ADTRAN INC, 10-Q filed on 11/5/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 22, 2012
Entity Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
ADTN 
 
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
 
62,670,966 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current Assets
 
 
Cash and cash equivalents
$ 43,535 
$ 42,979 
Short-term investments
190,333 
159,347 
Accounts receivable, less allowance for doubtful accounts of $5 and $8 at September 30, 2012 and December 31, 2011, respectively
102,693 
76,130 
Other receivables
8,260 
9,743 
Inventory
107,183 
87,800 
Prepaid expenses
4,354 
3,119 
Deferred tax assets, net
12,729 
12,125 
Total Current Assets
469,087 
391,243 
Property, plant and equipment, net
81,905 
75,295 
Deferred tax assets, net
6,843 
8,345 
Goodwill
3,492 
3,492 
Other assets
13,825 
7,131 
Long-term investments
327,106 
332,008 
Total Assets
902,258 
817,514 
Current Liabilities
 
 
Accounts payable
52,285 
29,404 
Unearned revenue
31,672 
9,965 
Accrued expenses
10,310 
5,876 
Accrued wages and benefits
16,894 
13,518 
Income tax payable, net
4,186 
3,169 
Total Current Liabilities
115,347 
61,932 
Non-current unearned revenue
19,805 
4,874 
Other non-current liabilities
15,162 
12,077 
Bonds payable
46,500 
46,500 
Total Liabilities
196,814 
125,383 
Commitments and contingencies (see Note 14)
   
   
Stockholders' Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 62,823 shares outstanding at September 30, 2012 and 79,652 shares issued and 63,703 shares outstanding at December 31, 2011
797 
797 
Additional paid-in capital
222,156 
213,560 
Accumulated other comprehensive income
15,311 
13,102 
Retained earnings
864,258 
840,206 
Less treasury stock at cost: 16,829 and 15,949 shares at September 30, 2012 and December 31, 2011, respectively
(397,078)
(375,534)
Total Stockholders' Equity
705,444 
692,131 
Total Liabilities and Stockholders' Equity
$ 902,258 
$ 817,514 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Allowance for doubtful accounts
$ 5 
$ 8 
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
62,823 
63,703 
Less treasury stock at cost
16,829 
15,949 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Sales
$ 162,125 
$ 192,194 
$ 480,858 
$ 541,943 
Cost of sales
82,153 
82,718 
231,598 
226,845 
Gross Profit
79,972 
109,476 
249,260 
315,098 
Selling, general and administrative expenses
34,114 
31,475 
103,130 
91,925 
Research and development expenses
35,582 
26,894 
92,835 
75,150 
Operating Income
10,276 
51,107 
53,295 
148,023 
Interest and dividend income
1,864 
2,037 
5,651 
5,829 
Interest expense
(587)
(599)
(1,756)
(1,795)
Net realized investment gain
2,530 
2,982 
7,353 
9,121 
Other income (expense), net
(368)
(155)
265 
(397)
Gain on bargain purchase of a business
 
 
1,753 
 
Income before provision for income taxes
13,715 
55,372 
66,561 
160,781 
Provision for income taxes
(4,443)
(19,159)
(23,259)
(53,367)
Net Income
$ 9,272 
$ 36,213 
$ 43,302 
$ 107,414 
Weighted average shares outstanding - basic
63,066 
64,023 
63,495 
64,300 
Weighted average shares outstanding - diluted
63,304 
64,961 
64,139 
65,697 
Earnings per common share - basic
$ 0.15 
$ 0.57 
$ 0.68 
$ 1.67 
Earnings per common share - diluted
$ 0.15 
$ 0.56 
$ 0.68 
$ 1.63 
Dividend per share
$ 0.09 
$ 0.09 
$ 0.27 
$ 0.27 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net Income
$ 9,272 
$ 36,213 
$ 43,302 
$ 107,414 
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Net change in unrealized gains (losses) on marketable securities
154 
(5,468)
1,855 
(11,259)
Reclassification adjustments for amounts included in net income
343 
(287)
164 
(682)
Foreign currency translation
134 
(1,487)
191 
(1,031)
Other Comprehensive Income (Loss), net of tax
631 
(7,242)
2,210 
(12,972)
Comprehensive Income, net of tax
$ 9,903 
$ 28,971 
$ 45,512 
$ 94,442 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash flows from operating activities:
 
 
Net Income
$ 43,302 
$ 107,414 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
10,366 
8,435 
Amortization of net premium on available-for-sale investments
6,343 
4,697 
Net realized gain on long-term investments
(7,353)
(9,121)
Net (gain) loss on disposal of property, plant and equipment
(213)
14 
Gain on bargain purchase of a business
(1,753)
 
Stock-based compensation expense
6,783 
6,455 
Deferred income taxes
(1,156)
128 
Tax benefit from stock option exercises
1,813 
10,457 
Excess tax benefits from stock-based compensation arrangements
(1,412)
(9,311)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(26,178)
(18,440)
Other receivables
1,866 
(8,525)
Income tax receivable, net
 
2,741 
Inventory
2,142 
(12,247)
Prepaid expenses and other assets
(1,193)
207 
Accounts payable
17,607 
8,924 
Accrued expenses and other liabilities
12,769 
15,047 
Income tax payable, net
1,022 
1,916 
Net cash provided by operating activities
64,755 
108,791 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(10,759)
(9,531)
Proceeds from disposals of property, plant and equipment
266 
 
Proceeds from sales and maturities of available-for-sale investments
198,566 
378,288 
Purchases of available-for-sale investments
(220,355)
(443,275)
Acquisition of business
7,496 
(22,762)
Net cash used in investing activities
(24,786)
(97,280)
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
4,932 
33,631 
Purchases of treasury stock
(28,578)
(35,178)
Dividend payments
(17,173)
(17,395)
Excess tax benefits from stock-based compensation arrangements
1,412 
9,311 
Net cash used in financing activities
(39,407)
(9,631)
Net increase in cash and cash equivalents
562 
1,880 
Effect of exchange rate changes
(6)
(1,031)
Cash and cash equivalents, beginning of period
42,979 
31,677 
Cash and cash equivalents, end of period
$ 43,535 
$ 32,526 
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, 2011 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 included 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, 2011, filed on February 29, 2012 with the SEC.

