UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20192020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number: 000-24612
ADTRAN, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 63-0918200 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
901 Explorer Boulevard Huntsville, Alabama | 35806-2807 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (256) 963-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, Par Value $0.01 per share |
| ADTN |
| The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 4, 2019,August 6, 2020, the registrant had 47,826,32347,957,952 shares of common stock, $0.01 par value per share, outstanding.
ADTRAN, Inc.
Quarterly Report on Form 10-Q
For the Three and NineSix Months Ended SeptemberJune 30, 20192020
Table of Contents
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| Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 – (Unaudited) |
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| Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 – (Unaudited) |
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2 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
CAUTIONARY NOTE REGARDING FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN, 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 (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 actual results to differ materially from those expressed or implied in our forward-looking statements:
| • | Our operating results may fluctuate in future periods, which may adversely affect our stock price. |
| • | Our revenues for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results. |
| • | General economic conditions may reduce our revenues and harm our operating |
• | The ongoing COVID-19 pandemic could adversely affect our business, results of operations and financial condition, including possible disruptions in our supply chain, workforce and/or customer demand. |
| • | Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could adversely affect our operating results, financial condition and cash |
| • | We expect gross margins to vary over time, and our levels of product and services gross margins may not be sustainable. |
| • | We must continue to update and improve our products and develop new products to compete and to keep pace with improvements in communications technology. |
| • | Our products may not continue to comply with evolving regulations governing their sale, which may harm our business. |
| • | We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Violations of these laws and regulations may harm our business. |
| • |
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| • | Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our global activities could subject us to penalties or other adverse consequences. |
| • | Our operating results may be adversely affected due to uncertain global economic and financial market conditions. |
| • | Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely impact our results of operations. |
| • | If our products do not interoperate with our customers’ networks, installations may be delayed or cancelled, which could harm our business. |
| • | The lengthy sales and approval process required by |
| • | Although we engage in research and development activities to develop new, innovative solutions and improve the application of developed technologies, we may miss certain market opportunities enjoyed by larger companies with substantially greater research and development resources. |
| • | We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income. |
| • | If we are unable to integrate |
| • | Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international regions may result in us not meeting our cost, quality or performance standards. |
| • | Our dependence on a limited number of suppliers for certain raw materials and key components may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results. |
| • | We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share. |
| • | Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment volumes, field service repair obligations and other rework costs incurred in correcting product failures. If our estimates change, the liability for warranty obligations may be increased or decreased, impacting future cost of goods sold. |
| • | Managing our inventory is complex and may include write-downs of excess or obsolete inventory. |
| • | The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely affect our operating results, financial condition and cash flow. |
| • | We may be adversely affected by fluctuations in currency exchange rates. |
| • | Our success depends on our ability to reduce the selling prices of succeeding generations of our products. |
| • | Breaches in our information systems and cyber-attacks could compromise our intellectual property and cause significant damage to our business and reputation. |
| • | Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality and commercial value of our products. |
3
| • | Software under license from third parties for use in certain of our products may not continue to be available to us on commercially reasonable terms. |
| • | Our use of open source software could impose limitations on our ability to commercialize our products. |
| • | We may incur liabilities or become subject to litigation that |
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| • | We depend on distributors who maintain inventories of our products. If the distributors reduce their inventories of these products, our sales could be adversely affected. |
| • | If we are unable to successfully develop and maintain relationships with system integrators, service providers and enterprise value-added resellers, our sales may be negatively affected. |
| • | If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted. |
| • | New or revised tax regulations, changes in our effective tax rate or assessments arising from tax audits may have an adverse impact on our results. |
| • | We are required to periodically evaluate the value of our deferred tax assets and long-lived assets, including the value of our intangibles |
| • | We may not fully realize the anticipated benefits of our restructuring plans. Our restructuring efforts may adversely affect our business and our operating results. |
| • | Our success depends on attracting and retaining key personnel. |
| • | Regulatory and potential physical impacts of climate change and other natural events may affect our customers and our production operations, resulting in adverse effects on our operating results. |
| • | The price of our common stock has been volatile and may continue to fluctuate significantly. |
The foregoing list of risks is not exclusive. For a more detailed description of the risk factors associated with our business, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on February 28, 2019 (as amended on September 20, 2019, the “201825, 2020 (the “2019 Form 10-K”), as well as the risk factors set forth in Part II, Item 1A of this Quarterly Report on 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.
4
GLOSSARY OF SELECTED TERMS
Below are certain acronyms, concepts and defined terms commonly used in our industry and in this Quarterly Report on Form 10-Q, along with their meanings:
Acronym/Concept/ Defined Term | Meaning |
carrier | An entity that provides voice, data or video services to consumers and businesses |
CPE | Customer-Premises Equipment |
CSP | Communication Service Provider |
DSO | Days Sales Outstanding |
FCC | Federal Communications Commission |
FTTN | Fiber to the Node |
Gfast | A digital subscriber line protocol standard for local loops (telephone lines) shorter than 500 meters with performance targets between 100 Mbps (as defined below) and 1 gigabit per second, depending on loop length |
LAN | Local Area Network |
MSO | Multiple System Operator |
PON | Passive Optical Network |
SD-Access | Software Defined Access |
SP | Service Provider |
U.S. | United States |
WAN | Wide Area Network |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADTRAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
|
| September 30, |
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| December 31, |
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| June 30, |
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| December 31, |
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| 2019 |
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| 2018 |
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| 2020 |
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| 2019 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
| $ | 96,407 |
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| $ | 105,504 |
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| $ | 69,059 |
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| $ | 73,773 |
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Restricted cash |
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| 1,186 |
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|
| — |
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Short-term investments |
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| 28,754 |
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| 3,246 |
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| 9,033 |
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| 33,243 |
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Accounts receivable, less allowance for doubtful accounts of $81 and $128 at September 30, 2019 and December 31, 2018, respectively |
|
| 90,647 |
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| 99,385 |
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Accounts receivable, less allowance for doubtful accounts of $38 as of June 30, 2020 and December 31, 2019 |
|
| 95,335 | �� |
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| 90,531 |
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Other receivables |
|
| 18,927 |
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| 36,699 |
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| 26,026 |
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| 16,566 |
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Inventory, net |
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| 104,941 |
|
|
| 99,848 |
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Inventory |
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| 106,131 |
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| 98,305 |
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Prepaid expenses and other current assets |
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| 10,327 |
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| 10,744 |
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| 8,104 |
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| 7,892 |
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Total Current Assets |
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| 350,003 |
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| 355,426 |
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| 314,874 |
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| 320,310 |
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Property, plant and equipment, net |
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| 73,384 |
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| 80,635 |
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| 65,194 |
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| 68,086 |
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Deferred tax assets, net |
|
| 6,492 |
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| 37,187 |
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| 7,573 |
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| 7,561 |
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Goodwill |
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| 6,968 |
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| 7,106 |
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| 6,968 |
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| 6,968 |
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Intangibles, net |
|
| 29,113 |
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| 33,183 |
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| 25,455 |
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| 27,821 |
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Other assets |
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| 23,283 |
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| 5,668 |
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| 18,225 |
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| 19,883 |
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Long-term investments |
|
| 90,632 |
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| 108,822 |
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| 84,383 |
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|
| 94,489 |
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Total Assets |
| $ | 579,875 |
|
| $ | 628,027 |
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| $ | 522,672 |
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| $ | 545,118 |
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
| $ | 52,842 |
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| $ | 60,054 |
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| $ | 62,465 |
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| $ | 44,870 |
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Bonds payable |
|
| 25,600 |
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| 1,000 |
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|
| — |
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| 24,600 |
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Unearned revenue |
|
| 14,022 |
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| 17,940 |
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| 12,090 |
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|
| 11,963 |
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Accrued expenses |
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| 15,697 |
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| 11,746 |
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Accrued expenses and other liabilities |
|
| 12,466 |
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| 13,876 |
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Accrued wages and benefits |
|
| 16,569 |
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| 14,752 |
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| 17,683 |
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|
| 13,890 |
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Income tax payable, net |
|
| 3,420 |
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|
| 12,518 |
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|
| 2,450 |
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|
| 3,512 |
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Total Current Liabilities |
|
| 128,150 |
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|
| 118,010 |
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|
| 107,154 |
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|
| 112,711 |
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Non-current unearned revenue |
|
| 4,581 |
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| 5,296 |
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| 6,166 |
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| 6,012 |
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Pension liability |
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| 15,649 |
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| 15,886 |
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Deferred compensation liability |
|
| 21,908 |
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| 21,698 |
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Other non-current liabilities |
|
| 52,189 |
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| 33,842 |
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|
| 7,601 |
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|
| 8,385 |
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Bonds payable |
|
| — |
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| 24,600 |
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Total Liabilities |
|
| 184,920 |
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|
| 181,748 |
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|
| 158,478 |
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| 164,692 |
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Commitments and contingencies (see Note 16) |
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Commitments and contingencies (see Note 18) |
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Stockholders’ Equity |
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Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,826 shares outstanding at September 30, 2019 and 79,652 shares issued and 47,751 shares outstanding at December 31, 2018 |
|
| 797 |
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| 797 |
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Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 47,957 shares outstanding as of June 30, 2020 and 79,652 shares issued and 48,020 shares outstanding as of December 31, 2019 |
|
| 797 |
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| 797 |
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Additional paid-in capital |
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| 272,854 |
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| 267,670 |
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| 278,078 |
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| 274,632 |
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Accumulated other comprehensive loss |
|
| (16,506 | ) |
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| (14,416 | ) |
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| (15,346 | ) |
|
| (16,417 | ) | |
Retained earnings |
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| 827,783 |
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| 883,975 |
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| 787,220 |
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| 806,702 |
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Treasury stock at cost: 31,826 and 31,901 shares at September 30, 2019 and December 31, 2018, respectively |
|
| (689,973 | ) |
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| (691,747 | ) | |||||||||
Treasury stock at cost: 31,568 and 31,636 shares at June 30, 2020 and December 31, 2019, respectively |
|
| (686,555 | ) |
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| (685,288 | ) | |||||||||
Total Stockholders’ Equity |
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| 394,955 |
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| 446,279 |
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| 364,194 |
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| 380,426 |
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Total Liabilities and Stockholders’ Equity |
| $ | 579,875 |
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| $ | 628,027 |
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| $ | 522,672 |
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| $ | 545,118 |
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See accompanying notes to condensed consolidated financial statements.
5
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
|
| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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| Six Months Ended |
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|
| September 30, |
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| September 30, |
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| June 30, |
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| June 30, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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Sales |
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Network Solutions |
| $ | 94,018 |
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| $ | 121,043 |
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| $ | 359,007 |
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| $ | 341,359 |
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| $ | 111,323 |
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| $ | 139,167 |
|
| $ | 208,695 |
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| $ | 264,989 |
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Services & Support |
|
| 20,074 |
|
|
| 19,292 |
|
|
| 55,267 |
|
|
| 47,830 |
|
|
| 17,392 |
|
|
| 17,224 |
|
|
| 34,543 |
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|
| 35,193 |
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Total Sales |
|
| 114,092 |
|
|
| 140,335 |
|
|
| 414,274 |
|
|
| 389,189 |
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|
| 128,715 |
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|
| 156,391 |
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|
| 243,238 |
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|
| 300,182 |
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Cost of Sales |
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|
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|
|
|
|
|
|
|
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|
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|
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Network Solutions |
|
| 56,444 |
|
|
| 69,943 |
|
|
| 207,353 |
|
|
| 208,184 |
|
|
| 64,071 |
|
|
| 80,175 |
|
|
| 115,697 |
|
|
| 150,909 |
|
Services & Support |
|
| 11,317 |
|
|
| 11,944 |
|
|
| 34,963 |
|
|
| 32,828 |
|
|
| 11,172 |
|
|
| 11,201 |
|
|
| 22,469 |
|
|
| 23,646 |
|
Total Cost of Sales |
|
| 67,761 |
|
|
| 81,887 |
|
|
| 242,316 |
|
|
| 241,012 |
|
|
| 75,243 |
|
|
| 91,376 |
|
|
| 138,166 |
|
|
| 174,555 |
|
Gross Profit |
|
| 46,331 |
|
|
| 58,448 |
|
|
| 171,958 |
|
|
| 148,177 |
|
|
| 53,472 |
|
|
| 65,015 |
|
|
| 105,072 |
|
|
| 125,627 |
|
Selling, general and administrative expenses |
|
| 30,912 |
|
|
| 30,750 |
|
|
| 99,663 |
|
|
| 96,361 |
|
|
| 30,799 |
|
|
| 33,619 |
|
|
| 57,419 |
|
|
| 68,751 |
|
Research and development expenses |
|
| 31,835 |
|
|
| 29,877 |
|
|
| 95,546 |
|
|
| 93,455 |
|
|
| 28,712 |
|
|
| 32,064 |
|
|
| 58,571 |
|
|
| 63,711 |
|
Gain on contingency |
|
| — |
|
|
| (1,230 | ) |
|
| — |
|
|
| (1,230 | ) | ||||||||||||||||
Asset impairments |
|
| 3,872 |
|
|
| — |
|
|
| 3,872 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 65 |
|
|
| — |
|
Gain on contingency |
|
| — |
|
|
| — |
|
|
| (1,230 | ) |
|
| — |
| ||||||||||||||||
Operating Loss |
|
| (20,288 | ) |
|
| (2,179 | ) |
|
| (25,893 | ) |
|
| (41,639 | ) | ||||||||||||||||
Operating Income (Loss) |
|
| (6,039 | ) |
|
| 562 |
|
|
| (10,983 | ) |
|
| (5,605 | ) | ||||||||||||||||
Interest and dividend income |
|
| 610 |
|
|
| 825 |
|
|
| 1,893 |
|
|
| 2,604 |
|
|
| 331 |
|
|
| 692 |
|
|
| 687 |
|
|
| 1,283 |
|
Interest expense |
|
| (128 | ) |
|
| (134 | ) |
|
| (382 | ) |
|
| (398 | ) |
|
| — |
|
|
| (127 | ) |
|
| (1 | ) |
|
| (254 | ) |
Net investment gain (loss) |
|
| (216 | ) |
|
| 4,507 |
|
|
| 8,195 |
|
|
| 5,400 |
|
|
| 9,852 |
|
|
| 2,485 |
|
|
| (1,025 | ) |
|
| 8,411 |
|
Other income (expense), net |
|
| 1,616 |
|
|
| 201 |
|
|
| 2,266 |
|
|
| (73 | ) |
|
| (1,757 | ) |
|
| (205 | ) |
|
| (628 | ) |
|
| 650 |
|
Gain on bargain purchase of a business, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,322 |
| ||||||||||||||||
Income (Loss) Before Income Taxes |
|
| (18,406 | ) |
|
| 3,220 |
|
|
| (13,921 | ) |
|
| (22,784 | ) |
|
| 2,387 |
|
|
| 3,407 |
|
|
| (11,950 | ) |
|
| 4,485 |
|
Income tax (expense) benefit |
|
| (27,717 | ) |
|
| 4,369 |
|
|
| (27,437 | ) |
|
| 11,889 |
|
|
| (1,635 | ) |
|
| 588 |
|
|
| 2,733 |
|
|
| 280 |
|
Net Income (Loss) |
| $ | (46,123 | ) |
| $ | 7,589 |
|
| $ | (41,358 | ) |
| $ | (10,895 | ) |
| $ | 752 |
|
| $ | 3,995 |
|
| $ | (9,217 | ) |
| $ | 4,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic |
|
| 47,824 |
|
|
| 47,710 |
|
|
| 47,803 |
|
|
| 47,927 |
|
|
| 47,958 |
|
|
| 47,802 |
|
|
| 47,957 |
|
|
| 47,792 |
|
Weighted average shares outstanding – diluted |
|
| 47,824 |
|
|
| 47,834 |
|
|
| 47,803 |
|
|
| 47,927 |
|
|
| 48,254 |
|
|
| 48,036 |
|
|
| 47,957 |
|
|
| 47,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share – basic |
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
| $ | 0.02 |
|
| $ | 0.08 |
|
| $ | (0.19 | ) |
| $ | 0.10 |
|
Earnings (loss) per common share – diluted |
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
| $ | 0.02 |
|
| $ | 0.08 |
|
| $ | (0.19 | ) |
| $ | 0.10 |
|
See accompanying notes to condensed consolidated financial statements.
6
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Net Income (Loss) |
| $ | (46,123 | ) |
| $ | 7,589 |
|
| $ | (41,358 | ) |
| $ | (10,895 | ) |
| $ | 752 |
|
| $ | 3,995 |
|
| $ | (9,217 | ) |
| $ | 4,765 |
|
Other Comprehensive Loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net unrealized gains (losses) on available-for-sale securities |
|
| (15 | ) |
|
| (32 | ) |
|
| 277 |
|
|
| (3,340 | ) | ||||||||||||||||
Other Comprehensive Income (Loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net unrealized gains on available-for-sale securities |
|
| 373 |
|
|
| 107 |
|
|
| 490 |
|
|
| 292 |
| ||||||||||||||||
Defined benefit plan adjustments |
|
| 90 |
|
|
| 37 |
|
|
| 361 |
|
|
| 104 |
|
|
| 191 |
|
|
| 150 |
|
|
| 332 |
|
|
| 271 |
|
Foreign currency translation |
|
| (2,486 | ) |
|
| (451 | ) |
|
| (3,113 | ) |
|
| (3,033 | ) |
|
| 1,899 |
|
|
| 533 |
|
|
| 249 |
|
|
| (627 | ) |
Other Comprehensive Loss, net of tax |
|
| (2,411 | ) |
|
| (446 | ) |
|
| (2,475 | ) |
|
| (6,269 | ) | ||||||||||||||||
Other Comprehensive Income (Loss), net of tax |
|
| 2,463 |
|
|
| 790 |
|
|
| 1,071 |
|
|
| (64 | ) | ||||||||||||||||
Comprehensive Income (Loss), net of tax |
| $ | (48,534 | ) |
| $ | 7,143 |
|
| $ | (43,833 | ) |
| $ | (17,164 | ) |
| $ | 3,215 |
|
| $ | 4,785 |
|
| $ | (8,146 | ) |
| $ | 4,701 |
|
See accompanying notes to condensed consolidated financial statements.
7
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
| Common Shares |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Loss |
|
| Total Stockholders' Equity |
|
| 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 |
| ||||||||||||||||||||||||||||
Balance as of January 1, 2019 |
|
| 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 |
| ||||||||||||||||||||||||||||
Adoption of new accounting standards |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (381 | ) |
|
| — |
|
|
| 385 |
|
|
| 4 |
| ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (854 | ) |
|
| (854 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (854 | ) |
|
| (854 | ) |
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,301 | ) |
|
| — |
|
|
| — |
|
|
| (4,301 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,301 | ) |
|
| — |
|
|
| — |
|
|
| (4,301 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18 | ) |
|
| — |
|
|
| — |
|
|
| (18 | ) |
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (865 | ) |
|
| 857 |
|
|
| — |
|
|
| (8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (865 | ) |
|
| 857 |
|
|
| — |
|
|
| (8 | ) |
Purchases of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (184 | ) |
|
| — |
|
|
| (184 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (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 |
| ||||||||||||||||||||||||||||
Balance as of March 31, 2019 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 269,529 |
|
| $ | 879,180 |
|
| $ | (691,074 | ) |
| $ | (14,885 | ) |
| $ | 443,547 |
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,995 |
|
|
| — |
|
|
| — |
|
|
| 3,995 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,995 |
|
|
| — |
|
|
| — |
|
|
| 3,995 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 790 |
|
|
| 790 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 790 |
|
|
| 790 |
|
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,303 | ) |
|
| — |
|
|
| — |
|
|
| (4,303 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,303 | ) |
|
| — |
|
|
| — |
|
|
| (4,303 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| — |
|
|
| — |
|
|
| (34 | ) |
Stock options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (208 | ) |
|
| 734 |
|
|
| — |
|
|
| 526 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (208 | ) |
|
| 734 |
|
|
| — |
|
|
| 526 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,454 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,454 |
|
|
| — |
|
|
| — |
|
|
| 1,454 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,454 |
|
Balance at June 30, 2019 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 270,983 |
|
| $ | 878,630 |
|
| $ | (690,340 | ) |
| $ | (14,095 | ) |
| $ | 445,975 |
|
|
| 79,652 |
|
| $ | 797 |
|
| $ | 270,983 |
|
| $ | 878,630 |
|
| $ | (690,340 | ) |
| $ | (14,095 | ) |
| $ | 445,975 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (46,123 | ) |
|
| — |
|
|
| — |
|
|
| (46,123 | ) | ||||||||||||||||||||||||||||
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,411 | ) |
|
| (2,411 | ) | ||||||||||||||||||||||||||||
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,304 | ) |
|
| — |
|
|
| — |
|
|
| (4,304 | ) | ||||||||||||||||||||||||||||
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 42 |
|
|
| — |
|
|
| — |
|
|
| 42 |
| ||||||||||||||||||||||||||||
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (462 | ) |
|
| 367 |
|
|
| — |
|
|
| (95 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,871 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,871 |
| ||||||||||||||||||||||||||||
Balance at September 30, 2019 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 272,854 |
|
| $ | 827,783 |
|
| $ | (689,973 | ) |
| $ | (16,506 | ) |
| $ | 394,955 |
|
See accompanying notes to condensed consolidated financial statements.
8
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
|
| Common Shares |
|
| Common Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Loss |
|
| Total Stockholders' Equity |
|
| 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 |
| ||||||||||||||||||||||||||||
Balance as of January 1, 2020 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 274,632 |
|
| $ | 806,702 |
|
| $ | (685,288 | ) |
| $ | (16,417 | ) |
| $ | 380,426 |
| ||||||||||||||||||||||||||||
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,670 | ) |
|
| — |
|
|
| — |
|
|
| (7,670 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,969 | ) |
|
| — |
|
|
| — |
|
|
| (9,969 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,315 | ) |
|
| (3,315 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,392 | ) |
|
| (1,392 | ) |
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,312 | ) |
|
| — |
|
|
| — |
|
|
| (4,312 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,328 | ) |
|
| — |
|
|
| — |
|
|
| (4,328 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (32 | ) |
|
| — |
|
|
| — |
|
|
| (32 | ) |
Deferred compensation adjustments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,758 | ) |
|
| — |
|
|
| (2,758 | ) | ||||||||||||||||||||||||||||
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (49 | ) |
|
| 49 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,524 | ) |
|
| 1,501 |
|
|
| — |
|
|
| (23 | ) |
Purchases of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,603 | ) |
|
| — |
|
|
| (2,603 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,784 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,784 |
|
|
| — |
|
|
| — |
|
|
| 1,791 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,791 |
|
Balance at June 30, 2018 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 264,118 |
|
| $ | 897,587 |
|
| $ | (693,757 | ) |
| $ | (9,118 | ) |
| $ | 459,627 |
| ||||||||||||||||||||||||||||
Balance as of March 31, 2020 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 276,423 |
|
| $ | 790,849 |
|
| $ | (686,545 | ) |
| $ | (17,809 | ) |
| $ | 363,715 |
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,589 |
|
|
| — |
|
|
| — |
|
|
| 7,589 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 752 |
|
|
| — |
|
|
| — |
|
|
| 752 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (446 | ) |
|
| (446 | ) | ||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,463 |
|
|
| 2,463 |
| ||||||||||||||||||||||||||||
Dividend payments ($0.09 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,297 | ) |
|
| — |
|
|
| — |
|
|
| (4,297 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,337 | ) |
|
| — |
|
|
| — |
|
|
| (4,337 | ) |
Dividends accrued on unvested RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28 | ) |
|
| — |
|
|
| — |
|
|
| (28 | ) |
Stock options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (385 | ) |
|
| 1,337 |
|
|
| — |
|
|
| 952 |
| ||||||||||||||||||||||||||||
Deferred compensation adjustments, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24 | ) |
|
|
|
|
|
| (24 | ) | ||||||||||||||||||||||||||||
PSUs, RSUs and restricted stock vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (150 | ) |
|
| 118 |
|
|
| — |
|
|
| (32 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16 | ) |
|
| 14 |
|
|
| — |
|
|
| (2 | ) |
Purchases of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,412 | ) |
|
| — |
|
|
| (1,412 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 1,640 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,640 |
|
|
| — |
|
|
| — |
|
|
| 1,655 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,655 |
|
Balance at September 30, 2018 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 265,758 |
|
| $ | 900,324 |
|
| $ | (693,714 | ) |
| $ | (9,564 | ) |
| $ | 463,601 |
| ||||||||||||||||||||||||||||
Balance at June 30, 2020 |
|
| 79,652 |
|
| $ | 797 |
|
| $ | 278,078 |
|
| $ | 787,220 |
|
| $ | (686,555 | ) |
| $ | (15,346 | ) |
| $ | 364,194 |
|
See accompanying notes to condensed consolidated financial statements.
