making the
imposssible
possible, and
driving innovation
several key
additions to our
10G PON portfolio
ADTRAN’s unmatched
experience in access
networks has proven to be a
critical asset. It is helping our
customers in Europe, Latin
America, and the U.S. plan,
provision, support, and build
their best networks.
We are excited
about the future
for ADTRAN
Financial Results
10 Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
11 Stock Performance Graph
12 Selected Financial Data
14 Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Results of Operations
Comparison of Years Ended December 31, 2019 and December 31, 2018
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Recently Issued Accounting Pronouncements
Subsequent Events
29 Quantitative and Qualitative Disclosures About Market Risk
31 Report of Independent Registered Public Accounting Firm
34 Financial Statements
39 Notes to Consolidated Financial Statements
Note 1 – Nature of Business
Note 2 – Business Combinations
Note 3 – Revenue
Note 4 – Stock-Based Compensation
Note 5 – Investments
Note 6 – Derivative Instruments and Hedging Activities
Note 7 – Inventory
Note 8 – Property, Plant and Equipment
Note 9 – Leases
Note 10 – Goodwill
Note 11 – Intangible Assets
Note 12 – Alabama State Industrial Development Authority
Financing and Economic Incentives
Note 13 – Income Taxes
Note 14 – Employee Benefit Plans
Note 15 – Segment Information and Major Customers
Note 16 – Commitments and Contingencies
Note 17 – Earnings (Loss) per Share
Note 18 – Restructuring
Note 19 – Summarized Quarterly Financial Data (Unaudited)
Note 20 – Subsequent Events
84 Directors and Executive Officers
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 accep-
tance 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,
2019. 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 9
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 19, 2020, ADTRAN had 163 stockholders of record and approximately 6,972 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
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
2018
High
Low
$15.40
$10.49
$ 17.81
$13.76
$16.40
$ 9.92
$11.59
$ 8.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$20.00
$15.35
$16.05
$13.95
$18.80
$14.95
$18.12
$ 10.43
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
Period
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
October 1, 2019 – October 31, 2019
November 1, 2019 – November 30, 2019
December 1, 2019 – December 31, 2019
Total
—
—
—
—
$ —
$ —
$ —
$ —
—
—
—
—
2,545,430
2,545,430
2,545,430
(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 2.5
million shares of our common stock under the current authorization of up to 5.0 million shares.
10 ADTRAN 2019 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, 2014, through December 31, 2019,
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, 2014, in each
of our common stock, the NASDAQ Telecommunications Index and the NASDAQ Composite Index and also
assume dividend reinvestment.
$250
$200
$150
$100
$50
$0
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
ADTRAN, Inc.
NASDAQ Composite
NASDAQ Telecommunications
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
ADTRAN, Inc.
$100.00
$ 80.70
$106.80
$ 94.01
$ 53.43
$ 50.66
NASDAQ Composite
$100.00
$106.96
$116.45
$150.96
$146.67
$200.49
NASDAQ Telecommunications
$100.00
$ 97.52
$102.36
$ 127.62
$127.16
$142.60
Financial Results 11
Selected Financial Data
INCOME STATEMENT DATA
(In thousands, except per share amounts)
Year Ended December 31,
2019
2018
2017
2016
2015
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Asset impairments
Gain on contingency
Operating income (loss)
Interest and dividend income
Interest expense
Net investment gain (loss)
Other income (expense), net
Gain on bargain purchase of a business
$530,061
$529,277 $666,900
$636,781 $600,064
310,894
325,712
363,265
345,451
333,166
219,167
203,565
303,635
291,330
266,898
130,288
126,200
3,872
(1,230)
124,440
124,547
135,583
130,666
131,848
124,909
123,540
129,868
—
—
—
—
—
—
—
—
(39,963)
(45,422)
37,386
34,573
13,490
2,765
(511)
11,434
1,498
—
4,026
(533)
(4,050)
1,286
11,322
4,380
(556)
4,685
(1,208)
—
3,918
(572)
5,923
(489)
3,542
Income (Loss) Before Income Taxes
Income tax (expense) benefit
(24,777)
(28,205) (1)
(33,371)
14,029
44,687
(20,847) (2)
46,895
(11,666)
Net income (loss)
$(52,982)
$(19,342)
$23,840
$35,229
$18,646
Weighted average shares outstanding – basic
47,836
47,880
48,153
48,724
51,145
Weighted average shares outstanding –
assuming dilution (3)
47,836
47,880
48,699
48,949
51,267
Earnings (loss) per common share – basic
($1.11)
($0.40)
$0.50
($1.11)
($0.40)
$0.49
$0.72
$0.72
$0.36
$0.36
3,953
(596)
10,337
(1,476)
—
25,708
(7,062)
Earnings (loss) per common share –
assuming dilution (3)
Dividends declared and paid per common
share
$0.36
$0.36
$0.36
$0.36
$0.36
(1) Provision for income taxes in 2019 reflected a valuation allowance of $42.8 million is primarily related to our
domestic deferred tax assets with respect to which the Company is no longer able to conclude that it is more likely
than not that these deferred tax assets will be realized. See Note 13 of Notes to Consolidated Financial Statements,
included in Part II, 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 13 of Notes to Consolidated Financial Statements,
included in Part II, 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 Part II, Item 8 of this report. As a result of the net loss for each of
the years ended December 31, 2019 and 2018, we excluded 0.1 million of unvested stock options, PSUs, RSUs and
restricted stock from the calculation of diluted EPS due to their anti-dilutive effect.
12 ADTRAN 2019 Annual Report
BALANCE SHEET DATA
(In thousands)
As of December 31,
Working capital (1)
Total assets
Total debt (2)
2019
2018
2017
2016
2015
$207,599
$237,416
$306,296
$226,367
$219,219
$545,118
$628,027
$669,094
$667,235
$632,904
$24,600
$25,600
$26,700
$27,800
$28,900
Stockholders’ equity
$380,426
$446,279
$497,911
$479,517
$480,160
(1) 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 Part II,
Item 8 of this report for additional information.
(2) Total debt outstanding consisted of taxable revenue bonds due to the State of Alabama Industrial Development
Authority. The bonds matured on January 1, 2020 and were repaid in full on January 2, 2020. See Note 12 of Notes
to Consolidated Financial Statements, included in Part II, Item 8 of this report for additional information.
Financial Results 13
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with
our audited consolidated financial statements and the related notes included in Part II, Item 8 of this Annual
Report on Form 10-K. We have omitted discussion of the earliest of the three years of financial condition
and results of operations and this information can be found in Part I, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2018, filed with the SEC on February 28, 2019, which is available free of charge on the
SEC’s website at sec.gov and on our website at www.adtran.com.
Overview
ADTRAN is a leading global provider of networking and communications equipment, serving a diverse domestic
and international customer base in multiple 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 worldwide. We
support our customers through our direct global sales organization and our distribution networks. Our success
depends upon our ability to increase unit volume and market share through the introduction of new products
and succeeding generations of products having lower selling prices and increased functionality as compared to
both the prior generation of a product and to the products of competitors. In order to service our customers and
grow revenue, we are constantly conducting research and development of new products addressing customer
needs and testing those products for the particular specifications of the particular customers. We are focused
on being a top global supplier of access infrastructure and related value-added solutions from the cloud edge
to the subscriber edge. We offer a broad portfolio of flexible software and hardware network solutions and
services that enable service providers to meet today’s service demands, while enabling them to transition to
the fully-converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the
future. In addition to our corporate headquarters in Huntsville, Alabama, we have research and development
facilities in strategic global locations.
An important part of our strategy is to reduce the cost of each succeeding product generation and then lower
the product’s selling price based on the cost savings achieved in order to gain market share and/or improve
gross margins. As a part of this strategy, we seek to be a high-quality, and in most instances the low-cost,
provider of products in our markets. Our success to date is attributable in large measure to our ability to
design our products initially with a view to their subsequent redesign, allowing both increased functionality
and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell
succeeding generations of products to existing customers, while increasing our market share by selling these
enhanced products to new customers.
We ended the first half of 2019 with 20.6% year-over-year revenue growth and good geographical diversity
with 50.8% of our revenue coming from international markets. During the third quarter of 2019, we experienced
a slowdown in capital spending by a Tier-1 customer in Europe and an unforeseen pause in spending from a
LATAM Tier-1 customer. While shipments to the LATAM customer resumed in the fourth quarter, these delays,
combined with seasonality, resulted in a softer than expected second half of the year. During 2019, we had
three 10% revenue customers geographically diversified with one each in the U.S., Europe and LATAM. Our
domestic revenue growth of 4.2% year-over-year was driven by an increase in sales to RSPs and additional
fiber deployments across all customers. In addition, we saw an increase in sales to a Tier-1 customer with
diversified business among our fiber access and CPE, service provider CPE and services as well as sales
to a Tier-2 customer. Our LATAM Tier-1 customer expanded their FTTx deployments in 2019 with ADTRAN
solutions. In Europe, a Tier-1 customer continued expansion of their vectoring and super-vectoring VDSL2
solutions. We also experienced increases in our service provider CPE business in 2019. Among our customers,
14 ADTRAN 2019 Annual Report
we made progress with our fiber and fiber-extension solutions, including Gfast and PON, while also continuing
to engage various Services & Support opportunities that we expect will contribute in 2020 and beyond. In
addition, we believe we are at the beginning of a significant investment cycle for fiber deployment driven
by technology advancements, regulatory influences and vendor disruption. The transition to next-generation
network architectures is beginning, and we are seeing demand for our next-generation SD-Access solutions. In
the latter part of 2020, we anticipate that payments to service providers under government funding programs
such as the FCC Rural Digital Opportunity Fund will begin and continue into 2021.
We made two acquisitions in 2018, strengthening our position in both the cable/MSOs and connected home
markets. In the first quarter of 2018, we acquired Sumitomo Electric Lightwave Corp.’s North American EPON
business and certain assets for North America and entered into a technology license and original equipment
manufacturer supply agreement with Sumitomo Electric Industries, Ltd. These solutions, combined with our
organic fiber access product portfolio and our distributed access expertise, present new opportunities in the
cable/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.
In addition to classifying our operations into two reportable segments, we report revenue across three
categories of products and services – (1) Access & Aggregation, (2) Subscriber Solutions & Experience (formerly
Customer Devices) and (3) Traditional & Other Products.
Our Access & Aggregation solutions are used by CSPs to connect their network infrastructure to subscribers.
This revenue category includes hardware- and software-based products and services that aggregate and/or
originate access technologies. ADTRAN solutions within this category include a wide array of modular or fixed
platforms designed to deliver the best technology and economy based on subscriber density and environmental
conditions.
Our Subscriber Solutions & Experience portfolio is used by service providers to terminate their infrastructure
at the customers premises while providing an immersive and interactive experience for the subscriber. These
solutions include copper and fiber WAN termination, LAN switching, Wi-Fi access, and cloud software services,
for both residential and business markets.
In alignment with our increased focus on enhancing the customer experience for both business and consumer
broadband customers as well as the addition of SmartRG during 2018, what was previously known as our
Customer Devices category became our Subscriber Solutions & Experience category, as this more accurately
represents this revenue category and our vision moving forward.
Our Traditional & Other Products category generally includes a mix of prior-generation technologies’ products
and services, as well as other products and services that do not fit within the other revenue categories.
Our operating results have fluctuated, and may continue to fluctuate, on a quarterly basis 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 a varying order backlog and limited order flow visibility. Additionally,
backlog levels may vary because of seasonal trends, the timing of customer projects, and other factors that
affect customer order lead times. 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
Financial Results 15
cost reductions, product warranty returns, expediting costs, tariffs and announcements of new products by us or
our competitors. Additionally, maintaining sufficient inventory levels to assure prompt delivery of our products
increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of
this inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient
inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet
customer delivery requirements, which may negatively impact our operating results in a given quarter. During
2019, the Company implemented restructuring plans to realign its expense structure with the reduction in
revenue experienced in recent years and with overall Company objectives. Management assessed the efficiency
of our operations and consolidated locations and personnel, among other things, and has implemented certain
cost savings initiatives, where possible. We expect to see a reduction in our operating expenses, both in the
U.S. and internationally, as a result of our implementation of these restructuring plans.
Our historical financial performance is not necessarily a meaningful indicator of future results, and, in
general, management expects that our financial results may vary from period to period. See Note 19 of Notes
to Consolidated Financial Statements, included in Part II, Item 8 of this report, for additional information on
quarterly results for 2018 and 2019. For a discussion of risks associated with our operating results, see Part I,
Item 1A of this report.
Results of Operations
The following table presents selected financial information derived from our Consolidated Statements of Income
(Loss) expressed as a percentage of sales for the years indicated. Amounts may not foot due to rounding.
Year Ended December 31,
2019
2018
2017
Sales
Network Solutions
Services & Support
Total sales
Cost of sales
Network Solutions
Services & Support
Total cost of sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Asset impairments
Gain on contingency
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 Income Taxes
Income tax (expense) benefit
Net income (loss)
85.9%
14.1
100.0
86.6%
13.4
100.0
81.0%
19.0
100.0
49.7
8.9
58.7
41.3
24.6
23.8
0.7
(0.2)
(7.5)
0.5
(0.1)
2.2
0.3
—
(4.7)
(5.3)
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
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)
(10.0 )%
(3.7 )%
3.6 %
16 ADTRAN 2019 Annual Report
The following discussion and financial information are presented to aid in an understanding of our current
consolidated financial position, changes in financial position, results of operations and cash flows and should
be read in conjunction with the audited Consolidated Financial Statements and notes thereto included herein.
The emphasis of the discussion is a comparison of the years ended December 31, 2019 and December 31, 2018.
For a discussion of a comparison of the years ended December 31, 2018 and December 31, 2017, please refer to
Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.
Comparison of Years Ended December 31, 2019 and December 31, 2018
Sales
Our sales increased 0.1% from $529.3 million for the year ended December 31, 2018 to $530.1 million for the
year ended December 31, 2019. Our Services & Support sales increased $3.8 million compared to 2018 and our
Network Solutions sales decreased $3.0 million versus the prior year. The increase in our 2019 sales was primarily
attributable to an increase in Subscriber Solutions & Experience sales of $18.5 million, partially offset by decreases
in Access & Aggregation sales of $10.0 million and Traditional & Other Products sales of $7.7 million.
