ADTRAN INC, 10-Q filed on 11/1/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2013
Oct. 23, 2013
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q3 
 
Entity Registrant Name
ADTRAN INC 
 
Entity Central Index Key
0000926282 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
57,689,485 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Current Assets
 
 
Cash and cash equivalents
$ 54,311 
$ 68,457 
Short-term investments
136,640 
160,481 
Accounts receivable, less allowance for doubtful accounts of $15 and $6 at September 30, 2013 and December 31, 2012, respectively
108,018 
81,194 
Other receivables
20,268 
16,253 
Inventory
92,972 
102,583 
Prepaid expenses
4,693 
4,148 
Deferred tax assets, net
13,494 
13,055 
Total Current Assets
430,396 
446,171 
Property, plant and equipment, net
77,658 
80,246 
Deferred tax assets, net
11,605 
10,261 
Goodwill
3,492 
3,492 
Other assets
11,711 
13,482 
Long-term investments
298,122 
332,729 
Total Assets
832,984 
886,381 
Current Liabilities
 
 
Accounts payable
73,672 
42,173 
Unearned revenue
19,658 
38,051 
Accrued expenses
16,527 
10,309 
Accrued wages and benefits
16,594 
15,022 
Income tax payable, net
548 
1,211 
Total Current Liabilities
126,999 
106,766 
Non-current unearned revenue
26,373 
23,803 
Other non-current liabilities
20,459 
17,406 
Bonds payable
46,500 
46,000 
Total Liabilities
220,331 
193,975 
Commitments and contingencies (see Note 15)
   
   
Stockholders' Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 57,687 shares outstanding at September 30, 2013 and 79,652 shares issued and 62,310 shares outstanding at December 31, 2012
797 
797 
Additional paid-in capital
231,146 
224,517 
Accumulated other comprehensive income
8,990 
11,268 
Retained earnings
878,384 
861,465 
Less treasury stock at cost: 21,965 and 17,342 shares at September 30, 2013 and December 31, 2012, respectively
(506,664)
(405,641)
Total Stockholders' Equity
612,653 
692,406 
Total Liabilities and Stockholders' Equity
$ 832,984 
$ 886,381 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 15 
$ 6 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000 
200,000 
Common stock, shares issued
79,652 
79,652 
Common stock, shares outstanding
57,687 
62,310 
Treasury stock, shares
21,965 
17,342 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Income Statement [Abstract]
 
 
 
 
Sales
$ 177,404 
$ 162,125 
$ 482,650 
$ 480,858 
Cost of sales
94,857 
82,153 
250,628 
231,598 
Gross Profit
82,547 
79,972 
232,022 
249,260 
Selling, general and administrative expenses
32,794 
34,114 
96,082 
103,130 
Research and development expenses
32,543 
35,582 
98,114 
92,835 
Operating Income
17,210 
10,276 
37,826 
53,295 
Interest and dividend income
1,579 
1,864 
5,021 
5,651 
Interest expense
(581)
(587)
(1,737)
(1,756)
Net realized investment gain
1,751 
2,530 
6,949 
7,353 
Other income (expense), net
22 
(368)
(1,521)
265 
Gain on bargain purchase of a business
 
 
 
1,753 
Income before provision for income taxes
19,981 
13,715 
46,538 
66,561 
Provision for income taxes
(3,776)
(4,443)
(12,584)
(23,259)
Net Income
$ 16,205 
$ 9,272 
$ 33,954 
$ 43,302 
Weighted average shares outstanding - basic
57,947 
63,066 
59,561 
63,495 
Weighted average shares outstanding - diluted
58,617 
63,304 
59,929 
64,139 
Earnings per common share - basic
$ 0.28 
$ 0.15 
$ 0.57 
$ 0.68 
Earnings per common share - diluted
$ 0.28 
$ 0.15 
$ 0.57 
$ 0.68 
Dividend per share
$ 0.09 
$ 0.09 
$ 0.27 
$ 0.27 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net Income
$ 16,205 
$ 9,272 
$ 33,954 
$ 43,302 
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
2,562 
497 
(780)
2,019 
Foreign currency translation
(108)
134 
(1,498)
191 
Other Comprehensive Income (Loss), net of tax
2,454 
631 
(2,278)
2,210 
Comprehensive Income, net of tax
$ 18,659 
$ 9,903 
$ 31,676 
$ 45,512 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities:
 
 
Net Income
$ 33,954 
$ 43,302 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
11,021 
10,366 
Amortization of net premium on available-for-sale investments
4,688 
6,343 
Net realized gain on long-term investments
(6,949)
(7,353)
Net (gain) loss on disposal of property, plant and equipment
(213)
Gain on bargain purchase of a business
 
(1,753)
Stock-based compensation expense
6,516 
6,783 
Deferred income taxes
(1,296)
(1,156)
Tax benefit from stock option exercises
113 
1,813 
Excess tax benefits from stock-based compensation arrangements
(106)
(1,412)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(25,844)
(26,178)
Other receivables
(3,724)
1,866 
Inventory
8,584 
2,142 
Prepaid expenses and other assets
(417)
(1,193)
Accounts payable
30,460 
17,607 
Accrued expenses and other liabilities
(4,339)
12,769 
Income tax payable, net
(678)
1,022 
Net cash provided by operating activities
51,989 
64,755 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(6,510)
(10,759)
Proceeds from disposals of property, plant and equipment
 
266 
Proceeds from sales and maturities of available-for-sale investments
275,581 
198,566 
Purchases of available-for-sale investments
(216,129)
(220,355)
Acquisition of business
 
7,496 
Net cash provided by (used in) investing activities
52,942 
(24,786)
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
2,332 
4,932 
Purchases of treasury stock
(104,147)
(28,578)
Dividend payments
(16,220)
(17,173)
Excess tax benefits from stock-based compensation arrangements
106 
1,412 
Net cash used in financing activities
(117,929)
(39,407)
Net increase (decrease) in cash and cash equivalents
(12,998)
562 
Effect of exchange rate changes
(1,148)
(6)
Cash and cash equivalents, beginning of period
68,457 
42,979 
Cash and cash equivalents, end of period
$ 54,311 
$ 43,535 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
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, 2012 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 for a fair presentation of these interim statements have been recorded, including the out of period adjustment discussed below. 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, 2012, filed on February 28, 2013 with the SEC.

Changes in Classifications

Certain changes in classifications have been made to the prior period balances in other comprehensive income to conform to the current period’s presentation as a result of our adoption of Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income.

