Annual Statements Open main menu

ADTRAN Holdings, Inc. - Quarter Report: 2016 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2016

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from             to            

Commission File Number 0-24612

 

ADTRAN, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

63-0918200

(State of Incorporation)

(I.R.S. Employer

 

Identification No.)

901 Explorer Boulevard, Huntsville, Alabama 35806-2807

(Address of principal executive offices, including zip code)

(256) 963-8000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the Registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

Non accelerated Filer

 

Smaller Reporting Company

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

Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date:

 

Class

 

Outstanding at October 20, 2016

Common Stock, $.01 Par Value

 

48,398,164 Shares

 

 

 

 

 


 

ADTRAN, Inc.

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended September 30, 2016

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 – (Unaudited)

 

3

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2016 – (Unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 – (Unaudited)

 

5

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 – (Unaudited)

 

6

 

 

Notes to Consolidated Financial Statements – (Unaudited)

 

7

2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

4

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

1A

 

Risk Factors

 

38

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

6

 

Exhibits

 

39

 

 

 

 

 

 

 

SIGNATURE

 

40

 

 

 

 

 

 

 

EXHIBIT INDEX

 

41

 

FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN. ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report, our other filings with the Securities and Exchange Commission (SEC) and other communications with our stockholders. Generally, the words, “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could” and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors that Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. They have also been discussed in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, 2015 filed on February 24, 2016 with the SEC. Though we have attempted to list comprehensively these important factors, we caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or a combination of factors may have on our business.

You are further cautioned not to place undue reliance on these forward-looking statements because they speak only of our views as of the date that the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADTRAN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,292

 

 

$

84,550

 

Short-term investments

 

 

55,516

 

 

 

34,396

 

Accounts receivable, less allowance for doubtful accounts of $- at September 30, 2016

   and $19 at December 31, 2015

 

 

101,822

 

 

 

71,917

 

Other receivables

 

 

12,159

 

 

 

19,321

 

Income tax receivable, net

 

 

540

 

 

 

-

 

Inventory, net

 

 

96,034

 

 

 

91,533

 

Prepaid expenses and other current assets

 

 

14,477

 

 

 

10,145

 

Deferred tax assets, net

 

 

17,963

 

 

 

18,924

 

Total Current Assets

 

 

364,803

 

 

 

330,786

 

Property, plant and equipment, net

 

 

78,078

 

 

 

73,233

 

Deferred tax assets, net

 

 

17,263

 

 

 

18,091

 

Goodwill

 

 

3,492

 

 

 

3,492

 

Other assets

 

 

13,548

 

 

 

9,276

 

Long-term investments

 

 

178,379

 

 

 

198,026

 

Total Assets

 

$

655,563

 

 

$

632,904

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

67,399

 

 

$

48,668

 

Unearned revenue

 

 

15,744

 

 

 

16,615

 

Accrued expenses

 

 

16,010

 

 

 

12,108

 

Accrued wages and benefits

 

 

16,468

 

 

 

12,857

 

Income tax payable, net

 

 

-

 

 

 

2,395

 

Total Current Liabilities

 

 

115,621

 

 

 

92,643

 

Non-current unearned revenue

 

 

7,105

 

 

 

7,965

 

Other non-current liabilities

 

 

26,740

 

 

 

24,236

 

Bonds payable

 

 

27,900

 

 

 

27,900

 

Total Liabilities

 

 

177,366

 

 

 

152,744

 

Commitments and contingencies (see Note 14)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares

   issued and 48,392 shares outstanding at September 30, 2016 and 79,652 shares

   issued and 49,558 shares outstanding at December 31, 2015

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

251,217

 

 

 

246,879

 

Accumulated other comprehensive loss

 

 

(7,826

)

 

 

(8,969

)

Retained earnings

 

 

920,395

 

 

 

906,772

 

Less treasury stock at cost: 31,260 and 30,094 shares at September 30, 2016 and

   December 31, 2015, respectively

 

 

(686,386

)

 

 

(665,319

)

Total Stockholders’ Equity

 

 

478,197

 

 

 

480,160

 

Total Liabilities and Stockholders’ Equity

 

$

655,563

 

 

$

632,904

 

 

See notes to consolidated financial statements

3


 

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

136,277

 

 

$

138,120

 

 

$

398,709

 

 

$

411,723

 

Services

 

 

32,613

 

 

 

19,958

 

 

 

75,086

 

 

 

49,328

 

Total Sales

 

 

168,890

 

 

 

158,078

 

 

 

473,795

 

 

 

461,051

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

70,988

 

 

 

75,969

 

 

 

202,905

 

 

 

231,739

 

Services

 

 

22,094

 

 

 

11,460

 

 

 

50,333

 

 

 

24,854

 

Total Cost of Sales

 

 

93,082

 

 

 

87,429

 

 

 

253,238

 

 

 

256,593

 

Gross Profit

 

 

75,808

 

 

 

70,649

 

 

 

220,557

 

 

 

204,458

 

Selling, general and administrative expenses

 

 

33,716

 

 

 

30,016

 

 

 

97,367

 

 

 

93,203

 

Research and development expenses

 

 

31,962

 

 

 

32,561

 

 

 

92,727

 

 

 

100,576

 

Operating Income

 

 

10,130

 

 

 

8,072

 

 

 

30,463

 

 

 

10,679

 

Interest and dividend income

 

 

910

 

 

 

839

 

 

 

2,692

 

 

 

2,680

 

Interest expense

 

 

(143

)

 

 

(151

)

 

 

(430

)

 

 

(448

)

Net realized investment gain

 

 

1,316

 

 

 

2,060

 

 

 

4,154

 

 

 

8,430

 

Other income (expense), net

 

 

(246

)

 

 

52

 

 

 

(378

)

 

 

(848

)

Gain on bargain purchase of a business

 

 

3,550

 

 

 

 

 

 

3,550

 

 

 

 

Income before provision for income taxes

 

 

15,517

 

 

 

10,872

 

 

 

40,051

 

 

 

20,493

 

Provision for income taxes

 

 

(3,102

)

 

 

(3,805

)

 

 

(12,394

)

 

 

(7,565

)

Net Income

 

$

12,415

 

 

$

7,067

 

 

$

27,657

 

 

$

12,928

 

Weighted average shares outstanding – basic

 

 

48,470

 

 

 

49,862

 

 

 

48,839

 

 

 

51,682

 

Weighted average shares outstanding – diluted

 

 

48,678

 

 

 

49,927

 

 

 

49,036

 

 

 

51,792

 

Earnings per common share – basic

 

$

0.26

 

 

$

0.14

 

 

$

0.57

 

 

$

0.25

 

Earnings per common share – diluted

 

$

0.26

 

 

$

0.14

 

 

$

0.56

 

 

$

0.25

 

Dividend per share

 

$

0.09

 

 

$

0.09

 

 

$

0.27

 

 

$

0.27

 

 

See notes to consolidated financial statements

 

 

4


 

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Income

 

$

12,415

 

 

$

7,067

 

 

$

27,657

 

 

$

12,928

 

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized losses on available-for-sale securities

 

 

258

 

 

 

(4,291

)

 

 

(162

)

 

 

(6,577

)

Defined benefit plan adjustments

 

 

36

 

 

 

71

 

 

 

103

 

 

 

211

 

Foreign currency translation

 

 

575

 

 

 

(1,351

)

 

 

1,202

 

 

 

(3,797

)

Other Comprehensive Income (Loss), net of tax

 

 

869

 

 

 

(5,571

)

 

 

1,143

 

 

 

(10,163

)

Comprehensive Income, net of tax

 

$

13,284

 

 

$

1,496

 

 

$

28,800

 

 

$

2,765

 

 

See notes to consolidated financial statements

 

 

5


 

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

27,657

 

 

$

12,928

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,260

 

 

 

10,765

 

Amortization of net premium on available-for-sale investments

 

 

489

 

 

 

2,085

 

Net realized investment gain

 

 

(4,154

)

 

 

(8,430

)

Net loss on disposal of property, plant and equipment

 

 

21

 

 

 

189

 

Gain on bargain purchase of a business

 

 

(3,550

)

 

 

-

 

Stock-based compensation expense

 

 

4,601

 

 

 

4,788

 

Deferred income taxes

 

 

(447

)

 

 

(2,332

)

Tax benefit from stock option exercises

 

 

(16

)

 

 

(40

)

Excess tax benefits from stock-based compensation arrangements

 

 

-

 

 

 

(3

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(29,370

)

 

 

843

 

Other receivables

 

 

7,475

 

 

 

10,532

 

Inventory

 

 

(683

)

 

 

(14,945

)

Prepaid expenses and other assets

 

 

(5,180

)

 

 

(1,665

)

Accounts payable

 

 

16,363

 

 

 

13,687

 

Accrued expenses and other liabilities

 

 

7,307

 

 

 

(3,996

)

Income tax payable/receivable, net

 

 

(2,941

)

 

 

(1,137

)

Net cash provided by operating activities

 

 

27,832

 

 

 

23,269

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(12,684

)

 

 

(7,843

)

Proceeds from disposals of property, plant and equipment

 

 

-

 

 

 

122

 

Proceeds from sales and maturities of available-for-sale investments

 

 

141,103

 

 

 

189,728

 

Purchases of available-for-sale investments

 

 