Network Solutions sales decreased by 0.7% from $458.2 million in 2018 to $455.2 million in 2019, due primarily
to a decrease in sales of our Access & Aggregation products and Traditional & Other Products. The decrease
in sales of 3.9% of our Access & Aggregation products for 2019 was primarily attributable to decreased FTTN
products, offset by an increase in sales of Gfast DPUs. The increase of 12.1% in 2019 for sales of our Subscriber
Solutions & Experience products was primarily attributable to increased residential CPE and fiber CPE sales,
partially offset by a decrease in sales of SP Business CPE and WiFi access points and infrastructure. 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 5.3% from $71.0 million in 2018 to $74.8 million in 2019. The increase
in sales for 2019 was primarily attributable to an increase in network installation and maintenance services for
Access & Aggregation products and Subscriber Solutions & Experience.
Domestic sales increased 4.2% from $288.8 million in 2018 to $300.9 million in 2019. Our domestic growth
was driven by an increase in sales to the RSP market segment and additional fiber deployments across all
customers. In addition, such growth was driven by an increase in sales to a Tier-1 customer with diversified
business among our fiber access and CPE, service provider CPE and services, as well as increased sales to a
Tier-2 customer.
International sales, which are included in the amounts for the Network Solutions and Services & Support
segments amounts discussed above, decreased 4.7% from $240.4 million for the year ended December 31,
2018 to $229.2 for the year ended December 31, 2019. International sales, as a percentage of total sales,
decreased from 45.4% for the year ended December 31, 2018 to 43.2% for the year ended December 31, 2019.
The decrease in international sales for 2019 was primarily attributable to the slowdown in shipments to two
international Tier-1 customers.
Our international revenue is largely focused on broadband infrastructure and is affected by the decisions of
our customers as to timing for installation of new technologies, expansion of their networks and/or network
upgrades. Our international customers must make these decisions in the regulatory and political environment
in which they operate – both nationally and in some instances, regionally – whether of a multi-country region or
a more local region within a country. The competitive landscape in certain international markets is also affected
by the increased presence of Asian manufacturers that seek to compete aggressively on price. Our revenue
and operating income in some international markets can be negatively impacted by a strengthening U.S. dollar.
Consequently, while we expect the global trend towards deployment of more robust broadband speeds and
access to continue creating additional market opportunities for us, the factors described above may result in
negative pressure on revenue and operating income.
Financial Results 17
Cost of Sales
As a percentage of sales, cost of sales decreased from 61.5% for the year ended December 31, 2018 to 58.7%
for the year ended December 31, 2019. The decrease was primarily attributable to regional revenue shifts,
changes in customer and product mix, changes in services and support mix and a decrease in labor expense as
a result of restructuring programs which were initiated in 2018 and continued throughout 2019.
Network Solutions cost of sales, as a percent of that segment’s sales, decreased from 60.9% of sales in 2018
to 57.9% of sales in 2019. The decrease in Network Solutions cost of sales as a percentage of that segment’s
sales was primarily attributable to regional revenue shifts, changes in customer and product mix and a decrease
in labor expense due to restructuring programs which were initiated in 2018 and continued throughout 2019,
offset by an increase in freight and shipping charges.
An important part of our strategy is to reduce the cost of each succeeding generation of product and then lower
the product’s selling price based on the cost savings achieved in order to gain market share and/or improve
gross margins. This may cause variations in our gross profit percentage due to timing differences between the
recognition of cost reductions and the lowering of product selling prices.
Services & Support cost of sales, as a percent of that segment’s sales, decreased from 65.8% of sales in 2018
to 63.1% of sales in 2019. The decrease in Services & Support cost of sales as a percentage of that segment’s
sales in 2019 was primarily attributable to lower fixed personnel costs due to restructuring programs which
were initiated in 2018 and continued throughout 2019, changes in customer mix, changes in services support
mix and an increase in volume.
Our Services & Support revenue is comprised of network planning and implementation, maintenance, support
and cloud-based management services, with network planning and implementation being the largest and
fastest growing component in the long-term. Compared to our other services, such as maintenance, support
and cloud-based management services, our network planning and implementation services typically utilize
a higher percentage of internal and subcontracted engineers, professionals and contractors to perform the
work for customers. The additional costs incurred to perform these infrastructure and labor-intensive services
inherently result in lower average gross margins as compared to maintenance and support services.
As our network planning and implementation revenue grew to become the largest component of our Services
& Support segment business, our Services & Support segment gross margins decreased versus those reported
when maintenance and support comprised the majority of the business. Further, because the growth in our
network planning and implementation services has resulted in our Services & Support segment revenue
comprising a larger percentage of our overall revenue, and because our Services & Support segment gross
margins are generally below those of the Network Solutions segment, our overall corporate gross margins may
decline as that business continues 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 as a percentage of sales increased from 23.5% for the year
ended December 31, 2018 to 24.6% for the year ended December 31, 2019. 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.
Selling, general and administrative expenses increased by 4.7% from $124.4 million for the year ended
December 31, 2018 to $130.3 million for the year ended December 31, 2019. 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 increase in selling, general and
administrative expenses was primarily attributable to deferred compensation related costs, incremental
expenses as a result of the SmartRG acquisition, IP litigation and other legal related costs, partially offset by
decreases in labor expense and use tax expense.
18 ADTRAN 2019 Annual Report
Research and Development Expenses
Research and development expenses as a percentage of sales increased from 23.5% for the year ended
December 31, 2018 to 23.8% for the year ended December 31, 2019. 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.
Research and development expenses increased by 1.3% from $124.5 million for the year ended December
31, 2018 to $126.2 million for the year ended December 31, 2019. The increase in research and development
expenses was primarily attributable to increases in incremental expenses as a result of the SmartRG acquisition
and lease expense offset by a decrease in labor expense, certain material engineering costs and contract
services.
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.
Asset Impairments
Asset impairments, which were $3.9 million for the year ended December 31, 2019, relate to the abandonment of
certain information technology implementation projects which we had previously capitalized costs for these projects.
There were no asset impairments recognized during the year ended December 31, 2018. See Note 1 and Note 8 of
Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.
Gain on Contingency
Gain on contingency, which was $1.2 million for the year ended December 31, 2019, relates to the reversal of
contingent liabilities which were initially recognized upon the acquisition of SmartRG in the fourth quarter of 2018.
See Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional
information. There was no gain on contingency recognized during the year ended December 31, 2018.
Interest and Dividend Income
Interest and dividend income decreased by 31.3% from $4.0 million for the year ended December 31, 2018 to
$2.8 million for the year ended December 31, 2019. The decrease in interest and dividend income was primarily
attributable to a decrease in interest income. Our investments increased from $112.1 million as of December 31,
2018 to $127.7 million as of December 31, 2019.
Interest Expense
Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.5 million for
the years ended December 31, 2019 and 2018, 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 (Loss)
We recognized a net investment loss of $4.0 million for the year ended December 31, 2018 and a net investment
gain of $11.4 million for the year ended December 31, 2019. The fluctuation in our net investment gain was
primarily attributable to changes in fair value of equity securities recognized during the period. 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 Part II, Item 8 of this report for additional information.
Financial Results 19
Other Income (Expense), net
Other income (expense), net, which is comprised primarily of miscellaneous income, gains and losses on
foreign currency transactions, net periodic pension costs, investment account management fees and gains and
losses on foreign exchange forward contracts, increased 16.5% from income of $1.3 million for the year ended
December 31, 2018 to income of $1.5 million for the year ended December 31, 2019. The change was primarily
attributable to a gain on a life insurance recovery recognized in 2019 partially offset by losses on foreign
exchange contracts and transactions in 2019 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. in March 2018. See Note 2 of Notes to Consolidated Financial Statements included in
Part II, Item 8 of this report for additional information.
Income Tax (Expense) Benefit
Our effective tax rate increased from a benefit of 42.0%, excluding the tax effect of the bargain purchase
gain, for the year ended December 31, 2018 to an expense of (113.9%) for the year ended December 31, 2019.
The increase in the effective tax rate between the two periods was primarily driven by the establishment of a
valuation allowance against our domestic deferred tax assets in the amount of $42.8 million during the year
ended December 31, 2019, offset by a 15.5% rate reduction related to the generation of federal research and
development credits, and a 16.7% rate reduction for the generation of foreign tax credits. See Note 13 of the
Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.
Net Loss
As a result of the above factors, our net loss increased from $19.3 million for the year ended December 31, 2018
to a net loss of $53.0 million for the year ended December 31, 2019. As a percentage of sales, net loss increased
from 3.7% for the year ended December 31, 2018 to 10.0% for the year ended December 31, 2019.
Liquidity and Capital Resources
Liquidity
We have historically and we currently expect to finance our ongoing business with existing cash and cash
flow from operations. We have used, and expect to continue to use, existing cash and 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, expansion of our sales and marketing activities and capital expenditures. 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.
As of December 31, 2019, cash on hand was $73.8 million and short-term investments were $33.2 million,
which resulted in available short-term liquidity of $107.0 million, of which $52.3 million was held by our foreign
subsidiaries. As of December 31, 2018, cash on hand was $105.5 million and short-term investments were
$3.2 million, which resulted in available short-term liquidity of $108.7 million, of which $87.1 million was held by
our foreign subsidiaries. The decrease in short-term liquidity from December 31, 2018 to December 31, 2019
was primarily attributable to the use of cash for operating, investing and financing activities and income tax
payments, offset by the reclassification of our certificate of deposit from long-term to short-term investments.
Operating Activities
Our working capital, which consists of current assets less current liabilities, decreased 12.6% from $237.4 million
as of December 31, 2018 to $207.6 million as of December 31, 2019. The current ratio, defined as current assets
divided by current liabilities, decreased from 3.01 as of December 31, 2018 to 2.84 as of December 31, 2019.
The decrease in our working capital and current ratio was primarily attributable to a decrease in cash and cash
20 ADTRAN 2019 Annual Report
equivalents, net accounts receivable and other receivables as described below. The quick ratio, defined as
cash and cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities,
decreased from 1.76 as of December 31, 2018 to 1.75 as of December 31, 2019. The decrease in the quick
ratio was primarily attributable to a decrease in cash and cash equivalents and net accounts receivable. This
decrease was offset by an increase in short-term investments.
Net accounts receivable decreased 8.91% from $99.4 million as of December 31, 2018 to $90.5 million as of
December 31, 2019. Our allowance for doubtful accounts was $0.1 million as of December 31, 2018 and $38
thousand as of December 31, 2019. Quarterly accounts receivable DSO increased from 65 days as of December
31, 2018 to 72 days as of December 31, 2019. The decrease in net accounts receivable and increase in DSO was
attributable to the timing of sales in the fourth quarter, customer specific payment terms and other collections
during the quarter.
Other receivables decreased 54.9% from $36.7 million as of December 31, 2018 to $16.6 million as of December
31, 2019. The decrease in other receivables was primarily attributable to a decrease in current lease payments
receivable related to our sales-type leases, income tax receivables and purchasing shipments.
Annual inventory turnover increased from 2.93 turns as of December 31, 2018 to 3.14 turns as of December 31,
2019. Inventory decreased 1.6% from $99.8 million as of December 31, 2018 to $98.3 million as of December
31, 2019. 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 excess inventory.
Accounts payable decreased 25.3% from $60.1 million as of December 31, 2018 to $44.9 million as of December
31, 2019. Accounts payable will fluctuate due to variations in the timing of the receipt of supplies, inventory and
services and our subsequent payments for these purchases.
Investing Activities
Capital expenditures totaled approximately $9.5 million, $8.1 million and $14.7 million for the years ended
December 31, 2019, 2018 and 2017, respectively. These expenditures were primarily used to purchase computer
hardware, software, manufacturing and test equipment and for building improvements.
Our combined short-term and long-term investments increased $15.7 million from $112.1 million as of December
31, 2018 to $127.7 million as of December 31, 2019. This increase reflects the increase in fair market value of our
equity investments.
We invest all available cash not required for immediate use in operations primarily in securities that we believe
bear minimal risk of loss. See Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of
this report for additional information. As of December 31, 2019, our corporate bonds, municipal fixed-rate bonds,
asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, and foreign government bonds
were classified as available-for-sale and had a combined duration of 1.71 years with an average credit rating of
AA. 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 $108.8 million as of December 31, 2018 to $94.5 million as
of December 31, 2019. Long-term investments as of December 31, 2018 included an investment in a certificate
of deposit of $25.6 million, which served as collateral for our revenue bonds. This certificate of deposit was
included in short-term investments as of December 31, 2019, as these bonds matured on January 1, 2020,
and were repaid in full on January 2, 2020. We also have investments in various marketable equity securities
classified as long-term investments with a fair market value of $35.8 million and $27.0 million, as of December
31, 2019 and December 31, 2018, respectively. Long-term investments as of December 31, 2019 and 2018 also
included $21.7 million and $18.3 million, respectively, related to our deferred compensation plan, and $0.3
million and $0.4 million, respectively, of other investments, consisting of interests in two private equity funds.
No businesses were acquired during the year ended December 31, 2019. Acquisition of businesses, net of cash
acquired, totaled $22.0 million for the year ended December 31, 2018. See Note 2 of Notes to Consolidated
Financial Statements included in Part II, Item 8 of this report for additional information.
Financial Results 21
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
(the “Taxable Revenue Bonds”) and loaned the proceeds from the sale of the Taxable Revenue Bonds to
ADTRAN. Further advances on the Taxable Revenue Bonds were made by the Authority, bringing the total
amount outstanding to $50.0 million. The bonds matured on January 1, 2020, and the current outstanding
balance of $24.6 million was repaid in full on January 2, 2020. We were required to make payments to the
Authority in amounts necessary to pay the interest on the Taxable Revenue Bonds which totaled $1.0 million,
$1.1 million and $1.1 million, respectively, for the years ended December 31, 2019, 2018 and 2017. See Note 12 of
Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.
Dividends
During 2019, 2018 and 2017, we paid shareholder dividends totaling $17.2 million, $17.3 million and $17.4 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 2019, 2018 and 2017.
DIVIDENDS PER COMMON SHARE
2019
2018
2017
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 ended December 31, 2019, 2018
and 2017, we repurchased 13 thousand shares, 1.0 million shares and 0.9 million shares, respectively, for $0.2
million, $15.5 million and $17.3 million, respectively, at an average price of $14.06, $15.52 and $20.27 per share,
respectively. We currently have authorization to repurchase an additional 2.5 million shares of our common
stock under the current authorization of up to 5.0 million shares.