Out of Period Adjustment

During the three months ended September 30, 2013, we identified two adjustments in the acquired Nokia Siemens Networks Broadband Access business (NSN BBA business) relating to customer payment discounts for one customer, and recoverable VAT taxes on certain vendor freight invoices that should have been recorded in prior periods. These adjustments resulted from a $0.4 million understatement of net income in 2012 and $0.5 million understatement of net income in the first two quarters of 2013. We evaluated the impact of the adjustments on the results of our previously issued financial statements for each of the prior periods affected and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in the current year and concluded that the impact is not material to our projected results for the year 2013. Accordingly, during the three months ended September 30, 2013 we recorded an out of period adjustment to correct these issues.

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 allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, estimated income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated working capital adjustments under negotiation related to the Nokia Siemens Networks Broadband Access business acquisition, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

 

Recent Accounting Pronouncements

During the nine months ended September 30, 2013, we adopted the following accounting standard, which had no material effect on our consolidated results of operations or financial condition:

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component either on the face of the financial statements or in the footnotes. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. This update is effective prospectively for reporting periods beginning after December 15, 2012. We adopted this amendment during the first quarter of 2013, and we have provided the disclosures required for the periods ended September 30, 2013 and 2012 in Note 10 of Notes to Consolidated Financial Statements.

Business Combinations
Business Combinations

2. BUSINESS COMBINATIONS

On May 4, 2012, we acquired the NSN BBA business. This acquisition provides us with an established customer base in key markets and complementary, market-focused products and was accounted for as a business combination. We have included the financial results of the NSN BBA business in our consolidated financial statements since the date of acquisition. These revenues are included in the Carrier Networks division in the Broadband Access subcategory.

We received a cash payment of $7.5 million from NSN and recorded a bargain purchase gain of $1.8 million, net of income taxes, in the second quarter of 2012, subject to customary working capital adjustments between the parties as defined in the purchase agreement. As of September 30, 2013, the parties were in the process of resolving the working capital adjustments. We adjusted the purchase price allocation during the fourth quarter of 2012 to record additional estimated liabilities and an estimated receivable from NSN related to working capital adjustments under negotiation. The bargain purchase gain of $1.8 million represents the excess of the consideration exchanged over the fair value of the assets acquired and liabilities assumed. We have assessed the recognition and measurements 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 allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:

 

(In Thousands)       

Other receivables

   $ 9,486   

Inventory

     21,068   

Property, plant and equipment

     5,035   

Accounts payable

     (5,194

Unearned revenue

     (18,203

Accrued expenses

     (1,931

Accrued wages and benefits

     (2,251

Deferred tax liability

     (788

Non-current unearned revenue

     (21,316
  

 

 

 

Net liabilities assumed

     (14,094

Customer relationships

     5,162   

Developed technology

     3,176   

Other

     13   

Gain on bargain purchase of a business, net of tax

     (1,753
  

 

 

 

Net consideration received from seller

   $ (7,496
  

 

 

 

 

The fair value of the customer relationships acquired was calculated using a discounted cash flow method (excess earnings) and is being amortized using a declining balance method derived from projected customer revenue over an average estimated useful life of 13 years. The fair value of the developed technology acquired was calculated using a discounted cash flow method (relief from royalty) and is being amortized using the straight-line method over an estimated useful life of five years.

The following supplemental pro forma information presents the financial results of the acquired NSN BBA business for the nine months ended September 30, 2012. The pro forma results for the period January 1, 2012 to May 4, 2012 are not included in our consolidated financial statements.

This supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition of the NSN BBA business been completed on January 1, 2012, nor are they indicative of any future results.

 

     Nine Months Ended  
(In thousands)    September 30, 2012  

Pro forma revenue

   $ 100,413   

Pro forma pre-tax loss

   $ (18,006

Weighted average exchange rate during the period (EURO/USD)

   1.00/$1.29   

For the three and nine months ended September 30, 2013, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.6 million and $2.2 million related to this acquisition.

Income Taxes
Income Taxes
3. INCOME TAXES

Our effective tax rate decreased from 34.9% in the nine months ended September 30, 2012 to 27.0% in the nine months ended September 30, 2013. The decrease in the effective tax rate between the two periods is primarily attributable to an acquired business that incurred losses in the prior year for which no tax benefit was recognized and the improved profitability for that business in the current year, the net effect of recording the benefit for the research tax credit for the 2012 tax year in January 2013 pursuant to the American Taxpayer Relief Act of 2012, and the inclusion of the benefit of the estimated 2013 research tax credit in the estimated annual effective rate for 2013.

Pension Benefit Plan
Pension Benefit Plan

4. PENSION BENEFIT PLAN

As a result of our acquisition of the NSN BBA business, we assumed a defined benefit obligation of $17.0 million as of May 4, 2012. We established a Contribution Trust Arrangement (CTA) to hold the pension assets, and NSN transferred assets to us equal to the defined benefit obligation.

The following table summarizes the components of net periodic pension cost for the three months ended September 30, 2013 and 2012, the nine months ended September 30, 2013, and the period May 4, 2012 to September 30, 2012:

 

     Three Months Ended     Nine Months Ended     May 4, 2012 to  
     September 30,     September 30,     September 30,  
(In thousands)    2013     2012     2013     2012  

Service cost

   $ 297      $ 288      $ 891      $ 478   

Interest cost

     185        187        554        314   

Expected return on plan assets

     (250     (250     (751     (415
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 232      $ 225      $ 694      $ 377   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-Based Compensation
Stock-Based Compensation

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, 2013 and 2012, which was recognized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2013     2012     2013     2012  

Stock-based compensation expense included in cost of sales

   $ 118      $ 106      $ 334      $ 304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,024        1,107        3,129        3,205   

Research and development expense

     1,034        1,138        3,053        3,274   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     2,058        2,245        6,182        6,479   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,176        2,351        6,516        6,783   

Tax benefit for expense associated with non-qualified options

     (307     (313     (924     (916
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 1,869      $ 2,038      $ 5,592      $ 5,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of our stock options was 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.

There were no options granted during the three and nine months ended September 30, 2013. The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2012 are summarized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2012  

Expected volatility

     40.20     40.20

Risk-free interest rate

     0.63     0.63

Expected dividend yield

     1.30     1.30

Expected life (in years)

     4.95        4.95   

Weighted-average estimated value

   $ 8.69      $ 8.69   

The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. There were no RSU grants during the three and nine months ended September 30, 2013 or 2012.

The fair value of restricted stock is equal to the closing price of our stock on the date of grant. There were no restricted stock grants during the three and nine months ended September 30, 2013 or 2012.

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based upon historical experience and approximate 1.7% 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, 2013, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $11.8 million, which is expected to be recognized over an average remaining recognition period of 2.1 years.