(139,181

)

 

 

(113,227

)

Acquisition of business

 

 

(943

)

 

 

-

 

Net cash provided by (used in) investing activities

 

 

(11,705

)

 

 

68,780

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

1,076

 

 

 

907

 

Purchases of treasury stock

 

 

(22,917

)

 

 

(65,808

)

Dividend payments

 

 

(13,230

)

 

 

(13,989

)

Excess tax benefits from stock-based compensation arrangements

 

 

-

 

 

 

3

 

Net cash used in financing activities

 

 

(35,071

)

 

 

(78,887

)

Net increase (decrease) in cash and cash equivalents

 

 

(18,944

)

 

 

13,162

 

Effect of exchange rate changes

 

 

686

 

 

 

(2,914

)

Cash and cash equivalents, beginning of period

 

 

84,550

 

 

 

73,439

 

Cash and cash equivalents, end of period

 

$

66,292

 

 

$

83,687

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

1,174

 

 

$

1,303

 

 

See notes to consolidated financial statements

 

 

6


 

ADTRAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (ADTRAN) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2015 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, all adjustments necessary to fairly state these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 24, 2016 with the SEC.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the obsolete and excess inventory reserves, warranty reserves, customer rebates, determination of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, estimated income tax provision and income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated pension liability, fair value of investments, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identified implementation issues. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We plan to adopt ASU 2014-09 and the related ASUs on January 1, 2018, and we are currently evaluating the transition method that will be elected and the impact that the adoption of ASU 2014-09 will have on our financial position, results of operations and cash flows.

7


 

In July 2015, the FASB issued Accounting Standards Update No.  2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We do not believe the adoption of ASU 2015-05 will have a material impact on our financial position, results of operations and cash flows.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 amends the existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively to all periods presented. We have not selected a transition method or determined whether to early adopt ASU 2015-17 in 2016. Other than the revised balance sheet presentation of current deferred tax assets and liabilities, we do not believe the adoption of ASU 2015-17 will have a material impact on our financial position, results of operations and cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. A modified retrospective approach is required. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial position, results of operations and cash flows.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of accounting for share-based compensation arrangements, including income tax effects, the classification of tax-related cash flows on the statement of cash flows, and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-09 will have on our financial position, results of operations and cash flows.

During the first quarter of 2016, we adopted the following accounting standards, which had no material effect on our financial position, results of operations or cash flows:

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The amendments may be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We adopted ASU 2015-05 during the first quarter of 2016 and will apply the new standard prospectively. The adoption of ASU 2015-05 did not have a material impact on our financial position, results of operations and cash flows.

 

 

2.  BUSINESS COMBINATIONS

 

On September 13, 2016, we acquired key fiber access products, technologies and service relationships from subsidiaries of CommScope, Inc. for $0.9 million in cash. This acquisition will enhance our solutions for the cable MSO industry and will provide cable operators with the scalable solutions, services and support they require to compete in the multi-gigabit service delivery market. 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 Network Solutions reportable segment, and in the Access & Aggregation and Customer Devices categories.

 

8


 

We recorded a bargain purchase gain of $3.6 million, net of income taxes, subject to customary working capital adjustments between the parties. The bargain purchase gain of $3.6 million represents the excess fair value of the net assets acquired over the consideration exchanged. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and pro forma data for future periods and 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 2016 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, subject to working capital adjustments, is as follows:

 

(In Thousands)

 

 

 

Assets

 

 

 

  Inventory

 

3,272

 

  Property, plant and equipment

 

352

 

  Intangible assets

 

4,700

 

Total assets acquired

 

8,324

 

 

 

 

 

Liabilities

 

 

 

  Accounts payable

 

(1,378

)

  Warranty payable

 

(61

)

  Accrued wages and benefits

 

(122

)

  Deferred income taxes

 

(2,270

)

Total liabilities assumed

 

(3,831

)

 

 

 

 

Total net assets

 

4,493

 

  Gain on bargain purchase of a business, net of tax

 

(3,550

)

Total purchase price

$

943

 

 

The details of the acquired intangible assets are as follows:

 

In thousands

Value

 

 

Life (years)

Supply agreement

$

1,400

 

 

0.8

Customer relationships

 

1,200

 

 

6

Developed technology

 

800

 

 

10

License

 

500

 

 

1.3

Patent

 

500

 

 

7.3

Non-compete

 

200

 

 

2.3

Trade name

 

100

 

 

2

Total

$

4,700

 

 

 

 

The actual revenue and pre-tax loss included in our Consolidated Statements of Income for the period September 13, 2016 to September 30, 2016 are as follows:

 

 

September 13 to

 

(In thousands)

September 30, 2016

 

Revenue

$

1,291

 

Pre-tax loss

$

(70

)

 

 

9


 

The following supplemental pro forma information presents the financial results as if the acquisition had occurred on January 1, 2015.  This supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on January 1, 2015, nor is it indicative of any future results. Aside from revising the 2015 pre-tax income for the effect of the bargain purchase gain, there were no material, non-recurring adjustments to this pro forma information.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Pro forma revenue

 

$

170,498

 

 

$

159,375

 

 

$

478,184

 

 

$

463,916

 

Pro forma pre-tax income

 

$

11,778

 

 

$

10,294

 

 

$

35,771

 

 

$

21,826

 

 

For the three months ended September 30, 2016, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.2 million related to this acquisition.

 

 

3. INCOME TAXES

Our effective tax rate decreased from 36.9% in the nine months ended September 30, 2015 to 34.0%, excluding the tax impact of the bargain purchase gain, in the nine months ended September 30, 2016. The decrease in the effective tax rate between the two periods is primarily attributable to the research and development tax credit being made permanent.

 

 

4. PENSION BENEFIT PLAN

We maintain a defined benefit pension plan covering employees in certain foreign countries.

The following table summarizes the components of net periodic pension cost for the three and nine months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Service cost

 

$

305

 

 

$

328

 

 

$

912

 

 

$

992

 

Interest cost

 

 

182

 

 

 

153

 

 

 

542

 

 

 

464

 

Expected return on plan assets

 

 

(266

)

 

 

(252

)

 

 

(796

)

 

 

(763

)

Amortization of actuarial losses

 

 

44

 

 

 

102

 

 

 

132

 

 

 

307

 

Net periodic pension cost

 

$

265

 

 

$

331

 

 

$

790

 

 

$

1,000

 

 

 

5. STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock for the three and nine months ended September 30, 2016 and 2015, which was recognized as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock-based compensation expense included in cost of

   sales

 

$

88

 

 

$

59

 

 

$

282

 

 

$

202

 

Selling, general and administrative expense

 

 

765

 

 

 

812

 

 

 

2,322

 

 

 

2,226

 

Research and development expense

 

 

639

 

 

 

803

 

 

 

1,997

 

 

 

2,360

 

Stock-based compensation expense included in operating

   expenses

 

 

1,404

 

 

 

1,615

 

 

 

4,319

 

 

 

4,586

 

Total stock-based compensation expense

 

 

1,492

 

 

 

1,674

 

 

 

4,601

 

 

 

4,788

 

Tax benefit for expense associated with non-qualified

   options

 

 

(218

)

 

 

(218

)

 

 

(643

)

 

 

(620

)

Total stock-based compensation expense, net of tax

 

$

1,274

 

 

$

1,456

 

 

$

3,958

 

 

$

4,168

 

 

10


 

The fair value of our stock options is estimated using the Black-Scholes model. The determination of the fair value of stock options on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.

The weighted-average assumptions and value of options granted during the three and nine months ended September 30, 2016 and 2015 are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected volatility

 

 

34.55

%

 

 

34.80

%

 

 

34.66

%

 

 

36.24

%

Risk-free interest rate

 

 

1.20

%

 

 

1.84

%

 

 

1.28

%

 

 

1.70

%

Expected dividend yield

 

 

1.83

%

 

 

2.13

%

 

 

1.88

%

 

 

1.94

%

Expected life (in years)

 

 

6.21

 

 

 

6.24

 

 

 

6.24

 

 

 

6.32

 

Weighted-average estimated value

 

$

5.64

 

 

$

4.89

 

 

$

5.50

 

 

$

5.89

 

 

The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. No RSUs were granted or vested during the three and nine months ended September 30, 2016 and 2015. Twelve thousand RSUs were forfeited during the nine months ended September 30, 2015.

The fair value of restricted stock is equal to the closing price of our stock on the date of grant. Two thousand shares and four thousand shares of restricted stock were granted during the three and nine months ended September 30, 2016, respectively. Two thousand shares of restricted stock vested during the three and nine months ended September 30, 2015.

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options are based upon historical experience and approximate 3.7% annually. We estimated a 0% forfeiture rate for our RSUs and restricted stock due to the limited number of recipients and historical experience for these awards.

As of September 30, 2016, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $9.9 million, which is expected to be recognized over an average remaining recognition period of 2.2 years.

The following table is a summary of our stock options outstanding as of December 31, 2015 and September 30, 2016 and the changes that occurred during the nine months ended September 30, 2016:

 

(In thousands, except per share amounts)

 

Number of

Options

 

 

Weighted Avg.

