in the table above represent~~value of stock options represents the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on ~~March 31,~~September 30, 2019. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s ~~stock.~~stock and was 0 as of September 30, 2019. The total pre-tax intrinsic value of options exercised during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 was ~~zero.~~$0.1 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. ~~The stock option pricing model requires the use of several assumptions that impact the fair value estimate.~~ These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors.

There were no0 stock options granted during the three and nine months ended ~~March 31,~~September 30, 2019 orand 2018.

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

	Number of Shares (in thousands)			Weighted Avg. Grant Date Fair Value (per share)		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		1,570		$	18.52
PSUs, RSUs and restricted stock granted		59		$	12.54		63		$	12.81
PSUs, RSUs and restricted stock vested		(1	)	$	18.86		(22	)	$	17.13
PSUs, RSUs and restricted stock forfeited		(44	)	$	17.88		(175	)	$	18.69
Unvested PSUs, RSUs and restricted stock outstanding, March 31, 2019		1,584		$	18.32
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 business day immediately preceding the grant date.

At ~~March 31,~~September 30, 2019, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately ~~$16.1~~$11.6 million, which is expected to be recognized over an average remaining recognition period of ~~2.8~~2.4 years. In addition, there was ~~$9.0~~$8.2 million of unrecognized compensation expense related to ~~the~~ unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period of ~~0.8~~0.3 years if achievement of the performance obligation becomes probable. For the three and nine months ~~ending March 31,~~ended September 30, 2019 and 2018, no0 compensation expense was recognized related to these 2017 performance-based 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.

At ~~March 31,~~September 30, 2019, 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	$	15,964	$	69	$	(24	)	$	16,009	$	10,733	$	95	$	—		$	10,828
Municipal fixed-rate bonds		951		—		(13	)		938		931		—		(1	)		930
Asset-backed bonds		7,171		13		(9	)		7,175		7,222		35		(2	)		7,255
Mortgage/Agency-backed bonds		4,561		6		(26	)		4,541		7,366		29		(7	)		7,388
U.S. government bonds		4,238		—		(11	)		4,227		9,160		4		(21	)		9,143
Foreign government bonds		2,159		—		(2	)		2,157		372		—		(3	)		369
Available-for-sale debt securities held at fair value	$	35,044	$	88	$	(85	)	$	35,047	$	35,784	$	163	$	(34	)	$	35,913
Restricted investment held at cost									25,600
Other investments held at cost									1,180
Total carrying value of available-for-sale investments								$	61,827

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

	Amortized		Gross Unrealized					Carrying		Amortized		Gross Unrealized					Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Corporate bonds	$	20,777	$	19	$	(112	)	$	20,684	$	20,777	$	19	$	(112	)	$	20,684
Municipal fixed-rate bonds		1,339		—		(26	)		1,313		1,339		—		(26	)		1,313
Asset-backed bonds		5,230		5		(14	)		5,221		5,230		5		(14	)		5,221
Mortgage/Agency-backed bonds		3,833		2		(44	)		3,791		3,833		2		(44	)		3,791
U.S. government bonds		9,271		1		(66	)		9,206		9,271		1		(66	)		9,206
Foreign government bonds		592		—		(8	)		584		592		—		(8	)		584
Available-for-sale debt securities held at fair value	$	41,042	$	27	$	(270	)	$	40,799	$	41,042	$	27	$	(270	)	$	40,799
Restricted investment held at cost									25,600
Other investments held at cost									397
Total carrying value of available-for-sale investments								$	66,796

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

(In thousands)	Corporate bonds		Municipal fixed-rate bonds		Asset- backed bonds		Mortgage / Agency- backed bonds		U.S. government bonds		Foreign government bonds		Corporate bonds		Municipal fixed-rate bonds		Asset- backed bonds		Mortgage / Agency- backed bonds		U.S. government bonds		Foreign government bonds
Less than one year	$	3,127	$	—	$	872	$	—	$	1,691	$	—	$	3,154	$	—	$	—	$	—	$	—	$	—
One to two years		8,389		—		387		289		—		1,196		4,316		930		941		215		—		—
Two to three years		4,493		938		976		—		1,324		961		3,068		—		2,475		1,072		7,528		—
Three to five years		—		—		3,105		827		1,212		—		290		—		1,593		920		1,615		369
Five to ten years		—		—		1,038		303		—		—		—		—		1,666		680		—		—
More than ten years		—		—		797		3,122		—		—		—		—		580		4,501		—		—
Total	$	16,009	$	938	$	7,175	$	4,541	$	4,227	$	2,157	$	10,828	$	930	$	7,255	$	7,388	$	9,143	$	369

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

Realized gains and losses on sales of 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						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
(In thousands)	2019			2018			2019			2018			2019			2018
Gross realized gains on debt securities	$	41		$	—		$	36		$	24		$	85		$	49
Gross realized losses on debt securities		(19	)		(73	)		(7	)		(50	)		(40	)		(365	)
Total gain (loss) recognized, net	$	22		$	(73	)	$	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 ~~March 31,~~September 30, 2019, we held a $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 $25.6 million at ~~March 31,~~September 30, 2019 and December 31, 2018. At ~~March 31,~~September 30, 2019 and December 31, 2018, the estimated fair value of the Bond using a level 2 valuation technique was approximately ~~$25.5~~$25.6 million and $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-off~~offset 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~~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~~We 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 on January 1, 2020.~~maturity.

Our marketable equity securities consist of publicly traded stock, funds and certain other investments measured at fair value or cost (where appropriate).

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 retained earnings.

ASU 2016-01 also provides a measurement alternative for equity investments that do not have a readily determinable fair value in which investments can be recorded at cost less impairment, if any, adjusted for observable price changes for an 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 ~~and $0~~ as of ~~March 31, 2019~~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 ~~December 31, 2018, respectively.~~represents a non-cash operating activity.

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

	Three Months Ended						Three Months Ended					Nine Months Ended
	March 31,						September 30,					September 30,
(In thousands)	2019			2018			2019			2018		2019			2018
Realized gains (losses) on equity securities sold	$	(14	)	$	398		$	(20	)	$	1,240	$	(83	)	$	1,587
Unrealized gains (losses) on equity securities held		5,918			(422	)		(225	)		3,293		8,233			4,129
Total gain (loss) recognized, net	$	5,904		$	(24	)	$	(245	)	$	4,533	$	8,150		$	5,716

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

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 March 31, 2019 Using								Fair Value Measurements at September 30, 2019 Using
(In thousands)	Cost or Fair Value		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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	$	1,279	$	1,279	$	—	$	—	$	1,817	$	1,817	$	—	$	—
Commercial paper		6,547		—		6,547		—		1,295		—		1,295		—
Cash equivalents		7,826		1,279		6,547		—		3,112		1,817		1,295		—
Available-for-sale debt securities
Corporate bonds		16,009		—		16,009		—		10,828		—		10,828		—
Municipal fixed-rate bonds		938		—		938		—		930		—		930		—
Asset-backed bonds		7,175		—		7,175		—		7,255		—		7,255		—
Mortgage/Agency-backed bonds		4,541		—		4,541		—		7,388		—		7,388		—
U.S. government bonds		4,227		4,227		—		—		9,143		9,143		—		—
Foreign government bonds		2,157		—		2,157		—		369		—		369		—
Marketable equity securities								—
Marketable equity securities – various industries		30,725		30,725		—		—		32,543		32,543		—		—
Equity in escrow		174		174		—		—		165		165		—		—
Deferred compensation plan assets		20,416		20,416		—		—		20,580		20,580		—		—
Total debt and equity securities at fair value		86,362		55,542		30,820		—		89,201		62,431		26,770		—
Other investments held at cost
Other investments		3,375		—		—		—
Total other investments held at cost		3,375		—		—		—
Total	$	97,563	$	56,821	$	37,367	$	—	$	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	$	—

Fair Value Measurements at December 31, 2018 Using

(In thousands)

Cost or Fair Value

Quoted Prices
in Active
Market for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Cash equivalents

Money market funds

$
1,554

$
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

$
—

The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are obtained from a variety of industry standard data providers, ~~security master files from~~ large financial institutions, and other third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.

