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Business Combinations | 12 Months Ended
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Dec. 31, 2018
Business Combinations [Abstract] |
Business Combinations | Note 2 – Business Combinations On November 30, 2018, we acquired SmartRG, Inc., a provider of carrier-class, open-source connected home platforms and cloud services for broadband service providers for cash consideration. Together, ADTRAN Mosaic and SmartOS provide full end-to-end management and orchestration solutions from cloud edge to subscriber edge. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Subscriber Solutions & Experience category within the Network Solutions and Services & Support reportable segments. As of the acquisition date, we acquired accounts receivables with a fair value of $4.9 million all of which we estimate will be collected under the respective terms of each agreement. Contingent liabilities with a fair value totaling $1.2 million were recognized at the acquisition date, the payments of which are dependent upon SmartRG achieving future revenue, EBIT or customer purchase order milestones. The contingent payments are subject to arbitration and the final payouts are expected to occur during the first quarter of 2020. The minimum and maximum potential payment under the total of the contingent liabilities ranges from no payment to $1.5 million. As of December 31, 2018, the fair value of the contingent liability was re-assessed and was determined to be $1.2 million, based on the expected probable outcomes. No change in fair value was recognized. An escrow in the amount of $2.8 million was set up at the acquisition date, to fund post-closing working capital settlements and to indemnify the Company from any inaccuracy or breach of representations, warranties, covenants, agreements or obligations of the sellers. The escrow is subject to arbitration with final settlement expected during the fourth quarter of 2020. The minimum and maximum potential release of funds to the seller ranges from no payment to $2.8 million. We have made preliminary allocations of the purchase price to the assets acquired and liabilities assumed based on estimated fair value assessments; however, we are still completing those assessments, including an analysis of the discounted cash flows. Once we finalize the fair values, we may have changes in the following areas: tangible and intangible assets, goodwill, commitments and contingencies, and deferred taxes. We recorded goodwill of $3.6 million during the year ended December 31, 2018. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and we have concluded that our valuation procedures and resulting measures were appropriate. On March 19, 2018, we acquired Sumitomo Electric Lightwave Corp.’s (SEL) North American EPON business and entered into a technology license and OEM supply agreement with Sumitomo Electric Industries, Ltd. (SEI). This acquisition establishes ADTRAN as a North American market leader for EPON solutions for the cable MSO industry and it will accelerate the MSO market’s adoption of our open, programmable and scalable architectures. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Access & Aggregation and Subscriber Solutions & Experience categories within the Network Solutions reportable segment. We recorded a bargain purchase gain of $11.3 million during the first quarter of 2018, net of income taxes, which is subject to customary working capital adjustments between the parties. The bargain purchase gain of $11.3 million represents the difference between the fair-value of the net assets acquired over the cash paid. SEI, an OEM supplier based in Japan, is the global market leader in EPON. SEI’s Broadband Networks Division, through its SEL subsidiary, operated a North American EPON business that included sales, marketing, support, and region-specific engineering development. The North American EPON market is primarily driven by the Tier 1 cable MSO operators and has developed more slowly than anticipated. Through the transaction, SEI divested its North American EPON assets and established a relationship with ADTRAN. The transfer of these assets to ADTRAN, which included key customer relationships and a required assumption by ADTRAN of relatively low incremental expenses, along with the value of the technology license and OEM supply agreement, resulted in the bargain purchase gain. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and forecasted data for future periods and we have concluded that our valuation procedures and resulting measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2018 Consolidated Statements of Income. The preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date for SmartRG and the final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date for Sumitomo are as follows:
(In Thousands) |  | Sumitomo |  |  | SmartRG |
Assets |  |  |  |  |  |  |  |
Tangible assets acquired |  | $ | 1,006 |  |  | $ | 8,594 |
Intangible assets |  |  | 22,100 |  |  |  | 9,960 |
Goodwill |  |  | — |  |  |  | 3,614 |
Total assets acquired |  |  | 23,106 |  |  |  | 22,168 |
Liabilities |  |  |  |  |  |  |  |
Liabilities assumed |  |  | (3,978 | ) |  |  | (6,126 | )
Total liabilities assumed |  |  | (3,978 | ) |  |  | (6,126 | )
Total net assets |  |  | 19,128 |  |  |  | 16,042 |
Gain on bargain purchase of a business, net of tax |  |  | (11,322 | ) |  |  | — |
Total purchase price |  | $ | 7,806 |  |  | $ | 16,042 |
Our consolidated income statements include the following revenue and net loss attributable to SmartRG and Sumitomo since the date of acquisition:
(In thousands) |  | March 19, 2018 to December 31, 2018 |
Revenue |  | $ | 9,186 |
Net loss |  | $ | (1,297 | )
The details of the acquired intangible assets are as follows:
(In thousands) |  | Value |  |  | Life (years) |
Customer relationships |  | $ | 15,190 |  |  | 3 – 12 |
Developed technology |  |  | 7,400 |  |  |  | 7 |
Licensed technology |  |  | 5,900 |  |  |  | 9 |
Supplier relationship |  |  | 2,800 |  |  |  | 2 |
Licensing agreements |  |  | 560 |  |  | 5 – 10 |
Trade name |  |  | 210 |  |  |  | 3 |
Total |  | $ | 32,060 |  |  |  |  |
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) |  | 2018 |  |  | 2017 |
Pro forma revenue |  | $ | 559,050 |  |  | $ | 702,573 |
Pro forma net income (loss) |  | $ | (33,862 | ) |  | $ | 33,206 |
Pro forma earnings (loss) per share – basic |  | $ | (0.71 | ) |  | $ | 0.69 |
Pro forma earnings (loss) per share – diluted |  | $ | (0.71 | ) |  | $ | 0.68 |
For the year ended December 31, 2018, we incurred acquisition and integration related expenses and amortization of acquired intangibles related to these acquisitions of $2.9 million.

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