Stock Option Exercises
To accommodate employee stock option exercises, we issued 34 thousand shares of treasury stock for $0.5
million during the year ended December 31, 2019, 0.1 million shares of treasury stock for $1.5 million during the
year ended December 31, 2018 and 0.7 million shares of treasury stock for $13.4 million during the year ended
December 31, 2017.
Employee Pension Plan
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.
22 ADTRAN 2019 Annual Report
Our defined benefit plan assets consist of a balanced portfolio of equity funds, bond funds, real estate funds and
managed futures. 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. At December 31, 2019, the estimated fair market value of our defined benefit pension plans assets
increased to $28.0 million from $24.2 million at December 31, 2018.
The defined benefit pension plan is accounted for on an actuarial basis, which requires the use 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. 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 projected benefit obligation for our defined
benefit pension plans was $43.9 million and $37.2 million as of December 31, 2019 and 2018, respectively.
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,
2019, 2018 and 2017 was $3.2 million, $6.1 million and $(0.2) million, respectively.
Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). 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 $0.8 million will be amortized from accumulated other
comprehensive income (loss) into net periodic pension cost in 2020 for the net actuarial loss. The net actuarial
loss recognized in accumulated other comprehensive income (loss) as of December 2019 and 2018 was $(13.0)
million and $(11.3) million, respectively.
See Note 14 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional
information.
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.
Financial Results 23
CONTRACTUAL OBLIGATIONS
We have various contractual obligations and commercial commitments. The following table sets forth the annual
payments we are required to make under contractual cash obligations and other commercial commitments as
of December 31, 2019:
(In thousands)
Bonds payable (1)
Purchase obligations (2)
Operating lease obligations (3)
Total
2020
$24,600
$24,600
99,210
8,879
98,324
2021
$ —
759
2,856
2,412
1,705
1,160
2022
2023
2024
$ —
83
$ —
28
After
2024
$ —
—
264
$ —
16
482
Totals
$132,689
$125,780
$3,171
$1,788
$1,188
$498
$264
(1) As of December 31, 2019, we were required to make payments necessary to pay the interest on the Taxable
Revenue Bonds, which were outstanding in the aggregate principal amount of $24.6 million as of December 31,
2019. The bonds had an interest rate of 2% per annum and matured on January 1, 2020. Included in short-term
investments as of December 31, 2019 was a certificate of deposit of $25.6 million, which served a collateral deposit
against the principal amount of the bonds. See Note 12 of Notes to Consolidated Financial Statements included in
Part II, Item 8 of this report for additional information.
(2) Primarily relates to open purchase orders to our contract manufacturers, component suppliers, service partners
and other vendors.
(3) Primarily relates 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, 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.
Certain contracts, customers and/or jurisdictions in which we do business require us to provide various
guarantees of performance such as bid bonds, performance bonds and customs bonds. As of December 31,
2019, we had commitments related to these bonds totaling $9.3 million, which expire at various dates through
August 2024. Although the triggering events vary from contract to contract, in general we would only be
liable for the amount of these guarantees in the event of default in our performance under each contract, the
probability of which we believe is remote.
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 13 of Notes to Consolidated
Financial Statements included in Part II, 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. Several accounting policies, as described
in Note 1 of Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report, require
material subjective or complex judgment and have a significant impact on our financial condition and results
of operations, as applicable. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Consolidated Financial Statements:
24 ADTRAN 2019 Annual Report
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.
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, 2019, 2018 and
2017 we recognized revenue of $1.7 million, $13.7 million and $16.5 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.
Financial Results 25
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 Sheets. 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. Standard costs for material, labor, and manufacturing overhead are used to value inventory
and are updated at least a quarterly. Any variances are expensed in the current period, therefore, our inventory
costs approximate actual costs at the end of each reporting period. We establish reserves for estimated
excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated
net realizable value of the inventory based on estimated reserve percentages, which consider historical usage,
known trends, inventory age and marketing conditions. If actual trends and 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 $34.1 million and $30.0 million at December 31, 2019 and 2018,
respectively. Inventory disposals charged against the reserve were $1.8 million, $0.4 million and $8.3 million for
the years ended December 31, 2019, 2018 and 2017, 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.
26 ADTRAN 2019 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 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 by-pass a qualitative assessment 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
and, in turn, performed a step-1 analysis of goodwill. Based on the results of our step-1 analysis, no impairment
charges on goodwill were recognized during the years ended December 31, 2019, 2018 and 2017.
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. We continually review the adequacy of our valuation allowance and recognize 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 realized in accordance with ASC 740, Income Taxes (ASC 740). Due to our recent decrease
in revenue and profitability for 2019, and all other positive and negative objective evidence considered as part
of our analysis, our ability to consider other subjective evidence such as projections for future growth is limited
when evaluating whether our deferred tax assets will be realized. As such, the Company is no longer able to
conclude that it is more likely than not that our domestic deferred tax assets will be realized and a valuation
allowance against our Domestic deferred tax assets was established in the third quarter of 2019. The amount
of the deferred tax assets considered realizable, however, could be adjusted in future periods in the event
sufficient evidence is present to support a conclusion that it is more likely than not that all or a portion of our
domestic deferred tax assets will be realized.
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 27
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 $8.4 million and $8.6 million at December 31, 2019
and 2018, 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 $15.9 million and
$13.1 million at December 31, 2019 and 2018, respectively. This liability is included in pension liability in the
accompanying Consolidated Balance Sheets.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 1 of Notes to Consolidated Financial
Statements included in Part II, Item 8 of this report for additional information.
Subsequent Events
On January 2, 2020, we paid off the outstanding balance of $24.6 million of the Taxable Revenue Bonds upon
their maturity. We used a certificate of deposit which was held as collateral to repay the outstanding balance.
On February 5, 2020, 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 20, 2020. The quarterly dividend payment will
be paid on March 5, 2020 in the aggregate amount of approximately $4.3 million. In July 2003, our Board of
Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of
dividends and adequate levels of Company liquidity.
28 ADTRAN 2019 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, 2019, $71.6 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, 2019, approximately $39.0 million of our cash and investments may be directly affected by
changes in interest rates. As of December 31, 2019, we held $3.7 million of cash and variable-rate investments
where a change in interest rates would impact our interest income. A hypothetical 50 basis points (“bps”)
decline in interest rates, assuming all other variables remain constant, as of December 31, 2019 would reduce
annualized interest income on our cash and investments by approximately $19 thousand. In addition, we held
$35.3 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, assuming all other variables remain constant, as of December 31,
2019 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, and our Australian subsidiary, whose functional currency is the Australian dollar. Our revenue is primarily
denominated in the respective functional currency of the subsidiary and paid in that subsidiary’s functional
currency or certain other local currency, our global supply chain predominately invoices us in the respective
functional currency of the subsidiary and is paid in U.S. dollars and some of our operating expenses are invoiced
and paid in certain local currencies (approximately 13% of total operating expense for the year ended December
31, 2019). Therefore, our revenues, gross margins, operating expense and operating income are all subject to
foreign currency fluctuations. As a result, changes in currency exchange rates could cause variations in our
operating income.
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 $1.2 million if the
U.S. dollar weakened or strengthened 10% against the billing currencies. This change represents a decrease
in the amount of hypothetical gain or loss compared to prior periods and is mainly due to a decrease in U.S.
dollar-denominated billings in a non-U.S. dollar denominated subsidiary. Although we do not currently hold any
derivative instruments, any gain or loss would be partially mitigated by any derivative instruments held.
Financial Results 29
As of December 31, 2019, we had certain material contracts subject to currency revaluation, including accounts
receivable, accounts payable and lease liabilities denominated in foreign currencies. As of December 31, 2019,
we did not have any 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, 2019, see Notes 5 and 6 of Notes to Consolidated Financial Statements included
in Part II, Item 8 of this report.
30 ADTRAN 2019 Annual Report
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, 2019 and 2018, and the related consolidated statements of income (loss),
comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain,
in all material respects, effective internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material
weakness in internal control over financial reporting existed as of that date related to ineffective controls over
the Company’s determination of its estimated reserve for excess and obsolete inventory.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. The material weakness referred to above
is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.
We considered this material weakness in determining the nature, timing, and extent of audit tests applied
in our audit of the 2019 consolidated financial statements, and our opinion regarding the effectiveness of
the Company’s internal control over financial reporting does not affect our opinion on those consolidated
financial statements.
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 management’s report referred to above. 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.
Financial Results 31
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.
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that
(i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved
our especially challenging, subjective, or complex judgments. The communication of critical audit matters does
not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Excess and Obsolete Inventory Reserve
As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated net inventory
and inventory reserves as of December 31, 2019 were $98.3 million and $34.1 million, respectively. Management
establishes reserves for estimated excess and obsolete inventory equal to the difference between the cost of
the inventory and the estimated net realizable value of the inventory based on estimated reserve percentages,
which consider historical usage, known trends, inventory age, and market conditions.
32 ADTRAN 2019 Annual Report
The principal considerations for our determination that performing procedures relating to the excess and obsolete
inventory reserve is a critical audit matter are there was significant judgment by management in estimating the
excess and obsolete inventory reserve, which in turn led to a high degree of auditor judgment, subjectivity
and effort in performing procedures and evaluating the reasonableness of the significant assumptions used
in developing the reserve, including the estimated reserve percentages. As described in the “Opinions on the
Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified
as of December 31, 2019 related to ineffective controls over the Company’s determination of its estimated
reserve for excess and obsolete inventory.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included, among
others, testing management’s process for developing the excess and obsolete inventory reserve; evaluating
the appropriateness of the approach; testing the completeness and accuracy of underlying data used in the
approach, including historical usage and inventory age; and evaluating the reasonableness of the estimated
reserve percentages used by management to determine the excess and obsolete inventory reserve. Evaluating
the reasonableness of the estimated reserve percentages involved assessing whether they were consistent
with the historical data and evidence obtained in other areas of the audit.
PricewaterhouseCoopers LLP
Birmingham, Alabama
February 25, 2020
We have served as the Company’s auditor since 1986.
Financial Results 33
Financial Statements
ADTRAN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
December 31, 2019 and 2018
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts of $38
and $128 at December 31, 2019 and 2018, 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
Bonds payable
Unearned revenue
Accrued expenses and other current liabilities
Accrued wages and benefits
Income tax payable, net
Total Current Liabilities
Non-current unearned revenue
Pension liability
Deferred compensation liability
Other non-current liabilities
Bonds payable
Total Liabilities
Commitments and contingencies (see Note 16)
Stockholders' Equity
Common stock, par value $0.01 per share; 200,000 shares authorized;
79,652 shares issued and 48,020 shares outstanding as of December 31, 2019 and
779,652 shares issued and 47,751 shares outstanding as of December 31, 2018
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Less treasury stock at cost: 31,638 and 31,901 shares as of December 31, 2019 and 2018,
respectively
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See accompanying notes to consolidated financial statements.
2019
2018
$73,773
33,243
$105,504
3,246
90,531
99,385
16,566
98,305
7,892
320,310
73,708
7,561
6,968
27,821
14,261
94,489
$545,118
36,699
99,848
10,744
355,426
80,635
37,187
7,106
33,183
5,668
108,822
$628,027
$44,870
24,600
11,963
13,876
13,890
3,512
112,711
6,012
15,886
21,698
8,385
—
164,692
$60,054
1,000
17,940
11,746
14,752
12,518
118,010
5,296
13,086
18,256
2,500
24,600
181,748
797
274,632
(16,417)
806,702
797
267,670
(14,416)
883,975
(685,288)
(691,747)
380,426
$545,118
446,279
$628,027
34 ADTRAN 2019 Annual Report
ADTRAN, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
Years ended December 31, 2019, 2018 and 2017
Sales
Network Solutions
Services & Support
Total Sales
Cost of Sales
Network Solutions
Services & Support
Total Cost of Sales
Gross Profit
Selling, general and administrative expenses
Research and development expenses
Asset impairments
Gain on contingency
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 Income Taxes
Income tax (expense) benefit
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.
2019
2018
2017
$455,226
$458,232
$540,396
74,835
530,061
263,677
47,217
310,894
219,167
130,288
126,200
3,872
(1,230)
71,045
529,277
278,929
46,783
325,712
203,565
124,440
124,547
—
—
(39,963)
(45,422)
2,765
(511)
11,434
1,498
—
(24,777)
(28,205)
4,026
(533)
(4,050)
1,286
11,322
(33,371)
14,029
$(52,982)
$(19,342)
47,836
47,836
$(1.11)
$(1.11)
47,880
47,880
$(0.40)
$(0.40)
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
Financial Results 35
ADTRAN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Years ended December 31, 2019, 2018 and 2017
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
2019
2018
2017
$(52,982)
$(19,342)
$23,840
279
(1,185)
(1,480)
(2,386)
(3,130)
(3,755)
(4,236)
(11,121)
2,163
731
5,999
8,893
Comprehensive Income (Loss), net of tax
$(55,368)
$(30,463)
$32,733
See accompanying notes to consolidated financial statements.