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

Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the planned purchase of products from foreign suppliers. Purchases of U.S. denominated inventory by our European subsidiary represent our primary exposure. Changes in the fair value of derivatives designated as cash flow hedges are not recognized in current operating results, but are recorded in accumulated other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other comprehensive income when the underlying hedged item impacts earnings. This reclassification is recorded in cost of sales, the same line item of the Consolidated Statements of Income at which the effects of the hedged item are recorded.

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

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

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

	March 31,		December 31,		September 30,		December 31,
(In thousands)	2019		2018		2019		2018
Raw materials	$	40,841	$	45,333	$	39,133	$	45,333
Work in process		1,513		1,638		1,083		1,638
Finished goods		51,255		52,877		64,725		52,877
Total	$	93,609	$	99,848	$	104,941	$	99,848

~~We establish~~Inventory reserves are established for estimated excess and obsolete ~~or unmarketable~~ inventory equal to the difference between the cost of the inventory and the estimated ~~fair~~net realizable value of the inventory based ~~upon assumptions about future demand~~on historical usage, known trends, inventory age, and market conditions. At ~~March 31,~~September 30, 2019 and December 31, 2018, ~~raw materials reserves totaled $17.1~~our inventory reserve was $32.0 million and ~~$17.6~~$30.0 million, ~~respectively,~~respectively.

At September 30, 2019 and ~~finished goods inventory reserves totaled $12.8~~December 31, 2018, property, plant and equipment consisted of the following:

Depreciation expense was $3.1 million for the three months ended September 30, 2019 and 2018 and was $9.3 million and ~~$12.4~~$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.

Goodwill, all of which relates to our acquisitions of Bluesocket, Inc. in 2011 and SmartRG in 2018, was $7.0 million and $7.1 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, of which $6.6 million and $0.4 million iswas allocated to our Network Solutions and Services & Support reportable segments, respectively, as of ~~March 31,~~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 ~~adjusted~~reduced by $0.1 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 as a result of ~~filing the SmartRG income tax returns during the quarter.~~a measurement period adjustment.

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in the fourth quarter of 2018, we concluded that it was not necessary to perform the two-step impairment test. No events or circumstances occurred during the nine months ended September 30, 2019 that would more likely than not reduce the fair value of goodwill below its carrying value.

Intangible assets include ~~intangibles~~those acquired in conjunction with several acquisitions since 2011, with the most recent being SmartRG, Inc. in November ~~2018 and SEI’s North American EPON business and technology license and OEM supply agreement with SEI in March~~ 2018.

The following table presents our intangible assets as of ~~March 31,~~September 30, 2019 and December 31, 2018:

	March 31, 2019							December 31, 2018							September 30, 2019							December 31, 2018
(In thousands)	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	$	22,363	$	(5,797	)	$	16,566	$	22,455	$	(5,380	)	$	17,075	$	22,235	$	(6,671	)	$	15,564	$	22,455	$	(5,380	)	$	17,075
Developed technology		10,170		(2,526	)		7,644		12,801		(4,867	)		7,934		10,170		(3,094	)		7,076		12,801		(4,867	)		7,934
Licensed technology		5,900		(683	)		5,217		5,900		(520	)		5,380		5,900		(1,011	)		4,889		5,900		(520	)		5,380
Supplier relationships		2,800		(1,458	)		1,342		2,800		(1,108	)		1,692		2,800		(2,158	)		642		2,800		(1,108	)		1,692
Licensing agreements		560		(24	)		536		560		(5	)		555		560		(61	)		499		560		(5	)		555
Patents		500		(174	)		326		500		(157	)		343		500		(209	)		291		500		(157	)		343
Trade names		310		(124	)		186		310		(106	)		204		310		(158	)		152		310		(106	)		204
Total	$	42,603	$	(10,786	)	$	31,817	$	45,326	$	(12,143	)	$	33,183	$	42,475	$	(13,362	)	$	29,113	$	45,326	$	(12,143	)	$	33,183

Amortization expense was $1.3 million and ~~$0.4~~$0.9 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and $4.0 million and $2.4 million for the nine months ended September 30, 2019 and 2018, respectively.

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

(In thousands)	Amount		Amount
Remainder of 2019	$	3,994	$	1,329
2020		4,444		4,436
2021		4,096		4,088
2022		3,472		3,464
2023		3,320		3,313
Thereafter		12,491		12,483
Total	$	31,817	$	29,113

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

As of ~~March 31,~~September 30, 2019, our operating leases have remaining lease terms of ~~one month~~two months to six years, some of which include options to extend the leases for up to 3five years, and some of which include options to terminate the leases within ~~3 months.~~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 ~~right of use liability included on the Consolidated Balance Sheet.~~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 ~~$0.2~~$0.1 million and $0.3 million for the three and nine months ended ~~March 31,~~September 30, 2019, respectively, and is included in cost of sales, selling, general and administrative expenses onand research and development expenses in the Condensed Consolidated ~~Statement~~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 ~~the practical expedient which allows us~~ to not separate lease and non-lease components. None of our lease agreements contain any material residual value guarantees or material restrictive covenants.

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

		March 31,		January 1,			September 30,		January 1,
(In thousands)	Classification	2019		2019		Classification	2019		2019 ⁽¹⁾
Assets
Operating lease asset	Other assets	$	9,502	$	10,322	Other assets	$	18,529	$	10,322
Total lease assets		$	9,502	$	10,322		$	18,529	$	10,322

Liabilities
Current operating lease liability	Accrued expenses	$	2,718	$	2,948	Accrued expenses	$	3,063	$	2,948
Non-current operating lease liability	Other non-current liabilities		6,801		7,374	Other non-current liabilities		15,659		7,374
Total lease liability		$	9,519	$	10,322		$	18,722	$	10,322

The components of lease expense included in the Condensed Consolidated ~~Statement~~Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2019 ~~are~~were as follows:

As of ~~March 31,~~September 30, 2019, ~~the maturity of~~operating lease liabilities included on the Condensed Consolidated Balance Sheet ~~are~~by future maturity were as follows:

(In thousands)	Amount			Amount
Remainder of 2019	$	2,363		$	1,044
2020		2,185			3,417
2021		2,032			3,071
2022		1,544			2,672
2023		1,163			2,350
Thereafter		747			8,258
Total lease payments		10,034			20,812
Less: Interest		(515	)		(2,090	)
Present value of lease liabilities	$	9,519		$	18,722

~~Operating~~Future operating lease payments include ~~$1.2~~$7.6 million related to options to extend lease terms that are reasonably certain of being ~~exercised and there~~exercised. There are no legally binding leases that have not yet ~~commenced.~~commenced.