Use of Estimates

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

Recent Accounting Pronouncements

During the nine months ended September 30, 2012, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We adopted this amendment during the first quarter of 2012, and we have provided the disclosures required for the three and nine months ended September 30, 2012 and 2011.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the effective date for certain presentation requirements that relate to reclassification adjustments and the effect of those reclassification adjustments on the financial statements. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We adopted this amendment during the first quarter of 2012. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2012.

 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We adopted this amendment during the first quarter of 2012. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2012.

BUSINESS COMBINATIONS
BUSINESS COMBINATIONS

2. BUSINESS COMBINATIONS

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

We received a cash payment of $7.5 million from NSN and recorded a bargain purchase gain of $1.8 million, net of income taxes, subject to customary working capital adjustments between the parties as defined in the purchase agreement. As of September 30, 2012, the parties were in the process of resolving the working capital adjustments. The bargain purchase gain of $1.8 million represents the excess of the consideration exchanged over the fair value of the assets acquired and liabilities assumed. We have assessed the recognition and measurements of the assets acquired and liabilities assumed based on historical and pro forma data for future periods and have concluded that our valuation procedures and resulting measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2012 Consolidated Statements of Income.

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

 

(In Thousands)       

Other receivables

   $ 395   

Inventory

     22,278   

Property, plant and equipment

     5,035   

Accounts payable

     (5,194

Unearned revenue

     (13,579

Accrued expenses

     (1,931

Accrued wages and benefits

     (2,251

Deferred tax liability

     (788

Non-current unearned revenue

     (18,059
  

 

 

 

Net liabilities assumed

     (14,094

Customer relationships

     5,162   

Developed technology

     3,176   

Other

     13   

Gain on bargain purchase of a business, net of tax

     (1,753
  

 

 

 

Net consideration received by buyer

   $ (7,496
  

 

 

 

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

 

The actual revenue and pre-tax loss included in our Consolidated Statements of Income for the three months ended September 30, 2012 and from the acquisition date to September 30, 2012 are as follows:

 

     Three Months
Ended
   

May 4, 2012

to

 
(In thousands)    September 30, 2012     September 30, 2012  

Revenue

   $ 26,343      $ 48,983   

Pre-tax loss

   $ (2,547   $ (2,947

The following supplemental pro forma information presents the financial results as if the acquisition of the NSN BBA business had occurred on January 1, 2011. 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.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2011     2012     2011  

Pro forma revenue

   $ 44,978      $ 100,413      $ 153,263   

Pro forma pre-tax loss

   $ (10,947   $ (18,006   $ (31,987

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

   €1.00/$1.42      1.00/$1.29      1.00/$1.40   

For the three and nine months ended September 30, 2012, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $1.2 million and $6.7 million, respectively, related to this acquisition.

On August 4, 2011, we acquired all of the outstanding stock of Bluesocket, Inc., a provider of wireless network solutions with virtual control capabilities, for $23.7 million in cash. The acquisition provides us with IEEE802.11N enterprise class wireless LAN expertise, technology, and products to address the growing transition within small-medium enterprises and large enterprises to wireless networks and mobile devices. We have included the financial results of Bluesocket in our consolidated financial statements since the date of acquisition. Pro forma results of operations prior to the closing date for the acquisition have not been presented because the effect of the acquisition was not material to our financial results.

 

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

 

(In Thousands)       

Cash

   $ 1,027   

Accounts receivable

     298   

Inventory

     792   

Prepaid expenses

     357   

Property, plant and equipment

     173   

Deferred tax assets, net

     12,962   

Accounts payable

     (441

Unearned revenue

     (600

Accrued expenses

     (332
  

 

 

 

Net assets acquired

     14,236   

Customer relationships

     1,530   

Developed technology

     3,230   

Intellectual property

     930   

Trade names

     270   

Goodwill

     3,492   
  

 

 

 

Total purchase price

   $ 23,688   
  

 

 

 

During the fourth quarter of 2011, the purchase price and purchase price allocation were adjusted for our final valuations. The adjustments resulted in a decrease to the goodwill recognized in the transaction.

The net deferred tax assets acquired are primarily related to net operating losses and previously capitalized and unamortized research and development expense for tax deduction purposes.

The fair value of the customer relationships, developed technology and intellectual property acquired was calculated using an income approach (excess earnings method) and is being amortized using the straight-line method. The customer relationships and intellectual property are being amortized over an estimated useful life of 7 years and the developed technology is being amortized over an average estimated useful life of 4.5 years.

The fair value of the trade names acquired was calculated using an income approach (relief from royalty method) and is being amortized using the straight-line method over the estimated useful life of 4.5 years.

The goodwill of $3.5 million generated from this acquisition is primarily related to expected synergies and was assigned to our Enterprise Networks division. The goodwill will not be deductible for U.S. federal income tax purposes.

For the three and nine months ended September 30, 2012, we incurred integration related expenses and amortization of acquired intangibles of $0.3 million and $1.2 million, respectively, related to this acquisition.

INCOME TAXES
INCOME TAXES

3. INCOME TAXES

Our effective tax rate increased from 33.2% in the nine months ended September 30, 2011 to 34.9% in the nine months ended September 30, 2012. The tax provision rate in the nine months ended September 30, 2012 did not include the benefit of the research tax credit, which expired on December 31, 2011. The exclusion of this benefit during the nine months ended September 30, 2012 resulted in a 2.2 percentage point increase in our effective tax rate. Reduced stock option exercises, increase in a valuation allowance related to foreign subsidiary losses, and an increase in reserves related to state apportionment resulted in an additional 6.1 percentage point increase in our effective tax rate for the nine months ended September 30, 2012. These increases were partially offset by provision to return reconciliation adjustments related to 2011, adjustments related to closed tax years and associated audits, and employment related state income tax incentives, which resulted in a 6.6 percentage point decrease in our effective tax rate for the nine months ended September 30, 2012.

 

During the nine months ended September 30, 2012, we acquired the NSN BBA business, which resulted in a bargain purchase gain reported on the income statement. The bargain purchase gain is presented net of tax in the income statement and a deferred tax liability was established in the opening balance sheet for the acquired entity.

