ADTRAN INC, 10-Q filed on 8/6/2014
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Jul. 22, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q2 
 
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
 
54,704,954 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Current Assets
 
 
Cash and cash equivalents
$ 58,903 
$ 58,298 
Short-term investments
45,930 
105,760 
Accounts receivable, less allowance for doubtful accounts of $116 and $130 at June 30, 2014 and December 31, 2013, respectively
115,538 
85,814 
Other receivables
23,841 
18,249 
Inventory
89,239 
90,111 
Prepaid expenses
5,295 
4,325 
Deferred tax assets, net
15,054 
17,083 
Total Current Assets
353,800 
379,640 
Property, plant and equipment, net
75,265 
76,739 
Deferred tax assets, net
11,092 
9,622 
Goodwill
3,492 
3,492 
Other assets
12,087 
11,180 
Long-term investments
311,622 
309,225 
Total Assets
767,358 
789,898 
Current Liabilities
 
 
Accounts payable
62,103 
48,282 
Unearned revenue
26,364 
22,205 
Accrued expenses
11,865 
12,776 
Accrued wages and benefits
15,930 
14,040 
Income tax payable, net
9,400 
5,002 
Total Current Liabilities
125,662 
102,305 
Non-current unearned revenue
15,213 
14,643 
Other non-current liabilities
24,424 
22,144 
Bonds payable
30,000 
46,200 
Total Liabilities
195,299 
185,292 
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 54,698 shares outstanding at June 30, 2014 and 79,652 shares issued and 56,918 shares outstanding at December 31, 2013
797 
797 
Additional paid-in capital
237,727 
233,511 
Accumulated other comprehensive income
11,437 
10,753 
Retained earnings
897,414 
884,451 
Less treasury stock at cost: 24,954 and 22,734 shares at June 30, 2014 and December 31, 2013, respectively
(575,316)
(524,906)
Total Stockholders' Equity
572,059 
604,606 
Total Liabilities and Stockholders' Equity
$ 767,358 
$ 789,898 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 116 
$ 130 
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
54,698 
56,918 
Treasury stock, shares
24,954 
22,734 
Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Income Statement [Abstract]
 
 
 
 
Sales
$ 176,129 
$ 162,233 
$ 323,133 
$ 305,246 
Cost of sales
89,332 
82,435 
158,546 
155,771 
Gross Profit
86,797 
79,798 
164,587 
149,475 
Selling, general and administrative expenses
33,788 
32,685 
67,727 
63,288 
Research and development expenses
33,670 
33,060 
66,223 
65,571 
Operating Income
19,339 
14,053 
30,637 
20,616 
Interest and dividend income
1,054 
1,674 
2,348 
3,442 
Interest expense
(148)
(575)
(375)
(1,156)
Net realized investment gain
2,340 
1,553 
4,532 
5,198 
Other income (expense), net
(774)
129 
(652)
(1,543)
Income before provision for income taxes
21,811 
16,834 
36,490 
26,557 
Provision for income taxes
(7,416)
(6,975)
(12,488)
(8,808)
Net Income
$ 14,395 
$ 9,859 
$ 24,002 
$ 17,749 
Weighted average shares outstanding - basic
55,409 
59,056 
56,077 
60,443 
Weighted average shares outstanding - diluted
55,729 
59,311 
56,559 
60,660 
Earnings per common share - basic
$ 0.26 
$ 0.17 
$ 0.43 
$ 0.29 
Earnings per common share - diluted
$ 0.26 
$ 0.17 
$ 0.42 
$ 0.29 
Dividend per share
$ 0.09 
$ 0.09 
$ 0.18 
$ 0.18 
Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 14,395 
$ 9,859 
$ 24,002 
$ 17,749 
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
1,219 
(1,698)
298 
(3,342)
Foreign currency translation
134 
(1,713)
386 
(1,390)
Other Comprehensive Income (Loss), net of tax
1,353 
(3,411)
684 
(4,732)
Comprehensive Income, net of tax
$ 15,748 
$ 6,448 
$ 24,686 
$ 13,017 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities:
 
 
Net income
$ 24,002 
$ 17,749 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
7,467 
7,373 
Amortization of net premium on available-for-sale investments
2,272 
3,315 
Net realized gain on long-term investments
(4,532)
(5,198)
Net loss on disposal of property, plant and equipment
37 
17 
Stock-based compensation expense
4,149 
4,340 
Deferred income taxes
377 
150 
Tax benefit from stock option exercises
67 
21 
Excess tax benefits from stock-based compensation arrangements
(58)
(21)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(29,949)
(23,018)
Other receivables
(5,706)
(2,727)
Inventory
841 
13,336 
Prepaid expenses and other assets
(3,103)
(665)
Accounts payable
14,425 
19,786 
Accrued expenses and other liabilities
8,248 
(6,587)
Income tax payable, net
4,442 
1,094 
Net cash provided by operating activities
22,979 
28,965 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(4,919)
(3,201)
Proceeds from disposals of property, plant and equipment
 
Proceeds from sales and maturities of available-for-sale investments
166,518 
224,163 
Purchases of available-for-sale investments
(106,406)
(179,730)
Net cash provided by investing activities
55,194 
41,232 
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
1,781 
819 
Purchases of treasury stock
(53,091)
(89,917)
Dividend payments
(10,137)
(10,982)
Payments on long-term debt
(16,500)
 
Excess tax benefits from stock-based compensation arrangements
58 
21 
Net cash used in financing activities
(77,889)
(100,059)
Net increase (decrease) in cash and cash equivalents
284 
(29,862)
Effect of exchange rate changes
321 
(1,036)
Cash and cash equivalents, beginning of period
58,298 
68,457 
Cash and cash equivalents, end of period
58,903 
37,559 
Supplemental disclosure of non-cash investing activities
 
 
Purchases of property, plant and equipment included in accounts payable
$ 423 
$ 574 
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, 2013 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 and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on February 27, 2014 with the SEC.

Changes in Classifications

We corrected immaterial misclassifications between the operating and investing sections of our consolidated statements of cash flows and adjusted our cash flows for the six months ended June 30, 2013 in these categories by $0.5 million in order to be consistent with the 2014 presentation.