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

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:

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

We are the lessor in sales-type lease arrangements for network equipment, which have initial terms of up to five years. Our sales-type lease arrangements contain either a provision whereby the network equipment reverts back to us upon the expiration of the lease or a provision that allows the lessee to purchase the network equipment at a bargain purchase amount. In addition, our sales-type lease arrangements do not contain any residual value guarantees or material restrictive covenants. The allocation of the consideration between lease and non-lease components is determined by standalone sales price by component. The net investment in sales-type leases consists of lease receivables less unearned income. Collectability of sales-type leases is evaluated periodically at an individual customer level. At ~~March 31,~~September 30, 2019 and December 31, 2018, we had no0 allowance for credit losses for our net investment in sales-type leases. As of ~~March 31,~~September 30, 2019 and December 31, 2018, the components of the net investment in sales-type leases were as follows:

	March 31,		December 31,		September 30,		December 31,
(In thousands)	2019		2018		2019		2018
Current minimum lease payments receivable (included in other receivables)	$	9,349	$	11,339
Non-current minimum lease payments receivable (included in other assets)		1,494		1,670
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		10,843		13,009		4,716		13,009
Less: Current unearned revenue		573		631		445		631
Less: Non-current unearned revenue		343		473		210		473
Net investment in sales-type leases	$	9,927	$	11,905	$	4,061	$	11,905

The components of sales-type lease gross profit recognized at the lease commencement date and interest and dividend income, included in the Condensed Consolidated ~~Statement~~Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2019, ~~are~~were as follows:

~~Future~~As of September 30, 2019, future minimum lease payments to be received from sales-type leases ~~as of March 31, 2019 are~~were as follows:

(In thousands)	Amount ⁽¹⁾		Amount
Remainder of 2019	$	9,005	$	2,700
2020		1,056		1,162
2021		493		542
2022		209		225
2023		78		83
Thereafter		2		4
Total	$	10,843	$	4,716

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized ~~open market repurchase transactions~~repurchases of our common stock, which are implemented through open market or private purchases from time to time as conditions warrant. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, we repurchased 13,000 shares of our common stock at an average price of $14.06 per share. As of ~~March 31,~~September 30, 2019, we ~~have~~had the authority to purchase an additional 2.5 million shares of our common stock under the current authorization of up to 5.0 million shares.

Other comprehensive income consists of unrealized gains (losses) on available-for-sale debt securities; 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, 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 ~~March 31,~~September 30, 2019 and 2018:

Three Months Ended March 31, 2019

(In thousands)

Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities

Defined
Benefit Plan
Adjustments

Foreign
Currency
Adjustments

ASU 2018-02 Adoption

Total

Beginning balance

$
(563
)

$
(8,041
)

$
(5,812
)

$
—

$
(14,416
)
Other comprehensive income (loss) before
reclassifications

231

—

(1,160
)

—

(929
)
Amounts reclassified from accumulated other
comprehensive income (loss)

(46
)

121

—

—

75

Amounts reclassified to retained earnings ⁽¹⁾

—

—

—

385

385

Net current period other comprehensive income (loss)

185

121

(1,160
)

385

(469
)
Ending balance

$
(378
)

$
(7,920
)

$
(6,972
)

$
385

$
(14,885
)

	Three Months Ended September 30, 2019
(In thousands)	Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			ASU 2018-02 Adoption ⁽¹⁾		Total
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)		24			90			—			—		114
Net current period other comprehensive income (loss)		(15	)		90			(2,486	)		—		(2,411	)
As of September 30, 2019	$	(286	)	$	(7,680	)	$	(8,925	)	$	385	$	(16,506	)

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

	Three Months Ended March 31, 2018												Nine Months Ended September 30, 2018
(In thousands)	Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			Total			Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			Total
Beginning balance	$	2,567		$	(4,286	)	$	(1,576	)	$	(3,295	)
As of December 31, 2017													$	2,567		$	(4,286	)	$	(1,576	)	$	(3,295	)
Other comprehensive income (loss) before reclassifications		(257	)		—			842			585			869			—			(3,033	)		(2,164	)
Amounts reclassified from accumulated other comprehensive income (loss)		65			62			—			127			(989	)		104			—			(885	)
Amounts reclassified to retained earnings ⁽¹⁾		(3,220	)		—			—			(3,220	)		(3,220	)		—			—			(3,220	)
Net current period other comprehensive income (loss)		(3,412	)		62			842			(2,508	)		(3,340	)		104			(3,033	)		(6,269	)
Ending balance	$	(845	)	$	(4,224	)	$	(734	)	$	(5,803	)
As of September 30, 2018													$	(773	)	$	(4,182	)	$	(4,609	)	$	(9,564	)

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

	Three Months Ended March 31, 2019				Three Months Ended September 30, 2019
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income Is Presented
Unrealized gains on available-for-sale securities:
Net realized gain on sales of securities	$	62		Net investment gain (loss)
(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 losses on sales of securities					$	(32	)	Net investment gain
Defined benefit plan adjustments – actuarial losses		(175	)	⁽¹⁾		(130	)	⁽¹⁾
Total reclassifications for the period, before tax		(113	)			(162	)
Tax benefit		38				48
Total reclassifications for the period, net of tax	$	(75	)		$	(114	)

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:

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

Three Months Ended

Three Months Ended

March 31, 2019

March 31, 2018

(In thousands)

Before-Tax
Amount

Tax
(Expense)
Benefit

Net-of-Tax
Amount

Before-Tax
Amount

Tax
(Expense)
Benefit

Net-of-Tax
Amount

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

$
312

$
(81
)

$
231

$
(347
)

$
90

$
(257
)
Reclassification adjustment for amounts related to
   available-for-sale investments included in net
   income

(62
)

16

(46
)

73

(8
)

65

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

—

—

—

(3,220
)

—

(3,220
)
Reclassification adjustment for amounts related to
   defined benefit plan adjustments included in net
   income

175

(54
)

121

90

(28
)

62

Foreign currency translation adjustment

(1,160
)

—

(1,160
)

842

—

842

Total Other Comprehensive Income (Loss)

$
(735
)

$
(119
)

$
(854
)

$
(2,562
)

$
54

$
(2,508
)

	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, 2019 and 2018:

	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	)

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

	Three Months Ended					Three Months Ended					Nine Months Ended
	March 31,					September 30,					September 30,
(In thousands, except per share amounts)	2019		2018			2019			2018		2019			2018
Numerator
Net income (loss)	$	770	$	(10,814	)	$	(46,123	)	$	7,589	$	(41,358	)	$	(10,895	)
Denominator
Weighted average number of shares – basic		47,782		48,232			47,824			47,710		47,803			47,927
Effect of dilutive securities
Stock options		—		—			—			27		—			—
PSUs, RSUs and restricted stock		71		—			—			97		—			—
Weighted average number of shares – diluted		47,853		48,232			47,824			47,834		47,803			47,927
Earnings (loss) per share – basic	$	0.02	$	(0.22	)	$	(0.96	)	$	0.16	$	(0.87	)	$	(0.23	)
Earnings (loss) per share – diluted	$	0.02	$	(0.22	)	$	(0.96	)	$	0.16	$	(0.87	)	$	(0.23	)

For the three months ended ~~March 31, 2019 and~~September 30, 2018, ~~2.9 million and 4.8~~1.8 million stock options were outstanding but were not included in the computation of diluted earnings ~~(loss)~~ per ~~share~~share. These stock options were excluded because ~~the stock options’~~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.