PENSION BENEFIT PLAN
PENSION BENEFIT PLAN

4. PENSION BENEFIT PLAN

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

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

 

    

Three Months

Ended

    May 4, 2012 to  
(In thousands)    September 30,
2012
    September 30,
2012
 

Service cost

   $ 288      $ 478   

Interest cost

     187        314   

Expected return on plan assets

     (250     (415
  

 

 

   

 

 

 

Net periodic pension cost

   $ 225      $ 377   
  

 

 

   

 

 

 
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION

5. STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock for the three and nine months ended September 30, 2012 and 2011, which was recognized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2012     2011     2012     2011  

Stock-based compensation expense included in cost of sales

   $ 106      $ 100      $ 304      $ 280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,107        1,090        3,205        3,096   

Research and development expense

     1,138        1,100        3,274        3,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     2,245        2,190        6,479        6,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,351        2,290        6,783        6,455   

Tax benefit for expense associated with non-qualified options

     (313     (302     (916     (1,018
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 2,038      $ 1,988      $ 5,867      $ 5,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Expected volatility

     40.20     38.31     40.20     38.31

Risk-free interest rate

     0.63     1.00     0.63     1.00

Expected dividend yield

     1.30     1.19     1.30     1.19

Expected life (in years)

     4.95        5.14        4.95        5.14   

Weighted-average estimated value

   $ 8.69      $ 9.52      $ 8.69      $ 9.54   

The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. There were no RSU grants during the nine months ended September 30, 2012 or 2011.

The fair value of restricted stock is equal to the closing price of our stock on the date of grant. There were no restricted stock grants during the nine months ended September 30, 2012 or 2011.

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based upon historical experience and approximate 1.6% annually. We estimated a 0% forfeiture rate for our RSUs and restricted stock due to the limited number of recipients and historical experience for these awards.

As of September 30, 2012, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $15.8 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, 2011 and September 30, 2012 and the changes that occurred during the nine months ended September 30, 2012:

 

(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, 2011

     5,400      $ 25.66         6.78       $ 27,270   

Options granted

     98      $ 27.75         

Options cancelled/forfeited

     (42   $ 26.63         

Options exercised

     (284   $ 17.39         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, September 30, 2012

     5,172      $ 26.15         6.24       $ 1,632   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2012

     3,013      $ 24.62         4.93       $ 1,205   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2012. The aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during the three and nine month periods ended September 30, 2012 was $0.5 million and $4.1 million, respectively.

 

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2011 and September 30, 2012 and the changes that occurred during the nine months ended September 30, 2012:

 

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

Unvested RSUs and restricted stock outstanding, December 31, 2011

     90       $ 34.21   

RSUs and restricted stock granted

     —         $ —     

RSUs and restricted stock vested

     —         $ —     

RSUs and restricted stock cancelled/forfeited

     —         $ —     
  

 

 

    

 

 

 

Unvested RSUs and restricted stock, September 30, 2012

     90       $ 34.21   
  

 

 

    

 

 

 
INVESTMENTS
INVESTMENTS

6. INVESTMENTS

At September 30, 2012, we held the following securities and investments, recorded at either fair value or cost.

 

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

Deferred compensation plan assets

   $ 10,199       $ 795       $ (6   $ 10,988   

Corporate bonds

     165,912         1,080         (65     166,927   

Municipal fixed-rate bonds

     190,893         947         (9     191,831   

Municipal variable rate demand notes

     58,780         —           —          58,780   

Fixed income bond fund

     862         18         —          880   

Marketable equity securities

     20,618         17,550         (348     37,820   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 447,264       $ 20,390       $ (428   $ 467,226   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,963   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 517,439   
          

 

 

 

At December 31, 2011, 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

   $ 7,994       $ 119       $ (401   $ 7,712   

Corporate bonds

     159,077         181         (2,505     156,753   

Municipal fixed-rate bonds

     174,300         579         (53     174,826   

Municipal variable rate demand notes

     69,660         —           —          69,660   

Fixed income bond fund

     527         194         —          721   

Marketable equity securities

     12,771         19,098         (559     31,310   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 424,329       $ 20,171       $ (3,518   $ 440,982   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             2,123   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 491,355   
          

 

 

 

 

As of September 30, 2012, 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

   $ 55,739       $ 73,594   

One to two years

     99,858         53,694   

Two to three years

     11,330         12,286   

Three to five years

     —           52,257   
  

 

 

    

 

 

 

Total

   $ 166,927       $ 191,831   
  

 

 

    

 

 

 

Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. As a result of our review, we recorded an other-than-temporary impairment charge of $0.1 million during the nine months ended September 30, 2012 related to 21 marketable equity securities. In addition to the impairment charge we recorded on our marketable equity securities, we recorded an impairment of $0.6 million during the nine months ended September 30, 2012 related to our deferred compensation plan as a result of similar reviews. For the nine months ended September 30, 2011, we recorded an other-than-temporary impairment charge of $32 thousand related to seven marketable equity securities.

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2012     2011     2012     2011  

Gross realized gains

   $ 3,388      $ 3,401      $ 8,688      $ 9,770   

Gross realized losses

   $ (858   $ (419   $ (1,335   $ (649

As of September 30, 2012 and 2011, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.

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

 

     Fair Value Measurements at September 30, 2012 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

   $ 16,861       $ 16,861       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     10,988         10,988         —           —     

Available-for-sale debt securities

           

Corporate bonds

     166,927         —           166,927         —     

Municipal fixed-rate bonds

     191,831         —           191,831         —     

Municipal variable rate demand notes

     58,780         —           58,780         —     

Fixed income bond fund

     880         880         —           —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     17,360         17,360         —           —     

Equity securities – other

     20,460         20,460         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     467,226         49,688         417,538         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 484,087       $ 66,549       $ 417,538       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2011 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

   $ 13,696       $ 13,696       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     7,712         7,712         —           —     

Available-for-sale debt securities

           

Corporate bonds

     156,753         —           156,753         —     

Municipal fixed-rate bonds

     174,826         —           174,826         —     

Municipal variable rate demand notes

     69,660         —           69,660         —     

Fixed income bond fund

     721         721         —           —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     18,743         18,743         —           —     

Equity securities – other

     12,567         12,567         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     440,982         39,743         401,239         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 454,678       $ 53,439       $ 401,239       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

INVENTORY
INVENTORY

7. INVENTORY

At September 30, 2012 and December 31, 2011, inventory consisted of the following:

 

     September 30,      December 31,  
(In thousands)    2012      2011  

Raw materials

   $ 48,868       $ 44,588   

Work in process

     5,495         3,954   

Finished goods

     52,820         39,258   
  

 

 

    

 

 

 

Total

   $ 107,183       $ 87,800   
  

 

 

    

 

 

 

We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At September 30, 2012 and December 31, 2011, raw materials reserves totaled $9.3 million and $7.9 million, respectively, and finished goods inventory reserves totaled $2.0 million and $1.5 million, respectively.

