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WORLD OF
POSSIBILITIES
2018 ANNUAL REPORT
ADTRAN and the ADTRAN logo are registered trademarks of ADTRAN, Inc. and/or its
affiliates in the U.S. and other countries. To view a list of ADTRAN trademarks, go to this
URL: www.adtran.com/trademarks. Third-party trademarks mentioned in this document
are the property of their respective owners.
Copyright © 2019 ADTRAN, Inc. All rights reserved. Printed in USA. AD10824A
FINANCIAL HIGHLIGHTS
Company Financial Summary
(Dollars in Millions, Except Per Share Amounts)
$667
$637
$630
$600
$529
49%
46%
46%
44%
$47
38%
$37
$35
$13
2014
2015 2016
2017
2018
2014
2015 2016
2017
2018
2014
2015 2016 2017
$(45)
2018
Annual Revenue
Gross Margin
Operating Income
(Loss)
$0.80
Per Share (Diluted)W
Annual Earnings (Loss)
$(0.40)
2018
2015 2016
$0.72
$0.36
$0.49
2017
2014
Consolidated Statements of Income Data
(In thousands, except per share amounts)
Years Ended December 31
Total Sales
Income (Loss) Before (Provision) Benefit for Income Taxes
Net Income (Loss)
Earnings (Loss) per Common Share (Diluted)
Consolidated Balance Sheets Data
(In thousands)
Years Ended December 31
Unrestricted Cash and Marketable Securities
Total Assets
Stockholders’ Equity
1
Net of $16 million in stock repurchases and
$17 million in dividend payments during 2018
2 Net of $17 million in stock repurchases and
$17 million in dividend payments during 2017
2 ADTRAN 2018 Annual Report
2018
$529,277
$(33,371)
$(19,342)
$(0.40)
2018
$173,3191
$628,027
$446,279
2017
$666,900
$44,687
$23,840
$0.49
2017
$184,5882
$669,094
$497,911
O R L D O F
W Our doorbells alert us with
video monitoring when a stranger
approaches our front door and an
alert chimes if our son is driving
over the speed limit. We are quickly
adapting to the benefits of a connect-
ed world, but we have not yet begun
to realize the full potential of our
world of possibilities.
P O S S I B I L I T I E S
As a global leader in the broadband
access market, the ADTRAN team
has had the privilege of meeting with
our customers around the world,
experiencing their unique cultures
and understanding the opportunities
and challenges for our industry and
the communities they serve. While
every culture is unique, it is clear
that what unites us is the ability to
connect. These connections, rather
than diminishing individuality,
enable us to share what makes us
unique and connect with others not
only in our local communities but
around the world. Though a 24/7
globally connected marketplace can
create challenges, the possibilities
for both our customers and those
that use these networks to connect,
are limitless. People are leveraging
these networks to learn, grow, enter-
tain and protect their lives, families,
and assets.
As we become more connected, we
will experience a quantum leap into
immersive ways to explore the world
around us. Artificial intelligence and
machine learning will unleash new
applications and capabilities beyond
our imagination, helping break down
barriers, find cures, and address
problems that challenge us on local,
national and global scales. The truth
is, no matter how far we think we
have come, the world of possibilities
has just begun to emerge.
At ADTRAN, we believe that
amazing things happen when people
connect. Our products, technologies,
services, and teams will play a
fundamental role in how this market
develops, grows and scales.
The exciting part is that we are just
starting to scratch the surface of
what is possible. We now live in a
world where our thermostats track
our location so our homes can be
at the perfect temperature when we
arrive. We hit a button on our phone
for pretty much anything from
mobile banking, to tracking fitness
and health, to summoning a ride.
Letter to Shareholders 3
20
4 ADTRAN 2018 Annual Report
I N R E F L E C T I O N
We entered 2018 aware of a direction
change by one of our largest
customers that would have a signifi-
cant impact on our business. We
responded by strengthening our
focus on broadening and diversifying
our customer and geographic mix.
This enabled us to capture opportu-
nities around the world with early
adopters and influence those who
will be in the majority–those who
are just entering the planning stage.
As a result, international revenue
was up almost 52 percent year-
over-year and comprised 45 percent
of company revenue in 2018. We
worked continually throughout the
year to manage our cost structure
positioning the company to aggres-
sively pursue, capture and deliver on
new opportunities. This enabled us
to absorb the impact of these changes
and positions us for future growth.
I am pleased to report that we
continue to make meaningful
progress in customer diversification
and engagement, product develop-
ment, and expansion of our market
opportunities, both domestically
and globally. We capitalized on the
possibilities before us and made
strong progress in our efforts to
diversify our customer base. We also
strengthened our product portfolio
with new organic developments as
well as the addition of new products
and solutions through acquisition.
“...we continue to make meaningful
progress in customer diversifi-
cation and engagement, product
development, and expansion
of our market opportunities, both
domestically and globally.”
Letter to Shareholders 5
T R A N S F O R M A T I O N A L
6 ADTRAN 2018 Annual Report
S
H
I
F
T
S
Letter to Shareholders 7
I G A B I T
B R O A D B A N D
A C C E S S
G
Research firm, Ovum, predicts that
broadband will continue its transfor-
mational effects to 2025 and beyond.
The growing demand for broadband
is creating a wealth of possibilities
thanks to the maturation of several
next-generation technologies like
10G-PON, Gfast, DOCSIS 3.1, and 5G.
Fiber is the enabler for the evolution
of gigabit broadband services. The
speed and scale afforded by fiber
will enable service creation on a scale
not possible with legacy networks.
With 10-gigabit services on the
immediate horizon, ADTRAN focused
on helping our customers build the
infrastructure to support these services
and deliver gigabit and multi-gigabit
services today.
There were many bright spots in
2018 including a major broadband
award from a large Tier 1 operator
in LATAM, a 10G-PON deployment
launch in London, and continued
volume deployments by Tier 1 and Tier
2 operators in our domestic market,
solidifying our primary position in this
segment. We also continue to have
a solid position in the rural broadband
market, adding many new accounts
for fiber-to-the-premises and gigabit
network buildouts.
We were pleased to announce and
ship the industry’s first gigabit-capable
second-generation Gfast solutions.
These distribution point units (DPUs)
are part of a nationwide network
buildout by a Tier 1 operator in
Australia, further strengthening our
position as the market leader.
The Connect America Fund (CAF)
continues to be a driver for the
expansion of broadband into rural
America. The Federal Communica-
tions Commission (FCC) announced
updates to the CAF program to
improve the quality and availability of
high-speed Internet service in rural
“The demand for higher bandwidth and the increased use
of fiber for cloud-computing services will continue to propel
the growth of the fiber market for the foreseeable future.”
8 ADTRAN 2018 Annual Report
America. Additionally, in 2018 the
U.S. Department of Agriculture
unveiled a $600 million loan and grant
program for 2019 to assist with the
buildout of rural broadband infra-
structure. To aid with CAF efforts, we
introduced our sixth-generation sealed,
micro Fiber-to-the-Node (FTTN)
solutions. These low-cost, low-main-
tenance, flexible deployment solutions
provide a cost-effective means for
service providers to connect hard-
to-reach subscribers. We experienced
strong demand for our CAF solutions
in 2018, with this area up 33 percent
over the previous year.
We are seeing the development of
a new broadband market segment
in America, electric cooperatives
and utilities. These organizations are
willing to deliver gigabit services to
rural residents and businesses that are
unserved or underserved. They realize
the importance of high-speed broad-
band, not only for their residents but
for the community at large. We hosted
the first-ever Fiber Forum earlier in the
year designed to educate electric co-ops
and utilities about the requirements
for gigabit broadband deployment, its
benefits and funding opportunities.
We are pleased to report that we have
successfully partnered with a number
of these rural organizations to provide
solutions for this critical service to their
communities. We anticipate further
growth in this new market segment
in 2019 and beyond.
The demand for higher bandwidth
and the increased use of fiber for
cloud-computing services will continue
to propel the growth of the fiber market
for the foreseeable future. XGS-PON is
leading the way with the ability to deliver
symmetrical 10-gigabit services. As the
market leader in this area, we made
significant progress in 2018, bringing a
number of new solutions to market and
adding a number of new customers,
both domestically and abroad.
Letter to Shareholders 9
We have maintained a strong focus
on leveraging adjacent broadband
markets. Two of these adjacent
markets are Cable/MSO broadband
access and the connected home.
Many traditional telecommunica-
tions service providers have been
slow or reluctant to upgrade aging
DSL users at any real scale. This has
caused subscribers to turn to cable
to have the ability to enjoy compet-
itive broadband speeds. As a result,
cable operators hold the dominant
broadband market share in the
U.S. with 64 percent of subscribers,
compared to telcos at 36 percent.
Cable operators have played a
major role in fostering the superfast
broadband market in both the U.S.
and Europe. American cable provid-
ers can provide speeds up to 2 Gbps
today, thanks to DOCSIS 3.0, 3.1,
and FTTx technologies. Many cable
operators are considering switching
from hybrid fiber/coax solutions
to Fiber-to-the-Premises or Fiber-
to-the-Basement solutions.
I am pleased to report that we
continued to extend our penetration
in the Cable/MSO broadband access
market this year, with solid growth
of over 50 percent to our direct
Cable/MSO customers over 2017.
This market remains a strategic
priority for us. Building upon our
acquisitions of two market-leading
fiber access businesses, along with
our organic R&D developments,
we achieved meaningful revenue
progress with Tier 1 Cable/MSO
operators with our 10G-EPON
remote optical line terminal, head-
end, and optical networking solu-
tions. These solutions, coupled with
our existing portfolio, strengthen
our incumbent position with leading
cable providers. We anticipate that
our growth in this area will continue
in 2019 and beyond. In fact, in Q3
a major MSO Tier 1 cable operator
selected ADTRAN to provide
next-generation SDN-capable 10G
remote EPON solutions for a large
deployment that will begin in 2019.
One of the markets benefiting from
the availability of high-speed broad-
band is connected home. The con-
nected home market is experiencing
tremendous growth. Analysts project
X P A N D I N G
that this market will reach $138
billion by 2026. Connected home
solutions enable the interoperability
and interconnection of devices and
appliances associated with security,
healthcare, energy management,
media, lighting, appliances, etc.,
via smartphones, computers or
tablets. Late in the year, we acquired
SmartRG, a leading global provider
of open-source connected home
platforms and cloud services. This
acquisition opens the door to a world
of possibilities for our customers,
enabling them to extend their
reach further into the home. These
solutions enable service providers to
optimize how services are delivered
and consumed in this rapidly
growing market. This also expands
operators’ ability to address the needs
of small and medium businesses.
The SmartRG software platform,
SmartOS, enables the development of
both hardware-based and virtualized
solutions. There are currently more
than three-million SmartRG network
devices in service, with 1.3 million
devices managed monthly on a glob-
ally deployed software-as-a-service
platform. Moving forward, the ability
to tap into this expertise in software
development and monetization will
enable us to extend the value of our
open, programmable and web-scal-
able Mosaic platform even further. A
A D T R A N ’ S
P O S S I B I L I T I E S
10 ADTRAN 2018 Annual Report
“SD-Access is one
of the first steps to-
ward vendor-agnostic
open, programmable,
scalable networks.”
T H E F U T U R EA The creation of open, vendor agnostic,
Software Defined Access (SD-Access)
holds a wealth of possibilities for
today and tomorrow. We cannot
fully fathom all that will be possible
through a fully disaggregated network
architecture. SD-Access is one of the
first steps toward vendor-agnostic,
open, programmable, scalable
networks. ADTRAN is the leader in
SD-Access solutions. We strengthened
our commitment to this area in 2018
as we joined the Open Networking
Foundation (ONF) and continued to
expand and enhance our portfolio of
Mosaic Cloud Platform solutions.
SD-Access solutions enables us to
not only drive innovation with the
world’s largest service providers but
allows us to help all communications
providers prepare to transition
their networks to meet increasing
subscriber expectations for faster,
better and more intuitive connec-
tivity. ADTRAN’s global leadership
in SD-Access ensures we are well
positioned to help operators who
seek transformation to grow revenue,
reduce costs and accelerate service
delivery and deployment.
G L I M P S E I N T O
Letter to Shareholders 11
L O O K
A H E A D
There is a world of possibilities before
us. ADTRAN is well positioned to
capitalize on the market shifts in
our core business and opportunities
in new areas like connected home,
Cable/Multiple System Operator
(Cable/MSO) broadband access and
fixed wireless. A diversified customer
base; expanded geographical reach;
and innovative, customer-focused
solutions create multiple avenues for
growth for 2019 and beyond.
I would like to take a moment to
remember Lonnie McMillian, one of
our company’s original founders who
passed away in December. Lonnie
was an engineers’ engineer and a true
visionary. He had a passion for life
and for helping others. After retiring
from ADTRAN, Lonnie was the
co-founder of the HudsonAlpha In-
stitute for Biotechnology, a nonprofit
institute dedicated to developing
and applying scientific advances to
health, agriculture, learning, and
commercialization. A gentle and
humble man, he built a lasting legacy
and will be greatly missed.
Finally, I must express my sincere
appreciation to our employees. They
have remained strong and focused,
despite the headwinds that we faced
in 2018. With their continued dedica-
tion, innovation and desire to exceed
customer expectations, we can and
will achieve great things.
Thomas R. Stanton
Chairman and CEO
ADTRAN, Inc.
“ADTRAN is well positioned to
capitalize on the market shifts in
our core business and opportu-
nities in new areas like connect-
ed home, Cable/MSO broadband
access and fixed wireless.”
12 ADTRAN 2018 Annual Report
Financial Results
14 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
15 Stock Performance Graph
16 Selected Financial Data
17 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Results of Operations
2018 Compared to 2017
2017 Compared to 2016
Liquidity and Capital Resources
Recently Issued Accounting Pronouncements
Critical Accounting Rolicies & Estimates
Subsequent Events
33 Quantitative and Qualitative Disclosures About Market Risk
34 Report of Independent Registered Public Accounting Firm
36 Financial Statements
41 Notes to Consolidated Financial Statements
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
– Nature of Business and Summary of Significant Accounting Policies
– Business Combinations
– Revenue
– Stock-Based Compensation
– Investments
– Derivative Instruments and Hedging Activities
– Inventory
– Property, Plant and Equipment
– Lease Arrangements
– Goodwill and Intangible Assets
– Alabama State Industrial Development Authority Financing and Economic Incentives
– Income Taxes
– Employee Benefit Plans
– Segment Information and Major Customers
– Commitments and Contingencies
– Earnings (Loss) Per Share
– Summarized Quarterly Financial Data (Unaudited)
– Subsequent Events
This annual report contains forward-looking statements which reflect management’s best judgment based on factors
currently known. However, these statements involve risks and uncertainties, including the successful development
and market acceptance of new products, the degree of competition in the market for such products, the product and
channel mix, component costs, manufacturing efficiencies, and other risks detailed in our annual report on Form 10-K
for the year ended December 31, 2018. These risks and uncertainties could cause actual results to differ materially
from those in the forward-looking statements included in this annual report.
Financial Results 13
Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities
ADTRAN’s common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. As of February 7,
2019, ADTRAN had 166 stockholders of record and approximately 7,019 beneficial owners of shares held in street name.
The following table shows the high and low closing prices per share for our common stock as reported by NASDAQ for the
periods indicated.
Common Stock Prices
2018
High
Low
2017
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$20.00
$15.35
$16.05
$13.95
$18.80
$14.95
$18.12
$10.43
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$23.20
$20.75
$20.65
$19.10
$24.00
$20.05
$24.50
$19.35
The following table shows the shareholder dividends paid in each quarter of 2018 and 2017. The Board of Directors presently
anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and
adequate levels of liquidity are maintained.
Dividends per Common Share
2018
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
Stock Repurchases
The following table sets forth repurchases of our common stock for the months indicated.
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
Period
October 1, 2018 – October 31, 2018
November 1, 2018 – November 30, 2018
December 1, 2018 – December 31, 2018
50,000
50,000
—
$13.60
$13.33
$ —
Total
100,000
50,000
50,000
—
100,000
2,608,516
2,558,516
2,558,516
(1) Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase
transactions of our 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 2.6 million shares of our common stock under
the current authorization of up to 5.0 million shares.
14 ADTRAN 2018 Annual Report
Stock Performance Graph
Our common stock began trading on the NASDAQ National Market on August 9, 1994. The price information reflected
for our common stock in the following performance graph and accompanying table represents the closing sales prices of
the common stock for the period from December 31, 2013, through December 31, 2018, on an annual basis. The graph
and the accompanying table compare the cumulative total stockholders’ return on our common stock with the NASDAQ
Telecommunications Index and the NASDAQ Composite Index. The calculations in the following graph and table assume
that $100 was invested on December 31, 2013, in each of our common stock, the NASDAQ Telecommunications Index
and the NASDAQ Composite Index and also assume dividend reinvestment.
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
ADTRAN, Inc.
NASDAQ Composite
NASDAQ Telecommunications
ADTRAN, Inc.
NASDAQ Composite
NASDAQ Telecommunications
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
$100.00
$100.00
$100.00
$82.02
$114.62
$102.75
$66.19
$122.81
$100.20
$87.59
$133.19
$106.61
$77.10
$172.11
$130.48
$43.82
$165.84
$130.76
Financial Results 15
Selected Financial Data
Income Statement Data
(In thousands, except per share amounts)
Year Ended December 31,
2018
2017
2016
2015
2014
Sales
Cost of sales (1)
Gross profit
Selling, general and administrative expenses (1)
Research and development expenses (1)
Operating income (loss)
Interest and dividend income
Interest expense
Net investment gain (loss)
Other income (expense), net (1)
Gain on bargain purchase of a business
Income (loss) before (provision) benefit for
income taxes
(Provision) benefit for income taxes
Net income (loss)
Weighted average shares outstanding – basic
Weighted average shares outstanding –
assuming dilution (3)
Earnings (loss) per common share – basic
Earnings (loss) per common share –
assuming dilution (3)
Dividends declared and paid per common share
$529,277
$666,900
$636,781
$600,064
$630,007
325,712
203,565
124,440
124,547
(45,422)
4,026
(533)
(4,050)
1.286
11,322
(33,371)
14,029
$19,342
47,880
47,880
($0.40)
($0.40)
$0.36
363,265
303,635
135,583
130,666
37,386
4,380
(556)
4,685
(1,208)
—
44,687
(20,847) (2)
$23,840
48,153
345,451
291,330
131,848
124,909
34,573
3,918
(572)
5,923
(489)
3,542
46,895
(11,666)
$35,229
48,724
333,166
266,898
123,540
129,868
13,490
3,953
(596)
10,337
(1,476)
—
25,708
(7,062)
$18,646
51,145
318,704
311,303
131,999
132,443
46,861
5,019
(677)
7,278
1,425
—
59,906
(15,286)
$44,620
55,120
48,699
48,949
51,267
55,482
$0.50
$0.49
$0.36
$0.72
$0.72
$0.36
$0.36
$0.36
$0.36
$0.81
$0.80
$0.36
Balance Sheet Data
(In thousands)
At December 31,
Working capital (4)
Total assets
Total debt
Stockholders’ equity
2018
$237,416
$628,027
$25,600
2017
$306,296
$669,094
$26,700
2016
$226,367
$667,235
$27,800
2015
$219,219
$632,904
$28,900
2014
$214,985
$738,694
$30,000
$446,279
$497,911
$479,517
$480,160
$549,013
(1) On January 1, 2018, we adopted ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. We retrospectively adopted the presentation of service cost
separate from other components of net periodic pension costs. As a result, $0.4 million, $0.2 million, ($11,000) and $0.3 million
have been reclassified from cost of sales, selling, general and administrative expenses, and research and development expense to
other income (expense), net for the years ended December 31, 2017, 2016, 2015 and 2014, respectively. See Note 1 of Notes to
Consolidated Financial Statements included in Item 8 of this report for additional information.
(2) Provision for income taxes in 2017 reflected an estimated expense of $11.9 million related to the Tax Cuts and Jobs Act, which
was signed into law on December 22, 2017. See Note 12 of Notes to Consolidated Financial Statements, included in Item 8 of this
report, for additional information.
(3) Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 16 of Notes to Consolidated
Financial Statements, included in Item 8 of this report. As a result of the net loss for the year ended December 31, 2018, we
excluded 0.1 million of unvested stock options, PSU’s, RSU’s and restricted stock from the calculation of diluted EPS due to their
anti-dilutive effect.
(4) Working capital consists of current assets less current liabilities. Amounts prior to 2016 have been recast to conform to the current
period’s presentation as a result of our adoption of Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred
Taxes. See Note 1 of Notes to Consolidated Financial Statements included in Item 8 of this report for additional information.
16 ADTRAN 2018 Annual Report
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
ADTRAN is a leading global provider of networking and communications equipment, serving a diverse domestic and
international customer base in 68 countries that includes Tier 1, 2 and 3 service providers, cable/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 of users worldwide. We support our customers through our
direct global sales organization and our distribution networks. Our success depends upon our ability to increase unit volume
and market share through the introduction of new products and succeeding generations of products having lower selling
prices and increased functionality as compared to both the prior generation of a product and to the products of competitors.
In order to service our customers and build 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.
In addition to our corporate headquarters in Huntsville, Alabama, we have research and development (R&D) facilities in
strategic global locations.
We are focused on being a top global supplier of access infrastructure and related value-added solutions from the cloud
edge to the subscriber edge. We offer a broad portfolio of flexible software and hardware network solutions and services that
enable service providers to meet today’s service demands, while enabling them to transition to the fully converged, scalable,
highly automated, cloud-controlled voice, data, internet and video network of the future.