25As 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, 4.1 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.

We operate in ~~two~~2 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) benefit for income taxes are reported on a company-wide, functional basis only. There is no inter-segment revenue.

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

	Three Months Ended
	March 31,								Three Months Ended
	2019				2018				September 30, 2019				September 30, 2018
(In thousands)	Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit		Sales		Gross Profit
Network Solutions	$	125,822	$	55,088	$	105,253	$	36,641	$	94,018	$	37,574	$	121,043	$	51,100
Services & Support		17,969		5,524		15,553		3,092		20,074		8,757		19,292		7,348
Total	$	143,791	$	60,612	$	120,806	$	39,733	$	114,092	$	46,331	$	140,335	$	58,448

In addition to our reporting segments, we also report revenue for the following ~~three~~3 categories – Access & Aggregation, Subscriber Solutions & Experience (formerly Customer Devices) and Traditional & Other Products.

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

	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(In thousands)	2019		2018		2019		2018		2019		2018
Access & Aggregation	$	99,778	$	81,680	$	65,114	$	91,901	$	274,313	$	258,323
Subscriber Solutions & Experience		36,753		30,101		42,476		38,552		119,731		103,213
Traditional & Other Products		7,260		9,025		6,502		9,882		20,230		27,653
Total	$	143,791	$	120,806	$	114,092	$	140,335	$	414,274	$	389,189

The following table represents sales information by geographic area for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018:

	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(In thousands)	2019		2018		2019		2018		2019		2018
United States	$	72,528	$	62,086	$	83,144	$	83,730	$	230,960	$	214,039
International		71,263		58,720		30,948		56,605		183,314		175,150
Total	$	143,791	$	120,806	$	114,092	$	140,335	$	414,274	$	389,189

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 ~~$8.8~~$8.7 million and $8.6 million at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively, which amounts are included in accrued expenses in the accompanying Condensed Consolidated Balance ~~Sheet.~~

~~A summary of warranty expense and write-off activity for~~Sheets. During the three months ended ~~March 31,~~September 30, 2018, we had a reversal of prior provisions, the impact of which is reflected in the table below.

A reconciliation of the beginning and ending warranty accrual for the three and nine months ended September 30, 2019 and 2018 is as follows:

	Three Months Ended						Three Months Ended						Nine Months Ended
	March 31,						September 30,						September 30,
(In thousands)	2019			2018			2019			2018			2019			2018
Balance at beginning of period	$	8,623		$	9,724		$	8,972		$	10,111		$	8,623		$	9,724
Plus: Amounts charged to cost and expenses		1,131			1,822			816			(34	)		3,796			6,649
Less: Deductions		(952	)		(1,859	)		(1,131	)		(1,053	)		(3,762	)		(7,349	)
Balance at end of period	$	8,802		$	9,687		$	8,657		$	9,024		$	8,657		$	9,024

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.

In addition to the ~~ordinary course of business,~~litigation described above, from time to time we ~~may be~~are 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 agreements~~contractual 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 or~~to 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. Although~~it is currently involved, the Company does not expect that the ultimate outcome of ~~any claim~~such Legal Matters will individually or ~~litigation can never be certain, it is our opinion that~~in the ~~outcome~~aggregate 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.

We have committed to invest up to an aggregate of $7.9 million in ~~two~~2 private equity funds, ~~and we have contributed $8.4 million as of March 31, 2019,~~ of which $7.7 million has been applied ~~to these commitments.~~as of September 30, 2019.

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 plans.

In February 2019, we announced the restructuring of certain of our workforce predominantly in Germany, which included the closure of ~~the~~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. The cumulative amount incurred during the three months ended March 31, 2019 related to this restructuring program is $1.8 million. We also offered a voluntary early retirement offering to certain other employees which was announced to employees in March 2019. As of March 31, 2019, we did not have sufficient information on which to estimate an additional liability associated with the voluntary early retirement program.

In January 2018, we announced an early retirement incentive program for employees that met certain requirements. The cumulative amount incurred during the year ended December 31, 2018 related to this restructuring program was $7.3 million, of which ~~$6.0~~$0.3 million and $7.2 million was incurred during the three and nine months ended ~~March 31, 2018.~~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 onin the Condensed Consolidated Balance ~~Sheet,~~Sheets, is as follows:

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

The following table represents the components of restructuring expense by geographic area for the three and nine months ended September 30, 2019 and 2018:

On ~~April 17,~~October 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 ~~May 2,~~November 14, 2019. The payment date will be ~~May 16, 2019. The quarterly dividend payment will be~~December 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.~~

A voluntary early retirement offering was communicated to certain of our employees in Germany in March 2019. These employees were given until April 28, 2019 to accept the early retirement offering. Therefore, as of March 31, 2019, we did not have sufficient information on which to estimate the liability associated with this program. The Company expects to incur approximately $0.8 million in restructuring expense during the second quarter of 2019 related to the early retirement program.

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

The following discussion should be read in conjunction with the ~~Consolidated Financial Statements~~consolidated financial statements and the related notes that appear 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

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.

ADTRAN is a leading global provider of networking and communications equipment, serving a diverse domestic and international customer base in 68multiple countries that includes Tier-1, 2-2 and 3-3 service providers, ~~Cable/MSOs~~ cable/multiple system operators (“MSO”) and distributed enterprises. Our innovative solutions and services enable voice, data, video and internet communications across a variety of network infrastructures and are currently in use by millions worldwide. We support our customers through our direct global sales organization and our distribution networks. Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. In order to service our customers and ~~build~~grow revenue, we are constantly conducting research and development ~~(R&D)~~ of new products addressing customer needs and testing those products for the particular specifications of the particular customers. ~~In addition to our corporate headquarters in Huntsville, Alabama, we have R&D facilities in strategic global locations.~~

We are focused on being a top global supplier of access infrastructure and related value-added solutions from the cloud edge to the subscriber edge. We offer a broad portfolio of flexible software and hardware network solutions and services that enable service providers to meet today’s service demands, while enabling them to transition to the fully-converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. 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 to be a high-quality, and in most instances the low-cost, provider of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.