9
ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| September 30, |
|
| June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (41,358 | ) |
| $ | (10,895 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | (9,217 | ) |
| $ | 4,765 |
| ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 13,315 |
|
|
| 11,952 |
|
|
| 8,404 |
|
|
| 8,913 |
|
Asset impairments |
|
| 3,872 |
|
|
| — |
|
|
| 65 |
|
|
| — |
|
Amortization of net premium (discount) on available-for-sale investments |
|
| (86 | ) |
|
| (14 | ) | ||||||||
Net gain on long-term investments |
|
| (8,195 | ) |
|
| (5,400 | ) | ||||||||
Amortization of net premium on available-for-sale investments |
|
| 86 |
|
|
| (57 | ) | ||||||||
Net (gain) loss on long-term investments |
|
| 1,025 |
|
|
| (8,411 | ) | ||||||||
Net loss on disposal of property, plant and equipment |
|
| 58 |
|
|
| 68 |
|
|
| 52 |
|
|
| 58 |
|
Gain on contingency |
|
| (1,230 | ) |
|
| — |
|
|
| — |
|
|
| (1,230 | ) |
Gain on life insurance proceeds |
|
| (1,000 | ) |
|
| — |
|
|
| — |
|
|
| (1,000 | ) |
Gain on bargain purchase of a business |
|
| — |
|
|
| (11,322 | ) | ||||||||
Stock-based compensation expense |
|
| 5,184 |
|
|
| 5,243 |
|
|
| 3,446 |
|
|
| 3,313 |
|
Deferred income taxes |
|
| 30,421 |
|
|
| (20,368 | ) |
|
| (5 | ) |
|
| (1,880 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 7,603 |
|
|
| 41,166 |
|
|
| (4,727 | ) |
|
| (17,288 | ) |
Other receivables |
|
| 17,645 |
|
|
| (1,842 | ) |
|
| (9,468 | ) |
|
| 11,678 |
|
Inventory, net |
|
| (5,998 | ) |
|
| 16,543 |
| ||||||||
Inventory |
|
| (7,878 | ) |
|
| 4,612 |
| ||||||||
Prepaid expenses and other assets |
|
| (10,071 | ) |
|
| 8,722 |
|
|
| 1,444 |
|
|
| 4,715 |
|
Accounts payable, net |
|
| (5,569 | ) |
|
| 5,223 |
|
|
| 17,389 |
|
|
| 5,009 |
|
Accrued expenses and other liabilities |
|
| 10,564 |
|
|
| 156 |
|
|
| 2,097 |
|
|
| 640 |
|
Income tax payable |
|
| (5,073 | ) |
|
| 9,461 |
| ||||||||
Income taxes payable |
|
| (1,032 | ) |
|
| (2,830 | ) | ||||||||
Net cash provided by operating activities |
|
| 10,082 |
|
|
| 48,693 |
|
|
| 1,681 |
|
|
| 11,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (6,008 | ) |
|
| (5,695 | ) |
|
| (3,148 | ) |
|
| (4,307 | ) |
Proceeds from sales and maturities of debt and equity investments |
|
| 38,561 |
|
|
| 116,757 |
| ||||||||
Purchases of debt and equity investments |
|
| (37,223 | ) |
|
| (115,271 | ) | ||||||||
Proceeds from sales and maturities of available-for-sale investments |
|
| 63,318 |
|
|
| 24,306 |
| ||||||||
Purchases of available-for-sale investments |
|
| (31,897 | ) |
|
| (21,544 | ) | ||||||||
Acquisition of note receivable |
|
| (523 | ) |
|
| — |
| ||||||||
Life insurance proceeds received |
|
| 1,000 |
|
|
| — |
|
|
| — |
|
|
| 1,000 |
|
Acquisition of business |
|
| 13 |
|
|
| (7,806 | ) |
|
| — |
|
|
| 13 |
|
Net cash used in investing activities |
|
| (3,657 | ) |
|
| (12,015 | ) | ||||||||
Net cash provided by (used in) investing activities |
|
| 27,750 |
|
|
| (532 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises |
|
| 526 |
|
|
| 1,321 |
|
|
| — |
|
|
| 526 |
|
Purchases of treasury stock |
|
| (184 | ) |
|
| (14,185 | ) |
|
| — |
|
|
| (184 | ) |
Dividend payments |
|
| (12,908 | ) |
|
| (12,976 | ) |
|
| (8,665 | ) |
|
| (8,604 | ) |
Repayment of bonds payable |
|
| (24,600 | ) |
|
| — |
| ||||||||
Net cash used in financing activities |
|
| (12,566 | ) |
|
| (25,840 | ) |
|
| (33,265 | ) |
|
| (8,262 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| (6,141 | ) |
|
| 10,838 |
| ||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| (3,834 | ) |
|
| 2,213 |
| ||||||||
Effect of exchange rate changes |
|
| (2,956 | ) |
|
| (3,098 | ) |
|
| 306 |
|
|
| (900 | ) |
Cash and cash equivalents, beginning of period |
|
| 105,504 |
|
|
| 86,433 |
| ||||||||
Cash and cash equivalents, end of period |
| $ | 96,407 |
|
| $ | 94,173 |
| ||||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 73,773 |
|
|
| 105,504 |
| ||||||||
Cash, cash equivalents and restricted cash, end of period |
| $ | 70,245 |
|
| $ | 106,817 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment included in accounts payable |
| $ | 135 |
|
| $ | 355 |
|
| $ | 198 |
|
| $ | 205 |
|
See accompanying notes to condensed consolidated financial statements.
10
ADTRAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (“ADTRAN”, the “Company”, “we”, “our” or “us”) have been prepared pursuant to the rules and regulations 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 (“U.S. GAAP”) for complete financial statements are not included herein. The December 31, 20182019 Condensed Consolidated Balance Sheet is derived from audited financial statements but does not include all disclosures required by U.S. 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, 2018,2019, filed with the SEC on February 28, 2019 (as amended on September 20, 2019, the “2018 Form 10-K”).25, 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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. OurThe more significant estimates include the excess and obsolete inventory reserves, warranty reserves, customer rebates, determination and accrual of the deferred and accrued revenue components of multiple performance obligationsmulti-element sales agreements, estimated costs to complete obligations associated with deferred and accrued revenue,revenues and network installations, estimated income tax provision and income tax contingencies, the fair value of stock-based compensation, impairmentassessment of goodwill valuation and other intangibles for impairment, estimated lives of intangible assets, estimated pension liability fair value of investments and the evaluation of other-than-temporary declines in thefair value of investments. Actual amounts could differ significantly from these estimates.
DuringWe assessed certain accounting matters that generally require consideration of forecasted financial information in context with the three monthsinformation reasonably available to us and the unknown future impacts of the novel coronavirus (“COVID-19”) as of June 30, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the allowance for doubtful accounts, current estimated credit losses, stock-based compensation, carrying value of goodwill, intangibles and other long-lived assets, financial assets, valuation allowances for tax assets and revenue recognition. While there was not a material impact to our consolidated financial statements as of and for the quarter 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 equal2020 resulting from these assessments, future conditions related to the difference between the costmagnitude and duration 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.COVID-19 pandemic, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.
Correction of Immaterial Misstatements
During the three months ended June 30, 2019, the Company determined that there was an immaterial misstatement of its excess and obsolete inventory reserves in its previously issued annual and interim financial statements. The Company corrected this misstatement by recognizing a $0.8 million out-of-period adjustment during the three months ended June 30, 2019, which increased its excess and obsolete inventory reservesreserve 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’sits excess and obsolete inventory reservesreserve and cost of goods sold. In addition, the Company determined that a $1.0$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 ninesix months ended SeptemberJune 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 on both a quantitative and qualitative basis.
During the first quarter of 2020, it was determined that certain investments held in the Company’s stock for a deferred compensation plan accounted for as a Rabbi trust were incorrectly classified as long-term investments with the fair value of such investments incorrectly marked to market at each period end rather than classified as treasury stock held at historical cost. This plan has been in existence since 2011. The Company corrected this misstatement as an out-of-period adjustment in the three months ended March 31, 2020 by remeasuring the investment assets to their historical cost basis through the recording of a net investment gain of $1.5 million in the unaudited Condensed Consolidated Statement of Income (Loss) and then correcting the classification by decreasing the long-term investment balance at its remeasured cost basis of $2.8 million to treasury stock in the unaudited Condensed Consolidated Balance Sheet as of March 31, 2020. Management has determined that this misstatement was not material to any of its previously issued financial statements and that correction of the misstatementsmisstatement is also not expected to be material to the current or estimated2020 annual 2019 financial results on either a quantitative andor qualitative basis.
11
RecentRecently Adopted Accounting Pronouncements Not Yet Adopted
During 2020, we adopted the following accounting standards, which had the following impacts on our consolidated financial statements:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, which clarifies 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.standard for leases. 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 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. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which makes various narrow-scope amendments to the new credit losses standard, such as providing disclosure relief for accrued interest receivables. All of these ASUs arewere codified as part of ASC Topic 326 and were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early2019. The Company adopted this standard on January 1, 2020, using a modified-retrospective approach and, therefore, elected to carry forward legacy disclosures for comparative periods and did not adjust the comparative period financial information. Additionally, the Company made an accounting policy election, at the class of financing receivable, not to measure the allowance for credit losses for accrued interest receivables, as the Company writes off the uncollectable accrued interest receivable by reversing any previously recorded interest income in a timely manner (as soon as these amounts are determined to be uncollectable). The adoption permitted. We are currently evaluating theof this standard did not have a material effect these ASUs will have on our consolidated financial statements.See Note 19 for additional information.
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 beare 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 iswas 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 performed2019. The Company adopted ASU 2017-04 on testing dates after January 1, 2017. The2020, and the amendments should bewere applied prospectively. We are currently evaluating whether to early adopt ASU 2017-04, but doThe adoption of this standard did 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-ChangesFramework – 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, 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. The Company adopted ASU 2018-13 is effective for fiscal years,on January 1, 2020, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the effectadoption of ASU 2018-13, but dothis standard did not expect it will have a material effect on our consolidated financial statement disclosures.statements.
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. The Company adopted ASU 2018-15 on January 1, 2020, retrospectively. The adoption of this standard resulted in a reclassification of $5.6 million from property, plant and equipment to other assets for certain previously capitalized costs related to information technology implementation projects that had not yet been placed in service on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019. There was no impact to previously reported net cash provided by (used in) operations on the statement of cash flows and no impact to the statements of income (loss) as no portion of the capitalized asset was depreciated in prior periods.
The following table illustrates the impact of adoption of ASU 2018-15 on the Condensed Consolidated Balance Sheet as of December 31, 2019:
|
| As of December 31, 2019 |
| |||||||||
(In thousands) |
| Pre-Adoption |
|
| Effect of Adoption |
|
| As Presented Now |
| |||
Condensed Consolidated Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
| $ | 73,708 |
|
| $ | (5,622 | ) |
| $ | 68,086 |
|
Other assets |
| $ | 14,261 |
|
| $ | 5,622 |
|
| $ | 19,883 |
|
The following table illustrates the impact of adoption of ASU 2018-15 on the Condensed Consolidated Statement of Income for the three and six months ended June 30, 2019 and the Condensed Consolidated Statement of Cash Flows for six months ended June 30, 2019:
|
| Three months ended June 30, 2019 |
| |||||||||
(In thousands) |
| Pre-Adoption |
|
| Effect of Adoption |
|
| As Presented Now |
| |||
Condensed Consolidated Statement of Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 3,995 |
|
| $ | — |
|
| $ | 3,995 |
|
|
| Six months ended June 30, 2019 |
| |||||||||
(In thousands) |
| Pre-Adoption |
|
| Effect of Adoption |
|
| As Presented Now |
| |||
Condensed Consolidated Statement of Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 4,765 |
|
| $ | — |
|
| $ | 4,765 |
|
Condensed Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| $ | 11,007 |
|
| $ | — |
|
| $ | 11,007 |
|
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments in this update also simplify the accounting for income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company early adopted ASU 2019-12 on April 1, 2020, which will be applied on a prospective basis as if the Company adopted the standard on January 1, 2020. The Company early adopted the standard to take advantage of the simplification of rules for income taxes on intra-period tax allocations. Specifically, the adoption of this standard resulted in the recognition of approximately $0.1 million of tax benefit in other comprehensive income (loss), that otherwise would have been recognized in continuing operations had the intra-period tax allocation been completed. There were no other impacts from this standard on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income (Loss) or Condensed Consolidated Statements of Cash Flows.
Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU2018-14, Compensation-Retirement Benefits-DefinedCompensation – Retirement Benefits – Defined Benefit Plans-GeneralPlans – General (Subtopic 715-20): Disclosure Framework-ChangesFramework – Changes to the Disclosure Requirements for Defined Benefit Plans, which makes changes to and clarifies the disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 requires additional disclosures related to the reasons for significant gains and losses affecting the benefit obligation and an explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in other disclosures required by ASC 715. ASU 2018-14 also clarifies the guidance in ASC 715 to require disclosure of the projected benefit obligation (“PBO”) and fair value of plan assets for pension plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for pension plans with ABOs in excess of plan assets. ASU 2018-14 is effective for public business entities for fiscal years ending after December 15, 2020. We areThe Company is currently evaluating the effect of ASU 2018-14, but do not expect itimpact this guidance will have a material effect on our financial statementits related disclosures.
In August 2018,2. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurredconsolidated balance sheet that sum to the total of the same such amounts shown in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies certain aspectsthe consolidated statement 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.
12
Recently Adopted Accounting Pronouncements
During 2019, we adopted the following accounting standards, which had the following impacts on our consolidated financial statements:cash flows:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), 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 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 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
(In thousands) |
| June 30, 2020 |
| |
Cash and cash equivalents |
| $ | 69,059 |
|
Restricted cash |
|
| 1,186 |
|
Cash, cash equivalents and restricted cash |
| $ | 70,245 |
|
The Company adopted the new standard on January 1, 2019, the effective date of our initial application, using the optional transition method. At that time, the Company elected to carry forward the legacy ASC 840 disclosures for comparative periods and, therefore, did not adjust the comparative period financial information prior to January 1, 2019. In addition, the Company elected the package of practical expedients which allows for companies to not reassess whether0t have 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 millionrestricted cash as of January 1, 2019, primarily related to our operating leases for office space, automobiles and other equipment. June 30, 2019.
As a lessee, the adoption of this standard did not have a material impact on our Condensed Consolidated Statement of Income or Statement of Cash Flows. See Note 1218 for additional information.
As a lessor, the adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Income or Condensed Consolidated Statement of Cash Flows. Prior to and after adoption, all of our leases in which we are the lessor were classified as sales-type leases.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortened the amortization period for the premium on certain purchased callable debt securities to the earliest call date. ASU 2017-08 was effective for fiscal years and interim periods within those fiscal years, 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”) Overnight Index Swap (“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 did not have any hedging 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.
13
2. BUSINESS COMBINATIONS
On November 30, 2018, we acquired SmartRG, Inc. (“SmartRG”), a provider of carrier-class, 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. 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 were dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones during the first half of 2019. The required milestones were not achieved and, therefore, we recognized a gain of $1.2 million upon the reversal of these liabilities during the second quarter of 2019.
An escrow in the amount of $2.8 million was set up at the acquisition date to fund post-closing working capital settlements and to satisfy indemnity obligations to the Company arising from any inaccuracy or breach of representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to arbitration with final settlement expected during the fourth quarter of 2020. The minimum and maximum potential release of funds to the sellers ranges from 0 to $2.8 million.
We recorded goodwill of $3.5 million as a 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:
(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 |
|
The details of the acquired intangible assets from the SmartRG acquisition are as follows:
(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 |
|
|
|
For the three and nine months ended September 30, 2019, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.5 million and $1.7 million, respectively, related to the SmartRG acquisition. NaN acquisition-related expenses were incurred during the three and nine months ended September 30, 2018 related to the SmartRG acquisition.
On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. This revenue is included in the Access & Aggregation and Subscriber Solutions & Experience categories within the Network Solutions reportable segment.
We recorded a bargain purchase gain, net of income taxes, of $11.3 million during the first quarter of 2018, which represents the difference between the fair value of the net assets acquired over the cash paid. We assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and concluded that our valuation procedures and resulting measures were appropriate.
14
The following unaudited supplemental pro forma information presents the financial results of the Company for the nine months ended September 30, 2018 as if the acquisition of the Sumitomo EPON business had occurred on January 1, 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. There were no material, non-recurring adjustments to this unaudited pro forma information.
| Nine Months Ended |
| |
(In thousands) | September 30, 2018 |
| |
Pro forma revenue | $ | 390,449 |
|
Pro forma net loss | $ | (23,431 | ) |
regarding restricted cash.
3. REVENUE
The following is a description of the principal activities from which we generate our revenue is generated by reportable segment.segment:
Network Solutions Segment
Network Solutions includes - Includes hardware products and software-defined next-generation virtualized solutions used in service provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware sales. In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment. These arrangements typically include network equipment, network implementation services and maintenance services. Network implementation services and maintenance services are included in the Services & Support segment discussed below. See Note 12 for additional information.
Services & Support Segment
To complement our Network Solutions segment, we offer a complete portfolio of - Includes maintenance, network implementation, solutions integration and managed services, which include hosted cloud services and subscription services.
Sales by Category
In addition to our reportingreportable segments, werevenue is also report revenue inreported for the following 3 categories – Access & Aggregation, Subscriber Solutions & Experience and Traditional & Other Products.
The following table disaggregates ourtables disaggregate revenue by reportable segment and revenue category for the three and six months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||||||||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| June 30, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||||||||||||||||||||
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
| ||||||||||||
Access & Aggregation |
| $ | 48,902 |
|
| $ | 16,212 |
|
| $ | 65,114 |
|
| $ | 76,046 |
|
| $ | 15,855 |
|
| $ | 91,901 |
|
| $ | 69,721 |
|
| $ | 13,055 |
|
| $ | 82,776 |
|
| $ | 96,262 |
|
| $ | 13,159 |
|
| $ | 109,421 |
|
Subscriber Solutions & Experience |
|
| 40,382 |
|
|
| 2,094 |
|
|
| 42,476 |
|
|
| 37,313 |
|
|
| 1,239 |
|
|
| 38,552 |
|
|
| 38,081 |
|
|
| 2,312 |
|
|
| 40,393 |
|
|
| 38,444 |
|
|
| 2,058 |
|
|
| 40,502 |
|
Traditional & Other Products |
|
| 4,734 |
|
|
| 1,768 |
|
|
| 6,502 |
|
|
| 7,684 |
|
|
| 2,198 |
|
|
| 9,882 |
|
|
| 3,521 |
|
|
| 2,025 |
|
|
| 5,546 |
|
|
| 4,461 |
|
|
| 2,007 |
|
|
| 6,468 |
|
Total |
| $ | 94,018 |
|
| $ | 20,074 |
|
| $ | 114,092 |
|
| $ | 121,043 |
|
| $ | 19,292 |
|
| $ | 140,335 |
|
| $ | 111,323 |
|
| $ | 17,392 |
|
| $ | 128,715 |
|
| $ | 139,167 |
|
| $ | 17,224 |
|
| $ | 156,391 |
|
|
|
15
The following table disaggregates our revenue by reportable segment and revenue category for the nine months ended September 30, 2019 and 2018:
|
| Nine Months Ended |
| |||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||||||||||||
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
| ||||||
Access & Aggregation |
| $ | 230,837 |
|
| $ | 43,476 |
|
| $ | 274,313 |
|
| $ | 220,653 |
|
| $ | 37,670 |
|
| $ | 258,323 |
|
Subscriber Solutions & Experience(1) |
|
| 113,545 |
|
|
| 6,186 |
|
|
| 119,731 |
|
|
| 99,396 |
|
|
| 3,817 |
|
|
| 103,213 |
|
Traditional & Other Products |
|
| 14,625 |
|
|
| 5,605 |
|
|
| 20,230 |
|
|
| 21,310 |
|
|
| 6,343 |
|
|
| 27,653 |
|
Total |
| $ | 359,007 |
|
| $ | 55,267 |
|
| $ | 414,274 |
|
| $ | 341,359 |
|
| $ | 47,830 |
|
| $ | 389,189 |
|
|
|
|
| Six Months Ended |
| |||||||||||||||||||||
|
| June 30, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||
(In thousands) |
| Network Solutions |
|
| Services & Support |
|
| Total |
|
| Network Solutions |
|
| Services & Support |
|
| Total |
| ||||||
Access & Aggregation |
| $ | 122,776 |
|
| $ | 25,966 |
|
| $ | 148,742 |
|
| $ | 181,935 |
|
| $ | 27,264 |
|
| $ | 209,199 |
|
Subscriber Solutions & Experience |
|
| 78,064 |
|
|
| 4,508 |
|
|
| 82,572 |
|
|
| 73,163 |
|
|
| 4,092 |
|
|
| 77,255 |
|
Traditional & Other Products |
|
| 7,855 |
|
|
| 4,069 |
|
|
| 11,924 |
|
|
| 9,891 |
|
|
| 3,837 |
|
|
| 13,728 |
|
Total |
| $ | 208,695 |
|
| $ | 34,543 |
|
| $ | 243,238 |
|
| $ | 264,989 |
|
| $ | 35,193 |
|
| $ | 300,182 |
|
Revenue is measured based on the consideration we expectallocated to receive in exchange for transferring goods or providing services to a customer and asremaining performance obligations under the termsrepresents contract revenues that have not yet been recognized for contracts with a duration 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).greater than one year. As of SeptemberJune 30, 2019,2020, we did 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. As a practical expedient, for certain contracts we recognize revenue equal to the amounts that we are entitled to invoice, which correspond to the value of completed performance obligations to date. The amount related to these performance obligations was $16.0 million and $13.6 million as of June 30, 2020 and December 31, 2019, respectively. The Company expects to recognize 62% of the $16.0 million as of June 30, 2020 over the next 12 months, with the remainder to be recognized thereafter.
The following table provides information about receivables, contract assets and unearned revenue from contracts with customers:
(In thousands) |
| September 30, 2019 |
|
| December 31, 2018 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||
Accounts receivable, net |
| $ | 90,647 |
|
| $ | 99,385 |
|
| $ | 95,335 |
|
| $ | 90,531 |
|
Contract assets(1) |
| $ | 2,434 |
|
| $ | 3,766 |
|
| $ | 1,028 |
|
| $ | 2,812 |
|
Unearned revenue |
| $ | 14,022 |
|
| $ | 17,940 |
|
| $ | 12,090 |
|
| $ | 11,963 |
|
Non-current unearned revenue |
| $ | 4,581 |
|
| $ | 5,296 |
|
| $ | 6,166 |
|
| $ | 6,012 |
|
| (1) | Included in other receivables on the Condensed Consolidated Balance |
Of the outstanding unearned revenue balance atbalances as of December 31, 2019 and December 31, 2018, $1.2$2.4 million and $11.7$3.6 million waswere recognized as revenue during the three and nine months ended SeptemberJune 30, 2020 and 2019, respectively, and $8.1 million and $10.5 million were recognized as revenue during the six months ended June 30, 2020 and 2019, respectively.