The following table is a summary of our stock options outstanding as of December 31, 2012 and September 30, 2013 and the changes that occurred during the nine months ended September 30, 2013:

 

(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, 2012

     6,035      $ 24.81         6.69       $ 5,154   

Options granted

     —        $ —        

Options cancelled/forfeited

     (188   $ 26.23      

Options exercised

     (123   $ 18.93      
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, September 30, 2013

     5,724      $ 24.89         5.96       $ 21,878   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2013

     3,618      $ 25.33         4.68       $ 11,955   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing 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, 2013. 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, 2013 was $0.5 million and $0.8 million, respectively.

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2012 and September 30, 2013 and the changes that occurred during the nine months ended September 30, 2013:

 

(In thousands, except per share amounts)    Number
of Shares
     Weighted
Average
Grant Date
Fair Value
 

Unvested RSUs and restricted stock outstanding, December 31, 2012

     103       $ 29.25   

RSUs and restricted stock granted

     —         $ —     

RSUs and restricted stock vested

     —         $ —     

RSUs and restricted stock cancelled/forfeited

     —         $ —     
  

 

 

    

 

 

 

Unvested RSUs and restricted stock, September 30, 2013

     103       $ 29.25   
  

 

 

    

 

 

 



Investments
Investments
6. INVESTMENTS

At September 30, 2013, we held the following securities and investments, recorded at either fair value or cost.

 

(In thousands)    Amortized
Cost
     Gross Unrealized     Carrying
Value
 
      Gains      Losses    

Deferred compensation plan assets

   $ 11,308       $ 2,490       $ (18   $ 13,780   

Corporate bonds

     177,798         446         (103     178,141   

Municipal fixed-rate bonds

     145,509         497         (71     145,935   

Municipal variable rate demand notes

     11,960         —           —          11,960   

Marketable equity securities

     22,825         12,393         (275     34,943   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 369,400       $ 15,826       $ (467   $ 384,759   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,753   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 434,762   
          

 

 

 

At December 31, 2012, we held the following securities and investments, recorded at either fair value or cost.

 

(In thousands)    Amortized
Cost
     Gross Unrealized     Carrying
Value
 
      Gains      Losses    

Deferred compensation plan assets

   $ 10,688       $ 846       $ (7   $ 11,527   

Corporate bonds

     185,464         966         (18     186,412   

Municipal fixed-rate bonds

     174,530         627         (73     175,084   

Municipal variable rate demand notes

     34,375         —           —          34,375   

Fixed income bond fund

     444         12         —          456   

Marketable equity securities

     20,966         14,630         (392     35,204   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 426,467       $ 17,081       $ (490   $ 443,058   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,902   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 493,210   
          

 

 

 

As of September 30, 2013, our corporate bonds and municipal fixed-rate bonds had the following contractual maturities:

 

(In thousands)    Corporate
bonds
     Municipal
fixed-rate
bonds
 

Less than one year

   $ 66,267       $ 58,413   

One to two years

     32,231         18,638   

Two to three years

     76,460         58,389   

Three to five years

     3,183         10,495   
  

 

 

    

 

 

 

Total

   $ 178,141       $ 145,935   
  

 

 

    

 

 

 

 

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.

At September 30, 2013, we held a $48.3 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). At September 30, 2013, the estimated fair value of the Bond using a level 2 valuation technique was approximately $44.9 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of A-. For more information on the Bond, see “Debt” under “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report.

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. As a result of our review, we recorded an other-than-temporary impairment charge of $13 thousand during the nine months ended September 30, 2013 related to five marketable securities. For the nine months ended September 30, 2012, we recorded an other-than-temporary impairment charge of $0.1 million related to 21 marketable equity securities.

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)    2013     2012     2013     2012  

Gross realized gains

   $ 1,797      $ 3,388      $ 7,252      $ 8,688   

Gross realized losses

   $ (46   $ (858   $ (303   $ (1,335

As of September 30, 2013 and 2012, gross unrealized losses related to individual securities in a continuous loss position for 12 months or longer were not significant.

 

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 in active markets for identical assets or liabilities; Level 2 – Values based on inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability; Level 3 – Values based on unobservable inputs for the asset or liability. These inputs include information supplied by investees.

 

     Fair Value Measurements at September 30, 2013 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

   $ 6,594       $ 6,594       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     13,780         13,780         —           —     

Available-for-sale debt securities

           

Corporate bonds

     178,141         —           178,141         —     

Municipal fixed-rate bonds

     145,935         —           145,935         —     

Municipal variable rate demand notes

     11,960         —           11,960         —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     9,973         9,973         —           —     

Equity securities – other

     24,970         24,970         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     384,759         48,723         336,036         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 391,353       $ 55,317       $ 336,036       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2012 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

   $ 28,071       $ 28,071       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     11,527         11,527         —           —     

Available-for-sale debt securities

           

Corporate bonds

     186,412         —           186,412         —     

Municipal fixed-rate bonds

     175,084         —           175,084         —     

Municipal variable rate demand notes

     34,375         —           34,375         —     

Fixed income bond fund

     456         456         —           —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     14,099         14,099         —           —     

Equity securities – other

     21,105         21,105         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     443,058         47,187         395,871         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 471,129       $ 75,258       $ 395,871       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 municipal 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.

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We have certain international customers who are billed in their local currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition. 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. The maximum contractual period for our derivatives is currently less than twelve months. Our derivative instruments are not subject to master netting arrangements and are not offset in the Consolidated Balance Sheets.

As of September 30, 2013, we had forward contracts outstanding with notional amounts totaling €19.8 million ($26.8 million), which mature through 2013.

The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of September 30, 2013 were as follows:

 

     September 30, 2013  
(In thousands)    Balance Sheet
Location
   Fair Value  

Derivatives Not Designated as Hedging Instruments (Level 2):

     

Foreign exchange contracts – asset derivatives

   Other receivables    $ 40   

Foreign exchange contracts – liability derivatives

   Accounts payable    $ (6

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, 2013 were as follows:

 

(In thousands)    Income Statement Location   Three Months
Ended

September 30,
2013
     Nine Months
Ended 
September 30,
2013
 

Derivatives Not Designated as Hedging Instruments:

       

Foreign exchange contracts

   Other income (expense)   $ 52       $ (34

Inventory
Inventory

8. INVENTORY

At September 30, 2013 and December 31, 2012, inventory consisted of the following:

 

     September 30,      December 31,  
(In thousands)    2013      2012  

Raw materials

   $ 40,947       $ 47,054   

Work in process

     3,562         3,262   

Finished goods

     48,463         52,267   
  

 

 

    

 

 

 

Total

   $ 92,972       $ 102,583   
  

 

 

    

 

 

 

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, 2013 and December 31, 2012, raw materials reserves totaled $15.9 million and $9.9 million, respectively, and finished goods inventory reserves totaled $5.0 million and $2.1 million, respectively.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

9. GOODWILL AND INTANGIBLE ASSETS

The change in the carrying value of goodwill, all of which is included in our Enterprise Networks division, for the nine months ended September 30, 2013 is as follows:

 

(In thousands)       

Balance, December 31, 2012

   $ 3,492   

Acquisitions

     —     

Impairment losses

     —     
  

 

 

 

Balance, September 30, 2013

   $ 3,492   
  

 

 

 

Balance as of September 30, 2013

  

Goodwill

   $ 3,492   

Accumulated impairment losses

     —     
  

 

 

 

Total goodwill

   $ 3,492   
  

 

 

 

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. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses recorded during the nine months ended September 30, 2013 or 2012.