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

~~The Company~~ made two acquisitions in 2018, strengthening ~~its~~our position in both the ~~Cable/MSO~~cable/MSOs and connected home markets. In the first quarter of 2018, we acquired ~~the market-leading~~ Sumitomo Electric Lightwave Corp.’s North American EPON business and certain assets for North America ~~from~~ and entered into a technology license and original equipment manufacturer supply agreement with Sumitomo Electric Industries, Ltd. These solutions, combined with our organic fiber access product portfolio and our distributed access expertise, present new opportunities in the ~~Cable/~~cable/MSO market. Also, in the fourth quarter of 2018, we acquired U.S.-based SmartRG, an industry-leading provider of carrier-class, ~~connected–home~~connected-home software platforms and cloud services for broadband service providers. With this acquisition, ADTRAN now offers a complete cloud-to-consumer portfolio of virtualized management, data analytics, Wi-Fi-enabled residential gateways and software platforms.~~For more information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 1 of this report.~~

We review our financial performance, specifically revenue and gross profit, based on two reportable segments – Network Solutions and Services & Support. Network Solutions software and hardware products provide solutions supporting fiber-, copper- and coaxial-based infrastructures and a growing number of wireless solutions, lowering the overall cost to deploy advanced services across a wide range of applications for ~~Carrier, Cable/~~carrier, cable/MSO networks and business networks, as well as for prior-generation products. ~~Our~~ Services & Support enables our customers to accelerate time to market, reduce costs and improve customer satisfaction through a complete portfolio of services, including maintenance, turnkey network implementation, solutions integration, and managed services. ADTRAN’s comprehensive network implementation services include engineering design and documentation (pre-construction), construction and installation (construction), and test, turn-up and provisioning (post-construction). Additionally, we partner with customers to tailor a program to each specific service-delivery need.

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

See Note 1514 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this ~~Form 10-Q~~report for further information regarding ~~these product~~the Company’s segments and revenue categories.

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. ~~Backlog~~Although 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 revenue 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 ~~general~~global 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, our~~Our historical financial performance is not necessarily a meaningful indicator of future results, and in general, management expects that our financial results may vary from period to period. Factors that could materially affect our business, financial condition or operating results are included in Part I, Item 1A of ~~Part I in our most recent Annual Report on~~the 2018 Form 10-K ~~for the year ended December 31, 2018, filed on February 28, 2019, with the SEC~~ and in Part II, Item 1A ~~herein.~~of this Form 10-Q.

~~Our~~There have been no material changes to our critical accounting policies and estimates ~~have not changed significantly~~ from those ~~detailed~~disclosed in our ~~most recent Annual Report~~2018 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-K~~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 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for ~~the year ended December 31, 2018, filed on February 28, 2019, with the SEC.~~additional information.

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

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

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

	Three Months Ended								Three Months Ended								Nine Months Ended
	March 31,								September 30,								September 30,
	2019				2018				2019				2018				2019				2018
Sales
Products		87.5		%		87.1		%
Services		12.5				12.9
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				100.0				100.0
Cost of Sales
Products		49.2				56.8
Services		8.7				10.3
Network Solutions										49.5				49.8				50.1				53.5
Services & Support										9.9				8.5				8.4				8.4
Total Cost of Sales		57.8				67.1				59.4				58.4				58.5				61.9
Gross Profit		42.2				32.9				40.6				41.6				41.5				38.1
Selling, general and administrative expenses		24.4				27.8				27.1				21.9				24.1				24.8
Research and development expenses		22.0				27.2				27.9				21.3				23.1				24.0
Operating Income		(4.3	)			(22.1	)
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		0.4				0.7				0.5				0.6				0.5				0.7
Interest expense		(0.1	)			(0.1	)			(0.1	)			(0.1	)			(0.1	)			(0.1	)
Net investment gain (loss)		4.1				(0.1	)			(0.2	)			3.2				2.0				1.4
Other income (expense), net		0.6				—				1.4				0.1				0.5				—
Gain on bargain purchase of a business, net		—				9.4				—				—				—				2.9
Income (Loss) Before Provision for Income Taxes		0.7				(12.2	)
(Provision) benefit for income taxes		(0.2	)			3.3
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)		0.5		%		(9.0	)	%		(40.4	)	%		5.4		%		(10.0	)	%		(2.8	)	%

Our sales ~~increased 19.0%~~decreased 18.7% from ~~$120.8~~$140.3 million infor the three months ended ~~March 31,~~September 30, 2018 to ~~$143.8~~$114.1 million infor the three months ended ~~March 31,~~September 30, 2019, and increased 6.4% from $389.2 million for the nine months ended September 30, 2018 to $414.3 million for the nine months ended September 30, 2019. The ~~increase~~decrease in sales for the three months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to ~~an $18.1~~a $26.8 million ~~increase~~decrease in Access & Aggregation ~~products,~~sales and a ~~$6.7 million increase in sales of our Subscriber Solutions & Experience products, partially offset by a $1.8~~$3.4 million decrease in sales of our Traditional & Other ~~products.~~

~~Network~~Products, partially offset by a $3.9 million increase in Subscriber Solutions ~~sales increased 19.5% from $105.3 million in the three months ended March 31, 2018 to $125.8 million in the three months ended March 31, 2019.~~& Experience sales. The increase in sales for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to ana $16.5 million increase in ~~sales of Access & Aggregation products and~~ Subscriber Solutions & Experience ~~products,~~sales and a $16.0 million increase in Access & Aggregation sales, partially offset by a $7.4 million decrease in sales of our Traditional & Other ~~products. The increase in~~Products.

Network Solutions segment sales ~~of our Access & Aggregation products~~decreased 22.3% from $121.0 million for the three months ended ~~March 31,~~September 30, 2018 to $94.0 million for the three months ended September 30, 2019, isand increased 5.2% from $341.4 million for the nine months ended September 30, 2018 to $359.0 million for the nine months ended September 30, 2019. The decrease in sales for 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 and 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 ~~fiber to the premises (FTTN) products, Gfast distribution point units (DPUs)~~Residential CPE, partially offset by a decrease in SP Business CPE and ~~fiber~~WiFi access points and ~~aggregation.~~infrastructure. The increase in sales ~~of our~~for the nine months ended September 30, 2019 was primarily attributable to an increase in Access & Aggregation and Subscriber Solutions & Experience issales. The increase in Access & Aggregation sales for the nine months ended September 30, 2019 was primarily attributable to increased FTTN products and G.fast DPUs. The increase in Subscriber Solutions & Experience for the nine months ended September 30, 2019 was primarily attributable to increased Residential CPE and fiber CPE sales, partially offset by a decrease in SP Business CPE and ~~network termination.~~WiFi access points and infrastructure. While we expect that revenue from Traditional & Other Products will continue to decline over time, this revenue may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.