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual

Life In Years

 

 

Aggregate

Intrinsic Value

 

Options outstanding, December 31, 2015

 

 

7,108

 

 

$

21.97

 

 

 

6.42

 

 

$

3,284

 

Options granted

 

 

2

 

 

$

19.19

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(65

)

 

$

16.49

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(78

)

 

$

17.93

 

 

 

 

 

 

 

 

 

Options expired

 

 

(142

)

 

$

25.49

 

 

 

 

 

 

 

 

 

Options outstanding, September 30, 2016

 

 

6,825

 

 

$

22.01

 

 

 

5.69

 

 

$

7,675

 

Options vested and expected to vest, September 30, 2016

 

 

6,729

 

 

$

22.09

 

 

 

5.65

 

 

$

7,414

 

Options exercisable, September 30, 2016

 

 

4,322

 

 

$

24.40

 

 

 

4.19

 

 

$

2,719

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing price of our stock on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2016. The aggregate intrinsic value will change based on the fair market value of our stock.

The total pre-tax intrinsic value of options exercised during the three and nine months ended September 30, 2016 was $0.1 million and $0.2 million, respectively.

 

11


 

6. INVESTMENTS

At September 30, 2016, we held the following securities and investments, recorded at either fair value or cost.

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,656

 

 

$

2,172

 

 

$

(20

)

 

$

13,808

 

Corporate bonds

 

 

59,900

 

 

 

136

 

 

 

(50

)

 

 

59,986

 

Municipal fixed-rate bonds

 

 

17,589

 

 

 

54

 

 

 

(4

)

 

 

17,639

 

Asset-backed bonds

 

 

22,564

 

 

 

72

 

 

 

(23

)

 

 

22,613

 

Mortgage/Agency-backed bonds

 

 

15,055

 

 

 

24

 

 

 

(43

)

 

 

15,036

 

U.S. government bonds

 

 

28,437

 

 

 

168

 

 

 

-

 

 

 

28,605

 

Foreign government bonds

 

 

6,428

 

 

 

3

 

 

 

(1

)

 

 

6,430

 

Variable rate demand notes

 

 

12,315

 

 

 

-

 

 

 

-

 

 

 

12,315

 

Marketable equity securities

 

 

26,975

 

 

 

1,468

 

 

 

(1,076

)

 

 

27,367

 

Available-for-sale securities held at fair value

 

$

200,919

 

 

$

4,097

 

 

$

(1,217

)

 

$

203,799

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,900

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,196

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

233,895

 

 

At December 31, 2015, we held the following securities and investments, recorded at either fair value or cost.

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,325

 

 

$

1,575

 

 

$

(66

)

 

$

12,834

 

Corporate bonds

 

 

58,328

 

 

 

20

 

 

 

(734

)

 

 

57,614

 

Municipal fixed-rate bonds

 

 

26,414

 

 

 

28

 

 

 

(18

)

 

 

26,424

 

Asset-backed bonds

 

 

19,281

 

 

 

2

 

 

 

(44

)

 

 

19,239

 

Mortgage/Agency-backed bonds

 

 

15,463

 

 

 

1

 

 

 

(91

)

 

 

15,373

 

U.S. Government bonds

 

 

35,646

 

 

 

-

 

 

 

(248

)

 

 

35,398

 

Marketable equity securities

 

 

31,643

 

 

 

4,301

 

 

 

(1,693

)

 

 

34,251

 

Available-for-sale securities held at fair value

 

$

198,100

 

 

$

5,927

 

 

$

(2,894

)

 

$

201,133

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,289

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

232,422

 

 

As of September 30, 2016, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, and foreign government bonds had the following contractual maturities:

 

(In thousands)

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-

backed

bonds

 

 

Mortgage /

Agency-

backed bonds

 

 

U.S. government

bonds

 

 

Foreign government bonds

 

Less than one year

 

$

22,993

 

 

$

12,156

 

 

$

-

 

 

$

-

 

 

$

2,952

 

 

$

5,100

 

One to two years

 

 

24,504

 

 

 

3,186

 

 

 

1,094

 

 

 

1,385

 

 

 

9,096

 

 

 

1,330

 

Two to three years

 

 

9,296

 

 

 

858

 

 

 

8,989

 

 

 

2,004

 

 

 

4,573

 

 

 

-

 

Three to five years

 

 

3,193

 

 

 

1,439

 

 

 

9,739

 

 

 

-

 

 

 

11,984

 

 

 

-

 

Five to ten years

 

 

-

 

 

 

-

 

 

 

2,614

 

 

 

1,448

 

 

 

-

 

 

 

-

 

More than ten years

 

 

-

 

 

 

-

 

 

 

177

 

 

 

10,199

 

 

 

-

 

 

 

-

 

Total

 

$

59,986

 

 

$

17,639

 

 

$

22,613

 

 

$

15,036

 

 

$

28,605

 

 

$

6,430

 

 

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

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.

12


 

At September 30, 2016, we held a $28.9 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond), which totaled $28.9 million at September 30, 2016 and December 31, 2015. At September 30, 2016, the estimated fair value of the Bond using a level 2 valuation technique was approximately $29.3 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due.

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the three and nine months ended September 30, 2016, other-than-temporary impairment charges were not significant.

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 investments.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Gross realized gains

 

$

1,346

 

 

$

2,251

 

 

$

5,226

 

 

$

8,856

 

Gross realized losses

 

$

(30

)

 

$

(191

)

 

$

(1,072

)

 

$

(426

)

 

As of September 30, 2016 and 2015, gross unrealized losses related to individual securities in a continuous loss position for 12 months or longer were not significant.

 

 

13


 

We have categorized our cash equivalents held in money market funds and our investments held at fair value into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique for the cash equivalents and investments as follows:  Level 1 - Values based on unadjusted quoted prices for identical assets or liabilities in an active market; Level 2 - Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3 - Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees.

 

 

 

Fair Value Measurements at September 30, 2016 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,032

 

 

$

2,032

 

 

$

-

 

 

$

-

 

Commercial Paper

 

 

3,585

 

 

 

-

 

 

 

3,585

 

 

 

-

 

Cash equivalents

 

 

5,617

 

 

 

2,032

 

 

 

3,585

 

 

 

-

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

13,808

 

 

 

13,808

 

 

 

-

 

 

 

-

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

59,986

 

 

 

-

 

 

 

59,986

 

 

 

-

 

Municipal fixed-rate bonds

 

 

17,639

 

 

 

-

 

 

 

17,639

 

 

 

-

 

Asset-backed bonds

 

 

22,613

 

 

 

-

 

 

 

22,613

 

 

 

-

 

Mortgage/Agency-backed bonds

 

 

15,036

 

 

 

-

 

 

 

15,036

 

 

 

-

 

U.S. government bonds

 

 

28,605

 

 

 

28,605

 

 

 

-

 

 

 

-

 

Foreign government bonds

 

 

6,430

 

 

 

-

 

 

 

6,430

 

 

 

-

 

Variable rate demand notes

 

 

12,315

 

 

 

-

 

 

 

12,315

 

 

 

-

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – technology industry

 

 

3,693

 

 

 

3,693

 

 

 

-

 

 

 

-

 

Marketable equity securities – other

 

 

23,674

 

 

 

23,674

 

 

 

-

 

 

 

-

 

Available-for-sale securities

 

 

203,799

 

 

 

69,780

 

 

 

134,019

 

 

 

-

 

Total

 

$

209,416

 

 

$

71,812

 

 

$

137,604

 

 

$

-

 

 

 

 

Fair Value Measurements at December 31, 2015 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,271

 

 

$

1,271

 

 

$

-

 

 

$

-

 

Commercial Paper

 

 

11,696

 

 

 

-

 

 

 

11,696

 

 

 

-

 

Cash equivalents

 

 

12,967

 

 

 

1,271

 

 

 

11,696

 

 

 

-

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

12,834

 

 

 

12,834

 

 

 

-

 

 

 

-

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

57,614

 

 

 

-

 

 

 

57,614

 

 

 

-

 

Municipal fixed-rate bonds

 

 

26,424

 

 

 

-

 

 

 

26,424

 

 

 

-

 

Asset-backed bonds

 

 

19,239

 

 

 

-

 

 

 

19,239

 

 

 

-

 

Mortgage/Agency-backed bonds

 

 

15,373

 

 

 

-

 

 

 

15,373

 

 

 

-

 

U.S. government bonds

 

 

35,398

 

 

 

35,398

 

 

 

-

 

 

 

-

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – technology industry

 

 

5,384

 

 

 

5,384

 

 

 

-

 

 

 

-

 

Marketable equity securities – other

 

 

28,867

 

 

 

28,867

 

 

 

-

 

 

 

-

 

Available-for-sale securities

 

 

201,133

 

 

 

82,483

 

 

 

118,650

 

 

 

-

 

Total

 

$

214,100

 

 

$

83,754

 

 

$

130,346

 

 

$

-

 

14


 

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.

 

 

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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 these are remeasured to the functional currency through profit and loss. When appropriate, we enter into various derivative transactions to enhance our ability to manage the volatility relating to these typical business exposures. We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments do not qualify for hedge accounting, and accordingly, all changes in the fair value of the instruments are recognized as other income (expense) in the Consolidated Statements of Income. Our derivative instruments are not subject to master netting arrangements and are not offset in the Consolidated Balance Sheets.

As of September 30, 2016 and December 31, 2015, we had no forward contracts outstanding.