GOODWILL AND INTANGIBLE ASSETS
GOODWILL AND INTANGIBLE ASSETS

8. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying value of goodwill, all of which is included in our Enterprise Networks division, for the nine months ended September 30, 2012 are as follows:

 

(In thousands)       

Balance, December 31, 2011

   $ 3,492   

Acquisitions

     —     

Impairment losses

     —     
  

 

 

 

Balance, September 30, 2012

   $ 3,492   
  

 

 

 

Balance as of September 30, 2012

  

Goodwill

   $ 3,492   

Accumulated impairment losses

     —     
  

 

 

 

Total goodwill

   $ 3,492   
  

 

 

 

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses recorded during the nine months ended September 30, 2012.

 

The following table presents our intangible assets as of September 30, 2012 and December 31, 2011. 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.

 

     September 30, 2012      December 31, 2011  
(In thousands)    Gross
Value
     Accumulated
Amortization
    Net
Value
     Gross
Value
     Accumulated
Amortization
    Net
Value
 

Customer relationships

   $ 6,636       $ (569   $ 6,067       $ 1,623       $ (194   $ 1,429   

Developed technology

     6,315         (1,024     5,291         3,230         (303     2,927   

Intellectual property

     2,340         (768     1,572         2,340         (525     1,815   

Trade names

     270         (70     200         270         (28     242   

Other

     13         (2     11         —           —          —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,574       $ (2,433   $ 13,141       $ 7,463       $ (1,050   $ 6,413   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense was $0.6 million and $0.3 million for the three months ended September 30, 2012 and 2011, respectively, and $1.4 million and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively.

As of September 30, 2012, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)    Amount  

Remainder of 2012

   $ 606   

2013

     2,408   

2014

     2,254   

2015

     2,119   

2016

     1,848   

Thereafter

     3,906   
  

 

 

 

Total

   $ 13,141   
  

 

 

 
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY

9. STOCKHOLDERS’ EQUITY

A summary of the changes in stockholders’ equity for the nine months ended September 30, 2012 is as follows:

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2011

   $ 692,131   

Net income

     43,302   

Dividend payments

     (17,173

Dividends accrued for unvested restricted stock units

     24   

Net change in unrealized gains and losses on marketable securities (net of deferred taxes)

     1,855   

Reclassification adjustment for amounts included in net income (net of deferred taxes)

     164   

Foreign currency translation adjustment

     191   

Proceeds from stock option exercises

     4,932   

Purchase of treasury stock

     (28,578

Tax benefits from stock option exercises

     1,813   

Stock-based compensation expense

     6,783   
  

 

 

 

Balance, September 30, 2012

   $ 705,444   
  

 

 

 

Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 35 million shares of our common stock. During the nine months ended September 30, 2012, we repurchased 1.2 million shares of our common stock at an average price of $24.24 per share. We currently have the authority to purchase an additional 4.7 million shares of our common stock under the current plan approved by the Board of Directors.

 

Stock Option Exercises

We issued 0.3 million shares of treasury stock during the nine months ended September 30, 2012 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $8.70 to $33.70. We received proceeds totaling $4.9 million from the exercise of these stock options during the nine months ended September 30, 2012.

Dividend Payments

During the nine months ended September 30, 2012, we paid cash dividends as follows (in thousands except per share amount):

 

Record Date

   Payment Date    Per Share Amount      Total Dividend Paid  

February 2, 2012

   February 16, 2012    $ 0.09       $ 5,739   

April 26, 2012

   May 10, 2012    $ 0.09       $ 5,737   

July 26, 2012

   August 9, 2012    $ 0.09       $ 5,697   

Other Comprehensive Income

Other comprehensive income consists of the net change in unrealized gains and losses on marketable securities, reclassification adjustments for amounts included in net income related to realized gains on previously impaired marketable securities and foreign currency translation adjustments.

The components of other comprehensive income for the three months ended September 30, 2012 and 2011 are as follows:

 

     Three Months Ended
September 30, 2012
     Three Months Ended
September 30, 2011
 
(In thousands)    Before-Tax
Amount
     Tax
(Expense)
Benefit
    Net-of-Tax
Amount
     Before-Tax
Amount
    Tax
(Expense)
Benefit
     Net-of-Tax
Amount
 

Net change in unrealized gains (losses) related to marketable securities

   $ 253       $ (99   $ 154       $ (9,001   $ 3,533       $ (5,468

Reclassification adjustment for amounts included in net income

     562         (219     343         (482     195         (287

Foreign currency translation adjustment

     134         —          134         (1,487     —           (1,487
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 949       $ (318   $ 631       $ (10,970   $ 3,728       $ (7,242
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

The components of other comprehensive income for the nine months ended September 30, 2012 and 2011 are as follows:

 

     Nine Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2011
 
(In thousands)    Before-Tax
Amount
     Tax
(Expense)
Benefit
    Net-of-Tax
Amount
     Before-Tax
Amount
    Tax
(Expense)
Benefit
     Net-of-Tax
Amount
 

Net change in unrealized gains (losses) related to marketable securities

   $ 3,041       $ (1,186   $ 1,855       $ (17,494   $ 6,235       $ (11,259

Reclassification adjustment for amounts included in net income

     269         (105     164         (1,063     381         (682

Foreign currency translation adjustment

     191         —          191         (1,031     —           (1,031
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 3,501       $ (1,291   $ 2,210       $ (19,588   $ 6,616       $ (12,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
EARNINGS PER SHARE
EARNINGS PER SHARE

10. EARNINGS PER SHARE

A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 is as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands, except per share amounts)    2012      2011      2012      2011  

Numerator

           

Net income

   $ 9,272       $ 36,213       $ 43,302       $ 107,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     63,066         64,023         63,495         64,300   

Effect of dilutive securities

           

Stock options

     225         882         637         1,346   

Restricted stock and restricted stock units

     13         56         7         51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     63,304         64,961         64,139         65,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.15       $ 0.57       $ 0.68       $ 1.67   

Net income per share – diluted

   $ 0.15       $ 0.56       $ 0.68       $ 1.63   

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 4.4 million and 1.5 million for the three months ended September 30, 2012 and 2011, respectively, and 2.6 million and 1.0 million for the nine months ended September 30, 2012 and 2011, respectively.