Out of Period Adjustment

During the year ended December 31, 2013, we identified two adjustments in the acquired NSN (formerly 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 $0.5 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 the second quarter of 2013 and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in 2013 and concluded that the impact is not material to our 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 obsolete and excess inventory reserves, warranty reserves, customer rebates, determination of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, estimated income tax provision and income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated working capital adjustments under negotiation related to the NSN BBA business acquisition, estimated pension liability, fair value of investments, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We are currently evaluating the transition method that will be elected and the impact that the adoption of ASU 2014-09 will have on our financial position, results of operations and cash flows.

Business Combination
Business Combination

2. BUSINESS COMBINATION

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.

The following supplemental pro forma information presents the financial results of the combined entity for the years ended December 31, 2012 and 2011. The pro forma results of the acquired NSN BBA business for the period January 1, 2012 to May 4, 2012 and January 1, 2011 to December 31, 2011 were not included in our consolidated financial results for the years ended December 31, 2012 or 2011. There were no material, non-recurring pro forma adjustments to the historical data.

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, 2011, nor are they indicative of any future results.

 

(In thousands) (Unaudited)    2012      2011  

Pro forma revenue

   $ 672,044       $ 913,485   

Pro forma pre-tax loss

   $ 57,906       $ 169,162   

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

   1.00/$1.29       1.00/$1.38   
Income Taxes
Income Taxes

3. INCOME TAXES

Our effective tax rate increased from 33.2% in the six months ended June 30, 2013 to 34.2% in the six months ended June 30, 2014. The increase in the effective tax rate between the two periods is primarily attributable to the net effect of the exclusion of a benefit for the research tax credit, which expired on December 31, 2013, offset by the release of a valuation allowance attributable to a foreign subsidiary in 2014.

Pension Benefit Plan
Pension Benefit Plan

4. PENSION BENEFIT PLAN

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

The following table summarizes the components of net periodic pension cost for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In thousands)    2014     2013     2014     2013  

Service cost

   $ 306      $ 294      $ 611      $ 594   

Interest cost

     216        182        431        369   

Expected return on plan assets

     (280     (248     (559     (501
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 242      $ 228      $ 483      $ 462   
  

 

 

   

 

 

   

 

 

   

 

 

 
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 six months ended June 30, 2014 and 2013, which was recognized as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(In thousands)    2014     2013     2014     2013  

Stock-based compensation expense included in cost of sales

   $ 119      $ 110      $ 235      $ 216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,015        1,042        2,041        2,105   

Research and development expense

     958        956        1,873        2,019   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     1,973        1,998        3,914        4,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,092        2,108        4,149        4,340   

Tax benefit for expense associated with non-qualified options

     (296     (310     (580     (617
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 1,796      $ 1,798      $ 3,569      $ 3,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 months ended June 30, 2014 or the three and six months ended June 30, 2013. The weighted-average assumptions and value of options granted for the six months ended June 30, 2014 are summarized as follows:

 

     Six Months Ended  
     June 30,  
     2014  

Expected volatility

     39.57

Risk-free interest rate

     1.86

Expected dividend yield

     1.38

Expected life (in years)

     6.25   

Weighted-average estimated value

   $ 9.28   

The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. No RSUs were granted, forfeited, or vested during the three and six months ended June 30, 2014 or 2013.

The fair value of restricted stock is equal to the closing price of our stock on the date of grant. We granted four thousand shares of restricted stock during the three and six months ended June 30, 2014 at a fair value of $21.30 per share. No restricted stock was forfeited or vested during the three and six months ended June 30, 2014 or 2013.

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013 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 2.5% 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 June 30, 2014, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $14.1 million, which is expected to be recognized over an average remaining recognition period of 2.4 years.

The following table is a summary of our stock options outstanding as of December 31, 2013 and June 30, 2014 and the changes that occurred during the six months ended June 30, 2014:

 

(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, 2013

     6,358      $ 24.43         6.60       $ 25,878   

Options granted

     2      $ 26.03         

Options cancelled/forfeited

     (144   $ 26.02         

Options exercised

     (91   $ 19.56         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, June 30, 2014

     6,125      $ 24.46         6.09       $ 8,724   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, June 30, 2014

     3,776      $ 24.81         4.68       $ 4,900   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing price of our stock on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2014. 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 six months ended June 30, 2014 was $0.1 million and $0.6 million, respectively.

Investments
Investments

6. INVESTMENTS

At June 30, 2014, 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

   $ 12,733       $ 3,037       $ (15   $ 15,755   

Corporate bonds

     98,995         403         (7     99,391   

Municipal fixed-rate bonds

     155,171         825         (14     155,982   

Municipal variable rate demand notes

     15,120         —           —          15,120   

Marketable equity securities

     25,896         14,249         (418     39,727   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 307,915       $ 18,514       $ (454   $ 325,975   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             30,000   

Other investments held at cost

             1,577   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 357,552   
          

 

 

 

At December 31, 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

   $ 12,300       $ 2,847       $ (24   $ 15,123   

Corporate bonds

     166,370         534         (45     166,859   

Municipal fixed-rate bonds

     135,773         583         (54     136,302   

Municipal variable rate demand notes

     8,310         —           —          8,310   

Marketable equity securities

     24,654         13,975         (177     38,452   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 347,407       $ 17,939       $ (300   $ 365,046   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,689   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 414,985   
          

 

 

 

 

As of June 30, 2014, 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

   $ 7,187       $ 25,826   

One to two years

     46,881         66,823   

Two to three years

     45,323         49,269   

Three to five years

     —           14,064   
  

 

 

    

 

 

 

Total

   $ 99,391       $ 155,982   
  

 

 

    

 

 

 

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 June 30, 2014, we held a $30.0 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). During the first quarter of 2014, we made a principal payment on the Bond of $16.5 million. At June 30, 2014, the estimated fair value of the Bond using a level 2 valuation technique was approximately $29.7 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. 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. For the three and six months ended June 30, 2014 and 2013, other-than-temporary impairment charges were not significant.

Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our investments.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In thousands)    2014     2013     2014     2013  

Gross realized gains

   $ 2,407      $ 1,728      $ 4,635      $ 5,455   

Gross realized losses

   $ (67   $ (175   $ (103   $ (257

As of June 30, 2014 and 2013, 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 for identical assets or liabilities in an active market; Level 2—Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3—Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees.

 

     Fair Value Measurements at June 30, 2014 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

   $ 11,737       $ 11,737       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,755         15,755         —           —     

Available-for-sale debt securities

           

Corporate bonds

     99,391         —           99,391         —     

Municipal fixed-rate bonds

     155,982         —           155,982         —     

Municipal variable rate demand notes

     15,120         —           15,120         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     12,085         12,085         —           —     

Marketable equity securities – other

     27,642         27,642         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     325,975         55,482         270,493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 337,712       $ 67,219       $ 270,493       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 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

   $ 3,949       $ 3,949       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,123         15,123         —           —     

Available-for-sale debt securities

           

Corporate bonds

     166,859         —           166,859         —     

Municipal fixed-rate bonds

     136,302         —           136,302         —     

Municipal variable rate demand notes

     8,310         —           8,310         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     11,398         11,398         —           —     

Marketable equity securities – other

     27,054         27,054         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     365,046         53,575         311,471         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 368,995       $ 57,524       $ 311,471       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2014, we had forward contracts outstanding with notional amounts totaling €19.3 million ($26.4 million), which mature through 2014.

The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of June 30, 2014 and December 31, 2013 were as follows:

 

(In thousands)   

Balance Sheet
Location

   June 30,
2014
    December 31,
2013
 

Derivatives Not Designated as Hedging Instruments (Level 2):

       

Foreign exchange contracts – asset derivatives

   Other receivables    $ 4      $ 18   

Foreign exchange contracts – liability derivatives

   Accounts payable    $ (232   $ (15

The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the three and six months ended June 30, 2014 were as follows:

 

    

Income Statement

Location

   Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands)       2014     2013      2014     2013  

Derivatives Not Designated as Hedging Instruments:

            

Foreign exchange contracts

   Other income (expense)    $ (438   $ 138       $ (548   $ (86
Inventory
Inventory

8. INVENTORY

At June 30, 2014 and December 31, 2013, inventory consisted of the following:

 

(In thousands)    June 30,
2014
     December 31,
2013
 

Raw materials

   $ 39,557       $ 44,093   

Work in process

     7,086         3,484   

Finished goods

     42,596         42,534   
  

 

 

    

 

 

 

Total

   $ 89,239       $ 90,111   
  

 

 

    

 

 

 

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 June 30, 2014 and December 31, 2013, raw materials reserves totaled $17.1 million and $16.9 million, respectively, and finished goods inventory reserves totaled $6.0 million and $6.1 million, respectively.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

9. GOODWILL AND INTANGIBLE ASSETS

We evaluate the carrying value of goodwill, generated from our acquisition of Bluesocket, Inc. and assigned to our Enterprise Networks division, during the fourth quarter of each year. We may perform additional 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 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 have been no impairment losses recorded since acquisition.

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 June 30, 2014 and December 31, 2013:

 

(In thousands)    June 30, 2014      December 31, 2013  
   Gross
Value
     Accumulated
Amortization
    Net Value      Gross
Value
     Accumulated
Amortization
    Net Value  

Customer relationships

   $ 6,914       $ (1,923   $ 4,991       $ 6,996       $ (1,555   $ 5,441   

Developed technology

     6,363         (3,208     3,155         6,537         (2,692     3,845   

Intellectual property

     2,340         (1,353     987         2,340         (1,185     1,155   

Trade names

     270         (175     95         270         (145     125   

Other

     14         (10     4         14         (8     6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,901       $ (6,669   $ 9,232       $ 16,157       $ (5,585   $ 10,572   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense, all of which relates to business acquisitions, was $0.6 million for the three months ended June 30, 2014 and 2013, and $1.2 million for the six months ended June 30, 2014 and 2013.

As of June 30, 2014, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)    Amount  

Remainder of 2014

   $ 1,140   

2015

     2,157   

2016

     1,883   

2017

     1,284   

2018

     778   

Thereafter

     1,990   
  

 

 

 

Total

   $ 9,232   
  

 

 

 

Stockholders' Equity
Stockholders' Equity

10. STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity for the six months ended June 30, 2014 is as follows:

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2013

   $ 604,606   

Net income

     24,002   

Dividend payments

     (10,137

Dividends accrued for unvested restricted stock units

     (2

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

     298   

Foreign currency translation adjustment

     386   

Proceeds from stock option exercises

     1,781   

Purchase of treasury stock

     (53,091

Income tax benefit from exercise of stock options

     67   

Stock-based compensation expense

     4,149   
  

 

 

 

Balance, June 30, 2014

   $ 572,059   
  

 

 

 

 

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 40.0 million shares of our common stock. On May 14, 2014, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock (bringing the total shares authorized for repurchase to 45.0 million), which will commence upon completion of the repurchase plan announced May 1, 2013. This new authorization will be implemented through open market or private purchases from time to time as conditions warrant.

During the six months ended June 30, 2014, we repurchased 2.3 million shares of our common stock at an average price of $22.73 per share. We currently have the authority to purchase an additional 6.1 million shares of our common stock under the current plans approved by the Board of Directors.

Stock Option Exercises

We issued 0.1 million shares of treasury stock during the six months ended June 30, 2014 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $23.46. We received proceeds totaling $1.8 million from the exercise of these stock options during the six months ended June 30, 2014.