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. An important part of our strategy is to reduce the cost of each
succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain
market share and/or improve gross margins. As a part of this strategy, we seek to be a high-quality, and in most instances the
low-cost provider of products in our markets. Our success to date is attributable in large measure to our ability to design our
products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing
costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing
customers, while increasing our market share by selling these enhanced products to new customers.
Our business is global. We supply different sets of products to different customers in different regions around the world. Our
financial results in any period reflect the activities of our various customers in their respective regions at any given time. In
order to service our customers and build 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. The lead
times to revenues for these products vary.
The company made two acquisitions in 2018, strengthening its position in both the Cable/MSO and connected home
markets. In the first quarter of 2018, we acquired the market-leading EPON business and certain assets for North America
from Sumitomo Electric Industries Ltd. These solutions, combined with our organic fiber access product portfolio and
our distributed access expertise, present new opportunities in the cable/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. For more
information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this report.
As previously reported, we experienced a significant negative impact on our North American revenue as a result of a decision
in mid-fourth quarter 2017 by a major customer to suspend a product rollout and network upgrade following a merger.
While we continue to sell to that customer, the project in question has not yet resumed to prior levels, and we are unsure
when, if ever, it will. During the periods covered in this report, our North American revenue was also impacted by slower-
than-expected orders of an ultra-broadband product by a large domestic customer.
During the same period, however, we have seen an expansion of our revenues from much of the customer base and have
brought to fruition our participation in a number of large customer projects, which in some cases have begun to produce
some revenues and in all cases represent a possibility of significant revenue in the future. These include next-generation
Financial Results 17
PON projects with service providers, both domestically and internationally, the deployment for a large project in the APAC
region, a significant network upgrade by a Tier 1 European customer, as well as continued expansion and opportunities for
our EPON products to two of the top North American cable/MSO operators.
While our services business did not increase at the rate that it did in 2016 and 2017, and has decreased from the record levels
we achieved in 2017 due to the above-mentioned merger-related disruption, we continue to develop our services business
around the world, and we anticipate that it will continue to expand and remain an increasingly important part of our revenue
streams across the world. Margins on services revenue vary depending upon the types of services performed.
We review our financial performance, specifically revenue and gross profit, based on two reportable segments – Network
Solutions and Services & Support. Network Solutions software and hardware products provide solutions supporting fiber-,
copper- and coaxial-based infrastructures and a growing number of wireless solutions, lowering the overall cost to deploy
advanced services across a wide range of applications for Carrier, Cable/MSO networks and business networks, as well
as prior-generation products. Our Services & Support enables our customers to accelerate time to market, reduce costs
and improve customer satisfaction through a complete portfolio of services, including maintenance, turnkey network
implementation, solutions integration, and managed services. ADTRAN’s comprehensive network implementation services
include engineering design and documentation (pre-construction), construction and installation (construction), and test,
turn-up and provisioning (post-construction). Additionally, we partner with customers to tailor a program to each specific
service-delivery need.
In addition, we also report revenue for the following three categories—Access & Aggregation, Subscriber Solutions &
Experience (formerly Customer Devices) and Traditional & Other Products.
Access & Aggregation solutions are used by service providers to connect their network infrastructure to subscribers. This
category includes software- and hardware-based products and services that aggregate and/or originate access technologies.
The portfolio of ADTRAN solutions within this category includes a wide array of modular or fixed physical form factors
designed to deliver the best technology and economic fit based on the target subscriber density and environmental conditions.
The Access & Aggregation category includes product and service families such as:
■■ Mosaic-branded network management and subscriber services control and orchestration software within SD-Access
architectures;
■■ SDX series of SDN-controlled programmable network elements that form the hardware components within
SD-Access architectures;
■■ Total Access 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN);
■■ hiX 5600 Series fiber aggregation and FTTN MSAN;
■■ Fiber to the Distribution Point (FTTdp) Gfast Distribution Point Units (DPUs);
■■ GPON, EPON and 10G PON Optical Line Terminals (OLTs);
■■ Optical Networking Edge (ONE) aggregation;
■■ IP-based Digital Subscriber Line Access Multiplexers (DSLAMs);
■■ Cabinet and Outside-Plant (OSP) enclosures and services;
■■ Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials;
■■ Planning, engineering, program management, maintenance, installation and commissioning services to implement
customer network solutions;
■■ Other products and services that are generally applicable to Access & Aggregation.
Subscriber Solutions & Experience (formerly Customer Devices) includes open-source connected home platforms, cloud
services and any of our solutions and services that deliver residential and/or enterprise subscribers an immersive and
interactive broadband experience from the service provider’s access network. These products, software, and services include
SmartRG solutions and applications, NetVanta Enterprise IP business gateways, access routers, Ethernet switches, ProCloud
service offerings, residential and enterprise operating systems (such as SmartOS and AOS), Bluesocket Wi-Fi portfolio,
18 ADTRAN 2018 Annual Report
service provider and Cable/MSO Optical Network Terminals (ONTs), as well as related software applications and services.
In alignment with our increased focus on enhancing customer experience for both business and consumer broadband
customers as well as the addition of SmartRG during 2018, Customer Devices will now be known as Subscriber Solutions &
Experience, as this more accurately represents this revenue category and our vision moving forward.
The Subscriber Solutions & Experience category includes products and services such as:
■■ Cloud-based SaaS management platforms for service providers to manage residential and enterprise networks;
■■ SaaS platforms for subscriber and network analytics collection used to enhance network operations and customer experience;
■■ SmartOS-branded embedded software licensing for residential and enterprise gateway and Wi-Fi devices;
■■ Broadband customer premises solutions, including GPON, XGS-PON, NG-PON2, EPON and 10G EPON and point-to-
point Ethernet Optical Network Terminals (ONTs);
■■ Radio Frequency over Glass (RFoG) MicroNodes;
■■ Wi-Fi enabled residential gateway products and accessories across xDSL, Ethernet, DOCSIS, LTE, and fiber technologies;
■■ Enterprise Wi-Fi access points and associated powering and switching infrastructure;
■■ Enterprise Session Border Controller (eSBC) device platforms and software;
■■ Branch office business routers;
■■ Carrier Ethernet services termination devices;
■■ Voice over Internet Protocol (VoIP) media gateways;
■■ ProServices pre-sale and post-sale technical support;
■■ Planning, engineering, program management, maintenance, installation and commissioning services to implement
customer devices solutions into consumer, small business and enterprise locations;
■■ Other products, software and services applicable to subscriber solutions and experience.
Traditional & Other Products generally includes a mix of prior-generation technologies’ products and services, as well as
other products and services that do not fit within the Access & Aggregation or Subscriber Solutions & Experience categories.
The Traditional & Other Products category includes products and services such as:
■■ Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM)-based aggregation systems and customer devices;
■■ HDSL, ADSL and other mature technologies used to deliver business and residential services over service provider access
and customer networks;
■■ Other products and services outside the Access & Aggregation and Subscriber Solutions & Experience categories.
Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly in future periods due to a
number of factors, including customer order activity and backlog. A substantial portion of our shipments in any fiscal period
relates to orders received 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 order backlog or 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. Because many of our customers require
prompt delivery of products, 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
revenues could significantly impact our financial results in a given quarter.
Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and
market conditions, foreign currency exchange rate movements, 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
Financial Results 19
inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete and
increases the risk that the obsolescence of this inventory may have an adverse effect on our business and operating results.
Also, not maintaining sufficient inventory levels to assure prompt delivery of our products may cause us to incur expediting
costs to meet customer delivery requirements, which may negatively impact our operating results in a given quarter.
Accordingly, our 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. See Note 17 of Notes to Consolidated
Financial Statements, included in Item 8 of this report, for additional information. For a discussion of risks associated with
our operating results, see Item 1A of this report.
Results of Operations
The following table presents selected financial information derived from our consolidated statements of income expressed as
a percentage of sales for the years indicated. Amounts may not foot due to rounding.
Year Ended December 31,
2018
2017
2016
Sales
Products
Services
Total sales
Cost of sales
Products
Services
Total cost of sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Operating income (loss)
Interest and dividend income
Interest expense
Net investment gain (loss)
Other income (expense), net
Gain on bargain purchase of a business
Income (loss) before (provision) benefit for income taxes
(Provision) benefit for income taxes
Net income (loss)
2018 Compared to 2017
86.6%
13.4
100.0
52.7
8.8
61.5
38.5
23.5
23.5
(8.6 )
0.8
(0.1)
(0.8 )
0.2
2.1
(6.3 )
2.7
(3.7)%
81.0%
19.0
100.0
41.9
12.6
54.5
45.5
20.3
19.6
5.6
0.7
(0.1)
0.7
(0.2)
—
6.7
(3.1)
3.6%
82.5%
17.5
100.0
42.5
11.7
54.2
45.8
20.7
19.6
5.4
0.6
(0.1)
0.9
(0.1)
0.6
7.4
(1.8 )
5.5%
Sales
Our sales decreased 20.6% from $666.9 million for the year ended December 31, 2017, to $529.3 million for the year ended
December 31, 2018. The decrease in sales occurred over both our Network Solutions and our Services & Support reporting
segments. Our Network Solutions sales decreased $82.2 million compared to 2017, and our Services & Support sales
decreased $55.5 million versus the prior year. The decrease in our 2018 sales is primarily attributable to the termination
of a multi-city broadband project, resulting from a merger-related review and slowdown in spending at a domestic Tier 1
customer that particularly affected our Access & Aggregation products and services, which decreased $115.1 million in 2018.
The 2018 decline in sales to this domestic Tier 1 customer was partially offset by an increase in international sales of $81.7
million during the year, primarily as a result of increased sales to Tier 1 customers in the EMEA and Asia-Pacific regions.
During 2018, sales of our Subscriber Solutions & Experience products decreased $4.0 million, due primarily to decreases in
sales of our fiber CPE, and sales of our Traditional & Other Products decreased $18.6 million.
20 ADTRAN 2018 Annual Report
Network Solutions segment sales decreased by 15.2% from $540.4 million in 2017 to $458.2 million in 2018, due primarily
to a decrease in our Access & Aggregation products. The decrease in sales of 16.6% of our Access & Aggregation products
for 2018 is primarily attributable to the above-mentioned merger-related review and slowdown in spending at a domestic
Tier 1 customer, partially offset by an increase in sales to international Tier 1 customers as discussed further below.
The decrease of 2.9% in 2018 for sales of our Subscriber Solutions & Experience products is primarily attributable to the
changes in sales of fiber CPE products. While we expect that revenues from Traditional & Other Products will continue to
decline over time, these revenues may fluctuate and continue for years because of the time required for our customers to
transition to newer technologies.
Services & Support sales decreased by 43.8% from $126.5 million in 2017 to $71.0 million in 2018. The decrease in sales for
2018 is primarily attributable to a significant decrease in network installation services for Access & Aggregation products
related to the above mentioned merger-related review and slowdown in spending at a domestic Tier 1 customer.
Domestic sales decreased 43.2% from $508.2 million in 2017 to $288.8 million in 2018 which was a result of a decision in
the mid-fourth quarter 2017 by a major customer to suspend a product rollout and network upgrade following a major.
Excluding the impact of this customer, domestic sales increased by 9.1% in 2018 over the prior year.
International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased
51.5% from $158.7 million in 2017 to $240.4 million in 2018. International sales as a percentage of total sales increased from
23.8% in 2017 to 45.4% in 2018. The increase in sales for 2018 is primarily attributable to an increase in sales in EMEA and
APAC. The increase in sales for 2018 in EMEA is primarily attributable to a network expansion program and a services award
by a large European Tier 1 customer. The increase in sales in APAC for 2018 is primarily attributable to a network expansion
program by a Tier 1 customer in Australia.
Our international revenues are largely focused on broadband infrastructure and are impacted by the decisions of our
customers as to the timing for installation of new technologies, expansion of their networks and/or network upgrades. Our
international customers must make these decisions in the regulatory and political environment in which they operate – both
nationally and in some instances, regionally – whether of a multi-country region or a more local region within a country.
For example, the European Commission launched a Gigabit Society initiative, and before that, the Digital Agenda, which has
provided a favorable market environment for the deployment of ultra-broadband and Gigabit network solutions. Although
the overall environment and market demand for broadband service deployment in the European Union have improved, some
new broadband technologies are still being reviewed for regulatory and standards compliance, which may affect the timing
of those technologies. In Mexico, regulatory changes have created uncertainty for customers resulting in slowdowns in their
network buying patterns, which are only now beginning to be resolved. The competitive landscape in certain international
markets is also impacted by the increased presence of Asian manufacturers that seek to compete aggressively on price. A
strengthening U.S. dollar can also negatively impact our revenues in regions such as Latin America, where our products are
traditionally priced in U.S. dollars, while in regions where our products are sold in local currency, such as Europe, a stronger
U.S. dollar can negatively impact operating income. Consequently, while we expect the global trend towards deployment of
more robust broadband speeds and access to continue creating additional market opportunities for us, the factors described
above may result in pressure on revenues and operating income. However, we do not presently foresee a significant negative
impact on our financial condition based on our strong liquidity and the generally positive environment described above.
We recognized a positive revenue impact in the first half of 2017 due to our being awarded a network expansion program by
a large European Tier 1 customer. During 2018, this European Tier 1 customer undertook an additional network expansion
project. Additionally, we anticipate that as our Latin American customers resume their network upgrade projects, we may
experience further enhancement to our revenues. As announced, we received of a new nationwide award in the APAC
region, as well as additional awards based on new ADTRAN technologies in the EMEA region that have, and we believe will
continue to have, a positive impact to our revenues.
Cost of Sales
As a percentage of sales, cost of sales increased from 54.5% for the year ended December 31, 2017, to 61.5% for the year
ended December 31, 2018. The increase in the cost of sales as a percentage of sales is due primarily to regional revenue shifts,
customer and product mix, services and support mix, restructuring expenses and an increase in warranty expense.
Network Solutions cost of sales, as a percent of that segment’s sales, increased from 51.7% of sales in 2017 to 60.9% of sales
in 2018. The increase in Network Solutions cost of sales as a percentage of that segment’s sales is primarily attributable to a
Financial Results 21
regional revenue shift, customer and product mix, an increase in warranty expense from the prior year due to a settlement
received in first quarter of 2017 from a third-party supplier for a defective component, higher product costs versus the
prior year due to purchase discounts received from a contract manufacturer in the first quarter of 2017 and an increase in
restructuring expenses incurred during 2018.
An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the
product’s price based on the cost savings achieved. 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 cost of sales, as a percent of that segment’s sales, decreased from 66.2% of sales in 2017 to 65.8% of sales in
2018. The decrease in Services & Support cost of sales as a percentage of that segment’s sales in 2018 is primarily attributable
to customer mix, services and support mix, and certain cost reductions from restructuring related to the realignment of our
Services & Support labor expense resulting from the above-mentioned merger-related termination of a network upgrade
project by a domestic Tier 1 customer.
Our Services & Support revenues are 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.
Our services business has experienced significant growth since 2015 as competitive pressures to expand broadband access
and speeds have strained carriers’ ability to respond to customer demand. However, the revenue associated with this business
decreased from 2017 to 2018 due to the impact of the above-mentioned merger-related review and slowdown of a network
upgrade project by a domestic Tier 1 customer. 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 sub-contracted 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 revenues have grown and are now the largest component of our Services &
Support 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 revenues comprising a larger percentage of our overall revenues, and because
our Services & Support gross margins are below those of the Network Solutions segment, our overall corporate gross margins
have declined as that business has continued to grow. Within the Services & Support segment, we do expect variability in
gross margins from quarter-to-quarter based on the mix of the services recognized.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by 8.2% from $135.6 million in 2017 to $124.4 million in 2018. Selling,
general and administrative expenses include personnel costs for administration, finance, information technology, human
resources, sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, advertising,
promotional material, trade show expenses, and related travel costs. The decrease in selling, general and administrative
expenses is primarily attributable to a decrease in compensation and labor expense, independent contractor expense, and
travel expense, partially offset by an increase in restructuring expenses.
Selling, general and administrative expenses as a percentage of sales increased from 20.3% for the year ended December 31,
2017, to 23.5% for the year ended December 31, 2018. Selling, general and administrative expenses as a percentage of sales
will generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared as these costs
are relatively fixed in the short term.
Research and Development Expenses
Research and development expenses decreased by 4.7% from $130.7 million for the year ended December 31, 2017, to $124.5
million for the year ended December 31, 2018. The decrease in research and development expenses is primarily attributable
to a decrease in compensation and labor expense, independent contractor expense, and travel expense, partially offset by an
increase in restructuring expenses.
Research and development expenses as a percentage of sales increased from 19.6% for the year ended December 31, 2017, to
23.5% for the year ended December 31, 2018. Research and development expenses as a percentage of sales will fluctuate whenever
there are incremental product development activities or significant fluctuations in revenues for the periods being compared.
22 ADTRAN 2018 Annual Report
We expect to continue to incur research and development expenses in connection with our new and existing products and
our expansion into international markets. We continually evaluate new product and market opportunities and engage in
significant research and development efforts which provide 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 revenues
from a major new product group.
Interest and Dividend Income
Interest and dividend income decreased by 8.1% from $4.4 million for the year ended December 31, 2017, to $4.0 million for
the year ended December 31, 2018. The decrease in interest and dividend income is primarily attributable to fluctuations in
investment balances.
Interest Expense
Interest expense, which is primarily related to our taxable revenue bond, decreased by 4.1% from $0.6 million for the year
ended December 31, 2017, to $0.5 million for the year ended December 31, 2018, as a result of a principal payment made
on our taxable revenue bond during the year ended December 31, 2018. See “Financing Activities” in “Liquidity and Capital
Resources” below for additional information on our taxable revenue bond.
Net Investment Gain (Loss)
Net investment gain (loss) reversed from a gain of $4.7 million for the year ended December 31, 2017, to a loss of $4.0
million for the year ended December 31, 2018. The decrease is primarily attributable to changes in fair value on equity
securities recognized during the period under ASC 2016-01. Prior to January 1, 2018, changes in fair value were recognized
in accumulated other comprehensive income, net of deferred taxes, on the balance sheet. With the adoption of ASC 2016-
01 in January 2018, unrealized gains or losses are now recognized in other income in the period they are incurred. The
loss in 2018 is a result of unrealized losses in our professionally-managed equity investment portfolios resulting from
extreme equity market volatility in the fourth quarter of 2018. We expect that any future equity market volatility will result
in continued volatility in gains or losses from our equity investment portfolios. See “Investing Activities” in “Liquidity and
Capital Resources” and Note 1 and Note 5 of Notes to Consolidated Financial Statements included in Item 8 of this report
for additional information.
Other Income (Expense), net
Other income (expense), net, which is comprised primarily of gains and losses on foreign currency transactions, gains and
losses on foreign exchange forward contracts, investment account management fees, and miscellaneous income and expense,
increased 206.5% from expense of $1.2 million for the year ended December 31, 2017, to income of $1.3 million for the year
ended December 31, 2018. The change is primarily attributable to losses on foreign exchange contracts and transactions in
2017 as compared to foreign exchange gains in 2018.
Gain on Bargain Purchase of a Business
Gain on bargain purchase of a business is 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. on March
19, 2018. See Note 2 of Notes to Consolidated Financial Statements included in Item 8 of this report for additional information.
(Provision) Benefit for Income Taxes
Our effective tax rate decreased from an expense of 46.7% for the year ended December 31, 2017, to a benefit of 42.0%,
excluding the tax effect of the bargain purchase gain, for the year ended December 31, 2018. The decrease in the effective
tax rate between the two periods was primarily driven by the current year losses in our domestic business and the expense
recognized in 2017 related to the effect of the U.S. Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.
As a result of the 2017 tax law change, an expense of $11.9 million was recorded in the fourth quarter of 2017, of which $9.2
million related to the write-down of deferred tax assets and $2.7 million related to tax on unrepatriated foreign earnings.
Additional work to complete a more detailed analysis of historical foreign earnings, as well as the full impact to the write-
down of deferred tax assets, was completed in the third quarter of 2018 and resulted in a tax benefit of $4.0 million. See Note
12 of Notes to Consolidated Financial Statements included in Item 8 of this report for additional information.
Net Income (Loss)
As a result of the above factors, net income (loss) decreased from income of $23.8 million for the year ended December 31,
2017 to a loss of $(19.3) million for the year ended December 31, 2018. As a percentage of sales, net income (loss) decreased
from 3.6% for the year ended December 31, 2017, to (3.7%) for the year ended December 31, 2018.
Financial Results 23
2017 Compared to 2016
Sales
Our sales increased by 4.7% from $636.8 million in 2016 to $666.9 million in 2017. The increase in sales occurred over both
our Network Solutions and our Services & Support reporting segments. Our Network Solutions sales increased $14.9 million
in 2017, and our Services & Support sales increased $15.2 million compared to the prior year.
Network Solutions sales increased by 2.8% from $525.5 million in 2016 to $540.4 million in 2017. The increase in sales in
2017 is primarily attributable to an increase in sales of our Access & Aggregation products, partially offset by a decrease in
sales of our Traditional & Other products. The increase in sales of our Access & Aggregation products is primarily attributable
to increased VDSL2 vectoring product sales in the U.S. and European carrier markets. While we expect that revenues from
Traditional & Other products will continue to decline over time, these revenues may fluctuate and continue for years because
of the time required for our customers to transition to newer technologies.
Services & Support sales increased by 13.7% from $111.3 million in 2016 to $126.5 million in 2017. The increase in sales in
2017 is primarily attributable to an increase in network installation services for Access & Aggregation products.
International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased
17.2% from $135.4 million in 2016 to $158.7 million in 2017. International sales, as a percentage of total sales, increased from
21.3% in 2016 to 23.8% in 2017. The increase in international sales in 2017 is primarily attributable to an increase in sales in
EMEA, partially offset by a decrease in sales in Latin America and the APAC region.