 

Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangibles acquired in conjunction with our acquisition of Objectworld Communications Corporation on September 15, 2009, Bluesocket, Inc. on August 4, 2011, and the NSN BBA business on May 4, 2012.

The following table presents our intangible assets as of September 30, 2013 and December 31, 2012:

 

(In thousands)    September 30, 2013      December 31, 2012  
     Gross
Value
     Accumulated
Amortization
    Net Value      Gross
Value
     Accumulated
Amortization
    Net Value  

Customer relationships

   $ 6,906       $ (1,348   $ 5,558       $ 6,769       $ (766   $ 6,003   

Developed technology

     6,481         (2,347     4,134         6,397         (1,354     5,043   

Intellectual property

     2,340         (1,102     1,238         2,340         (851     1,489   

Trade names

     270         (130     140         270         (85     185   

Other

     14         (6     8         13         (3     10   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 16,011       $ (4,933   $ 11,078       $ 15,789       $ (3,059   $ 12,730   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense, all of which relates to business acquisitions, was $0.6 million for the three months ended September 30, 2013 and 2012, and $1.8 million and $1.4 million for the nine months ended September 30, 2013 and 2012, respectively.

As of September 30, 2013, the estimated future amortization expense of our intangible assets is as follows:

 


(In thousands)    Amount  

Remainder of 2013

   $ 618   

2014

     2,315   

2015

     2,179   

2016

     1,905   

2017

     1,291   

Thereafter

     2,770   
  

 

 

 

Total

   $ 11,078   
Stockholders' Equity
Stockholders' Equity
10. STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity for the nine months ended September 30, 2013 is as follows:

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2012

   $ 692,406   

Net income

     33,954   

Dividend payments

     (16,220

Dividends accrued for unvested restricted stock units

     (23

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

     (780

Foreign currency translation adjustment

     (1,498

Proceeds from stock option exercises

     2,332   

Purchase of treasury stock

     (104,147

Income tax benefit from exercise of stock options

     113   

Stock-based compensation expense

     6,516   
  

 

 

 

Balance, September 30, 2013

   $ 612,653   
  

 

 

 

 

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 35 million shares of our common stock. On May 1, 2013, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock, which commenced upon completion of the repurchase plan announced on October 11, 2011. This new authorization is being implemented through open market or private purchases from time to time as conditions warrant.

During the nine months ended September 30, 2013, we repurchased 4.8 million shares of our common stock at an average price of $21.89 per share. We currently have the authority to purchase an additional 4.3 million shares of our common stock under the current plan approved by the Board of Directors on May 1, 2013.

Stock Option Exercises

We issued 0.1 million shares of treasury stock during the nine months ended September 30, 2013 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $26.06. We received proceeds totaling $2.3 million from the exercise of these stock options during the nine months ended September 30, 2013.

Dividend Payments

During the nine months ended September 30, 2013, we paid cash dividends as follows (in thousands except per share amounts):

 

Record Date

  

Payment Date

  

Per Share Amount

    

Total Dividend Paid

 

February 7, 2013

   February 21, 2013    $ 0.09       $ 5,586   

April 25, 2013

   May 9, 2013    $ 0.09       $ 5,396   

July 25, 2013

   August 8, 2013    $ 0.09       $ 5,238   

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 and realized gains (losses) on available-for-sale securities, 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, 2013 and 2012:

 

     Three Months Ended September 30, 2013  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
    Total  

Beginning balance

   $ 6,766      $ (1,952   $ 1,722      $ 6,536   

Other comprehensive income (loss) before reclassifications

     3,522        —          (108     3,414   

Amounts reclassified from accumulated other comprehensive income

     (960     —          —          (960
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     2,562        —          (108     2,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2012  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 11,682      $ 2,999       $ 14,681   

Other comprehensive income before reclassifications

     1,905        134         2,039   

Amounts reclassified from accumulated other comprehensive income

     (1,408     —           (1,408
  

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income

     497        134         631   
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ 12,179      $ 3,133       $ 15,312   
  

 

 

   

 

 

    

 

 

 

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30, 2013  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
    Total  

Beginning balance

   $ 10,108      $ (1,952   $ 3,112      $ 11,268   

Other comprehensive income (loss) before reclassifications

     3,174        —          (1,498     1,676   

Amounts reclassified from accumulated other comprehensive income

     (3,954     —          —          (3,954
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss)

     (780     —          (1,498     (2,278
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2012  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 10,160      $ 2,942       $ 13,102   

Other comprehensive income before reclassifications

     6,230        191         6,421   

Amounts reclassified from accumulated other comprehensive income

     (4,211     —           (4,211
  

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income

     2,019        191         2,210   
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ 12,179      $ 3,133       $ 15,312   
  

 

 

   

 

 

    

 

 

 

 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2013 and 2012:

 

(In thousands)    Three Months Ended September 30, 2013

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

   $ 1,583      Net realized investment gain

Impairment expense

     (9   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     1,574     

Tax (expense) benefit

     (614  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 960     
  

 

 

   

 

(In thousands)    Three Months Ended September 30, 2012

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

   $ 2,939      Net realized investment gain

Impairment expense

     (631   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     2,308     

Tax (expense) benefit

     (900  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 1,408     
  

 

 

   

The following tables present the details of reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2013 and 2012:

 

(In thousands)    Nine Months Ended September 30, 2013

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

   $ 6,496      Net realized investment gain

Impairment expense

     (13   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     6,483     

Tax (expense) benefit

     (2,529  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 3,954     
  

 

 

   

 

(In thousands)    Nine Months Ended September 30, 2012

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

   $ 7,567      Net realized investment gain

Impairment expense

     (664   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     6,903     

Tax (expense) benefit

     (2,692  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 4,211     
  

 

 

   

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, 2013 and 2012:

 

     Three Months Ended
September 30, 2013
    Three Months Ended
September 30, 2012
 
(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

   $ 5,774      $ (2,252   $ 3,522      $ 3,123      $ (1,218   $ 1,905   

Reclassification adjustment for amounts included in net income

     (1,574     614        (960     (2,308     900        (1,408

Foreign currency translation adjustment

     (108     —          (108     134        —          134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ 4,092      $ (1,638   $ 2,454      $ 949      $ (318   $ 631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2013 and 2012:

 

     Nine Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2012
 
(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

   $ 5,203      $ (2,029   $ 3,174      $ 10,213      $ (3,983   $ 6,230   

Reclassification adjustment for amounts included in net income

     (6,483     2,529        (3,954     (6,903     2,692        (4,211

Foreign currency translation adjustment

     (1,498     —          (1,498     191        —          191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (2,778   $ 500      $ (2,278   $ 3,501      $ (1,291   $ 2,210   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Earnings Per Share
Earnings Per Share

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, 2013 and 2012 is as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands, except per share amounts)    2013      2012      2013      2012  

Numerator

           

Net income

   $ 16,205       $ 9,272       $ 33,954       $ 43,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     57,947         63,066         59,561         63,495   

Effect of dilutive securities

           

Stock options

     613         225         321         637   

Restricted stock and restricted stock units

     57         13         47         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     58,617         63,304         59,929         64,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.28       $ 0.15       $ 0.57       $ 0.68   

Net income per share – diluted

   $ 0.28       $ 0.15       $ 0.57       $ 0.68   

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 2.5 million and 4.4 million for the three months ended September 30, 2013 and 2012, respectively, and 3.3 million and 2.6 million for the nine months ended September 30, 2013 and 2012, respectively.

Segment Information
Segment Information
12. SEGMENT INFORMATION

We operate in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expense, research and development expenses, interest income and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on an entity-wide basis only. There are no inter-segment revenues.

The following table presents information about the reported sales and gross profit of our reportable segments for the three and nine months ended September 30, 2013 and 2012. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

     Three Months Ended  
     September 30, 2013      September 30, 2012  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 141,278       $ 63,066       $ 131,942       $ 63,827   

Enterprise Networks

     36,126         19,481         30,183         16,145   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,404       $ 82,547       $ 162,125       $ 79,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30, 2013      September 30, 2012  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 374,498       $ 172,570       $ 381,303       $ 195,448   

Enterprise Networks

     108,152         59,452         99,555         53,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 482,650       $ 232,022       $ 480,858       $ 249,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Sales by Product

Our three major product categories are Carrier Systems, Business Networking and Loop Access.

Carrier Systems products are used by communications service providers to provide data, voice and video services to consumers and enterprises. This category includes the following product areas and related services:

 

    Broadband Access

 

    Total Access® 5000 Multi-Service Access and Aggregation Platform (MSAP)

 

    hiX family of MSAPs

 

    Total Access 1100/1200 Series of Fiber to the Node (FTTN) products

 

    Ultra Broadband Ethernet (UBE)

 

    Digital Subscriber Line Access Multiplexer (DSLAM) products

 

    Optical

 

    Optical Networking Edge (ONE)

 

    NetVanta 8000 Series

 

    OPTI and TA 3000 optical products

 

    Small Form-Factor Pluggable (SFP) products

 

    TDM systems

 

    Network Management Solutions

Business Networking products provide access to telecommunication services and facilitate the delivery of cloud connectivity, enterprise communications and virtual mobility to the small and mid-sized enterprise (SME) market. This category includes the following product areas and related services:

 

    Internetworking products

 

    Total Access IP Business Gateways

 

    Optical Network Terminals (ONTs)

 

    Bluesocket® virtual Wireless LAN (WLAN)

 

    NetVanta®

 

    Multiservice Routers

 

    Managed Ethernet Switches

 

    IP Business Gateways

 

    Unified Communications (UC) solutions

 

    Carrier Ethernet Network Terminating Equipment (NTE)

 

    Network Management Solutions

 

    Integrated Access Devices (IADs)

Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. The Loop Access category includes the following product areas:

 

    High bit-rate Digital Subscriber Line (HDSL) products

 

    Digital Data Service (DDS)

 

    Integrated Services Digital Network (ISDN) products

 

    T1/E1/T3 Channel Service Units/Data Service Units (CSUs/DSUs)

 

    TRACER fixed-wireless products

 

The table below presents sales information by product category for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2013      2012      2013      2012  

Carrier Systems

   $ 120,778       $ 111,577       $ 319,119       $ 309,590   

Business Networking

     44,213         36,600         127,668         116,332   

Loop Access

     12,413         13,948         35,863         54,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,404       $ 162,125       $ 482,650       $ 480,858   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, we identify subcategories of product revenues, which we divide into our core products and legacy products. Our core products consist of Broadband Access and Optical products (included in Carrier Systems) and Internetworking products (included in Business Networking). Our legacy products include HDSL products (included in Loop Access) and other products not included in the aforementioned core products.

The table below presents subcategory revenues for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2013      2012      2013      2012  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 98,132       $ 94,464       $ 251,994       $ 249,988   

Optical (included in Carrier Systems)

     16,640         11,160         41,500         39,418   

Internetworking (included in Business Networking)

     43,329         35,411         124,163         111,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     158,101         141,035         417,657         400,726   

Legacy Products

           

HDSL (does not include T1) (included in Loop Access)

     11,487         12,926         33,183         51,350   

Other products (excluding HDSL)

     7,816         8,164         31,810         28,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     19,303         21,090         64,993         80,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,404       $ 162,125       $ 482,650       $ 480,858   
Liability for Warranty Returns
Liability for Warranty Returns

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 systems products. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $8.6 million at September 30, 2013 and $9.7 million at December 31, 2012. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

A summary of warranty expense and write-off activity for the nine months ended September 30, 2013 and 2012 is as follows:

 

     Nine Months Ended  
     September 30,  
     2013     2012  
(In thousands)             

Balance at beginning of period

   $ 9,653      $ 4,118   

Plus: Amounts charged to cost and expenses

     2,078        3,910   

Amounts assumed on acquisition

     —          1,932   

Less: Deductions

     (3,120     (2,709
  

 

 

   

 

 

 

Balance at end of period

   $ 8,611      $ 7,251   
  

 

 

   

 

 

 

Related Party Transactions
Related Party Transactions

14. RELATED PARTY TRANSACTIONS

We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. For the three and nine month periods ended September 30, 2013 and 2012, we incurred fees of $10 thousand per month for these legal services.

Commitments and Contingencies
Commitments and Contingencies

15. COMMITMENTS AND CONTINGENCIES

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

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2013, of which $7.7 million has been applied to these commitments.

Subsequent Events
Subsequent Events
16. SUBSEQUENT EVENTS

On October 8, 2013, 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 October 24, 2013. The payment date will be November 7, 2013. The quarterly dividend payment will be approximately $5.2 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 of 2013 and as of November 1, 2013, we repurchased 0.4 million shares of our common stock through open market purchases at an average cost of $23.85 per share. We currently have the authority to purchase an additional 3.9 million shares of our common stock under the current plan approved by the Board of Directors.