Dividend Payments

During the six months ended June 30, 2014, we paid cash dividends as follows (in thousands except per share amounts):

 

Record Date

 

Payment Date

 

Per Share Amount

 

Total Dividend Paid

February 6, 2014   February 20, 2014   $0.09   $5,102
May 1, 2014   May 15, 2014   $0.09   $5,035

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 June 30, 2014 and 2013:

 

     Three Months Ended June 30, 2014  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 9,816      $ (891   $ 1,159       $ 10,084   

Other comprehensive income (loss) before

reclassifications

     2,516        —          134         2,650   

Amounts reclassified from accumulated other

comprehensive income

     (1,297     —          —           (1,297
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income (loss)

     1,219        —          134         1,353   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,035      $ (891   $ 1,293       $ 11,437   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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

Beginning balance

   $ 8,464      $ (1,952   $ 3,435      $ 9,947   

Other comprehensive income (loss) before

reclassifications

     (802     —          (1,713     (2,515

Amounts reclassified from accumulated other

comprehensive income

     (896     —          —          (896
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (1,698     —          (1,713     (3,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended June 30, 2014  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 10,737      $ (891   $ 907       $ 10,753   

Other comprehensive income (loss) before

reclassifications

     2,918        —          386         3,304   

Amounts reclassified from accumulated other

comprehensive income

     (2,620     —          —           (2,620
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income (loss)

     298        —          386         684   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,035      $ (891   $ 1,293       $ 11,437   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended June 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

     (348     —          (1,390     (1,738

Amounts reclassified from accumulated other

comprehensive income

     (2,994     —          —          (2,994
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (3,342     —          (1,390     (4,732
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

 

 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2014 and 2013:

 

(In thousands)    Three Months Ended June 30, 2014

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

   $ 2,160      Net realized investment gain

Impairment expense

     (34   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     2,126     

Tax (expense) benefit

     (829  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 1,297     
  

 

 

   
(In thousands)    Three Months Ended June 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

   $ 1,469      Net realized investment gain

Impairment expense

     —        Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     1,469     

Tax (expense) benefit

     (573  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 896     
  

 

 

   

The following tables present the details of reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2014 and 2013:

 

(In thousands)    Six Months Ended June 30, 2014

Details about Accumulated Other
Comprehensive Income Components

   Amount Reclassified
from Accumulated
Other Comprehensive
Income
    Affected Line Item in the
Statement Where Net
Income Is Presented

Unrealized gains (losses) on available-for-sale securities:

    

Net realized gain on sales of securities

   $ 4,330      Net realized investment gain

Impairment expense

     (34   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     4,296     

Tax (expense) benefit

     (1,676  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 2,620     
  

 

 

   

 

(In thousands)    Six Months Ended June 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

   $ 4,913        Net realized investment gain   

Impairment expense

     (4     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     4,909     

Tax (expense) benefit

     (1,915  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 2,994     
  

 

 

   

The following table presents the tax effects related to the change in each component of other comprehensive income for the three months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30, 2014
    Three Months Ended
June 30, 2013
 
(In thousands)    Before-Tax
Amount
    Tax
(Expense)
Benefit
    Net-of-Tax
Amount
    Before-Tax
Amount
    Tax
Benefit
     Net-of-Tax
Amount
 

Unrealized gains (losses) on available-for-sale securities

   $ 4,125      $ (1,609   $ 2,516      $ (1,315   $ 513       $ (802

Reclassification adjustment for amounts included in net income

     (2,126     829        (1,297     (1,469     573         (896

Foreign currency translation adjustment

     134        —          134        (1,713     —           (1,713
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 2,133      $ (780   $ 1,353      $ (4,497   $ 1,086       $ (3,411
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following table presents the tax effects related to the change in each component of other comprehensive income for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 
(In thousands)    Before-Tax
Amount
    Tax
(Expense)
Benefit
    Net-of-Tax
Amount
    Before-Tax
Amount
    Tax
Benefit
     Net-of-Tax
Amount
 

Unrealized gains (losses) on available-for-sale securities

   $ 4,784      $ (1,866   $ 2,918      $ (571   $ 223       $ (348

Reclassification adjustment for amounts included in net income

     (4,296     1,676        (2,620     (4,909     1,915         (2,994

Foreign currency translation adjustment

     386        —          386        (1,390     —           (1,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 874      $ (190   $ 684      $ (6,870   $ 2,138       $ (4,732 )
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 six months ended June 30, 2014 and 2013 is as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands, except per share amounts)    2014      2013      2014      2013  

Numerator

           

Net income

   $ 14,395       $ 9,859       $ 24,002       $ 17,749   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     55,409         59,056         56,077         60,443   

Effect of dilutive securities

           

Stock options

     288         209         459         177   

Restricted stock and restricted stock units

     32         46         23         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     55,729         59,311         56,559         60,660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.26       $ 0.17       $ 0.43       $ 0.29   

Net income per share – diluted

   $ 0.26       $ 0.17       $ 0.42       $ 0.29   

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 4.3 million for the three months ended June 30, 2014 and 2013, and 3.1 million and 5.1 million for the six months ended June 30, 2014 and 2013, 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 expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on an entity-wide basis only. There are no inter-segment revenues.

The following tables present information about the reported sales and gross profit of our reportable segments for the three and six months ended June 30, 2014 and 2013. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

     Three Months Ended  
     June 30, 2014      June 30, 2013  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 143,455       $ 68,053       $ 123,333       $ 57,913   

Enterprise Networks

     32,674         18,744         38,900         21,885   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,129       $ 86,797       $ 162,233       $ 79,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended  
     June 30, 2014      June 30, 2013  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 261,617       $ 129,406       $ 233,220       $ 109,504   

Enterprise Networks

     61,516         35,181         72,026         39,971   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 323,133       $ 164,587       $ 305,246       $ 149,475   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 Node (MSAN)

 

    hiX family of MSANs

 

    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 of Fiber Ethernet Access Devices (EAD)

 

    OPTI-6100 and Total Access 3000 optical Multi-Service Provisioning Platforms (MSPP)

 

    Pluggable Optical Products, including SFP, XFP, and SFP+

 

    TDM systems

Business Networking products provide access to communication services and facilitate the delivery of cloud connectivity and enterprise communications to distributed enterprises and small and medium-sized businesses. 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 (vWLAN®)

 

    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 communications networks. The Loop Access category includes the following product areas and related services:

 

    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 six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands)    2014      2013      2014      2013  

Carrier Systems

   $ 128,824       $ 105,537       $ 228,377       $ 198,341   

Business Networking

     41,969         45,379         79,888         83,455   

Loop Access

     5,336         11,317         14,868         23,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,129       $ 162,233       $ 323,133       $ 305,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, we identify subcategories of product revenues, which we divide into 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 six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands)    2014      2013      2014      2013  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 108,309       $ 81,628       $ 189,836       $ 153,862   