Cost of Sales
As a percentage of sales, cost of sales increased from 54.2% in 2016 to 54.5% in 2017. The increase is primarily attributable to
a regional revenue shift, customer and product mix and services and support mix.
Network Solutions cost of sales, as a percent of that segment’s sales, increased from 51.5% of sales in 2016 to 51.7% of sales
in 2017. The increase in Network Solutions cost of sales as a percentage of that segment’s sales is primarily attributable to
customer and product mix.
An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the
product’s price based on the cost savings achieved. 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 cost of sales, as a percent of that segment’s sales, decreased from 67.2% of sales in 2016 to 66.2% of sales
in 2017. The decrease in Services & Support cost of sales as a percentage of that segment’s sales is primarily attributable to the
mix of network installation programs and support.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 2.8% from $131.8 million in 2016 to $135.6 million in 2017. Selling,
general and administrative expenses include personnel costs for administration, finance, information technology, human
resources, sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, bad
debt expense, advertising, promotional material, trade show expenses, and related travel costs. The increase in selling,
general and administrative expenses is primarily attributable to increases in ERP implementation expense, deferred
compensation expense, travel expense, and stock-based compensation expense, partially offset by a decrease in performance-
based compensation expense.
Selling, general and administrative expenses as a percentage of sales decreased from 20.7% for the year ended December 31,
2016 to 20.3% for the year ended December 31, 2017. Selling, general and administrative expenses as a percentage of sales will
generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.
Research and Development Expenses
Research and development expenses increased 4.6% from $124.9 million in 2016 to $130.7 million in 2017. The increase
in research and development expenses is primarily attributable to an increase in labor and engineering materials related to
customer specific projects, contract services and amortization of intangibles acquired in the third quarter of 2016.
Research and development expenses as a percentage of sales remained constant at 19.6% for the years ended December 31,
2016 and 2017. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental
product development activities or significant fluctuations in revenues for the periods being compared.
24 ADTRAN 2018 Annual Report
Interest and Dividend Income
Interest and dividend income increased by 11.8% from $3.9 million in 2016 to $4.4 million in 2017. The increase in interest
and dividend income is primarily attributable to an increase in the rate of return on investments.
Interest Expense
Interest expense, which is primarily related to our taxable revenue bond, remained consistent at $0.6 million in 2016 and
2017, as we had no substantial change in our fixed-rate borrowing. See “Financing Activities” in “Liquidity and Capital
Resources” below for additional information on our taxable revenue bond.
Net Investment Gain
Net investment gain decreased by 20.9% from $5.9 million in 2016 to $4.7 million in 2017. The decrease in realized investment
gains is primarily attributable to decreased gains from the sale of equity securities. See “Investing Activities” in “Liquidity and
Capital Resources” below for additional information.
Other Income (Expense), net
Other income (expense), net, comprised primarily of miscellaneous income and expense, gains and losses on foreign
currency transactions, gains and losses on foreign exchange forward contracts, investment account management fees, and
scrap raw material sales, increased 147.0% from $0.5 million of expense in 2016 to $1.2 million of expense in 2017. The
change is primarily attributable to increased losses on our foreign exchange contracts.
Gain on Bargain Purchase of a Business
Gain on bargain purchase of a business in 2016 is related to our acquisition of key fiber access products, technologies and
service relationships from subsidiaries of CommScope, Inc. on September 13, 2016. See Note 2 of Notes to Consolidated
Financial Statements included in Item 8 of this report for additional information.
Provision for Income Taxes
Our effective tax rate increased from 24.9% in 2016 to 46.7% in 2017. The increase in the effective tax rate between the two
periods is primarily attributable to the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. As a result of
the new law, we recognized an estimated expense of $11.9 million in the fourth quarter of 2017, of which $9.2 million related
to the write-down of deferred tax assets and $2.7 million related to tax on unrepatriated foreign earnings. See Note 12 of
Notes to Consolidated Financial Statements included in Item 8 of this report for additional information.
Net Income
As a result of the above factors, net income decreased from $35.2 million in 2016 to $23.8 million in 2017. As a percentage of
sales, net income decreased from 5.5% in 2016 to 3.6% in 2017.
Liquidity and Capital Resources
Liquidity
We currently expect to finance our operations with cash flow from operations. We have used, and expect to continue to
use, the cash generated from operations for working capital, business acquisitions, purchases of treasury stock, shareholder
dividends, and other general corporate purposes, including product development activities to enhance our existing products
and develop new products and expansion of our sales and marketing activities. We believe our cash and cash equivalents,
investments and cash generated from operations to be adequate to meet our operating and capital needs for at least the next
12 months.
At December 31, 2018, cash on hand was $105.5 million and short-term investments were $3.2 million, which resulted in
available short-term liquidity of $108.7 million, of which $87.1 million was held by our foreign subsidiaries. At December 31,
2017, cash on hand was $86.4 million and short-term investments were $16.1 million, which resulted in available short-term
liquidity of $102.6 million, of which $56.8 million was held by our foreign subsidiaries. The increase in short-term liquidity
from December 31, 2017, to December 31, 2018, is primarily attributable to cash held by certain foreign subsidiaries, at least
some of which we expect to repatriate as tax and regulatory considerations may allow.
Financial Results 25
Operating Activities
Our working capital, which consists of current assets less current liabilities, decreased 22.5% from $306.3 million as of December
31, 2017 to $237.4 million as of December 31, 2018. The current ratio, defined as current assets divided by current liabilities,
decreased from 3.87 as of December 31, 2017, to 3.01 as of December 31, 2018. The decrease in our working capital and current
ratio is primarily attributable to a decrease in net accounts receivable, inventory, and short term investments as well as an
increase in income tax payable. The quick ratio, defined as cash and cash equivalents, short-term investments, and net accounts
receivable, divided by current liabilities, decreased from 2.31 as of December 31, 2017, to 1.76 as of December 31, 2018. The
decrease in the quick ratio is primarily attributable to a decrease in net accounts receivable and short term investments with an
increase in income taxes payable. This decrease was slightly offset by an increase in cash and cash equivalents.
Net accounts receivable decreased 31.1% from $144.2 million at December 31, 2017, to $99.4 million at December 31, 2018.
Our allowance for doubtful accounts was $0.1 million at December 31, 2018. We did not have an allowance for doubtful
accounts at December 31, 2017. Quarterly accounts receivable DSO decreased from 105 days as of December 31, 2017, to 65
days as of December 31, 2018. The decrease in net accounts receivable and DSO is attributable to customer specific payment
terms agreed upon in 2017 that became due in the first quarter of 2018 and the timing of sales and other collections during
the quarter.
Other receivables increased 38.1% from $26.6 million at December 31, 2017, to $36.7 million at December 31, 2018. The
increase in other receivables is primarily attributable to an increase in contract assets, purchasing shipments, investment loan
receivable and income tax receivables.
On February 25, 2019, one the Company’s customers filed for voluntary Chapter 11 bankruptcy as a result of a court ruling
resulting in a substantial legal judgment against the customer. In 2018, this customer accounted for less than 5% of the
Company’s revenue. As of December 31, 2018, the Company had $2.6 million related to product and services revenue and
$0.3 million related to a leased equipment arrangement included in accounts receivable on the Consolidated Balance Sheet
that was due from this customer. As of December 31, 2018, the Company had $9.4 million included in other receivables related
to a leased equipment arrangement on its Consolidated Balance Sheet that was due from this customer. Since December 31,
2018, and through the date of this filing, all $2.6 million of the outstanding products and services accounts receivable and $0.1
million of the outstanding accounts receivable related to leased equipment have been collected. Additionally, $1.7 million
of the outstanding other receivables related to leased equipment have been collected. Therefore, there is potential risk of
uncollectibility up to $7.8 million on the remaining outstanding receivable balances as of December 31 2018. The Company
has evaluated the collectibility of the remaining receivable balances with the best available and applicable information as of
the date of this filing and the impact was not material to the consolidated financial statements as of December 31, 2018. The
Company will continue to evaluate the collectibility of the remaining accounts receivable balances in subsequent reporting
periods. Additionally, it is uncertain at this time the impact this voluntary bankruptcy filing might have on the Company’s
operating income prospectively; however, the Company believes it will not have a significant impact on the Company’s
liquidity and capital resources.
Annual inventory turnover decreased from 3.19 turns as of December 31, 2017, to 2.93 turns as of December 31, 2018.
Inventory decreased 18.5% from $122.5 million at December 31, 2017 to $99.8 million at December 31, 2018. We expect
inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to seasonal cycles of our business
ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing
technology and customer demand.
Accounts payable increased 0.7% from $60.6 million at December 31, 2017, to $61.1 million at December 31, 2018. 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 $8.1 million, $14.7 million and $21.4 million for the years ended December
31, 2018, 2017 and 2016, respectively. These expenditures were primarily used to purchase computer hardware, software,
manufacturing and test equipment, and building improvements.
26 ADTRAN 2018 Annual Report
Our combined short-term and long-term investments decreased $34.3 million from $146.4 million at December 31, 2017
to $112.1 million at December 31, 2018. This decrease reflects the impact of our cash used for business acquisitions, share
repurchases, shareholder dividends, property, plant and equipment purchases, as well as net realized losses on these investments.
We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal
risk of loss. At December 31, 2018, these investments included corporate bonds of $20.7 million, municipal fixed-rate bonds
of $1.3 million, asset-backed bonds of $5.2 million, mortgage/agency-backed bonds of $3.8 million, U.S. government bonds
of $9.2 million, and foreign government bonds of $0.6 million. At December 31, 2017, these investments included corporate
bonds of $32.5 million, municipal fixed-rate bonds of $2.9 million, asset-backed bonds of $6.5 million, mortgage/agency-
backed bonds of $5.5 million, U.S. government bonds of $14.3 million and foreign government bonds of $0.7 million. As of
December 31, 2018, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds,
U.S. government bonds, and foreign government bonds were classified as available-for-sale and had a combined duration
of 1.55 years with an average credit rating of A+. Because our bond portfolio has a high-quality rating and contractual
maturities of short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for
similar securities traded in an active market, on a daily basis.
Our long-term investments decreased 16.5% from $130.3 million at December 31, 2017, to $108.8 million at December 31,
2018. Long-term investments at December 31, 2018, and December 31, 2017, included investments in various marketable
equity securities classified as long-term investments with a fair market value of $27.0 million and $35.7 million, at December
31, 2018, and December 31, 2017, respectively. Our long-term investments also included an investment in a certificate of
deposit of $25.6 million and $27.8 million, respectively, which serves as collateral for our revenue bond, as discussed below.
Long-term investments at December 31, 2018 and 2017 also included $18.3 million and $19.9 million, respectively, related to
our deferred compensation plan, and $0.4 million and $0.5 million, respectively, of other investments, consisting of interests
in two private equity funds.
Acquisition of businesses, net of cash acquired, totaled $22.0 million, zero and $0.9 million for the years ended December 31,
2018, 2017 and 2016, respectively. See Note 2 of Notes to Consolidated Financial Statements included in Item 8 of this report
for additional information.
Financing Activities
In 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 Industrial Development Authority (the Authority). Pursuant to the program, on
January 13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of the
bonds to ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama (now Regions Bank of Alabama)
(the Bank). Wachovia Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of Tennessee) (the Bondholder),
which was acquired by Wells Fargo & Company on December 31, 2008, purchased the original bonds from the Bank and
made further advances to the Authority, bringing the total amount outstanding to $50.0 million. An Amended and Restated
Taxable Revenue Bond (Amended and Restated Bond) was issued and the original financing agreement was amended. The
Amended and Restated Bond bears interest, payable monthly. The interest rate is 2% per annum. The Amended and Restated
Bond matures on January 1, 2020, and is currently outstanding in the aggregate principal amount of $25.6 million. The
estimated fair value of the bond using a level 2 valuation technique at December 31, 2018, was approximately $25.4 million,
based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. We are
required to make payments to the Authority in amounts necessary to pay the interest on the Amended and Restated Bond.
Included in long-term investments at December 31, 2018, is $25.6 million which is invested in a restricted certificate of
deposit. These funds serve as a collateral deposit against the principal of this bond, and we have the right to set-off the balance
of the Amended and Restated Bond with the collateral deposit in order to reduce the balance of the indebtedness.
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 that we are required to remit to the state for those employment positions that qualify
under the program. We realized economic incentives related to payroll withholdings totaling $1.4 million, $1.5 million and
$1.3 million for the years ended December 31, 2018, 2017 and 2016.
We made principal payments of $1.1 million for each of the years ended December 31, 2018 and 2017, and we anticipate
making a principal payment in 2019. At December 31, 2018 and 2017, $1.0 million and $1.1 million, respectively
of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance Sheets included
in Item 8 of this report.
Financial Results 27
Dividends
During 2018, 2017 and 2016, we paid shareholder dividends totaling $17.3 million, $17.4 million and $17.6 million,
respectively. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present
tax treatment of dividends exists and adequate levels of liquidity are maintained. The following table shows dividends per
common share paid to our shareholders in each quarter of 2018, 2017 and 2016.
Dividends per Common Share
2018
2017
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market
repurchase transactions of our common stock, which are implemented through open market or private purchases from time
to time as conditions warrant. For the years 2018, 2017 and 2016, we repurchased 1.0 million shares, 0.9 million shares and
1.4 million shares, respectively, for a cost of $15.5 million, $17.3 million and $25.8 million, respectively, at an average price
of $15.52, $20.27 and $18.29 per share, respectively. We currently have authorization to repurchase an additional 2.6 million
shares of our common stock under the current authorization of up to 5.0 million shares.
Stock Option Exercises
To accommodate employee stock option exercises, we issued 0.1 million shares of treasury stock for $1.5 million during the
year ended December 31, 2018, 0.7 million shares of treasury stock for $13.4 million during the year ended December 31,
2017, and 0.3 million shares of treasury stock for $4.7 million during the year ended December 31, 2016.
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.
We have various contractual obligations and commercial commitments. The following table sets forth, in millions, the annual
payments we are required to make under contractual cash obligations and other commercial commitments at December 31, 2018.
Contractual Obligations
(In millions)
Short-term and long-term debt
Interest on short-term and
long-term debt
Purchase obligations
Operating lease obligations
Total
$25.6
0.5
127.1
14.4
2019
$ —
0.5
126.1
3.9
2020
$25.6
—
0.9
3.6
Totals
$167.6
$130.5
$30.1
2021
$ —
—
0.1
2.8
$2.9
2022
$ —
—
—
2.0
$2.0
2023
After 2023
$ —
—
—
1.3
$1.3
$ —
—
—
0.8
$0.8
We are required to make payments necessary to pay the interest on the Amended and Restated Bond, currently outstanding
in the aggregate principal amount of $25.6 million. The bond matures on January 1, 2020, and bears interest at the rate of
2% per annum. Included in long-term investments are $25.6 million of restricted funds, which is a collateral deposit against
the principal amount of this bond. We made principal payments of $1.1 million for each of the years ended December 31,
2018 and 2017. We anticipate making a principal payment in 2019. At December 31, 2018 and 2017, $1.0 million and $1.1
million, respectively of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance
Sheets included in Item 8 of this report. See Note 11 of Notes to Consolidated Financial Statements included in Item 8 of this
report for additional information.
28 ADTRAN 2018 Annual Report
Purchase obligations primarily relate to open purchase orders to our contract manufacturers, component suppliers, service
partners, and other vendors.
Operating lease obligations primarily relate to future minimum rental payments under non-cancelable operating leases,
including renewals determined to be reasonably assured, with original maturities of greater than 12 months.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4
million as of December 31, 2018, of which $7.7 million has been applied to these commitments. The additional $0.2 million
commitment has been excluded from the table above due to the uncertainty of when it will be applied.
We also have obligations related to uncertain income tax positions that have been excluded from the table above due to
the uncertainty of when the related expense will be recognized. See Note 12 of Notes to Consolidated Financial Statements
included in Item 8 of this report for additional information.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 1 of Notes to Consolidated Financial Statements
included in Item 8 of this report for additional information.
Critical Accounting Policies and Estimates
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used,
or if changes in the accounting estimate that are reasonably likely to occur could materially impact the results of financial
operations. We believe the following critical accounting policies affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements. These policies have been consistently applied across our two
reportable segments: (1) Network Solutions and (2) Services & Support.
Revenue Recognition
Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services
to a customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the
transfer of control of a product or service to the customer. For transactions where there are multiple performance obligations,
we account for individual products and services separately if they are distinct (if a product or service is separately identifiable
from other items and if a customer can benefit from it on its own or with other resources that are readily available to the
customer). The consideration, including any discounts, is allocated between separate products and services based on their
stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which we sell the separate
products and services and are allocated based on each item’s relative value to the total value of the products and services in the
arrangement. For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost
plus a margin” approach. Payment terms are generally 30 days in the U.S. and typically longer in many geographic markets
outside the U.S. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales, value-added
and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of obtaining a
contract are capitalized and amortized over the period that the related revenue is recognized if greater than one year. We have
elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those costs as an
expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general
and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.
The following is a description of the principal activities from which we generate our revenue by reportable segment.
Network Solutions Segment
Network Solutions includes software and 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.
Hardware and Software Revenue
Revenue from hardware sales is recognized when control is transferred to our customers, which is generally when we ship
the products. Shipping terms are generally FOB shipping point. This segment also includes revenues from software license
sales which is recognized at delivery and transfer of control to the customer. Revenue is recorded net of estimated discounts
and rebates using historical trends. Customers are typically invoiced when control is transferred and revenue is recognized.
Our products generally include assurance-based warranties of 90 days to five years for product defects, which are accrued at
the time revenue is recognized.
Financial Results 29
In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment that have terms of
18 months to five years. These arrangements typically include network equipment, network implementation services and
maintenance services. Product revenue for these leases is generally recorded when we transfer control of the product to our
customers. Revenue for network implementation and maintenance services is recognized as described below. Customers are
typically invoiced and pay in equal installments over the lease term. In relation to these lease agreements, during the years ended
December 31, 2018, 2017 and 2016 we recognized revenue of $13.7 million, $16.5 million and $2.7 million, respectively.
Services & Support Segment
To complement our Network Solutions segment, we offer a complete portfolio of maintenance, network implementation, and
solutions integration and managed services, which include hosted cloud services and subscription services.
Maintenance Revenue
Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for
maintenance services at the beginning of the maintenance period. We recognize revenue for maintenance services on a
straight-line basis over the maintenance period in services revenue as our customers benefit evenly throughout the contract
term and deferred revenues are recorded in current and non-current unearned revenue.
Network Implementation Revenue
We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement
services, at a point in time when each performance obligation is complete. If we have recognized revenue, but have not
billed the customer, the right to consideration is recognized as a contract asset that is included in other receivables in the
Consolidated Balance Sheet. The contract asset is transferred to accounts receivable when the completed performance
obligation is invoiced to the customer.
Inventory
We carry our inventory at the lower of cost and net realizable value, with cost being determined using the first-in, first-out
method. We use standard costs for material, labor, and manufacturing overhead to value our inventory. Our standard costs
are updated on at least a quarterly basis and any variances are expensed in the current period; therefore, our inventory costs
approximate actual costs at the end of each reporting period. We write down our inventory for estimated obsolescence or
unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated fair value
based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less
favorable than those projected by management, we may be required to make additional inventory write-downs. Our reserve
for excess and obsolete inventory was $30.0 million and $23.4 million at December 31, 2018 and 2017, respectively. Inventory
disposals charged against the reserve were $0.4 million, $8.3 million and $4.7 million for the years ended December 31, 2018,
2017 and 2016, respectively.
Stock-Based Compensation
For purposes of determining the estimated fair value of our stock option awards on the date of grant, we use the Black-
Scholes Model. This model requires the input of certain assumptions that require subjective judgment. These assumptions
include, but are not limited to, expected stock price volatility over the term of the awards and actual and projected employee
stock option exercise behaviors. Because our stock option awards have characteristics significantly different from those of
traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model
may not provide a reliable, single measure of the fair value of our stock option awards. For purposes of determining the
estimated fair value of our market-based performance stock unit (PSU) awards on the date of grant, we use a Monte Carlo
Simulation valuation method. These PSUs are subject to a market condition based on the relative total shareholder return
of ADTRAN against all of the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year
performance period. The fair value of performance-based PSUs, restricted stock units (RSUs) and restricted stock is equal
to the closing price of our stock on the business day immediately preceding the grant date. Compensation expense related
to unvested performance-based PSUs will be recognized over the requisite service period of three years as the achievement
of the performance obligation becomes probable. Management will continue to assess the assumptions and methodologies
used to calculate the estimated fair value of stock-based compensation. Circumstances may change and additional data may
become available over time, which could result in changes to these assumptions and methodologies and thereby materially
impact our fair value determination. If factors change in future periods, the compensation expense that we record may differ
significantly from what we have recorded in the current period.
30 ADTRAN 2018 Annual Report
Business Combinations
The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets
recognized as part of business combinations based on their fair values on the date of acquisition. The excess of the purchase
price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. If the estimated
fair values of net tangible and intangible assets acquired exceed the purchase price, a bargain purchase gain is recorded. The
Company’s estimates of fair value are based on historical experience, industry knowledge, certain information obtained
from the management of the acquired company and, in some cases, valuations performed by independent third-party firms.
The results of operations of acquired companies are included in the accompanying condensed consolidated statements of
operations since their dates of acquisition. Costs incurred to complete the business combination, such as legal, accounting, or
other professional fees, are charged to general and administrative expenses as they are incurred.
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired. We evaluate the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first
assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which
the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-
step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the
two-step impairment test will be performed. Based on the results of our qualitative assessment in 2018, we concluded that it
was not necessary to perform the two-step impairment test. There were no impairment losses on goodwill recognized during
the years ended December 31, 2018, 2017 and 2016.