36 ADTRAN 2019 Annual Report
ADTRAN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Years ended December 31, 2019, 2018 and 2017
C
o
m
p
r
e
h
e
n
s
v
e
i
A
c
c
u
m
u
a
t
e
d
l
O
t
h
e
r
T
r
e
a
s
u
r
y
t
S
o
c
k
L
o
s
s
E
q
u
i
t
y
E
a
r
n
n
g
s
i
R
e
t
a
n
e
d
i
t
S
o
c
k
h
o
d
e
r
s
l
’
T
o
t
a
l
A
d
d
i
t
i
o
n
a
l
i
P
a
d
-
I
n
C
a
p
i
t
a
l
C
o
m
m
o
n
S
h
a
r
e
s
C
o
m
m
o
n
t
S
o
c
k
Balance as of December 31, 2016
Net income
Other comprehensive income,
net of tax
Dividend payments ($0.09 per share)
Dividends accrued on unvested
restricted stock units
Stock options exercised
PSUs, RSUs and restricted
stock vested
Purchase of treasury stock
Stock-based compensation expense
ASU 2016-09 adoption
Balance as of December 31, 2017
Net loss
ASU 2014-09 adoption
ASU 2016-01 adoption
Other comprehensive loss, net of tax
Dividend payments ($0.09 per share)
Dividends accrued on unvested
restricted stock units
Stock options exercised
PSUs, RSUs and restricted
stock vested
Purchase of treasury stock
Stock-based compensation expense
Balance as of December 31, 2018
Net loss
ASU 2016-02 adoption (see Note 1)
ASU 2018-02 adoption (see Note 1)
Other comprehensive loss, net of tax
Dividend payments ($0.09 per share)
Dividends accrued on unvested
restricted stock units
Stock options exercised
PSUs, RSUs and restricted
stock vested
Purchase of treasury stock
Stock-based compensation expense
Balance as of December 31, 2019
79,652 $797 $252,957 $921,942 $(683,991) $(12,188) $479,517
23,840
23,840
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(17,368)
—
—
8,893
8,893
— (17,368)
(37)
(2,827)
—
16,239
—
—
(37)
13,412
—
—
—
—
—
—
—
—
(3,257)
—
—
(115)
—
(441)
2,816
—
— (17,348)
(17,348)
—
7,433
—
—
7,433
10
—
—
125
497,911
(3,295)
79,652 797 260,515 922,178 (682,284)
— (19,342)
—
—
—
278
—
—
3,220
—
—
—
(11,121)
— (11,121)
—
— (17,267)
—
—
(19,342)
278
3,220
—
(17,267)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7)
(603)
—
2,086
—
—
(7)
1,483
—
—
—
—
—
—
—
—
7,155
(4,482)
—
—
79,652 797 267,670 883,975
(52,982)
4
(385)
—
(17,212)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,983
(15,532)
—
(691,747)
—
—
—
—
—
—
(499)
— (15,532)
7,155
—
(14,416) 446,279
— (52,982)
4
—
—
385
(2,386)
(2,386)
— (17,212)
—
—
—
—
—
—
(10)
(208)
—
734
—
—
(10)
526
—
—
—
—
—
—
(571)
(6,480)
(184)
—
6,962
—
79,652 $797 $274,632 $806,702 $(685,288) $(16,417) $380,426
—
—
6,962
5,909
(184)
—
—
—
—
See accompanying notes to consolidated financial statements.
Financial Results 37
ADTRAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, 2019, 2018 and 2017
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
$(52,982)
$(19,342)
$23,840
2019
2018
2017
Depreciation and amortization
Asset impairments
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
Gain on contingency payment
Gain on life insurance proceeds
Stock-based compensation expense
Deferred income taxes
Change in operating assets and liabilities:
Accounts receivable, net
Other receivables
Inventory, net
Prepaid expenses and other assets
Accounts payable, net
Accrued expenses and other liabilities
Income taxes payable
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
17,771
3,872
(100)
(11,434)
67
—
(1,230)
(1,000)
6,962
30,070
8,282
20,046
1,252
2,749
(13,494)
(4,598)
(8,705)
(2,472)
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
55,454
15,692
—
425
(4,685)
(145)
—
—
—
7,433
14,073
(49,103)
(10,222)
(15,518)
(4,830)
(17,742)
(5,455)
3,858
(42,379)
(9,494)
—
(8,110)
—
(14,720)
151
Proceeds from sales and maturities of available-for-sale investments
47,268
153,649
173,752
Purchases of available-for-sale investments
Life insurance proceeds received
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
(48,578)
1,000
13
(9,791)
526
(184)
(17,212)
(1,000)
(17,870)
(30,133)
(1,598)
105,504
$73,773
(123,209)
—
(22,045)
285
1,483
(15,532)
(17,267)
(1,100)
(32,416)
23,323
(4,252)
86,433
$105,504
(93,141)
—
—
66,042
13,412
(17,348)
(17,368)
(1,100)
(22,404)
1,259
5,279
79,895
$86,433
$512
$9,357
$534
$4,104
$555
$2,988
Purchases of property, plant and equipment included in accounts payable
Contingent payment
$90
—
$62
$1,230
$408
$ —
See accompanying notes to consolidated financial statements.
38 ADTRAN 2019 Annual Report
Notes to Consolidated Financial Statements
Note 1 – Nature of Business
ADTRAN, Inc. (“ADTRAN” or the “Company”) is a leading global provider of networking and communications
solutions. Our vision is to enable a fully connected world where the power to communicate is available to
everyone, everywhere. Our unique approach, unmatched industry expertise and innovative solutions enable
us to address almost any customer need. Our products and services are utilized by a diverse global customer
base of network operators that range from those having national or regional reach, operating as telephone or
cable television network operators, to alternative network providers such as municipalities or utilities, as well as
managed service providers who serve small- and medium-sized businesses and distributed enterprises.
Principles of Consolidation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting
principles generally accepted in the U.S. (“U.S. GAAP”) and include the financial position, results of operations,
comprehensive income (loss), changes in equity and cash flows of 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 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 expenses during
the reporting period. Our more significant estimates include excess and obsolete 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, assessment of goodwill and other intangibles for impairment, 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.
Correction of Immaterial Misstatement
During the three months ended June 30, 2019, the Company determined that there was an immaterial misstatement
of its excess and obsolete inventory reserves in its previously issued annual and interim financial statements. The
Company corrected this misstatement by recognizing a $0.8 million out-of-period adjustment during the three
months ended June 30, 2019, which increased its excess and obsolete inventory reserves and cost of goods
sold for the period. For the six months ended June 30, 2019, the out-of-period adjustment was a cumulative $0.2
million reduction in the Company’s excess and obsolete inventory reserves and cost of goods sold.
Summary of Significant Accounting Policies
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, 2019, $71.6 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 Results 39
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 $24.6 million, which
was its fair value as of December 31, 2019.
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 recorded any losses relating to variable rate demand notes.
Long-term investments is comprised of 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 other income (expense). See Note 5 for additional
information.
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. As of
December 31, 2019, single customers comprising more than 10% of our total accounts receivable balance
included four customers, which accounted for 53.2% of our total accounts receivable. As of December 31, 2018,
single customers comprising more than 10% of our total accounts receivable balance included two customers,
which accounted for 36.9% 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 impacting these customers 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 $38 thousand and $0.1 million as of December 31, 2019 and December 31, 2018, respectively.
Inventory
Inventory is carried at the lower of cost and estimated 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 and are updated at least quarterly. We establish reserves for estimated excess and obsolete inventory
equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory
based on estimated reserve percentages, which consider historical usage, known trends, inventory age and
market conditions. When we dispose of excess and obsolete inventories, the related disposals are charged
against the inventory reserve. See Note 7 for additional information.
40 ADTRAN 2019 Annual Report
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 (loss). See Note
8 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 11 for
additional information.
Impairment of Long-Lived Assets and Intangibles
Long-lived assets used in operations and intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the
undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value.
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. During the year ended December 31, 2019, we recognized an
impairment loss of approximately $3.9 million related to the abandonment of certain information technology
implementation projects which we had previously capitalized expenses related to these projects. There were
no impairment losses for long-lived assets during the years ended December 31, 2018 or 2017, or for intangible
assets recognized during the years ended December 31, 2019, 2018 or 2017.
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 by-pass a qualitative assessment 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
and, in turn, performed a step-1 analysis of goodwill. Based on the results of our step-1 analysis, no impairment
charges on goodwill were recognized during the years ended December 31, 2019, 2018 and 2017.
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. 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 $8.4 million and $8.6 million as of December 31, 2019 and
2018, 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.
Financial Results 41
A summary of warranty expense and write-off activity for the years ended December 31, 2019, 2018 and 2017
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
2019
$8,623
4,569
(4,798)
$8,394
2018
$9,724
7,392
(8,493)
$8,623
2017
$8,548
6,951
(5,775)
$9,724
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 $15.9 million and $13.1 million as of
December 31, 2019 and 2018, respectively.
Stock-Based Compensation
We have two 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. Costs related to these
awards are recognized over their vesting periods. 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 and therefore are measured at fair value on their grant date.
Stock-based compensation expense recognized for the years ended December 31, 2019, 2018 and 2017
was approximately $7.0 million, $7.2 million and $7.4 million, respectively. As of December 31, 2019, total
unrecognized compensation cost related to non-vested stock options, PSUs, RSUs and restricted stock was
approximately $17.2 million, which is expected to be recognized over an average remaining recognition period
of 3.0 years. See Note 4 for additional information.
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 $126.2 million,
$124.5 million and $130.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
42 ADTRAN 2019 Annual Report
Other Comprehensive Income (Loss)
The following table presents changes in accumulated other comprehensive income (loss), net of tax, by
components of accumulated other comprehensive income (loss) for the years ended December 31, 2019 2018
and 2017:
S
e
c
u
r
i
t
i
e
s
(In thousands)
Balance at December 31, 2016
Other comprehensive income
before reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Balance at December 31, 2017
Other comprehensive income loss
before reclassifications
Amounts reclassified to retained earnings(1)
Amounts reclassified from accumulated
other comprehensive loss
Balance at December 31, 2018
Other comprehensive income loss
before reclassifications
Amounts reclassified to retained earnings(1)
Amounts reclassified from accumulated
other comprehensive loss
A
v
a
i
l
l
a
b
e
-
f
o
r
-
S
a
e
l
U
n
r
e
a
l
i
z
e
d
G
a
n
s
i
l
F
o
w
H
e
d
g
e
s
(
L
o
s
s
e
s
)
o
n
C
a
s
h
U
n
r
e
a
l
i
z
e
d
G
a
n
s
i
j
A
d
u
s
t
m
e
n
t
s
B
e
n
e
fi
t
l
P
a
n
D
e
fi
n
e
d
j
A
d
u
s
t
m
e
n
t
s
C
u
r
r
e
n
c
y
F
o
r
e
g
n
i
(
L
o
s
s
e
s
)
o
n
A
S
U
2
0
1
8
-
0
2
A
d
o
p
t
i
o
n
2
(
)
T
o
t
a
l
$ — $(5,017)
$(7,575)
$ — $(12,188)
$404
5,020
(619)
451
5,999
(2,857)
619
280
—
—
—
—
—
—
—
10,851
(1,958)
(3,295)
(7,441)
(3,220)
(460)
(4,286)
(1,576)
(3,890)
(4,236)
—
135
—
—
(8,041)
(5,812)
— (14,416)
(1,717)
(1,480)
—
(2,624)
—
532
—
—
385
—
(385)
(238)
2,567
685
(3,220)
(595)
(563)
573
—
(294)
—
—
—
—
—
—
—
—
Balance at December 31, 2019
$(284)
$ — $(9,226)
$(7,292)
$385 $(16,417)
(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 below for more information.
(2) With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of
2017 were reclassified to retained earnings. See Note 13 for additional information.
Financial Results 43
The following tables present the details of reclassifications out of accumulated other comprehensive income
(loss) for the years ended December 31, 2019, 2018 and 2017:
(In thousands)
Details about Accumulated Other
Comprehensive Loss Components
Unrealized gains (losses) 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 benefit
Total reclassifications for the period, net of tax
Amount Reclassified
from Accumulated
Other Comprehensive
Loss
$397
(771) (1)
(374)
136
$(238)
2019
Affected Line Item
in the Statement
Where Net Income
Is Presented
Net investment gain (loss)
(1) Included in the computation of net periodic pension cost. See Note 14 for additional information.
(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
Loss
Affected Line Item in the
Statement Where Net
Income
Is Presented
2018
Net investment gain (loss)
$804
(196) (1)
608
(148)
$460
(1) Included in the computation of net periodic pension cost. See Note 14 for additional information.
(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
Loss
Affected Line Item in the
Statement Where Net
Income
Is Presented
2017
$4,864
Net investment gain (loss)
(180)
Net investment gain (loss)
Cost of sales
(897)
(406) (1)
3,381
(1,423)
$1,958
(1) Included in the computation of net periodic pension cost. See Note 14 for additional information.
44 ADTRAN 2019 Annual Report
The following tables present the tax effects related to the change in each component of other comprehensive
income (loss) for the years ended December 31, 2019, 2018 and 2017:
(In thousands)
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for amounts related to
available-for-sale investments included in net loss
Defined benefit plan adjustments
Reclassification adjustment for amounts related to
defined 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 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
defined benefit plan adjustments included in net loss
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
Before-Tax
Amount
Tax (Expense)
Benefit
$774
(397)
(2,488)
771
(1,480)
$(2,820)
$(201)
103
771
(239)
—
$434
Before-Tax
Amount
Tax (Expense)
Benefit
$926
(804)
(4,351)
(5,638)
196
(4,236)
$(13,907)
$(241)
209
1,131
1,748
(61)
—
2019
Net-of-Tax
Amount
$573
(294)
(1,717)
532
(1,480)
$(2,386)
2018
Net-of-Tax
Amount
$685
(595)
(3,220)
(3,890)
135
(4,236)
$2,786
$(11,121)
(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)
Before-Tax
Amount
Tax (Expense)
Benefit
$8,230
(4,684)
(897)
897
654
406
5,999
$10,605
$(3,210)
1,827
278
(278)
(203)
(126)
—
$(1,712)
2017
Net-of-Tax
Amount
$5,020
(2,857)
(619)
619
451
280
5,999
$8,893
Financial Results 45
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.
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.
Foreign Currency
We record transactions denominated in foreign currencies using appropriate 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 as most invoices are paid in Mexican Pesos. Adjustments resulting from
translating financial statements of international subsidiaries are recorded as a component of accumulated other
comprehensive income (loss).
Revenue
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.
Generally, this occurs with the transfer of control of a product to the customer. Review of contracts with customers,
for both direct customers and distributors, are performed and assessment made regarding principal versus
agent considerations to determine primary responsibility for delivery of performance obligation, presumed
inventory risk, and discretion in establishing pricing. 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. 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, if material, are capitalized and amortized over the period that the related
revenue is recognized if greater than one year. We have elected to account for shipping fees as a cost of
fulfilling the related contract. We have also 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.
46 ADTRAN 2019 Annual Report
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.
■ 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 as our customers
benefit evenly throughout the contract term and deferred revenues, when applicable, 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 on the Consolidated Balance Sheet. The contract
asset is transferred to accounts receivable when the completed performance obligation is invoiced
to the customer.
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 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.