Optical (included in Carrier Systems)

     15,833         15,986         28,622         24,860   

Internetworking (included in Business Networking)

     40,986         43,922         77,932         80,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     165,128         141,536         296,390         259,556   

Legacy Products

           

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

     4,798         10,289         13,675         21,696   

Other products (excluding HDSL)

     6,203         10,408         13,068         23,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     11,001         20,697         26,743         45,690   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,129       $ 162,233       $ 323,133       $ 305,246   
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 $8.3 million at June 30, 2014 and $9.0 million at December 31, 2013. The decrease from December 31, 2013 to June 30, 2014 includes a $1.5 million decrease related to the settlement of an outstanding warranty claim, which corresponds to a reduction in Other Receivables. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

 

A summary of warranty expense and write-off activity for the six months ended June 30, 2014 and 2013 is as follows:

 

     Six Months Ended
June 30,
 
(In thousands)    2014     2013  

Balance at beginning of period

   $ 8,977      $ 9,653   

Plus: Amounts charged to cost and expenses

     1,339        470   

Less: Deductions

     (1,999     (2,182
  

 

 

   

 

 

 

Balance at end of period

   $ 8,317      $ 7,941   
  

 

 

   

 

 

 

Deductions for the six months ended June 30, 2014 include a $1.5 million reduction that relates to the settlement of an outstanding warranty claim, which corresponds to a reduction in Other Receivables.

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 six months ended June 30, 2014 and 2013, 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 June 30, 2014, of which $7.7 million has been applied to these commitments.

Subsequent Events
Subsequent Events

16. SUBSEQUENT EVENTS

On July 15, 2014, 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 July 31, 2014. The payment date will be August 14, 2014. The quarterly dividend payment will be approximately $4.9 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 third quarter and as of August 6, 2014, we have repurchased 45 thousand shares of our common stock through open market purchases at an average cost of $21.93 per share. We currently have the authority to purchase an additional 6.1 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, 2013 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 and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on February 27, 2014 with the SEC.

Changes in Classifications

We corrected immaterial misclassifications between the operating and investing sections of our consolidated statements of cash flows and adjusted our cash flows for the six months ended June 30, 2013 in these categories by $0.5 million in order to be consistent with the 2014 presentation.

Out of Period Adjustment

During the year ended December 31, 2013, we identified two adjustments in the acquired NSN (formerly 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 $0.5 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 the second quarter of 2013 and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in 2013 and concluded that the impact is not material to our 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 obsolete and excess inventory reserves, warranty reserves, customer rebates, determination of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, estimated income tax provision and income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated working capital adjustments under negotiation related to the NSN BBA business acquisition, estimated pension liability, fair value of investments, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

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.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We are currently evaluating the transition method that will be elected and the impact that the adoption of ASU 2014-09 will have on our financial position, results of operations and cash flows.

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 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.

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.

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.

Business Combination (Tables)
Supplemental Pro Forma Information

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, 2011, nor are they indicative of any future results.

 

(In thousands) (Unaudited)    2012      2011  

Pro forma revenue

   $ 672,044       $ 913,485   

Pro forma pre-tax loss

   $ 57,906       $ 169,162   

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

   1.00/$1.29       1.00/$1.38   
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 and six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In thousands)    2014     2013     2014     2013  

Service cost

   $ 306      $ 294      $ 611      $ 594   

Interest cost

     216        182        431        369   

Expected return on plan assets

     (280     (248     (559     (501
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 242      $ 228      $ 483      $ 462   
  

 

 

   

 

 

   

 

 

   

 

 

 
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 six months ended June 30, 2014 and 2013, which was recognized as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(In thousands)    2014     2013     2014     2013  

Stock-based compensation expense included in cost of sales

   $ 119      $ 110      $ 235      $ 216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,015        1,042        2,041        2,105   

Research and development expense

     958        956        1,873        2,019   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     1,973        1,998        3,914        4,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,092        2,108        4,149        4,340   

Tax benefit for expense associated with non-qualified options

     (296     (310     (580     (617
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 1,796      $ 1,798      $ 3,569      $ 3,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

The weighted-average assumptions and value of options granted for the six months ended June 30, 2014 are summarized as follows:

 

     Six Months Ended  
     June 30,  
     2014  

Expected volatility

     39.57

Risk-free interest rate

     1.86

Expected dividend yield

     1.38

Expected life (in years)

     6.25   

Weighted-average estimated value

   $ 9.28   

The following table is a summary of our stock options outstanding as of December 31, 2013 and June 30, 2014 and the changes that occurred during the six months ended June 30, 2014:

 

(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, 2013

     6,358      $ 24.43         6.60       $ 25,878   

Options granted

     2      $ 26.03         

Options cancelled/forfeited

     (144   $ 26.02         

Options exercised

     (91   $ 19.56         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, June 30, 2014

     6,125      $ 24.46         6.09       $ 8,724   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, June 30, 2014

     3,776      $ 24.81         4.68       $ 4,900   
  

 

 

   

 

 

    

 

 

    

 

 

 

Investments (Tables)

At June 30, 2014, 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

   $ 12,733       $ 3,037       $ (15   $ 15,755   

Corporate bonds

     98,995         403         (7     99,391   

Municipal fixed-rate bonds

     155,171         825         (14     155,982   

Municipal variable rate demand notes

     15,120         —           —          15,120   

Marketable equity securities

     25,896         14,249         (418     39,727   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 307,915       $ 18,514       $ (454   $ 325,975   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             30,000   

Other investments held at cost

             1,577   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 357,552   
          

 

 

 

At December 31, 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

   $ 12,300       $ 2,847       $ (24   $ 15,123   

Corporate bonds

     166,370         534         (45     166,859   

Municipal fixed-rate bonds

     135,773         583         (54     136,302   

Municipal variable rate demand notes

     8,310         —           —          8,310   

Marketable equity securities

     24,654         13,975         (177     38,452   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 347,407       $ 17,939       $ (300   $ 365,046   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,689   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 414,985   
          

 

 

 