SEGMENT INFORMATION
SEGMENT INFORMATION

11. SEGMENT INFORMATION

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

The following table presents information about the reported sales and gross profit of our reportable segments for the three and nine months ended September 30, 2012 and 2011. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

     Three Months Ended  
     September 30, 2012      September 30, 2011  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 131,942       $ 63,827       $ 152,492       $ 85,944   

Enterprise Networks

     30,183         16,145         39,702         23,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 79,972       $ 192,194       $ 109,476   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30, 2012      September 30, 2011  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 381,303       $ 195,448       $ 435,344       $ 252,908   

Enterprise Networks

     99,555         53,812         106,599         62,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 480,858       $ 249,260       $ 541,943       $ 315,098   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. The Carrier Systems category includes our broadband access products comprised of Total Access® 5000 multi-service access and aggregation platform products, Total Access 1100/1200 Series Fiber-To-The-Node (FTTN) products, hiX 5600 Series Multi-Service Access Node (MSAN), Ultra Broadband Ethernet (UBE) and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access products are used by service providers around the world to deliver high-speed Internet access, Plain Old Telephone Service (POTS), Voice over Internet Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from the central office or remote terminal locations to customer premises. The Carrier Systems category also includes our optical products. These products consist of optical multiplexers and transceivers including those used in our Optical Networking Edge (ONE) products, NetVanta 8000 series products, and our family of OPTI products. Optical products are used to deliver higher bandwidth services, aggregate large numbers of low bandwidth services, or transport wavelength services across a fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and a number of mobile backhaul products are also included in the Carrier Systems product category.

Business Networking products provide access to telecommunication services, facilitating the delivery of converged services and Unified Communications to the small and mid-sized enterprises (SME) market. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network Terminals (ONTs), Virtual Wireless LAN products and NetVanta product lines. NetVanta products include multi-service routers, managed Ethernet switches, IP Private Branch Exchange (PBX) products, IP phone products, Unified Communications solutions, Unified Threat Management (UTM) solutions, and Carrier Ethernet Network Terminating Equipment (NTE). IAD products consist of our Total Access 600 Series and the Total Access 850.

Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. The Loop Access category includes products such as: Digital Data Service (DDS) and Integrated Services Digital Network (Total Reach) products, High bit-rate Digital Subscriber Line (HDSL) products including Total Access 3000 HDSL and Time Division Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service Units, and TRACER fixed wireless products.

 

The table below presents sales information by product category for the three and nine months ended September 30, 2012 and 2011.

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2012      2011      2012      2011  

Carrier Systems

   $ 111,577       $ 119,979       $ 309,590       $ 319,018   

Business Networking

     36,600         44,919         116,332         116,981   

Loop Access

     13,948         27,296         54,936         105,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 192,194       $ 480,858       $ 541,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Subcategory revenues included in the above are as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2012      2011      2012      2011  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 94,464       $ 86,954       $ 249,988       $ 215,798   

Optical (included in Carrier Systems)

     11,160         22,298         39,418         65,222   

Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)

     35,411         42,506         111,320         108,418   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     141,035         151,758         400,726         389,438   

Legacy Products

           

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

     12,926         25,297         51,350         100,291   

Other products (excluding HDSL)

     8,164         15,139         28,782         52,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     21,090         40,436         80,132         152,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 192,194       $ 480,858       $ 541,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales by Geographic Region

The table below presents sales information by geographic area for the three and nine months ended September 30, 2012 and 2011. International sales correlate to shipments with a non-U.S. destination.

 

     Three Months Ended      Nine Months Ended  
(In thousands)    September 30,      September 30,  
   2012      2011      2012      2011  

United States

   $ 112,972       $ 170,343       $ 359,804       $ 484,260   

International

     49,153         21,851         121,054         57,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 192,194       $ 480,858       $ 541,943   
  

 

 

    

 

 

    

 

 

    

 

 

 
LIABILITY FOR WARRANTY RETURNS
LIABILITY FOR WARRANTY RETURNS

12. 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 $7.3 million at September 30, 2012 and $4.1 million at December 31, 2011. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

 

A summary of warranty expense and write-off activity for the nine months ended September 30, 2012 and 2011 is as follows:

 

Nine Months Ended September 30,    2012     2011  
(In thousands)             

Balance at beginning of period

   $ 4,118      $ 3,304   

Plus: Amounts charged to cost and expenses

     3,910        2,306   

Amounts assumed on acquisition

     1,932        —     

Less: Deductions

     (2,709     (1,743
  

 

 

   

 

 

 

Balance at end of period

   $ 7,251      $ 3,867   
  

 

 

   

 

 

 
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS

13. RELATED PARTY TRANSACTIONS

We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. For the three and nine month periods ended September 30, 2012 and 2011, we incurred fees of $10 thousand per month for these legal services.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

14. COMMITMENTS AND CONTINGENCIES

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

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2012, of which $7.7 million has been applied to these commitments.

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

15. SUBSEQUENT EVENTS

On October 9, 2012, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on October 25, 2012. The payment date will be November 8, 2012. The quarterly dividend payment will be approximately $5.6 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.

During the fourth quarter of 2012 and as of November 5, 2012, we repurchased 0.3 million shares of our common stock through open market purchases at an average cost of $16.01 per share. We currently have the authority to purchase an additional 4.4 million shares of our common stock under the current plan approved by the Board of Directors.

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, 2011 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 included 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, 2011, filed on February 29, 2012 with the SEC.

Use of Estimates

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

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We adopted this amendment during the first quarter of 2012, and we have provided the disclosures required for the three and nine months ended September 30, 2012 and 2011.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We adopted this amendment during the first quarter of 2012. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2012.