4. INCOME TAXES
Our effective tax rate increased from a benefit of 34.9%, excluding17.3% for the tax effect of the bargain purchase gain, in the ninethree months ended SeptemberJune 30, 2018,2019 to an expense of 197.1% in68.5% for the ninethree months ended SeptemberJune 30, 2019. 2020 and decreased from a benefit of 6.2% for the six months ended June 30, 2019 to a benefit of 22.9% for the six months ended June 30, 2020. The increasechange in the effective tax rate betweenfor the two periodsthree months ended June 30, 2020 was impacted by tax expense in our international operations and additional changes in the valuation allowance related to our domestic operations. The change in the effective tax rate for the three and six months ended June 30, 2019 was primarily driven by the establishment of a valuation allowance against our domestic deferred tax assets in the amount of $37.1 million duringshift to profitability for the three and six months ended SeptemberJune 30, 2019, with tax expense being offset by a 9.38%29.1% 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 companyCompany locations, and the effective income tax rates among the respective jurisdictions.
AsThe decrease in the effective tax rate for the six months ended June 30, 2020 was primarily driven by a tax benefit of September$7.4 million recognized during the six months ended June 30, 2019,2020 as a result of the Company had deferredCoronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, which allowed for the carryback of federal net operating losses, partially offset with tax assets totaling $49.4 million. As of September 30, 2019, aexpense in our international operations and changes in our valuation allowance totaling $42.9 million has been establishedrelated to our domestic operations. An increase in the valuation allowance 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 $5.8assets was recorded in the amount of $3.6 million that was established in prior periods relates to state researchduring the three and development credit carryforwards, and foreign net operating loss and research and development credit carryforwards, where we lack sufficient activity to realize those deferred tax assets. The remaining $6.5 million in deferred tax assets not offset by a valuation allowance are located in various foreign jurisdictions where the Company believes it is more likely than not we will realize these deferred tax assets.
16
Supplemental balance sheet information related to deferred tax assets is as follows:six months ended June 30, 2020.
|
| September 30, 2019 |
| |||||||||
(In thousands) |
| Deferred Tax Assets |
|
| Valuation Allowance |
|
| Deferred Tax Assets, net |
| |||
Domestic |
| $ | 40,496 |
|
| $ | (40,496 | ) |
| $ | — |
|
International |
|
| 8,909 |
|
|
| (2,417 | ) |
|
| 6,492 |
|
Total |
| $ | 49,405 |
|
| $ | (42,913 | ) |
| $ | 6,492 |
|
The Company continually reviews the adequacy of ourits 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 realizedrecognized in accordance with ASC 740, Income TaxesTaxes. . Due to our recent decrease in revenue and profitability forAs of June 30, 2020, the third quarter of 2019, management’s current expectations for revenue for the remainder of 2019, and all other positive and negative objective evidence considered as part of our analysis, our ability to consider other subjective evidence such as projections for future growth is limited when evaluating whether ourCompany had deferred tax assets will be realized. As such,totaling $59.8 million, and a valuation allowance totaling $52.2 million had been established against those deferred tax assets. The remaining $7.6 million in deferred tax assets not offset by a valuation allowance is located in various foreign jurisdictions where the Company is no longer able to concludebelieves that it is more likely than not that we will realize these deferred tax assets. Our assessment of the realizability of our domestic deferred tax assets will be realized. The amountincludes the evaluation of evidence, some of which requires significant judgement, including historical operating results, the evaluation of our three-year cumulative income position, future taxable income projections and tax planning strategies. Should management’s conclusion change in the future and additional valuation allowance or a partial or full release of the valuation allowance is necessary, it could have a material effect on our consolidated financial statements.
Supplemental balance sheet information related to deferred tax assets considered realizable, however, could be adjusted in future periods in the event sufficient evidenceas of June 30, 2020 and December 31, 2019 is present to support a conclusion that it is more likely than not that all or a portion of our domestic deferred tax assets will be realized.as follows:
|
| June 30, 2020 |
| |||||||||
(In thousands) |
| Deferred Tax Assets |
|
| Valuation Allowance |
|
| Deferred Tax Assets, net |
| |||
Domestic |
| $ | 50,164 |
|
| $ | (50,164 | ) |
| $ | — |
|
International |
|
| 9,603 |
|
|
| (2,030 | ) |
|
| 7,573 |
|
Total |
| $ | 59,767 |
|
| $ | (52,194 | ) |
| $ | 7,573 |
|
|
| December 31, 2019 |
| |||||||||
(In thousands) |
| Deferred Tax Assets |
|
| Valuation Allowance |
|
| Deferred Tax Assets, net |
| |||
Domestic |
| $ | 46,266 |
|
| $ | (46,266 | ) |
| $ | — |
|
International |
|
| 9,911 |
|
|
| (2,350 | ) |
|
| 7,561 |
|
Total |
| $ | 56,177 |
|
| $ | (48,616 | ) |
| $ | 7,561 |
|
5. PENSION BENEFIT PLAN
We maintain a defined benefit pension plan covering employees in certain foreign countries.
The following table summarizes the components of net periodic pension cost related to a defined benefit pension plan covering employees in certain foreign countries for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Service cost |
| $ | 366 |
|
| $ | 294 |
|
| $ | 1,109 |
|
| $ | 905 |
|
| $ | 307 |
|
| $ | 368 |
|
| $ | 617 |
|
| $ | 743 |
|
Interest cost |
|
| 158 |
|
|
| 179 |
|
|
| 479 |
|
|
| 551 |
|
|
| 108 |
|
|
| 159 |
|
|
| 216 |
|
|
| 321 |
|
Expected return on plan assets |
|
| (346 | ) |
|
| (381 | ) |
|
| (1,049 | ) |
|
| (1,174 | ) |
|
| (407 | ) |
|
| (348 | ) |
|
| (817 | ) |
|
| (703 | ) |
Amortization of actuarial losses |
|
| 198 |
|
|
| 61 |
|
|
| 600 |
|
|
| 188 |
|
|
| 235 |
|
|
| 199 |
|
|
| 472 |
|
|
| 402 |
|
Net periodic pension cost |
| $ | 376 |
|
| $ | 153 |
|
| $ | 1,139 |
|
| $ | 470 |
|
| $ | 243 |
|
| $ | 378 |
|
| $ | 488 |
|
| $ | 763 |
|
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.Income (Loss). Service cost areis included in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income.Income (Loss).
6. STOCK-BASED COMPENSATION
The following table summarizes stock-based compensation expense related to stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and restricted stock for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Stock-based compensation expense included in cost of sales |
| $ | 83 |
|
| $ | 101 |
|
| $ | 272 |
|
| $ | 298 |
|
| $ | 87 |
|
| $ | 85 |
|
| $ | 202 |
|
| $ | 189 |
|
Selling, general and administrative expense |
|
| 1,142 |
|
|
| 894 |
|
|
| 2,867 |
|
|
| 2,924 |
|
|
| 971 |
|
|
| 662 |
|
|
| 2,046 |
|
|
| 1,725 |
|
Research and development expense |
|
| 646 |
|
|
| 645 |
|
|
| 2,045 |
|
|
| 2,021 |
|
|
| 597 |
|
|
| 707 |
|
|
| 1,198 |
|
|
| 1,399 |
|
Stock-based compensation expense included in operating expenses |
|
| 1,788 |
|
|
| 1,539 |
|
|
| 4,912 |
|
|
| 4,945 |
|
|
| 1,568 |
|
|
| 1,369 |
|
|
| 3,244 |
|
|
| 3,124 |
|
Total stock-based compensation expense |
|
| 1,871 |
|
|
| 1,640 |
|
|
| 5,184 |
|
|
| 5,243 |
|
|
| 1,655 |
|
|
| 1,454 |
|
|
| 3,446 |
|
|
| 3,313 |
|
Tax benefit for expense associated with stock options, PSUs, RSUs and restricted stock |
|
| (446 | ) |
|
| (292 | ) |
|
| (1,235 | ) |
|
| (1,016 | ) |
|
| (394 | ) |
|
| (332 | ) |
|
| (821 | ) |
|
| (775 | ) |
Total stock-based compensation expense, net of tax |
| $ | 1,425 |
|
| $ | 1,348 |
|
| $ | 3,949 |
|
| $ | 4,227 |
|
| $ | 1,261 |
|
| $ | 1,122 |
|
| $ | 2,625 |
|
| $ | 2,538 |
|
17
PSUs, RSUs and Restricted Stock Options
The following table summarizes PSUs, RSUs and restricted stock outstanding as of December 31, 2019 and June 30, 2020 and the changes that occurred during the six months ended June 30, 2020.
|
| Number of Shares (in thousands) |
|
| Weighted Avg. Grant Date Fair Value (per share) |
| ||
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2019 |
|
| 1,891 |
|
| $ | 14.58 |
|
PSUs, RSUs and restricted stock granted |
|
| 399 |
|
| $ | 8.21 |
|
PSUs, RSUs and restricted stock vested |
|
| (13 | ) |
| $ | 12.32 |
|
PSUs, RSUs and restricted stock forfeited |
|
| (518 | ) |
| $ | 19.27 |
|
Unvested PSUs, RSUs and restricted stock outstanding, June 30, 2020 |
|
| 1,759 |
|
| $ | 11.78 |
|
During the six months ended June 30, 2020, the Company issued 0.3 million performance-based PSUs under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (the “2015 Employee Plan”) to its executive officers and certain employees. The grant-date fair value of these performance-based awards is based on the closing price of the Company’s stock on the date of grant. Subject to the grantee’s continued employment, the grantee has the ability to earn shares in a summaryrange of 0% to 142.8% of the awarded number of PSUs based on the achievement of defined performance target at the end of a three-year period. If the Company achieves the performance target at the end of the first or second year during the performance period, the grantee will be entitled to the target number of performance shares, which will not be issued until the end of the three-year period. Equity-based compensation expense with respect to these awards will be adjusted over the vesting period to reflect the probability of achievement of the performance targets defined in the award agreements.
The fair value of RSUs and restricted stock is equal to the closing price of our stock on the date of grant. The fair value of PSUs with market conditions is calculated using a Monte Carlo simulation valuation method.
As of June 30, 2020, total unrecognized compensation expense related to non-vested market-based PSUs, RSUs and restricted stock was approximately $12.7 million, which will be recognized over the remaining weighted-average period of 2.5 years. Unrecognized compensation expense will be adjusted for actual forfeitures.
At the annual meeting of stockholders held on May 13, 2020, the Company’s stockholders approved, upon recommendation of the Board of Directors, the adoption of the ADTRAN, Inc. 2020 Employee Stock Incentive Plan (the “2020 Employee Plan”) as well as the ADTRAN, Inc. 2020 Directors Stock Plan (the “2020 Directors Plan”). NaN additional awards will be granted under the 2015 Employee Plan or the 2010 Directors Stock Plan subsequent to the stockholders’ approval of these new stock plans. Outstanding awards granted under the 2015 Employee Plan and the 2010 Directors Stock Plan will remain subject to the terms of such plans, and shares underlying awards granted under such plans that are cancelled or forfeited will be available for issuance under the 2020 Employee Plan or the 2020 Directors Plan, as applicable.
Under the 2020 Employee Plan, the Company is authorized to issue 2.8 million shares of common stock to certain employees, key service providers and advisors through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs and restricted stock, any of which may be subject to performance-based conditions. Options, RSUs and restricted stock granted under the 2020 Employee Plan reduce the shares authorized for issuance under the 2020 Employee Plan by one (1) share of common stock for each share underlying the award. Forfeitures, cancellations or expirations of awards granted under the 2015 Employee Plan increase the shares authorized for issuance under the 2020 Employee Plan, with forfeitures, cancellations or expirations of RSUs and restricted stock increasing the shares authorized for issuance by 2.5 shares of common stock for each share underlying the award. Forfeitures cancellations or expirations of options from the 2015 Employee Plan increase the shares authorized for issuance under the 2020 Employee Plan by one (1) share of common stock for each share underlying the award. RSUs and restricted stock granted under the 2020 Employee Plan will typically vest pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date. Options granted under the 2020 Employee Plan will typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date and have a ten-year contractual term.
Under the 2020 Directors Plan, the Company is authorized to issue 0.4 million shares of common stock. Under the 2020 Directors Plan, the Company may issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the 2020 Directors Plan typically will become vested in full on the first anniversary of the grant date. Options issued under the 2020 Directors Plan will have a ten-year contractual term. Options, restricted stock and RSUs granted under the 2020 Directors Plan reduce the shares authorized for issuance under the 2020 Directors Plan by one (1) share of common stock for each share underlying the award. Forfeitures, cancellations and expirations of awards granted under the 2010 Directors Stock Plan increase the shares authorized for issuance under the 2010 Directors Stock Plan or the 2020 Directors Plan by one (1) share of common stock for each share underlying the award.
As of June 30, 2020, 3.4 million shares were available for issuance under stockholder-approved equity plans.
Stock Options
The following table summarizes stock options outstanding as of December 31, 20182019 and SeptemberJune 30, 2019,2020 and the changes that occurred during the ninesix months ended SeptemberJune 30, 2019:2020:
|
| 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 |
|
| $ | — |
| ||||||||||||||||
Stock options outstanding, December 31, 2019 |
|
| 3,572 |
|
| $ | 22.88 |
|
|
| 3.4 |
|
| $ | — |
| ||||||||||||||||
Stock options exercised |
|
| (34 | ) |
| $ | 15.53 |
|
|
|
|
|
|
|
|
|
|
| — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
Stock options forfeited |
|
| (28 | ) |
| $ | 15.53 |
|
|
|
|
|
|
|
|
|
|
| — |
|
| $ | — |
|
|
|
|
|
|
|
|
|
Stock options expired |
|
| (183 | ) |
| $ | 24.41 |
|
|
|
|
|
|
|
|
|
|
| (265 | ) |
| $ | 21.20 |
|
|
|
|
|
|
|
|
|
Stock options outstanding, September 30, 2019 |
|
| 4,137 |
|
| $ | 22.96 |
|
|
| 3.27 |
|
| $ | — |
| ||||||||||||||||
Stock options exercisable, September 30, 2019 |
|
| 3,915 |
|
| $ | 23.39 |
|
|
| 3.11 |
|
| $ | — |
| ||||||||||||||||
Stock options outstanding, June 30, 2020 |
|
| 3,307 |
|
| $ | 22.93 |
|
|
| 2.9 |
|
| $ | — |
| ||||||||||||||||
Stock options exercisable, June 30, 2020 |
|
| 3,305 |
|
| $ | 22.93 |
|
|
| 2.9 |
|
| $ | — |
|
At SeptemberAs of June 30, 2019,2020, total unrecognized compensation expense related to non-vested stock options was approximately $0.1 million,$4 thousand, which is expected towill be recognized over an averagethe remaining recognitionweighted-average period of 0.3 years. Unrecognized compensation expense will be adjusted for actual forfeitures.
There were 0 stock options granted during the three and six months ended June 30, 2020 and 2019. All of the options above were previously issued at exercise prices that approximated fair market value at the date of grant.
The aggregate intrinsic 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 SeptemberJune 30, 2019.2020. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock and was 0 as of SeptemberJune 30, 2019.2020. The total pre-tax intrinsic value of options exercised during the ninesix months ended SeptemberJune 30, 20192020 was $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. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors.
There were 0 stock options granted during the three and nine months ended September 30, 2019 and 2018.
PSUs, RSUs and Restricted Stock
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 nine months ended September 30, 2019.
|
| Number of Shares (in thousands) |
|
| Weighted Avg. Grant Date Fair Value (per share) |
| ||
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2018 |
|
| 1,570 |
|
| $ | 18.52 |
|
PSUs, RSUs and restricted stock granted |
|
| 63 |
|
| $ | 12.81 |
|
PSUs, RSUs and restricted stock vested |
|
| (22 | ) |
| $ | 17.13 |
|
PSUs, RSUs and restricted stock forfeited |
|
| (175 | ) |
| $ | 18.69 |
|
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.
18
At September 30, 2019, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $11.6 million, which is expected to be recognized over an average remaining recognition period of 2.4 years. In addition, there was $8.2 million of unrecognized compensation expense related to unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period of 0.3 years if achievement of the performance obligation becomes probable. For the three and nine months ended September 30, 2019 and 2018, 0 compensation expense was recognized related to these 2017 performance-based PSUs. Unrecognized compensation expense will be adjusted for actual forfeitures.
0.
At September 30, 2019, 2.7 million shares were available for issuance under shareholder-approved equity plans in connection with the grant and exercise of stock options, PSUs, RSUs or restricted stock.
7. INVESTMENTS
Debt Securities and Other Investments
At SeptemberAs of June 30, 2019, we held2020, the following debt securities and other investments were included on the Condensed Consolidated Balance Sheet and recorded at fair value:
|
| Amortized |
|
| Gross Unrealized |
|
| Fair |
|
| Amortized |
|
| Gross Unrealized |
|
| Fair |
| ||||||||||||||
(In thousands) |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||||||
Corporate bonds |
| $ | 10,733 |
|
| $ | 95 |
|
| $ | — |
|
| $ | 10,828 |
|
| $ | 13,747 |
|
| $ | 168 |
|
| $ | (1 | ) |
| $ | 13,914 |
|
Municipal fixed-rate bonds |
|
| 931 |
|
|
| — |
|
|
| (1 | ) |
|
| 930 |
|
|
| 2,379 |
|
|
| 21 |
|
|
| — |
|
|
| 2,400 |
|
Asset-backed bonds |
|
| 7,222 |
|
|
| 35 |
|
|
| (2 | ) |
|
| 7,255 |
|
|
| 7,600 |
|
|
| 86 |
|
|
| (4 | ) |
|
| 7,682 |
|
Mortgage/Agency-backed bonds |
|
| 7,366 |
|
|
| 29 |
|
|
| (7 | ) |
|
| 7,388 |
|
|
| 7,944 |
|
|
| 152 |
|
|
| (12 | ) |
|
| 8,084 |
|
U.S. government bonds |
|
| 9,160 |
|
|
| 4 |
|
|
| (21 | ) |
|
| 9,143 |
|
|
| 7,935 |
|
|
| 211 |
|
|
| — |
|
|
| 8,146 |
|
Foreign government bonds |
|
| 372 |
|
|
| — |
|
|
| (3 | ) |
|
| 369 |
|
|
| 540 |
|
|
| — |
|
|
| — |
|
|
| 540 |
|
Commercial paper |
|
| 1,120 |
|
|
| 4 |
|
|
| — |
|
|
| 1,124 |
| ||||||||||||||||
Variable-rate demand notes |
|
| 300 |
|
|
| — |
|
|
| — |
|
|
| 300 |
| ||||||||||||||||
Other |
|
| 442 |
|
|
| — |
|
|
| — |
|
|
| 442 |
| ||||||||||||||||
Available-for-sale debt securities held at fair value |
| $ | 35,784 |
|
| $ | 163 |
|
| $ | (34 | ) |
| $ | 35,913 |
|
| $ | 42,007 |
|
| $ | 642 |
|
| $ | (17 | ) |
| $ | 42,632 |
|
AtAs of December 31, 2018, we held2019, the following debt securities and other investments were included on the Condensed Consolidated Balance sheet and recorded at fair value:
|
| Amortized |
|
| Gross Unrealized |
|
| Fair |
|
| Amortized |
|
| Gross Unrealized |
|
| Fair |
| ||||||||||||||
(In thousands) |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||||||
Corporate bonds |
| $ | 20,777 |
|
| $ | 19 |
|
| $ | (112 | ) |
| $ | 20,684 |
|
| $ | 9,304 |
|
| $ | 80 |
|
| $ | — |
|
| $ | 9,384 |
|
Municipal fixed-rate bonds |
|
| 1,339 |
|
|
| — |
|
|
| (26 | ) |
|
| 1,313 |
|
|
| 930 |
|
|
| — |
|
|
| — |
|
|
| 930 |
|
Asset-backed bonds |
|
| 5,230 |
|
|
| 5 |
|
|
| (14 | ) |
|
| 5,221 |
|
|
| 6,867 |
|
|
| 26 |
|
|
| (3 | ) |
|
| 6,890 |
|
Mortgage/Agency-backed bonds |
|
| 3,833 |
|
|
| 2 |
|
|
| (44 | ) |
|
| 3,791 |
|
|
| 6,944 |
|
|
| 26 |
|
|
| (8 | ) |
|
| 6,962 |
|
U.S. government bonds |
|
| 9,271 |
|
|
| 1 |
|
|
| (66 | ) |
|
| 9,206 |
|
|
| 12,311 |
|
|
| 21 |
|
|
| (9 | ) |
|
| 12,323 |
|
Foreign government bonds |
|
| 592 |
|
|
| — |
|
|
| (8 | ) |
|
| 584 |
|
|
| 372 |
|
|
| — |
|
|
| (1 | ) |
|
| 371 |
|
Variable-rate demand notes |
|
| 800 |
|
|
| — |
|
|
| — |
|
|
| 800 |
| ||||||||||||||||
Available-for-sale debt securities held at fair value |
| $ | 41,042 |
|
| $ | 27 |
|
| $ | (270 | ) |
| $ | 40,799 |
|
| $ | 37,528 |
|
| $ | 153 |
|
| $ | (21 | ) |
| $ | 37,660 |
|
As of SeptemberJune 30, 2019, our2020, contractual maturities related to debt securities had the following contractual maturities:and other investments were as follows:
(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 |
|
| Commercial paper |
|
| Variable-rate demand notes |
|
| Other |
| |||||||||||||||
Less than one year |
| $ | 3,154 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 5,441 |
|
| $ | 738 |
|
| $ | 465 |
|
| $ | 146 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,124 |
|
| $ | — |
|
| $ | 442 |
|
One to two years |
|
| 4,316 |
|
|
| 930 |
|
|
| 941 |
|
|
| 215 |
|
|
| — |
|
|
| — |
|
|
| 2,926 |
|
|
| 528 |
|
|
| 465 |
|
|
| 603 |
|
|
| 1,638 |
|
|
| 75 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Two to three years |
|
| 3,068 |
|
|
| — |
|
|
| 2,475 |
|
|
| 1,072 |
|
|
| 7,528 |
|
|
| — |
|
|
| 5,547 |
|
|
| 757 |
|
|
| 1,141 |
|
|
| 1,528 |
|
|
| 6,065 |
|
|
| 465 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Three to five years |
|
| 290 |
|
|
| — |
|
|
| 1,593 |
|
|
| 920 |
|
|
| 1,615 |
|
|
| 369 |
|
|
| — |
|
|
| 377 |
|
|
| 3,932 |
|
|
| — |
|
|
| 443 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Five to ten years |
|
| — |
|
|
| — |
|
|
| 1,666 |
|
|
| 680 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 982 |
|
|
| 1,890 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
More than ten years |
|
| — |
|
|
| — |
|
|
| 580 |
|
|
| 4,501 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 697 |
|
|
| 3,917 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 300 |
|
|
| — |
|
Total |
| $ | 10,828 |
|
| $ | 930 |
|
| $ | 7,255 |
|
| $ | 7,388 |
|
| $ | 9,143 |
|
| $ | 369 |
|
| $ | 13,914 |
|
| $ | 2,400 |
|
| $ | 7,682 |
|
| $ | 8,084 |
|
| $ | 8,146 |
|
| $ | 540 |
|
| $ | 1,124 |
|
| $ | 300 |
|
| $ | 442 |
|
Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
19
Realized gains and losses on sales of debt securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our debt securities:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Gross realized gains on debt securities |
| $ | 36 |
|
| $ | 24 |
|
| $ | 85 |
|
| $ | 49 |
|
| $ | 190 |
|
| $ | 8 |
|
| $ | 233 |
|
| $ | 49 |
|
Gross realized losses on debt securities |
|
| (7 | ) |
|
| (50 | ) |
|
| (40 | ) |
|
| (365 | ) |
|
| (19 | ) |
|
| (14 | ) |
|
| (39 | ) |
|
| (33 | ) |
Total gain (loss) recognized, net |
| $ | 29 |
|
| $ | (26 | ) |
| $ | 45 |
|
| $ | (316 | ) | ||||||||||||||||
Total gain recognized, net |
| $ | 171 |
|
| $ | (6 | ) |
| $ | 194 |
|
| $ | 16 |
|
OurThe Company’s investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.