Financial Results 47
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 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 performance obligations where we still
have contractual obligations, we also defer the related costs. Current deferred costs are included in prepaid
expenses and other current assets on the accompanying Consolidated Balance Sheets and totaled $1.6 million
and $2.4 million as of December 31, 2019 and 2018, respectively. Non-current deferred costs are included in
other assets on the accompanying Consolidated Balance Sheets and totaled $0.1 million and $0.8 million as of
December 31, 2019 and 2018, respectively.
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 17 for additional information.
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 and liabilities assumed acquired is recorded as goodwill. If the estimated fair values of net tangible
and intangible assets acquired and liabilities assumed 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 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 selling,
general and administrative expenses as incurred.
48 ADTRAN 2019 Annual Report
Derivative Instruments and Hedging Activities
Historically, we have participated in foreign exchange forward contracts in connection with the management of
exposure to fluctuations in foreign exchange rates as outlined below.
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 recorded in accumulated
other comprehensive income. Amounts related to cash flow hedges are reclassified from accumulated other
comprehensive income to earnings 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 earnings. 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 in 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 on the Consolidated Balance Sheets at their fair values. Our derivative instruments
are not subject to master netting arrangements and are not offset on the Consolidated Balance Sheets.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU 2016-13 requires the measurement and recognition of expected credit losses for financial
instruments held at amortized cost. In November 2018, the FASB issued ASU 2018-19, Codification Improvements
to Topic 326 Financial Instruments – Credit Losses, that clarifies receivables arising from operating leases are
not within the scope of the credit losses standard, but rather should be accounted for in accordance with
the leases standard. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326,
Financial Instruments–Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,
which clarifies the accounting for transfers between classifications of debt securities and clarifies that entities
should include expected recoveries on financial assets in the calculation of the current expected credit loss
allowance. In addition, renewal options that are not unconditionally cancelable should be considered in the
determination of expected credit losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments
– Credit Losses (Topic 326): Targeted Transition Relief, which amends ASU 2016-13 to allow companies, upon
adoption, to elect the fair value option on financial instruments that were previously recorded at amortized cost
if they meet certain criteria. In November 2019, the FASB issued ASU 2019-11, Codification improvements to
Topic 326, Financial Instruments – Credit Losses, which makes various narrow-scope amendments to the new
credit losses standard, such as, providing disclosure relief for accrued interest receivables. All of these ASUs
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 these ASUs will have on our consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment. ASU 2017-04 simplifies the measurement of goodwill by eliminating step
2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a
reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests
Financial Results 49
performed in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or
interim impairment tests performed on testing dates after January 1, 2017. The amendments should be applied
prospectively. We are currently evaluating ASU 2017-04, but do not expect it will have a material effect on our
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-
Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement
disclosure requirements of ASC 820, Fair Value Measurement. The amendments in this ASU are the result of
a broader disclosure project, Concepts Statement No. 8 — Conceptual Framework for Financial Reporting —
Chapter 8 — Notes to Financial Statements, which the FASB finalized on August 28, 2018. The FASB used the
guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. ASU
2018-13 provides users of financial statements with information about assets and liabilities measured at fair value
in the statement of financial position or disclosed in the notes to the financial statements. More specifically, ASU
2018-13 requires disclosures about the valuation techniques and inputs that are used to arrive at measures of fair
value, including judgments and assumptions that are made in determining fair value. In addition, ASU 2018-13
requires disclosures regarding the uncertainty in the fair value measurements as of the reporting date and how
changes in fair value measurements affect performance and cash flows. ASU 2018-13 is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the
effect of ASU 2018-13, but do not expect it will have a material effect on our financial statement disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General
(Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,
which makes changes to and clarifies the disclosure requirements related to defined benefit pension and other
postretirement plans. ASU 2018-14 requires additional disclosures related to the reasons for significant gains and
losses affecting the benefit obligation and an explanation of any other significant changes in the benefit obligation
or plan assets that are not otherwise apparent in other disclosures required by ASC 715. ASU 2018-14 also clarifies
the guidance in ASC 715 to require disclosure of the projected benefit obligation (“PBO”) 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 do not expect it will have a material effect on our financial statement disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract. ASU 2018-15 clarifies certain aspects of ASU 2015-05, Customer’s Accounting for Fees
Paid in a Cloud Computing Arrangement. Specifically, ASU 2018-15 aligns the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitalizing implementations costs incurred to develop or obtain internal use software. ASU 2018-15 is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early
adoption permitted. We are currently evaluating the effect of ASU 2018-15, but do not expect it will have a
material effect on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes. The amendments in this update simplify the accounting for income taxes by removing various
exceptions, such as, the exception to the incremental approach for intra-period tax allocation when there is a
loss from continuing operations and income or a gain from other items. The amendments in this update, also
simplify the accounting for income taxes related to income-based franchise taxes and requiring that an entity
50 ADTRAN 2019 Annual Report
reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes
the enactment date. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the effect of
ASU 2019-12, but do not expect it will have a material effect on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
During 2019, we adopted the following accounting standards, which had the following impacts on our
consolidated financial statements:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity to recognize
right-of-use assets and lease liabilities on the balance sheet and to disclose key information about the entity’s
leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842,
Leases, which clarified certain aspects of ASU 2016-02, as well as ASU 2018-11, Leases (Topic 842), Targeted
Improvements, which provided for an optional transition method allowing for the application of the legacy lease
guidance, Leases (Topic 840), including its disclosure requirements, for the comparative periods presented
in the year of adoption, with the cumulative effect of initially applying the new lease standard recognized as
an adjustment to retained earnings as of the date of adoption. In March 2019, the FASB issued ASU 2019-01,
Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the
interim periods after adoption, the effect of the change on income from continuing operations, net income, any
other affected financial statement line item and any affected per share amount. For lessors, the new leasing
standard requires leases to be classified as sales-type, direct financing or operating leases. These criteria focus
on the transfer of control of the underlying lease asset. This standard, and its related updates, were effective for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
The Company adopted the new standard on January 1, 2019, the effective date of our initial application,
using the optional transition method. At that time, the Company elected to carry forward the legacy ASC 840
disclosures for comparative periods and, therefore, did not adjust the comparative period financial information
prior to January 1, 2019. In addition, the Company elected the package of practical expedients which allows
for companies to not reassess whether any expired or existing contracts are or contain leases, not reassess
historical lease classifications for expired or existing contracts and not reassess initial direct costs for existing
leases. Additionally, the Company elected the practical expedients which allow the use of hindsight when
determining the lease term, the short-term lease recognition exemption and the option to not separate lease
and nonlease 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 Sheets of $10.3 million as of January 1, 2019,
primarily related to our operating leases for office space, automobiles and other equipment.
As a lessee, the adoption of this standard did not have a material impact on our Consolidated Statement of
Income or Statement of Cash Flows. See Note 9 for additional information.
As a lessor, the adoption of this standard did not have a material impact on our Consolidated Balance Sheet,
Consolidated Statement of Income or Consolidated Statement of Cash Flows. Prior to and after adoption, all of
our leases in which we are the lessor were classified as sales-type leases.
Financial Results 51
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable Debt Securities, which shortened the amortization
period for the premium on certain purchased callable debt securities to the earliest call date. ASU 2017-08 was
effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. The
amendments were required to be applied through a modified-retrospective transition approach that required
a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The
Company adopted ASU 2017-08 on January 1, 2019, and the adoption of this standard did not have a material
effect on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. ASU 2017-12 expanded and refined hedge accounting for both financial and
non-financial risk components, aligned the recognition and presentation of the effects of hedging instruments
and hedge items in the financial statements, and included certain targeted improvements to ease the application
of current guidance related to the assessment of hedge effectiveness. In October 2018, the FASB issued ASU
2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”)
Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting, which permits the OIS
rate based on SOFR as a U.S. benchmark interest rate. Both ASU 2017-12 and ASU 2018-16 were effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company
adopted ASU 2017-12 on January 1, 2019, and the adoption of this standard did not have a material effect on
our consolidated financial statements as we did not have any hedging instruments as of the date of adoption.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Comprehensive Income. ASU 2018-02
allowed for an optional reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU 2018-02 was effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted ASU
2018-02 on January 1, 2019, and upon adoption reclassified $0.4 million of stranded tax effects created by rate
changes related to the Tax Cuts and Jobs Act of 2017 to retained earnings.
Note 2 – Business Combinations
In November 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. 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.
Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments
of which were dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones
during the first half of 2019. The required milestones were not achieved and therefore, we recognized a gain of
$1.2 million upon the reversal of these liabilities during the second quarter of 2019.
An escrow in the amount of $2.8 million was set up at the acquisition date to fund post-closing working capital
settlements and to satisfy indemnity obligations to the Company arising from any inaccuracy or breach of
representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to
arbitration. In December 2019, $1.3 million of the $2.8 million was released from the escrow account pursuant
to the agreement, with the final settlement of the remaining balance expected during the fourth quarter of
2020. The remaining minimum and maximum potential release of funds to the seller ranges from no payment
to $1.5 million.
52 ADTRAN 2019 Annual Report
We recorded goodwill of $3.5 million as a result of this acquisition, which represents the excess of the purchase
price over the fair value of net assets acquired and liabilities assumed. We assessed the recognition and
measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future
periods and concluded that our valuation procedures and resulting measures were appropriate.
On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business
and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd.
(SEI). This acquisition establishes ADTRAN as the North American market leader for EPON solutions for the
cable MSO industry and it will accelerate the MSO market’s adoption of our open, programmable and scalable
architectures. This transaction was accounted for as a business combination. We have included the financial
results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues
are included in the Access & Aggregation and 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.
The final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities
assumed at the acquisition date for SmartRG and 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
3,476
22,030
(6,001)
(6,001)
16,029
—
$16,029
Financial Results 53
Our Consolidated Statements of Income include the following revenue and net loss attributable to SmartRG and
Sumitomo since the date of acquisition:
(In thousands)
Revenue
Net Loss
March 19, 2018 to
December 31, 2018
$9,186
$(1,297)
The details of the acquired intangible assets from the SmartRG and Sumitomo acquisitions are as follows:
(In thousands)
Customer relationships
Developed technology
Licensed technology
Supplier relationship
Licensing agreements
Trade name
Total
Value
Life (in 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)
2018
2017
$559,050
$702,573
$(33,862)
$33,206
For the years ended December 31, 2019 and 2018, we incurred acquisition and integration related expenses
and amortization of acquired intangibles of $5.0 million and $2.9 million, respectively, related to the SmartRG
and Sumitomo acquisitions. No acquisition expenses related to the SmartRG and Sumitomo acquisitions were
recorded during the year ended December 31, 2017.
Note 3 – Revenue
The following table disaggregates our revenue by major source for the year ended December 31, 2019:
(In thousands)
Access & Aggregation
Subscriber Solutions & Experience (1)
Traditional & Other Products
Total
Network
Solutions
Services &
Support
Total
$289,980
$58,894
$348,874
144,651
20,595
8,269
7,672
152,920
28,267
$455,226
$74,835
$530,061
(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.
54 ADTRAN 2019 Annual Report
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
Total
$301,801
$57,069
$358,870
129,067
27,364
5,393
8,583
134,460
35,947
$458,232
$71,045
$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.
Revenue allocated to remaining performance obligations represents contract revenues that have not yet been
recognized for contracts with a duration greater than one year. As of December 31, 2019, 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. As a practical expedient, for
certain contracts recognize revenue equal to the amounts we are entitled to invoice which correspond to the
value of completed performance obligations to date. The amount related to these performance obligations was
$13.3 million as of December 31, 2018. The amount related to these performance obligations was $13.6 million
as of December 31, 2019, and the Company expects to recognize 64% of such revenue over the next 12 months
with the remainder thereafter.
The following table provides information about accounts receivables, contract assets and unearned revenue
from contracts with customers:
(In thousands)
Accounts receivable
Contract assets (1)
Unearned revenue
Non-current unearned revenue
(1) Included in other receivables on the Consolidated Balance Sheets
December 31,
2019
December 31,
2018
$90,531
$2,812
$11,963
$6,012
$99,385
$3,766
$17,940
$5,296
Of the outstanding unearned revenue balance as of December 31, 2018, $12.7 million was recognized as
revenue during the year ended December 31, 2019.
Note 4 – Stock-Based Compensation
Stock Incentive Program Descriptions
In January 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (the
“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 in May 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 had a ten-year contractual term. The 2006 Plan was replaced in May 2015 by
the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (the “2015 Plan”). Expiration dates of options outstanding
as of December 31, 2019 under the 2006 Plan range from 2020 to 2024.
Financial Results 55
In January 2015, the Board of Directors adopted the 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 in May 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, 2019 under the 2015 Plan range from 2025 to 2026.
Our stockholders approved the 2010 Directors Stock Plan (the “2010 Directors Plan”) in May 2010, under which
0.5 million shares of common stock have been reserved for issuance. This plan replaced 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 issued under the 2010 Directors Plan become vested in
full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan had a ten-year
contractual term. All remaining options under the 2010 Directors Plan expired 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, 2019, 2018 and 2017, 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
2019
$369
3,889
2,704
6,593
6,962
2018
$418
3,989
2,748
6,737
7,155
2017
$379
4,063
2,991
7,054
7,433
(1,659)
(1,432)
(1,699)
Total stock-based compensation expense, net of tax
$5,303
$5,723
$5,734
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 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. 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 vest and are 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 contained performance conditions and would have vested at the end of a
three-year period if such performance conditions were met. The fair value of these performance-based PSU
awards was equal to the closing price of our stock on the date of grant. These awards were forfeited during the
first quarter of 2020 as the performance conditions were not achieved.
56 ADTRAN 2019 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, 2018
and 2019 and the changes that occurred during 2019:
(In thousands, except per share amounts)
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2018
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, 2019
Number
of Shares
Weighted
Average Grant
Date Fair Value
1,570
897
(368)
(208)
1,891
$18.52
$9.63
$17.23
$18.24
$14.58
As of December 31, 2019, total unrecognized compensation expense related to the non-vested portion of market-
based PSUs, RSUs and restricted stock was approximately $17.2 million, which is expected to be recognized
over an average remaining recognition period of 2.9 years and adjusted for actual forfeitures as they occur.