Income Taxes
We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating
exposures related to examinations by taxing authorities. We also make judgments regarding the realization of deferred tax
assets, and establish valuation allowances where we believe it is more likely than not that future taxable income in certain
jurisdictions will be insufficient to realize these deferred tax assets. Our estimates regarding future taxable income and
income tax provision or benefit may vary due to changes in market conditions, changes in tax laws, or other factors. If our
assumptions, and consequently our estimates, change in the future, the valuation allowances we have established may be
increased or decreased, impacting future income tax expense. At December 31, 2018 and 2017, the Company had federal
and state net operating loss carryforwards of $16.1 million and $2.8 million, respectively. These carryforwards are the result
of acquisitions in 2011 and 2018 and domestic operating losses in 2018. A valuation allowance of $0.1 million has been
established against these losses as losses in a particular state may not be recognized. At December 31, 2018 and 2017, the
Company had state tax credit carryforwards of $3.7 million, which expire between 2019 and 2030. A valuation allowance
of $3.3 million and $3.4, million, respectively, has been established against these credits. These state credits were generated
primarily in a particular state where we no longer generate sufficient state income. In addition, at December 31, 2018 and
2017, the Company had foreign loss carryforwards of $3.1 million. A majority of these loss carryforwards are the result of
an acquisition in 2009. A valuation allowance of $2.4 million and $2.5 million, respectively, has been established against the
net operating losses in a foreign jurisdiction where the Company has limited business. We believe it is more likely than not
that we will not realize the full benefits of some of our deferred tax assets, and accordingly, we have provided a valuation
allowance against that piece.
We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the
positions become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and
circumstances change.
Financial Results 31
Liability for Warranty
Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the
time revenue is recognized based on our historical return rate and an estimate of the cost to repair or replace the defective
products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the
quality of our component suppliers. Our products continue to become more complex in both size and functionality as many
of our product offerings migrate from line card applications to total systems. The increasing complexity of our products
will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations
may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure.
In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual
experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense.
Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods.
The liability for warranty obligations totaled $8.6 million and $9.7 million at December 31, 2018 and 2017, respectively. These
liabilities are included in accrued expenses in the accompanying consolidated balance sheets.
Pension Benefit Obligations
Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts.
These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates and
mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future expenses and
obligations. Our net pension liability totaled $13.1 million and $8.3 million at December 31, 2018 and 2017, respectively. This
liability is included in other non-current liabilities in the accompanying consolidated balance sheets.
Subsequent Events
On January 23, 2019, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders
of record at the close of business on February 7, 2019. The quarterly dividend payment was $4.3 million and was paid on
February 21, 2019. 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 first quarter and as of February 26, 2019, we have repurchased 13,000 shares of our common stock through open
market purchases at an average cost of $14.06 per share. We currently have the authority to purchase an additional 2.5 million
shares of our common stock under the current plan approved by the Board of Directors.
In February 2019, $1.0 million of an outstanding investment loan due to ADTRAN was replaced with a secured loan in that
amount. The remaining balance of this investment loan was converted to participating preferred shares of the respective company.
In February 2019, we announced the restructuring of our workforce in Germany, which includes the closure of the office
location in Munich, Germany accompanied by relocation or severance benefits for the affected employees and a voluntary
early retirement offering to certain other employees. The restructuring is expected to be completed in the fourth quarter
of 2019. ADTRAN does not have sufficient information currently on which to estimate the liability associated with this
restructuring, including costs associated with employee severance and relocation.
On February 25, 2019, one the Company’s customers filed for voluntary Chapter 11 bankruptcy as a result of a court ruling
resulting in a substantial legal judgment against the customer. In 2018, this customer accounted for less than 5% of the
Company’s revenue. As of December 31, 2018, the Company had $2.6 million related to product and services revenue and
$0.3 million related to a leased equipment arrangement included in accounts receivable on the Consolidated Balance Sheet
that was due from this customer. As of December 31, 2018, the Company had $9.4 million included in other receivables related
to a leased equipment arrangement on its Consolidated Balance Sheet that was due from this customer. Since December 31,
2018, and through the date of this filing, all $2.6 million of the outstanding products and services accounts receivable and $0.1
million of the outstanding accounts receivable related to leased equipment have been collected. Additionally, $1.7 million
of the outstanding other receivables related to leased equipment have been collected. Therefore, there is potential risk of
uncollectibility up to $7.8 million on the remaining outstanding receivable balances as of December 31, 2018. The Company
has evaluated the collectibility of the remaining receivable balances with the best available and applicable information as of
the date of this filing and the impact was not material to the consolidated financial statements as of December 31, 2018. The
Company will continue to evaluate the collectibility of the remaining accounts receivable balances in subsequent reporting
periods. Additionally, it is uncertain at this time the impact this voluntary bankruptcy filing might have on the Company’s
operating income prospectively; however, the Company believes it will not have a significant impact on the Company’s
liquidity and capital resources.
32 ADTRAN 2018 Annual Report
Quantitative and Qualitative Disclosures
About Market Risk
We are exposed to financial market risks, including changes in interest rates, foreign currency rates and prices of marketable
equity and fixed-income securities. The primary objective of the large majority of our investment activities is to preserve
principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective,
a majority of our marketable securities are investment grade, fixed-rate 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 December 31, 2018, $102.2 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 December 31, 2018, approximately $42.9 million of our cash and investments may 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 December 31, 2018, we held $5.7 million of
cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bps
decline in interest rates as of December 31, 2018, would reduce annualized interest income on our cash and investments by
approximately $.01 million. In addition, we held $37.2 million of fixed-rate bonds whose fair values may be directly affected
by a change in interest rates. A hypothetical 50 bps increase in interest rates as of December 31, 2018 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 rate movements are with
our German subsidiary, whose functional currency is the Euro, our Australian subsidiary, whose functional currency is the
Australian dollar, and our Mexican subsidiary, whose functional currency is the U.S. dollar. We are exposed to changes in
foreign currency exchange rates to the extent of our German subsidiary’s use of contract manufacturers and raw material
suppliers whom we predominantly pay in U.S. dollars. As a result, changes in currency exchange rates could cause variations
in gross margin in the products that we sell in the EMEA region.
We have certain international customers 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. To manage the volatility relating to these typical business
exposures, we may enter into various derivative transactions, 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 $2.1 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. This
increase in this fluctuation compared to prior periods is mainly due to an increase in U.S. dollar-denominated billings in a
non-U.S. dollar denominated subsidiary as well as an increase in international sales. Although we do not currently hold any
derivative instruments, any gain or loss would be partially mitigated by any derivative instruments held.
As of December 31, 2018, we had no material contracts subject to currency revaluation, other than accounts receivable and
accounts payable denominated in foreign currencies. As of December 31, 2018, we had no forward contracts outstanding.
For further information about the fair value of our available-for-sale investments and our derivative and hedging activities
as of December 31, 2018, see Notes 5 and 6 of Notes to Consolidated Financial Statements included in Item 8 of this report.
Financial Results 33
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and Stockholders of ADTRAN, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ADTRAN, Inc. and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes
in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the
related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated
financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is
to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
34 ADTRAN 2018 Annual Report
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Birmingham, Alabama
February 28, 2019
We have served as the Company’s auditor since 1986.
Financial Results 35
Financial Statements
ADTRAN, INC.
Consolidated Balance Sheets
(In thousands, except per share amounts)
December 31, 2018 and 2017
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts of $128 and $ — at
December 31, 2018 and 2017, respectively
Other receivables
Inventory, net
Prepaid expenses and other current assets
Total Current Assets
Property, plant and equipment, net
Deferred tax assets, net
Goodwill
Intangibles, net
Other assets
Long-term investments
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
Unearned revenue
Accrued expenses
Accrued wages and benefits
Income tax payable
Total Current Liabilities
Non-current unearned revenue
Other non-current liabilities
Bonds payable
Total Liabilities
Commitments and contingencies (see Note 15)
Stockholders' Equity
Common stock, par value $0.01 per share; 200,000 shares authorized;
79,652 shares issued and 47,751 shares outstanding at December 31, 2018 and
79,652 shares issued and 48,485 shares outstanding at December 31, 2017
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Less treasury stock at cost: 31,901 and 31,167 shares at December 31, 2018 and
2017, respectively
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See accompanying notes to consolidated financial statements.
36 ADTRAN 2018 Annual Report
2018
2017
$105,504
3,246
99,385
36,699
99,848
10,744
355,426
80,635
37,187
7,106
33,183
5,668
108,822
$628,027
$61,054
17,940
11,746
14,752
12,518
118,010
5,296
33,842
24,600
181,748
797
267,670
(14,416)
883,975
(691,747)
446,279
$628,027
$86,433
16,129
144,150
26,578
122,542
17,282
413,114
85,079
23,428
3,492
4,661
9,064
130,256
$669,094
$60,632
13,070
13,232
15,948
3,936
106,818
4,556
34,209
25,600
171,183
797
260,515
(3,295)
922,178
(682,284)
497,911
$669,094
ADTRAN, INC.
Consolidated Statements of Income (Loss)
(In thousands, except per share amounts)
Years ended December 31, 2018, 2017 and 2016
Sales
Products
Services
Total Sales
Cost of Sales
Products
Services
Total Cost of Sales
Gross Profit
Selling, general and administrative expenses
Research and development expenses
Operating Income (Loss)
Interest and dividend income
Interest expense
Net investment gain (loss)
Other income (expense), net
Gain on bargain purchase of a business
Income (loss) before (provision) benefit for income taxes
(Provision) benefit for income taxes
Net Income (Loss)
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Earnings (loss) per common share—basic
Earnings (loss) per common share—diluted
See accompanying notes to consolidated financial statements.
2018
2017
2016
$458,232
71,045
529,277
278,929
46,783
325,712
203,565
124,440
124,547
(45,422)
4,026
(533)
(4,050)
1,286
11,322
(33,371)
14,029
$(19,342)
47,880
47,880
$(0.40)
$(0.40)
$540,396
126,504
666,900
279,563
83,702
363,265
303,635
135,583
130,666
37,386
4,380
(556)
4,685
(1,208)
—
44,687
(20,847)
$23,840
48,153
48,699
$0.50
$0.49
$525,502
111,279
636,781
270,705
74,746
345,451
291,330
131,848
124,909
34,573
3,918
(572)
5,923
(489)
3,542
46,895
(11,666)
$35,229
48,724
48,949
$0.72
$0.72
Financial Results 37
ADTRAN, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Years ended December 31, 2018, 2017 and 2016
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax:
Net unrealized gains (losses) on available-for-sale securities
Defined benefit plan adjustments
Foreign currency translation
Other Comprehensive Income (Loss), net of tax
Comprehensive Income (Loss), net of tax
See accompanying notes to consolidated financial statements.
2018
$(19,342)
(3,130)
(3,755)
(4,236)
(11,121)
$(30,463)
2017
$23,840
2,163
731
5,999
8,893
2016
$35,229
(1,528)
(1,122)
(569)
(3,219)
$32,733
$32,010
38 ADTRAN 2018 Annual Report
ADTRAN, INC.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)
Years ended December 31, 2018, 2017 and 2016
Common
Shares
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Balance, December 31, 2015
79,652
$797
$246,879
$906,772
$(665,319)
$(8,969)
$480,160
Net income
Other comprehensive loss, net of tax
Dividend payments
Dividends accrued on unvested
restricted stock units
Stock options exercised: 283 shares
PSUs, RSUs and restricted stock
vested: 42 shares
Purchase of treasury stock:
1,411 shares
Income tax effect of stock
compensation arrangements
Stock-based compensation expense
(3,219)
35,229
(17,583)
(48)
(1,499)
6,216
(142)
(929)
929
(25,817)
(475)
6,695
Balance, December 31, 2016
79,652
797
252,957
921,942
(683,991)
(12,188)
Net income
Other comprehensive income, net of tax
Dividend payments
Dividends accrued on unvested
restricted stock units
Stock options exercised: 742 shares
PSUs, RSUs and restricted stock
vested: 154 shares
Purchase of treasury stock:
856 shares
Stock-based compensation expense
ASU 2016-09 adoption (see Note 1)
8,893
23,840
(17,368)
(37)
(2,827)
16,239
(3,257)
2,816
(17,348)
7,433
125
(115)
Balance, December 31, 2017
79,652
797
260,515
922,178
(682,284)
(3,295)
Net loss
ASU 2014-09 adoption (see Note 1)
ASU 2016-01 adoption (see Note 1)
Other comprehensive loss, net of tax
Dividend payments
Dividends accrued on unvested
restricted stock units
Stock options exercised: 96 shares
PSUs, RSUs and restricted stock
vested: 217 shares
Purchase of treasury stock: 1,001 shares
Stock-based compensation expense
7,155
(11,121)
(19,342)
278
3,220
(17,267)
(7)
(603)
(4,482)
2,086
3,983
(15,532)
Balance, December 31, 2018
79,652
$797
$267,670
$883,975
$(691,747)
$(14,416)
See accompanying notes to consolidated financial statements.
35,229
(3,219)
(17,583)
(48)
4,717
(142)
(25,817)
(475)
6,695
479,517
23,840
8,893
(17,368)
(37)
13,412
(441)
(17,348)
7,433
10
497,911
(19,342)
278
3,220
(11,121)
(17,267)
(7)
1,483
(499)
(15,532)
7,155
$446,279
Financial Results 39
ADTRAN, INC.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 2018, 2017 and 2016
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of net premium (discount) on available-for-sale investments
Net (gain) loss on long-term investments
Net (gain) loss on disposal of property, plant and equipment
Gain on bargain purchase of a business
Stock-based compensation expense
Deferred income taxes
Change in operating assets and liabilities:
Accounts receivable, net
Other receivables
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Income taxes payable
2018
2017
2016
$(19,342)
$23,840
$35,229
15,891
(50)
4,050
67
(11,322)
7,155
(17,257)
49,200
(8,522)
24,192
10,727
(3,799)
(3,226)
7,690
15,692
425
(4,685)
(145)
—
7,433
14,073
(49,103)
(10,222)
(15,518)
(4,830)
(17,742)
(5,455)
3,858
14,407
643
(5,923)
22
(3,542)
6,695
(2,685)
(21,302)
4,101
(10,887)
(7,108)
26,722
8,792
(3,162)
42,002
Net cash provided by (used in) operating activities
55,454
(42,379)
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
Proceeds from sales and maturities of available-for-sale investments
Purchases of available-for-sale investments
Acquisition of business, net of cash acquired
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from stock option exercises
Purchases of treasury stock
Dividend payments
Payments on long-term debt
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Effect of exchange rate changes
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information
Cash paid during the year for interest
Cash paid during the year for income taxes
Supplemental disclosure of non-cash investing activities
Purchases of property, plant and equipment included in accounts payable
Contingent payments
See accompanying notes to consolidated financial statements.
(8,110)
(14,720)
(21,441)
—
151
—
153,649
(123,209)
(22,045)
285
1,483
(15,532)
(17,267)
(1,100)
(32,416)
23,323
(4,252)
86,433
$105,504
$534
$4,104
$62
$1,230
173,752
225,075
(93,141)
(209,172)
—
66,042
13,412
(17,348)
(17,368)
(1,100)
(22,404)
1,259
5,279
79,895
$86,433
$555
$2,988
$408
$ —
(943)
(6,481)
4,717
(25,817)
(17,583)
(1,100)
(39,783)
(4,262)
(393)
84,550
$79,895
$575
$18,689
$2,103
$ —
Notes to Consolidated Financial Statements
Note 1 – Nature of Business and Summary of Significant Accounting Policies
At ADTRAN, Inc., we believe amazing things happen when people connect. From the cloud edge to the subscriber edge, we
help service providers around the world manage and scale services that connect people, places and things to advance human
progress. Whether rural or urban, domestic or international, telco or cable, enterprise or residential—ADTRAN solutions
optimize existing technology infrastructures and create new, multi-gigabit platforms that leverage cloud economics, data
analytics, machine learning and open ecosystems—the future of global networking.
Principles of Consolidation
The consolidated financial statements include ADTRAN and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America (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. Our more significant estimates include obsolete and excess
inventory reserves, warranty reserves, customer rebates, determination and accrual of the deferred revenue components of
multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues and network
installations, estimated income tax provision and income tax contingencies, fair value of stock-based compensation,
impairment of goodwill, valuation and estimated lives of intangible assets, estimated pension liability, fair value of investments,
and evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from
these estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as
available-for-sale with original maturities of three months or less. 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 applicable financial institutions, and determined the risk of material financial loss due to
the exposure of such credit risk to be minimal. As of December 31, 2018, $102.2 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.
Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The
carrying amount reported for bonds payable was $25.6 million, compared to an estimated fair value of $25.4 million, based
on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.
Investments with contractual maturities beyond one year may be classified as short-term based on their highly liquid nature
and because such marketable securities represent the investment of cash that is available for current operations. Despite the
long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe we have the
ability to quickly sell them to the remarketing agent, tender agent, or issuer at par value plus accrued interest in the event we
decide to liquidate our investment in a particular variable rate demand note. All income generated from these investments
was recorded as interest income. We have not been required to record any losses relating to variable rate demand notes.
Long-term investments represent a restricted certificate of deposit held at cost, deferred compensation plan assets, corporate
bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. and foreign government
bonds, marketable equity securities and other equity investments. Marketable equity securities are reported at fair value as
determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be
readily marketable due to the size of the available market. Any changes in fair value are recognized in net investment gain
(loss). Realized gains and losses on sales of debt securities are computed under the specific identification method and are
included in current income. See Note 5 of Notes to Consolidated Financial Statements for additional information.
Financial Results 41
Accounts Receivable
We record accounts receivable at net realizable value. Prior to establishing payment terms for a new customer, we evaluate
the credit risk of the customer. Credit limits and payment terms established for new customers are re-evaluated periodically
based on customer collection experience and other financial factors. At December 31, 2018, single customers comprising
more than 10% of our total accounts receivable balance included three customers, which accounted for 45.8% of our total
accounts receivable. As of December 31, 2017, single customers comprising more than 10% of our total accounts receivable
balance included two customers, which accounted for 63.8% of our total accounts receivable.
We regularly review the need to maintain an allowance for doubtful accounts and consider factors such as the age of accounts
receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events
and our historical experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability
to make payments, we may be required to record an allowance for doubtful accounts. If circumstances change with regard to
individual receivable balances that have previously been determined to be uncollectible (and for which a specific reserve has
been established), a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts
was $0.1 million and zero as of December 31, 2018, and December 31, 2017, respectively.
Other Receivables
Other receivables are comprised primarily of lease receivables, amounts due from subcontract manufacturers for product
component transfers, unbilled receivables, investment loan, amounts due from various jurisdictions for value-added tax, and
income tax receivable.
Inventory
Inventory is carried at the lower of cost and net realizable value, with cost being determined using the first-in, first-out
method. Standard costs for material, labor and manufacturing overhead are used to value inventory. Standard costs are
updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period. We
establish reserves for estimated excess, obsolete or unmarketable inventory equal to the difference between the cost of the
inventory and the estimated fair value of the inventory based upon assumptions about future demand, market conditions and
life. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserve. See
Note 7 of Notes to Consolidated Financial Statements for additional information.
Property, Plant and Equipment
Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful
lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment
from three to seven years, engineering machinery and equipment from three to seven years, and computer software from
three to five years. Expenditures for repairs and maintenance are charged to expense as incurred. Major improvements that
materially prolong the lives of the assets are capitalized. Gains and losses on the disposal of property, plant and equipment are
recorded in operating income. See Note 8 of Notes to Consolidated Financial Statements for additional information.
Intangible Assets
Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is recorded over
the estimated useful lives of the respective assets, which is two to 14 years. See Note 10 of Notes to Consolidated Financial
Statements for additional information.
Impairment of Long-Lived Assets and Intangibles
We review long-lived assets used in operations and intangible assets 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. An impairment loss would be recognized in the
amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of
an asset or an estimate based on the best information available in the circumstances. There were no impairment losses for
long-lived assets or intangible assets recognized during the years ended December 31, 2018, 2017 or 2016.
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired. We evaluate the carrying value of
goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first
assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which
42 ADTRAN 2018 Annual Report
the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-
step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the
two-step impairment test will be performed. Based on the results of our qualitative assessment in 2018, we concluded that it
was not necessary to perform the two-step impairment test. There were no impairment losses on goodwill recognized during
the years ended December 31, 2018, 2017 and 2016.
Liability for Warranty
Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at
the time revenue is recognized based on our historical return rate and estimate of the cost to repair or replace the defective
products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the
quality of our component suppliers. Our products continue to become more complex in both size and functionality as many
of our product offerings migrate from line card applications to total systems. The increasing complexity of our products
will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations
may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure.
In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual
experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense.
Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods.
The liability for warranty obligations totaled $8.6 million and $9.7 million as of December 31, 2018 and 2017, respectively.
These liabilities are included in accrued expenses in the accompanying consolidated balance sheets. During 2017, we recorded
a reduction in warranty expense related to a settlement with a third party supplier for a defective component, the impact of
which is reflected in the following table.
A summary of warranty expense and write-off activity for the years ended December 31, 2018, 2017 and 2016 is as follows:
(In thousands)
Year Ended December 31,
Balance at beginning of period
Plus: Amounts charged to cost and expenses
Less: Deductions
Balance at end of period
2018
$9,724
7,392
(8,493)
$8,623
2017
$8,548
6,951
(5,775)
$9,724
2016
$8,739
8,561
(8,752)
$8,548
Pension Benefit Plan Obligations
We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations
are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount
rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that
differ from the assumptions and changes in assumptions could affect future expenses and obligations. Our net pension
liability totaled $13.1 million and $8.3 million at December 31, 2018 and 2017, respectively. This liability is included in other
non-current liabilities in the accompanying consolidated balance sheets.