 

The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Income Statement

 

September 30,

 

 

September 30,

 

(In thousands)

 

Location

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income (expense)

 

$

(37

)

 

$

30

 

 

$

153

 

 

$

208

 

 

 

8. INVENTORY

At September 30, 2016 and December 31, 2015, inventory consisted of the following:

 

 

 

 

September 30,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Raw materials

 

$

37,879

 

 

$

34,223

 

Work in process

 

 

3,044

 

 

 

2,893

 

Finished goods

 

 

55,111

 

 

 

54,417

 

Total

 

$

96,034

 

 

$

91,533

 

 

We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At September 30, 2016 and December 31, 2015, raw materials reserves totaled $18.3 million and $17.5 million, respectively, and finished goods inventory reserves totaled $10.1 million and $9.2 million, respectively.

 

 

9. GOODWILL AND INTANGIBLE ASSETS

Goodwill, all of which relates to our acquisition of Bluesocket, Inc., was $3.5 million at September 30, 2016 and December 31, 2015, and was previously recorded in our Enterprise Networks reportable segment. As a result of our new reporting structure, which is discussed further in Note 12, we reallocated goodwill from our Enterprise Networks reportable segment to our two, new reportable segments – Network Solutions and Services & Support. As a result, goodwill of $3.1 million and $0.4 million was reallocated to our Network Solutions and Services & Support reportable segments, respectively.

 

15


 

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in 2015, we concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses recognized since the acquisition in 2011.

Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangibles acquired in conjunction with our acquisitions of Objectworld Communications Corporation on September 15, 2009, Bluesocket, Inc. on August 4, 2011, the NSN BBA business on May 4, 2012, and CommScope’s active fiber access business on September 13, 2016.

The following table presents our intangible assets as of September 30, 2016 and December 31, 2015:

 

(In thousands)

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Gross

Value

 

 

Accumulated Amortization

 

 

Net Value

 

 

Gross

Value

 

 

Accumulated Amortization

 

 

Net Value

 

Customer relationships

 

$

7,178

 

 

$

(3,147

)

 

 

4,031

 

 

$

5,828

 

 

$

(2,627

)

 

$

3,201

 

Developed technology

 

 

6,609

 

 

 

(4,995

)

 

 

1,614

 

 

 

5,720

 

 

 

(4,329

)

 

 

1,391

 

Intellectual property

 

 

2,340

 

 

 

(2,096

)

 

 

244

 

 

 

2,340

 

 

 

(1,854

)

 

 

486

 

Supply agreement

 

 

1,400

 

 

 

(78

)

 

 

1,322

 

 

 

-

 

 

 

-

 

 

 

-

 

License

 

 

500

 

 

 

(16

)

 

 

484

 

 

 

-

 

 

 

-

 

 

 

-

 

Patent

 

 

500

 

 

 

(3

)

 

 

497

 

 

 

-

 

 

 

-

 

 

 

-

 

Trade names

 

 

370

 

 

 

(272

)

 

 

98

 

 

 

270

 

 

 

(265

)

 

 

5

 

Non-compete

 

 

200

 

 

 

(4

)

 

 

196

 

 

 

11

 

 

 

(11

)

 

 

-

 

Total

 

$

19,097

 

 

$

(10,611

)

 

$

8,486

 

 

$

14,169

 

 

$

(9,086

)

 

$

5,083

 

 

Amortization expense, all of which relates to business acquisitions, was $0.5 million for the three months ended September 30, 2016 and 2015, and $1.4 million and $1.5 million for the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)

 

Amount

 

Remainder of 2016

 

$

1,058

 

2017

 

 

2,901

 

2018

 

 

1,189

 

2019

 

 

675

 

2020

 

 

640

 

Thereafter

 

 

2,023

 

Total

 

$

8,486

 

 

 

16


 

10. STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity for the nine months ended September 30, 2016 is as follows:

 

(In thousands)

 

Stockholders’ Equity

 

Balance, December 31, 2015

 

$

480,160

 

Net income

 

 

27,657

 

Dividend payments

 

 

(13,230

)

Dividends accrued for unvested restricted stock units

 

 

(30

)

Net unrealized losses on available-for-sale securities (net of tax)

 

 

(162

)

Defined benefit plan adjustments

 

 

103

 

Foreign currency translation adjustment

 

 

1,202

 

Proceeds from stock option exercises

 

 

1,076

 

Purchase of treasury stock

 

 

(22,917

)

Income tax effect of stock compensation arrangements

 

 

(263

)

Stock-based compensation expense

 

 

4,601

 

Balance, September 30, 2016

 

$

478,197

 

 

Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 50.0 million shares of our common stock, which will be implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended September 30, 2016, we repurchased 1.2 million shares of our common stock at an average price of $18.34 per share. As of September 30, 2016, we have the authority to purchase an additional 4.6 million shares of our common stock under the current plans approved by the Board of Directors.

Stock Option Exercises

We issued 0.1 million shares of treasury stock during the nine months ended September 30, 2016 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $18.97. We received proceeds totaling $1.1 million from the exercise of these stock options during the nine months ended September 30, 2016.

Dividend Payments

During the nine months ended September 30, 2016, we paid cash dividends as follows (in thousands except per share amounts):

 

Record Date

 

Payment Date

 

Per Share Amount

 

 

Total Dividend Paid

 

February 4, 2016

 

February 18, 2016

 

$

0.09

 

 

$

4,453

 

April 28, 2016

 

May 12, 2016

 

$

0.09

 

 

$

4,407

 

July 28, 2016

 

August 11, 2016

 

$

0.09

 

 

$

4,370

 

17


 

Other Comprehensive Income

Other comprehensive income consists of unrealized gains (losses) on available-for-sale securities, reclassification adjustments for amounts included in net income related to impairments of available-for-sale securities, realized gains (losses) on available-for-sale securities, and amortization of actuarial gains (losses) related to our defined benefit plan, defined benefit plan adjustments, and foreign currency translation adjustments.

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended September 30, 2016

 

(In thousands)

 

Unrealized

Gains

(Losses)

on

Available-

for-Sale

Securities

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

Total

 

Beginning balance

 

$

1,512

 

 

$

(3,828

)

 

$

(6,379

)

 

$

(8,695

)

Other comprehensive income (loss) before

   reclassifications

 

 

1,028

 

 

 

-

 

 

 

575

 

 

 

1,603

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

(770

)

 

 

36

 

 

 

-

 

 

 

(734

)

Net current period other comprehensive income (loss)

 

 

258

 

 

 

36

 

 

 

575

 

 

 

869

 

Ending balance

 

$

1,770

 

 

$

(3,792

)

 

$

(5,804

)

 

$

(7,826

)

 

 

 

Three Months Ended September 30, 2015

 

(In thousands)

 

Unrealized

Gains

(Losses)

on

Available-

for-Sale

Securities

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

Total

 

Beginning balance

 

$

6,678

 

 

$

(5,617

)

 

$

(5,728

)

 

$

(4,667

)

Other comprehensive income (loss) before

   reclassifications

 

 

(3,034

)

 

 

-

 

 

 

(1,351

)

 

 

(4,385

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(1,257

)

 

 

71

 

 

 

-

 

 

 

(1,186

)

Net current period other comprehensive income (loss)

 

 

(4,291

)

 

 

71

 

 

 

(1,351

)

 

 

(5,571

)

Ending balance

 

$

2,387

 

 

$

(5,546

)

 

$

(7,079

)

 

$

(10,238

)

 

18


 

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the nine months ended September 30, 2016 and 2015:

 

 

 

Nine Months Ended September 30, 2016

 

(In thousands)

 

Unrealized

Gains

(Losses)

on

Available-

for-Sale

Securities

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

Total

 

Beginning balance

 

$

1,932

 

 

$

(3,895

)

 

$

(7,006

)

 

$

(8,969

)

Other comprehensive income (loss) before

   reclassifications

 

 

2,267

 

 

 

-

 

 

 

1,202

 

 

 

3,469

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

(2,429

)

 

 

103

 

 

 

-

 

 

 

(2,326

)

Net current period other comprehensive income (loss)

 

 

(162

)

 

 

103

 

 

 

1,202

 

 

 

1,143

 

Ending balance

 

$

1,770

 

 

$

(3,792

)

 

$

(5,804

)

 

$

(7,826

)

 

 

 

Nine Months Ended September 30, 2015

 

(In thousands)

 

Unrealized

Gains

(Losses)

on

Available-

for-Sale

Securities

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

Total

 

Beginning balance

 

$

8,964

 

 

$

(5,757

)

 

$

(3,282

)

 

$

(75

)

Other comprehensive income (loss) before

   reclassifications

 

 

(1,497

)

 

 

-

 

 

 

(3,797

)

 

 

(5,294

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(5,080

)

 

 

211

 

 

 

-

 

 

 

(4,869

)

Net current period other comprehensive income (loss)

 

 

(6,577

)

 

 

211

 

 

 

(3,797

)

 

 

(10,163

)

Ending balance

 

$

2,387

 

 

$

(5,546

)

 

$

(7,079

)

 

$

(10,238

)

 

 

19


 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2016 and 2015:

 

(In thousands)

 

Three Months Ended September 30, 2016

Details about Accumulated Other Comprehensive Income Components

 

Amount

Reclassified

from

Accumulated

Other

Comprehensive

Income

 

 

Affected Line Item in the

Statement Where Net

Income Is Presented

Unrealized gains (losses) on available-for-

   sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

1,268

 

 

Net realized investment gain

Impairment expense

 

 

(6

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial

   losses

 

 

(51

)

 

(1)

Total reclassifications for the period, before

   tax

 

 

1,211

 

 

 

Tax (expense) benefit

 

 

(477

)

 

 

Total reclassifications for the period, net

   of tax

 

$

734

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.