BUSINESS COMBINATIONS (Tables)

The actual revenue and pre-tax loss included in our Consolidated Statements of Income for the three months ended September 30, 2012 and from the acquisition date to September 30, 2012 are as follows:

 

     Three Months
Ended
   

May 4, 2012

to

 
(In thousands)    September 30, 2012     September 30, 2012  

Revenue

   $ 26,343      $ 48,983   

Pre-tax loss

   $ (2,547   $ (2,947

The following supplemental pro forma information presents the financial results as if the acquisition of the NSN BBA business had occurred on January 1, 2011. 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.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2011     2012     2011  

Pro forma revenue

   $ 44,978      $ 100,413      $ 153,263   

Pro forma pre-tax loss

   $ (10,947   $ (18,006   $ (31,987

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

   €1.00/$1.42      1.00/$1.29      1.00/$1.40   

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

 

(In Thousands)       

Other receivables

   $ 395   

Inventory

     22,278   

Property, plant and equipment

     5,035   

Accounts payable

     (5,194

Unearned revenue

     (13,579

Accrued expenses

     (1,931

Accrued wages and benefits

     (2,251

Deferred tax liability

     (788

Non-current unearned revenue

     (18,059
  

 

 

 

Net liabilities assumed

     (14,094

Customer relationships

     5,162   

Developed technology

     3,176   

Other

     13   

Gain on bargain purchase of a business, net of tax

     (1,753
  

 

 

 

Net consideration received by buyer

   $ (7,496
  

 

 

 

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

 

(In Thousands)       

Cash

   $ 1,027   

Accounts receivable

     298   

Inventory

     792   

Prepaid expenses

     357   

Property, plant and equipment

     173   

Deferred tax assets, net

     12,962   

Accounts payable

     (441

Unearned revenue

     (600

Accrued expenses

     (332
  

 

 

 

Net assets acquired

     14,236   

Customer relationships

     1,530   

Developed technology

     3,230   

Intellectual property

     930   

Trade names

     270   

Goodwill

     3,492   
  

 

 

 

Total purchase price

   $ 23,688   
  

 

 

 
PENSION BENEFIT PLAN (Tables)
Summarization of Components of Net Periodic Cost

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

 

    

Three Months

Ended

    May 4, 2012 to  
(In thousands)    September 30,
2012
    September 30,
2012
 

Service cost

   $ 288      $ 478   

Interest cost

     187        314   

Expected return on plan assets

     (250     (415
  

 

 

   

 

 

 

Net periodic pension cost

   $ 225      $ 377   
  

 

 

   

 

 

 
STOCK-BASED COMPENSATION (Tables)

The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock for the three and nine months ended September 30, 2012 and 2011, which was recognized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2012     2011     2012     2011  

Stock-based compensation expense included in cost of sales

   $ 106      $ 100      $ 304      $ 280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,107        1,090        3,205        3,096   

Research and development expense

     1,138        1,100        3,274        3,079   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     2,245        2,190        6,479        6,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,351        2,290        6,783        6,455   

Tax benefit for expense associated with non-qualified options

     (313     (302     (916     (1,018
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 2,038      $ 1,988      $ 5,867      $ 5,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2012 and 2011 are summarized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Expected volatility

     40.20     38.31     40.20     38.31

Risk-free interest rate

     0.63     1.00     0.63     1.00

Expected dividend yield

     1.30     1.19     1.30     1.19

Expected life (in years)

     4.95        5.14        4.95        5.14   

Weighted-average estimated value

   $ 8.69      $ 9.52      $ 8.69      $ 9.54   

The following table is a summary of our stock options outstanding as of December 31, 2011 and September 30, 2012 and the changes that occurred during the nine months ended September 30, 2012:

 

(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, 2011

     5,400      $ 25.66         6.78       $ 27,270   

Options granted

     98      $ 27.75         

Options cancelled/forfeited

     (42   $ 26.63         

Options exercised

     (284   $ 17.39         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, September 30, 2012

     5,172      $ 26.15         6.24       $ 1,632   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2012

     3,013      $ 24.62         4.93       $ 1,205   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2011 and September 30, 2012 and the changes that occurred during the nine months ended September 30, 2012:

 

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

Unvested RSUs and restricted stock outstanding, December 31, 2011

     90       $ 34.21   

RSUs and restricted stock granted

     —         $ —     

RSUs and restricted stock vested

     —         $ —     

RSUs and restricted stock cancelled/forfeited

     —         $ —     
  

 

 

    

 

 

 

Unvested RSUs and restricted stock, September 30, 2012

     90       $ 34.21   
  

 

 

    

 

 

 
INVESTMENTS (Tables)

At September 30, 2012, we held the following securities and investments, recorded at either fair value or cost.

 

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

Deferred compensation plan assets

   $ 10,199       $ 795       $ (6   $ 10,988   

Corporate bonds

     165,912         1,080         (65     166,927   

Municipal fixed-rate bonds

     190,893         947         (9     191,831   

Municipal variable rate demand notes

     58,780         —           —          58,780   

Fixed income bond fund

     862         18         —          880   

Marketable equity securities

     20,618         17,550         (348     37,820   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 447,264       $ 20,390       $ (428   $ 467,226   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,963   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 517,439   
          

 

 

 

At December 31, 2011, 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

   $ 7,994       $ 119       $ (401   $ 7,712   

Corporate bonds

     159,077         181         (2,505     156,753   

Municipal fixed-rate bonds

     174,300         579         (53     174,826   

Municipal variable rate demand notes

     69,660         —           —          69,660   

Fixed income bond fund

     527         194         —          721   

Marketable equity securities

     12,771         19,098         (559     31,310   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 424,329       $ 20,171       $ (3,518   $ 440,982   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             2,123   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 491,355   
          

 

 

 

As of September 30, 2012, 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

   $ 55,739       $ 73,594   

One to two years

     99,858         53,694   

Two to three years

     11,330         12,286   

Three to five years

     —           52,257   
  

 

 

    

 

 

 

Total

   $ 166,927       $ 191,831   
  

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2012     2011     2012     2011  

Gross realized gains

   $ 3,388      $ 3,401      $ 8,688      $ 9,770   

Gross realized losses

   $ (858   $ (419   $ (1,335   $ (649

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

 

     Fair Value Measurements at September 30, 2012 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

   $ 16,861       $ 16,861       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     10,988         10,988         —           —     

Available-for-sale debt securities

           