Stock-Based Compensation
We have two Board and stockholder-approved stock incentive plans from which stock options, performance stock units
(PSUs), restricted stock units (RSUs) and restricted stock are available for grant to employees and directors. All employee
and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the
award, as defined in the plan, of the underlying common stock on the grant date. All of our outstanding stock option awards
are classified as equity awards.
Stock-based compensation expense recognized for the years ended December 31, 2018, 2017 and 2016 was approximately
$7.2 million, $7.4 million and $6.7 million, respectively. As of December 31, 2018, total compensation cost related to
non-vested stock options, PSUs, RSUs and restricted stock not yet recognized was approximately $18.6 million, which is
expected to be recognized over an average remaining recognition period of 2.9 years. In addition, there was $9.1 million of
unrecognized compensation expense related to unvested 2017 performance-based PSUs, which will be recognized over the
remaining requisite service period if achievement of the performance obligation becomes probable. See Note 4 of Notes to
Consolidated Financial Statements for additional information.
Financial Results 43
Research and Development Costs
Research and development costs include compensation for engineers and support personnel, outside contracted services,
depreciation and material costs associated with new product development, enhancement of current products and product
cost reductions. We continually evaluate new product opportunities and engage in intensive research and product
development efforts. Research and development costs totaled $124.5 million, $130.7 million and $124.9 million for the years
ended December 31, 2018, 2017 and 2016, respectively.
Other Comprehensive Income
Other comprehensive income consists of unrealized gains (losses) on available-for-sale debt securities, unrealized gains
(losses) on cash flow hedges, reclassification adjustments for amounts included in net income related to impairments
of available-for-sale securities, realized gains (losses) on debt securities, realized gains (losses) on cash flow hedges, and
amortization of actuarial gains (losses) related to our defined benefit plan, defined benefit plan adjustments, and foreign
currency translation adjustments.
The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years
ended December 31, 2018, 2017 and 2016:
(In thousands)
Balance at December 31, 2015
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Balance at December 31, 2016
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Balance at December 31, 2017
Other comprehensive income (loss)
before reclassifications
Amounts reclassified to retained earnings(1)
Amounts reclassified from accumulated
other comprehensive income
Balance at December 31, 2018
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
Unrealized
Gains (Losses)
on Cash Flow
Hedges
Defined
Benefit Plan
Adjustments
Foreign
Currency
Adjustments
Total
$1,932
1,515
(3,043)
404
5,020
(2,857)
2,567
685
(3,220)
(595)
$(563)
$ —
$(3,895)
$(7,006)
$(8,969)
—
—
—
(619)
619
—
—
—
—
—
(1,229)
(569)
(283)
107
— (2,936)
(5,017)
(7,575)
(12,188)
451
280
(4,286)
(3,890)
—
135
5,999
10,851
— (1,958)
(1,576)
(3,295)
(4,236)
(7,441)
— (3,220)
—
(460)
$(8,041)
$(5,812)
$(14,416)
(1) With the adoption of ASU 2016-01, the unrealized gains on our equity investments were reclassified to retained earnings.
See Recently Issued Accounting Standards later in Note 1 for more information.
44 ADTRAN 2018 Annual Report
The following tables present the details of reclassifications out of accumulated other comprehensive income for the years
ended December 31, 2018, 2017 and 2016:
(In thousands)
Details about Accumulated Other
Comprehensive Loss Components
Unrealized gains on available-for-sale securities:
Net realized gain on sales of securities
Defined benefit plan adjustments – actuarial losses
Total reclassifications for the period, before tax
Tax expense
Total reclassifications for the period, net of tax
Amount Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income
Is Presented
2018
Net investment gain (loss)
(1)
$804
(196)
608
(148)
$460
(1) Included in the computation of net periodic pension cost. See Note 13 of Notes to Consolidated Financial Statements.
(In thousands)
Details about Accumulated Other
Comprehensive Loss Components
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities
Impairment expense
Net losses on derivatives designated as
hedging instruments
Defined benefit plan adjustments – actuarial losses
Total reclassifications for the period, before tax
Tax expense
Total reclassifications for the period, net of tax
Amount Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income
Is Presented
2017
Net investment gain (loss)
Net investment gain (loss)
Cost of sales
(1)
$4,864
(180)
(897)
(406)
3,381
(1,423)
$1,958
(1) Included in the computation of net periodic pension cost. See Note 13 of Notes to Consolidated Financial Statements.
(In thousands)
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities
Impairment expense
Defined benefit plan adjustments – actuarial losses
Total reclassifications for the period, before tax
Tax expense
Total reclassifications for the period, net of tax
Amount Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income
Is Presented
2016
$5,408
Net investment gain (loss)
Net investment gain (loss)
(1)
(419)
(156)
4,833
(1,897)
$2,936
(1) Included in the computation of net periodic pension cost. See Note 13 of Notes to Consolidated Financial Statements.
Financial Results 45
The following tables present the tax effects related to the change in each component of other comprehensive income for the
years ended December 31, 2018, 2017 and 2016:
(In thousands)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for amounts related to
available-for-sale investments included in net loss
Reclassification adjustment for amounts reclassed to
retained earnings related to the adoption of ASU 2016-01
Defined benefit plan adjustments
Reclassification adjustment for amounts related to de-
fined benefit plan adjustments included in net loss
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
(In thousands)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for amounts related to
available-for-sale investments included in net income
Unrealized gains (losses) on cash flow hedges
Reclassification adjustment for amounts related to cash
flow hedges included in net income
Defined benefit plan adjustments
Reclassification adjustment for amounts related to
defined benefit plan adjustments included in net income
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
(In thousands)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for amounts related to
available-for-sale investments included in net income
Defined benefit plan adjustments
Reclassification adjustment for amounts related to
defined benefit plan adjustments included in net income
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
Before-Tax
Amount
Tax (Expense)
Benefit
$926
(804)
(4,351)
(5,638)
196
(4,236)
$(13,907)
Before-Tax
Amount
$8,230
(4,684)
(897)
897
654
406
5,999
$10,605
$(241)
209
1,131
1,748
(61)
—
$2,786
Tax (Expense)
Benefit
$(3,210)
1,827
278
(278)
(203)
(126)
—
$(1,712)
Before-Tax
Amount
Tax (Expense)
Benefit
$2,484
(4,989)
(1,782)
156
(569)
$(4,700)
$(969)
1,946
553
(49)
—
2018
Net-of-Tax
Amount
$685
(595)
(3,220)
(3,890)
135
(4,236)
$(11,121)
2017
Net-of-Tax
Amount
$5,020
(2,857)
(619)
619
451
280
5,999
$8,893
2016
Net-of-Tax
Amount
$1,515
(3,043)
(1,229)
107
(569)
$1,481
$(3,219)
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes.
Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts
of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for
the current year plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial
and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are
enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit
will not be realized.
46 ADTRAN 2018 Annual Report
We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the
positions become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and
circumstances change.
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. As a result of the Act, we recognized an
estimated expense of $11.9 million in the fourth quarter of 2017, of which $9.2 million related to the write-down of deferred
tax assets and $2.7 million related to tax on unrepatriated foreign earnings. We calculated our best estimate of the impact of
the Act in our 2017 year-end income tax provision, in accordance with Staff Accounting Bulletin No. 118, which was issued
to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available,
prepared or analyzed to finalize the accounting for certain income tax effects of the Act. Additional work to complete a more
detailed analysis of historical foreign earnings, as well as the full impact relating to the write-down of deferred tax assets, was
completed in the third quarter of 2018 and resulted in a tax benefit of $4.0 million.
Foreign Currency
We record transactions denominated in foreign currencies on a monthly basis using exchange rates from throughout the year.
Assets and liabilities denominated in foreign currencies are remeasured at the balance sheet dates using the closing rates of
exchange between those foreign currencies and the functional currency with any transaction gains or losses reported in other
income (expense). Our primary exposures to foreign currency exchange rate movements are with our German subsidiary,
whose functional currency is the Euro, our Australian subsidiary, whose functional currency is the Australian dollar, and our
Mexican subsidiary, whose functional currency is the U.S. dollar. Adjustments resulting from translating financial statements
of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).
Revenue Recognition
On January 1, 2018 we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the
revenue recognition requirements in Topic 605, Revenue Recognition.
Accounting Policy under Topic 606
Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services
to a customer and as performance obligations under the terms of the contract are satisfied. For transactions where there are
multiple performance obligations, we account for individual products and services separately if they are distinct (if a product
or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources
that are readily available to the customer). The consideration, including any discounts, is allocated between separate products
and services based on their stand-alone selling prices. Shipping fees are recorded as revenue and the related cost is included in
cost of sales. Sales, value-added, and other taxes collected concurrently with revenue-producing activities are excluded from
revenue. Costs of obtaining a contract are capitalized and amortized over the period that the related revenue is recognized if
greater than one year. We have elected to apply the practical expedient related to the incremental costs of obtaining contracts
and recognize those costs as an expense when incurred if the amortization period of the assets is one year or less. These costs
are included in selling, general, and administrative expenses. Capitalized costs with an amortization period greater than one
year were immaterial.
A portion of our products is sold to a non-exclusive distribution network of major technology distributors in the United
States. These large organizations then distribute or provide fulfillment services to an extensive network of VARs and Sis.
VARs and Sis may be affiliated with us as a channel partner, or they may purchase from the distributor in an unaffiliated
fashion. Additionally, with certain limitations our distributors may return unused and unopened product for stock-balancing
purposes when such returns are accompanied by offsetting orders for products of equal or greater value.
We participate in cooperative advertising and market development programs with certain customers. We use these programs
to reimburse customers for certain forms of advertising, and in general, to allow our customers credits up to a specified
percentage of their net purchases. Our costs associated with these programs are estimated and included in marketing
expenses in our consolidated statements of income. We also participate in rebate programs to provide sales incentives for
certain products. Our costs associated with these programs are estimated and accrued at the time of sale, and are recorded as
a reduction of sales in our consolidated statements of income.
Accounting Policy under Topic 605
Revenue was generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the product
price was fixed or determinable, collection of the resulting receivable was reasonably assured, and product returns were
reasonably estimable. For product sales, revenue was generally recognized upon shipment of the product to our customer
Financial Results 47
in accordance with the title transfer terms of the sales agreement, generally Ex Works, per International Commercial Terms.
In the case of consigned inventory, revenue was recognized when the end customer assumes ownership of the product.
Contracts that contained multiple deliverables were evaluated to determine the units of accounting, and the consideration
from the arrangement was allocated to each unit of accounting based on the relative selling price and corresponding terms
of the contract. When this was not available, we were generally not able to determine third-party evidence of selling price
because of the extent of customization among competing products or services from other companies. In these instances,
we used best estimates to allocate consideration to each respective unit of accounting. These estimates included analysis of
respective bills of material and review and analysis of similar product and service offerings. We recorded revenue associated
with installation services when respective contractual obligations are complete. In instances where customer acceptance
was required, revenue was deferred until respective acceptance criteria were met. Contracts that included both installation
services and product sales were evaluated for revenue recognition in accordance with contract terms. As a result, installation
services may have been considered a separate deliverable or may have been considered a combined single unit of accounting
with the delivered product. Generally, either the purchaser, ADTRAN, or a third party would perform the installation of our
products. Shipping fees were recorded as revenue and the related costs were included in cost of sales. Sales taxes invoiced to
customers were included in revenues, and represented less than one percent of total revenues. The corresponding sales taxes
paid were included in cost of goods sold. Value-added taxes collected from customers in international jurisdictions were
recorded in accrued expenses as a liability. Revenue was recorded net of discounts. Sales returns were recorded as a reduction
of revenue and accrued based on historical sales return experience, which we believed provided a reasonable estimate of
future returns.
Unearned Revenue
Unearned revenue primarily represents customer billings on our maintenance service programs and leases and unearned
revenues related to multiple element contracts where we still have contractual obligations to our customers. We currently
offer maintenance contracts ranging from one month to five years. Revenue attributable to maintenance contracts is
recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety
of hardware maintenance services to customers under contracts with terms up to ten years. When we defer revenue related
to multiple-element contracts where we still have contractual obligations, we also defer the related costs. Current deferred
costs are included in prepaid expenses and other assets and totaled $2.4 million and $11.4 million as of December 31, 2018
and 2017, respectively. Non-current deferred costs are included in other assets and totaled $0.8 million and $2.8 million as of
December 31, 2018 and 2017, respectively.
Other Income (Expense), Net
Other income (expense), net, is comprised primarily of gains and losses on foreign currency transactions, net periodic
pension costs, scrap raw material sales, investment account management fees, gains and losses on foreign exchange forward
contracts and miscellaneous income and expense.
Earnings (Loss) per Share
Earnings (loss) per common share and earnings (loss) per common share assuming dilution, are based on the weighted
average number of common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 16
of Notes to Consolidated Financial Statements for additional information.
Dividends
During 2018, 2017 and 2016, we paid shareholder dividends totaling $17.3 million, $17.4 million and $17.6 million,
respectively. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present
tax treatment of dividends exists and adequate levels of liquidity are maintained. The following table shows dividends paid to
our shareholders in each quarter of 2018, 2017 and 2016.
Dividends per Common Share
2018
2017
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
$0.09
48 ADTRAN 2018 Annual Report
On January 23, 2019, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to
shareholders of record at the close of business on February 7, 2019. The ex-dividend date was February 6, 2019 and the
payment date was February 21, 2019. The quarterly dividend payment was $4.3 million.
Business Combinations
The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets
recognized as part of business combinations based on their fair values on the date of acquisition. The excess of the purchase
price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. If the estimated
fair values of net tangible and intangible assets acquired exceed the purchase price, a bargain purchase gain is recorded. The
Company’s estimates of fair value are based on historical experience, industry knowledge, certain information obtained
from the management of the acquired company and, in some cases, valuations performed by independent third-party firms.
The results of operations of acquired companies are included in the accompanying condensed consolidated statements of
operations since their dates of acquisition. Costs incurred to complete the business combination, such as legal, accounting, or
other professional fees, are charged to general and administrative expenses as they are incurred.
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-
02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize 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 provides for an optional transition method that allows for the application
of the legacy lease guidance, 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. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct
financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and
related updates are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
The Company adopted the new standard on January 1, 2019, the effective date of our initial application, using the optional
transition method. The Company will not adjust the comparative period financial information prior to January 1, 2019
and will carry forward the legacy (ASC 840) disclosures for comparative periods. In addition, the Company elected the
package of practical expedients which allows for companies to not reassess historical lease classifications and 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 consolidated balance sheet of less than 3% of total assets, mainly related to our operating leases for office
space. The adoption of this standard did not have a material impact on our consolidated statement of income or statement
of cash flow.
The adoption of this standard from a lessor perspective did not have a material impact on the Company’s consolidated
balance sheet, consolidated statement of income or statement of cash flow. Prior to adoption, all of our leases in which we are
the lessor were classified as sales-types leases and will continue after adoption of the new standard.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for
financial instruments held at amortized cost. In November 2018, the FASB issued ASU 2018-19, Codification Improvements
to Topic 326 Financial Instruments – Credit Losses, that clarifies receivables arising from operating leases are not within the
scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. ASU 2016-13
and ASU 2018-19 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019, with early adoption permitted. We are currently evaluating the effect ASU 2016-13 and ASU 2018-19 will have on our
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. ASU 2017-04 simplifies the measurement of goodwill by eliminating step 2 of the goodwill impairment
test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting unit to its carrying amount and
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU
2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019,
Financial Results 49
with early adoption permitted for annual or interim impairment tests performed on testing dates after January 1, 2017. The
amendments should be applied prospectively. We are currently evaluating whether to early adopt ASU 2017-04, but we do
not expect it will have a material effect on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities, which shortens the amortization period for the premium
on certain purchased callable debt securities to the earliest call date. ASU 2017-08 is effective for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The amendments
should be applied through a modified-retrospective transition approach that requires a cumulative-effect adjustment directly
to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2017-08 on January 1, 2019
and the adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities. ASU 2017-12 expands and refines hedge accounting for both financial and non-financial risk
components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial
statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment
of hedge effectiveness. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018, with early adoption permitted. The Company adopted ASU 2017-12 on January 1, 2019 and the
adoption of this standard did not have a material impact on our consolidated financial statements as we currently do not have
any hedging instruments.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. ASU 2018-02 allows for an optional
reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting
from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018, with early adoption permitted. The Company adopted ASU 2018-02 on January
1, 2019, and upon adoption elected to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017 to
retained earnings.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of
ASC 820, Fair Value Measurement. The amendments in this ASU are the result of a broader disclosure project called, Concepts
Statement No. 8 - Conceptual Framework for Financial Reporting — Chapter 8, Notes to Financial Statements, which the
FASB finalized on August 28, 2018. The FASB used the guidance in the Concepts Statement to improve the effectiveness of
ASC 820’s disclosure requirements. ASU 2018-13 provides users of financial statements with information about assets and
liabilities measured at fair value in the statement of financial position or disclosed in the notes to the financial statements.
More specifically ASU 2018-13 requires disclosures about the valuation techniques and inputs that are used to arrive at
measures of fair value, including judgments and assumptions that are made in determining fair value. In addition, ASU
2018-13 requires disclosures regarding the uncertainty in the fair value measurements as of the reporting date and how
changes in fair value measurements affect performance and cash flows. ASU 2018-13 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the effect of ASU 2018-13,
but we do not expect it will have a material effect on our financial statement disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic
715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which makes changes
to and clarifies the disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-
14 requires additional disclosures related to the reasons for significant gains and losses affecting the benefit obligation and
an explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in
other disclosures required by ASC 715. ASU 2018-14 also clarifies the guidance in ASC 715 to require disclosure of the
projected benefit obligation (PBO) and fair value of plan assets for pension plans with PBOs in excess of plan assets and the
accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with ABOs in excess of plan assets. ASU
2018-14 is effective for public business entities for fiscal years ending after December 15, 2020. We are currently evaluating
the effect of ASU 2018-14, but we do not expect it will have a material effect on our financial statement disclosures.
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
50 ADTRAN 2018 Annual Report
Arrangement. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementations costs incurred to develop or
obtain internal use software. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019, with early adoption permitted. We are currently evaluating whether to early adopt, but we do not
expect it will have a material effect on our consolidated financial statements.
During 2018, we adopted the following accounting standards, which had no material effect on our financial position, results
of operations or cash flows:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the
revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition
guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues
when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected
to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective
date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, with
early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in
2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with
Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended
to improve the operability and understandability of the implementation guidance on principal versus agent considerations;
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation
guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients, which contains certain provisions and practical expedients in response to identified implementation issues; and
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is
intended to clarify the Codification and/or to correct unintended application of guidance. ASU 2014-09 allows for either full
retrospective or modified retrospective adoption. We adopted ASU 2014-09 and the related ASUs on January 1, 2018 using
the modified retrospective method, which was applied to all contracts on the date of initial adoption.
These ASUs primarily affected our network implementation service revenue performance obligations and contract costs.
We are using the “output method” to measure network implementation services progress, which 1) accelerates revenue
recognition for certain performance obligations related to service revenue arrangements that were previously deferred until
customer acceptance and 2) requires capitalization and amortization of the incremental costs of obtaining a contract as
described below.
In connection with the adoption of the new revenue standard, effective January 1, 2018, we adopted ASC 340-40, Other
Assets and Deferred Costs – Contracts with Customers, with respect to capitalization and amortization of incremental costs
of obtaining a contract. As a result, certain costs of obtaining a contract, including sales commissions, will be capitalized, as
the guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would
not have incurred if the contract had not been obtained, provided the costs are recoverable. The primary effect was the
capitalization of certain sales commissions for our extended maintenance and support contracts in excess of one year and
amortization of those costs over the period that the related revenue is recognized. Those costs that will be amortized within
the next 12 months are included in prepaid expenses and other current assets and those costs that will be amortized after the
next 12 months are included in other assets on the consolidated balance sheets.
The cumulative effect of the changes made to our Consolidated Balance Sheet on January 1, 2018 for the adoption of ASU
2014-09 and the related ASUs was as follows:
(In thousands)
Other receivables
Deferred tax assets, net
Retained earnings
Balance at
December 31, 2017
Adjustments due to
ASU 2014-09
Balance at
January 1, 2018
$26,578
$23,428
$922,178
$374
$(96)
$278
$26,952
$23,332
$922,456
Financial Results 51
The effect of the adoption of ASU 2014-09 and the related ASUs on our financial statements was as follows:
(In thousands)
Sales
Products
Services
Cost of Sales
Products
Services
Loss before benefit for income taxes
Benefit for income taxes
Net loss
(In thousands)
Assets
Other receivables
Prepaid expenses and other current assets
Inventory
Liabilities
Income tax payable
Equity
Retained earnings
Balances Without
Adoption of ASC 606
As of December 31, 2018
Effect of Adoption
of ASC 606
As Reported
$458,232
$71,045
$278,929
$46,783
$(33,371)
$14,029
$(19,342)
$458,182
$67,329
$278,904
$44,788
$(35,117)
$14,763
$(20,354)
$50
$3,716
$25
$1,995
$1,746
$(734)
$1,012
Balances Without
Adoption of ASC 606
As of December 31, 2018
Effect of Adoption
of ASC 606
As Reported
$36,699
$10,744
$99,848
$12,518
$32,933
$12,739
$99,873
$13,252
$883,975
$882,963
$3,766
$(1,995)
$(25)
$(734)
$1,012
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities, which addresses certain aspects of the recognition, measurement, presentation and disclosure
of financial instruments. Subsequently, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial
Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which issued technical corrections and improvements intended to clarify certain aspects of ASU 2016-01. ASU 2016-01 was
effective beginning January 1, 2018 and we now recognize any changes in the fair value of certain equity investments in net
income as prescribed by the new standard rather than in other comprehensive income. We adopted ASU 2016-01 on January
1, 2018 using the modified retrospective method, which resulted in a $3.2 million reclassification of net unrealized gains from
accumulated other comprehensive income to opening retained earnings. ASU 2018-03 is effective for us with the interim
period beginning after June 15, 2018. See Note 5 of Notes to Consolidated Financial Statements for additional information.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts
and Cash Payments, which clarifies how to classify cash receipts and cash payments on the statement of cash flows. The new
guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects
of more than one class of cash flows. We adopted ASU 2016-15 on January 1, 2018, which has been applied retrospectively.