 

(In thousands)

 

Three Months Ended September 30, 2015

Details about Accumulated Other Comprehensive Income Components

 

Amount

Reclassified

from

Accumulated

Other

Comprehensive

Income

 

 

Affected Line Item in the

Statement Where Net

Income Is Presented

Unrealized gains (losses) on available-for-

   sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

2,098

 

 

Net realized investment gain

Impairment expense

 

 

(37

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial

   losses

 

 

(103

)

 

(1)

Total reclassifications for the period, before

   tax

 

 

1,958

 

 

 

Tax (expense) benefit

 

 

(772

)

 

 

Total reclassifications for the period, net

   of tax

 

$

1,186

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.

 

 

20


 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015:

 

(In thousands)

 

Nine Months Ended September 30, 2016

Details about Accumulated Other Comprehensive Income Components

 

Amount

Reclassified

from

Accumulated

Other

Comprehensive

Income

 

 

Affected Line Item in the

Statement Where Net

Income Is Presented

Unrealized gains (losses) on available-for-

   sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

4,383

 

 

Net realized investment gain

Impairment expense

 

 

(401

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial

   losses

 

 

(149

)

 

(1)

Total reclassifications for the period, before

   tax

 

 

3,833

 

 

 

Tax (expense) benefit

 

 

(1,507

)

 

 

Total reclassifications for the period, net

   of tax

 

$

2,326

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.

 

(In thousands)

 

Nine Months Ended September 30, 2015

Details about Accumulated Other Comprehensive Income Components

 

Amount

Reclassified

from

Accumulated

Other

Comprehensive

Income

 

 

Affected Line Item in the

Statement Where Net

Income Is Presented

Unrealized gains (losses) on available-for-

   sale securities:

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

8,438

 

 

Net realized investment gain

Impairment expense

 

 

(110

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial

   losses

 

 

(306

)

 

(1)

Total reclassifications for the period, before

   tax

 

 

8,022

 

 

 

Tax (expense) benefit

 

 

(3,153

)

 

 

Total reclassifications for the period, net

   of tax

 

$

4,869

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.

21


 

The following table presents the tax effects related to the change in each component of other comprehensive income for the three months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

Unrealized gains (losses) on available-for-sale

   securities

 

$

1,685

 

 

$

(657

)

 

$

1,028

 

 

$

(4,974

)

 

$

1,940

 

 

$

(3,034

)

Reclassification adjustment for amounts related to

   available-for-sale investments included in net

   income

 

 

(1,262

)

 

 

492

 

 

 

(770

)

 

 

(2,061

)

 

 

804

 

 

 

(1,257

)

Reclassification adjustment for amounts related to

   defined benefit plan adjustments included in net

   income

 

 

51

 

 

 

(15

)

 

 

36

 

 

 

103

 

 

 

(32

)

 

 

71

 

Foreign currency translation adjustment

 

 

575

 

 

 

-

 

 

 

575

 

 

 

(1,351

)

 

 

-

 

 

 

(1,351

)

Total Other Comprehensive Income (Loss)

 

$

1,049

 

 

$

(180

)

 

$

869

 

 

$

(8,283

)

 

$

2,712

 

 

$

(5,571

)

 

The following table presents the tax effects related to the change in each component of other comprehensive income for the nine months ended September 30, 2016 and 2015:

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

Unrealized gains (losses) on available-for-sale

   securities

 

$

3,716

 

 

$

(1,449

)

 

$

2,267

 

 

$

(2,454

)

 

$

957

 

 

$

(1,497

)

Reclassification adjustment for amounts related to

   available-for-sale investments included in net

   income

 

 

(3,982

)

 

 

1,553

 

 

 

(2,429

)

 

 

(8,328

)

 

 

3,248

 

 

 

(5,080

)

Reclassification adjustment for amounts related to

   defined benefit plan adjustments included in net

   income

 

 

149

 

 

 

(46

)

 

 

103

 

 

 

306

 

 

 

(95

)

 

 

211

 

Foreign currency translation adjustment

 

 

1,202

 

 

 

-

 

 

 

1,202

 

 

 

(3,797

)

 

 

-

 

 

 

(3,797

)

Total Other Comprehensive Income (Loss)

 

$

1,085

 

 

$

58

 

 

$

1,143

 

 

$

(14,273

)

 

$

4,110

 

 

$

(10,163

)

 

 

 

22


 

11. EARNINGS PER SHARE

A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015 is as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands, except per share amounts)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,415

 

 

$

7,067

 

 

$

27,657

 

 

$

12,928

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares – basic

 

 

48,470

 

 

 

49,862

 

 

 

48,839

 

 

 

51,682

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

137

 

 

 

29

 

 

 

137

 

 

 

94

 

Restricted stock and restricted stock units

 

 

71

 

 

 

36

 

 

 

60

 

 

 

16

 

Weighted average number of shares – diluted

 

 

48,678

 

 

 

49,927

 

 

 

49,036

 

 

 

51,792

 

Net income per share – basic

 

$

0.26

 

 

$

0.14

 

 

$

0.57

 

 

$

0.25

 

Net income per share – diluted

 

$

0.26

 

 

$

0.14

 

 

$

0.56

 

 

$

0.25

 

 

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 5.6 million and 6.0 million for the three months ended September 30, 2016 and 2015, respectively, and 5.7 million and 6.1 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

12. SEGMENT INFORMATION

In 2015, we began a realignment of our organizational structure to better match our market opportunities, technological development initiatives, and improve efficiencies. During the first quarter of 2016, our chief operating decision maker requested changes in the information that he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning with the quarter ended March 31, 2016, we began reporting our financial performance based on two, new reportable segments – Network Solutions and Services & Support. Network Solutions includes hardware products and next-generation virtualized solutions used in service provider or business networks, as well as prior-generation products. Services & Support includes our suite of ProCloud® managed services, network installation, engineering and maintenance services, and fee-based technical support and equipment repair/replacement plans.

We evaluate the performance of our new segments based on gross profit; therefore, selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on a company-wide, functional basis only. Historical financial information by reportable segment and category, as discussed below, has been recast to conform to our new reporting structure. There are no inter-segment revenues.

The following table presents information about the reported sales and gross profit of our reportable segments for the three and nine months ended September 30, 2016 and 2015. We do not produce asset information by reportable segment; therefore, it is not reported.

 

 

 

Three Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

(In thousands)

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

Network Solutions

 

$

136,277

 

 

$

65,289

 

 

$

138,120

 

 

$

62,151

 

Services & Support

 

 

32,613

 

 

 

10,519

 

 

 

19,958

 

 

 

8,498

 

Total

 

$

168,890

 

 

$

75,808

 

 

$

158,078

 

 

$

70,649

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

(In thousands)

 

Sales

 

 

Gross Profit

 

 

Sales

 

 

Gross Profit

 

Network Solutions

 

$

398,709

 

 

$

195,804

 

 

$

411,723

 

 

$

179,984

 

Services & Support

 

 

75,086

 

 

 

24,753

 

 

 

49,328

 

 

 

24,474

 

Total

 

$

473,795

 

 

$

220,557

 

 

$

461,051

 

 

$

204,458

 

 

23


 

Sales by Category

In addition to our new reporting segments, we will also report revenue for the following three categories – Access & Aggregation, Customer Devices, and Traditional & Other Products.

Access & Aggregation generally includes software and hardware based products and services that communication service providers (CSPs) use to aggregate and/or originate network access technologies. The portfolio of ADTRAN solutions within this category includes a wide array of modular or fixed physical form factors designed to deliver the best technology and economic fit for our customers based on the target subscriber density and environmental conditions.

The Access & Aggregation category includes product and service families such as:

 

Total Access® 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)

 

hiX 5600 Series fiber aggregation and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)

 

A9000 Series of EPON DOCSIS-provisioned Optical Line Terminals (OLT)

 

Fiber to the Distribution Point (FTTdp) Optical Network Units (ONU)

 

Optical Line Terminals (OLT)

 

Optical Networking Edge (ONE) aggregation

 

Distribution Point Units (DPUs)

 

IP Digital Subscriber Line Access Multiplexers (DSLAMs)

 

Cabinet and Outside-Plant (OSP) enclosures and services

 

Network Management and Cloud based software platforms and applications

 

Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials

 

Other products and services that are generally applicable to Access & Aggregation

Customer Devices generally includes the products and services that provide end users access to the CSP network.  The Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.

The Customer Devices category includes products and services such as:

 

Broadband customer premise solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical Network Terminals (ONTs)

 

Radio Frequency over Glass (RFoG) MicroNodes

 

Residential and business gateways

 

Wi-Fi access points and associated powering and switching infrastructure

 

enterprise Session Border Controllers (eSBC)

 

Branch office and access routers

 

Carrier Ethernet services termination devices

 

VoIP media gateways

 

ProServices®

 

Planning, engineering, program management, maintenance, installation and commissioning services to implement the customer devices solutions into consumer, small business and enterprise locations

 

Other products and services that are generally applicable to customer devices

24


 

Traditional & Other Products generally includes a mix of prior generation technologies’ products and services, as well as other products and services that do not fit within the Access & Aggregation or Customer Devices categories.