The following table details the significant assumptions that impact the fair value estimate of the market-based PSUs:
Estimated fair value per share
Expected volatility
Risk-free interest rate
Expected dividend yield
2019
$9.53 to $18.05
2018
$16.59
32.7% to 38.9%
27.98% to 31.58%
1.6% to 2.46%
2.11% to 2.99%
2.3% to 4.09%
1.83% to 2.49%
2017
$24.17
27.03%
1.78%
1.74%
As of December 31, 2019, 1.0 million shares were available for issuance under shareholder-approved equity
plans in connection with the grant and exercise of stock options, PSU’s, RSU’s or restricted stock.
Stock Options
The following table is a summary of our stock options outstanding as of December 31, 2019 and 2018 and the
changes that occurred during 2019:
(In thousands, except per share amounts)
Number
of
Options
Weighted
Average
Exercise Price
Stock options outstanding, December 31, 2018
4,382
Stock options granted
Stock options exercised
Stock options forfeited
Stock options expired
Stock options outstanding, December 31, 2019
Stock options exercisable, December 31, 2019
—
(34)
(32)
(744)
3,572
3,570
$22.91
$ —
$15.53
$15.56
$23.72
$22.88
$22.89
Weighted Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic
Value
4.10
$ —
3.40
3.40
$ —
$ —
Financial Results 57
All of the options above were issued at exercise prices that approximated fair market value at the date of grant.
As of December 31, 2019, total unrecognized compensation expense related to non-vested stock options was
approximately $11 thousand, which is expected to be recognized over an average remaining recognition period
of one year and will be adjusted for actual forfeitures as they occur.
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 2019 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, 2019. The amount of aggregate intrinsic value will change based on
the fair market value of ADTRAN’s stock and was $0 as of December 31, 2019.
The total pre-tax intrinsic value of options exercised during 2019, 2018 and 2017 was $0.1 million, $0.2 million
and $3.4 million, respectively. The fair value of options fully vesting during 2019, 2018 and 2017 was $0.9
million, $2.5 million and $4.3 million, respectively.
The following table further describes our stock options outstanding as of December 31, 2019:
Range of
Exercise Prices
$14.88 – $18.96
$18.97 – $23.45
$23.46 – $30.35
$30.36 – $41.92
Options Outstanding
Options
Outstanding
in 12/31/19
(In thousands)
Weighted Avg.
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
1,135
685
686
1,066
3,572
4.90
4.70
3.67
1.29
$15.89
$19.10
$24.17
$31.93
Options Exercisable
Options
Exercisable
in 12/31/19
(In thousands)
Weighted
Average
Exercise
Price
$15.89
$19.10
$24.17
$31.93
1,133
685
686
1,066
3,570
The Black-Scholes option pricing model (the “Black-Scholes Model”) is used to determine 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 during the years ended December 31, 2019, 2018 or 2017.
58 ADTRAN 2019 Annual Report
Note 5 – Investments
Debt Securities and Other Investments
As of December 31, 2019, we held the following debt securities and other investments, recorded at fair value:
(In thousands)
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Valuable rate demand notes
Amortized
Cost
$9,304
930
6,867
6,944
12,311
372
800
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$80
$ —
$9,384
—
26
26
21
—
—
—
(3)
(8)
(9)
(1)
—
930
6,890
6,962
12,323
371
800
Available-for-sale debt securities held at fair value
$37,528
$153
$(21)
$37,660
As of December 31, 2018, we held the following debt securities and other investments, recorded at fair value:
(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
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$19
(112)
$20,684
1,339
5,230
3,833
9,271
592
—
5
2
1
—
(26)
(14)
(44)
(66)
(8)
1,313
5,221
3,791
9,206
584
Available-for-sale debt securities held at fair value
$41,042
$27
$(270)
$40,799
As of December 31, 2019, 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
Corporate
Bonds
$4,005
4,120
967
292
—
—
Municipal
Fixed-rate
Bonds
Asset-
backed
Bonds
Mortgage/
Agency-
backed
Bonds
U.S.
Government
Bonds
Foreign
Government
Bonds
$ —
930
—
—
—
—
$396
760
1,632
2,092
1,719
291
$ —
213
1,424
494
792
4,039
$ —
1,347
9,344
1,632
—
—
$ —
—
—
371
—
—
Total
$9,384
$930
$6,890
$6,962
$12,323
$371
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.
Financial Results 59
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, 2019, 2018 and 2017:
(In thousands)
Year Ended December 31,
Gross realized gains on debt securities
Gross realized losses on debt securities
Total gain (loss) recognized, net
2019
$108
(50)
$58
2018
$57
(592)
$(535)
2017
$169
(226)
$(57)
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.
The following table presents the breakdown of debt securities and other investments with unrealized losses as
of December 31, 2019:
(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
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$203
930
797
2,594
4,070
371
$ —
—
(3)
(6)
(9)
(1)
$ —
—
—
136
—
—
$ —
—
—
(2)
—
—
$203
930
797
2,730
4,070
371
$ —
—
(3)
(8)
(9)
(1)
Total
$8,965
$(19)
$136
$(2)
$9,101
$(21)
The following table presents the breakdown of debt securities and other investments with unrealized losses as
of December 31, 2018:
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair Value
Total
Unreal-
ized
Losses
$11,129
$(60)
$3,608
$(52)
$14,737
$(112)
(In thousands)
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
—
1,874
1,021
6,527
584
—
(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 decrease in unrealized losses during 2019, as reflected in the table above, results from changes in market
positions associated with our fixed income portfolio.
60 ADTRAN 2019 Annual Report
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 (loss), 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.
ASU 2016-01 also provides a measurement alternative for equity investments that do not have a readily
determinable fair value in which investments can be recorded at cost less impairment, if any, adjusted for
observable price changes for an identical or similar investment. We elected to record our equity investment that
does not have a readily determinable fair value using the measurement alternative method. As of December 31,
2018, the Company had a note receivable of approximately $4.3 million, which was included in other receivables
on the Consolidated Balance Sheets. During the three months ended March 31, 2019, this amount was repaid
and reissued in the form of debt and equity. Approximately $3.4 million was issued as an equity investment,
which represented a non-cash investing activity. The carrying value of this investment under the measurement
alternative was $3.4 million as of December 31, 2019. The remaining amount, approximately $0.9 million, was
converted into a new note receivable, which is included in other receivables on the Consolidated Balance
Sheets and represents a non-cash operating activity.
Realized and unrealized gains and losses for our marketable equity securities for the twelve months ended
December 31, 2019 were as follows:
(in thousands)
Realized gains (losses) on equity securities sold
Unrealized gains (losses) on equity securities held
Total gain (loss) recognized, net
2019
$(96)
(11,472)
$(11,376)
2018
$1,306
(4,821)
$(3,515)
As of December 31, 2019 and 2018, gross unrealized losses related to individual investments in a continuous
loss position for twelve months or longer were not material.
U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for
fair value measurement of financial instruments:
■ Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities
in an active market;
■ Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not
active or model inputs that are observable either directly or indirectly;
■ Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair value measurement. These inputs could
include information supplied by investees.
Financial Results 61
We have categorized our cash equivalents and our investments held at fair value into this hierarchy as follows:
Fair Value Measurements at December 31, 2019 Using
(In thousands)
Cash equivalents
Money market funds
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
Variable rate demand notes
Marketable equity securities
Marketable equity securities –
various industries
Equity in escrow
Deferred compensation plan assets
Other investments
Total
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
$1,309
$1,309
$ —
$ —
9,384
930
6,890
6,962
12,323
371
800
—
—
—
—
12,323
—
—
35,501
35,501
298
21,698
2,442
$98,908
298
21,698
2,442
$73,571
9,384
930
6,890
6,962
—
371
800
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$25,337
$ —
Fair Value Measurements at December 31, 2018 Using
(In thousands)
Cash equivalents
Money market funds
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
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
—
—
—
—
9,206
—
26,763
26,763
253
18,256
$87,625
253
18,256
$56,032
20,684
1,313
5,221
3,791
—
584
—
—
—
—
—
—
—
—
—
—
—
—
$31,593
$ —
62 ADTRAN 2019 Annual Report
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.
Our variable rate demand notes have a structure that implies a standard expected market price. The frequent
interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the
expected market price.
Note 6 – Derivative Instruments and Hedging Activities
As of December 31, 2019 and 2018, we had no foreign exchange forward contracts.
The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income
(Loss) during the years ended December 31, 2019, 2018 and 2017 were as follows:
(In thousands)
Income Statement Location
2019
2018
2017
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts
Other income (expense)
$ —
$13
$(754)
The change in our derivatives designated as hedging instruments recorded in other comprehensive income
and reclassified to income, net of tax, during the twelve months ended December 31, 2019, 2018 and 2017 were
as follows:
(In thousands)
Derivatives Designated as Hedging Instruments:
Location of Losses
Reclassifed from
AOCI into Income
Amount of Losses Reclassified
from AOCI into Income
2019
2018
2017
Foreign exchange contracts
Cost of Sales
$ —
$ —
$(897)
Note 7 – Inventory
As of December 31, 2019 and 2018, inventory was comprised of the following:
(In thousands)
Raw materials
Work in process
Finished goods
Total Inventory, net
2019
2018
$36,987
$45,333
1,085
60,233
1,638
52,877
$98,305
$99,848
Inventory reserves are established for estimated excess and obsolete inventory equal to the difference
between the cost of the inventory and the estimated net realizable value of the inventory based on estimated
reserve percentages, which consider historical usage, known trends, inventory age and market conditions. As
of December 31, 2019 and 2018, our inventory reserve was $34.1 million and $30.0 million, respectively.
Financial Results 63
Note 8 – Property, Plant and Equipment
As of December 31, 2019 and 2018, property, plant and equipment was 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
2019
$4,575
34,797
68,157
19,959
74,399
2018
$4,575
34,379
68,183
19,831
92,071
130,430
332,317
127,060
346,099
(258,609)
(265,464)
$73,708
$80,635
Depreciation expense was $12.5 million, $12.7 million and $12.8 million for the years ended December 31, 2019,
2018 and 2017, respectively, which is recorded in cost of sales, selling, general and administrative expense and
research and development expense in the consolidated statements of income.
We assess long-lived assets used in operations for potential impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash
flows estimated to be generated by the asset are less than the asset’s carrying value. During the year ended
December 31, 2019, the Company recognized impairment charges of $3.9 million related to the abandonment
of certain information technology projects in which we had previously capitalized expenses related to these
projects. The impairment charges were determined based on actual costs incurred as part of the projects. No
impairment charges were recognized during the years ended December 31, 2018 and 2017.
Note 9 – Leases
We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain
international locations. We also reviewed other contracts, such as manufacturing agreements and service
agreements, for potential embedded leases. We specifically reviewed these other contracts to determine
whether we have the right to substantially all of the economic benefit from the use of any specified assets or
the right to direct the use of any specified assets, either of which would indicate the existence of a lease.
As of December 31, 2019, our operating leases had remaining lease terms of one month to six years, some
of which included options to extend the leases for up to nine years, and some of which included options to
terminate the leases within three months. For those leases that are reasonably assured to be renewed, we
have included the option to extend as part of our right of use asset and lease liability. Leases with an initial
term of 12 months or less were not recorded on the balance sheet and lease expense for these leases is
recognized on a straight-line basis over the lease term. Lease expense related to these short-term leases was
$0.4 million for the twelve months ended December 31, 2019, and is included in cost of sales, selling, general
and administrative expenses and research and development expenses in the Consolidated Statements of
Income. Lease expense related to variable lease payments that do not depend on an index or rate, such as real
estate taxes and insurance reimbursements, was $0.9 million for the twelve months ended December 31, 2019.
For lease agreements entered into or reassessed after the adoption of Topic 842, we elected to not separate
lease and nonlease components. Our lease agreements do not contain any material residual value guarantees
or material restrictive covenants.
64 ADTRAN 2019 Annual Report
Supplemental balance sheet information related to operating leases is as follows:
(In thousands)
Classification
Assets
Right of use lease assets
Other Assets
Total lease asset
Liabilities
Current lease liability
Accrued expenses
Non-current lease liability
Other non-current liabilities
Total lease liability
(1) Reflects the adoption of the new lease accounting standard on January 1, 2019.
December 31,
2019
January 1,
2019 (1)
$8,452
$8,452
$2,676
5,818
$8,494
$10,322
$10,322
$2,948
7,374
$10,322
The components of lease expense included in the Consolidated Statements of Income for the twelve months
ended December 31, 2019 were as follows:
(In thousands)
Research and development expenses
Selling, general and administrative expenses
Cost of sales
Total operating lease expense
2019
$2,417
1,400
64
$3,881
As of December 31, 2019, operating lease liabilities included on the Consolidated Balance Sheet by future
maturity were as follows:
(In thousands)
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Amount
$2,856
2,412
1,705
1,160
482
264
8,879
(385)
$8,494
Future operating lease payments include $0.7 million related to options to extend lease terms that are reasonably
certain of being exercised. There are no legally binding leases that have not yet commenced.
Financial Results 65
As of December 31, 2018, future minimum rental payments under non-cancelable operating leases, including
renewals determined to be reasonably assured as of December 31, 2018, with original maturities of greater than
12 months, were as follows:
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total
Amount (1)
$3,873
3,580
2,771
2,053
1,317
762
$14,356
(1) Certain renewal options were subsequently determined to not be reasonably assured of renewal upon the
Company’s adoption of the new lease accounting standard on January 1, 2019.