The adoption of this guidance did not have a material effect on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 amends ASC 715, Compensation
— Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings
to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in
operating expenses (together with other employee compensation costs). The other components of net benefit cost, including
amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating
expenses. We adopted ASU 2017-07 on January 1, 2018. We retrospectively adopted the presentation of service cost separate
from other components of net periodic pension costs. As a result, $0.4 million and $0.2 million have been reclassified from
cost of sales, selling, general and administrative expenses, and research and development expense to other income (expense),
net for the years ended December 31, 2017 and 2016, respectively.
52 ADTRAN 2018 Annual Report
Note 2 – Business Combinations
On November 30, 2018, we acquired SmartRG, Inc., a provider of carrier-class, open-source connected home platforms and
cloud services for broadband service providers for cash consideration. Together, ADTRAN Mosaic and SmartOS provide full
end-to-end management and orchestration solutions from cloud edge to subscriber edge. This transaction was accounted for
as a business combination. We have included the financial results of this acquisition in our consolidated financial statements
since the date of acquisition. These revenues are included in the Subscriber Solutions & Experience category within the
Network Solutions and Services & Support reportable segments.
As of the acquisition date, we acquired accounts receivables with a fair value of $4.9 million all of which we estimate will be
collected under the respective terms of each agreement.
Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which are
dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones. The contingent payments
are subject to arbitration and the final payouts are expected to occur during the first quarter of 2020. The minimum and
maximum potential payment under the total of the contingent liabilities ranges from no payment to $1.5 million. As of
December 31, 2018, the fair value of the contingent liability was re-assessed and was determined to be $1.2 million, based on
the expected probable outcomes. No change in fair value was recognized.
An escrow in the amount of $2.8 million was set up at the acquisition date, to fund post-closing working capital settlements
and to indemnify the Company from any inaccuracy or breach of representations, warranties, covenants, agreements or
obligations of the sellers. The escrow is subject to arbitration with final settlement expected during the fourth quarter of 2020.
The minimum and maximum potential release of funds to the seller ranges from no payment to $2.8 million.
We have made preliminary allocations of the purchase price to the assets acquired and liabilities assumed based on estimated
fair value assessments; however, we are still completing those assessments, including an analysis of the discounted cash
flows. Once we finalize the fair values, we may have changes in the following areas: tangible and intangible assets, goodwill,
commitments and contingencies, and deferred taxes. We recorded goodwill of $3.6 million during the year ended December
31, 2018. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We have assessed the
recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future
periods and we have concluded that our valuation procedures and resulting measures were appropriate.
On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into
a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This acquisition establishes
ADTRAN as a North American market leader for EPON solutions for the cable MSO industry and it will accelerate the MSO
market’s adoption of our open, programmable and scalable architectures. This transaction was accounted for as a business
combination. We have included the financial results of this acquisition in our consolidated financial statements since the date
of acquisition. These revenues are included in the Access & Aggregation and Subscriber Solutions & Experience categories
within the Network Solutions reportable segment.
We recorded a bargain purchase gain of $11.3 million during the first quarter of 2018, net of income taxes, which is subject
to customary working capital adjustments between the parties. The bargain purchase gain of $11.3 million represents the
difference between the fair-value of the net assets acquired over the cash paid. SEI, an OEM supplier based in Japan, is the
global market leader in EPON. SEI’s Broadband Networks Division, through its SEL subsidiary, operated a North American
EPON business that included sales, marketing, support, and region-specific engineering development. The North American
EPON market is primarily driven by the Tier 1 cable MSO operators and has developed more slowly than anticipated.
Through the transaction, SEI divested its North American EPON assets and established a relationship with ADTRAN. The
transfer of these assets to ADTRAN, which included key customer relationships and a required assumption by ADTRAN of
relatively low incremental expenses, along with the value of the technology license and OEM supply agreement, resulted in
the bargain purchase gain. We have assessed the recognition and measurement of the assets acquired and liabilities assumed
based on historical and forecasted data for future periods and we have concluded that our valuation procedures and resulting
measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2018
Consolidated Statements of Income.
Financial Results 53
The preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the
acquisition date for SmartRG and the final allocation of the purchase price to the estimated fair value of the assets acquired
and liabilities assumed at the acquisition date for Sumitomo are as follows:
(In thousands)
Assets
Tangible assets aquired
Intangible assets
Goodwill
Total assets acquired
Liabilities
Liabilities Assumed
Total liabilities assumed
Total net assets
Gain on bargain purchase of a business, net of tax
Total purchase price
Sumitomo
SmartRG
$1,006
22,100
—
23,106
(3,978)
(3,978)
19,128
(11,322)
$7,806
$8,594
9,960
3,614
22,168
(6,126)
(6,126)
16,042
—
$16,042
Our consolidated income statements include the following revenue and net loss attributable to SmartRG and Sumitomo since
the date of acquisition:
(In thousands)
Revenue
Net Loss
The details of the acquired intangible assets are as follows:
(In thousands)
Customer relationships
Developed technology
Licensed technology
Supplier relationship
Licensing agreements
Trade name
Total
March 19, 2018 to
December 31, 2018
$9,186
$(1,297)
Value
Life (years)
$15,190
3 – 12
7,400
5,900
2,800
560
210
$32,060
7
9
2
5 – 10
3
The following unaudited supplemental pro forma information presents the financial results as if the acquisition of SmartRG
and Sumitomo had occurred on January 1, 2017. This unaudited supplemental pro forma information does not purport to
be indicative of what would have occurred had the acquisition been completed on January 1, 2017, nor is it indicative of any
future results. Aside from revising the 2017 net income for the effect of the bargain purchase gains, there were no material,
non-recurring adjustments to this unaudited pro forma information.
(In thousands)
Pro forma revenue
Pro forma net income (loss)
Pro forma earnings (loss) per share–basic
Pro forma earnings (loss) per share–diluted
2018
$559,050
$(33,862)
$(0.71)
$(0.71)
2017
$702,573
$33,206
$0.69
$0.68
For the year ended December 31, 2018, we incurred acquisition and integration related expenses and amortization of
acquired intangibles related to these acquisitions of $2.9 million.
54 ADTRAN 2018 Annual Report
Note 3 - Revenue
Revenue is measured based on the consideration we expect to receive in exchange for transferring goods or providing services
to a customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the
transfer of control of a product or service to the customer. For transactions where there are multiple performance obligations,
we account for individual products and services separately if they are distinct (if a product or service is separately identifiable
from other items and if a customer can benefit from it on its own or with other resources that are readily available to the
customer). The consideration, including any discounts, is allocated between separate products and services based on their
stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which we sell the separate
products and services and are allocated based on each item’s relative value to the total value of the products and services in the
arrangement. For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost
plus a margin” approach. Payment terms are generally 30 days in the U.S. and typically longer in many geographic markets
outside the U.S. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales, value-added,
and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of obtaining a
contract are capitalized and amortized over the period that the related revenue is recognized if greater than one year. We have
elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those costs as an
expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general
and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.
The following is a description of the principal activities from which we generate our revenue by reportable segment.
Network Solutions Segment
Network Solutions includes hardware products and 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.
Hardware and Software Revenue
Revenue from hardware sales is recognized when control is transferred to our customers, which is generally when we ship
the products. Shipping terms are generally FOB shipping point. This segment also includes revenues from software license
sales which is recognized at delivery and transfer of control to the customer. Revenue is recorded net of estimated discounts
and rebates using historical trends. Customers are typically invoiced when control is transferred and revenue is recognized.
Our products generally include assurance-based warranties of 90 days to five years for product defects, which are accrued at
the time revenue is recognized.
In certain transactions, we are also the lessor in sales-type lease arrangements for network equipment that have terms of
18 months to five years. These arrangements typically include network equipment, network implementation services and
maintenance services. Product revenue for these leases is generally recorded when we transfer control of the product to our
customers. Revenue for network implementation and maintenance services is recognized as described below. Customers are
typically invoiced and pay in equal installments over the lease term. In relation to these lease agreements, during the years ended
December 31, 2018, 2017 and 2016 we recognized revenue of $13.7 million, $16.5 million and $2.7 million, respectively.
Services & Support Segment
To complement our Network Solutions segment, we offer a complete portfolio of maintenance, network implementation, and
solutions integration and managed services, which include hosted cloud services and subscription services.
Maintenance Revenue
Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for
maintenance services at the beginning of the maintenance period. We recognize revenue for maintenance services on a
straight-line basis over the maintenance period in services revenue as our customers benefit evenly throughout the contract
term and deferred revenues are recorded in current and non-current unearned revenue.
Network Implementation Revenue
We recognize revenue for network implementation, which primarily consists of engineering, execution, and enablement
services, at a point in time when each performance obligation is complete. If we have recognized revenue, but have not
billed the customer, the right to consideration is recognized as a contract asset that is included in other receivables in the
Consolidated Balance Sheet. The contract asset is transferred to accounts receivable when the completed performance
obligation is invoiced to the customer.
Financial Results 55
As of December 31, 2018, we did not have any significant performance obligations related to customer contracts that had an
original expected duration of one year or more, other than maintenance services, which are satisfied over time.
The following table provides information about receivables, contract assets and unearned revenue from contracts with customers:
(In thousands)
Accounts receivable
Contract assets
Unearned revenue
Non-current unearned revenue
December 31, 2018
January 1, 2018
$99,385
$3,766
$17,940
$5,296
$144,150
$374
$13,070
$4,556
The decrease in accounts receivable is due to the collection of customer-specific payment terms that became due in the first
quarter of 2018. The increase in the contract asset balance for the year ended December 31, 2018 is primarily attributable
to revenue recognized that has not yet been billed to the customer during the period. The increase in the unearned revenue
balance as of the year ended December 31, 2018, is primarily attributable to cash payments received or due in advance of
satisfying our performance obligations, offset by $9.9 million of revenues recognized that were included in the unearned
revenue balance as of December 31, 2017.
The following table disaggregates our revenue by major source for the year ended December 31, 2018.
(In thousands)
Access & Aggregation
Subscriber Solutions & Experience (1)
Traditional & Other Products
Total
Network
Solutions
Services &
Support
$301,801
129,067
27,364
$458,232
$57,069
5,393
8,583
$71,045
Total
$358,870
134,460
35,947
$529,277
(1) Subscriber Solutions & Experience was formerly reported as Customer Devices. With the increasing focus on enhancing the
customer experience for both our business and consumer broadband customers and the addition of SmartRG during the fourth
quarter of 2018, Subscriber Solutions & Experience more accurately represents this revenue category.
Note 4 – Stock-Based Compensation
Stock Incentive Program Descriptions
On January 23, 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (2006 Plan),
which authorized 13.0 million shares of common stock for issuance to certain employees and officers through incentive
stock options and non-qualified stock options, stock appreciation rights, RSUs, and restricted stock. The 2006 Plan was
adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the
2006 Plan 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. The 2006 Plan
was replaced on May 13, 2015, by the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan). Expiration dates of
options outstanding as of December 31, 2018, under the 2006 Plan range from 2019 to 2024.
On January 20, 2015, the Board of Directors adopted the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan),
which authorized 7.7 million shares of common stock for issuance to certain employees and officers through incentive stock
options and non-qualified stock options, stock appreciation rights, PSUs, RSUs, and restricted stock. The 2015 Plan was
adopted by stockholder approval at our annual meeting of stockholders held on May 13, 2015. PSUs, RSUs, and restricted
stock granted under the 2015 Plan reduce the shares authorized for issuance under the 2015 Plan by 2.5 shares of common
stock for each share underlying the award. Options granted under the 2015 Plan 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. Expiration dates of options outstanding as of December 31, 2018 under
the 2015 Plan range from 2025 to 2026.
Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million
shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. Under the 2010
Directors Plan, the Company may issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards
56 ADTRAN 2018 Annual Report
issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued
under the 2010 Directors Plan have a 10-year contractual term. All remaining options outstanding as of December 31, 2018,
under the 2010 Directors Plan will expire in 2019.
The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock
for the years ended December 31, 2018, 2017 and 2016, which was recognized as follows:
(In thousands)
Stock-based compensation expense included in cost of sales
Selling, general and administrative expense
Research and development expense
Stock-based compensation expense included in operating expenses
Total stock-based compensation expense
Tax benefit for expense associated with non-qualified options,
PSUs, RSUs and restricted stock
Total stock-based compensation expense, net of tax
2018
$418
3,989
2,748
6,737
7,155
(1,432)
$5,723
2017
$379
4,063
2,991
7,054
7,433
(1,699)
$5,734
2016
$389
3,341
2,965
6,306
6,695
(963)
$5,732
With our adoption of ASU 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting in January 2017, we elected to discontinue our past practice of estimating forfeitures
and now account for forfeitures as they occur.
Stock Options
The following table is a summary of our stock options outstanding as of December 31, 2017 and 2018, and the changes that
occurred during 2018:
(In thousands, except per share amounts)
Stock options outstanding, December 31, 2017
Stock options granted
Stock options exercised
Stock options forfeited
Stock options expired
Stock options outstanding, December 31, 2018
Stock options exercisable, December 31, 2018
Number of
Options
Weighted
Average
Exercise Price
Weighted Average
Remaining Contractual
Life in Years
Aggregate
Intrinsic
Value
5,148
—
(96)
(73)
(597)
4,382
4,131
$22.65
$ —
$15.46
$16.49
$22.58
$22.91
$23.37
4.87
$6,109
4.10
3.93
$ —
$ —
At December 31, 2018, total unrecognized compensation expense related to non-vested stock options was approximately $0.8
million, which is expected to be recognized over an average remaining recognition period of one year.
All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At December
31, 2018, 2.5 million options were available for grant under the shareholder-approved plans.
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s
closing stock price on the last trading day of 2018 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 December 31, 2018.
The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.
The total pre-tax intrinsic value of options exercised during 2018, 2017 and 2016 was $0.2 million, $3.4 million and $1.1
million, respectively. The fair value of options fully vesting during 2018, 2017 and 2016 was $2.5 million, $4.3 million and
$5.7 million, respectively.
Financial Results 57
The following table further describes our stock options outstanding as of December 31, 2018:
Range of
Exercise Prices
$14.88 – 18.96
$18.97 – 23.45
$23.46 – 30.35
$30.36 – 41.92
Options Outstanding
Options Exercisable
Options
Outstanding
at 12/31/18
(in thousands)
Weighted Avg.
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
Options
Exercisable
at 12/31/18
(in thousands)
Weighted
Average
Exercise
Price
1,257
739
1,223
1,163
4,382
5.93
5.68
3.18
2.29
$15.87
$19.12
$23.87
$31.93
1,006
739
1,223
1,163
4,131
$15.99
$19.12
$23.87
$31.93
We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair
value of stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that
involve judgment. Because our stock options have characteristics significantly different from those of traded options, and
because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide
reliable measures of fair value of our stock options.
The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables
include, but are not limited to, the volatility of our stock price and employee exercise behaviors.
There were no stock options granted in 2017 or 2018. The weighted-average estimated fair value of stock options granted to
employees during the year ended December 31, 2016, was $5.22 per share, with the following weighted-average assumptions:
Expected volatility
Risk-free interest rate
Expected dividend yield
Expected life (in years)
2016
34.79%
1.36%
1.98%
6.25
We based our estimate of expected volatility for the year ended December 31, 2016 on the sequential historical daily trading
data of our common stock for a period equal to the expected life of the options granted. The selection of the historical
volatility method was based on available data indicating our historical volatility is as equally representative of our future stock
price trends as is our implied volatility. The risk-free interest rate assumption is based upon implied yields of U.S. Treasury
zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The
dividend yield is based on our historical and expected dividend payouts. The expected life of our stock options is based upon
historical exercise and forfeiture activity of our previous stock-based grants with a ten-year contractual term.
PSUs, RSUs and restricted stock
Under the 2015 Plan, awards other than stock options, including PSUs, RSUs, and restricted stock, may be granted to certain
employees and officers.
Under our market-based PSU program, the number of shares of common stock earned by a recipient pursuant to the PSUs
is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the NASDAQ
Telecommunications Index at the end of a three-year performance period. Depending on the relative total shareholder return
over the performance period, the recipient may earn from 0% to 150% of the shares underlying the PSUs, with the shares
earned distributed upon the vesting of the PSUs at the end of the three-year performance period. The fair value of the award
is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of
market conditions using a Monte Carlo Simulation valuation method. A portion of the granted PSUs vests and the underlying
shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined
by the 2015 Plan. The recipients of the PSUs receive dividend credits based on the shares of common stock underlying the
PSUs. The dividend credits are vested and earned in the same manner as the PSUs and are paid in cash upon the issuance of
common stock for the PSUs.
During the first quarter of 2017, the Compensation Committee of the Board of Directors approved a one-time PSU grant of 0.5
million shares that contain performance conditions and vest at the end of a three-year period if such performance conditions
are met. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant.
58 ADTRAN 2018 Annual Report
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. RSUs and restricted stock vest ratably over four-year and one-year periods, respectively.
We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based
compensation. If circumstances change, and additional data becomes available over time, we may change our assumptions
and methodologies, which may materially impact our fair value determination.
The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2017 and 2018, and
the changes that occurred during 2018. The unvested awards outstanding as of December 31, 2017, have been adjusted for
the actual shares vested in 2018 for our market-based PSUs.
(In thousands except per share amounts)
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2017
PSUs, RSUs and restricted stock granted
PSUs, RSUs and restricted stock vested
PSUs, RSUs and restricted stock forfeited
Unvested RSUs and restricted stock outstanding, December 31, 2018
Number
of Shares
Weighted
Average Grant
Date Fair Value
1,292
690
(217)
(195)
1,570
$21.33
$14.48
$19.94
$21.29
$18.52
At December 31, 2018, total unrecognized compensation expense related to the non-vested portion of market-based PSUs,
RSUs and restricted stock was approximately $17.8 million, which is expected to be recognized over an average remaining
recognition period of 3.0 years. In addition, there was $9.1 million of unrecognized compensation expense related to the
unvested 2017 performance-based PSUs, which will be recognized over the remaining requisite service period if achievement
of the performance obligation becomes probable. For the years ended December 31, 2018 and 2017, no compensation
expense was recognized related to these performance-based PSUs.
The market based PSU pricing model also requires the use of several significant assumptions that impact the fair value
estimate. The estimated fair value of the PSUs granted to employees during the year ended December 31, 2018, 2017 and 2016
was $16.59 per share, $24.17 per share and $23.50 per share, respectively, with the following assumptions:
Expected volatility
Risk-free interest rate
Expected dividend yield
Note 5 – Investments
2018
27.98% to 31.58%
2.11% to 2.99%
1.83% to 2.49%
2017
27.03%
1.78%
1.74%
2016
29.79%
1.17%
1.80%
Debt securities and Other Investments
At December 31, 2018, we held the following debt securities and other investments, recorded at either fair value or cost:
(In thousands)
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Amortized
Cost
$20,777
1,339
5,230
3,833
9,271
592
Available-for-sale securities held at fair value
$41,042
Restricted investment held at cost
Other investments held at cost
Total carrying value of available-for-sale investments
Gross
Unrealized
Gains
$19
—
5
2
1
—
$27
Gross
Unrealized
Losses
$(112)
(26)
(14)
(44)
(66)
(8)
$(270)
Carrying
Value
$20,684
1,313
5,221
3,791
9,206
584
$40,799
25,600
397
$66,796
Financial Results 59
At December 31, 2017, we held the following debt securities and other investments, recorded at either fair value or cost:
(In thousands)
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Available-for-sale securities held at fair value
Restricted investment held at cost
Other investments held at cost
Total carrying value of available-for-sale investments
Amortized
Cost
$32,654
2,902
6,545
5,554
14,477
725
$62,857
Gross
Unrealized
Gains
$44
2
1
1
—
5
$53
Gross
Unrealized
Losses
$(155)
(22)
(20)
(46)
(174)
—
$(417)
Carrying
Value
$32,543
2,882
6,526
5,509
14,303
730
$62,493
27,800
547
$90,840
As of December 31, 2018, our debt securities had the following contractual maturities:
(In thousands)
Less than one year
One to two years
Two to three years
Three to five years
Five to ten years
More than ten years
Total
Corporate
Bonds
Municipal
Fixed-rate
Bonds
Asset-
backed
Bonds
Mortgage/
Agency-
backed
Bonds
U.S.
Government
Bonds
Foreign
Government
Bonds
$2,127
11,557
6,831
169
—
—
$176
208
929
—
—
—
$943
401
193
2,433
260
991
$20,684
$1,313
$5,221
$ —
—
425
853
6
2,507
$3,791
$ —
6,714
—
2,492
—
—
$9,206
$ —
285
299
—
—
—
$584
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.
Realized gains and losses on sales of securities are computed under the specific identification method. The following table
presents gross realized gains and losses related to our debt securities for the years ended December 31, 2018, 2017 and 2016:
(In thousands)
Year Ended December 31,
Gross realized gains on debt securities
Gross realized losses on debt securities
Total gain (loss) recognized, net
2018
$57
(592)
$(535)
2017
$169
(226)
$(57)
2016
$341
(222)
$119
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.