At September 30, 2019, we held a $25.6 million restricted certificate of deposit that is carried at 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”), which totaled $25.6 million at September 30, 2019 and December 31, 2018. At September 30, 2019 and December 31, 2018, the estimated fair value of the Bond using a level 2 valuation technique was approximately $25.6 million and $25.4 million, respectively, based on a The Company did 0t purchase any available-for-sale debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AA+. We havedeterioration during the right to 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. 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.three months ended June 30, 2020.
Marketable Equity Securities
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,During the three months ended March 31, 2019, an outstanding note receivable of $4.3 million was repaid and reissued in the form of debt and equity. Of the outstanding $4.3 million, $3.4 million was issued as an equity investment, which requires usrepresented a non-cash investing activity. We elected to measure allrecord this equity investmentsinvestment that dodoes not result in consolidation and are not accounted for under the equity method athave a readily determinable 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 ausing the measurement alternative. Under the measurement alternative, for equity investments that do not have a readily determinable fair value in which investments can be recorded at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment. We elected to record our equity investment that does not have a readily determinable fair value using the measurement alternative method. As of December 31, 2018, the Company had a note receivable of approximately $4.3 million, which was included in other receivables on the Condensed Consolidated Balance Sheet. During the three months ended March 31, 2019, this amount was repaid and reissued in the form of debt and equity. Approximately $3.4 million was issued as an equity investment, which represented a non-cash investing activity. The carrying value of this investment under the measurement alternative was $3.4 million as of SeptemberDecember 31, 2019. During the six months ended June 30, 2019.2020, an impairment charge of $1.6 million was recorded related to this equity investment, which is included in net investment gain (loss) on the Condensed Consolidated Statement of Income (Loss). As a result, the carrying value of this investment was $1.8 million as of June 30, 2020. The remaining amount, approximately $0.9 million of the original $4.3 million note receivable, was converted intoreissued as a new note receivable, which is included in other receivableslong-term investments on the Condensed Consolidated Balance SheetSheets as of June 30, 2020 and representsDecember 31, 2019, and represented a non-cash operating activity.investing activity during the six months ended June 30, 2019. NaN impairment charge was recognized related to the note receivable as it is a secured loan.
Realized and unrealized gains and losses for ourrelated to marketable equity securities for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Realized gains (losses) on equity securities sold |
| $ | (20 | ) |
| $ | 1,240 |
|
| $ | (83 | ) |
| $ | 1,587 |
|
| $ | 328 |
|
| $ | (49 | ) |
| $ | (2,108 | ) |
| $ | (63 | ) |
Unrealized gains (losses) on equity securities held |
|
| (225 | ) |
|
| 3,293 |
|
|
| 8,233 |
|
|
| 4,129 |
|
|
| 9,353 |
|
|
| 2,540 |
|
|
| 889 |
|
|
| 8,458 |
|
Total gain (loss) recognized, net |
| $ | (245 | ) |
| $ | 4,533 |
|
| $ | 8,150 |
|
| $ | 5,716 |
|
| $ | 9,681 |
|
| $ | 2,491 |
|
| $ | (1,219 | ) |
| $ | 8,395 |
|
As of September 30, 2019U.S. GAAP establishes a three-level valuation hierarchy based upon observable and 2018, gross unrealized losses related to individual investments in a continuous loss positionunobservable inputs for twelve months or longer were not material.
20
We have categorized our cash equivalents and our investments held at fair value into a three-level fair value hierarchy based on the prioritymeasurement of the inputs to the valuation technique for the cash equivalents and investments as follows:financial instruments:
• Level 1 - Values– Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;
• Level 2 - Values– Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly;
• Level 3 - Values– Significant unobservable inputs; values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs could include information supplied by investees.
The Company’s cash equivalents and investments held at fair value are categorized into this hierarchy as follows:
|
|
|
|
|
| Fair Value Measurements at September 30, 2019 Using |
|
|
|
|
|
| Fair Value Measurements as of June 30, 2020 Using |
| ||||||||||||||||||
(In thousands) |
| Fair Value |
|
| Quoted Prices in Active Market for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| Fair Value |
|
| Quoted Prices in Active Market for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 1,817 |
|
| $ | 1,817 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,697 |
|
| $ | 1,697 |
|
| $ | — |
|
| $ | — |
|
U.S. government securities |
|
| 1,250 |
|
|
| 1,250 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Commercial paper |
|
| 1,295 |
|
|
| — |
|
|
| 1,295 |
|
|
| — |
|
|
| 100 |
|
|
| — |
|
|
| 100 |
|
|
| — |
|
Cash equivalents |
|
| 3,112 |
|
|
| 1,817 |
|
|
| 1,295 |
|
|
| — |
| ||||||||||||||||
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
| 10,828 |
|
|
| — |
|
|
| 10,828 |
|
|
| — |
|
|
| 13,914 |
|
|
| — |
|
|
| 13,914 |
|
|
| — |
|
Municipal fixed-rate bonds |
|
| 930 |
|
|
| — |
|
|
| 930 |
|
|
| — |
|
|
| 2,400 |
|
|
| — |
|
|
| 2,400 |
|
|
| — |
|
Asset-backed bonds |
|
| 7,255 |
|
|
| — |
|
|
| 7,255 |
|
|
| — |
|
|
| 7,682 |
|
|
| — |
|
|
| 7,682 |
|
|
| — |
|
Mortgage/Agency-backed bonds |
|
| 7,388 |
|
|
| — |
|
|
| 7,388 |
|
|
| — |
|
|
| 8,084 |
|
|
| — |
|
|
| 8,084 |
|
|
| — |
|
U.S. government bonds |
|
| 9,143 |
|
|
| 9,143 |
|
|
| — |
|
|
| — |
|
|
| 8,146 |
|
|
| 8,146 |
|
|
| — |
|
|
| — |
|
Foreign government bonds |
|
| 369 |
|
|
| — |
|
|
| 369 |
|
|
| — |
| ||||||||||||||||
Foreign government securities |
|
| 540 |
|
|
| — |
|
|
| 540 |
|
|
| — |
| ||||||||||||||||
Commercial paper |
|
| 1,124 |
|
|
| — |
|
|
| 1,124 |
|
|
| — |
| ||||||||||||||||
Variable-rate demand notes |
|
| 300 |
|
|
| — |
|
|
| 300 |
|
|
| — |
| ||||||||||||||||
Other |
|
| 442 |
|
|
| — |
|
|
| — |
|
|
| 442 |
| ||||||||||||||||
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities – various industries |
|
| 32,543 |
|
|
| 32,543 |
|
|
| — |
|
|
| — |
|
|
| 26,116 |
|
|
| 26,116 |
|
|
| — |
|
|
| — |
|
Equity in escrow |
|
| 165 |
|
|
| 165 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Deferred compensation plan assets |
|
| 20,580 |
|
|
| 20,580 |
|
|
| — |
|
|
| — |
|
|
| 20,468 |
|
|
| 20,468 |
|
|
| — |
|
|
| — |
|
Total debt and equity securities at fair value |
|
| 89,201 |
|
|
| 62,431 |
|
|
| 26,770 |
|
|
| — |
| ||||||||||||||||
Other investments |
|
| 1,223 |
|
|
| 1,223 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Total |
| $ | 92,313 |
|
| $ | 64,248 |
|
| $ | 28,065 |
|
| $ | — |
|
| $ | 93,486 |
|
| $ | 58,900 |
|
| $ | 34,144 |
|
| $ | 442 |
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2018 Using |
|
|
|
|
|
| Fair Value Measurements as of December 31, 2019 Using |
| ||||||||||||||||||
(In thousands) |
| Fair Value |
|
| Quoted Prices in Active Market for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| 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 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,309 |
|
| $ | 1,309 |
|
| $ | — |
|
| $ | — |
|
Cash equivalents |
|
| 1,554 |
|
|
| 1,554 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
| 20,684 |
|
|
| — |
|
|
| 20,684 |
|
|
| — |
|
|
| 9,384 |
|
|
| — |
|
|
| 9,384 |
|
|
| — |
|
Municipal fixed-rate bonds |
|
| 1,313 |
|
|
| — |
|
|
| 1,313 |
|
|
| — |
|
|
| 930 |
|
|
| — |
|
|
| 930 |
|
|
| — |
|
Asset-backed bonds |
|
| 5,221 |
|
|
| — |
|
|
| 5,221 |
|
|
| — |
|
|
| 6,890 |
|
|
| — |
|
|
| 6,890 |
|
|
| — |
|
Mortgage/Agency-backed bonds |
|
| 3,791 |
|
|
| — |
|
|
| 3,791 |
|
|
| — |
|
|
| 6,962 |
|
|
| — |
|
|
| 6,962 |
|
|
| — |
|
U.S. government bonds |
|
| 9,206 |
|
|
| 9,206 |
|
|
| — |
|
|
| — |
|
|
| 12,323 |
|
|
| 12,323 |
|
|
| — |
|
|
| — |
|
Foreign government bonds |
|
| 584 |
|
|
| — |
|
|
| 584 |
|
|
| — |
|
|
| 371 |
|
|
| — |
|
|
| 371 |
|
|
| — |
|
Variable-rate demand notes |
|
| 800 |
|
|
| — |
|
|
| 800 |
|
|
| — |
| ||||||||||||||||
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities – various industries |
|
| 26,763 |
|
|
| 26,763 |
|
|
| — |
|
|
| — |
|
|
| 35,501 |
|
|
| 35,501 |
|
|
| — |
|
|
| — |
|
Equity in escrow |
|
| 253 |
|
|
| 253 |
|
|
| — |
|
|
| — |
|
|
| 298 |
|
|
| 298 |
|
|
| — |
|
|
| — |
|
Deferred compensation plan assets |
|
| 18,256 |
|
|
| 18,256 |
|
|
| — |
|
|
| — |
|
|
| 21,698 |
|
|
| 21,698 |
|
|
| — |
|
|
| — |
|
Total debt and equity securities at fair value |
|
| 86,071 |
|
|
| 54,478 |
|
|
| 31,593 |
|
|
| — |
| ||||||||||||||||
Other investments |
|
| 2,442 |
|
|
| 2,442 |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Total |
| $ | 87,625 |
|
| $ | 56,032 |
|
| $ | 31,593 |
|
| $ | — |
|
| $ | 98,908 |
|
| $ | 73,571 |
|
| $ | 25,337 |
|
| $ | — |
|
21
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, 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.
The fair value of Level 3 securities is calculated based on unobservable inputs. Quantitative information with respect to unobservable inputs consists of third-party valuations performed in accordance with ASC 820 – Fair Value Measurement. Inputs used in preparing the third-party valuation included the following assumptions, among others: estimated discount rates and fair market yields.
8. INVENTORY
At SeptemberAs of June 30, 20192020 and December 31, 2018,2019, inventory consisted of the following:
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Raw materials |
| $ | 39,133 |
|
| $ | 45,333 |
|
| $ | 37,057 |
|
| $ | 36,987 |
|
Work in process |
|
| 1,083 |
|
|
| 1,638 |
|
|
| 610 |
|
|
| 1,085 |
|
Finished goods |
|
| 64,725 |
|
|
| 52,877 |
|
|
| 68,464 |
|
|
| 60,233 |
|
Total |
| $ | 104,941 |
|
| $ | 99,848 |
| ||||||||
Total inventory |
| $ | 106,131 |
|
| $ | 98,305 |
|
Inventory reserves are established 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 estimated reserve percentages, which consider historical usage, known trends, inventory age and market conditions. At SeptemberAs of June 30, 20192020 and December 31, 2018, our2019, inventory reserve was $32.0reserves were $35.9 million and $30.0$34.1 million, respectively.respectively.
9. PROPERTY, PLANT AND EQUIPMENT
At SeptemberJune 30, 20192020 and December 31, 2018,2019, property, plant and equipment consisted of the following:
|
| September 30, |
|
| December 31, |
|
| June 30, |
|
| December 31, |
| ||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Land |
| $ | 4,575 |
|
| $ | 4,575 |
|
| $ | 4,575 |
|
| $ | 4,575 |
|
Building and land improvements |
|
| 34,634 |
|
|
| 34,379 |
|
|
| 34,897 |
|
|
| 34,797 |
|
Building |
|
| 68,247 |
|
|
| 68,183 |
|
|
| 68,155 |
|
|
| 68,157 |
|
Furniture and fixtures |
|
| 19,878 |
|
|
| 19,831 |
|
|
| 19,972 |
|
|
| 19,959 |
|
Computer hardware and software |
|
| 72,390 |
|
|
| 92,071 |
|
|
| 69,564 |
|
|
| 68,777 |
|
Engineering and other equipment |
|
| 129,479 |
|
|
| 127,060 |
|
|
| 131,785 |
|
|
| 130,430 |
|
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 |
| ||||||||
Total property, plant and equipment |
|
| 328,948 |
|
|
| 326,695 |
| ||||||||
Less: accumulated depreciation |
|
| (263,754 | ) |
|
| (258,609 | ) | ||||||||
Total property, plant and equipment, net |
| $ | 65,194 |
|
| $ | 68,086 |
|
Depreciation expense was $3.1 million for the three months ended September 30, 2019 and 2018 and was $9.3 million and $9.5 million 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-livedLong-lived assets used in operations are reviewed 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 Due to the current economic environment, particularly related to COVID-19, the Company assessed impairment triggers related to long-lived assets during the second quarter of 2020. Based on this assessment, no triggers occurred to perform an impairment test, and 0 impairment losses of long-lived assets were recorded.
Depreciation expense was $3.0 million and $3.1 million for the three and nine months ended SeptemberJune 30, 2020 and 2019, respectively, and $6.0 million and $6.2 million for the Company recognized impairment chargessix months ended June 30, 2020 and 2019, respectively, which is recorded in cost of $3.9 million related tosales, selling, general and administrative expenses and research and development expenses in the abandonmentCondensed Consolidated Statements 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.Income (Loss).
10. GOODWILL
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 Septemberas of June 30, 20192020 and December 31, 2018, respectively,2019, of which $6.6 million and $0.4 million was allocated to our Network Solutions and Services & Support reportable segments, respectively, as of September 30, 2019, and of which $6.7 million and $0.4 million was allocated to our Network Solutions and Services & Support reportable segments, respectively, as of December 31, 2018. Goodwill related to our SmartRG acquisition was reduced by $0.1 million during the nine months ended September 30, 2019 as a result of a measurement period adjustment.respectively.
22
We evaluateThe Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that wouldcould 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 basisand recognize an impairment charge 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 fairamount by which the carrying 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 reduceexceeds the fair value of the reporting unit. Due to the current economic environment, particularly related to COVID-19, the Company performed a triggering event assessment, in which no triggers were identified. Therefore, no interim impairment test of goodwill below its carrying value.was performed as of June 30, 2020, and 0 impairment of goodwill was recorded.
11. INTANGIBLE ASSETS
Intangible assets include those acquired in conjunction with several acquisitions since 2011, with the most recent being SmartRG, Inc. in November 2018.
The following table presents our intangible assets as of SeptemberJune 30, 20192020 and December 31, 2018:2019 consisted of the following:
|
| September 30, 2019 |
|
| December 31, 2018 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||||||||||||
(In thousands) |
| Gross Value |
|
| Accumulated Amortization |
|
| Net Value |
|
| Gross Value |
|
| Accumulated Amortization |
|
| Net Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Book Value |
| ||||||||||||
Customer relationships |
| $ | 22,235 |
|
| $ | (6,671 | ) |
| $ | 15,564 |
|
| $ | 22,455 |
|
| $ | (5,380 | ) |
| $ | 17,075 |
|
| $ | 20,742 |
|
| $ | (6,690 | ) |
| $ | 14,052 |
|
| $ | 22,356 |
|
| $ | (7,233 | ) |
| $ | 15,123 |
|
Developed technology |
|
| 10,170 |
|
|
| (3,094 | ) |
|
| 7,076 |
|
|
| 12,801 |
|
|
| (4,867 | ) |
|
| 7,934 |
|
|
| 8,200 |
|
|
| (1,977 | ) |
|
| 6,223 |
|
|
| 10,170 |
|
|
| (3,379 | ) |
|
| 6,791 |
|
Licensed technology |
|
| 5,900 |
|
|
| (1,011 | ) |
|
| 4,889 |
|
|
| 5,900 |
|
|
| (520 | ) |
|
| 5,380 |
|
|
| 5,900 |
|
|
| (1,503 | ) |
|
| 4,397 |
|
|
| 5,900 |
|
|
| (1,174 | ) |
|
| 4,726 |
|
Supplier relationships |
|
| 2,800 |
|
|
| (2,158 | ) |
|
| 642 |
|
|
| 2,800 |
|
|
| (1,108 | ) |
|
| 1,692 |
|
|
| 2,800 |
|
|
| (2,800 | ) |
|
| — |
|
|
| 2,800 |
|
|
| (2,508 | ) |
|
| 292 |
|
Licensing agreements |
|
| 560 |
|
|
| (61 | ) |
|
| 499 |
|
|
| 560 |
|
|
| (5 | ) |
|
| 555 |
|
|
| 560 |
|
|
| (116 | ) |
|
| 444 |
|
|
| 560 |
|
|
| (79 | ) |
|
| 481 |
|
Patents |
|
| 500 |
|
|
| (209 | ) |
|
| 291 |
|
|
| 500 |
|
|
| (157 | ) |
|
| 343 |
|
|
| 500 |
|
|
| (260 | ) |
|
| 240 |
|
|
| 500 |
|
|
| (226 | ) |
|
| 274 |
|
Trade names |
|
| 310 |
|
|
| (158 | ) |
|
| 152 |
|
|
| 310 |
|
|
| (106 | ) |
|
| 204 |
|
|
| 210 |
|
|
| (111 | ) |
|
| 99 |
|
|
| 310 |
|
|
| (176 | ) |
|
| 134 |
|
Total |
| $ | 42,475 |
|
| $ | (13,362 | ) |
| $ | 29,113 |
|
| $ | 45,326 |
|
| $ | (12,143 | ) |
| $ | 33,183 |
|
| $ | 38,912 |
|
| $ | (13,457 | ) |
| $ | 25,455 |
|
| $ | 42,596 |
|
| $ | (14,775 | ) |
| $ | 27,821 |
|
The Company evaluates the carrying value of intangible assets 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. Due to the current economic environment, particularly related to COVID-19, the Company assessed impairment triggers related to intangible assets during the second quarter of 2020. Based on this assessment, no triggers occurred to perform an impairment test, and 0 impairment losses of intangible assets were recorded.
Amortization expense was $1.3$1.0 million and $0.9$1.3 million for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively, and $4.0 million and $2.4 million and $2.7 million for the ninesix months ended SeptemberJune 30, 2020 and 2019, respectively, and 2018, respectively.was included in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income (Loss).
As of SeptemberJune 30, 2019,2020, estimated future amortization expense of our intangible assets was as follows:
(In thousands) |
| Amount |
|
|
|
|
| |
Remainder of 2019 |
| $ | 1,329 |
| ||||
2020 |
|
| 4,436 |
|
| $ | 2,076 |
|
2021 |
|
| 4,088 |
|
|
| 4,095 |
|
2022 |
|
| 3,464 |
|
|
| 3,472 |
|
2023 |
|
| 3,313 |
|
|
| 3,320 |
|
2024 |
|
| 3,227 |
| ||||
Thereafter |
|
| 12,483 |
|
|
| 9,265 |
|
Total |
| $ | 29,113 |
|
| $ | 25,455 |
|
12. LEASES
Operating Leases
We have operatingOperating leases forconsist of office space, automobiles and various other equipment in the United StatesU.S. and in certain international locations in which we do business. We also have otherOther contracts, such as manufacturing agreements and service agreements, which weare reviewed to determine if they contain any embedded leases. We specifically reviewed these other contracts to determine whether we have the right to substantially all of the economic benefit from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of a lease.
23
As of SeptemberJune 30, 2019, our2020, the operating leases havehad remaining lease terms of two monthsone month to sixfive years, some of which include options to extend the leases for up to fivenine years, and some of which include options to terminate the leases within three months. For those leases that are reasonably assured to be renewed, we have includedAs of June 30, 2020 and December 31, 2019, the option to extendCompany’s operating lease assets and operating lease liabilities were as part of our right of use asset and lease liability. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. follows:
(In thousands) |
| Classification |
| June 30, 2020 |
|
| December 31, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
|
|
Operating lease asset |
| Other assets |
| $ | 5,973 |
|
| $ | 8,452 |
|
Total lease asset |
|
|
| $ | 5,973 |
|
| $ | 8,452 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Current operating lease liability |
| Accrued expenses |
| $ | 1,854 |
|
| $ | 2,676 |
|
Non-current operating lease liability |
| Other non-current liabilities |
|
| 4,134 |
|
|
| 5,818 |
|
Total lease liability |
|
|
| $ | 5,988 |
|
| $ | 8,494 |
|
Lease expense related to these short-term leases (initial term of less than 12 months) was $5 thousand and $0.1 million for the three months ended June 30, 2020 and 2019, respectively, and was $14 thousand and $0.3 million for the three and ninesix months ended SeptemberJune 30, 2020 and 2019, respectively, and iswas included in cost of sales, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Income.Income (Loss). 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$0.1 million and $0.7$0.3 million for the three and nine months ended SeptemberJune 30, 2019. For lease agreements entered into or reassessed after2020 and 2019, respectively and was $0.3 million and $0.4 million for the adoption of Topic 842, we elected to not separate leasesix months ended June 30, 2020 and non-lease components. None of our lease agreements contain any material residual value guarantees or material restrictive covenants.2019, respectively.
Supplemental balance sheet information related to operating leases is as follows:
|
|
|
| September 30, |
|
| January 1, |
| ||
(In thousands) |
| Classification |
| 2019 |
|
| 2019 (1) |
| ||
Assets |
|
|
|
|
|
|
|
|
|
|
Operating lease asset |
| Other assets |
| $ | 18,529 |
|
| $ | 10,322 |
|
Total lease assets |
|
|
| $ | 18,529 |
|
| $ | 10,322 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Current operating lease liability |
| Accrued expenses |
| $ | 3,063 |
|
| $ | 2,948 |
|
Non-current operating lease liability |
| Other non-current liabilities |
|
| 15,659 |
|
|
| 7,374 |
|
Total lease liability |
|
|
| $ | 18,722 |
|
| $ | 10,322 |
|
|
|
The componentsComponents of lease expense included in the Condensed Consolidated Statements of Income (Loss) for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 were as follows:
(in thousands) |
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||||||||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||
(In thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||
Selling, general and administrative expenses |
| $ | 352 |
|
| $ | 1,050 |
|
| $ | 271 |
|
| $ | 349 |
|
| $ | 598 |
|
| $ | 698 |
|
Research and development expenses |
|
| 847 |
|
|
| 1,731 |
|
|
| 251 |
|
|
| 430 |
|
|
| 676 |
|
|
| 884 |
|
Cost of sales |
|
| 16 |
|
|
| 49 |
|
|
| 26 |
|
|
| 17 |
|
|
| 47 |
|
|
| 33 |
|
Total operating lease expense |
| $ | 1,215 |
|
| $ | 2,830 |
|
| $ | 548 |
|
| $ | 796 |
|
| $ | 1,321 |
|
| $ | 1,615 |
|
As of SeptemberJune 30, 2020 and December 31, 2019, operating lease liabilities included on the Condensed Consolidated Balance SheetSheets by future maturity were as follows:
(In thousands) |
| Amount |
|
| June 30, 2020 |
|
| December 31, 2019 |
| |||
Remainder of 2019 |
| $ | 1,044 |
| ||||||||
2020 |
|
| 3,417 |
|
| $ | 1,048 |
|
| $ | 2,856 |
|
2021 |
|
| 3,071 |
|
|
| 1,815 |
|
|
| 2,412 |
|
2022 |
|
| 2,672 |
|
|
| 1,514 |
|
|
| 1,705 |
|
2023 |
|
| 2,350 |
|
|
| 1,110 |
|
|
| 1,160 |
|
2024 |
|
| 478 |
|
|
| 482 |
| ||||
Thereafter |
|
| 8,258 |
|
|
| 264 |
|
|
| 264 |
|
Total lease payments |
|
| 20,812 |
|
|
| 6,229 |
|
|
| 8,879 |
|
Less: Interest |
|
| (2,090 | ) |
|
| (241 | ) |
|
| (385 | ) |
Present value of lease liabilities |
| $ | 18,722 |
|
| $ | 5,988 |
|
| $ | 8,494 |
|
Future operating lease payments include $7.6$0.5 million related to options to extend lease terms that are reasonably certain of being exercised. There are no legally binding leases that have not yet commenced.