As of June 30, 2014, 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

   $ 7,187       $ 25,826   

One to two years

     46,881         66,823   

Two to three years

     45,323         49,269   

Three to five years

     —           14,064   
  

 

 

    

 

 

 

Total

   $ 99,391       $ 155,982   
  

 

 

    

 

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(In thousands)    2014     2013     2014     2013  

Gross realized gains

   $ 2,407      $ 1,728      $ 4,635      $ 5,455   

Gross realized losses

   $ (67   $ (175   $ (103   $ (257

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

 

     Fair Value Measurements at June 30, 2014 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

   $ 11,737       $ 11,737       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,755         15,755         —           —     

Available-for-sale debt securities

           

Corporate bonds

     99,391         —           99,391         —     

Municipal fixed-rate bonds

     155,982         —           155,982         —     

Municipal variable rate demand notes

     15,120         —           15,120         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     12,085         12,085         —           —     

Marketable equity securities – other

     27,642         27,642         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     325,975         55,482         270,493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 337,712       $ 67,219       $ 270,493       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 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

   $ 3,949       $ 3,949       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,123         15,123         —           —     

Available-for-sale debt securities

           

Corporate bonds

     166,859         —           166,859         —     

Municipal fixed-rate bonds

     136,302         —           136,302         —     

Municipal variable rate demand notes

     8,310         —           8,310         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     11,398         11,398         —           —     

Marketable equity securities – other

     27,054         27,054         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     365,046         53,575         311,471         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 368,995       $ 57,524       $ 311,471       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Instruments and Hedging Activities (Tables)

The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of June 30, 2014 and December 31, 2013 were as follows:

 

(In thousands)   

Balance Sheet
Location

   June 30,
2014
    December 31,
2013
 

Derivatives Not Designated as Hedging Instruments (Level 2):

       

Foreign exchange contracts – asset derivatives

   Other receivables    $ 4      $ 18   

Foreign exchange contracts – liability derivatives

   Accounts payable    $ (232   $ (15

The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the three and six months ended June 30, 2014 were as follows:

 

    

Income Statement

Location

   Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands)       2014     2013      2014     2013  

Derivatives Not Designated as Hedging Instruments:

            

Foreign exchange contracts

   Other income (expense)    $ (438   $ 138       $ (548   $ (86
Inventory (Tables)
Components of Inventory

At June 30, 2014 and December 31, 2013, inventory consisted of the following:

 

(In thousands)    June 30,
2014
     December 31,
2013
 

Raw materials

   $ 39,557       $ 44,093   

Work in process

     7,086         3,484   

Finished goods

     42,596         42,534   
  

 

 

    

 

 

 

Total

   $ 89,239       $ 90,111   
  

 

 

    

 

 

 

Goodwill and Intangible Assets (Tables)

The following table presents our intangible assets as of June 30, 2014 and December 31, 2013:

 

(In thousands)    June 30, 2014      December 31, 2013  
     Gross
Value
     Accumulated
Amortization
    Net Value      Gross
Value
     Accumulated
Amortization
    Net Value  

Customer relationships

   $ 6,914       $ (1,923   $ 4,991       $ 6,996       $ (1,555   $ 5,441   

Developed technology

     6,363         (3,208     3,155         6,537         (2,692     3,845   

Intellectual property

     2,340         (1,353     987         2,340         (1,185     1,155   

Trade names

     270         (175     95         270         (145     125   

Other

     14         (10     4         14         (8     6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,901       $ (6,669   $ 9,232       $ 16,157       $ (5,585   $ 10,572   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of June 30, 2014, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)    Amount  

Remainder of 2014

   $ 1,140   

2015

     2,157   

2016

     1,883   

2017

     1,284   

2018

     778   

Thereafter

     1,990   
  

 

 

 

Total

   $ 9,232   
  

 

 

 
Stockholders' Equity (Tables)

A summary of the changes in stockholders’ equity for the six months ended June 30, 2014 is as follows:

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2013

   $ 604,606   

Net income

     24,002   

Dividend payments

     (10,137

Dividends accrued for unvested restricted stock units

     (2

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

     298   

Foreign currency translation adjustment

     386   

Proceeds from stock option exercises

     1,781   

Purchase of treasury stock

     (53,091

Income tax benefit from exercise of stock options

     67   

Stock-based compensation expense

     4,149   
  

 

 

 

Balance, June 30, 2014

   $ 572,059   
  

 

 

 

During the six months ended June 30, 2014, we paid cash dividends as follows (in thousands except per share amounts):

 

Record Date

 

Payment Date

 

Per Share Amount

 

Total Dividend Paid

February 6, 2014   February 20, 2014   $0.09   $5,102
May 1, 2014   May 15, 2014   $0.09   $5,035

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the three months ended June 30, 2014 and 2013:

 

     Three Months Ended June 30, 2014  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 9,816      $ (891   $ 1,159       $ 10,084   

Other comprehensive income (loss) before

reclassifications

     2,516        —          134         2,650   

Amounts reclassified from accumulated other

comprehensive income

     (1,297     —          —           (1,297
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income (loss)

     1,219        —          134         1,353   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,035      $ (891   $ 1,293       $ 11,437   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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

Beginning balance

   $ 8,464      $ (1,952   $ 3,435      $ 9,947   

Other comprehensive income (loss) before

reclassifications

     (802     —          (1,713     (2,515

Amounts reclassified from accumulated other

comprehensive income

     (896     —          —          (896
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (1,698     —          (1,713     (3,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended June 30, 2014  
(In thousands)    Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
    Defined
Benefit Plan
Adjustments
    Foreign
Currency
Adjustments
     Total  

Beginning balance

   $ 10,737      $ (891   $ 907       $ 10,753   

Other comprehensive income (loss) before

reclassifications

     2,918        —          386         3,304   

Amounts reclassified from accumulated other

comprehensive income

     (2,620     —          —           (2,620
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive income (loss)

     298        —          386         684   
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,035      $ (891   $ 1,293       $ 11,437   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six Months Ended June 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

     (348     —          (1,390     (1,738

Amounts reclassified from accumulated other

comprehensive income

     (2,994     —          —          (2,994
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (3,342     —          (1,390     (4,732
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the three months ended June 30, 2014 and 2013:

 

(In thousands)    Three Months Ended June 30, 2014

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

   $ 2,160      Net realized investment gain

Impairment expense

     (34   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     2,126     

Tax (expense) benefit

     (829  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 1,297     
  

 

 

   
(In thousands)    Three Months Ended June 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

   $ 1,469      Net realized investment gain

Impairment expense

     —        Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     1,469     

Tax (expense) benefit

     (573  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 896     
  

 

 

   

The following tables present the details of reclassifications out of accumulated other comprehensive income for the six months ended June 30, 2014 and 2013:

 

(In thousands)    Six Months Ended June 30, 2014

Details about Accumulated Other
Comprehensive Income Components

   Amount Reclassified
from Accumulated
Other Comprehensive
Income
    Affected Line Item in the
Statement Where Net
Income Is Presented

Unrealized gains (losses) on available-for-sale securities:

    

Net realized gain on sales of securities

   $ 4,330      Net realized investment gain

Impairment expense

     (34   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     4,296     

Tax (expense) benefit

     (1,676  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 2,620     
  

 

 

   

 

(In thousands)    Six Months Ended June 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

   $ 4,913        Net realized investment gain   

Impairment expense

     (4     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     4,909     

Tax (expense) benefit

     (1,915  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 2,994     
  

 

 

   

 

The following table presents the tax effects related to the change in each component of other comprehensive income for the three months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30, 2014
    Three Months Ended
June 30, 2013
 
(In thousands)    Before-Tax
Amount
    Tax
(Expense)
Benefit
    Net-of-Tax
Amount
    Before-Tax
Amount
    Tax
Benefit
     Net-of-Tax
Amount
 

Unrealized gains (losses) on available-for-sale securities

   $ 4,125      $ (1,609   $ 2,516      $ (1,315   $ 513       $ (802

Reclassification adjustment for amounts included in net income

     (2,126     829        (1,297     (1,469     573         (896

Foreign currency translation adjustment

     134        —          134        (1,713     —           (1,713
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 2,133      $ (780   $ 1,353      $ (4,497   $ 1,086       $ (3,411
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following table presents the tax effects related to the change in each component of other comprehensive income for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 
(In thousands)    Before-Tax
Amount
    Tax
(Expense)
Benefit
    Net-of-Tax
Amount
    Before-Tax
Amount
    Tax
Benefit
     Net-of-Tax
Amount
 

Unrealized gains (losses) on available-for-sale securities

   $ 4,784      $ (1,866   $ 2,918      $ (571   $ 223       $ (348

Reclassification adjustment for amounts included in net income

     (4,296     1,676        (2,620     (4,909     1,915         (2,994

Foreign currency translation adjustment

     386        —          386        (1,390     —           (1,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 874      $ (190   $ 684      $ (6,870   $ 2,138       $ (4,732
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Earnings Per Share (Tables)
Summary of Calculation of Basic and Diluted Earnings Per Share

A summary of the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 is as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands, except per share amounts)    2014      2013      2014      2013  

Numerator

           

Net income

   $ 14,395       $ 9,859       $ 24,002       $ 17,749   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     55,409         59,056         56,077         60,443   

Effect of dilutive securities

           

Stock options

     288         209         459         177   

Restricted stock and restricted stock units

     32         46         23         40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     55,729         59,311         56,559         60,660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.26       $ 0.17       $ 0.43       $ 0.29   

Net income per share – diluted

   $ 0.26       $ 0.17       $ 0.42       $ 0.29   
Segment Information (Tables)

The following tables present information about the reported sales and gross profit of our reportable segments for the three and six months ended June 30, 2014 and 2013. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

     Three Months Ended  
     June 30, 2014      June 30, 2013  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 143,455       $ 68,053       $ 123,333       $ 57,913   

Enterprise Networks

     32,674         18,744         38,900         21,885   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,129       $ 86,797       $ 162,233       $ 79,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended  
     June 30, 2014      June 30, 2013  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 261,617       $ 129,406       $ 233,220       $ 109,504   

Enterprise Networks

     61,516         35,181         72,026         39,971   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 323,133       $ 164,587       $ 305,246       $ 149,475   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents sales information by product category for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands)    2014      2013      2014      2013  

Carrier Systems

   $ 128,824       $ 105,537       $ 228,377       $ 198,341   

Business Networking

     41,969         45,379         79,888         83,455   

Loop Access

     5,336         11,317         14,868         23,450   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,129       $ 162,233       $ 323,133       $ 305,246   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents subcategory revenues for the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(In thousands)    2014      2013      2014      2013  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 108,309       $ 81,628       $ 189,836       $ 153,862   

Optical (included in Carrier Systems)

     15,833         15,986         28,622         24,860   

Internetworking (included in Business Networking)

     40,986         43,922         77,932         80,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     165,128         141,536         296,390         259,556   

Legacy Products

           

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

     4,798         10,289         13,675         21,696   

Other products (excluding HDSL)

     6,203         10,408         13,068         23,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     11,001         20,697         26,743         45,690   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,129       $ 162,233       $ 323,133       $ 305,246   
  

 

 

    

 

 

    

 

 

    

 

 

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

A summary of warranty expense and write-off activity for the six months ended June 30, 2014 and 2013 is as follows:

 

     Six Months Ended
June 30,
 
(In thousands)    2014     2013  

Balance at beginning of period

   $ 8,977      $ 9,653   

Plus: Amounts charged to cost and expenses

     1,339        470   

Less: Deductions

     (1,999     (2,182
  

 

 

   

 

 

 

Balance at end of period

   $ 8,317      $ 7,941   
  

 

 

   

 

 

 
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Adjustments to Operating Activities [Member]
Jun. 30, 2014
Adjustments to Investing Activities [Member]
Jun. 30, 2013
Immaterial Corrections [Member]
Summary of Significant Accounting Policy [Line Items]
 
 
 
Prior period reclassification adjustment
$ 0.5 
$ 0.5 
 
Understatement of net income in the first two quarters of 2013
 
 
$ 0.5 
Business Combination - Supplemental Pro Forma Information (Detail) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Business Combinations [Abstract]
 