The Traditional & Other Products category includes products and services such as:

 

Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM) based aggregation systems and customer devices

 

HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and customer networks

 

Other products and services that do not fit within the Access & Aggregation and Customer Devices categories

The table below presents sales information by category for the three and nine months ended September 30, 2016 and 2015:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Access & Aggregation

 

$

120,618

 

 

$

103,431

 

 

$

316,705

 

 

$

309,014

 

Customer Devices

 

 

32,984

 

 

 

35,545

 

 

 

106,213

 

 

 

97,291

 

Traditional & Other Products

 

 

15,288

 

 

 

19,102

 

 

 

50,877

 

 

 

54,746

 

Total

 

$

168,890

 

 

$

158,078

 

 

$

473,795

 

 

$

461,051

 

 

 

13. LIABILITY FOR WARRANTY RETURNS

Our products generally include warranties of 90 days to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $8.8 million and $8.7 million at September 30, 2016 and December 31, 2015, respectively. During the three months ended September 30, 2016, we incurred an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

A summary of warranty expense and write-off activity for the three and nine months ended September 30, 2016 and 2015 is as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Balance at beginning of period

 

$

8,935

 

 

$

8,933

 

 

$

8,739

 

 

$

8,415

 

Plus: Amounts charged to cost and expenses

 

 

4,012

 

 

 

777

 

 

 

6,341

 

 

 

1,905

 

Less: Deductions

 

 

(4,195

)

 

 

(994

)

 

 

(6,328

)

 

 

(1,604

)

Balance at end of period

 

$

8,752

 

 

$

8,716

 

 

$

8,752

 

 

$

8,716

 

 

 

25


 

14. COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment disputes, patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek damages or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2016, of which $7.7 million has been applied to these commitments.

 

 

15. SUBSEQUENT EVENTS

On October 18, 2016, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on November 03, 2016. The payment date will be November 17, 2016. The quarterly dividend payment will be 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.

During the fourth quarter and as of November 8, 2016, we have repurchased 0.2 million shares of our common stock through open market purchases at an average cost of $17.96 per share. We currently have the authority to purchase an additional 4.4 million shares of our common stock under the current plan approved by the Board of Directors.

 

 

26


 

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

OVERVIEW

ADTRAN, Inc. is a leading global provider of networking and communications equipment. Our solutions enable voice, data, video and Internet communications across a variety of network infrastructures. These solutions are deployed by many of the United States’ and the world’s largest service providers, distributed enterprises and small and medium-sized businesses, public and private enterprises, and millions of individual users worldwide.

Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, 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 report revenue for the following three categories – Access & Aggregation, Customer Devices, and Traditional & Other Products.

Access & Aggregation generally includes software and hardware based products and services that communication service providers (CSPs) use to aggregate and/or originate network access technologies. The portfolio of ADTRAN solutions within this category includes a wide array of modular or fixed physical form factors designed to deliver the best technology and economic fit for our customers based on the target subscriber density and environmental conditions.

The Access & Aggregation category includes product and service families such as:

 

Total Access® 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)

 

hiX 5600 Series fiber aggregation and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)

 

A9000 Series of EPON DOCSIS-provisioned Optical Line Terminals (OLT)

 

Fiber to the Distribution Point (FTTdp) Optical Network Units (ONU)

 

Optical Line Terminals (OLT)

 

Optical Networking Edge (ONE) aggregation

 

Distribution Point Units (DPUs)

 

IP Digital Subscriber Line Access Multiplexers (DSLAMs)

 

Cabinet and Outside-Plant (OSP) enclosures and services

 

Network Management and Cloud based software platforms and applications

 

Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials

 

Other products and services that are generally applicable to Access & Aggregation

 

 

 

27


 

Customer Devices generally includes the products and services that provide end users access to the CSP network.  The Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.

The Customer Devices category includes products and services such as:

 

Broadband customer premise solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical Network Terminals (ONTs)

 

Radio Frequency over Glass (RFoG) MicroNodes

 

Residential and business gateways

 

Wi-Fi access points and associated powering and switching infrastructure

 

enterprise Session Border Controllers (eSBC)

 

Branch office and access routers

 

Carrier Ethernet services termination devices

 

VoIP media gateways

 

ProServices

 

Planning, engineering, program management, maintenance, installation and commissioning services to implement the customer devices solutions into consumer, small business and enterprise locations

 

Other products and services that are generally applicable to customer devices

Traditional & Other Products generally includes a mix of prior generation technologies’ products and services, as well as other products and services that do not fit within the Access & Aggregation or Customer Devices categories.

The Traditional & Other Products category includes products and services such as:

 

Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM) based aggregation systems and customer devices

 

HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and customer networks

 

Other products and services that do not fit within the Access & Aggregation and Customer Devices categories

See Note 12 of Notes to Consolidated Financial Statements in this report for further information regarding these product categories.

Sales were $168.9 million and $473.8 million for the three and nine months ended September 30, 2016 compared to $158.1 million and $461.1 million for the three and nine months ended September 30, 2015. Our gross margin increased to 44.9% and 46.6% for the three and nine months ended September 30, 2016 from 44.7% and 44.3% for the three and nine months ended September 30, 2015. Our operating income margin increased to 6.0% and 6.4% for the three and nine months ended September 30, 2016 from 5.1% and 2.3% for the three and nine months ended September 30, 2015. Net income was $12.4 million and $27.7 million for the three and nine months ended September 30, 2016, compared to $7.1 million and $12.9 million for the three and nine months ended September 30, 2015. Our effective tax rate, excluding the tax impact of the bargain purchase gain, decreased to 25.9% and 34.0% for the three and nine months ended September 30, 2016 from 35.0% and 36.9% for the three and nine months ended September 30, 2015.  Earnings per share, assuming dilution, were $0.26 and $0.56 for the three and nine months ended September 30, 2016, compared to $0.14 and $0.25 for the three and nine months ended September 30, 2015.

Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly in future periods due to a number of factors, including customer order activity and backlog. Backlog levels vary because of seasonal trends, the timing of customer projects and other factors that affect customer order lead times. Many of our customers require prompt delivery of products. This requires us to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for our products declines, or if potential sales in any quarter do not occur as anticipated, our financial results could be adversely affected. Operating expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results in a given quarter.

28


 

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, foreign currency exchange rate movements, increased competition, customer order patterns, changes in product and services mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs and announcements of new products by us or our competitors. Additionally, maintaining sufficient inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of this inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements, which may negatively impact our operating results in a given quarter.

Accordingly, our 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. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. These factors have also been discussed in more detail in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 24, 2016 with the SEC.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies and estimates have not changed significantly from those detailed in our most recent Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 24, 2016 with the SEC.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

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

 

 

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015

SALES

Our sales increased 6.8% from $158.1 million in the three months ended September 30, 2015 to $168.9 million in the three months ended September 30, 2016, and increased 2.8% from $461.1 million in the nine months ended September 30, 2015 to $473.8 million in the nine months ended September 30, 2016. The increase in sales for the three months ended September 30, 2016 is primarily attributable to a $17.2 million increase in our Access and Aggregation products, partially offset by a $3.8 million decrease in sales of our Traditional & Other products and a $2.6 million decrease in sales of our Customer Devices products. The increase in sales for the nine months ended September 30, 2016 is primarily attributable to a $8.9 million increase in sales of our Customer Devices products and a $7.7 million increase in sales of our Access & Aggregation products, partially offset by a $3.9 million decrease in sales of our Traditional & Other products.

Network Solutions sales decreased 1.3% from $138.1 million in the three months ended September 30, 2015 to $136.3 million in the three months ended September 30, 2016, and decreased 3.2% from $411.7 million in the nine months ended September 30, 2015 to $398.7 million in the nine months ended September 30, 2016. The decrease in sales for the three months ended September 30, 2016 is primarily attributable to a decrease in sales of Customer Devices products and Traditional & Other products, partially offset by an increase in Access & Aggregation products. The decrease in sales of our Customer Devices products is primarily attributable to decreased sales of our Ethernet products. The increase in sales of our Access and Aggregation products for the three months ended September 30, 2016 is primarily attributable to an increase in international hiX product sales. The decrease in sales for the nine months ended September 30, 2016 is primarily attributable to a decrease in sales of Access & Aggregation products and Traditional & Other products, partially offset by an increase in Customer Devices products. The decrease in sales of our Access and Aggregation products is primarily attributable to a decrease in international hiX product sales, partially offset by an increase in U.S. Total Access 5000 product sales. The increase in sales of our Customer Devices products is primarily attributable to increased sales of our FTTP ONT products and Ethernet products. While we expect that revenues from Traditional & Other products will continue to decline over time, these revenues may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.

 

29


 

Services & Support sales increased 63.4% from $20.0 million in the three months ended September 30, 2015 to $32.6 million in the three months ended September 30, 2016, and increased 52.2% from $49.3 million in the nine months ended September 30, 2015 to $75.1 million in the nine months ended September 30, 2016. The increase in sales for the three and nine months ended September 30, 2016 is primarily attributable to an increase in network installation services for Access and Aggregation products.