24
As of December 31, 2018, future minimum rental payments under non-cancelable operating leases, including renewals determined to be reasonably assured as of December 31, 2018, with original maturities of greater than 12 months, were as follows:
(In thousands) |
| Amount (1) |
| |
2019 |
| $ | 3,873 |
|
2020 |
|
| 3,580 |
|
2021 |
|
| 2,771 |
|
2022 |
|
| 2,053 |
|
2023 |
|
| 1,317 |
|
Thereafter |
|
| 762 |
|
Total |
| $ | 14,356 |
|
|
|
Our leases do not provide an implicit borrowing rate and therefore we use anAn incremental borrowing rate is used based on the information available at the 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 ourthe weighted average lease terms and weighted average discount rates as of SeptemberJune 30, 2019:2020:
|
|
|
| |
Weighted average remaining lease term |
|
|
|
|
Operating leases with USD functional currency |
|
|
|
|
Operating leases with Euro functional currency |
|
|
|
|
Weighted average discount rate |
|
|
|
|
Operating leases with USD functional currency |
|
|
| % |
Operating leases with Euro functional currency |
|
|
| % |
Supplemental cash flow information related to operating leases is as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||
|
| Nine Months Ended |
|
| June 30, |
|
| June 30, |
| |||||||||||
(In thousands) |
| September 30, 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||
Cash paid for amounts included in the measurement of operating lease assets / liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities related to operating leases |
| $ | (775 | ) |
| $ | 770 |
|
| $ | 797 |
|
| $ | 1,477 |
|
| $ | 1,608 |
|
|
|
|
|
| ||||||||||||||||
Right-of-use assets obtained in exchange for lease obligations |
| $ | 21,418 |
|
| $ | 8 |
|
| $ | 9 |
|
| $ | 93 |
|
| $ | 10,396 |
|
25
Net Investment in Sales-Type Leases
We are the lessor in sales-type lease arrangements for network equipment, which have initial terms of up to five years. Our sales-type lease arrangements contain either a provision whereby the network equipment reverts back to us upon the expirationyears, and consisted 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 allocationfollowing as 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 SeptemberJune 30, 20192020 and December 31, 2018, we had 0 allowance for credit losses for our net investment in sales-type leases. As of September 30, 2019 and December 31, 2018, the components of the net investment in sales-type leases were as follows:2019:
|
| September 30, |
|
| December 31, |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| June 30, 2020 |
|
| December 31, 2019 |
| ||||
Current minimum lease payments receivable(1) |
| $ | 3,643 |
|
| $ | 11,339 |
|
| $ | 923 |
|
| $ | 1,201 |
|
Non-current minimum lease payments receivable(2) |
|
| 1,073 |
|
|
| 1,670 |
|
|
| 566 |
|
|
| 889 |
|
Total minimum lease payments receivable |
|
| 4,716 |
|
|
| 13,009 |
|
|
| 1,489 |
|
|
| 2,090 |
|
Less: Current unearned revenue |
|
| 445 |
|
|
| 631 |
|
|
| 265 |
|
|
| 365 |
|
Less: Non-current unearned revenue |
|
| 210 |
|
|
| 473 |
|
|
| 92 |
|
|
| 163 |
|
Net investment in sales-type leases |
| $ | 4,061 |
|
| $ | 11,905 |
|
| $ | 1,132 |
|
| $ | 1,562 |
|
| (1) | Included in other receivables on the Condensed Consolidated Balance |
| (2) | Included in other assets on the Condensed Consolidated Balance |
The componentsComponents of sales-type lease gross profit related to sales-type leases recognized at the lease commencement date and interest and dividend income included in the Condensed Consolidated Statements of Income (Loss) for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 were as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||
|
| Three Months Ended |
|
| Nine Months Ended |
|
| June 30, |
|
| June 30, |
| ||||||||||||
(In thousands) |
| September 30, 2019 |
|
| September 30, 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Sales - Network Solutions |
| $ | 47 |
|
| $ | 1,668 |
|
| $ | 12 |
|
| $ | 109 |
|
| $ | 50 |
|
| $ | 1,621 |
|
Cost of sales - Network Solutions |
|
| 25 |
|
|
| 660 |
| ||||||||||||||||
Less: Cost of sales - Network Solutions |
|
| 4 |
|
|
| 44 |
|
|
| 20 |
|
|
| 635 |
| ||||||||
Gross profit |
| $ | 22 |
|
| $ | 1,008 |
|
| $ | 8 |
|
| $ | 65 |
|
| $ | 30 |
|
| $ | 986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
| $ | 92 |
|
| $ | 278 |
|
| $ | 11 |
|
| $ | 99 |
|
| $ | 24 |
|
| $ | 186 |
|
As13. ALABAMA STATE INDUSTRIAL DEVELOPMENT AUTHORITY FINANCING AND ECONOMIC INCENTIVES
In conjunction with the 1995 expansion of September 30,our Huntsville, Alabama facility, we were approved for participation in an incentive program offered by the State of Alabama Industrial Development Authority (the “Authority”). Pursuant to the program, in January 1995, the Authority issued $20.0 million of its taxable revenue bonds (the “Taxable Revenue Bonds”) and loaned the proceeds from the sale of the Taxable Revenue Bonds to the Company. Further advances on the Taxable Revenue Bonds were made by the Authority, bringing the total amount to $50.0 million. The Taxable Revenue Bonds bore interest, payable monthly with an interest rate of 2% per annum. The Taxable Revenue Bonds’ aggregate principal amount outstanding as of December 31, 2019 future minimum lease payments to be received from sales-type leases wereof $24.6 million matured on January 1, 2020 and was repaid in full on January 2, 2020, using the funds held in a certificate of deposit by the Company. This certificate of deposit, which totaled $25.6 million, was included in short-term investments on the Condensed Consolidated Balance Sheet as follows:
(In thousands) |
| Amount |
| |
Remainder of 2019 |
| $ | 2,700 |
|
2020 |
|
| 1,162 |
|
2021 |
|
| 542 |
|
2022 |
|
| 225 |
|
2023 |
|
| 83 |
|
Thereafter |
|
| 4 |
|
Total |
| $ | 4,716 |
|
of December 31, 2019.
26
13.14. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
Since 1997, ourthe Company’s Board of Directors has approved multiple share repurchase programs that have authorized repurchases of ourits common stock, which are implemented through open market or private purchases from time to time as conditions warrant. During the ninesix months ended SeptemberJune 30, 2019,2020, we repurchased 13,000did 0t repurchase shares of our common stock at an average price of $14.06 per share.stock. As of SeptemberJune 30, 2019,2020, we 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.
Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in accumulated other comprehensive income (loss),loss, net of tax, by component for the three months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| 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 | ) |
|
| Three Months Ended June 30, 2020 |
| |||||||||||||||||
(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 March 31, 2020 |
| $ | (167 | ) |
| $ | (9,085 | ) |
| $ | (8,942 | ) |
| $ | 385 |
|
| $ | (17,809 | ) |
Other comprehensive income before reclassifications |
|
| 881 |
|
|
| — |
|
|
| 1,899 |
|
|
| — |
|
|
| 2,780 |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (508 | ) |
|
| 191 |
|
|
| — |
|
|
| — |
|
|
| (317 | ) |
Net current period other comprehensive income |
|
| 373 |
|
|
| 191 |
|
|
| 1,899 |
|
|
| — |
|
|
| 2,463 |
|
As of June 30, 2020 |
| $ | 206 |
|
| $ | (8,894 | ) |
| $ | (7,043 | ) |
| $ | 385 |
|
| $ | (15,346 | ) |
|
| Three Months Ended June 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 March 31, 2019 |
| $ | (378 | ) |
| $ | (7,920 | ) |
| $ | (6,972 | ) |
| $ | 385 |
|
| $ | (14,885 | ) |
Other comprehensive income before reclassifications |
|
| 180 |
|
|
| — |
|
|
| 533 |
|
|
| — |
|
|
| 713 |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (73 | ) |
|
| 150 |
|
|
| — |
|
|
| — |
|
|
| 77 |
|
Net current period other comprehensive income |
|
| 107 |
|
|
| 150 |
|
|
| 533 |
|
|
| — |
|
|
| 790 |
|
As of June 30, 2019 |
| $ | (271 | ) |
| $ | (7,770 | ) |
| $ | (6,439 | ) |
| $ | 385 |
|
| $ | (14,095 | ) |
| (1) | With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were reclassified to retained earnings. |
|
| 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 | ) |
27
The following tables present the changes in accumulated other comprehensive income (loss),loss, net of tax, by component for the ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| 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 | ) |
|
| Six Months Ended June 30, 2020 |
| |||||||||||||||||
(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, 2019 |
| $ | (284 | ) |
| $ | (9,226 | ) |
| $ | (7,292 | ) |
| $ | 385 |
|
| $ | (16,417 | ) |
Other comprehensive income (loss) before reclassifications |
|
| (50 | ) |
|
| — |
|
|
| 249 |
|
|
| — |
|
|
| 199 |
|
Amounts reclassified from accumulated other comprehensive income |
|
| 540 |
|
|
| 332 |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
Net current period other comprehensive income |
|
| 490 |
|
|
| 332 |
|
|
| 249 |
|
|
| — |
|
|
| 1,071 |
|
As of June 30, 2020 |
| $ | 206 |
|
| $ | (8,894 | ) |
| $ | (7,043 | ) |
| $ | 385 |
|
| $ | (15,346 | ) |
|
| Six Months Ended June 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 |
|
| 411 |
|
|
| — |
|
|
| (627 | ) |
|
| — |
|
|
| (216 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (119 | ) |
|
| 271 |
|
|
| — |
|
|
| — |
|
|
| 152 |
|
Amounts reclassified to retained earnings (1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 385 |
|
|
| 385 |
|
Net current period other comprehensive income (loss) |
|
| 292 |
|
|
| 271 |
|
|
| (627 | ) |
|
| 385 |
|
|
| 321 |
|
As of June 30, 2019 |
| $ | (271 | ) |
| $ | (7,770 | ) |
| $ | (6,439 | ) |
| $ | 385 |
|
| $ | (14,095 | ) |
| (1) | With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were reclassified to retained earnings. |
|
| Nine Months Ended September 30, 2018 |
| |||||||||||||
(In thousands) |
| Unrealized Gains (Losses) on Available- for-Sale Securities |
|
| Defined Benefit Plan Adjustments |
|
| Foreign Currency Adjustments |
|
| Total |
| ||||
As of December 31, 2017 |
| $ | 2,567 |
|
| $ | (4,286 | ) |
| $ | (1,576 | ) |
| $ | (3,295 | ) |
Other comprehensive income (loss) before reclassifications |
|
| 869 |
|
|
| — |
|
|
| (3,033 | ) |
|
| (2,164 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| (989 | ) |
|
| 104 |
|
|
| — |
|
|
| (885 | ) |
Amounts reclassified to retained earnings (1) |
|
| (3,220 | ) |
|
| — |
|
|
| — |
|
|
| (3,220 | ) |
Net current period other comprehensive income (loss) |
|
| (3,340 | ) |
|
| 104 |
|
|
| (3,033 | ) |
|
| (6,269 | ) |
As of September 30, 2018 |
| $ | (773 | ) |
| $ | (4,182 | ) |
| $ | (4,609 | ) |
| $ | (9,564 | ) |
|
|
28
The following tables present the details of reclassifications out of accumulated other comprehensive income (loss)loss for the three months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended September 30, 2019 |
| Three Months Ended June 30, 2020 | ||||||||
(In thousands) |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | ||
Unrealized gains (losses) on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses on sales of securities |
| $ | (32 | ) |
| Net investment gain | ||||||
Net realized gains on sales of securities |
| $ | 686 |
|
| Net investment gain (loss) | ||||||
Defined benefit plan adjustments – actuarial losses |
|
| (130 | ) |
| (1) |
|
| (277 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| (162 | ) |
|
|
|
| 409 |
|
|
|
Tax benefit |
|
| 48 |
|
|
| ||||||
Tax expense |
|
| (92 | ) |
|
| ||||||
Total reclassifications for the period, net of tax |
| $ | (114 | ) |
|
|
| $ | 317 |
|
|
|
| (1) | Included in the computation of net periodic pension cost. See Note 5. |
|
| Three Months Ended September 30, 2018 |
| Three Months Ended June 30, 2019 | ||||||||
(In thousands) |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | ||
Unrealized gains (losses) on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on sales of securities |
| $ | 1,676 |
|
| Net investment gain |
| $ | 99 |
|
| Net investment gain (loss) |
Defined benefit plan adjustments – actuarial losses |
|
| (54 | ) |
| (1) |
|
| (217 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 1,622 |
|
|
|
|
| (118 | ) |
|
|
Tax expense |
|
| (419 | ) |
|
| ||||||
Tax benefit |
|
| 41 |
|
|
| ||||||
Total reclassifications for the period, net of tax |
| $ | 1,203 |
|
|
|
| $ | (77 | ) |
|
|
| (1) | Included in the computation of net periodic pension cost. See Note 5. |
The following tables present the details of reclassifications out of accumulated other comprehensive income (loss)loss for the ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Nine Months Ended September 30, 2019 |
| Six Months Ended June 30, 2020 | ||||||||
(In thousands) |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | ||
Unrealized gains (losses) on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on sales of securities |
| $ | 128 |
|
| Net investment gain | ||||||
Net realized losses on sales of securities |
| $ | (730 | ) |
| Net investment gain | ||||||
Defined benefit plan adjustments – actuarial losses |
|
| (523 | ) |
| (1) |
|
| (481 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| (395 | ) |
|
|
|
| (1,211 | ) |
|
|
Tax benefit |
|
| 129 |
|
|
|
|
| 339 |
|
|
|
Total reclassifications for the period, net of tax |
| $ | (266 | ) |
|
|
| $ | (872 | ) |
|
|
| (1) | Included in the computation of net periodic pension cost. See Note 5. |
29
|
| Nine Months Ended September 30, 2018 |
| Six Months Ended June 30, 2019 | ||||||||
(In thousands) |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Statement Where Net Income Is Presented | ||
Unrealized gains (losses) on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on sales of securities |
| $ | 1,352 |
|
| Net investment gain |
| $ | 161 |
|
| Net investment gain |
Defined benefit plan adjustments – actuarial losses |
|
| (151 | ) |
| (1) |
|
| (393 | ) |
| (1) |
Total reclassifications for the period, before tax |
|
| 1,201 |
|
|
|
|
| (232 | ) |
|
|
Tax expense |
|
| (316 | ) |
|
| ||||||
Tax benefit |
|
| 80 |
|
|
| ||||||
Total reclassifications for the period, net of tax |
| $ | 885 |
|
|
|
| $ | (152 | ) |
|
|
| (1) | Included in the computation of net periodic pension cost. See Note 5. |
The following table presents the tax effects related to the change in each component of other comprehensive income (loss) for the three months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| June 30, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||||||||||||||||||||
(In thousands) |
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
| ||||||||||||
Unrealized gain (loss) on available-for-sale securities |
| $ | (53 | ) |
| $ | 14 |
|
| $ | (39 | ) |
| $ | 1,632 |
|
| $ | (424 | ) |
| $ | 1,208 |
| ||||||||||||||||||||||||
Unrealized gain on available-for-sale securities |
| $ | 1,191 |
|
| $ | (310 | ) |
| $ | 881 |
|
| $ | 243 |
|
| $ | (63 | ) |
| $ | 180 |
| ||||||||||||||||||||||||
Reclassification adjustment for amounts related to available-for-sale investments included in net income (loss) |
|
| 32 |
|
|
| (8 | ) |
|
| 24 |
|
|
| (1,676 | ) |
|
| 436 |
|
|
| (1,240 | ) |
|
| (686 | ) |
|
| 178 |
|
|
| (508 | ) |
|
| (99 | ) |
|
| 26 |
|
|
| (73 | ) |
Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income (loss) |
|
| 130 |
|
|
| (40 | ) |
|
| 90 |
|
|
| 54 |
|
|
| (17 | ) |
|
| 37 |
|
|
| 277 |
|
|
| (86 | ) |
|
| 191 |
|
|
| 217 |
|
|
| (67 | ) |
|
| 150 |
|
Foreign currency translation adjustment |
|
| (2,486 | ) |
|
| — |
|
|
| (2,486 | ) |
|
| (451 | ) |
|
| — |
|
|
| (451 | ) |
|
| 1,899 |
|
|
| — |
|
|
| 1,899 |
|
|
| 533 |
|
|
| — |
|
|
| 533 |
|
Total Other Comprehensive Loss |
| $ | (2,377 | ) |
| $ | (34 | ) |
| $ | (2,411 | ) |
| $ | (441 | ) |
| $ | (5 | ) |
| $ | (446 | ) | ||||||||||||||||||||||||
Total Other Comprehensive Income (Loss) |
| $ | 2,681 |
|
| $ | (218 | ) |
| $ | 2,463 |
|
| $ | 894 |
|
| $ | (104 | ) |
| $ | 790 |
|
The following table presents the tax effects related to the change in each component of other comprehensive income (loss) for the ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Nine Months Ended |
|
| Nine Months Ended |
|
| Six Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| June 30, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||||||||||||||||||||
(In thousands) |
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
|
| Before-Tax Amount |
|
| Tax (Expense) Benefit |
|
| Net-of-Tax Amount |
| ||||||||||||
Unrealized gain (loss) on available-for-sale securities |
| $ | 503 |
|
| $ | (131 | ) |
| $ | 372 |
|
| $ | 1,174 |
|
| $ | (305 | ) |
| $ | 869 |
|
| $ | (68 | ) |
| $ | 18 |
|
| $ | (50 | ) |
| $ | 555 |
|
| $ | (144 | ) |
| $ | 411 |
|
Reclassification adjustment for amounts related to available-for-sale investments included in net income (loss) |
|
| (128 | ) |
|
| 33 |
|
|
| (95 | ) |
|
| (1,352 | ) |
|
| 363 |
|
|
| (989 | ) |
|
| 730 |
|
|
| (190 | ) |
|
| 540 |
|
|
| (161 | ) |
|
| 42 |
|
|
| (119 | ) |
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 |
|
|
| 481 |
|
|
| (149 | ) |
|
| 332 |
|
|
| 393 |
|
|
| (122 | ) |
|
| 271 |
|
Foreign currency translation adjustment |
|
| (3,113 | ) |
|
| — |
|
|
| (3,113 | ) |
|
| (3,033 | ) |
|
| — |
|
|
| (3,033 | ) |
|
| 249 |
|
|
| — |
|
|
| 249 |
|
|
| (627 | ) |
|
| — |
|
|
| (627 | ) |
Total Other Comprehensive Income (Loss) |
| $ | (2,215 | ) |
| $ | (260 | ) |
| $ | (2,475 | ) |
| $ | (6,280 | ) |
| $ | 11 |
|
| $ | (6,269 | ) |
| $ | 1,392 |
|
| $ | (321 | ) |
| $ | 1,071 |
|
| $ | 160 |
|
| $ | (224 | ) |
| $ | (64 | ) |
30
14.15. EARNINGS (LOSS) PER SHARE
A summary of the calculation of basic and diluted earnings (loss) per share for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands, except per share amounts) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (46,123 | ) |
| $ | 7,589 |
|
| $ | (41,358 | ) |
| $ | (10,895 | ) |
| $ | 752 |
|
| $ | 3,995 |
|
| $ | (9,217 | ) |
| $ | 4,765 |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares – basic |
|
| 47,824 |
|
|
| 47,710 |
|
|
| 47,803 |
|
|
| 47,927 |
|
|
| 47,958 |
|
|
| 47,802 |
|
|
| 47,957 |
|
|
| 47,792 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
| — |
|
|
| 27 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 7 |
|
|
| — |
|
|
| — |
| |
PSUs, RSUs and restricted stock |
|
| — |
|
|
| 97 |
|
|
| — |
|
|
| — |
|
|
| 296 |
|
|
| 227 |
|
|
| — |
|
|
| 147 |
|
Weighted average number of shares – diluted |
|
| 47,824 |
|
|
| 47,834 |
|
|
| 47,803 |
|
|
| 47,927 |
|
|
| 48,254 |
|
|
| 48,036 |
|
|
| 47,957 |
|
|
| 47,939 |
|
Earnings (loss) per share – basic |
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
| $ | 0.02 |
|
| $ | 0.08 |
|
| $ | (0.19 | ) |
| $ | 0.10 |
|
Earnings (loss) per share – diluted |
| $ | (0.96 | ) |
| $ | 0.16 |
|
| $ | (0.87 | ) |
| $ | (0.23 | ) |
| $ | 0.02 |
|
| $ | 0.08 |
|
| $ | (0.19 | ) |
| $ | 0.10 |
|
For the three months ended SeptemberJune 30, 2018, 1.82020 and 2019, 0.1 million and 15 thousand shares, respectively, and for the six months ended June 30, 2020 and 2019, 0.2 million and 0.1 million shares, respectively, of unvested PSUs, RSUs and restricted stock were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.
For the three months ended June 30, 2020 and 2019, 4.1 million and 1.9 million stock options, respectively, and for the six months ended June 30, 2020 and 2019, 4.9 million and 2.3 million stock options, respectively, were outstanding but were not included in the computation of diluted earnings per share. These stock options were excluded because their exercise prices were greater than the average market price of the common shares during the quarter, therefore making them anti-dilutive under the treasury stock method.
As a result of the net loss for the three months ended September 30, 2019, and for the nine months ended September 30, 2019 and 2018, 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.
15.16. SEGMENT INFORMATION
We operate inThe chief operating decision maker regularly reviews the Company’s financial performance based on 2 reportable segments: (1) Network Solutions and (2) Services & Support. Network Solutions includes hardware products and software definedproducts and next-generation virtualized solutions used in service provider or business networks, as well as prior-generation products. Services & Support includes our suitea portfolio of ProCloud managed services,maintenance, network installation engineering and maintenancesolution integration services, which include hosted cloud services and fee-based technical support and equipment repair/replacement plans.subscription services.
We evaluate theThe performance of our segments is evaluated 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, functionalCompany-wide basis only. There is no inter-segment revenue. Asset information by reportable segment is not produced and, therefore, is not reported.
The following table presentstables present information about the sales and gross profit of our reportable segments for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018. We do not produce asset information by reportable segment; therefore, it is not reported.2019.