 
Pro forma revenue
$ 672,044 
$ 913,485 
Pro forma pre-tax loss
$ 57,906 
$ 169,162 
Weighted average exchange rate during the period (EURO/USD)
1.29 
1.38 
Income Taxes - Additional Information (Detail)
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Income Tax Disclosure [Abstract]
 
 
Effective tax rate
34.20% 
33.20% 
Pension Benefit Plan - Summarization of Components of Net Periodic Pension Cost (Detail) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Compensation And Retirement Disclosure [Abstract]
 
 
 
 
Service cost
$ 306 
$ 294 
$ 611 
$ 594 
Interest cost
216 
182 
431 
369 
Expected return on plan assets
(280)
(248)
(559)
(501)
Net periodic pension cost
$ 242 
$ 228 
$ 483 
$ 462 
Stock-Based Compensation - Additional Information (Detail) (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Number of Options, granted
2,000 
Estimated forfeitures for stock options
 
 
2.50% 
 
Forfeiture rate for RSUs and restricted stock
 
 
0.00% 
 
Compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized
$ 14.1 
 
$ 14.1 
 
Recognition period of non-vested compensation cost
 
 
2 years 4 months 24 days 
 
Total pre-tax intrinsic value of options exercised
$ 0.1 
 
$ 0.6 
 
Restricted Stock Units (RSUs) [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Number of RSUs and restricted stock grants in period
Number of RSUs and restricted stock forfeitures in period
Number of RSUs and restricted stock vesting in period
Restricted Stock [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Number of RSUs and restricted stock grants in period
4,000 
 
4,000 
 
Number of RSUs and restricted stock forfeitures in period
Number of RSUs and restricted stock vesting in period
Restricted stock grants , fair value
$ 21.30 
 
$ 21.30 
 
Stock-Based Compensation - Summary of Weighted-Average Assumptions and Value of Options Granted (Detail)
6 Months Ended
Jun. 30, 2014
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
 
Expected volatility
39.57% 
Risk-free interest rate
1.86% 
Expected dividend yield
1.38% 
Expected life (in years)
6 years 3 months 
Weighted-average estimated value
$ 9.28 
Stock-Based Compensation - Summary of Stock Options Outstanding (Detail) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
 
 
 
 
 
Number of Options, outstanding, Beginning Balance
 
 
6,358 
 
 
Number of Options, granted
 
Number of Options, cancelled/forfeited
 
 
(144)
 
 
Number of Options, exercised
 
 
(91)
 
 
Number of Options, outstanding, Ending Balance
6,125 
 
6,125 
 
6,358 
Number of Options, Options exercisable
3,776 
 
3,776 
 
 
Weighted Average Exercise Price, outstanding, Beginning Balance
 
 
$ 24.43 
 
 
Weighted Average Exercise Price, granted
 
 
$ 26.03 
 
 
Weighted Average Exercise Price, cancelled/forfeited
 
 
$ 26.02 
 
 
Weighted Average Exercise Price, exercised
 
 
$ 19.56 
 
 
Weighted Average Exercise Price, outstanding, Ending Balance
$ 24.46 
 
$ 24.46 
 
$ 24.43 
Weighted Average Exercise Price, Options exercisable
$ 24.81 
 
$ 24.81 
 
 
Weighted Average Remaining Contractual Life In Years, Options outstanding
 
 
6 years 1 month 2 days 
 
6 years 7 months 6 days 
Weighted Average Remaining Contractual Life In Years, Options exercisable
 
 
4 years 8 months 5 days 
 
 
Aggregate Intrinsic Value, Options outstanding, Beginning Balance
$ 8,724 
 
$ 8,724 
 
$ 25,878 
Aggregate Intrinsic Value, Options exercisable
$ 4,900 
 
$ 4,900 
 
 
Investments - Securities and Investments, Recorded at Either Fair Value or Cost (Detail) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
$ 307,915 
$ 347,407 
Gross Unrealized Gains
18,514 
17,939 
Gross Unrealized Losses
(454)
(300)
Available-for-sale-securities, Fair Value/Carrying Value
325,975 
365,046 
Restricted investment held at cost
30,000 
48,250 
Other investments held at cost
1,577 
1,689 
Total carrying value of available-for-sale investments
357,552 
414,985 
Deferred Compensation Plan Assets [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
12,733 
12,300 
Gross Unrealized Gains
3,037 
2,847 
Gross Unrealized Losses
(15)
(24)
Available-for-sale-securities, Fair Value/Carrying Value
15,755 
15,123 
Corporate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
98,995 
166,370 
Gross Unrealized Gains
403 
534 
Gross Unrealized Losses
(7)
(45)
Available-for-sale-securities, Fair Value/Carrying Value
99,391 
166,859 
Municipal Fixed-Rate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
155,171 
135,773 
Gross Unrealized Gains
825 
583 
Gross Unrealized Losses
(14)
(54)
Available-for-sale-securities, Fair Value/Carrying Value
155,982 
136,302 
Municipal Variable Rate Demand Notes [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
15,120 
8,310 
Available-for-sale-securities, Fair Value/Carrying Value
15,120 
8,310 
Marketable Equity Securities [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
25,896 
24,654 
Gross Unrealized Gains
14,249 
13,975 
Gross Unrealized Losses
(418)
(177)
Available-for-sale-securities, Fair Value/Carrying Value
$ 39,727 
$ 38,452 
Investments - Contractual Maturities of Corporate and Municipal Fixed-Rate Bonds (Detail) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale-securities, Fair Value/Carrying Value
$ 325,975 
$ 365,046 
Corporate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Less than one year
7,187 
 
One to two years
46,881 
 
Two to three years
45,323 
 
Available-for-sale-securities, Fair Value/Carrying Value
99,391 
166,859 
Municipal Fixed-Rate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Less than one year
25,826 
 
One to two years
66,823 
 
Two to three years
49,269 
 
Three to five years
14,064 
 
Available-for-sale-securities, Fair Value/Carrying Value
$ 155,982 
$ 136,302 
Investments - Additional Information (Detail) (USD $)
3 Months Ended