Summary of Significant Accounting Policies (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, 2012 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 for a fair presentation of these interim statements have been recorded, including the out of period adjustment discussed below. 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, 2012, filed on February 28, 2013 with the SEC.

Changes in Classifications

Certain changes in classifications have been made to the prior period balances in other comprehensive income to conform to the current period’s presentation as a result of our adoption of Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income.

Out of Period Adjustment

During the three months ended September 30, 2013, we identified two adjustments in the acquired Nokia Siemens Networks Broadband Access business (NSN BBA business) relating to customer payment discounts for one customer, and recoverable VAT taxes on certain vendor freight invoices that should have been recorded in prior periods. These adjustments resulted from a $0.4 million understatement of net income in 2012 and $0.5 million understatement of net income in the first two quarters of 2013. We evaluated the impact of the adjustments on the results of our previously issued financial statements for each of the prior periods affected and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in the current year and concluded that the impact is not material to our projected results for the year 2013. Accordingly, during the three months ended September 30, 2013 we recorded an out of period adjustment to correct these issues.

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 allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, estimated income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated working capital adjustments under negotiation related to the Nokia Siemens Networks Broadband Access business acquisition, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Recent Accounting Pronouncements

During the nine months ended September 30, 2013, we adopted the following accounting standard, which had no material effect on our consolidated results of operations or financial condition:

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component either on the face of the financial statements or in the footnotes. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. This update is effective prospectively for reporting periods beginning after December 15, 2012. We adopted this amendment during the first quarter of 2013, and we have provided the disclosures required for the periods ended September 30, 2013 and 2012 in Note 10 of Notes to Consolidated Financial Statements.

Business Combinations (Tables)

The allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:

 

(In Thousands)       

Other receivables

   $ 9,486   

Inventory

     21,068   

Property, plant and equipment

     5,035   

Accounts payable

     (5,194

Unearned revenue

     (18,203

Accrued expenses

     (1,931

Accrued wages and benefits

     (2,251

Deferred tax liability

     (788

Non-current unearned revenue

     (21,316
  

 

 

 

Net liabilities assumed

     (14,094

Customer relationships

     5,162   

Developed technology

     3,176   

Other

     13   

Gain on bargain purchase of a business, net of tax

     (1,753
  

 

 

 

Net consideration received from seller

   $ (7,496
  

 

 

 

This supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition of the NSN BBA business been completed on January 1, 2012, nor are they indicative of any future results.

 

(In thousands)    Nine Months Ended
September 30, 2012
 

Pro forma revenue

   $ 100,413   

Pro forma pre-tax loss

   $ (18,006

Weighted average exchange rate during the period
(EURO/USD)

   1.00/$1.29   
Pension Benefit Plan (Tables)
Summarization of Components of Net Periodic Pension Cost

The following table summarizes the components of net periodic pension cost for the three months ended September 30, 2013 and 2012, the nine months ended September 30, 2013, and the period May 4, 2012 to September 30, 2012:

 

     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
    May 4, 2012 to
September 30,
 
(In thousands)    2013     2012     2013     2012  

Service cost

   $ 297      $ 288      $ 891      $ 478   

Interest cost

     185        187        554        314   

Expected return on plan assets

     (250     (250     (751     (415
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 232      $ 225      $ 694      $ 377   
  

 

 

   

 

 

   

 

 

   

 

 

 
Stock-Based Compensation (Tables)

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, 2013 and 2012, which was recognized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2013     2012     2013     2012  

Stock-based compensation expense included in cost of sales

   $ 118      $ 106      $ 334      $ 304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,024        1,107        3,129        3,205   

Research and development expense

     1,034        1,138        3,053        3,274   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     2,058        2,245        6,182        6,479   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,176        2,351        6,516        6,783   

Tax benefit for expense associated with non-qualified options

     (307     (313     (924     (916
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 1,869      $ 2,038      $ 5,592      $ 5,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2012 are summarized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2012  

Expected volatility

     40.20     40.20

Risk-free interest rate

     0.63     0.63

Expected dividend yield

     1.30     1.30

Expected life (in years)

     4.95        4.95   

Weighted-average estimated value

   $ 8.69      $ 8.69   

The following table is a summary of our stock options outstanding as of December 31, 2012 and September 30, 2013 and the changes that occurred during the nine months ended September 30, 2013:

 

(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, 2012

     6,035      $ 24.81         6.69       $ 5,154   

Options granted

     —        $ —           

Options cancelled/forfeited

     (188   $ 26.23         

Options exercised

     (123   $ 18.93         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, September 30, 2013

     5,724      $ 24.89         5.96       $ 21,878   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2013

     3,618      $ 25.33         4.68       $ 11,955   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2012 and September 30, 2013 and the changes that occurred during the nine months ended September 30, 2013:

 

(In thousands, except per share amounts)    Number
of Shares
     Weighted
Average
Grant Date
Fair Value
 

Unvested RSUs and restricted stock outstanding, December 31, 2012

     103       $ 29.25   

RSUs and restricted stock granted

     —         $ —     

RSUs and restricted stock vested

     —         $ —     

RSUs and restricted stock cancelled/forfeited

     —         $ —     
  

 

 

    

 

 

 

Unvested RSUs and restricted stock, September 30, 2013

     103       $ 29.25   
  

 

 

    

 

 

 
Investments (Tables)

At September 30, 2013, we held the following securities and investments, recorded at either fair value or cost.

 

(In thousands)    Amortized      Gross Unrealized     Carrying  
   Cost      Gains      Losses     Value  

Deferred compensation plan assets

   $ 11,308       $ 2,490       $ (18   $ 13,780   

Corporate bonds

     177,798         446         (103     178,141   

Municipal fixed-rate bonds

     145,509         497         (71     145,935   

Municipal variable rate demand notes

     11,960         —           —          11,960   

Marketable equity securities

     22,825         12,393         (275     34,943   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 369,400       $ 15,826       $ (467   $ 384,759   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,753   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 434,762   
          

 

 

 

At December 31, 2012, we held the following securities and investments, recorded at either fair value or cost.