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| June 30, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||||
(In thousands) |
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
| ||||||||
Network Solutions |
| $ | 94,018 |
|
| $ | 37,574 |
|
| $ | 121,043 |
|
| $ | 51,100 |
|
| $ | 111,323 |
|
| $ | 47,252 |
|
| $ | 139,167 |
|
| $ | 58,992 |
|
Services & Support |
|
| 20,074 |
|
|
| 8,757 |
|
|
| 19,292 |
|
|
| 7,348 |
|
|
| 17,392 |
|
|
| 6,220 |
|
|
| 17,224 |
|
|
| 6,023 |
|
Total |
| $ | 114,092 |
|
| $ | 46,331 |
|
| $ | 140,335 |
|
| $ | 58,448 |
|
| $ | 128,715 |
|
| $ | 53,472 |
|
| $ | 156,391 |
|
| $ | 65,015 |
|
|
| Nine Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||||||||
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| June 30, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||||
(In thousands) |
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
|
| Sales |
|
| Gross Profit |
| ||||||||
Network Solutions |
| $ | 359,007 |
|
| $ | 151,654 |
|
| $ | 341,359 |
|
| $ | 133,175 |
|
| $ | 208,695 |
|
| $ | 92,998 |
|
| $ | 264,989 |
|
| $ | 114,080 |
|
Services & Support |
|
| 55,267 |
|
|
| 20,304 |
|
|
| 47,830 |
|
|
| 15,002 |
|
|
| 34,543 |
|
|
| 12,074 |
|
|
| 35,193 |
|
|
| 11,547 |
|
Total |
| $ | 414,274 |
|
| $ | 171,958 |
|
| $ | 389,189 |
|
| $ | 148,177 |
|
| $ | 243,238 |
|
| $ | 105,072 |
|
| $ | 300,182 |
|
| $ | 125,627 |
|
31
Sales by Category
In addition to our reporting segments, werevenue is also report revenuereported for the following 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 ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Access & Aggregation |
| $ | 65,114 |
|
| $ | 91,901 |
|
| $ | 274,313 |
|
| $ | 258,323 |
|
| $ | 82,776 |
|
| $ | 109,421 |
|
| $ | 148,742 |
|
| $ | 209,199 |
|
Subscriber Solutions & Experience |
|
| 42,476 |
|
|
| 38,552 |
|
|
| 119,731 |
|
|
| 103,213 |
|
|
| 40,393 |
|
|
| 40,502 |
|
|
| 82,572 |
|
|
| 77,255 |
|
Traditional & Other Products |
|
| 6,502 |
|
|
| 9,882 |
|
|
| 20,230 |
|
|
| 27,653 |
|
|
| 5,546 |
|
|
| 6,468 |
|
|
| 11,924 |
|
|
| 13,728 |
|
Total |
| $ | 114,092 |
|
| $ | 140,335 |
|
| $ | 414,274 |
|
| $ | 389,189 |
|
| $ | 128,715 |
|
| $ | 156,391 |
|
| $ | 243,238 |
|
| $ | 300,182 |
|
Sales by Geographic Area
The following table representspresents sales information by geographic area for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| |||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| |||||||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
United States |
| $ | 83,144 |
|
| $ | 83,730 |
|
| $ | 230,960 |
|
| $ | 214,039 |
|
| $ | 84,458 |
|
| $ | 75,288 |
|
| $ | 163,449 |
|
| $ | 147,816 |
| |||||
International |
|
| 30,948 |
|
|
| 56,605 |
|
|
| 183,314 |
|
|
| 175,150 |
|
|
| 44,257 |
|
|
| 81,103 |
|
|
| 79,789 |
|
|
| 152,366 |
| |||||
Total |
| $ | 114,092 |
|
| $ | 140,335 |
|
| $ | 414,274 |
|
| $ | 389,189 |
|
| $ | 128,715 |
|
| $ | 156,391 |
|
| $ | 243,238 |
|
| $ | 300,182 |
|
16.17. LIABILITY FOR WARRANTY RETURNS
Our products generally include warranties of 90 days to five years for product defects. We accrue for warrantyWarranty returns are accrued at the time revenue is recognized based on ouran 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 productsProducts 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 estimatesEstimates 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, weestimated, additional warranty expense will be required to record additional warranty expense.incurred. Alternatively, if we provide for more reservesactual costs incurred are less than we require, we will reverseestimated, a portion of such provisionsthe warranty reserves will be reversed in future periods. The liability for warranty obligations totaled $8.7$7.3 million and $8.6$8.4 million at Septemberas of June 30, 20192020 and December 31, 2018,2019, respectively, which amountsand are included in accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets. During the three months ended September 30, 2018, we had a reversal of prior provisions, the impact of which is reflected in the table below.
A reconciliation of the beginningwarranty expense and ending warranty accrualrelated write-off activity for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Balance at beginning of period |
| $ | 8,972 |
|
| $ | 10,111 |
|
| $ | 8,623 |
|
| $ | 9,724 |
|
| $ | 7,635 |
|
| $ | 8,802 |
|
| $ | 8,394 |
|
| $ | 8,623 |
|
Plus: Amounts charged to cost and expenses |
|
| 816 |
|
|
| (34 | ) |
|
| 3,796 |
|
|
| 6,649 |
|
|
| 393 |
|
|
| 1,849 |
|
|
| 338 |
|
|
| 2,980 |
|
Less: Deductions |
|
| (1,131 | ) |
|
| (1,053 | ) |
|
| (3,762 | ) |
|
| (7,349 | ) |
|
| (734 | ) |
|
| (1,679 | ) |
|
| (1,438 | ) |
|
| (2,631 | ) |
Balance at end of period |
| $ | 8,657 |
|
| $ | 9,024 |
|
| $ | 8,657 |
|
| $ | 9,024 |
|
| $ | 7,294 |
|
| $ | 8,972 |
|
| $ | 7,294 |
|
| $ | 8,972 |
|
32
17.18. COMMITMENTS AND CONTINGENCIES
Securities Class Action Lawsuit
On October 17, 2019, a purported stockholder class action lawsuit, captioned Burbridge v. ADTRAN, Inc. et al., Docket No. 19-cv-09619, was filed in the United States District Court for the Southern District of New York against the Company, 2 of its current executive officers and 1 of its former executive officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages on behalf of purported purchasers of ADTRAN securities between February 28, 2019 and October 9, 2019. The lawsuit claims that the defendants made materially false and misleading statements regarding, and/or failed to disclose material adverse facts about, the Company’s business, operations and prospects, specifically relating to the Company’s internal control over financial reporting, excess and obsolete inventory reserves, financial results and shipmentsdemand from certain customers. The lawsuit was transferred to the U.S. District Court for the Northern District of Alabama on January 7, 2020, and co-lead plaintiffs have been appointed to represent the putative class. The plaintiffs filed an amended complaint on April 30, 2020. The defendants filed a Latin American customer. Investors in ADTRAN securities have until December 16, 2019motion to movedismiss the courtamended complaint on June 17, 2020. The plaintiffs filed an opposition brief to serve as lead plaintiff in this action. the defendants’ motion to dismiss on July 17, 2020. The defendants intend to file a reply to the plaintiffs’ brief on August 17, 2020. We disagree withdeny the claims madeallegations in the complaint, as amended, 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.
Shareholder Derivative Lawsuit
On March 31, 2020, a shareholder derivative suit, captioned Johnson (Derivatively on behalf of ADTRAN) v. T. Stanton, M. Foliano, R. Shannon, and Board of Directors, case no. 5:20-cv-00447, was filed in the U.S. District Court of Northern Alabama against 2 of the Company’s current executive officers, 1 of its former executive officers and its Board of Directors. The derivative suit, which is purportedly brought on behalf of ADTRAN, makes similar allegations as the shareholder class action and accuses the directors and officers of breaches of fiduciary duty in connection with those allegations. On June 7, 2020, the Court entered an order staying the derivative litigation pending resolution of the motion to dismiss in the securities class action. The Company and its defendants disagree with the claims made in the complaint, and the defendants intend to vigorously defend against this lawsuit. At this time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with this lawsuit.
Other Legal Matters
In addition to the litigation described above, from time to time we 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 contractual and other commercial disputes. Such Legal Matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Additionally, an unfavorable outcome in aany legal matter, including in a patent dispute, could require the Company to pay damages, entitle claimants to other relief, such as 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 it is currently involved, the Company does not expect that the ultimate outcome of such Legal Matters will individually or in the aggregate have a material adverse effect on its business, results of operations, financial condition or cash flows.
Performance Bonds
Certain contracts, customers and jurisdictions in which we do business require us to provide various guarantees of performance such as bid bonds, performance bonds and customs bonds. As of June 30, 2020 and December 31, 2019, we had commitments related to these bonds totaling $11.3 million and $9.3 million, respectively, which expire at various dates through August 2024. Although the triggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default under each contract, the probability of which we believe is remote.
In June of 2020, the Company entered into a letter of credit with a bank to guarantee performance obligations under a contract with a customer. The letter of credit is secured by a pledge of collateral in the amount of $5.0 million, of which $1.2 million is included in restricted cash and $3.8 million is included in long-term investments on the Condensed Consolidated Balance Sheet as of June 30, 2020. Currently, the Company is required to maintain a minimum collateral value of approximately $5.0 million. The minimum collateral value will increase over time as the Company reaches certain milestones in the contract. The maximum collateral value required under the contract will be approximately $12.0 million, and this is expected to occur in February 2021. This minimum collateral value will increase further if the Company changes the mix of investments away from restricted cash and into other investments. Any shortfalls in the minimum collateral value are required to be restored by the Company from available cash and cash equivalents, short-term investments or long-term investments. The obligations under the customer contract will be performed over multiple years. The collateral under the letter of credit will be released when all obligations under the customer contract have been met. As of June 30, 2020, the Company was in compliance with all contractual requirements under the letter of credit.
Investment Commitment
We have committed to invest up to an aggregate of $7.9$5.0 million in 2a private equity funds,fund, of which $7.7$4.9 million has been appliedcontributed as of SeptemberJune 30, 2019.2020.
18.19. CURRENT EXPECTED CREDIT LOSSES
Under ASC 326 – Financial Instruments – Credit Losses, the Company estimates credit losses for the contractual life of assets that are measured at amortized cost and are within the scope of this guidance, which includes accounts receivable, net investment in sales-type leases, contract assets under the revenue recognition model and outstanding notes receivable. Where appropriate, the Company pools assets if similar risk characteristics exist. Additionally, the Company analyzes its available-for-sale debt securities for impairment and records a credit loss allowance as needed.
Assets Measured at Amortized Cost
Accounts Receivable
The Company records accounts receivable in the normal course of business as products are shipped or services are performed and invoiced, but payment has not yet been remitted by the customer. As of January 1, 2020 and June 30, 2020, the Company’s outstanding accounts receivable balance was $90.5 million and $95.3 million, respectively. The Company assessed the need for an allowance for credit losses related to its outstanding accounts receivable as of June 30, 2020 and January 1, 2020 using the historical loss-rate method as well as assessing asset-specific risks. The Company’s historical losses related to accounts receivable have been immaterial as evidenced by its historical allowance and write-offs due to uncollectability. The assessment of asset-specific risks included the evaluation of relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to pay, such as the customer’s current financial condition, credit rating by geographic location, as provided by a third party and/or by customer, if needed, and overall macro-economic conditions in which the customer operates. The Company pooled assets by geographic location to determine if an allowance should be applied to its accounts receivable balance, assessing the specific country risk rating and overall economics of that particular country. If elevated risk existed, or customer specific risk indicated the accounts receivable balance was at risk, the Company further analyzed the need for an allowance related to specific accounts receivable balances. Additionally, the Company determined that significant changes to customer country risk rating from period-to-period and from the end of the prior year to the end of the current quarter would require further review and analysis by the Company.
Accounts receivable balances are considered past due when payment has not been received by the date indicated on the relevant invoice or based on agreed upon terms between the customer and the Company.
NaN allowance for credit loss was recorded on January 1, 2020 (the “implementation date”) or during the three and six months ended June 30, 2020 related to accounts receivable. The Company’s allowance for credit losses related to accounts receivable was $38 thousand as of June 30, 2020 and December 31, 2019, all of which was expensed prior to January 1, 2020.
Contract Assets
The Company records contract assets when it has recognized revenue but has not yet billed the customer. As of January 1, 2020 and June 30, 2020, the Company’s outstanding contract asset balance was $2.8 million and $1.0 million, respectively, which is included in other receivables on the Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2020. The Company assessed the need for an allowance for credit losses related to its outstanding contract assets as of June 30, 2020 and January 1, 2020 using the historical loss-rate method as well as asset-specific risks. The Company’s historical losses related to contract assets receivable have been immaterial as evidenced by historical write-offs due to uncollectability. Asset-specific risk included the evaluation of relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to pay once invoiced, such as the customer’s financial condition, credit rating by geographic location as provided by a third party and/or by customer, if needed, and overall macro-economic conditions in which the customer operates. The Company pooled assets by geographic location to determine if an allowance should be applied to its contract asset balance, assessing the specific country risk rating and overall economics of that particular country. If elevated risk existed, or customer specific risk indicated the contract balance was at risk, the Company further analyzed the need for an allowance related to specific customer balances. Additionally, the Company determined that significant changes to customer country risk rating from period-to-period and from the end of the prior year to the end of the current quarter would be subject to further review and analysis by the Company.
NaN allowance for credit loss was recorded on the implementation date or during the three and six months ended June 30, 2020 related to contract assets.
Net Investment in Sales-Type Leases
The Company is the lessor in sales-type lease arrangements for network equipment. As of January 1, 2020 and June 30, 2020, the Company’s outstanding net investment in sales-type leases was $1.6 million and $1.1 million, respectively, which is included in other receivables and other assets on the Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2020. The Company assessed the need for an allowance for credit losses related to future receivables under its outstanding sales-type leases as of June 30, 2020 and January 1, 2020 using the historical loss-rate method as well as asset-specific risks. The Company’s historical losses related to contract assets receivable have been immaterial as evidenced by historical write-offs due to uncollectability. Asset-specific risk included the evaluation of relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to pay once invoiced, such as the customer’s financial condition, credit rating by geographic location as provided by a third party and/or by customer, if needed, and overall macro-economic conditions in which the customer operates.
The following table presents amortized cost basis in sales-type leases based on payment activity:
|
| Sales-Type Leases Amortized Cost Basis by Origination Year |
| |||||||||||||||||||||||||
(In thousands) |
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Total |
| |||||||
Payment performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
| $ | 43 |
|
| $ | 261 |
|
| $ | 500 |
|
| $ | 187 |
|
| $ | 127 |
|
| $ | 14 |
|
| $ | 1,132 |
|
Non-performing |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 43 |
|
| $ | 261 |
|
| $ | 500 |
|
| $ | 187 |
|
| $ | 127 |
|
| $ | 14 |
|
| $ | 1,132 |
|
Sales-type lease receivables are considered past due when payment has not been received based on agreed upon terms between the customer and the Company. NaN allowance for credit loss was recorded on the implementation date or during the three and six months ended June 30, 2020 related to sales-type leases.
Secured Loan Receivable
The Company has a secured loan receivable totaling $0.9 million as of June 30, 2020 and January 1, 2020, which originated in February 2019, and is included in long-term investments on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019. The Company assessed the need for an allowance for credit loss related to its secured loan receivable as of June 30, 2020 and January 1, 2020 using the historical loss-rate method as well as asset-specific risks. There have been 0 historical losses related to this receivable. Asset-specific risks included the evaluation of relevant available information, from internal and external sources, relating to current conditions that may affect the customer’s ability to repay the loan upon maturity, such as the customer’s current financial condition, credit rating specific to the customer as determined by a third party and current overall economic conditions, as well as a Company valuation prepared by a third party which was based on reasonable and supportable forecasts as provided by management. Accrued interest receivable on the secured loan receivable, which is included in other receivables on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, totaled $24 thousand and $0 as of January 1, 2020 and June 30, 2020, respectively, and was excluded from the estimate of credit losses for both periods based on the Company’s accounting policy election.
NaN allowance for credit loss was recorded on the implementation date or during the three and six months ended June 30, 2020 related to the secured loan receivable.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of January 1, 2020 or June 30, 2020.
Available-for-Sale Debt Securities
As of January 1, 2020 and June 30, 2020, the Company’s available-for-sale debt securities totaled $37.7 million and $42.6 million, respectively. These securities were analyzed at the individual investment level, by CUSIP, to limit credit losses, if applicable, to reflect only the amount by which the fair value of the security was less than its amortized cost. The Company noted that, as of January 1, 2020 and June 30, 2020, there was no intent to sell any of its available-for-sale debt securities before maturity, and, therefore, the Company assessed the need for an allowance for each of its available-for-sale debt securities in which the fair value was less than its amortized cost as of January 1, 2020 and June 30, 2020. Accrued interest receivable on available-for-sale debt securities, which is included in other receivables on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, totaled $0.1 million as of January 1, 2020 and June 30, 2020, and was excluded from the estimate of credit losses for both periods based on the Company’s accounting policy election. Income generated from available-for-sale debt securities was recorded as interest and dividend income in the Condensed Consolidated Statements of Income (Loss).
The Company had 43 positions in available-for-sale debt securities that were in an unrealized loss position as of June 30, 2020, which are presented in the table below:
(In thousands) |
| Continuous Unrealized Loss Position for Less than 12 Months |
|
| Continuous Unrealized Loss Position for 12 Months or Greater |
|
| Total |
| |||||||||||||||
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
Corporate bonds |
|
| 865 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| 865 |
|
|
| (1 | ) |
Municipal fixed-rate bonds |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Asset-backed bonds |
|
| 331 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| 331 |
|
|
| (4 | ) |
Mortgage/Agency-backed bonds |
|
| 1,017 |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| 1,017 |
|
|
| (12 | ) |
U.S. government bonds |
|
| 900 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 900 |
|
|
| — |
|
Foreign government |
|
| 75 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 75 |
|
|
| — |
|
Commercial paper |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 3,188 |
|
| $ | (17 | ) |
| $ | — |
|
| $ | — |
|
| $ | 3,188 |
|
| $ | (17 | ) |
The following table outlines the available-for-sale debt securities in an unrealized loss position as of January 1, 2020:
(In thousands) |
| Continuous Unrealized Loss Position for Less than 12 Months |
|
| Continuous Unrealized Loss Position for 12 Months or Greater |
|
| Total |
| |||||||||||||||
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
Corporate bonds |
|
| 203 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 203 |
|
|
| — |
|
Municipal fixed-rate bonds |
|
| 930 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 930 |
|
|
| — |
|
Asset-backed bonds |
|
| 797 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| 797 |
|
|
| (3 | ) |
Mortgage/Agency-backed bonds |
|
| 2,594 |
|
|
| (6 | ) |
|
| 136 |
|
|
| (2 | ) |
|
| 2,730 |
|
|
| (8 | ) |
U.S. government bonds |
|
| 4,070 |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| 4,070 |
|
|
| (9 | ) |
Total |
| $ | 8,594 |
|
| $ | (18 | ) |
| $ | 136 |
|
| $ | (2 | ) |
| $ | 8,730 |
|
| $ | (20 | ) |
For those available-for-sale debt securities whose fair value was less than its amortized cost basis, the Company analyzed additional criteria such as adverse conditions specifically related to the security, an industry or geographic area, failure of the issuer of the security to make scheduled interest or principal payments, if applicable, and any changes to the rating of the security by a rating agency to determine if a credit loss existed. The Company used information provided by its investment manager to determine if any scheduled interest or principal payments had not been received and used a third party to determine if any changes to credit ratings had occurred. The Company noted that all principal and interest payments had been received as scheduled and that there had been no changes in credit ratings year-over-year or period-over-period that warranted further review.
NaN allowance for credit loss was recorded on the implementation date or during the three and six months ended June 30, 2020 related to the Company’s available-for-sale debt securities.
20. RESTRUCTURING
During the second half of 2019, the Company implemented a restructuring plan to realign its expense structure with the reduction in revenue experienced in recent years and overall Company objectives. Management assessed the efficiency of operations and, in turn, consolidated locations and personnel, among other things, where possible. As part of this restructuring plan, the Company announced plans to reduce its overall operating expenses, both in the U.S. and internationally.
In OctoberFebruary 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 a certain portion of ourits workforce predominantly in Germany, which included the closure of ourthe Company’s office location in Munich, Germany accompanied by relocation or severance benefits for the affected employees. We also offered voluntaryVoluntary early retirement was offered to certain other employees, which was announced in March 2019. The restructuring is expected to be completed in the fourth quarter of 2019.
In January 2018, we announced an early retirement incentive program for employees that met certain requirements. The cumulative amount incurred during the year ended December 31, 2018 related to this restructuring program was $7.3 million, of which $0.3 million and $7.2 million was incurred during the three and nine months ended September 30, 2018, respectively. We do not expect to incur any additional expenses related to this restructuring program.
A reconciliation of the beginning and ending restructuring liability, which is included in accrued wages and benefits in the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||
(In thousands) |
| September 30, 2019 |
|
| September 30, 2019 |
|
| June 30, 2020 |
|
| June 30, 2020 |
| ||||
Balance at beginning of period |
| $ | 2,655 |
|
| $ | 185 |
|
| $ | 133 |
|
| $ | 1,568 |
|
Plus: Amounts charged to cost and expense |
|
| 1,195 |
|
|
| 4,658 |
|
|
| 1,192 |
|
|
| 1,745 |
|
Less: Amounts paid |
|
| (252 | ) |
|
| (1,245 | ) |
|
| (967 | ) |
|
| (2,955 | ) |
Balance at end of period |
| $ | 3,598 |
|
| $ | 3,598 |
| ||||||||
Balance as of June 30, 2020 |
| $ | 358 |
|
| $ | 358 |
|
(In thousands) |
| December 31, 2019 |
| |
Balance as of December 31, 2018 |
| $ | 185 |
|
Plus: Amounts charged to cost and expense |
|
| 6,014 |
|
Less: Amounts paid |
|
| (4,631 | ) |
Balance as of December 31, 2019 |
| $ | 1,568 |
|
33
The components of restructuring expenseRestructuring expenses included in the Condensed Consolidated Statements of Income are(Loss) were as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Selling, general and administrative expenses |
| $ | 531 |
|
| $ | 261 |
|
| $ | 2,078 |
|
| $ | 2,661 |
|
| $ | 489 |
|
| $ | 703 |
|
| $ | 572 |
|
| $ | 1,547 |
|
Research and development expenses |
|
| 602 |
|
|
| — |
|
|
| 1,833 |
|
|
| 1,814 |
|
|
| 681 |
|
|
| 647 |
|
|
| 1,117 |
|
|
| 1,231 |
|
Cost of sales |
|
| 62 |
|
|
| — |
|
|
| 747 |
|
|
| 2,761 |
|
|
| 22 |
|
|
| 50 |
|
|
| 56 |
|
|
| 685 |
|
Total restructuring expenses |
| $ | 1,195 |
|
| $ | 261 |
|
| $ | 4,658 |
|
| $ | 7,236 |
|
| $ | 1,192 |
|
| $ | 1,400 |
|
| $ | 1,745 |
|
| $ | 3,463 |
|
The following table represents the components of restructuring expense by geographic area for the three and nine months ended September 30, 2019 and 2018:area:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Domestic |
| $ | 1,116 |
|
| $ | 256 |
|
| $ | 1,941 |
|
| $ | 7,096 |
|
| $ | 1,192 |
|
| $ | 541 |
|
| $ | 1,743 |
|
| $ | 825 |
|
International |
|
| 79 |
|
|
| 5 |
|
|
| 2,717 |
|
|
| 140 |
|
|
| — |
|
|
| 859 |
|
|
| 2 |
|
|
| 2,638 |
|
Total restructuring expenses |
| $ | 1,195 |
|
| $ | 261 |
|
| $ | 4,658 |
|
| $ | 7,236 |
|
| $ | 1,192 |
|
| $ | 1,400 |
|
| $ | 1,745 |
|
| $ | 3,463 |
|
19.21. SUBSEQUENT EVENTS
On October 30, 2019,August 5, 2020, 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 as of the close of business on November 14, 2019.August 20, 2020. The payment date will be December 2, 2019September 3, 2020 in the aggregate amount of approximately $4.3 million.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear 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, 2018,2019, 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, 2018,2019, filed with the SEC on February 28, 2019 (as amended on September 20, 2019, the “2018
25, 2020 (the “2019 Form 10-K”).
This discussion is designed to provide the reader with information that will assist in understanding our condensed 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 Part I, Item 1A, Risk Factors, of the 20182019 Form 10‑K.K and Part II, Item 1A, Risk Factors, of this Form 10-Q.