Our leases do not provide an implicit rate and therefore we use an incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments. We used the
incremental borrowing rate on January 1, 2019, for operating leases that commenced on or prior to that date. The
incremental borrowing rate was determined on a portfolio basis by grouping leases with similar terms as well as
grouping leases based on a U.S. dollar or Euro functional currency. The actual rate was then determined based
on a credit spread over LIBOR as well as the Bloomberg Curve Matrix for the U.S. Communications section. The
following table provides information about our weighted average lease terms and weighted average discount
rates as of December 31, 2019:
Weighted average remaining lease term (years)
Operating leases with USD functional currency
Operating leases with Euro functional currency
Weighted average discount rate
Operating leases with USD functional currency
Operating leases with Euro functional currency
As of December 31, 2019
2.6
4.4
4.02%
1.84%
Supplemental cash flow information related to operating leases is as follows:
(In thousands)
As of December 31, 2019
Cash paid for amounts included in the measurement of operating lease assets / liabilities
Cash used in operating activities related to operating leases
Right-of-use assets obtained in exchange for lease obligations
$3,439
$11,615
66 ADTRAN 2019 Annual Report
Sales-Type Leases
We are the lessor in sales-type lease arrangements for network equipment, which have initial terms of up
to five years. Our sales-type lease arrangements contain either a provision whereby the network equipment
reverts back to us upon the expiration of the lease or a provision that allows the lessee to purchase the network
equipment at a bargain purchase amount at the end of the lease. In addition, our sales-type lease arrangements
do not contain any residual value guarantees or material restrictive covenants. The allocation of the consideration
between lease and nonlease components is determined by stand-alone selling price by component. The net
investment in sales-type leases consists of lease receivables less unearned income. Collectability of sales-type
leases is evaluated periodically at an individual customer level. The Company has elected to exclude taxes
related to sales-type leases from revenue and the associated expense of such taxes. As of December 31, 2019
and 2018, we did not have an allowance for credit losses for our net investment in sales-type leases. As of
December 31, 2019 and 2018, the components of the net investment in sales-type leases were as follows:
(In thousands)
December 31, 2019
December 31, 2018
Current minimum lease payments receivable(1)
Non-current minimum lease payments receivable(2)
Total minimum lease payments receivable
Less: Current unearned revenue(1)
Less: Non-current unearned revenue(2)
Net investment in sales-type leases
(1) Included in other receivables on the Consolidated Balance Sheet.
(2) Included in other assets on the Consolidated Balance Sheet.
$1,201
889
2,090
365
163
$1,562
$11,339
1,670
13,009
631
473
$11,905
The components of sales-type lease gross profit recognized at the lease commencement date and interest and
dividend income, included in the Consolidated Statements of Income for the twelve months ended December 31,
2019 were as follows:
(In thousands)
Sales - Network Solutions
Cost of sales - Network Solutions
Gross profit
Interest and dividend income
For the Year Ended
December 31, 2019
$1,723
675
$1,048
$357
As of December 31, 2019 future minimum lease payments to be received from sales-type leases were as follows:
(In thousands)
2020
2021
2022
2023
2024
Total
Amount
$1,201
565
232
86
6
$2,090
Financial Results 67
Note 10 – Goodwill
Goodwill, all of which relates to our acquisitions of Bluesocket, Inc. in 2011 and SmartRG in 2018, was $7.0
million as of December 31, 2019 and $7.1 million as of December 31, 2018 of which $6.6 million and $0.4 million
was allocated to our Network Solutions and Services & Support reportable segments, respectively, for the year
ended December 31, 2019, and of which $6.7 million and $0.4 million was allocated to our Network Solutions
and Services & Support reportable segments, respectively, for the year ended December 31, 2018. Goodwill
related to our SmartRG acquisition was reduced by $0.1 million during the twelve months ended December 31,
2019 as a result of a measurement period adjustment.
We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual
evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the
reporting unit below its carrying amount. We have elected to first assess the qualitative factors to determine
whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less
than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment
test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-
step impairment test will be performed. Based on the results of our qualitative assessment for the years ended
December 31, 2019, 2018 and 2017, there were no events or circumstances that occurred that would more likely
than not reduce the fair value of goodwill below its carrying value.
Note 11 – Intangible Assets
As of December 31, 2019 and 2018, our intangible assets were comprised of the following:
(In thousands)
Gross
Value
Accumulated
Amortization
2019
Net
Value
Gross
Value
Accumulated
Amortization
2018
Net
Value
Customer relationships
$22,356
$(7,233) $15,123
Developed technology
Licensed technology
Supplier relationships
Intellectual property
Licensing agreements
Patents
Trade names
Non-compete
Total
10,170
5,900
2,800
—
560
500
310
—
(3,379)
(1,174)
(2,508)
—
(79)
(226)
(176)
—
6,791
4,726
292
—
481
274
134
—
$22,455
12,801
5,900
2,800
930
560
500
310
200
$(5,380)
$17,075
(4,867)
(520)
(1,108)
(930)
(5)
(157)
(106)
(200)
7,934
5,380
1,692
—
555
343
204
—
$42,596
$(14,775) $27,821
$46,456
$(13,273) $33,183
Amortization expense was $5.3 million, $2.3 million and $2.9 million for the years ended December 31, 2019,
2018 and 2017, respectively.
As of December 31, 2019, the estimated future amortization expense of intangible assets is as follows:
(In thousands)
2020
2021
2022
2023
2024
Thereafter
Total
68 ADTRAN 2019 Annual Report
Amount
$4,444
4,095
3,471
3,320
3,226
9,265
$27,821
Note 12 – 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
(the “Taxable Revenue Bonds”) and loaned the proceeds from the sale of the Taxable Revenue Bonds to
ADTRAN. Further advances on the Taxable Revenue Bonds were made by the Authority, bringing the total
amount outstanding to $50.0 million. The Taxable Revenue Bonds bore interest, payable monthly with an
interest rate of 2% per annum. The Taxable Revenue Bond’s outstanding aggregate principal amount of $24.6
million matured on January 1, 2020 and was repaid in full on January 2, 2020. The fair value of the bond as of
December 31, 2019 was $24.6 million. We are required to make payments to the Authority in amounts necessary
to pay the interest on the Taxable Revenue Bonds. Included in short-term investments as of December 31, 2019
is $25.6 million which is invested in a 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 Taxable Revenue Bonds with the
collateral deposit in order to reduce the balance of the indebtedness.
In conjunction with this program, we were eligible to receive certain economic incentives from the state of
Alabama that reduce the amount of payroll withholdings that we were required to remit to the state for those
employment positions that qualify under the program. We realized economic incentives related to payroll
withholdings totaling $1.2 million, $1.4 million and $1.5 million for the years ended December 31, 2019, 2018 and
2017, respectively. This program concluded on January 2, 2020 following the maturity of the Taxable Revenue
Bonds. No additional benefits will be received in future periods.
We made principal payments of $1.0 million and $1.1 million for the years ended December 31, 2019 and 2018.
No additional principal payments will be made in future periods.
Note 13 – Income Taxes
A summary of the components of the expense (benefit) for income taxes for the years ended December 31,
2019, 2018 and 2017 is as follows:
(In thousands)
Current
Federal
State
International
Total Current
Deferred
Federal
State
International
Total Deferred
Total Income Tax Expense (Benefit)
2019
2018
2017
$(518)
(1,065)
(282)
(1,865)
24,801
5,815
(546)
$(8,001)
(476)
11,705
3,228
(14,448)
(3,390)
581
$466
(150)
6,458
6,774
8,024
1,882
4,167
30,070
(17,257)
$28,205
$(14,029)
14,073
$20,847
Financial Results 69
Our effective income tax rate differs from the federal statutory rate due to the following:
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
Change in valuation allowance
Foreign tax credits
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
2019
21.00%
6.97
15.53
2.83
0.49
3.85
(172.82)
16.69
(6.01)
—
—
—
(1.87)
(0.49)
2018
21.00%
14.53
14.23
(11.45)
0.45
3.15
—
—
(2.87)
—
8.82
12.00
(17.48)
(0.34)
2017
35.00%
2.17
(11.88)
(2.27)
(0.75)
(2.71)
—
—
1.43
(1.13)
—
26.70
—
0.09
(113.83)%
42.04%
46.65%
Income (loss) before expense (benefit) for income taxes for the years ended December 31, 2019, 2018 and 2017
is as follows:
(In thousands)
U.S. entities
International entities
Total
2019
2018
$(29,829)
$(74,131)
5,052
40,760
2017
$26,552
18,135
$(24,777)
$(33,371)
$44,687
Income (loss) before expense (benefit) for income taxes for international entities reflects income (loss) based
on statutory transfer pricing agreements. This amount does not correlate to consolidated international revenue,
many of which occur from our U.S. entity.
70 ADTRAN 2019 Annual Report
Deferred income taxes on the Consolidated Balance Sheets 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 were 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
Lease liabilities
Capitalized research and development expenditures
Valuation allowance
Total Deferred Tax Assets
Deferred tax liabilities
Property, plant and equipment
Intellectual property
Right of use lease assets
Investments
Total Deferred Tax Liabilities
Net Deferred Tax Assets
2019
2018
$7,144
2,330
—
5,660
2,451
241
7,074
2,925
3,995
12,171
2,496
22,230
(48,616)
20,101
(2,815)
(5,337)
(2,496)
(1,892)
(12,540)
$7,561
$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
In December 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 for the year ended December 31, 2018.
As of December 31, 2019 and 2018, 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, which resulted in a deferred tax benefit of $0.4 million and $2.8 million in 2019
and 2018, respectively, was recorded as an adjustment to other comprehensive income (loss), presented in the
Consolidated Statements of Comprehensive Income (Loss).
Financial Results 71
The Company continually reviews the adequacy of our valuation allowance and recognizes the benefits of
deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax
assets will be realized in accordance with ASC 740, Income Taxes. Due to our recent decrease in revenue and
profitability for 2019, and all other positive and negative objective evidence considered as part of our analysis,
our ability to consider other subjective evidence such as projections for future growth is limited when evaluating
whether our deferred tax assets will be realized. As such, the Company was no longer able to conclude that
it was more likely than not that our domestic deferred tax assets would be realized and a valuation allowance
against our domestic deferred tax assets was established in the third quarter of 2019. The amount of the
deferred tax assets considered realizable may be adjusted in future periods in the event that sufficient evidence
is present to support a conclusion that it is more likely than not that all or a portion of our domestic deferred tax
assets will be realized.
As of December 31, 2019, the Company had gross deferred tax assets totaling $56.2 million offset by a valuation
allowance totaling $48.6 million. Of the valuation allowance, $42.8 million was established in the current year
primarily related to our domestic deferred tax assets. The remaining $5.8 million established in prior periods
related to state research and development credit carryforwards and foreign net operating loss and research
and development credit carryforwards where we lack sufficient activity to realize those deferred tax assets. The
remaining $7.6 million in deferred tax assets that were not offset by a valuation allowance are located in various
foreign jurisdictions where the Company believes it is more likely than not we will realize these deferred tax
assets.
Supplemental balance sheet information related to deferred tax assets is as follows:
(In thousands)
Domestic
International
Total
December 31, 2019
Deferred
Tax Assets
Valuation
Allowance
Deferred Tax
Assets, net
$46,266
$(46,266)
9,911
(2,350)
$56,177
$(48,616)
$ —
7,561
$7,561
As of December 31, 2019 and 2018, the deferred tax assets for foreign and domestic loss carry-forwards,
research and development tax credits, unamortized research and development costs and state credit carry-
forwards totaled $41.3 million and $28.8 million, respectively. As of December 31, 2019, $19.1 million of these
deferred tax assets will expire at various times between 2020 and 2039. The remaining deferred tax assets will
either amortize through 2029 or carryforward indefinitely.
As of December 31, 2019 and 2018, respectively, our cash and cash equivalents were $73.8 million and $105.5
million and short-term investments were $33.2 million and $3.2 million, which provided available short-term
liquidity of $107.0 million and $108.7 million. Of these amounts, our foreign subsidiaries held cash of $52.3
million and $87.1 million, respectively, representing approximately 48.9% and 80.1% 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
of 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 2019, 2018 and 2017, no income tax benefit or expense was recorded for stock options exercised as an
adjustment to equity.
72 ADTRAN 2019 Annual Report
The change in the unrecognized income tax benefits for the years ended December 31, 2019, 2018 and 2017
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
Expiration of applicable statute of limitations
Balance at end of period
2019
$1,868
2018
$2,366
2017
$2,226
—
161
(71)
(471)
3
254
—
(755)
465
285
(14)
(596)
$1,487
$1,868
$2,366
As of December 31, 2019, 2018 and 2017, our total liability for unrecognized tax benefits was $1.5 million, $1.9
million and $2.4 million, respectively, of which $1.4 million, $1.7 million and $2.2 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, 2019, 2018 and 2017, the balances of accrued interest and penalties
were $0.5 million, $0.7 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. for
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 2016.
Note 14 – 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 as of December 31, 2019 and 2018, were as follows:
(In thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
2019
2018
$37,245
$34,893
Service cost
Interest cost
Actuarial loss - experience
Actuarial 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 gain (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
1,471
634
453
5,091
(166)
(826)
43,902
24,159
4,392
—
(535)
28,016
1,193
727
38
2,139
(138)
(1,607)
37,245
26,624
(2,024)
688
(1,129)
24,159
$(15,886)
$(13,086)
Financial Results 73
The accumulated benefit obligation was $43.9 million and $37.2 million as of December 31, 2019 and 2018,
respectively. The increase in the accumulated benefit obligation and the actuarial loss was primarily attributable
to a decrease in the discount rate during 2019.
The net amounts recognized in the balance sheet for the unfunded pension liability as of December 31, 2019
and 2018 were as follows:
(In thousands)
Current liability
Pension liability
Total
2019
$ —
15,886
$15,886
2018
$ —
13,086
$13,086
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,
2019, 2018 and 2017 were 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)
2019
2018
2017
$1,471
634
(1,392)
795
1,508
2,488
(771)
1,717
$1,193
727
(1,548)
247
619
5,638
(196)
5,442
$3,225
$6,061
$1,260
607
(1,267)
309
909
(654)
(406)
(1,060)
$(151)
The amounts recognized in accumulated other comprehensive income (loss) as of December 31, 2019 and 2018
were as follows:
(In thousands)
Net actuarial loss
2019
$(12,973)
2018
$(11,256)
The defined benefit pension plan is accounted for on an actuarial basis, which requires the use 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. 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.
74 ADTRAN 2019 Annual Report
The weighted-average assumptions that were used to determine the net periodic benefit cost for the years
ended December 31, 2019, 2018 and 2017 were as follows:
Discount rate
Rate of compensation increase
Expected long-term rates of return
2019
1.75%
2.00%
5.90%
2018
2.13%
2.00%
5.90%
2017
1.90%
2.00%
5.90%
The weighted-average assumptions that were used to determine the benefit obligation as of December 31,
2019 and 2018:
Discount rate
Rate of compensation increase
2019
1.00%
2.00%
2018
1.75%
2.00%
Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). 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 $0.8 million will be amortized from accumulated other
comprehensive income (loss) into net periodic pension cost in 2020 for the net actuarial loss.
We do not anticipate making any contributions to the pension plan in 2020.