International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased 6.7% from $38.6 million in the three months ended September 30, 2015 to $41.2 million in the three months ended September 30, 2016, and decreased 37.4% from $153.7 million in the nine months ended September 30, 2015 to $96.2 million in the nine months ended September 30, 2016. International sales, as a percentage of total sales, stayed consistent at 24.4% for the three months ended September 30, 2016 and 2015, and decreased from 33.3% for the nine months ended September 30, 2015 to 20.3% for the nine months ended September 30, 2016. Our international revenues are affected to a great extent by the timing of network upgrade projects at our larger European and Latin American customers and by changes in foreign exchange rates in territories in which we sell or products and services. Throughout 2016, our largest European customer has focused on completing network upgrade activities in regions outside of our footprint with them, and we currently expect this pattern to continue throughout the remainder of 2016. However, we expect that once current projects are completed, future network upgrades will resume in the second half of 2017 within our geographic footprint with this customer. Additionally, after reaching a cyclical high in the second quarter of 2014, the value of the Euro currency relative to the U.S. dollar declined significantly throughout the second half of 2014 and in 2015. Though the Euro-USD exchange rate appears to have stabilized since reaching a low in the fourth quarter of 2015, it remains approximately 20% below the highs of 2014. This decline in the value of the Euro throughout 2015 and into 2016 significantly reduced the U.S. dollar value of revenue from our European sales.

 

COST OF SALES

 

As a percentage of sales, cost of sales decreased from 55.3% in the three months ended September 30, 2015 to 55.1% in the three months ended September 30, 2016, and decreased from 55.7% in the nine months ended September 30, 2015 to 53.4% in the nine months ended September 30, 2016. The decrease in cost of sales as a percentage of sales for the three and nine months ended September 30, 2016 is primarily attributable to a regional revenue shift and customer and product mix, partially offset by a change in services mix, restructuring expenses and an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.

 

Network Solutions cost of sales, as a percent of that segment’s sales, decreased from 55.0% in the three months ended September 30, 2015 to 52.1% in the three months ended September 30, 2016, and decreased from 56.3% in the nine months ended September 30, 2015 to 50.9% in the nine months ended September 30, 2016. The decrease in cost of sales as a percent of that segment’s sales for the three and nine months ended September 30, 2016 is primarily attributable to a regional revenue shift and customer and product mix, partially offset by restructuring expenses and an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.

 

Services & Support cost of sales, as a percent of that segment’s sales, increased from 57.4% in the three months ended September 30, 2015 to 67.7% in the three months ended September 30, 2016, and increased from 50.4% in the nine months ended September 30, 2015 to 67.0% in the nine months ended September 30, 2016. The increase in cost of sales as a percent of that segment’s sales for the three and nine months ended September 30, 2016 is primarily attributable to an increase in network installation services, which have higher costs, versus a greater mix of maintenance and support services in the prior periods, and in restructuring expenses.

 

An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differences between the recognition of cost reductions and the lowering of product selling prices.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased 12.3% from $30.0 million in the three months ended September 30, 2015 to $33.7 million in the three months ended September 30, 2016, and increased 4.5% from $93.2 million in the nine months ended September 30, 2015 to $97.4 million in the nine months ended September 30, 2016. The increase in selling, general and administrative expenses for the three months ended September 30, 2016 is primarily attributable to an increase in variable incentive compensation expense, partially offset by a decrease in marketing expenses. The increase in selling, general and administrative expenses for the nine months ended September 30, 2016 is primarily attributable to an increase in variable incentive compensation expense and contract services, partially offset by a decrease in professional services and marketing expenses.

 

30


 

As a percentage of sales, selling, general and administrative expenses increased from 19.0% in the three months ended September 30, 2015 to 20.0% in the three months ended September 30, 2016, and increased from 20.2% in the nine months ended September 30, 2015 to 20.6% in the nine months ended September 30, 2016. Selling, general and administrative expenses as a percentage of sales may fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.

 

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased 1.8% from $32.6 million in the three months ended September 30, 2015 to $32.0 million in the three months ended September 30, 2016, and decreased 7.8% from $100.6 million in the nine months ended September 30, 2015 to $92.7 million in the nine months ended September 30, 2016. The decrease in research and development expenses for the three months ended September 30, 2016 is primarily attributable to a decrease in compensation expense, lease expense and testing expense. The decrease in research and development expenses for the nine months ended September 30, 2016 is primarily attributable to a decrease in compensation expense, lease expense and testing expense, partially offset by an increase in contract services. The decrease in compensation expense and lease expense for the three and nine months ended September 30, 2016 was primary attributable to the consolidation of engineering resources that occurred during the second quarter of 2015.

As a percentage of sales, research and development expenses decreased from 20.6% in the three months ended September 30, 2015 to 18.9% in the three months ended September 30, 2016, and decreased from 21.8% in the nine months ended September 30, 2015 to 19.6% in the nine months ended September 30, 2016. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.

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

 

INTEREST AND DIVIDEND INCOME

Interest and dividend income increased 8.5%, or $0.1 million from the three months ended September 30, 2015 to the three months ended September 30, 2016, and was consistent at $2.7 million for the nine months ended September 30, 2016 and 2015. The increase in interest and dividend income for the three months ended September 30, 2016, is primarily attributable to an increase in the rate of return on fixed income investments.

 

INTEREST EXPENSE

Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.14 million and $0.15 million in the three months ended September 30, 2015 and 2016, respectively, and $0.4 million in the nine months ended September 30, 2015 and 2016, as we had no substantial change in our fixed-rate borrowing. See “Liquidity and Capital Resources” below for additional information on our revenue bond.

 

NET REALIZED INVESTMENT GAIN

Net realized investment gains decreased 36.1% from $2.1 million in the three months ended September 30, 2015 to $1.3 million in the three months ended September 30, 2016, and decreased 50.7% from $8.4 million in the nine months ended September 30, 2015 to $4.2 million in the nine months ended September 30, 2016. The decrease in realized investment gains for the three and nine months ended September 30, 2016 is primarily attributable to decreased gains from the sale of equity securities. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

 

OTHER INCOME (EXPENSE), NET

Other income (expense), net, comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees, and scrap raw material sales, changed from $0.1 million of income in the three months ended September 30, 2015 to $0.2 million of expense in the three months ended September 30, 2016, and changed from $0.8 million of expense in the nine months ended September 30, 2015 to $0.4 million of expense in the nine months ended September 30, 2016. The changes for the three and nine months ended September 30, 2016 is primarily attributable to foreign currency transactions.

 

INCOME TAXES

Our effective tax rate decreased from 36.9% in the nine months ended September 30, 2015 to 34.0%, excluding the tax impact of the bargain purchase gain, in the nine months ended September 30, 2016. The decrease in the effective tax rate between the two periods is primarily attributable to the research and development tax credit being made permanent.

 

 

31


 

NET INCOME

As a result of the above factors, net income increased $5.3 million from $7.1 million in the three months ended September 30, 2015 to $12.4 million in the three months ended September 30, 2016, and increased $14.7 million from $12.9 million in the nine months ended September 30, 2015 to $27.7 million in the nine months ended September 30, 2016.

As a percentage of sales, net income increased from 4.5% in the three months ended September 30, 2015 to 7.4% in the three months ended September 30, 2016, and increased from 2.8% in the nine months ended September 30, 2015 to 5.8% in the nine months ended September 30, 2016.

 

 

 

32


 

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We intend to finance our operations with cash flow from operations. We have used, and expect to continue to use, the cash generated from operations for working capital, purchases of treasury stock, shareholder dividends, and other general corporate purposes, including (i) product development activities to enhance our existing products and develop new products and (ii) expansion of sales and marketing activities. We believe our cash and cash equivalents, investments and cash generated from operations to be adequate to meet our operating and capital needs for at least the next 12 months.

At September 30, 2016, cash on hand was $66.3 million and short-term investments were $55.5 million, which resulted in available short-term liquidity of $121.8 million, of which $45.3 million was held by our foreign subsidiaries. At December 31, 2015, cash on hand was $84.6 million and short-term investments were $34.4 million, which resulted in available short-term liquidity of $118.9 million, of which $38.9 million was held by our foreign subsidiaries. The increase in short-term liquidity from December 31, 2015 to September 30, 2016 is primarily attributable to shifts among available investment option tenures to provide funds for our short-term cash needs.

 

Operating Activities

Our working capital, which consists of current assets less current liabilities, increased 4.6% from $238.1 million as of December 31, 2015 to $249.2 million as of September 30, 2016. The increase in our working capital is primarily attributable to an increase in accounts receivable, partially offset by a decrease in other receivables and an increase in accounts payable, accrued expenses, and accrued wages and benefits. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 2.06 as of December 31, 2015 to 1.93 as of September 30, 2016. The decrease in the quick ratio is primarily attributable to an increase in accounts receivable, partially offset by an increase in accounts payable, accrued expenses, and accrued wages and benefits. The current ratio, defined as current assets divided by current liabilities, decreased from 3.57 as of December 31, 2015 to 3.16 as of September 30, 2016. The decrease in the current ratio is primarily attributable to an increase in accounts payable, accrued expenses, accrued wages and benefits, and a decrease in other receivables, partially offset by an increase in accounts receivable.