OVERVIEW
ADTRAN is a leading global provider of networking and communications equipment,solutions focused on the access market, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and -3 service providers, cable/multiple system operators (“MSO”) MSOs 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 grow revenue, we are constantly conducting research and development of new products addressing customer needs and testing those products for the particular specifications of the particular customers. We are focused on being a top global supplier of access infrastructure and related value-added solutions from the cloud edge to the subscriber edge. We offer a broad portfolio of flexible software and hardware network solutions and services that enable service providers to meet today’s service demands, while enabling them to transition to the fully-converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. In addition to our corporate headquarters in Huntsville, Alabama, we have research and development facilities in strategic global locations.
An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek 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.
We madeended the second quarter of 2020 with a decrease in revenue of 17.7% for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, mainly driven by the reduction in spending from a Tier-1 customer in Latin America and a slow-down in spending from a Tier-1 customer in Europe, partially offset by growth in the U.S. and the Asia Pacific region. Additionally, in the second quarter of 2020, we had two acquisitions10% revenue customers geographically diversified, with one in 2018, strengthening our positionthe U.S. and one in Europe. Our domestic revenue grew 12.2% during the three months ended June 30, 2020 compared to the same quarter in the prior year, which was driven by growth in both Tier-2 and Tier-3 carrier categories due to additional fiber access deployments in both access equipment and CPE. In Europe, our revenue was down 12.8% compared to the cable/MSOs and connected home markets.same quarter in the prior year, primarily driven by a slow-down in spending from a Tier-1 customer. In the Asia Pacific region, we experienced growth driven by the acceleration of access network builds. Additionally, fiber access continues to experience revenue growth, and, during the first quarterhalf of 2018, 2020, we acquired announced multiple long-term Tier-1 next-generation fiber access deals in Europe and the U.S., positioning us well for the next access network upgrade investment cycle.
Sumitomo Electric Lightwave Corp.’s North American EPONDuring the first half of 2020, there was a downturn in the global financial markets followed by a gradual rebound and a slowdown in the global economy due to the COVID-19 pandemic. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and certain assetsoperations, as well as that of our key customers, suppliers and other counterparties, for North Americaan indefinite period of time. We have experienced some impact to our supply chain, including a slowdown in supply chain deliveries, extended lead times on some key components and entered into a technology licensesome raw material cost increases. In addition, we have experienced significant increases in freight-related costs. While throughout the pandemic, we have seen increased demand in networking requirements and original equipment manufacturerutilization due to social distancing guidelines issued by governments, as well as COVID-19 related reductions in travel and infrastructure expenses, it is possible that we could experience some slowdown in demand and further supply agreement with Sumitomo Electric Industries, Ltd. chain issues as the pandemic continues.These solutions, combined
Among our customers, we made progress with our organic fiber access product portfolio and fiber-extension solutions, including PON and Gfast, while also continuing to engage various Services & Support opportunities that we expect will contribute in 2020 and beyond. In addition, we believe that we are at the beginning of a significant investment cycle for fiber deployment driven by technology advancements and regulatory influences. The transition to next-generation network architectures is beginning, and we are seeing demand for our distributed access expertise, present new opportunities innext-generation SD-Access solutions. In 2021, we anticipate that payments to service providers under government funding programs such as the 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 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.FCC Rural Digital Opportunity Fund will begin.
We reviewIn addition to classifying our financial performance, specifically revenue and gross profit, based onoperations into 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/MSO networks and business networks, as well as for prior-generation products. 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.
35
We report revenue for the followingacross three categories of products and services – (1) Access & Aggregation, (2) Subscriber Solutions & Experience (formerly Customer Devices) and (3) Traditional & Other Products.Products.
| Our Access & Aggregation solutions are used by CSPs to connect their network infrastructure to subscribers. This revenue category includes hardware- and software-based products and services that aggregate and/or originate access technologies. ADTRAN solutions within this category include a wide array |
|
|
|
|
See Note 14 of modular or fixed platforms designed to deliver the Notesbest technology and economy based on subscriber density and environmental conditions.
Our Subscriber Solutions & Experience portfolio is used by service providers to Consolidated Financial Statements included in Part I, Item 1terminate their infrastructure at the customer’s premises while providing an immersive and interactive experience for the subscriber. These solutions include copper and fiber WAN termination, LAN switching, Wi-Fi access, and cloud software services, for both residential and business markets.
Our Traditional & Other Products category generally includes a mix of this report for further information regardingprior-generation technologies’ products and services, as well as other products and services that do not fit within the Company’s segments andother revenue categories.
Our operating results have fluctuated, and may continue to fluctuate, 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. Although the timingA substantial portion of our product deliveriesshipments in responseany fiscal period relates to customer orders resultsreceived and shipped within that fiscal period for customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require delivery within a few days. These factors normally result in very little purchasea varying order backlog suchand limited order flow visibility. Additionally, backlog levels may vary because of seasonal trends, the timing of customer projects, and other factors that affect customer order lead times. ManyBecause many of our customers require prompt delivery of products. This requires usproducts, we are required 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 revenuerevenues 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 globalgeneral economic and financial market conditions, specifically the decline that has resulted from the COVID-19 pandemic, 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, tariffs 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. During 2019, the Company implemented restructuring plans to realign its expense structure with the reduction in revenue experienced in recent years and with overall Company objectives. Management assessed the efficiency of our operations and consolidated locations and personnel, among other things, and has implemented certain cost savings initiatives, where possible. We expect to continue to see a reduction in our operating expenses and cost of sales, both in the U.S. and internationally, as a result of our implementation of these restructuring plans.
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 the 20182019 Form 10-K and in Part II, Item 1A of this Form 10-Q.
36
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates from those disclosed in our 20182019 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 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 additional information.10-K.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this 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.
37
RESULTS OF OPERATIONS – THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20192020 COMPARED TO THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20182019
The following table presents selected financial information derived from our Condensed Consolidated Statements of Income (Loss) expressed as a percentage of sales for the periods indicated. Amounts may not foot due to rounding.
|
| Three Months Ended |
|
| Nine Months Ended |
|
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
|
| June 30, |
|
| June 30, |
|
| ||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Solutions |
|
| 82.4 |
| % |
| 86.3 |
| % |
| 86.7 |
| % |
| 87.7 |
| % |
|
| 86.5 |
| % |
| 89.0 |
| % |
| 85.8 |
| % |
| 88.3 |
| % |
Services & Support |
|
| 17.6 |
|
|
| 13.7 |
|
|
| 13.3 |
|
|
| 12.3 |
|
|
|
| 13.5 |
|
|
| 11.0 |
|
|
| 14.2 |
|
|
| 11.7 |
|
|
Total Sales |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
Cost of Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Solutions |
|
| 49.5 |
|
|
| 49.8 |
|
|
| 50.1 |
|
|
| 53.5 |
|
|
|
| 49.8 |
|
|
| 51.3 |
|
|
| 47.6 |
|
|
| 50.3 |
|
|
Services & Support |
|
| 9.9 |
|
|
| 8.5 |
|
|
| 8.4 |
|
|
| 8.4 |
|
|
|
| 8.7 |
|
|
| 7.2 |
|
|
| 9.2 |
|
|
| 7.9 |
|
|
Total Cost of Sales |
|
| 59.4 |
|
|
| 58.4 |
|
|
| 58.5 |
|
|
| 61.9 |
|
|
|
| 58.5 |
|
|
| 58.4 |
|
|
| 56.8 |
|
|
| 58.1 |
|
|
Gross Profit |
|
| 40.6 |
|
|
| 41.6 |
|
|
| 41.5 |
|
|
| 38.1 |
|
|
|
| 41.5 |
|
|
| 41.6 |
|
|
| 43.2 |
|
|
| 41.9 |
|
|
Selling, general and administrative expenses |
|
| 27.1 |
|
|
| 21.9 |
|
|
| 24.1 |
|
|
| 24.8 |
|
|
|
| 23.9 |
|
|
| 21.5 |
|
|
| 23.6 |
|
|
| 22.9 |
|
|
Research and development expenses |
|
| 27.9 |
|
|
| 21.3 |
|
|
| 23.1 |
|
|
| 24.0 |
|
|
|
| 22.3 |
|
|
| 20.5 |
|
|
| 24.1 |
|
|
| 21.2 |
|
|
Gain on contingency |
|
| — |
|
|
| (0.8 | ) |
|
| — |
|
|
| (0.4 | ) |
| |||||||||||||||||
Asset impairments |
|
| 3.4 |
|
|
| — |
|
|
| 0.9 |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
Gain on contingency |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
| |||||||||||||||||
Operating Loss |
|
| (17.8 | ) |
|
| (1.6 | ) |
|
| (6.3 | ) |
|
| (10.7 | ) |
| |||||||||||||||||
Operating Income (Loss) |
|
| (4.7 | ) |
|
| 0.4 |
|
|
| (4.5 | ) |
|
| (1.9 | ) |
| |||||||||||||||||
Interest and dividend income |
|
| 0.5 |
|
|
| 0.6 |
|
|
| 0.5 |
|
|
| 0.7 |
|
|
|
| 0.3 |
|
|
| 0.4 |
|
|
| 0.3 |
|
|
| 0.4 |
|
|
Interest expense |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
|
Net investment gain (loss) |
|
| (0.2 | ) |
|
| 3.2 |
|
|
| 2.0 |
|
|
| 1.4 |
|
|
|
| 7.7 |
|
|
| 1.6 |
|
|
| (0.4 | ) |
|
| 2.8 |
|
|
Other income (expense), net |
|
| 1.4 |
|
|
| 0.1 |
|
|
| 0.5 |
|
|
| — |
|
|
|
| (1.4 | ) |
|
| (0.1 | ) |
|
| (0.3 | ) |
|
| 0.2 |
|
|
Gain on bargain purchase of a business, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.9 |
|
| |||||||||||||||||
Income (Loss) Before Income Taxes |
|
| (16.1 | ) |
|
| 2.3 |
|
|
| (3.4 | ) |
|
| (5.9 | ) |
|
|
| 1.9 |
|
|
| 2.2 |
|
|
| (4.9 | ) |
|
| 1.5 |
|
|
Income tax (expense) benefit |
|
| (24.3 | ) |
|
| 3.1 |
|
|
| (6.6 | ) |
|
| 3.1 |
|
|
|
| (1.3 | ) |
|
| 0.4 |
|
|
| 1.1 |
|
|
| 0.1 |
|
|
Net Income (Loss) |
|
| (40.4 | ) | % |
| 5.4 |
| % |
| (10.0 | ) | % |
| (2.8 | ) | % |
|
| 0.6 |
| % |
| 2.6 |
| % |
| (3.8 | ) | % |
| 1.6 |
| % |
SALES
Our sales decreased 18.7%17.7% from $140.3$156.4 million for the three months ended SeptemberJune 30, 20182019 to $114.1$128.7 million for the three months ended SeptemberJune 30, 2019,2020 and increased 6.4%decreased 19.0% from $389.2$300.2 million for the ninesix months ended SeptemberJune 30, 20182019 to $414.3$243.2 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease in sales for the three and six months ended SeptemberJune 30, 20192020 was primarily attributable to a $26.8$26.6 million and $60.5 million decrease in Access & Aggregation sales, respectively, and a $3.4$0.9 million and $1.8 million decrease in the sales of our Traditional & Other Products, partially offset byrespectively. Additionally, there was a $3.9$0.1 million increasedecrease in Subscriber Solutions & Experience sales. The increase in sales for the ninethree months ended SeptemberJune 30, 2019 was primarily attributable to2020 and a $16.5$5.3 million increase in Subscriber Solutions & Experience 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.for the six months ended June 30, 2020.
Network Solutions segment sales decreased 22.3%20.0% from $121.0$139.2 million for the three months ended SeptemberJune 30, 20182019 to $94.0$111.3 million for the three months ended SeptemberJune 30, 2019,2020 and increased 5.2%decreased 21.2% from $341.4$265.0 million for the ninesix months ended SeptemberJune 30, 20182019 to $359.0$208.7 million for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease in sales for the three and six months ended SeptemberJune 30, 20192020 was primarily attributable to the slowdown in shipments to two Tier-1 customers as previously discussed. For the three months ended SeptemberJune 30, 2019,2020, sales in the Access & Aggregation, Subscriber Solutions & Experience and Traditional & Other Products categories decreased. For the six months ended June 30, 2020, sales in the Access & Aggregation and Traditional & Other Products categories decreased and were partially offset by aan increase in Subscriber Solutions & Experience category sales. The decrease in Access & Aggregation sales for the three and six months ended SeptemberJune 30, 20192020 was primarily attributable to decreased fiber to the node (“FTTN”) products, offset by an increasevolume in G.fast DPUs.sales of FTTN products. The increasedecrease in Subscriber Solutions & Experience sales for the three months ended SeptemberJune 30, 20192020 was primarily attributable to increased Residential CPE, partially offset by a decrease indecreased volume of SP Business CPE and WiFi access points and infrastructure. The increase in sales for the nine months ended September 30, 2019 was primarily attributable to an increase in Access & Aggregation and Subscriber Solutions & Experienceinfrastructure sales. 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 sales for the ninesix months ended SeptemberJune 30, 20192020 was primarily attributable to increased Residential CPE and fiber CPEvolume in sales partially offset by a decrease inof SP Business CPE, network termination and WiFi access points and infrastructure.fiber CPE. 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.
38
Services & Support segment sales increased 4.1%1.0% from $19.3$17.2 million for the three months ended SeptemberJune 30, 20182019 to $20.1$17.4 million for the three months ended SeptemberJune 30, 2019,2020 and increased 15.5%decreased 1.8% from $47.8$35.2 million for the ninesix months ended SeptemberJune 30, 20182019 to $55.3$34.5 million for the ninesix months ended SeptemberJune 30, 2019.2020. The increase in sales for the three and nine months ended SeptemberJune 30, 2020 was primarily attributable to increased volume of maintenance services for Subscriber Solutions & Experience products. The decrease in sales for the six months ended June 30, 2019 was primarily attributable to an increase in network installation anddecreased volume of maintenance services for Access & Aggregation products.
International sales, which are included in the amounts for both the Network Solutions and Services & Support segments amounts discussed above, decreased 45.3%45.4% from $56.6$81.1 million for the three months ended SeptemberJune 30, 20182019 to $30.9$44.3 million for the three months ended SeptemberJune 30, 20192020 and increased 4.7%decreased 47.6% from $175.2$152.4 million for the ninesix months ended SeptemberJune 30, 20182019 to $183.3$79.8 million for the ninesix months ended SeptemberJune 30, 2019.2020. International sales, as a percentage of total sales, decreased from 40.3%51.9% for the three months ended SeptemberJune 30, 20182019 to 27.1%34.4% for the three months ended SeptemberJune 30, 20192020 and decreased from 45.0%50.8% for the ninesix months ended SeptemberJune 30, 20182019 to 44.2%32.8% for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease in sales for the three and six months ended SeptemberJune 30, 2019,2020, was primarily attributable the slowdownreduction 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 Asia Pacific (“APAC”), primarily attributable to network expansion programs of large Tier-1 customers.
Our international revenue is largely focused on broadband infrastructure and is 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. The competitive landscape in certain international markets is also affected by the increased presence of Asian manufacturers that seek to compete aggressively on price. Our revenue and operating income in some international markets canhave been, and may continue to be, negatively impacted by a strengthening U.S. dollar.dollar, adverse changes in trade policy and disruptions in international trade due to the COVID-19 pandemic. Consequently, while we expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market opportunities for us in the long-run, the factors described above may result in negative pressure on revenue and operating income.
COST OF SALES
As a percentage of sales, cost of sales increased slightly from 58.4% for the three months ended SeptemberJune 30, 20182019 to 59.4%58.5% for the three months ended SeptemberJune 30, 20192020 and decreased from 61.9%58.2% for the ninesix months ended SeptemberJune 30, 20182019 to 58.5%56.8% for the ninesix months ended SeptemberJune 30, 2020. For the six months ended June 30, 2020, the decrease was primarily attributable to changes in customer and product mix, a regional revenue shift, changes in services and support mix and a decrease in fixed personnel costs as a result of our restructuring program initiated in 2019. The increase in
Network Solutions cost of sales, as a percentage of that segment’s sales, remained flat at 57.6% for the three months ended SeptemberJune 30, 2020 and 2019 and decreased from 57.0% for the six months ended June 30, 2019 was primarily attributable to a decrease in volume, changes in customer and product mix and changes in services and support mix.55.4% for the six months ended June 30, 2020. The decrease in cost of sales as a percentage of sales for the ninesix months ended SeptemberJune 30, 20192020 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 percentage of that segment’s sales, increased from 57.8% for the three months ended September 30, 2018 to 60.0% for the three months ended 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 increase in cost of sales as a percentage of sales for the three months ended September 30, 2019 was 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 tofixed personnel costs as a result of our restructuring program initiated in the first quarter of 2018.2019.
An important part of our strategy is to reduce the cost of each succeeding generation of product 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 percentage of that segment’s sales, decreased from 61.9%65.0% for the three months ended SeptemberJune 30, 20182019 to 56.4%64.2% for the three months ended SeptemberJune 30, 20192020 and decreased from 68.6%67.2% for the ninesix months ended SeptemberJune 30, 20182019 to 63.3%65.0% for the ninesix months ended SeptemberJune 30, 2019.2020. The decrease in cost of sales as a percentage of sales for the three and six months ended SeptemberJune 30, 20192020 was primarily attributable to an increase in volume, customer mix, and changes in services and support mix. Themix and a 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 toas a result of our restructuring program initiated in the first quarter of 2018, changes in customer mix and changes in services and support mix.2019.
39
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 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-quarterquarter to quarter based on the mix of the services recognized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 0.5% from $30.8 million for the three months ended September 30, 2018 to $30.9 million for the three months ended 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 September 30, 2019 was primarily attributable to incremental expenses as a result of the SmartRG acquisition, IP litigation costs and professional and contract services offset by decreases in 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 increased from 21.9%21.5% for the three months ended SeptemberJune 30, 20182019 to 27.1%23.9% for the three months ended SeptemberJune 30, 2020 and increased from 22.9% for the six months ended June 30, 2019 and decreased from 24.8%to 23.6% for the ninesix months ended SeptemberJune 30, 2018 to 24.1% for the nine months ended September 30, 2019.2020. Selling, general and administrative expenses as a percentage of sales maywill generally fluctuate whenever there is a significant fluctuation in revenue for the periods being compared.
RESEARCH AND DEVELOPMENT EXPENSES
ResearchSelling, general and developmentadministrative expenses increased 6.6%decreased 8.4% from $29.9$33.6 million for the three months ended SeptemberJune 30, 20182019 to $31.8$30.8 million for the three months ended SeptemberJune 30, 20192020 and increased 2.2%decreased 16.5% from $93.5$68.8 million for the ninesix months ended SeptemberJune 30, 20182019 to $95.5$57.4 million for the ninesix months ended SeptemberJune 30, 2019.2020. The increasedecrease in researchselling, general and developmentadministrative expenses for the three months ended SeptemberJune 30, 20192020 was primarily attributable to lower travel-related expenses and lower labor expense partially due to our restructuring program initiated in 2019, partially offset by increases in incrementalcosts for deferred compensation and contract services related to an enterprise resource planning implementation project. The decrease in selling, general and administrative expenses as a result of the SmartRG acquisition, personnel-related expenses and restructuring expenses. The increase in research and development expense for the ninesix months ended SeptemberJune 30, 20192020 was primarily attributable to increaseslower labor expense partially due to our restructuring program initiated in incremental2019, lower deferred compensation costs and reduced travel-related expenses, as a result of the SmartRG acquisition,partially offset by increased contract services and lease expense, offset by a decrease in personnel-related expenses.related to an enterprise resource planning implementation project.
RESEARCH AND DEVELOPMENT EXPENSES
As a percentage of sales, research and development expenses increased from 21.3%20.5% for the three months ended SeptemberJune 30, 20182019 to 27.9%22.3% for the three months ended SeptemberJune 30, 2020 and increased from 21.2% for the six months ended June 30, 2019 and decreased from 24.0%to 24.1% for the ninesix months ended SeptemberJune 30, 2018 to 23.1% for the nine months ended September 30, 2019.2020. 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.
Research and development expenses decreased 10.5% from $32.1 million for the three months ended June 30, 2019 to $28.7 million for the three months ended June 30, 2020 and decreased 8.1% from $63.7 million for the six months ended June 30, 2019 to $58.6 million for the six months ended June 30, 2020. The decrease in research and development expenses for the three and six months ended June 30, 2020 was primarily attributable to lower labor expense and other expenses which were mainly the result of our restructuring program initiated in 2019, partially offset by increased contract services costs.
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.products. We continually evaluate new product opportunities and engage in intensivesignificant 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 IMPAIRMENTS
Asset impairment, which were $3.9 million for the three and nine months ended September 30, 2019, relate to the abandonment of certain information technology implementation projects which we had previously capitalized costs related to these projects. There were no impairment charges recognized during the three and nine months ended September 30, 2018.
40
GAIN ON CONTINGENCY
Gain on contingency, which was $1.2 million for the ninethree and six months ended SeptemberJune 30, 2019, relates to the reversal of unearned 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 ninesix months ended SeptemberJune 30, 2018.2020.
ASSET IMPAIRMENTS
Asset impairments, which were $0.1 million for the six months ended June 30, 2020, relate to the abandonment of certain information technology projects in which we had previously capitalized costs. There were no asset impairments recognized during the six months ended June 30, 2019.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased 26.1%52.2% from $0.8$0.7 million for the three months ended SeptemberJune 30, 20182019 to $0.6$0.3 million for the three months ended SeptemberJune 30, 2019,2020 and decreased 27.3%46.5% from $2.6$1.3 million for the ninesix months ended SeptemberJune 30, 20182019 to $1.9$0.7 million for the ninesix months ended SeptemberJune 30, 2019.2020. The changesdecrease in interest and dividend income for the three and nine months ended September 30, 2019 werewas primarily attributable to fluctuationsa decrease in interest income as a result of a decline in our investment balances.balances mainly due to the maturity of our certificate of deposit which served as collateral for our taxable revenue bonds. Our total investments decreased from $118.2 million as of June 30, 2019 to $93.4 million as of June 30, 2020.
INTEREST EXPENSE
Interest expense, which is primarily related to our taxable revenue bond, remained constant atbonds, decreased by $0.1 million in the three months ended SeptemberJune 30, 2018 and2020 compared to the three months ended June 30, 2019 and $0.4decreased by $0.3 million in the ninesix months ended SeptemberJune 30, 2018 and 2019, as we had no substantial change2020 compared to the six months ended June 30, 2019. The decrease was due to the fact that the outstanding principal balance of the taxable revenue bonds was paid off upon maturity in our fixed-rate borrowing.January 2020. See “Liquidity and Capital Resources” below for additional information on our revenue bond.
NET INVESTMENT GAIN (LOSS)
Net
We recognized a net investment gain decreased from a gain of $4.5$2.5 million and $9.9 million for the three months ended SeptemberJune 30, 2018 to2019 and June 30, 2020, respectively, a lossnet investment gain of $0.2$8.4 million for the threesix months ended SeptemberJune 30, 2019 and increased from a gainnet investment loss of $5.4$1.0 million for the ninesix months ended SeptemberJune 30, 2018 to a gain of $8.2 million for the nine months ended September 30, 2019.2020. The fluctuationfluctuations in our net investment gain wasinvestments were primarily attributable to changes in the fair value of equityour securities recognized during the period. During the six months ended June 30, 2020, our investments were impacted by market conditions due to the COVID-19 pandemic, which resulted in a sharp downturn in the markets followed by a gradual rebound. We expect that any future market volatility, whether from COVID-19 or other factors, will result in continued volatility in our investment portfolio. 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
Other income (expense), net is comprised primarily of miscellaneous income and gains and losses on foreign currency transactions. Other income (expense), net increased from incomeexpense of $0.2 million for the three months ended SeptemberJune 30, 20182019 to incomeexpense of $1.6$1.8 million for the three months ended SeptemberJune 30, 20192020 and increaseddecreased from expenseincome of $0.1$0.7 million for the ninesix months ended SeptemberJune 30, 20182019 to incomeexpense of $2.3$0.6 million for the ninesix months ended SeptemberJune 30, 2019. The fluctuations in other income (expense), net for2020. For the three and ninesix months ended SeptemberJune 30, 2019 was primarily attributable to2020, other income, net consisted mainly of gains and losses on foreign currency transactions. For the three and six months ended June 30, 2019, other income, net consisted mainly of the receipt of insurance proceeds from a life insurance policy.