60 ADTRAN 2018 Annual Report
The following table presents the breakdown of debt securities and other investments with unrealized losses at December 31, 2018:
(In thousands)
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Total
Fair Value
$11,129
—
1,874
1,021
6,527
584
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$(60)
$3,608
$(52)
$14,737
$(112)
—
(2)
(5)
(48)
(8)
1,136
1,257
1,918
537
—
(26)
(12)
(39)
(18)
—
1,136
3,131
2,939
7,064
584
(26)
(14)
(44)
(66)
(8)
Total
$21,135
$(123)
$8,456
$(147)
$29,591
$(270)
The following table presents the breakdown of debt securities and other investments with unrealized losses at December 31, 2017:
(In thousands)
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Total
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Fair Value
$16,015
230
4,941
3,062
2,754
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$(58)
—
(17)
(8)
(26)
$6,112
1,165
179
1,673
11,549
$20,678
$(97)
(22)
(3)
(38)
(148)
$(308)
$22,127
$(155)
1,395
5,120
4,735
14,303
$47,680
(22)
(20)
(46)
(174)
$(417)
Total
$27,002
$(109)
The decrease in unrealized losses during 2018, as reflected in the table above, results from changes in market positions
associated with our fixed income portfolio.
Marketable Equity Securities
Our marketable equity securities consist of publicly traded stocks or funds measured at fair value.
Prior to January 1, 2018, our marketable equity securities were classified as available-for-sale. Realized gains and losses on
marketable equity securities were included in net investment gain (loss). Unrealized gains and losses were recognized in
accumulated other comprehensive income, net of deferred taxes, on the balance sheet.
On January 1, 2018, we adopted ASU 2016-01, which requires us to measure all equity investments that do not result in
consolidation and are not accounted for under the equity method at fair value, with any changes in fair value recognized in
net investment gain (loss). Upon adoption, we reclassified $3.2 million of net unrealized gains related to marketable equity
securities from accumulated other comprehensive income (loss) to opening retained earnings.
Realized and unrealized gains and losses for our marketable equity securities for the twelve months ended December 31,
2018 were as follows:
(in thousands)
Realized gains on equity securities sold
Unrealized losses on equity securities held
Total loss recognized, net
2018
$1,306
(4,821)
$(3,515)
We have categorized our cash equivalents and our investments held at fair value into a three-level fair value hierarchy based
on the priority of the inputs to the valuation technique for the cash equivalents and investments as follows: Level 1 - Values
based on unadjusted quoted prices for identical assets or liabilities in an active market; Level 2 - Values based on quoted
prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3 - Values based
on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. These inputs could include information supplied by investees.
Financial Results 61
Fair Value Measurements at December 31, 2018 Using
(In thousands)
Cash equivalents
Money market funds
Cash equivalents
Available-for-sale debt securities
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Marketable equity securities
Marketable equity securities – various
industries
Equity in escrow
Deferred compensation plan assets
Available-for-sale securities
Total
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$1,554
1,554
20,684
1,313
5,221
3,791
9,206
584
26,763
253
18,256
86,071
$87,625
$1,554
1,554
—
—
—
—
9,206
—
26,763
253
18,256
54,478
$56,032
$ —
—
20,684
1,313
5,221
3,791
—
584
—
—
—
31,593
$31,593
$ —
—
—
—
—
—
—
—
—
—
—
—
—
$ —
Fair Value Measurements at December 31, 2017 Using
(In thousands)
Cash equivalents
Money market funds
Commercial paper
Cash equivalents
Available-for-sale debt securities
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Marketable equity securities
Marketable equity securities – various
industries
Deferred compensation plan assets
Available-for-sale securities
Total
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$5,851
3,999
9,850
32,543
2,882
6,526
5,509
14,303
730
35,662
19,883
118,038
$127,888
$5,851
—
5,851
—
—
—
—
14,303
—
35,662
19,883
69,848
$75,699
$ —
3,999
3,999
32,543
2,882
6,526
5,509
—
730
—
—
48,190
$52,189
$ —
—
—
—
—
—
—
—
—
—
—
—
$ —
The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are
obtained from a variety of industry standard data providers, security master files from large financial institutions, and other
third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine
the daily market value of each security.
62 ADTRAN 2018 Annual Report
Note 6 – Derivative Instruments and Hedging Activities
We participate in foreign exchange forward contracts in connection with the management of exposure to fluctuations in
foreign exchange rates.
Cash Flow Hedges
Our cash flow hedging activities utilize foreign exchange forward contracts to reduce the risk that movements in exchange
rates will adversely affect the net cash flows resulting from the planned purchase of products from foreign suppliers. Purchases
of U.S. denominated inventory by our European subsidiary represent our primary exposure. Changes in the fair value of
derivatives designated as cash flow hedges are not recognized in current operating results, but are recorded in accumulated
other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other comprehensive
income when the underlying hedged item impacts earnings. This reclassification is recorded in the same line item of the
consolidated statements of income as where the effects of the hedged item are recorded, which is cost of sales.
Undesignated Hedges
We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary
exchange rates may adversely affect our results of operations and financial condition, as outstanding non-functional balances
are revalued to the functional currency through profit and loss. When appropriate, we utilize foreign exchange forward
contracts to help manage the volatility relating to these valuation exposures. All changes in the fair value of our derivative
instruments that do not qualify for or are not designated for hedged accounting transactions are recognized as other income
(expense), net in the Consolidated Statements of Income.
We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are
recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments are not subject to master netting
arrangements and are not offset in the Consolidated Balance Sheets.
As of December 31, 2018 and 2017, we had no foreign exchange forward contracts.
The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the
years ended December 31, 2018, 2017 and 2016 were as follows:
(In thousands)
Income Statement Location
2018
2017
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts
Other income (expense)
$13
$(754)
2016
$724
The change in our derivatives designated as hedging instruments recorded in other comprehensive income (OCI) and
reclassified to income, net of tax, during the twelve months ended December 31, 2018, 2017 and 2016 were as follows:
(In thousands)
Derivatives Designated as Hedging Instruments:
Location of Losses
Reclassifed from
AOCI into Income
Foreign exchange contracts
Cost of Sales
$ —
$(897)
Note 7 – Inventory
At December 31, 2018 and 2017, inventory was comprised of the following:
Amount of Gains (Losses) Reclassified
from AOCI into Income
2018
2017
2016
$ —
(In thousands)
Raw materials
Work in process
Finished goods
Total Inventory, net
2018
$45,333
1,638
52,877
$99,848
2017
$44,185
1,939
76,418
$122,542
Financial Results 63
We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of
the inventory and the estimated fair value of the inventory based upon assumptions about future demand, market conditions,
and life. At December 31, 2018 and 2017, raw materials reserves totaled $17.6 million and $15.0 million, respectively, and
finished goods inventory reserves totaled $12.4 million and $8.3 million, respectively.
Note 8 – Property, Plant and Equipment
At December 31, 2018 and 2017, property, plant and equipment were comprised of the following:
(In thousands)
Land
Building and land improvements
Building
Furniture and fixtures
Computer hardware and software
Engineering and other equipment
Total Property, Plant and Equipment
Less accumulated depreciation
Total Property, Plant and Equipment, net
2018
$4,575
34,379
68,183
19,831
92,071
127,060
346,099
(265,464)
$80,635
2017
$4,575
32,470
68,301
19,489
90,726
123,363
338,924
(253,845)
$85,079
Depreciation expense was $12.7 million, $12.8 million and $12.0 million for the years ended December 31, 2018, 2017
and 2016, respectively, which is recorded in cost of sales, selling, general and administrative expense and research and
development expense in the consolidated statements of income.
Note 9 – Lease Arrangements
We are the lessor in sales-type lease arrangements for network equipment, which have terms of 18 months to five years.
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 December 31, 2018 and 2017, we had no allowance for credit
losses for our net investment in sales-type leases. As of December 31, 2018 and 2017, the components of the net investment
in sales-type leases were as follows:
(In thousands)
Current minimum lease payments receivable (included in other receivables)
Non-current minimum lease payments receivable (included in other assets)
Total minimum lease payments receivable
Less: Current unearned revenue
Less: Non-current unearned revenue
Net investment in sales-type leases
2018
$11,339
1,670
13,009
631
473
2017
$11,325
2,913
14,238
707
787
$11,905
$12,744
Future minimum lease payments to be received from sales-type leases as of December 31, 2018, are as follows:
(In thousands)
2019
2020
2021
2022
2023
Total
Amount (1)
$11,339
990
431
189
60
$13,009
(1) $9.4 million of these future minimum lease payments relate to one of our customers who filed for Chapter 11 bankruptcy in
February 2019. Therefore, there is a potential risk of uncollectibility related to any outstanding balance. See Note 18 of Notes to
Consolidated Financial Statements for additional information.
64 ADTRAN 2018 Annual Report
Note 10 – Goodwill and Intangible Assets
Goodwill, which relates to our acquisitions of Bluesocket, Inc. and SmartRG, were $7.1 million at December 31, 2018, and
$3.5 million at December 31, 2017, of which $6.7 million and $0.4 million is allocated to our Network Solutions and Services
& Support reportable segments, respectively, for the year ended December 31, 2018, and of which $3.1 million and $0.4
million is allocated to our Network Solutions and Services & Support reportable segments, respectively, for the year ended
December 31, 2017.
We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events
occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying
amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value
of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it
is necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less
than its carrying amount, then the two-step impairment test is performed. Based on the results of our qualitative assessment
in 2018, we concluded that it was not necessary to perform the two-step impairment test. There were no impairment losses
on goodwill recognized for the years ended December 31, 2018, 2017 and 2016.
The following table presents our intangible assets as of December 31, 2018 and 2017:
(In thousands)
Customer relationships
Developed technology
Licensed technology
Supplier relationships
Patents
Licensing agreements
Intellectual property
Non-compete
Trade names
Total
Gross Value
Accumulated
Amortization
2018
Net
Value
Gross Value
Accumulated
Amortization
2017
Net
Value
$22,455
12,801
5,900
2,800
500
560
930
200
310
$(5,380)
$17,075
(4,867)
(520)
(1,108)
(157)
(5)
(930)
(200)
(106)
7,934
5,380
1,692
343
555
—
—
204
$7,474
5,524
—
—
500
—
930
200
100
$(4,283)
$3,191
(4,663)
—
—
(89)
—
(852)
(115)
(65)
861
—
—
411
—
78
85
35
$46,456
$(13,273)
$33,183
$14,728
$(10,067)
$4,661
Amortization expense was $2.3 million, $2.9 million and $2.5 million for the years ended December 31, 2018, 2017 and
2016, respectively.
As of December 31, 2018, the estimated future amortization expense of intangible assets is as follows:
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Amount
$5,332
4,450
4,101
3,477
3,325
12,498
$33,183
Note 11 – Alabama State Industrial Development Authority Financing and Economic Incentives
In 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 Industrial Development Authority (the Authority). Pursuant to the program, on
January 13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of
the bonds to ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama (now
Regions Bank of Alabama) (the Bank). Wachovia Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of
Tennessee) (the Bondholder), which was acquired by Wells Fargo & Company on December 31, 2008, purchased the original
bonds from the Bank and made further advances to the Authority, bringing the total amount outstanding to $50.0 million.
Financial Results 65
An Amended and Restated Taxable Revenue Bond (Amended and Restated Bond) was issued and the original financing
agreement was amended. The Amended and Restated Bond bears interest, payable monthly. The interest rate is 2% per
annum. The Amended and Restated Bond matures on January 1, 2020, and is currently outstanding in the aggregate principal
amount of $25.6 million. The estimated fair value of the bond using a level 2 valuation technique at December 31, 2018, was
approximately $25.4 million based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s
credit rating of AAA. We are required to make payments to the Authority in amounts necessary to pay the interest on the
Amended and Restated Bond. Included in long-term investments at December 31, 2018, is $25.6 million which is invested
in a restricted certificate of deposit. These funds serve as a collateral deposit against the principal of this bond, and we have
the right to set-off the balance of the Amended and Restated Bond with the collateral deposit in order to reduce the balance
of the indebtedness.
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 that we are required to remit to the state for those employment positions that qualify
under the program. We realized economic incentives related to payroll withholdings totaling $1.4 million, $1.5 million and
$1.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.
We made principal payments of $1.1 million for each of the years ended December 31, 2018 and 2017, and anticipate making
a principal payment in 2019. At December 31, 2018 and 2017, $1.0 million and $1.1 million, respectively of the bond debt
was classified as a current liability in accounts payable in the Consolidated Balance Sheets.
Note 12 – Income Taxes
A summary of the components of the provision (benefit) for income taxes for the years ended December 31, 2018, 2017
and 2016 is as follows:
(In thousands)
Current
Federal
State
International
Total Current
Deferred
Federal
State
International
Total Deferred
Total Provision (Benefit) for Income Taxes
2018
$(8,001)
(476)
11,705
3,228
(14,448)
(3,390)
581
(17,257)
$(14,029)
Our effective income tax rate differs from the federal statutory rate due to the following:
2017
$466
(150)
6,458
6,774
8,024
1,882
4,167
14,073
$20,847
2017
35.00%
2.17
(11.88)
(2.27)
(0.75)
(2.71)
1.43
(1.13)
—
26.70
—
0.09
2016
$12,733
1,141
477
14,351
647
73
(3,405)
(2,685)
$11,666
2016
35.00%
3.93
(8.15)
(0.34)
(0.53)
(2.77)
2.53
(2.23)
(2.64)
—
—
0.08
2018
21.00%
14.53
14.23
(11.45)
0.45
3.15
(2.87)
—
8.82
12.00
(17.48)
(0.34)
42.04%
46.65%
24.88%
Tax provision computed at the federal statutory rate
State income tax provision, net of federal benefit
Federal research credits
Foreign taxes
Tax-exempt income
State tax incentives
Stock-based compensation
Domestic production activity deduction
Bargain purchase
Impact of U.S. tax reform
Global intangible low-taxed income (GILTI)
Other, net
Effective Tax Rate
66 ADTRAN 2018 Annual Report
Income (loss) before provision for income taxes for the years ended December 31, 2018, 2017 and 2016 is as follows:
(In thousands)
U.S. entities
International entities
Total
2018
$(74,131)
40,760
$(33,371)
2017
$26,552
18,135
$44,687
2016
$54,077
(7,182)
$46,895
Income (loss) before provision (benefit) for income taxes for international entities reflects income (loss) based on statutory
transfer pricing agreements. This amount does not correlate to consolidated international revenues, many of which occur
from our U.S. entity.
Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities
recognized for financial reporting and tax purposes. The principal components of our current and non-current deferred
taxes are as follows:
(In thousands)
Deferred tax assets
Inventory
Accrued expenses
Investments
Deferred compensation
Stock-based compensation
Uncertain tax positions related to state taxes and related interest
Pensions
Foreign losses
State losses and credit carry-forwards
Federal loss and research carry-forwards
Valuation allowance
Total Deferred Tax Assets
Deferred tax liabilities
Property, plant and equipment
Intellectual property
Investments
Total Deferred Tax Liabilities
Net Deferred Tax Assets
2018
2017
$6,609
2,850
1,122
4,779
3,069
326
5,538
3,097
8,164
17,495
(5,816)
47,233
(3,515)
(6,531)
—
(10,046)
$37,187
$7,545
3,103
—
5,204
2,988
370
4,727
3,091
3,854
3,058
(6,006)
27,934
(3,553)
(663)
(290)
(4,506)
$23,428
On December 22, 2017, the Tax Cuts and Jobs Act (the Act) was signed into law. As a result of the Act, we recognized an
estimated expense of $11.9 million in the fourth quarter of 2017, of which $9.2 million related to the write-down of deferred
tax assets and $2.7 million related to tax on unrepatriated foreign earnings. We calculated our best estimate of the impact of
the Act in our 2017 year-end income tax provision, in accordance with Staff Accounting Bulletin No. 118, which was issued
to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available,
prepared or analyzed to finalize the accounting for certain income tax effects of the Act. Additional work to complete a more
detailed analysis of historical foreign earnings, as well as the full impact relating to the write-down of deferred tax assets, was
completed in the third quarter of 2018 and resulted in a tax benefit of $4.0 million.
At December 31, 2018 and 2017, non-current deferred taxes related to our investments and our defined benefit pension plan
reflect deferred taxes on the net unrealized gains and losses on available-for-sale investments and deferred taxes on unrealized
losses in our pension plan. The net change in non-current deferred taxes associated with these items, a deferred tax benefit
of $2.8 million and $1.7 million in 2018 and 2017, respectively, is recorded as an adjustment to other comprehensive income,
presented in the Consolidated Statements of Comprehensive Income.
The Company continually reviews the adequacy of the valuation allowance and recognizes the benefits of deferred tax assets
only as the reassessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance
with ASC 740, Income Taxes (ASC 740). As of December 31, 2018, we had foreign losses of $3.1 million. A valuation
Financial Results 67
allowance of $2.4 million has been established against the loss carryforwards. The foreign loss carryforwards primarily
resulted from an acquisition in 2009. As of December 31, 2018, we had $8.2 million of state loss and tax credit carryforwards.
We believe it is more likely than not we will not realize the full benefit of the deferred tax asset arising from these losses and
credit carryforwards. Therefore, a valuation allowance of $3.4 million has been established against these carryforwards. The
valuation allowance relates to a particular state where we no longer generate sufficient state income. As of December 31,
2018, we had $17.5 million of federal loss and research carryforwards. These carryforwards are the result of acquisitions in
2011 and 2018 as well as domestic operating losses in 2018. Management will continue to assess the realization of our deferred
tax assets and related valuation allowance. As such, we may release a portion of the valuation allowance or establish a new
valuation allowance based on operations in the jurisdictions in which these assets arose. Management continues to evaluate
all evidence including historical operating results, the existence of losses in the most recent year, forecasted earnings, future
taxable income, and tax planning strategies. Should management determine a valuation allowance is needed in the future
due to not being able to absorb loss carryforwards, it would have a material impact on our consolidated financial statements.
The deferred tax assets for foreign and domestic carry-forwards, research and development tax credits, unamortized research
and development costs, and state credit carry-forwards are $28.8 million. Some of these deferred tax assets will expire
between 2019 and 2030 and others carryforward indefinitely. We will continue to assess the realization of our deferred tax
assets and related valuation allowances. The net change in our valuation allowance from December 31, 2017, to December
31, 2018 was $(0.2) million.
As of December 31, 2018, and 2017, respectively, our cash and cash equivalents were $105.5 million and $86.4 million and
short-term investments were $3.2 million and $16.1 million, which provided available short-term liquidity of $108.7 million
and $102.6 million. Of these amounts, our foreign subsidiaries held cash of $87.1 million and $56.8 million, respectively,
representing approximately 80.1% and 55.4% of available short-term liquidity, which is used to fund on-going liquidity
needs of these subsidiaries. We intend to permanently reinvest these funds outside the U.S., except to the extent any of these
funds can be repatriated without withholding tax, and our current business plans do not indicate a need to repatriate to fund
domestic operations. However, if all these funds were repatriated to the U.S. or used for U.S. operations, certain amounts
could be subject to tax. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practical to
determine the amount of funds subject to unrecognized deferred tax liability.
During 2018, 2017 and 2016, we recorded no income tax benefit or expense for stock options exercised as an adjustment to
equity. This is calculated on the difference between the exercise price of stock option exercises and the market price of the
underlying common stock upon exercise.
The change in the unrecognized income tax benefits for the years ended December 31, 2018, 2017 and 2016 is reconciled below:
(In thousands)
Balance at beginning of period
Increases for tax position related to:
Prior years
Current year
Decreases for tax positions related to:
Prior years
Settlements with taxing authorities
Expiration of applicable statute of limitations
Balance at end of period
2018
$2,366
2017
$2,226
2016
$2,537
3
254
—
—
465
285
(14)
—
95
428
—
—
(755)
$1,868
(596)
$2,366
(834)
$2,226
As of December 31, 2018, 2017 and 2016, our total liability for unrecognized tax benefits was $1.9 million, $2.4 million and
$2.2 million, respectively, of which $1.7 million, $2.2 million and $1.7 million, respectively, would reduce our effective tax rate
if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest
and penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2018, 2017
and 2016, the balances of accrued interest and penalties were $0.7 million, $0.8 million and $0.8 million, respectively.
We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax
benefits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions
and several foreign jurisdictions. We are not currently under audit by the Internal Revenue Service. Generally, we are not
subject to changes in income taxes by any taxing jurisdiction for the years prior to 2015.
68 ADTRAN 2018 Annual Report
Note 13 – Employee Benefit Plans
Pension Benefit Plan
We maintain a defined benefit pension plan covering employees in certain foreign countries.
The pension benefit plan obligations and funded status at December 31, 2018 and 2017, are as follows:
(In thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
Service cost
Interest cost
Actuarial loss - experience
Actuarial gain (loss) - assumptions
Benefit payments
Effects of foreign currency exchange rate changes
Projected benefit obligation at end of period
Change in plan assets:
Fair value of plan assets at beginning of period
Actual return (loss) on plan assets
Contributions
Effects of foreign currency exchange rate changes
Fair value of plan assets at end of period
Unfunded status at end of period
2018
2017
$34,893
1,193
727
38
2,139
(138)
(1,615)
37,237
26,624
(2,024)
688
(1,129)
24,159
$(13,078)
$30,011
1,260
607
47
(1,294)
(80)
4,342
34,893
20,045
709
3,001
2,869
26,624
$(8,269)
The accumulated benefit obligation was $37.2 million and $32.9 million at December 31, 2018 and 2017, respectively. The
increase in the accumulated benefit obligation and the actuarial loss is primarily attributable to a decrease in the discount
rate during 2018.