Services & Support segment sales increased ~~15.5%~~4.1% from ~~$15.6~~$19.3 million infor the three months ended ~~March 31,~~September 30, 2018 to ~~$18.0~~$20.1 million infor the three months ended ~~March 31,~~September 30, 2019, and increased 15.5% from $47.8 million for the nine months ended September 30, 2018 to $55.3 million for the nine months ended September 30, 2019. The increase in sales for the three and nine months ended ~~March 31,~~September 30, 2019 iswas 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, ~~increased 21.4%~~decreased 45.3% from ~~$58.7~~$56.6 million infor the three months ended ~~March 31,~~September 30, 2018 to ~~$71.3~~$30.9 million infor the three months ended ~~March 31,~~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, ~~increased~~decreased from ~~48.6%~~40.3% for the three months ended ~~March 31,~~September 30, 2018 to ~~49.6%~~27.1% for the three months ended ~~March 31,~~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 ~~increase~~decrease in sales for the three months ended ~~March 31,~~September 30, 2019, iswas 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 LATAM and ~~APAC regions. The increase in sales in LATAM for the three months ended March 31, 2019 is~~Asia Pacific (“APAC”), primarily attributable to a network expansion ~~program~~programs of a large Tier-1 ~~customer. The increase in sales in APAC for the three months ended March 31, 2019 is primarily attributable to a network expansion program in Australia.~~customers.

Our international revenue is largely focused on broadband infrastructure and is ~~effected~~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. The competitive landscape in certain international markets is also ~~effected~~affected by the increased presence of Asian manufacturers that seek to compete aggressively on price. Our revenue and operating income in ~~our~~some international markets can be negatively impacted by a strengthening U.S. dollar. Consequently, while we expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market opportunities for us, the factors described above may result in negative pressure on revenue and operating income.

As a percentage of sales, cost of sales ~~decreased~~increased from ~~67.1% in~~58.4% for the three months ended ~~March 31,~~September 30, 2018 to ~~57.8% in~~59.4% for the three months ended ~~March 31,~~September 30, 2019 and decreased from 61.9% for the nine months ended September 30, 2018 to 58.5% for the nine months ended September 30, 2019. The ~~decrease~~increase in cost of sales as a percentage of sales for the three months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to a ~~regional revenue shift,~~decrease in volume, changes in customer and product mix and changes in services and support mix. The decrease in cost of sales as a percentage of sales for the nine months ended September 30, 2019 was primarily attributable to an increase in volume, a regional revenue shift, changes in customer and product mix, changes in services and support mix and a decrease in labor expense as a result of a restructuring program initiated in the first quarter of 2018.

Network Solutions segment cost of sales, as a ~~percent~~percentage of that segment’s sales, ~~decreased~~increased from ~~65.2% in~~57.8% for the three months ended ~~March 31,~~September 30, 2018 to ~~56.2% in~~60.0% for the three months ended ~~March 31,~~September 30, 2019 and decreased from 61.0% for the nine months ended September 30, 2018 to 57.8% for the nine months ended September 30, 2019. The ~~decrease~~increase in cost of sales as a percentage of sales for the three months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to a decrease in volume, a regional revenue shift and changes in customer and product mix. The decrease in cost of sales as a percentage of sales for the nine months ended September 30, 2019 was primarily attributable to an increase in volume, a regional revenue shift, changes in customer and product mix and a decrease in labor expense due to a restructuring program initiated in the first quarter of 2018.

An important part of our strategy is to reduce the cost of each succeeding generation of 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. 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 ~~percent~~percentage of that segment’s sales, decreased from ~~80.1% in~~61.9% for the three months ended ~~March 31,~~September 30, 2018 to ~~69.3% in~~56.4% for the three months ended ~~March 31,~~September 30, 2019 and decreased from 68.6% for the nine months ended September 30, 2018 to 63.3% for the nine months ended September 30, 2019. The decrease in cost of sales as a percentage of sales for the three months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to an increase in volume, customer mix and changes in services and support mix. The decrease in cost of sales as a percentage of sales for the nine months ended September 30, 2019 was primarily attributable to an increase in volume, lower fixed personnel costs due to a restructuring program initiated in the first quarter of ~~2081,~~2018, changes in customer mix and changes in services and support mix.

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

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

Selling, general and administrative expenses increased ~~4.8%~~0.5% from ~~$33.5~~$30.8 million infor the three months ended ~~March 31,~~September 30, 2018 to ~~$35.1~~$30.9 million infor the three months ended ~~March 31,~~September 30, 2019, and increased 3.4% from $96.4 million for the nine months ended September 30, 2018 to $99.7 million for the nine months ended September 30, 2019. The increase in selling, general and administrative expenses for the three months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to ~~increases in deferred compensation expense and~~ incremental expenses as a result of the SmartRG ~~acquisition.~~acquisition, IP litigation costs and professional and contract services offset by decreases in personnel-related expenses. The increase in selling, general and administrative expenses for the nine months ended September 30, 2019 was primarily attributable to incremental expenses as a result of the SmartRG acquisition, IP litigation costs and deferred compensation offset by a decrease in personnel-related expenses.

As a percentage of sales, selling, general and administrative expenses ~~decreased~~increased from ~~27.8% in~~21.9% for the three months ended ~~March 31,~~September 30, 2018 to ~~24.4% in~~27.1% for the three months ended ~~March 31,~~September 30, 2019, and decreased from 24.8% for the nine months ended September 30, 2018 to 24.1% for the nine months ended September 30, 2019. Selling, general and administrative expenses as a percentage of sales may fluctuate whenever there is a significant fluctuation in revenue for the periods being compared.

Research and development expenses ~~decreased 3.7%~~increased 6.6% from ~~$32.8~~$29.9 million infor the three months ended ~~March 31,~~September 30, 2018 to ~~$31.6~~$31.8 million infor the three months ended ~~March 31,~~September 30, 2019 and increased 2.2% from $93.5 million for the nine months ended September 30, 2018 to $95.5 million for the nine months ended September 30, 2019. The ~~decrease~~increase in research and development expenses for the three months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to ~~decreases in restructuring and labor expenses, partially offset by an increase~~increases in incremental expenses as a result of the SmartRG acquisition, personnel-related expenses and ~~Sumitomo acquisitions.~~restructuring expenses. The increase in research and development expense for the nine months ended September 30, 2019 was primarily attributable to increases in incremental expenses as a result of the SmartRG acquisition, contract services and lease expense, offset by a decrease in personnel-related expenses.

As a percentage of sales, research and development expenses ~~decreased~~increased from ~~27.2% in~~21.3% for the three months ended ~~March 31,~~September 30, 2018 to ~~22.0% in~~27.9% for the three months ended ~~March 31,~~September 30, 2019, and decreased from 24.0% for the nine months ended September 30, 2018 to 23.1% for the nine months ended September 30, 2019. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or significant fluctuations in revenue for the periods being compared.

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

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.

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 decreased ~~31.8%~~26.1% from ~~$0.9~~$0.8 million infor the three months ended ~~March 31,~~September 30, 2018 to $0.6 million infor the three months ended ~~March 31,~~September 30, 2019, and decreased 27.3% from $2.6 million for the nine months ended September 30, 2018 to $1.9 million for the nine months ended September 30, 2019. The ~~decrease~~changes in interest and dividend income for the three and nine months ended ~~March 31,~~September 30, 2019 iswere primarily attributable to fluctuations in investment balances.

Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.1 million ~~for both~~in the three months ended ~~March 31,~~September 30, 2018 and 2019 and $0.4 million in the nine months ended September 30, 2018 and 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) increased~~decreased from a ~~loss~~gain of ~~$(0.1)~~$4.5 million infor the three months ended ~~March 31,~~September 30, 2018 to a loss of $0.2 million for the three months ended September 30, 2019, and increased from a gain of $5.4 million for the nine months ended September 30, 2018 to a gain of ~~$5.9~~$8.2 million infor the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The fluctuation in our net investment gain ~~(loss) is~~was primarily attributable to changes in fair value onof equity securities recognized during the period. See Note 7 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, and “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

Other income (expense), net is comprised primarily of miscellaneous income and gains and losses on foreign currency ~~transactions and gains and losses on foreign exchange forward contracts.~~transactions. Other income (expense), net increased from ~~$0.1~~income of $0.2 million ~~of expense in~~for the three months ended ~~March 31,~~September 30, 2018 to ~~$0.9~~income of $1.6 million ~~of income in~~for the three months ended ~~March 31,~~September 30, 2019 and increased from expense of $0.1 million for the nine months ended September 30, 2018 to income of $2.3 million for the nine months ended September 30, 2019. The ~~change~~fluctuations in other income (expense), net for the three and nine months ended ~~March 31,~~September 30, 2019 iswas primarily attributable to ~~the receipt of insurance proceeds from a life insurance policy.~~gains on foreign currency transactions.

Gain on bargain purchase of a business, net, which was $11.3 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2018, ~~and is~~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. in March 2018. No gain on bargain purchase of a business was recorded during the three or nine months ended ~~March 31,~~September 30, 2019. ~~See Note 2 of Notes to Consolidated Financial Statements included in Item 1 of this report for additional information.~~

Our effective tax rate increased from a benefit of ~~15.1%~~135.7% for the three months ended September 30, 2018 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 ~~three~~nine months ended ~~March 31,~~September 30, 2018 to an expense of ~~28.6% three~~197.1% for the nine months ended ~~March 31,~~September 30, 2019. The increase in the effective tax rate between the two periods iswas primarily driven by the ~~shift to profitability~~establishment of a valuation allowance against our domestic deferred tax assets in the ~~current quarter.~~

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 effective income tax rates among the respective jurisdictions. See Note 4 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

As a result of the above factors, net income ~~increased $11.6~~(loss) decreased 707.8% from net income of $7.6 million for 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 279.6% from a net loss of ~~$10.8~~$10.9 million infor the ~~three~~nine months ended ~~March 31,~~September 30, 2018 to a net ~~income~~loss of ~~$0.8~~$41.4 million infor the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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 ~~March 31,~~September 30, 2019, cash on hand was ~~$109.1~~$96.4 million and short-term investments were ~~$31.3~~$28.8 million, which resulted in available short-term liquidity of ~~$140.4~~$125.2 million, of which ~~$70.2~~$62.5 million was held by our foreign subsidiaries. At December 31, 2018, cash on hand was $105.5 million and short-term investments were $3.2 million, which resulted in available short-term liquidity of $108.7 million, of which $87.1 million was held by our foreign subsidiaries. The increase in short-term liquidity from December 31, 2018 to ~~March 31,~~September 30, 2019 is primarily attributable to ~~the~~a restricted certificate of deposit ~~totaling~~of $25.6 million, which serves as collateral for our revenue bond, being reclassified from a long-term investment to a short-term ~~investment.~~investment in 2019 as it matures in January 2020.

Our working capital, which consists of current assets less current liabilities, decreased ~~0.8%~~6.6% from $237.4 million as of December 31, 2018 to ~~$235.4~~$221.9 million as of ~~March 31,~~September 30, 2019, and our current ratio, defined as current assets divided by current liabilities, decreased from 3.01 as of December 31, 2018 to ~~2.66~~2.73 as of ~~March 31,~~September 30, 2019. The ~~decreases~~decrease in our working capital and our current ratio ~~are~~was primarily attributable to the reclassification of our bond payable to current liabilities as it matures in January 2020, as well as the reclassification of the related restricted certificate of deposit from a ~~decrease in inventory.~~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 1.76 as of December 31, 2018 to ~~1.69~~1.68 as of ~~March 31,~~September 30, 2019. The decrease in the quick ratio iswas primarily attributable to the reclassification of our bond payable to current liabilities as it matures in January 2020, partially offset by an increase in ~~cash and cash equivalents and~~ short-term investments, ~~mainly~~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 ~~0.4%~~8.8% from $99.4 million at December 31, 2018 to ~~$99.0~~$90.6 million at ~~March 31,~~September 30, 2019. Our allowance for doubtful accounts was $0.1 million at December 31, 2018 and ~~March 31,~~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) decreased~~(“DSO”) increased from 65 days as of December 31, 2018 to 6273 days as of ~~March 31,~~September 30, 2019. The ~~decrease~~increase in ~~net accounts receivable~~DSO is due to the timing of ~~international~~product shipments and customer mix.

Other receivables decreased ~~5.8%~~48.4% from $36.7 million at December 31, 2018 to ~~$34.6~~$18.9 million at ~~March 31,~~September 30, 2019. The decrease in other receivables iswas primarily attributable to a decrease in ~~contract assets,~~ leased equipment receivables, repayment of certain outstanding notes receivable in the first quarter of 2019, contract manufacturers’ receivables and income tax ~~receivables partially offset by an increase in contract manufacturers’~~ receivables.

Quarterly inventory turnover ~~increased~~decreased from 3.29 turns as of December 31, 2018 to ~~3.44~~2.71 turns at ~~March 31,~~September 30, 2019. Inventory ~~decreased 6.2%~~increased 5.1% from $99.8 million at December 31, 2018 to ~~$93.6~~$104.9 million at ~~March 31,~~September 30, 2019. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to services activity and seasonal cycles of our business, ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.

Accounts payable ~~remained consistent at~~decreased 12.0% from $60.1 million at December 31, 2018 ~~and March 31,~~to $52.8 million at September 30, 2019. Accounts payable will fluctuate due to variations in the timing of the receipt of supplies, inventory and services and our subsequent payments for these purchases.

Capital expenditures totaled approximately ~~$1.9~~$6.0 million and ~~$2.0~~$5.7 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 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 ~~$4.4~~$7.3 million from $112.1 million at December 31, 2018 to ~~$116.5~~$119.4 million at ~~March 31,~~September 30, 2019. This increase reflects the impact of net realized and unrealized gains and losses on our combined investments ~~plus~~as well as new ~~investments, partially offset by cash used for share repurchases, shareholder dividends and property, plant and equipment purchases.~~investments.