GAIN ON BARGAIN PURCHASE OF A BUSINESS, NET
Gain on bargain purchase of a business, net, which was $11.3 million during the nine months ended September 30, 2018, was related to our acquisition of Sumitomo Electric Lightwave Corp.’s North American EPON business and entry into a technology license and supply agreement with Sumitomo Electric Industries, Ltd. in March 2018. No gain on bargain purchase of a business was recorded during the three or nine months ended September 30, 2019.
BENEFIT (EXPENSE) FOR INCOME TAXESTAX EXPENSE (BENEFIT)
Our effective tax rate increased from a benefit of 135.7%17.3% for the three months ended SeptemberJune 30, 20182019 to an expense of 150.6%68.5% for the three months ended SeptemberJune 30, 2019,2020 and increaseddecreased from a benefit of 34.9%, excluding the tax effect of the bargain purchase gain,6.2% for the ninesix months ended SeptemberJune 30, 20182019 to an expensea benefit of 197.1%22.9% for the ninesix months ended SeptemberJune 30, 2019.2020. The increasechange in the effective tax rate betweenfor the two periodsthree months ended June 30, 2020 was impacted by tax expense in our international operations and additional changes in the valuation allowance related to our domestic operations. The change in the effective tax rate for the six months ended June 30, 2020 was primarily driven by the establishment of aimpact recorded in the quarter ending March 31, 2020 from the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”) Act signed into law on March 27, 2020, partially offset by tax expense in our international operations and changes in our valuation allowance againstrelated to our domestic deferred tax assetsoperations. The change in the amount of $37.1 million duringeffective tax rate for the three and six months ending Septemberended June 30, 2019 was primarily driven by the shift to profitability for the three and six months ended June 30, 2019, with tax expense being offset by a 9.38%29.1% 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 companyCompany 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.
NET INCOME (LOSS)
As a result of the above factors, net income (loss) decreased 707.8% from net income of $7.6$4.0 million for the three months ended SeptemberJune 30, 20182019 to a net lossincome of $46.1$0.8 million for the three months ended SeptemberJune 30, 2019,2020, and decreased 279.6% from a net lossincome of $10.9$4.8 million for the ninesix months ended SeptemberJune 30, 20182019 to a net loss of $41.4$9.2 million for the ninesix months ended SeptemberJune 30, 2019.2020.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We intendhave historically financed, and we currently expect to continue to finance, our future operationsongoing business with existing cash, investments and cash flow from operations. We have used, and expect to continue to use, existing cash, investments and cash generated from operations for working capital, business acquisitions, 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 our sales and marketing activities.activities and capital expenditures. We believe that 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 SeptemberAs of June 30, 2019,2020, cash on hand was $96.4$69.1 million and short-term investments were $28.8$9.0 million, which resulted in available short-term liquidity of $125.2$78.1 million, of which $62.5$50.0 million was held by our foreign subsidiaries. AtAs of December 31, 2018,2019, cash on hand was $105.5$73.8 million and short-term investments were $3.2$33.2 million, which resulted in available short-term liquidity of $108.7$107.0 million, of which $87.1$52.3 million was held by our foreign subsidiaries. Generally, we intend to permanently reinvest funds held outside the U.S., except to the extent that any of these funds can be repatriated without withholding tax. The increasedecrease in short-term liquidity from December 31, 20182019 to SeptemberJune 30, 2019 is2020 was primarily attributable to the maturity of a restricted certificate of deposit of $25.6 million which servesthat served as collateral for our revenue bond, being reclassified from a long-term investment to a short-term investment in 2019 as it matureswhich matured in January 2020.
Operating Activities
Our working capital, which consists ofdefined as current assets less current liabilities, decreased 6.6% from $237.4remained flat at $207.6 million as of December 31, 2018 to $221.92019 and $207.7 million as of SeptemberJune 30, 2019,2020, and our current ratio, defined as current assets divided by current liabilities, decreasedincreased from 3.012.84 as of December 31, 20182019 to 2.732.94 as of SeptemberJune 30, 2019.2020. The decreaseincrease in our working capital and our current ratio was primarily attributable to the reclassificationincreases in other receivables, accounts payable, inventory and accounts receivable, partially offset by short-term investments, which consisted of our bond payable to current liabilities as it matures in January 2020, as well as the reclassification of the related restricteda certificate of deposit from a long-term investmentrelated to a short-term investment.our taxable revenue bond and the related bonds payable. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 1.761.75 as of December 31, 20182019 to 1.681.62 as of SeptemberJune 30, 2019.2020. The decrease in the quick ratio was primarily attributable to the reclassificationpayment of our bond payable to current liabilities as it maturesupon maturity in January 2020, partially offset by a decrease in accounts receivable and cash and cash equivalents along with an increase in short-term investments, primarily related to the reclassification of our restricted certificate of deposit from a long-term investment to a short-term investment.accounts payable.
Net accounts receivable decreased 8.8%increased 5.3% from $99.4$90.5 million atas of December 31, 20182019 to $90.6$95.3 million at Septemberas of June 30, 2019.2020. Our allowance for doubtful accounts was $0.1 million at$38 thousand as of December 31, 20182019 and SeptemberJune 30, 2019.2020. The decreaseincrease in net accounts receivable was due to a decreasean increase in sales volume.volume in the second quarter of 2020 as compared to the fourth quarter of 2019. Quarterly accounts receivable day’s sales outstanding (“DSO”) increasedDSO decreased from 6572 days as of December 31, 20182019 to 7367 days as of SeptemberJune 30, 2019.2020. The increasedecrease in DSO iswas due to the timing of product shipments and customer mix.
Other receivables decreased 48.4%increased 57.1% from $36.7$16.6 million atas of December 31, 20182019 to $18.9$26.0 million at Septemberas of June 30, 2019.2020. The decreaseincrease in other receivables was primarily attributable to increases in income tax receivables related to the CARES Act and purchasing shipments partially offset by a decrease in leased equipment receivables, repayment of certain outstanding notes receivable in the first quarter of 2019, contract manufacturers’ receivables and income tax receivables.assets.
Quarterly inventory turnover decreasedincreased from 3.292.7 turns as of December 31, 20182019 to 2.712.9 turns at Septemberas of June 30, 2019.2020. Inventory increased 5.1%8.0% from $99.8$98.3 million atas of December 31, 20182019 to $104.9$106.1 million at Septemberas of June 30, 2019. We2020. In addition to COVID-19 uncertainties related to supply chain and demand, we expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to services activity and seasonal cycles of our business and ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.inventory.
Accounts payable decreased 12.0%increased 39.2% from $60.1$44.9 million atas of December 31, 20182019 to $52.8$62.5 million at Septemberas of June 30, 2019.2020. 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.
Investing Activities
Capital expenditures totaled approximately $6.0$3.1 million and $5.7$4.3 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. These expenditures were primarily used to purchase manufacturing and test equipment, software, computer hardware and forto finance building improvements.
Our combined short-term and long-term investments increased $7.3decreased $34.3 million from $112.1$127.7 million atas of December 31, 20182019 to $119.4$93.4 million at Septemberas of June 30, 2019.2020. This increasedecrease reflects the maturity of a certificate deposit which served as collateral for our revenue bond and the impact of net realized and unrealized gains and losses on our combined investments as well as new investments.
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We typically invest all available cash not required for immediate use in operations, primarily in securities that we believe bear minimal risk of loss. See Note 7 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. As of SeptemberJune 30, 2019,2020, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backedagency bonds, U.S. government bonds, and foreignother government bonds and variable-rate demand notes were classified as available-for-sale and had a combined duration of 1.61.54 years with an average Moody’sStandard & Poor’s credit rating of A.AA. Because our bondinvestment 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 atdecreased 10.7% from $94.5 million as of December 31, 2018 included an investment in a certificate of deposit of $25.62019 to $84.4 million which serves as collateral for our revenue bond. This certificate of deposit is now included in short-term investments as of SeptemberJune 30, 2019, as this bond matures on January 1, 2020. See 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 haveOur investments ininclude various marketable equity securities classified as long-term investments with a fair market value of $32.7$26.1 million and $27.0$35.8 million at Septemberas of June 30, 20192020 and December 31, 2018,2019, respectively. Long-term investments at Septemberas of June 30, 20192020 and December 31, 20182019 also included $20.6$20.5 million and $18.3$21.7 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 $7.8plans, and $0.3 million, for the nine months ended September 30, 2018. See Note 2both years, of the Notes to Condensed Consolidated Financial Statements includedother investments, consisting of interests in Part I, Item 1 of this report for additional information.a private equity fund.
Financing Activities
Dividends
In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity. During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, we paid dividends totaling $12.9$8.7 million and $13.0$8.6 million, respectively. The continued payment of dividends is at the discretion of the Company’s Board of Directors and is subject to general business conditions and ongoing financial results of the Company.
Debt
We have amounts outstanding under loans made pursuant toIn conjunction with the 1995 expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive program offered by the State of Alabama State Industrial Development Authority (the “Authority”). Pursuant to the program, in January 1995, the Authority issued $20.0 million of its taxable revenue bond (the “Bond”) which totaled $25.6 million at September 30, 2019bonds and December 31, 2018. At September 30, 2019,loaned the estimated fair valueproceeds from the sale of these taxable revenue bonds to the Bond was $25.6 million, basedCompany. Further advances on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AA+. Restricted funds serving as a collateral deposit against the principaltaxable revenue bonds were made by the Authority, bringing the total 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 December 31, 2018, respectively. We have the rightoutstanding to offset the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness.$50.0 million. The Bond maturesbonds matured 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. 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.balance of $24.6 million was repaid in full on January 2, 2020. The Company had no outstanding debt as of June 30, 2020.
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized repurchases of our common stock, which are implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended 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.
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Stock Option Exercises
We issued 34,000 During the six months ended June 30, 2020 there were no common stock repurchases. During the six months ended June 30, 2019, we repurchased 13,000 shares of treasuryour common stock during the nine months ended September 30, 2019 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.33 to $16.97. We received proceeds totaling $0.5for $0.2 million from the exerciseat an average price of these stock options during the nine months ended September 30, 2019.$14.06 per share.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. During
Certain contracts, customers and jurisdictions in which we do business require us to provide various guarantees of performance such as bid bonds, performance bonds and customs bonds. As of June 30, 2020 and December 31, 2019, we had commitments related to these bonds totaling $11.3 million and $9.3 million, respectively, which expire at various dates through August 2024. Although the nine months ended Septembertriggering events vary from contract to contract, in general we would only be liable for the amount of these guarantees in the event of default under each contract, the probability of which we believe is remote.
In June of 2020, the Company entered into a letter of credit with a bank to guarantee performance obligations under a contract with a customer. The letter of credit is secured by a pledge of collateral in the amount of $5.0 million, of which $1.2 million is included in restricted cash and $3.8 million is included in long-term investments on the Condensed Consolidated Balance Sheet as of June 30, 2019, there2020. Currently, the Company is required to maintain a minimum collateral value of approximately $5.0 million. The minimum collateral value will increase over time as the Company reaches certain milestones in the contract. The maximum collateral value required under the contract will be approximately $12.0 million, and this is expected to occur in February 2021. This minimum collateral value will increase further if the Company changes the mix of investments away from restricted cash and into other investments. Any shortfalls in the minimum collateral value are required to be restored by the Company from available cash and cash equivalents, short-term investments or long-term investments. The obligations under the customer contract will be performed over multiple years. The collateral under the letter of credit will be released when all obligations under the customer contract have been no material changesmet. As of June 30, 2020, the Company was in compliance with all contractual obligations and commercial commitments from those discussed inrequirements under the 2018 Form 10-K, except for a new operating lease for office space in India. This lease has an initial termletter of five years and includes an option to renew for an additional five-year period.credit.
We have committed to invest up to an aggregate of $7.9$5.0 million in twoa private equity funds,fund of which $7.7$4.9 million has been appliedcontributed as of SeptemberJune 30, 2019.2020.
During the six months ended June 30, 2020, there have been no other material changes in contractual obligations and commercial commitments out of the normal course of business from those discussed in the 2019 Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in foreign currency rates, interest rates and prices of marketable equity and fixed-income securities. In addition, the ongoing global pandemic raises the possibility of an extended economic downturn and has caused volatility in financial markets. 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 SeptemberJune 30, 2019, $93.72020, $68.0 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 SeptemberJune 30, 2019,2020, approximately $38.4$44.6 million of our cash and investments couldmay be directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (“bps”) for an entire year, while all other variables remain constant. At SeptemberAs of June 30, 2019,2020, we held $5.9$4.9 million of cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bpsbasis point decline in interest rates as of SeptemberJune 30, 20192020, assuming all other variables remain constant, would reduce annualized interest income on our cash and investments by approximately $0.1 million.$16 thousand. In addition, we held $32.5$39.6 million of fixed-rate bonds whose fair values may be directly affected by a change in interest rates. A hypothetical 50 bpsbasis point increase in interest rates as of SeptemberJune 30, 20192020, assuming all other variables remain constant, would reduce the fair value of our fixed-rate bonds by approximately $0.3 million.
We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, expenses, and assets and liabilities held in non-functional currencies related to our foreign subsidiaries. Our primary exposures to foreign currency exchange ratesrate movements are with our German subsidiary, whose functional currency is the Euro, and our Australian subsidiary, whose functional currency is the Australian dollar, and our Mexican subsidiary, whosedollar. Our revenue is primarily denominated in the respective functional currency of the subsidiary and paid in that subsidiary’s functional currency or certain other local currency, our global supply chain predominately invoices us in the respective functional currency of the subsidiary and is paid in U.S. dollars and some of our operating expenses are invoiced and paid in certain local currencies (approximately 9% and 10% of total operating expense for the U.S. dollar. Wethree and six months ended June 30, 2020, respectively). Therefore, our revenues, gross margins, operating expense and operating income are exposedall subject 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.fluctuations. As a result, changes in currency exchange rates could cause variations in gross margin in the products that we sell in the Europe, Middle East and Africa region.our operating income.
We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates used to invoice such customers versus the functional currency of the entity billing such customers 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 helpcondition. To manage the volatility relating to these valuation exposures. All changes in the fair value of ourtypical business exposures, we may enter into various 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.when appropriate. 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 $1.6$2.1 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. This change represents a decrease in the amount of hypothetical gain or loss compared to prior periods and is mainly due to a decrease in U.S. dollar denominated billings in a non-U.S. dollar denominated subsidiary. Although we do not currently hold any derivative instruments, any gain or loss would be partially mitigated by theseany derivative instruments.instruments held.
As of SeptemberJune 30, 2019,2020, we had certain material contracts subject to currency revaluation, including accounts receivable, accounts payable and lease liabilities, denominated in foreign currencies. As of SeptemberJune 30, 2019,2020, we did not have any forward contracts outstanding.
For further information about the fair value of our investments as of SeptemberJune 30, 2019,2020, see Note 7 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.Procedures
We maintain disclosure controls and 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 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 our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no 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 report, an evaluation was carried out by management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, (asas such term is defined in Exchange Actunder Rule 13a-15(e)) pursuant to Rule 13a-15 of promulgated under the Exchange Act. Based uponon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective asat the reasonable assurance level.
Remediation of September 30, 2019 due to the material weaknessesPreviously Identified Material Weakness in our internal controlInternal Control over financial reporting described below.Financial Reporting
Material Weaknesses
A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial 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:
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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.
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Management’s Remediation Initiatives. Management has been working to further strengthen the Company’s internal controls relating to inventory. Specifically, theThe Company has begun redesigningredesigned, enhanced 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 enhancedadded 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 begunKey reports and calculations have been redesigned and fully integrated into our enterprise resource planning system to implement enhancements to these processes and controls to comply with internal policies in order to ensure the completeness and accuracy of inventories. For example,significant inputs. New controls and procedures have also been established by the Company has revisedaround the methodologyestimated reserve percentages used in estimating itsestablishing the excess and obsolete inventory reserve as further discussed in Note 1that consider historical usage, known trends, inventory age and market conditions of the Notesinventory. As a result of these remediation efforts, management has determined that, as of June 30, 2020, our controls related 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,estimated reserve for excess and through our efforts to identify, design,obsolete inventory were effectively designed, documented and implement the necessary control activities, will be effective in remediatingmaintained, and the material weaknesses described above. We will continue to devote significant time and attentionweakness related 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.controls no longer existed.
Changes in Internal Control over Financial Reporting. There
Except as noted above, there were no changes in our internal control over financial reporting that occurred during our most recentthe fiscal quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
InformationSecurities Class Action Lawsuit
On October 17, 2019, a purported stockholder class action lawsuit, captioned Burbridge v. ADTRAN, Inc. et al., Docket No. 19-cv-09619, was filed in the United States District Court for the Southern District of New York against the Company, 2 of its current executive officers and 1 of its former executive officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages on behalf of purported purchasers of ADTRAN securities between February 28, 2019 and October 9, 2019. The lawsuit claims that the defendants made materially false and misleading statements regarding, and/or failed to disclose material adverse facts about, the Company’s business, operations and prospects, specifically relating to the Company’s internal control over financial reporting, excess and obsolete inventory reserves, financial results and demand from certain customers. The lawsuit was transferred to the U.S. District Court for the Northern District of Alabama on January 7, 2020, and co-lead plaintiffs have been appointed to represent the putative class. The plaintiffs filed an amended complaint on April 30, 2020. The defendants filed a motion to dismiss the amended complaint on June 17, 2020. The plaintiffs filed an opposition brief to the defendants’ motion to dismiss on July 17, 2020. The defendants intend to file a reply to the plaintiffs’ brief on August 17, 2020. We deny the allegations in the complaint, as amended, 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 respect to this item may be foundlawsuit.
Shareholder Derivative Lawsuit
On March 31, 2020, a shareholder derivative suit, captioned Johnson (Derivatively on behalf of ADTRAN) v. T. Stanton, M. Foliano, R. Shannon, and Board of Directors, case no. 5:20-cv-00447, was filed in Note 17the U.S. District Court of Northern Alabama against 2 of the Notes to Condensed Consolidated Financial Statements included in Part I, ItemCompany’s current executive officers, 1 of its former executive officers and its Board of Directors. The derivative suit, which is purportedly brought on behalf of ADTRAN, makes similar allegations as the shareholder class action and accuses the directors and officers of breaches of fiduciary duty in connection with those allegations. On June 7, 2020, the Court entered an order staying the derivative litigation pending resolution of the motion to dismiss in the securities class action. The Company and its defendants disagree with the claims made in the complaint, and the defendants intend to vigorously defend against this report.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.
ITEM 1A. RISK FACTORS
A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in the 20182019 Form 10-K. There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 20182019 Form 10-K, other than as described in the risk factorfactors below.
We have identified certain material weaknesses in our internal control over financial reporting, which
The ongoing COVID-19 pandemic could if not remediated, materially adversely affect us.our business, results of operations and financial condition.
Section 404
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 continues to spread throughout the Sarbanes-Oxley Act of 2002 (“Section 404”) requires usU.S. and the world and has resulted in authorities implementing numerous measures to include in our annual reports on Form 10-K an assessment bycontain the Company’s management of the effectiveness of our internal control over financial reporting. We must perform systemvirus, including travel bans and process evaluationrestrictions, quarantines, shelter-in-place orders, and testing of our internal control over financial reporting to allow managementbusiness limitations 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 thatshutdowns. While we incur substantial accounting expense and expend significant management efforts. In addition, if management or our independent auditors are unable to concludeaccurately predict the full impact that COVID-19 will have on our internal control overresults from operations, financial reportingcondition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted, and may continue to impact, our day-to-day operations and could continue to disrupt our business and operations, as well as that of our customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time. We have experienced, and may continue to experience, disruptions in our supply chain, including a slow-down in supply chain deliveries and some raw material and freight-related cost increases as a result of the pandemic.
To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees are working remotely as of August 7, 2020. In addition, many of our customers, suppliers and other counterparties are working remotely, which may delay the timing of some orders and expected deliveries. The disruptions to our operations caused by COVID-19 may result in inefficiencies, delays and additional costs in our product development, sales, marketing and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements. These additional costs may be partially offset by reduced travel expenses as a result of travel restrictions that we have in place, as well as lower marketing-related costs.
More generally, the global pandemic raises the possibility of an extended economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is effective,contained and the shelter-in-place orders are lifted. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Also, a decrease in orders could lose investor confidencenegatively affect our revenues in future periods, particularly if experienced on a sustained basis.
Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase as a result of the COVID-19 pandemic, our operations and financial condition could be adversely impacted.
Moreover, the impacts of the COVID-19 pandemic may exacerbate other pre-existing risks, such as political, regulatory, social, financial, operational and cybersecurity risks, and those associated with global economic conditions, any of which could have a material adverse effect on our business.
We will continue to evaluate the nature and extent of the impact of COVID-19 on our business.
We are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Violations of these laws and regulations may harm our business.
A wide variety of provincial, state, national and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of data, including personal data. Foreign data protection, privacy and other laws and regulations, including the EU’s General Data Protection Regulation (the “GDPR”), are often more restrictive than those in the accuracyU.S. These data protection and completenessprivacy-related laws and regulations are varied, evolving, can be subject to significant change, may be augmented or replaced by new or additional laws and regulations and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. For example, California’s Consumer Privacy Act became effective in January 2020, providing new data privacy rights for consumers and new operational requirements for companies, and, on July 16, 2020, the Court of Justice of the European Union issued a decision that invalidated the EU-U.S. Privacy Shield framework as a basis for transfers of personal data from the EU to the U.S., resulting in uncertainty and potential additional compliance obligations to ensure that a valid basis under the GDPR exists for these data transfers. New and changing laws, regulations and industry practices regarding our financial statements,employees’ and users’ data could require us to modify our business, products or services offered, potentially in a material manner, and may limit our ability to develop new products, services and features. There is also a risk that we, directly or as the result of a third-party service provider we use, could be found to have failed to comply with the laws and regulations applicable in a jurisdiction regarding the collection, consent, handling, transfer or disposal of personal data. If we violate these laws and regulations, governmental authorities in the U.S., the EU and elsewhere could seek to impose civil and/or criminal fines and penalties 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 existedreputation, 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 periods ended March 31, 2019 and June 30, 2019) present fairly, in all material respects, our financial position, results of operations, financial condition 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.flows.
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.
48
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth repurchases of our common stock for the months indicated:
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) |
|
| Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| ||||
|
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 2,545,430 |
|
|
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 2,545,430 |
|
|
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 2,545,430 |
|
Total |
|
| — |
|
|
|
|
|
|
| — |
|
|
|
|
|
In July 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
(1) | Since 1997, the Company’s Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of the Company’s common stock, which are implemented through open market or private purchases from time to time as conditions warrant. 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. |
49
ITEM 6. EXHIBITS
Exhibits.
Exhibit No. |
| Description |
|
|
|
| Certificate of Incorporation, as amended (Exhibit 3.1 to ADTRAN’s Registration Statement on Form S-1, No. 33-81062) (P) | |
3.2 | Bylaws, as Amended, of ADTRAN, Inc. (Exhibit 3.1 to ADTRAN’s Form 8-K filed July 23, 2020) | |
10.1* | ||
10.2* | ||
10.3 | ||
31* |
| |
|
|
|
|
| |
|
|
|
|
| The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
|
|
|
|
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed herewith
50
(P)Indicates a paper filing with the SEC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| ADTRAN, Inc. (Registrant) |
|
|
|
|
|
|
Date: |
| /s/ Michael Foliano |
|
| Michael Foliano |
|
| Senior Vice President of Finance and |
|
| Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
|
|
|
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