Corporate bonds

     166,927         —           166,927         —     

Municipal fixed-rate bonds

     191,831         —           191,831         —     

Municipal variable rate demand notes

     58,780         —           58,780         —     

Fixed income bond fund

     880         880         —           —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     17,360         17,360         —           —     

Equity securities – other

     20,460         20,460         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     467,226         49,688         417,538         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 484,087       $ 66,549       $ 417,538       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2011 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

   $ 13,696       $ 13,696       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     7,712         7,712         —           —     

Available-for-sale debt securities

           

Corporate bonds

     156,753         —           156,753         —     

Municipal fixed-rate bonds

     174,826         —           174,826         —     

Municipal variable rate demand notes

     69,660         —           69,660         —     

Fixed income bond fund

     721         721         —           —     

Available-for-sale marketable equity securities

           

Equity securities – technology industry

     18,743         18,743         —           —     

Equity securities – other

     12,567         12,567         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     440,982         39,743         401,239         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 454,678       $ 53,439       $ 401,239       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
INVENTORY (Tables)
Inventory

At September 30, 2012 and December 31, 2011, inventory consisted of the following:

 

     September 30,      December 31,  
(In thousands)    2012      2011  

Raw materials

   $ 48,868       $ 44,588   

Work in process

     5,495         3,954   

Finished goods

     52,820         39,258   
  

 

 

    

 

 

 

Total

   $ 107,183       $ 87,800   
  

 

 

    

 

 

 
GOODWILL AND INTANGIBLE ASSETS (Tables)

The changes in the carrying value of goodwill, all of which is included in our Enterprise Networks division, for the nine months ended September 30, 2012 are as follows:

 

(In thousands)       

Balance, December 31, 2011

   $ 3,492   

Acquisitions

     —     

Impairment losses

     —     
  

 

 

 

Balance, September 30, 2012

   $ 3,492   
  

 

 

 

Balance as of September 30, 2012

  

Goodwill

   $ 3,492   

Accumulated impairment losses

     —     
  

 

 

 

Total goodwill

   $ 3,492   
  

 

 

 

The following table presents our intangible assets as of September 30, 2012 and December 31, 2011. 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.

 

     September 30, 2012      December 31, 2011  
(In thousands)    Gross
Value
     Accumulated
Amortization
    Net
Value
     Gross
Value
     Accumulated
Amortization
    Net
Value
 

Customer relationships

   $ 6,636       $ (569   $ 6,067       $ 1,623       $ (194   $ 1,429   

Developed technology

     6,315         (1,024     5,291         3,230         (303     2,927   

Intellectual property

     2,340         (768     1,572         2,340         (525     1,815   

Trade names

     270         (70     200         270         (28     242   

Other

     13         (2     11         —           —          —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,574       $ (2,433   $ 13,141       $ 7,463       $ (1,050   $ 6,413   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2012, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)    Amount  

Remainder of 2012

   $ 606   

2013

     2,408   

2014

     2,254   

2015

     2,119   

2016

     1,848   

Thereafter

     3,906   
  

 

 

 

Total

   $ 13,141   
  

 

 

 
STOCKHOLDERS' EQUITY (Tables)

A summary of the changes in stockholders’ equity for the nine months ended September 30, 2012 is as follows:

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2011

   $ 692,131   

Net income

     43,302   

Dividend payments

     (17,173

Dividends accrued for unvested restricted stock units

     24   

Net change in unrealized gains and losses on marketable securities (net of deferred taxes)

     1,855   

Reclassification adjustment for amounts included in net income (net of deferred taxes)

     164   

Foreign currency translation adjustment

     191   

Proceeds from stock option exercises

     4,932   

Purchase of treasury stock

     (28,578

Tax benefits from stock option exercises

     1,813   

Stock-based compensation expense

     6,783   
  

 

 

 

Balance, September 30, 2012

   $ 705,444   
  

 

 

 

During the nine months ended September 30, 2012, we paid cash dividends as follows (in thousands except per share amount):

 

Record Date

   Payment Date    Per Share Amount      Total Dividend Paid  

February 2, 2012

   February 16, 2012    $ 0.09       $ 5,739   

April 26, 2012

   May 10, 2012    $ 0.09       $ 5,737   

July 26, 2012

   August 9, 2012    $ 0.09       $ 5,697   

The components of other comprehensive income for the three months ended September 30, 2012 and 2011 are as follows:

 

     Three Months Ended
September 30, 2012
     Three Months Ended
September 30, 2011
 
(In thousands)    Before-Tax
Amount
     Tax
(Expense)
Benefit
    Net-of-Tax
Amount
     Before-Tax
Amount
    Tax
(Expense)
Benefit
     Net-of-Tax
Amount
 

Net change in unrealized gains (losses) related to marketable securities

   $ 253       $ (99   $ 154       $ (9,001   $ 3,533       $ (5,468

Reclassification adjustment for amounts included in net income

     562         (219     343         (482     195         (287

Foreign currency translation adjustment

     134         —          134         (1,487     —           (1,487
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 949       $ (318   $ 631       $ (10,970   $ 3,728       $ (7,242
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

The components of other comprehensive income for the nine months ended September 30, 2012 and 2011 are as follows:

 

     Nine Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2011
 
(In thousands)    Before-Tax
Amount
     Tax
(Expense)
Benefit
    Net-of-Tax
Amount
     Before-Tax
Amount
    Tax
(Expense)
Benefit
     Net-of-Tax
Amount
 

Net change in unrealized gains (losses) related to marketable securities

   $ 3,041       $ (1,186   $ 1,855       $ (17,494   $ 6,235       $ (11,259

Reclassification adjustment for amounts included in net income

     269         (105     164         (1,063     381         (682

Foreign currency translation adjustment

     191         —          191         (1,031     —           (1,031
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Other Comprehensive Income (Loss)

   $ 3,501       $ (1,291   $ 2,210       $ (19,588   $ 6,616       $ (12,972
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
EARNINGS PER SHARE (Tables)
Earnings Per Share

A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 is as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands, except per share amounts)    2012      2011      2012      2011  

Numerator

           

Net income

   $ 9,272       $ 36,213       $ 43,302       $ 107,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     63,066         64,023         63,495         64,300   

Effect of dilutive securities

           

Stock options

     225         882         637         1,346   

Restricted stock and restricted stock units

     13         56         7         51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     63,304         64,961         64,139         65,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.15       $ 0.57       $ 0.68       $ 1.67   

Net income per share – diluted

   $ 0.15       $ 0.56       $ 0.68       $ 1.63   
SEGMENT INFORMATION (Tables)

The following table presents information about the reported sales and gross profit of our reportable segments for the three and nine months ended September 30, 2012 and 2011. Asset information by reportable segment is not reported, since we do not produce such information internally.