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to
be paid to participants:
(In thousands)
2020
2021
2022
2023
2024
Thereafter
Total
$515
582
619
706
789
4,872
$8,083
U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for
fair value measurement of financial instruments:
■ Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities
in an active market;
■ Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not
active or model inputs that are observable either directly or indirectly;
■ Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair value measurement. These inputs could
include information supplied by investees.
Financial Results 75
We have categorized our cash equivalents and our investments held at fair value into this hierarchy as follows:
Fair Value Measurements at December 31, 2019, Using
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$691
$ —
$ —
Fair Value
$691
6,645
5,514
531
6,645
5,514
531
11,071
11,071
956
863
312
902
531
956
863
312
902
531
27,325
$28,016
27,325
$28,016
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ —
$ —
Fair Value Measurements at December 31, 2018, Using
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
6,268
4,840
443
7,743
1,188
815
262
926
664
23,149
$24,159
23,149
$24,159
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ —
$ —
(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
(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
76 ADTRAN 2019 Annual Report
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.
401(k) Savings Plan
We maintain the ADTRAN, Inc. 401(k) Retirement Plan (the “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 (the “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 ($280,000 for
2019). All matching contributions under the Savings Plan vest immediately. Employer contribution expense and
plan administration costs for the Savings Plan amounted to approximately $4.4 million, $4.4 million and $4.6
million in 2019, 2018 and 2017, 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 PSUs and RSUs 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.
Financial Results 77
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 as of December 31,
2019 and 2018 were as follows:
(In thousands)
Fair Value of Plan Assets
Long-term investments
Total Fair Value of Plan Assets
Amounts Payable to Plan Participants
Deferred compensation liability
Total Amounts Payable to Plan Participants
2019
2018
$21,698
$18,256
$21,698
$18,256
$21,698
$18,256
$21,698
$18,256
Interest and dividend income of the Trust are included in interest and dividend income in the accompanying
2019, 2018 and 2017 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 2019, 2018 and 2017
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 2019, 2018 and 2017 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 2019, 2018 and 2017 of $3.6 million, $(2.1) million and $(2.6) million,
respectively.
Retiree Medical Coverage
We provided medical, dental and prescription drug coverage to two spouses of retired former officers on the
same terms as provided to our active officers for up to 30 years. As of December 31, 2019 and 2018, this liability
totaled $0.1 million.
Note 15 – Segment Information and Major Customers
Our chief operating decision maker regularly reviews our financial performance based on two reportable
segments across our segments– (1) Network Solutions and (2) Services & Support. Network Solutions includes
hardware and software products and next-generation virtualized solutions used in service provider or business
networks, as well as prior-generation products. Services & Support includes a portfolio of maintenance, network
implementation and solutions integration services, which include hosted cloud services and subscription services.
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 income tax (expense) benefit are reported on a company-wide, functional
basis only. There are no inter-segment revenues.
78 ADTRAN 2019 Annual Report
The following table presents information about the reported sales and gross profit of our reportable segments
for each of the years ended December 31, 2019, 2018 and 2017. Asset information by reportable segment is not
reported, since we do not produce such information internally.
2019
2018
2017
(In thousands)
Sales
Gross Profit
Sales
Gross Profit
Sales Gross Profit
Network Solutions
$455,226
$191,549
$458,232
$179,303
$540,396
$260,833
Services & Support
74,835
27,618
71,045
24,262
126,504
42,802
Total
$530,061
$219,167
$529,277
$203,565
$666,900
$303,635
Sales by Category
In addition to the above reporting segments, we also report revenue for the following three categories – (1) Access
& Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products.
The following tables disaggregates our revenue by major source for the years ended December 31, 2019, 2018
and 2017:
(In thousands)
Access & Aggregation
Subscriber Solutions & Experience (1)
Traditional & Other Products
Total
(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
Services &
Support
2019
Total
$289,980
$58,894
$348,874
144,651
20,595
8,269
7,672
152,920
28,267
$455,226
$74,835
$530,061
Network
Solutions
Services &
Support
2018
Total
$301,801
$57,069
$358,870
129,067
27,364
5,393
8,583
134,460
35,947
$458,232
$71,045
$529,277
Network
Solutions
Services &
Support
2017
Total
$361,955
$111,989
$473,944
132,294
46,147
6,162
8,353
138,456
54,500
$540,396
$126,504
$666,900
(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.
Financial Results 79
Additional Information
The following table presents sales information by geographic area for the years ended December 31, 2019,
2018 and 2017:
(In thousands)
United States
Mexico
Germany
Other international
Total
2019
2018
2017
$300,853
$288,843
$508,178
90,795
78,062
60,351
12,186
167,251
60,997
2,246
119,502
36,974
$530,061
$529,277
$666,900
Customers comprising more than 10% of revenue can change from year to year. Single customers comprising
more than 10% of our revenue in 2019 included three customers at 19%, 17% and 13%. 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%. Other than those
with more than 10% of revenues disclosed above, and excluding distributors, our next five largest customers can
change, and has historically changed, from year-to-year. These combined customers represented 15%, 18% and
15% of total revenue in 2019, 2018 and 2017, respectively.
As of December 31, 2019, property, plant and equipment, net totaled $73.7 million, which included $69.9 million
held in the U.S. and $3.9 million held outside the U.S. As of December 31, 2018, property, plant and equipment,
net totaled $80.6 million, which included $77.3 million held in the U.S. and $3.3 million held outside the U.S.
Property, plant and equipment, net is reported on a company-wide, functional basis only.
Note 16 – Commitments and Contingencies
Securities Class Action Lawsuit
On October 17, 2019, a purported stockholder class action lawsuit, captioned Burbridge v. ADTRAN, Inc. et
al., Docket No. 19-cv-09619, was filed in the United States District Court for the Southern District of New
York against the Company, two of its current executive officers and one of its former executive officers. The
complaint alleges violations of federal securities laws and seeks unspecified compensatory damages on behalf
of purported purchasers of ADTRAN securities between February 28, 2019 and October 9, 2019. The lawsuit
claims that the defendants made materially false and misleading statements regarding, and/or failed to disclose
material adverse facts about, the Company’s business, operations and prospects, specifically relating to the
Company’s internal control over financial reporting, excess and obsolete inventory reserves, financial results
and shipments to a Latin American customer. Investors in ADTRAN securities had until December 16, 2019 to
move the court to serve as lead plaintiff in this action.
On December 16, 2019, two purported investors in ADTRAN securities filed motions seeking to be appointed
lead plaintiff in the case. On January 6, 2020, the United States District Court for the Southern District of New
York granted Defendants’ unopposed request to transfer the case to the United States District Court for the
Northern District of Alabama, where the case is now pending as Burbridge v. ADTRAN, Inc. et al., Docket No.
5:20-cv-00050-LCB. On January 27, 2020, the two prospective lead plaintiff movants filed a stipulation among
plaintiffs seeking to be appointed as co-lead plaintiffs in the case.
We disagree with the claims made in the complaint and intend to vigorously defend against this lawsuit. At this
time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated
with this lawsuit.
80 ADTRAN 2019 Annual Report
Other Legal Matters
In addition to the litigation described above, from time to time we are subject to or otherwise involved in
various lawsuits, claims, investigations and legal proceedings that arise out of or are incidental to the conduct
of our business (collectively, “Legal Matters”), including those relating to employment matters, patent rights,
regulatory compliance matters, stockholder claims, and contractual and other commercial disputes. Such Legal
Matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
Additionally, an unfavorable outcome in a legal matter, including in a patent dispute, could require the Company
to pay damages, entitle claimants to other relief, such as royalties, or could prevent the Company from selling
some of its products in certain jurisdictions. While the Company cannot predict with certainty the results of
the Legal Matters in which it is currently involved, the Company does not expect that the ultimate outcome of
such Legal Matters will individually or in the aggregate have a material adverse effect on its business, results of
operations, financial condition or cash flows.
Investment Commitment
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, of which $7.7 million
has been applied to these commitments as of December 31, 2019.
Performance Bonds
Certain contracts, customers and/or jurisdictions in which we do business require us to provide various
guarantees of performance such as bid bonds, performance bonds and customs bonds. As of December 31,
2019, we had commitments related to these bonds totaling $9.3 million which expire at various dates through
August 2024. As of December 31, 2018, we had commitments related to these bonds totaling $6.5 million.
Although the triggering events vary from contract to contract, in general we would only be liable for the amount
of these guarantees in the event of default in our under each contract, the probability of which we believe is
remote.
Note 17 – Earnings (Loss) per Share
A summary of the calculation of basic and diluted earnings (loss) per share for the years ended December 31,
2019, 2018 and 2017 is as follows:
(In thousands, except for per share amounts)
2019
2018
2017
Numerator
Net Income (Loss)
Denominator
$(52,982)
$(19,342)
$23,840
Weighted average number of shares—basic
47,836
47,880
48,153
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
—
—
47,836
$(1.11)
$(1.11)
—
—
47,880
$(0.40)
$(0.40)
406
140
48,699
$0.50
$0.49
For each of the years ended December 31, 2019 and 2018, 5.7 million and 2.5 million, respectively, shares of
unvested stock options, PSUs, RSUs and restricted stock were excluded from the calculation of diluted EPS due
to their anti-dilutive effect.
For the year ended December 31, 2017, 3.2 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.
Financial Results 81
Note 18 – Restructuring
During the second half of 2019, the Company implemented a restructuring plan to realign its expense structure
with the reduction in revenue experienced in recent years and overall Company objectives. Management
assessed the efficiency of our operations and consolidated locations and personnel, among other things,
where possible. As part of this restructuring plan, the Company announced plans to reduce its overall operating
expenses, both in the U.S and internationally.
In February 2019, the Company announced the restructuring of certain of our workforce predominantly in
Germany, which included the closure of our office location in Munich, Germany accompanied by relocation
or severance benefits for the affected employees. We also offered voluntary early retirement to certain other
employees, which was announced in March 2019.
In January 2018, the Company announced an early retirement incentive program for employees that met certain
defined requirements. The cumulative amount incurred during the year ended December 31, 2018 related to this
restructuring program was $7.3 million. We did not incur any additional expenses related to this restructuring
program during the year ended December 31, 2019.
A reconciliation of the beginning and ending restructuring liability, which is included in accrued wages and
benefits in the Consolidated Balance Sheets as of December 31, 2019 and 2018, is as follows:
(In thousands)
Balance at beginning of period
Plus: Amounts charged to cost and expense
Less: Amounts paid
Balance at end of period
2019
$185
6,014
(4,631)
$1,568
2018
$205
7,261
(7,281)
$185
The components of restructuring expense in the Consolidated Statements of Income are for the years ended
December 31, 2019, 2018 and 2017:
(In thousands)
Selling, general and administrative expenses
Research and development expenses
Cost of sales
Total restructuring expenses
2019
$2,360
2,869
785
$6,014
2018
$2,655
1,831
2,775
$7,261
2017
$152
122
—
$274
The following table represents the components of restructuring expense by geographic area for the years
ended December 31, 2019, 2018 and 2017:
(In thousands)
United States
International
Total restructuring expenses
2019
$3,336
2,678
$6,014
2018
$7,120
141
$7,261
2017
$274
—
$274
82 ADTRAN 2019 Annual Report
Note 19 – 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
Net sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per common share - basic
Earnings (loss) per common share - diluted
Three Months Ended
Net sales
Gross profit
Operating income (loss)
Net income (loss)
Earnings (loss) per common share - basic
Earnings (loss) per common share - diluted
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
$143,791
$156,391
$60,612
$(6,167)
$770
$0.02
$0.02(1)
$65,015
$562
$3,995
$0.08
$0.08(1)
$114,092
$46,331
$(20,288)
$(46,123)
$(0.96)
$(0.96)
$115,787
$47,209
$(14,070)
$(11,624)
$(0.25)
$(0.25)
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
$120,806
$128,048
$140,335
$140,088
$39,733
$(26,647)
$(10,814)
$(0.22)
$(0.22)
$49,996
$(12,813)
$(7,670)
$(0.16)
$(0.16)
$58,448
$(2,179)
$7,589
$0.16
$0.16(1)
$55,388
$(3,783)
$(8,447)
$(0.18)
$(0.18)
(1) Assumes exercise of dilutive securities calculated under the treasury stock method.
Note 20 – Subsequent Events
On January 2, 2020, we paid off the outstanding balance of $24.6 million of the Taxable Revenue Bonds upon
their maturity. We used a restricted certificate of deposit which was held as collateral to repay the outstanding
balance.
On February 5, 2020, 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 20, 2020. The quarterly dividend will be paid
on March 5, 2020 payment in the aggregate amount of approximately $4.3 million. In July 2003, our Board of
Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of
dividends and adequate levels of Company liquidity.
Financial Results 83
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
Jeffery F. McInnis
Senior Vice President
Subscriber Solutions & Experience
Eduard Scheiterer
Senior Vice President
Research and Development
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)
Daniel T. Whalen
Chief Product Officer
James D. Wilson, Jr.
Chief Revenue Officer
Gregory McCray
Director of the Company
CEO of FDH
Transfer Agent
American Stock Transfer and Trust Company
New York, NY
Anthony J. Melone
Director of the Company
Former Executive Vice President and Chief Technology
Officer for Verizon Communications
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
Ronald D. Centis
Senior Vice President
Global Operations
Michael K. Foliano
Chief Financial Officer
Raymond Harris
Chief Information Officer
Marc Kimpe
Senior Vice President
Research and Development
84 ADTRAN 2019 Annual Report
Outside Counsel
Maynard Cooper & Gale
Birmingham, AL
Form 10-K
ADTRAN’s 2019 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 2020 Annual Meeting of Stockholders will be
held at ADTRAN corporate headquarters, 901 Explorer
Boulevard, Huntsville, Alabama, on Wednesday,
May 13, 2020, at 10:30 a.m. Central time.*
* We intend to hold our Annual Meeting in person. However,
we are actively monitoring the coronavirus (COVID-19) and
we are sensitive to the public health and travel concerns our
shareholders may have and the protocols that federal, state,
and local governments may impose. In the event that it is not
possible or advisable to hold our Annual Meeting in person,
we will announce alternative arrangements for the meeting
as promptly as practicable, which may include holding the
meeting solely by means of remote communication. Please
monitor our website annual meeting website at https://inves-
tors.adtran.com for updated information. If you are planning
to attend our meeting, please check the website one week
prior to the meeting date. As always, we encourage you to
vote your shares prior to the Annual Meeting.