 

(In thousands)    Amortized      Gross Unrealized     Carrying  
   Cost      Gains      Losses     Value  

Deferred compensation plan assets

   $ 10,688       $ 846       $ (7   $ 11,527   

Corporate bonds

     185,464         966         (18     186,412   

Municipal fixed-rate bonds

     174,530         627         (73     175,084   

Municipal variable rate demand notes

     34,375         —           —          34,375   

Fixed income bond fund

     444         12         —          456   

Marketable equity securities

     20,966         14,630         (392     35,204   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 426,467       $ 17,081       $ (490   $ 443,058   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,902   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 493,210   
          

 

 

 

As of September 30, 2013, our corporate bonds and municipal fixed-rate bonds had the following contractual maturities:

 

(In thousands)    Corporate
bonds
     Municipal
fixed-rate
bonds
 

Less than one year

   $ 66,267       $ 58,413   

One to two years

     32,231         18,638   

Two to three years

     76,460         58,389   

Three to five years

     3,183         10,495   
  

 

 

    

 

 

 

Total

   $ 178,141       $ 145,935   
  

 

 

    

 

 

 

The following table presents gross realized gains and losses related to our investments.

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
(In thousands)    2013     2012     2013     2012  

Gross realized gains

   $ 1,797      $ 3,388      $ 7,252      $ 8,688   

Gross realized losses

   $ (46   $ (858   $ (303   $ (1,335

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 in active markets for identical assets or liabilities; Level 2 – Values based on inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability; Level 3 – Values based on unobservable inputs for the asset or liability. These inputs include information supplied by investees.

 

     Fair Value Measurements at September 30, 2013 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

   $ 6,594       $ 6,594       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     13,780         13,780         —           —     

Available-for-sale debt securities

           

Corporate bonds

     178,141         —           178,141         —     

Municipal fixed-rate bonds

     145,935         —           145,935         —     

Municipal variable rate demand notes

     11,960         —           11,960         —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     9,973         9,973         —           —     

Equity securities – other

     24,970         24,970         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     384,759         48,723         336,036         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 391,353       $ 55,317       $ 336,036       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at December 31, 2012 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

   $ 28,071       $ 28,071       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     11,527         11,527         —           —     

Available-for-sale debt securities

           

Corporate bonds

     186,412         —           186,412         —     

Municipal fixed-rate bonds

     175,084         —           175,084         —     

Municipal variable rate demand notes

     34,375         —           34,375         —     

Fixed income bond fund

     456         456         —           —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     14,099         14,099         —           —     

Equity securities – other

     21,105         21,105         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     443,058         47,187         395,871         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 471,129       $ 75,258       $ 395,871       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
Derivative Instruments and Hedging Activities (Tables)

The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of September 30, 2013 were as follows:

 

     September 30, 2013  
(In thousands)    Balance Sheet
Location
   Fair Value  

Derivatives Not Designated as Hedging Instruments (Level 2):

     

Foreign exchange contracts – asset derivatives

   Other receivables    $ 40   

Foreign exchange contracts – liability derivatives

   Accounts payable    $ (6 )

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, 2013 were as follows:

 

(In thousands)    Income Statement Location      Three Months
Ended

September 30,
2013
     Nine Months
Ended
September 30,
2013
 

Derivatives Not Designated as Hedging Instruments:

        

Foreign exchange contracts

     Other income (expense)       $ 52       $ (34
Inventory (Tables)
Components of Inventory

At September 30, 2013 and December 31, 2012, inventory consisted of the following:

 

(In thousands)    September 30,
2013
     December 31,
2012
 

Raw materials

   $ 40,947       $ 47,054   

Work in process

     3,562         3,262   

Finished goods

     48,463         52,267   
  

 

 

    

 

 

 

Total

   $ 92,972       $ 102,583   
  

 

 

    

 

 

 
Goodwill and Intangible Assets (Tables)

The change in the carrying value of goodwill, all of which is included in our Enterprise Networks division, for the nine months ended September 30, 2013 is as follows:

 

(In thousands)       

Balance, December 31, 2012

   $ 3,492   

Acquisitions

     —     

Impairment losses

     —     
  

 

 

 

Balance, September 30, 2013

   $ 3,492   
  

 

 

 

Balance as of September 30, 2013

  

Goodwill

   $ 3,492   

Accumulated impairment losses

     —     
  

 

 

 

Total goodwill

   $ 3,492   
  

 

 

 

The following table presents our intangible assets as of September 30, 2013 and December 31, 2012:

 

(In thousands)    September 30, 2013      December 31, 2012  
     Gross
Value
     Accumulated
Amortization
    Net
Value
     Gross
Value
     Accumulated
Amortization
    Net
Value
 

Customer relationships

   $ 6,906       $ (1,348   $ 5,558       $ 6,769       $ (766   $ 6,003   

Developed technology

     6,481         (2,347     4,134         6,397         (1,354     5,043   

Intellectual property

     2,340         (1,102     1,238         2,340         (851     1,489   

Trade names

     270         (130     140         270         (85     185   

Other

     14         (6     8         13         (3     10   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 16,011       $ (4,933   $ 11,078       $ 15,789       $ (3,059   $ 12,730   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2013, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)    Amount  

Remainder of 2013

   $ 618   

2014

     2,315   

2015

     2,179   

2016

     1,905   

2017

     1,291   

Thereafter

     2,770   
  

 

 

 

Total

   $ 11,078   
  

 

 

 
Stockholders' Equity (Tables)

A summary of the changes in stockholders’ equity for the nine months ended September 30, 2013 is as follows:

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2012

   $ 692,406   

Net income

     33,954   

Dividend payments

     (16,220

Dividends accrued for unvested restricted stock units

     (23

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

     (780

Foreign currency translation adjustment

     (1,498

Proceeds from stock option exercises

     2,332   

Purchase of treasury stock

     (104,147

Income tax benefit from exercise of stock options

     113   

Stock-based compensation expense

     6,516   
  

 

 

 

Balance, September 30, 2013

   $ 612,653   
  

 

 

 

During the nine months ended September 30, 2013, we paid cash dividends as follows (in thousands except per share amounts):

 

Record Date

  

Payment Date

  

Per Share Amount

    

Total Dividend Paid

 

February 7, 2013

   February 21, 2013    $ 0.09       $ 5,586   

April 25, 2013

   May 9, 2013    $ 0.09       $ 5,396   

July 25, 2013

   August 8, 2013    $ 0.09       $ 5,238   

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the three months ended September 30, 2013 and 2012:

 

     Three Months Ended September 30, 2013  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
    Total  

Beginning balance

   $ 6,766      $ (1,952   $ 1,722      $ 6,536   

Other comprehensive income (loss) before reclassifications

     3,522        —          (108     3,414   

Amounts reclassified from accumulated other comprehensive income

     (960     —          —          (960
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     2,562        —          (108     2,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2012  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 11,682      $ 2,999       $ 14,681   

Other comprehensive income before reclassifications

     1,905        134         2,039   

Amounts reclassified from accumulated other comprehensive income

     (1,408     —           (1,408
  

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income

     497        134         631   
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ 12,179      $ 3,133       $ 15,312   
  

 

 

   

 

 

    

 

 

 

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the nine months ended September 30, 2013 and 2012:

 

     Nine Months Ended September 30, 2013  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
    Total  