 

     Three Months Ended  
     September 30, 2012      September 30, 2011  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 131,942       $ 63,827       $ 152,492       $ 85,944   

Enterprise Networks

     30,183         16,145         39,702         23,532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 79,972       $ 192,194       $ 109,476   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30, 2012      September 30, 2011  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 381,303       $ 195,448       $ 435,344       $ 252,908   

Enterprise Networks

     99,555         53,812         106,599         62,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 480,858       $ 249,260       $ 541,943       $ 315,098   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents sales information by product category for the three and nine months ended September 30, 2012 and 2011.

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2012      2011      2012      2011  

Carrier Systems

   $ 111,577       $ 119,979       $ 309,590       $ 319,018   

Business Networking

     36,600         44,919         116,332         116,981   

Loop Access

     13,948         27,296         54,936         105,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 192,194       $ 480,858       $ 541,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subcategory revenues included in the above are as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2012      2011      2012      2011  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 94,464       $ 86,954       $ 249,988       $ 215,798   

Optical (included in Carrier Systems)

     11,160         22,298         39,418         65,222   

Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)

     35,411         42,506         111,320         108,418   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     141,035         151,758         400,726         389,438   

Legacy Products

           

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

     12,926         25,297         51,350         100,291   

Other products (excluding HDSL)

     8,164         15,139         28,782         52,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     21,090         40,436         80,132         152,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 192,194       $ 480,858       $ 541,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents sales information by geographic area for the three and nine months ended September 30, 2012 and 2011. International sales correlate to shipments with a non-U.S. destination.

 

     Three Months Ended      Nine Months Ended  
(In thousands)    September 30,      September 30,  
   2012      2011      2012      2011  

United States

   $ 112,972       $ 170,343       $ 359,804       $ 484,260   

International

     49,153         21,851         121,054         57,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,125       $ 192,194       $ 480,858       $ 541,943   
  

 

 

    

 

 

    

 

 

    

 

 

 
LIABILITY FOR WARRANTY RETURNS (Tables)
Summary of Warranty Expense and Write-Off Activity

A summary of warranty expense and write-off activity for the nine months ended September 30, 2012 and 2011 is as follows:

 

Nine Months Ended September 30,    2012     2011  
(In thousands)             

Balance at beginning of period

   $ 4,118      $ 3,304   

Plus: Amounts charged to cost and expenses

     3,910        2,306   

Amounts assumed on acquisition

     1,932        —     

Less: Deductions

     (2,709     (1,743
  

 

 

   

 

 

 

Balance at end of period

   $ 7,251      $ 3,867   
  

 

 

   

 

 

 
Business Combinations - Additional information (Detail) (USD $)
9 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2012
Nokia Siemens Networks [Member]
Sep. 30, 2012
Nokia Siemens Networks [Member]
May 4, 2012
Nokia Siemens Networks [Member]
Sep. 30, 2012
Nokia Siemens Networks [Member]
Customer relationships [Member]
Sep. 30, 2012
Nokia Siemens Networks [Member]
Developed technology [Member]
Sep. 30, 2012
Bluesocket [Member]
Sep. 30, 2012
Bluesocket [Member]
Aug. 4, 2011
Bluesocket [Member]
Sep. 30, 2012
Bluesocket [Member]
Customer relationships [Member]
Sep. 30, 2012
Bluesocket [Member]
Developed technology [Member]
Sep. 30, 2012
Bluesocket [Member]
Intellectual property [Member]
Sep. 30, 2012
Bluesocket [Member]
Trade names [Member]
Business Acquisition [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase price, net of consideration
 
 
 
$ (7,496,000)
 
 
 
 
$ 23,688,000 
 
 
 
 
Bargain purchase gain, net of tax
1,753,000 
 
1,753,000 
 
 
 
 
 
 
 
 
 
 
Average estimated useful life
 
 
 
 
13 years 
5 years 
 
 
 
7 years 
4 years 6 months 
7 years 
4 years 6 months 
Acquisition and integration related expenses and amortization of acquired intangibles
 
1,200,000 
6,700,000 
 
 
 
300,000 
1,200,000 
 
 
 
 
 
Acquisition cost
 
 
 
 
 
 
 
 
23,700,000 
 
 
 
 
Goodwill
 
 
 
 
 
 
$ 3,500,000 
$ 3,500,000 
$ 3,492,000 
 
 
 
 
Business Combinations - Allocation of Purchase Price to Estimated Fair Value of Assets Acquired and Liabilities Assumed at Acquisition Date (Detail) (USD $)
In Thousands, unless otherwise specified
May 4, 2012
Nokia Siemens Networks [Member]
Sep. 30, 2012
Bluesocket [Member]
Aug. 4, 2011
Bluesocket [Member]
May 4, 2012
Customer relationships [Member]
Nokia Siemens Networks [Member]
Aug. 4, 2011
Customer relationships [Member]
Bluesocket [Member]
May 4, 2012
Developed technology [Member]
Nokia Siemens Networks [Member]
Aug. 4, 2011
Developed technology [Member]
Bluesocket [Member]
May 4, 2012
Other [Member]
Nokia Siemens Networks [Member]
Aug. 4, 2011
Intellectual property [Member]
Bluesocket [Member]
Aug. 4, 2011
Trade names [Member]
Bluesocket [Member]
Business Acquisition [Line Items]
 
 
 
 
 
 
 
 
 
 
Cash
 
 
$ 1,027 
 
 
 
 
 
 
 
Goodwill
 
3,500 
3,492 
 
 
 
 
 
 
 
Other receivables/Accounts receivable
395 
 
298 
 
 
 
 
 
 
 
Inventory
22,278 
 
792 
 
 
 
 
 
 
 
Prepaid expenses
 
 
357 
 
 
 
 
 
 
 
Property, plant and equipment
5,035 
 
173 
 
 
 
 
 
 
 
Accounts payable
(5,194)