The net amounts recognized in the balance sheet for the unfunded pension liability as of December 31, 2018 and 2017 are as follows:
(In thousands)
Current liability
Non-current liability
Total
2018
$ —
13,078
$13,078
2017
$ —
8,269
$8,269
The components of net periodic pension cost, other than the service cost component, are included in other income (expense),
net in the consolidated statements of income (loss). The components of net periodic pension cost and amounts recognized in
other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 are as follows:
(In thousands)
Net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial losses
Net periodic benefit cost
Other changes in plan assets and benefit obligations
recognized in other comprehensive income:
Net actuarial (gain) loss
Amortization of actuarial losses
Amount recognized in other comprehensive income (loss)
Total recognized in net periodic benefit cost and
other comprehensive income (loss)
2018
2017
$1,193
727
(1,548)
247
619
5,638
(196)
5,442
$6,061
$1,260
607
(1,267)
309
909
(654)
(406)
(1,060)
$(151)
2016
$1,211
720
(1,057)
175
1,049
1,782
(156)
1,626
$2,675
Financial Results 69
The amounts recognized in accumulated other comprehensive income as of December 31, 2018 and 2017 are as follows:
(In thousands)
Net actuarial loss
2018
$(11,256)
2017
$(5,812)
The defined benefit pension plan is accounted for on an actuarial basis, which requires the selection of various assumptions,
including an expected rate of return on plan assets and a discount rate. The expected return on our German plan assets
that is utilized in determining the benefit obligation and net periodic benefit cost is derived from periodic studies, which
include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks using
standard deviations, and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies
give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term,
prospective rates of return.
Another key assumption in determining net pension expense is the assumed discount rate to be used to discount plan
obligations. The discount rate has been derived from the returns of high-quality, corporate bonds denominated in Euro
currency with durations close to the duration of our pension obligations.
The weighted-average assumptions that were used to determine the net periodic benefit cost for the years ended December
31, 2018, 2017 and 2016 are as follows:
Discount rates
Rate of compensation increase
Expected long-term rates of return
2018
2.13%
2.00%
5.90%
2017
1.90%
2.00%
5.90%
2016
2.64%
2.00%
5.40%
The weighted-average assumptions that were used to determine the benefit obligation at December 31, 2018 and 2017:
Discount rates
Rate of compensation increase
2018
1.75%
2.00%
2017
2.13%
2.00%
Actuarial gains and losses are recorded in accumulated other comprehensive income. To the extent unamortized gains
and losses exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is
amortized as a component of net periodic pension cost over the remaining service period of active participants. We estimate
that $0.7 million will be amortized from accumulated other comprehensive income into net periodic pension cost in 2019
for the net actuarial loss.
We anticipate making a contribution to the pension plan in 2019 of approximately $1.1 million which reflects the net amount
of service costs less expected benefit payments. The following pension benefit payments, which reflect expected future
service, as appropriate, are expected to be paid to participants:
(In thousands)
2019
2020
2021
2022
2023
2024 – 2028
Total
$400
555
646
704
808
5,430
$8,543
We have categorized our cash equivalents and our investments held at fair value that are included in the pension plan into
a three-level fair value hierarchy based on the priority of the inputs to the valuation technique for the cash equivalents and
investments as follows: Level 1 - values based on unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 - values based on quoted prices in markets that are not active or model inputs that are observable either directly
or indirectly; Level 3 - values based on prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. These inputs include information supplied by investees.
70 ADTRAN 2018 Annual Report
Fair Value Measurements at December 31, 2018, Using
(In thousands)
Cash and cash equivalents
Available-for-sale securities
Bond funds:
Government bonds
Corporate bonds
Emerging markets bonds
Equity funds:
Global equity
Emerging markets
Balanced fund
Large-cap value
Global real estate fund
Managed futures fund
Available-for-sale securities
Total
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$1,010
$ —
$ —
Fair Value
$1,010
6,268
4,840
443
7,743
1,188
815
262
926
664
23,149
$24,159
6,268
4,840
443
7,743
1,188
815
262
926
664
23,149
$24,159
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ —
$ —
Fair Value Measurements at December 31, 2017, Using
(In thousands)
Cash and cash equivalents
Available-for-sale securities
Bond funds:
Corporate bonds
Government bonds
Equity funds:
Large cap blend
Balanced fund
Large cap value
Available-for-sale securities
Total
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$3,005
$ —
$ —
Fair Value
$3,005
14,349
2,305
5,758
898
309
23,619
$26,624
14,349
2,305
5,758
898
309
23,619
$26,624
—
—
—
—
—
—
—
—
—
—
—
—
$ —
$ —
Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner
necessary to meet expected future benefits earned by participants, and consider a broad range of economic conditions.
Central to the policy are target allocation ranges by asset class, which is currently 50% for bond funds, 40% for equity funds
and 10% cash, real estate and managed futures.
The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset
allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, and achieve asset returns
that are competitive with like institutions employing similar investment strategies.
The investment policy is periodically reviewed by us and a designated third-party fiduciary for investment matters. The
policy is established and administered in a manner that is compliant at all times with applicable government regulations.
Financial Results 71
401(k) Savings Plan
We maintain the ADTRAN, Inc. 401(k) Retirement Plan (Savings Plan) for the benefit of our eligible employees. The Savings
Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (Code), and
is intended to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for
retirement by contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us
to contribute a “safe harbor” amount each year. We match up to 4% of employee contributions (100% of an employee’s first
3% of contributions and 50% of their next 2% of contributions), beginning on the employee’s one-year anniversary date. In
calculating our matching contribution, we only use compensation up to the statutory maximum under the Code ($275,000
for 2018). All contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributions and plan
administration costs for the Savings Plan amounted to approximately $4.4 million, $4.6 million and $4.1 million in 2018,
2017 and 2016, respectively.
Deferred Compensation Plans
We maintain four deferred compensation programs for certain executive management employees and our Board of Directors.
For our executive management employees, the ADTRAN, Inc. Deferred Compensation Program for Employees is offered
as a supplement to our tax-qualified 401(k) plan and is available to certain executive management employees who have
been designated by our Board of Directors. This deferred compensation plan allows participants to defer all or a portion of
certain specified bonuses and up to 25% of remaining cash compensation, and permits us to make matching contributions
on a discretionary basis, without the limitations that apply to the 401(k) plan. To date, we have not made any matching
contributions under this plan. We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees. Under this plan,
participants may elect to defer all or a portion of their vested PSU’s and RSU’s to the Plan. Such deferrals shall continue to be
held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals
are moved to another deemed investment pursuant to an election made by the Participant.
For our Board of Directors, we maintain the ADTRAN, Inc. Deferred Compensation Program for Directors. This program
allows our Board of Directors to defer all or a portion of monetary remuneration paid to the Director, including, but not
limited to, meeting fees and annual retainers. We also maintain the ADTRAN, Inc. Equity Deferral Program for Directors.
Under this plan, participants may elect to defer all or a portion of their vested restricted stock awards. Such deferrals shall
continue to be held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or
such deferrals are moved to another deemed investment pursuant to an election made by the Director.
We have set aside the plan assets for all plans in a rabbi trust (the Trust) and all contributions are credited to bookkeeping
accounts for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or
insolvency. The assets of the Trust are deemed to be invested in pre-approved mutual funds as directed by each participant,
and the participant’s bookkeeping account is credited with the earnings and losses attributable to those investments. Benefits
are scheduled to be distributed six months after termination of employment in a single lump sum payment or annual
installments paid over a three or ten-year term based on the participant’s election. Distributions will be made on a pro-rata
basis from each of the hypothetical investments of the Participant’s account in cash. Any whole shares of ADTRAN, Inc.
common stock that are distributed will be distributed in-kind.
Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money
market instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the
Trust and the amounts payable to the plan participants at December 31, 2018 and 2017, are as follows:
(In thousands)
Fair Value of Plan Assets
Long-term investments
Total Fair Value of Plan Assets
Amounts Payable to Plan Participants
Non-current liabilities
Total Amounts Payable to Plan Participants
2018
2017
$18,256
$18,256
$18,256
$18,256
$19,883
$19,883
$19,883
$19,883
72 ADTRAN 2018 Annual Report
Interest and dividend income of the Trust have been included in interest and dividend income in the accompanying 2018,
2017 and 2016 Consolidated Statements of Income (Loss). Changes in the fair value of the plan assets held by the Trust have
been included in other income (expense) in the accompanying 2018, 2017 and 2016 Consolidated Statements of Income
(Loss). Changes in the fair value of the deferred compensation liability are included as selling, general, and administrative
expense in the accompanying 2018, 2017 and 2016 Consolidated Statements of Income (Loss). Based on the changes in the
total fair value of the Trust’s assets, we recorded deferred compensation income (expense) in 2018, 2017 and 2016 of $2.1
million, $(2.6) million and $(1.3) million, respectively.
Retiree Medical Coverage
We provided medical, dental and prescription drug coverage to one retired former officer and his spouse, for his life, on the
same terms as provided to our active officers, and to the spouse of a former deceased officer for up to 30 years. At December
31, 2018 and 2017, this liability totaled $0.1 million.
Note 14 – Segment Information and Major Customers
Our chief operating decision maker regularly reviews our financial performance based on two reportable segments –
Network Solutions and Services & Support. Network Solutions includes software and hardware products and next-generation
virtualized solutions used in service provider or business networks, as well as prior-generation products. Services & Support
includes our suite of ProCloud managed services, network installation, engineering and maintenance services, and fee-based
technical support and equipment repair/replacement plans.
We evaluate the performance of our segments based on gross profit. 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 taxes are reported on a company-wide, functional basis only. There are no inter-segment revenues.
The following table presents information about the reported sales and gross profit of our reportable segments for each of the
years ended December 31, 2018, 2017 and 2016. Asset information by reportable segment is not reported, since we do not
produce such information internally.
2018
2017
2016
(In thousands)
Network Solutions
Services & Support
Total
Sales
Gross Profit
Sales
Gross Profit
Sales
Gross Profit
$458,232
71,045
$529,277
$179,303
24,262
$203,565
$540,396
126,504
$666,900
$260,833
42,802
$303,635
$525,502
111,279
$636,781
$254,797
36,533
$291,330
Sales by Category
In addition to the above reporting segments, we also report revenue for the following three categories – Access & Aggregation,
Subscriber Solutions & Experience, and Traditional & Other Products.
The following tables disaggregates our revenue by major source for the years ended December 31, 2018, 2017 and 2016:
(In thousands)
Access & Aggregation
Subscriber Solutions & Experience (1)
Traditional & Other Products
Total
(In thousands)
Access & Aggregation
Subscriber Solutions & Experience (1)
Traditional & Other Products
Total
Network
Solutions
$301,801
129,067
27,364
$458,232
Network
Solutions
$361,955
132,294
46,147
$540,396
Services &
Support
$57,069
5,393
8,583
$71,045
Services &
Support
$111,989
6,162
8,353
$126,504
2018
Total
$358,870
134,460
35,947
$529,277
2017
Total
$473,944
138,456
54,500
$666,900
Financial Results 73
(In thousands)
Access & Aggregation
Subscriber Solutions & Experience (1)
Traditional & Other Products
Total
Network
Solutions
$339,451
130,645
55,406
$525,502
Services &
Support
$96,921
6,963
7,395
$111,279
2016
Total
$436,372
137,608
62,801
$636,781
(1) Subscriber Solutions & Experience was formerly reported as Customer Devices. With the increasing focus on enhancing the
customer experience for both our business and consumer broadband customers and the addition of SmartRG during the fourth
quarter of 2018, Subscriber Solutions & Experience more accurately represents this revenue category.
The following table presents sale information by geographic area for the years ended December 31, 2018, 2017 and 2016.
(In thousands)
United States
Germany
Other international
Total
2018
$288,843
167,251
73,183
$529,277
2017
$508,178
119,502
39,220
$666,900
2016
$501,337
85,780
49,664
$636,781
Customers comprising more than 10% of revenue can change from year to year. Single customers comprising more than
10% of our revenue in 2018 included two customers at 27% and 17%. Single customers comprising more than 10% of our
revenue in 2017 included two customers at 40% and 16%. Single customers comprising more than 10% of our revenue in
2016 included three customers at 24%, 19% and 12%. Other than those with more than 10 percent of revenues disclosed
above, and excluding distributors, our next five largest customers can change from year-to-year. These customers represented
18%, 15% and 13% of total revenue in 2018, 2017 and 2016, respectively.
Additional Segment Information
As of December 31, 2018, long-lived assets, net totaled $80.6 million, which includes $77.3 million held in the U.S. and $3.3
million held outside the U.S. As of December 31, 2017, long-lived assets, net totaled $85.1 million, which includes $80.6
million held in the U.S. and $4.5 million held outside the U.S.
Note 15 – Commitments and Contingencies
In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment
disputes, patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek
damages or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures.
Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies
of which we are currently aware will not materially affect our business, operations, financial condition, or cash flows.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4
million as of December 31, 2018, of which $7.7 million has been applied to these commitments.
We lease office space and equipment under operating leases which expire at various dates through 2025. As of December
31, 2018, future minimum rental payments under non-cancelable operating leases, including renewals determined to be
reasonably assured, with original maturities of greater than 12 months are as follows:
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total
74 ADTRAN 2018 Annual Report
$3,873
3,580
2,771
2,053
1,317
762
$14,356
Rental expense was $4.6 million, $4.7 million and $4.5 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
Note 16 – Earnings (Loss) per Share
A summary of the calculation of basic and diluted earnings (loss) per share for the years ended December 31, 2018, 2017 and
2016 is as follows:
(In thousands, except for per share amounts)
2018
2017
2016
Numerator
Net Income (Loss)
Denominator
$(19,342)
$23,840
$35,229
Weighted average number of shares—basic
47,880
48,153
48,724
Effect of dilutive securities:
Stock options
Restricted stock and restricted stock units
Weighted average number of shares—diluted
Earnings (loss) per share—basic
Earnings (loss) per share—diluted
—
—
47,880
$(0.40)
$(0.40)
406
140
48,699
$0.50
$0.49
170
55
48,949
$0.72
$0.72
For each of the years ended December 31, 2018, 2017 and 2016, 2.5 million, 3.2 million and 4.6 million stock options were
outstanding but were not included in the computation of diluted earnings (loss) per share because the options’ exercise prices
were greater than the average market price of the common shares, therefore making them anti-dilutive under the treasury
stock method. As a result of the net loss for the year ended December 31, 2018, we excluded 0.1 million of unvested stock
options, PSU’s, RSU’s and restricted stock from the calculation of diluted EPS due to their anti-dilutive effect.
Note 17 – Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of our last eight fiscal quarters. This information
has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting only
of normal recurring adjustments, considered necessary for a fair presentation of the data.
Unaudited Quarterly Operating Results
(In thousands, except for per share amounts)
Three Months Ended
March 31, 2018
Net sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per common share
Earnings (loss) per common share
assuming dilution (1)
$120,806
$39,733
$(26,647)
$(10,814)
$(0.22)
$(0.22)
June 30, 2018 September 30, 2018 December 31, 2018
$128,048
$49,996
$(12,813)
$(7,670)
$(0.16)
$(0.16)
$140,335
$58,448
$(2,179)
$7,589
$0.16
$0.16
$140,088
$55,388
$(3,783)
$(8,447)
$(0.18)
$(0.18)
Three Months Ended
March 31, 2017
June 30, 2017 September 30, 2017 December 31, 2017
Net sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per common share
Earnings (loss) per common share
assuming dilution (1)
$170,279
$73,709
$6,949
$6,651
$0.14
$0.14
$184,673
$84,626
$16,363
$12,401
$0.26
$0.26
$185,112
$86,491
$18,227
$15,898
$0.33
$0.33
$126,836
$58,809
$(4,153)
$(11,110)
$(0.23)
$(0.23)
(1) Assumes exercise of dilutive stock options calculated under the treasury stock method.
Financial Results 75
Note 18 – Subsequent Events
On January 23, 2019, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders
of record at the close of business on February 7, 2019. The quarterly dividend payment was $4.3 million and was paid on
February 21, 2019. 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 first quarter and as of February 26, 2019, we have repurchased 13,000 shares of our common stock through open
market purchases at an average cost of $14.06 per share. We currently have the authority to purchase an additional 2.5 million
shares of our common stock under the current plan approved by the Board of Directors.
In February 2019, $1.0 million of an outstanding investment loan due to ADTRAN was replaced with a secured loan in that
amount. The remaining balance of this investment loan was converted to participating preferred shares of the respective
company.
In February 2019, we announced the restructuring of our workforce in Germany, which includes the closure of the office
location in Munich, Germany accompanied by relocation or severance benefits for the affected employees and a voluntary
early retirement offering to certain other employees. The restructuring is expected to be completed in the fourth quarter
of 2019. ADTRAN does not have sufficient information currently on which to estimate the liability associated with this
restructuring, including costs associated with employee severance and relocation.
On February 25, 2019, one the Company’s customers filed for voluntary Chapter 11 bankruptcy as a result of a court ruling
resulting in a substantial legal judgment against the customer. In 2018, this customer accounted for less than 5% of the
Company’s revenue. As of December 31, 2018, the Company had $2.6 million related to product and services revenue and
$0.3 million related to a leased equipment arrangement included in accounts receivable on the Consolidated Balance Sheet
that was due from this customer. As of December 31, 2018, the Company had $9.4 million included in other receivables related
to a leased equipment arrangement on its Consolidated Balance Sheet that was due from this customer. Since December 31,
2018, and through the date of this filing, all $2.6 million of the outstanding products and services accounts receivable and $0.1
million of the outstanding accounts receivable related to leased equipment have been collected. Additionally, $1.7 million
of the outstanding other receivables related to leased equipment have been collected. Therefore, there is potential risk of
uncollectibility up to $7.8 million on the remaining outstanding receivable balances as of December 31 2018. The Company
has evaluated the collectibility of the remaining receivable balances with the best available and applicable information as of
the date of this filing and the impact was not material to the consolidated financial statements as of December 31, 2018. The
Company will continue to evaluate the collectibility of the remaining accounts receivable balances in subsequent reporting
periods. Additionally, it is uncertain at this time the impact this voluntary bankruptcy filing might have on the Company’s
operating income prospectively; however, the Company believes it will not have a significant impact on the Company’s
liquidity and capital resources.
76 ADTRAN 2018 Annual Report
Directors and Executive Officers
Thomas R. Stanton
Chairman and Chief Executive Officer
H. Fenwick Huss
Director of the Company
Willem Kooyker Dean of the Zicklin School
of Business at Baruch College
William L. Marks
Director of the Company
Former Chairman of the Board and Chief Executive
Officer of Whitney Holding Corp. (the holding company
for Whitney National Bank of New Orleans)
Roger D. Shannon
Senior Vice President of Finance,
Chief Financial Officer,
Corporate Secretary and Treasurer
James D. Wilson, Jr.
Senior Vice President
Technology and Strategy
Raymond Harris
Chief Information Officer
Paul Sykes
General Counsel
Gregory McCray
Director of the Company
CEO of FDH
Anthony J. Melone
Director of the Company
Former Executive Vice President and Chief Technology
Officer for Verizon Communications
Transfer Agent
American Stock Transfer and Trust Company
New York, NY
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Birmingham, Alabama
Balan Nair
Director of the Company
President and Chief Executive Officer of
Liberty Latin America
Jacqueline H. Rice
Director of the Company
Principal of RH Associates
Kathryn A. Walker
Director of the Company
Managing Director for OpenAir Equity Partners
Roy J. Nichols
Director Emeritus
Founder and former President of
Nichols Research Corporation
Michael K. Foliano
Senior Vice President
Operations
John Neville
Senior Vice President
Sales
Eduard Scheiterer
Senior Vice President
Research and Development
Outside Counsel
Dentons US LLP
Atlanta, Georgia
Trusted Counsel Ashley LLC
Atlanta, Georgia
Form 10-K
ADTRAN’s 2018 Annual Report on Form 10-K
(without exhibits) as filed with the Securities and
Exchange Commission is available to stockholders
without charge upon written request to:
Investor Relations
ADTRAN, Inc.
901 Explorer Blvd.
P.O. Box 140000
Huntsville, Alabama 35814-4000
256 963-8220
investorrelations@adtran.com (email)
Annual Meeting
The 2019 Annual Meeting of Stockholders will be held
at ADTRAN corporate headquarters, 901 Explorer
Boulevard, Huntsville, Alabama, on Wednesday,
May 8, 2019, at 10:30 a.m. Central time.
Financial Results 77
Corporate
Headquarters
ADTRAN, Inc.
901 Explorer Boulevard
Huntsville, AL 35806
USA
P.O. Box 140000
Huntsville, AL 35814-4000
1 800 9ADTRAN
1 256 963-8000
1 256 963-8004 fax
investor.relations@adtran.com
www.adtran.com
International Offices
ADTRAN Networks Pty. Ltd.
Melbourne, Australia
ADTRAN Canada, Inc.
Montreal, Canada
ADTRAN GmbH
Berlin, Greifswald,
and Munich, Germany
ADTRAN M.E.P.E.
Athens, Greece
ADTRAN Networks India Private Ltd.
Hyderabad, India
ADTRAN Holdings Ltd.
Tel Aviv, Israel
ADTRAN S.R.L.
Milan, Italy
ADTRAN Networks Sdn. Bhd.
Penang, Malaysia
ADTRAN Networks S.A. de C.V.
Mexico City, Mexico
ADTRAN Networks & Services S. de R.L. de C.V.
Mexico City, Mexico
ADTRAN Sp. z.o.o.
Warsaw, Poland
Saudi Arabian Branch of ADTRAN International, Inc.
Riyadh, Saudi Arabia
ADTRAN s.r.o.
Bratislava, Slovakia
ADTRAN GmbH Permanent Establishment
Tunis, Tunisia
ADTRAN Europe Limited
Basingstoke, Hampshire, United Kingdom