Beginning balance

   $ 10,108      $ (1,952   $ 3,112      $ 11,268   

Other comprehensive income (loss) before reclassifications

     3,174        —          (1,498     1,676   

Amounts reclassified from accumulated other comprehensive income

     (3,954     —          —          (3,954
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss)

     (780     —          (1,498     (2,278
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

 


     Nine Months Ended September 30, 2012  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 10,160      $ 2,942       $ 13,102   

Other comprehensive income before reclassifications

     6,230        191         6,421   

Amounts reclassified from accumulated other comprehensive income

     (4,211     —           (4,211
  

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income

     2,019        191         2,210   
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ 12,179      $ 3,133       $ 15,312

The following tables present the details of reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2013 and 2012:

 

(In thousands)    Three Months Ended September 30, 2013

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

   $ 1,583      Net realized investment gain

Impairment expense

     (9   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     1,574     

Tax (expense) benefit

     (614  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 960     
  

 

 

   

 

(In thousands)    Three Months Ended September 30, 2012

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

   $ 2,939      Net realized investment gain

Impairment expense

     (631   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     2,308     

Tax (expense) benefit

     (900  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 1,408     
  

 

 

   

The following tables present the details of reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2013 and 2012:

 

(In thousands)    Nine Months Ended September 30, 2013

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

   $ 6,496      Net realized investment gain

Impairment expense

     (13   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     6,483     

Tax (expense) benefit

     (2,529  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 3,954     
  

 

 

   

 

(In thousands)    Nine Months Ended September 30, 2012  

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

   $ 7,567        Net realized investment gain   

Impairment expense

     (664     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     6,903     

Tax (expense) benefit

     (2,692  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 4,211     
  

 

 

   

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, 2013 and 2012:

 

     Three Months Ended
September 30, 2013
    Three Months Ended
September 30, 2012
 
(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

   $ 5,774      $ (2,252   $ 3,522      $ 3,123      $ (1,218   $ 1,905   

Reclassification adjustment for amounts included in net income

     (1,574     614        (960     (2,308     900        (1,408

Foreign currency translation adjustment

     (108     —          (108     134        —          134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ 4,092      $ (1,638   $ 2,454      $ 949      $ (318   $ 631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2013 and 2012:

 

     Nine Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2012
 
(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

   $ 5,203      $ (2,029   $ 3,174      $ 10,213      $ (3,983   $ 6,230   

Reclassification adjustment for amounts included in net income

     (6,483     2,529        (3,954     (6,903     2,692        (4,211

Foreign currency translation adjustment

     (1,498     —          (1,498     191        —          191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (2,778   $ 500      $ (2,278   $ 3,501      $ (1,291   $ 2,210   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Earnings Per Share (Tables)
Earnings Per Share

A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 is as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands, except per share amounts)    2013      2012      2013      2012  

Numerator

           

Net income

   $ 16,205       $ 9,272       $ 33,954       $ 43,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     57,947         63,066         59,561         63,495   

Effect of dilutive securities

           

Stock options

     613         225         321         637   

Restricted stock and restricted stock units

     57         13         47         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     58,617         63,304         59,929         64,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.28       $ 0.15       $ 0.57       $ 0.68   

Net income per share – diluted

   $ 0.28       $ 0.15       $ 0.57       $ 0.68   
Segment Information (Tables)

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, 2013 and 2012. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

     Three Months Ended  
     September 30, 2013      September 30, 2012  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 141,278       $ 63,066       $ 131,942       $ 63,827   

Enterprise Networks

     36,126         19,481         30,183         16,145   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,404       $ 82,547       $ 162,125       $ 79,972   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended  
     September 30, 2013      September 30, 2012  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 374,498       $ 172,570       $ 381,303       $ 195,448   

Enterprise Networks

     108,152         59,452         99,555         53,812   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 482,650       $ 232,022       $ 480,858       $ 249,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents sales information by product category for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(In thousands)    2013      2012      2013      2012  

Carrier Systems

   $ 120,778       $ 111,577       $ 319,119       $ 309,590   

Business Networking

     44,213         36,600         127,668         116,332   

Loop Access

     12,413         13,948         35,863         54,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,404       $ 162,125       $ 482,650       $ 480,858   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents subcategory revenues for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(In thousands)    2013      2012      2013      2012  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 98,132       $ 94,464       $ 251,994       $ 249,988   

Optical (included in Carrier Systems)

     16,640         11,160         41,500         39,418   

Internetworking (included in Business Networking)

     43,329         35,411         124,163         111,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     158,101         141,035         417,657         400,726   

Legacy Products

           

HDSL (does not include T1) (included in Loop Access)

     11,487         12,926         33,183         51,350   

Other products (excluding HDSL)

     7,816         8,164         31,810         28,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     19,303         21,090         64,993         80,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,404       $ 162,125       $ 482,650       $ 480,858   
  

 

 

    

 

 

    

 

 

    

 

 

 
Liability for Warranty Returns (Tables)
Summary of Warranty Expense and Write-Off Activity

A summary of warranty expense and write-off activity for the nine months ended September 30, 2013 and 2012 is as follows:

 

     Nine Months Ended
September 30,
 
     2013     2012  
(In thousands)             

Balance at beginning of period

   $ 9,653      $ 4,118   

Plus: Amounts charged to cost and expenses

     2,078        3,910   

Amounts assumed on acquisition

     —          1,932   

Less: Deductions

     (3,120     (2,709
  

 

 

   

 

 

 

Balance at end of period

   $ 8,611      $ 7,251   
  

 

 

   

 

 

 
Summary of Significant Accounting Policies - Additional Information (Detail) (Immaterial Corrections [Member], USD $)
In Millions, unless otherwise specified
6 Months Ended 12 Months Ended
Jun. 30, 2013
Dec. 31, 2012
Immaterial Corrections [Member]
 
 
Summary Of Significant Accounting Policy [Line Items]
 
 
Understatement of net income of previous year
 
$ 0.4 
Understatement of net income of previous quarters
$ 0.5 
 
Business Combinations - Additional Information (Detail) (USD $)
9 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2013
Nokia Siemens Networks [Member]
Jun. 30, 2012
Nokia Siemens Networks [Member]
Sep. 30, 2013
Nokia Siemens Networks [Member]
May 4, 2012
Nokia Siemens Networks [Member]
Sep. 30, 2013
Nokia Siemens Networks [Member]
Customer Relationships [Member]
Sep. 30, 2013
Nokia Siemens Networks [Member]
Developed Technology [Member]
Business Acquisition [Line Items]
 
 
 
 
 
 
 
Purchase price, net of consideration
 
 
 
 
$ 7,496,000 
 
 
Bargain purchase gain, net of tax
1,753,000