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 March 31, 2019, these investments~~See Note 7 of the Notes to Condensed Consolidated Financial Statements included ~~corporate bonds~~in Part I, Item 1 of $16.0 million, municipal bonds of $0.9 million, asset-backed bonds of $7.2 million, mortgage/agency bonds of $4.5 million, U.S. government bonds of $4.2 million and foreign government bonds of $2.2 million. At December 31, 2018, these investments included corporate bonds of $20.7 million, municipal fixed-rate bonds of $1.3 million, asset-backed bonds of $5.2 million, mortgage/agency-backed bonds of $3.8 million, U.S. government bonds of $9.2 million and foreign government bonds of $0.6 million.this report for additional information. As of ~~March 31,~~September 30, 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 ~~0.96~~1.6 years with an average ~~Standard & Poor’s~~Moody’s credit rating of ~~A+.~~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 decreased 21.7% from $108.8 million at December 31, 2018 to $85.2 million at March 31, 2019. Long-term~~ investments at December 31, 2018 included an investment in a certificate of deposit of $25.6 million, which serves as collateral for our revenue bond. This certificate of deposit is now included in short-term investments as of ~~March 31,~~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 securities classified as long-term investments with a fair market value of ~~$30.9~~$32.7 million and $27.0 million, at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. Long-term investments at ~~March 31,~~September 30, 2019 and December 31, 2018 also included ~~$20.4~~$20.6 million and $18.3 million, respectively, related to our deferred compensation plans.

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 ~~three~~nine months ended ~~March 31,~~September 30, 2018. ~~No businesses were acquired during the three months ended March 31, 2019.~~ See Note 2 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, we paid dividends totaling ~~$4.3~~$12.9 million and ~~$4.4~~$13.0 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.

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

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized ~~open market repurchase transactions~~repurchases of our common stock, which are implemented through open market or private purchases from time to time as conditions warrant. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, we repurchased 13,000 shares of our common stock for $0.2 million at an average price of $14.06 per share. We currently have authorization to repurchase an additional 2.5 million shares of our common stock under the current authorization of up to 5.0 million shares.

~~There were no~~We issued 34,000 shares of treasury stock during the nine months ended September 30, 2019 to accommodate employee stock option exercises. The stock options ~~exercised~~had exercise prices ranging from $15.33 to $16.97. We received proceeds totaling $0.5 million from the exercise of these stock options during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, there have been no material changes in contractual obligations and commercial commitments from those discussed in ~~our most recent Annual Report on~~the 2018 Form 10-K, except for ~~the year ended December 31, 2018 filed on February 28, 2019 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 March 31, 2019,~~ of which $7.7 million has been applied ~~to these commitments.~~as of September 30, 2019.

We are exposed to financial market risks, including changes in ~~interest~~foreign currency rates, ~~foreign currency~~interest rates and prices of marketable equity and fixed-income securities. The primary objective of the large majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective, a majority of our marketable securities are investment grade corporate 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 ~~March 31,~~September 30, 2019, ~~$106.2~~$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 ~~March 31,~~September 30, 2019, approximately ~~$37.1~~$38.4 million of our cash and investments ~~may~~could 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 ~~March 31,~~September 30, 2019, we held ~~$10.1~~$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 ~~March 31,~~September 30, 2019 would reduce annualized interest income on our cash and investments by approximately $0.1 million. In addition, we held ~~$26.9~~$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 ~~March 31,~~September 30, 2019 would reduce the fair value of our fixed-rate bonds by approximately ~~$0.1~~$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 ~~EMEA~~Europe, 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 ~~$1.1~~$1.6 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. ~~The fluctuation compared to prior periods is due to an increase in U.S. dollar-denominated billings in a non-U.S. dollar denominated subsidiary as well as an increase in international sales.~~ Although we do not currently hold any derivative instruments, any gain or loss would be partially mitigated by these derivative instruments.

As of ~~March 31,~~September 30, 2019, we ~~have~~had certain material contracts, including accounts receivable, accounts payable and lease liabilities, denominated in foreign currencies. As of ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2019, see ~~Notes~~Note 7 ~~and 8~~ of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

~~(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 ~~Our~~Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated by the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, ~~are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in~~as 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 evaluating~~inherent limitations to the effectiveness of ~~our~~any 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, ~~have~~an 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.

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:

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.

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.

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.

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

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

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

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

January 1, 2019 – January 31, 2019

—

$
—

—

2,558,516

February 1, 2019 – February 28, 2019

13,086

$
14.06

13,086

2,545,430

March 1, 2019 – March 31, 2019

—

$
—

—

2,545,430

Total

13,086

13,086

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.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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

(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

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

	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

	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

(In thousands)	Value		Life (in years)
Developed technology	$	7,400	7
Customer relationships		1,790	3
Licensing agreements		560	5 – 10
Trade name		210	3
Total	$	9,960

	Three Months Ended			March 19 to
(In thousands)	March 31, 2019			March 31, 2018
Revenue	$	7,348		$	—
Net loss	$	(1,684	)	$	(77	)

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

		Three Months Ended
	Income Statement	March 31,
(In thousands)	Location	2019		2018
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other income (expense), net	$	—	$	13

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

(in thousands)	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 March 31,~~September 30, 2019
Weighted average remaining lease term (years)
Operating leases with USD functional currency		~~3.0~~8.4
Operating leases with Euro functional currency		~~5.1~~4.6
Weighted average discount rate
Operating leases with USD functional currency		~~4.61~~3.22	%
Operating leases with Euro functional currency		~~1.85~~1.84	%

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

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

	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	)

	Nine Months Ended September 30, 2019
(In thousands)	Unrealized Gains (Losses) on Available- for-Sale Securities			Defined Benefit Plan Adjustments			Foreign Currency Adjustments			ASU 2018-02 Adoption⁽¹⁾		Total
As of December 31, 2018	$	(563	)	$	(8,041	)	$	(5,812	)	$	—	$	(14,416	)
Other comprehensive income (loss) before reclassifications		372			—			(3,113	)		—		(2,741	)
Amounts reclassified from accumulated other comprehensive income (loss)		(95	)		361			—			—		266
Amounts reclassified to retained earnings ⁽¹⁾		—			—			—			385		385
Net current period other comprehensive income (loss)		277			361			(3,113	)		385		(2,090	)
As of September 30, 2019	$	(286	)	$	(7,680	)	$	(8,925	)	$	385	$	(16,506	)

Exhibit No.		Description

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

32		Section 1350 Certifications

~~101.INS~~101		~~XBRL Instance Document-~~The following financial statements from the ~~instance document does not appear~~Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018; (ii) Condensed Consolidated Statements of Income (Loss) for the ~~Interactive Data File because its XBRL tags are embedded within~~three and nine months ended September 30, 2019 and 2018; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the ~~Inline XBRL document.~~three and nine months ended September 30, 2019 and 2018; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2019, June 30, 2019, March 31, 2019, September 30, 2018, June 30, 2018 and March 31, 2018; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018; and (vi) Notes to Consolidated Financial Statements

~~101.SCH~~104		Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Extension Schema Document~~

~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase Document~~

~~101.LAB~~		~~XBRL Taxonomy Extension Labels Linkbase Document~~

~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase Document~~

~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase Document~~and contained in Exhibit 101)

		ADTRAN, Inc. (Registrant)


Date: ~~May 7,~~November 5, 2019		/s/ Michael Foliano
		Michael Foliano
		Senior Vice President of Finance and
		Chief Financial Officer
		~~(Principal Accounting Officer)~~

Large accelerated filer

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Non-accelerated filer

Small reporting company

Emerging growth company