Net accounts receivable increased 41.6% from $71.9 million at December 31, 2015 to $101.8 million at September 30, 2016. Our allowance for doubtful accounts was $19 thousand at December 31, 2015 and nil at September 30, 2016. Quarterly accounts receivable days sales outstanding (DSO) increased from 48 days as of December 31, 2015 to 55 days as of September 30, 2016. The change in net accounts receivable is due to changes in customer mix and the timing of sales and collections during the quarter. Certain international customers can have longer payment terms than U.S. customers. Other receivables decreased from $19.3 million at December 31, 2015 to $12.2 million at September 30, 2016. The decrease in other receivables is primarily attributable to the timing of filing returns and collections of VAT receivables in our international subsidiaries. Other receivables will also fluctuate due to the timing of shipments and collections for materials supplied to our contract manufacturers during the quarter.

Quarterly inventory turnover increased from 3.3 turns as of December 31, 2015 to 4.1 turns at September 30, 2016. Inventory increased 4.9% from December 31, 2015 to September 30, 2016. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to services activity and seasonal cycles of our business, ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.

Accounts payable increased 38.5% from $48.7 million at December 31, 2015 to $67.4 million at September 30, 2016. 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 $12.7 million and $7.8 million for the nine months ended September 30, 2016 and 2015, respectively. These expenditures were primarily used to purchase computer hardware, software, manufacturing and test equipment, and building improvements.

On September 13, 2016, we acquired key fiber access products, technologies and service relationships from subsidiaries of CommScope, Inc. for $0.9 million in cash. This acquisition will enhance our solutions for the cable MSO industry and will provide cable operators with the scalable solutions, services and support they require to compete in the multi-gigabit service delivery market. We recorded a bargain purchase gain of $3.6 million, net of income taxes, subject to customary working capital adjustments between the parties.

33


 

Our combined short-term and long-term investments increased $1.5 million from $232.4 million at December 31, 2015 to $233.9 million at September 30, 2016. This increase reflects funds available for investment provided by our operating activities and stock option exercises by our employees, partially offset by our cash needs for capital expenditures, purchases of treasury stock, and shareholder dividends, as well as net realized and unrealized gains and losses and amortization of net premiums on our combined investments.

We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal risk of loss. At September 30, 2016 these investments included corporate bonds of $60.0 million, municipal fixed-rate bonds of $17.6 million, asset-backed bonds of $22.6 million, mortgage/agency-backed bonds of $15.0 million, U.S. government bonds of $28.6 million, foreign government bonds of $6.4 million, and variable rate demand notes of $12.3 million. At December 31, 2015, these investments included corporate bonds of $57.6 million, municipal fixed-rate bonds of $26.4 million, asset-backed bonds of $19.2 million, mortgage/agency-backed bonds of $15.4 million, and U.S. government bonds of $35.4 million. As of September 30, 2016, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, foreign government bonds, and variable rate demand notes were classified as available-for-sale and had a combined duration of 1.0 years with an average Standard & Poor’s credit rating of AA-. Because our bond portfolio has a high quality rating and contractual maturities of a 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 9.9% from $198.0 million at December 31, 2015 to $178.4 million at September 30, 2016. Long-term investments at September 30, 2016 and December 31, 2015 included an investment in a certificate of deposit of $28.9 and $30.0 million, respectively, which serves as collateral for our revenue bond. See “Debt” below for additional information. We have various equity investments included in long-term investments at a cost of $27.0 million and $31.6 million, and with a fair value of $27.4 million and $34.3 million, at September 30, 2016 and December 31, 2015, respectively.

Long-term investments at September 30, 2016 and December 31, 2015 also included $13.8 million and $12.8 million, respectively, related to our deferred compensation plans, and $1.2 million and $1.3 million, respectively, of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer.

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the three and nine months ended September 30, 2016 and 2015, other-than-temporary impairment charges were not significant.

 

Financing Activities

Dividends

In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity. During the nine months ended September 30, 2016, we paid dividends totaling $13.2 million.

Debt

We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond) which totaled $28.9 million at September 30, 2016 and December 31, 2015. At September 30, 2016, the estimated fair value of the Bond was approximately $29.3 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. Included in long-term investments are restricted funds in the amount of $28.9 million at September 30, 2016 and $30.0 million at December 31, 2015, which is a collateral deposit against the principal amount of the Bond. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due. In connection with this decision, $1.0 million of the Bond has been classified as a current liability in accounts payable in the Consolidated Balance Sheet at September 30, 2016.

34


 

Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 50.0 million shares of our common stock, which will be implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended September 30, 2016, we repurchased 1.2 million shares of our common stock at an average price of $18.34 per share. As of September 30, 2016, we have the authority to purchase an additional 4.6 million shares of our common stock under the current plans approved by the Board of Directors.

Stock Option Exercises

We issued 0.1 million shares of treasury stock during the nine months ended September 30, 2016 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $18.97. We received proceeds totaling $1.1 million from the exercise of these stock options during the nine months ended September 30, 2016.

Off-Balance Sheet Arrangements and Contractual Obligations

We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. During the nine months ended September 30, 2016, there have been no material changes in contractual obligations and commercial commitments from those discussed in our most recent Annual Report on Form 10-K for the year ended December 31, 2015 filed on February 24, 2016 with the SEC.

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2016, of which $7.7 million has been applied to these commitments.

 

 

35


 

ITEM 3. 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, municipal fixed-rate bonds, variable rate demand notes 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 September 30, 2016, $64.4 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 September 30, 2016, approximately $178.8 million of our cash and investments may be directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (bps) for an entire year, while all other variables remain constant. At September 30, 2016, we held $78.1 million of cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bps decline in interest rates as of September 30, 2016 would reduce annualized interest income on our cash and investments by approximately $0.4 million. In addition, we held $100.7 million of fixed-rate bonds whose fair values may be directly affected by a change in interest rates. A hypothetical 50 bps increase in interest rates as of September 30, 2016 would reduce the fair value of our fixed-rate bonds by approximately $0.5 million.

As of September 30, 2015, approximately $182.6 million of our cash and investments was subject to being directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 bps for the entire year, while all other variables remain constant. A hypothetical 50 bps decline in interest rates as of September 30, 2015 would have reduced annualized interest income on our cash, money market instruments and variable rate demand notes by approximately $0.4 million. In addition, a hypothetical 50 bps increase in interest rates as of September 30, 2015 would have reduced the fair value of our municipal fixed-rate bonds and corporate bonds by approximately $0.6 million.

We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, expenses, and assets and liabilities held in non-functional currencies related to our foreign subsidiaries. Our primary exposures to foreign currency exchange rates are with our Mexican subsidiary, whose functional currency is the United States dollar, our German subsidiary, whose functional currency is the Euro, and our Australian subsidiary, whose functional currency is the Australian dollar. We are exposed to changes in foreign currency exchange rates to the extent of our German subsidiary’s use of contract manufacturers and raw material suppliers whom we predominately pay in U.S. dollars. As a result, changes in currency exchange rates could cause variations in gross margin in the products that we sell in the EMEA region.

We have certain international customers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates used to invoice such customers versus the functional currency of the entity billing such customers may adversely affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures, we may enter into various derivative transactions, when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. All non-functional currencies billed would result in a combined hypothetical gain or loss of $0.1 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. Any gain or loss would be partially mitigated by these derivative instruments.

As of September 30, 2016, we had no material contracts, other than accounts receivable, accounts payable, and loans to a subsidiary, denominated in foreign currencies. As of September 30, 2016, we had no forward contracts outstanding.

For further information about the fair value of our available-for-sale investments and our derivative and hedging activities as of September 30, 2016, see Notes 6 and 7 of Notes to Consolidated Financial Statements.

36


 

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for ADTRAN. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

37


 

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2015.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth repurchases of our common stock for the months indicated:

 

Period

 

Total

Number of

Shares

Purchased

 

 

Average

Price

Paid per

Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

 

 

Maximum Number

of Shares that May

Yet Be Purchased

Under the Plans or

Programs

 

July 1, 2016 – July 31, 2016

 

 

247,764

 

 

 

18.00

 

 

 

247,764

 

 

 

4,681,188

 

August 1, 2016 – August 31, 2016

 

 

104,784

 

 

 

17.92

 

 

 

104,784

 

 

 

4,576,404

 

September 1, 2016 – September 30, 2016

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,576,404

 

Total

 

 

352,548

 

 

 

 

 

 

 

352,548

 

 

 

 

 

 

On July 14, 2015, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock (bringing the total shares authorized for repurchase to 50.0 million). This authorization will be implemented through open market or private purchases from time to time as conditions warrant.

 

 

38


 

ITEM 6. EXHIBITS

Exhibits.

 

Exhibit No.

 

Description

 

 

 

 31

 

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

 

 

 

 32

 

Section 1350 Certifications

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

39


 

SIGNATURE

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

 

 

 

ADTRAN, Inc.

(Registrant)

 

 

 

Date:  November 8, 2016

 

/s/ Roger D. Shannon

 

 

Roger D. Shannon

 

 

Senior Vice President of Finance,

 

 

Chief Financial Officer,

 

 

Corporate Treasurer and Secretary

 

 

(Principal Financial Officer)

 

 

40


 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

 31

 

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

 

 

 

 32

 

Section 1350 Certifications

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

41