ADTRAN INC, 10-K filed on 2/24/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 9, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
ADTN 
 
 
Entity Registrant Name
ADTRAN INC 
 
 
Entity Central Index Key
0000926282 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
48,519,654 
 
Entity Public Float
 
 
$ 903,566,094 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current Assets
 
 
Cash and cash equivalents
$ 79,895 
$ 84,550 
Short-term investments
43,188 
34,396 
Accounts receivable, less allowance for doubtful accounts of $— and $19 at December 31, 2016 and 2015, respectively
92,346 
71,917 
Other receivables
15,137 
19,321 
Income tax receivable, net
760 
 
Inventory, net
105,117 
91,533 
Prepaid expenses and other current assets
16,459 
10,145 
Total Current Assets
352,902 
311,862 
Property, plant and equipment, net
84,469 
73,233 
Deferred tax assets, net
38,036 
37,015 
Goodwill
3,492 
3,492 
Other assets
12,234 
9,276 
Long-term investments
176,102 
198,026 
Total Assets
667,235 
632,904 
Current Liabilities
 
 
Accounts payable
77,342 
48,668 
Unearned revenue
16,326 
16,615 
Accrued expenses
12,434 
12,108 
Accrued wages and benefits
20,433 
12,857 
Income tax payable, net
 
2,395 
Total Current Liabilities
126,535 
92,643 
Non-current unearned revenue
6,333 
7,965 
Other non-current liabilities
28,050 
24,236 
Bonds payable
26,800 
27,900 
Total Liabilities
187,718 
152,744 
Commitments and contingencies (see Note 13)
   
   
Stockholders' Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 48,472 shares outstanding at December 31, 2016 and 79,652 shares issued and 49,558 shares outstanding at December 31, 2015
797 
797 
Additional paid-in capital
252,957 
246,879 
Accumulated other comprehensive loss
(12,188)
(8,969)
Retained earnings
921,942 
906,772 
Less treasury stock at cost: 31,180 and 30,094 shares at December 31, 2016 and 2015, respectively
(683,991)
(665,319)
Total Stockholders' Equity
479,517 
480,160 
Total Liabilities and Stockholders' Equity
$ 667,235 
$ 632,904 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
 
$ 19 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
79,652,000 
79,652,000 
Common stock, shares outstanding
48,472,000 
49,558,000 
Treasury stock, shares
31,180,000 
30,094,000 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Sales
 
 
 
Products
$ 525,502 
$ 527,422 
$ 559,532 
Services
111,279 
72,642 
70,475 
Total Sales
636,781 
600,064 
630,007 
Cost of Sales
 
 
 
Products
270,695 
293,843 
288,015 
Services
74,742 
39,324 
30,665 
Total Cost of Sales
345,437 
333,167 
318,680 
Gross Profit
291,344 
266,897 
311,327 
Selling, general and administrative expenses
131,805 
123,542 
131,958 
Research and development expenses
124,804 
129,876 
132,258 
Operating Income
34,735 
13,479 
47,111 
Interest and dividend income
3,918 
3,953 
5,019 
Interest expense
(572)
(596)
(677)
Net realized investment gain
5,923 
10,337 
7,278 
Other income (expense), net
(651)
(1,465)
1,175 
Gain on bargain purchase of a business
3,542 
 
 
Income before provision for income taxes
46,895 
25,708 
59,906 
Provision for income taxes
(11,666)
(7,062)
(15,286)
Net Income
$ 35,229 
$ 18,646 
$ 44,620 
Weighted average shares outstanding – basic
48,724 
51,145 
55,120 
Weighted average shares outstanding – diluted
48,949 
51,267 
55,482 
Earnings per common share – basic
$ 0.72 
$ 0.36 
$ 0.81 
Earnings per common share – diluted
$ 0.72 
$ 0.36 
$ 0.80 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net Income
$ 35,229 
$ 18,646 
$ 44,620 
Other Comprehensive Loss, net of tax:
 
 
 
Net unrealized losses on available-for-sale securities
(1,528)
(7,032)
(1,773)
Defined benefit plan adjustments
(1,122)
1,862 
(4,866)
Foreign currency translation
(569)
(3,724)
(4,189)
Other Comprehensive Loss, net of tax
(3,219)
(8,894)
(10,828)
Comprehensive Income, net of tax
$ 32,010 
$ 9,752 
$ 33,792 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Income [Member]
Beginning Balance at Dec. 31, 2013
$ 604,606 
$ 797 
$ 233,511 
$ 884,451 
$ (524,906)
$ 10,753 
Beginning Balance, Shares at Dec. 31, 2013
 
79,652 
 
 
 
 
Net Income
44,620 
 
 
44,620 
 
 
Other comprehensive loss, net of tax
(10,828)
 
 
 
 
(10,828)
Dividend payments
(19,947)
 
 
(19,947)
 
 
Dividends accrued for unvested restricted stock units
(19)
 
 
(19)
 
 
Stock options exercised
2,839 
 
 
(558)
3,397 
 
PSUs and restricted stock vested
(326)
 
(326)
(796)
796 
 
Purchase of treasury stock
(80,576)
 
 
 
(80,576)
 
Income tax effect of stock compensation arrangements
81 
 
81 
 
 
 
Stock-based compensation expense
8,563 
 
8,563 
 
 
 
Ending Balance at Dec. 31, 2014
549,013 
797 
241,829 
907,751 
(601,289)
(75)
Ending Balance, Shares at Dec. 31, 2014
 
79,652 
 
 
 
 
Net Income
18,646 
 
 
18,646 
 
 
Other comprehensive loss, net of tax
(8,894)
 
 
 
 
(8,894)
Dividend payments
(18,449)
 
 
(18,449)
 
 
Dividends accrued for unvested restricted stock units
(7)
 
 
(7)
 
 
Stock options exercised
961 
 
 
(402)
1,363 
 
PSUs and restricted stock vested
(69)
 
(69)
(767)
767 
 
Purchase of treasury stock
(66,160)
 
 
 
(66,160)
 
Income tax effect of stock compensation arrangements
(1,593)
 
(1,593)
 
 
 
Stock-based compensation expense
6,712 
 
6,712 
 
 
 
Ending Balance at Dec. 31, 2015
480,160 
797 
246,879 
906,772 
(665,319)
(8,969)
Ending Balance, Shares at Dec. 31, 2015
79,652 
79,652 
 
 
 
 
Net Income
35,229 
 
 
35,229 
 
 
Other comprehensive loss, net of tax
(3,219)
 
 
 
 
(3,219)
Dividend payments
(17,583)
 
 
(17,583)
 
 
Dividends accrued for unvested restricted stock units
(48)
 
 
(48)
 
 
Stock options exercised
4,717 
 
 
(1,499)
6,216 
 
PSUs and restricted stock vested
(142)
 
(142)
(929)
929 
 
Purchase of treasury stock
(25,817)
 
 
 
(25,817)
 
Income tax effect of stock compensation arrangements
(475)
 
(475)
 
 
 
Stock-based compensation expense
6,695 
 
6,695 
 
 
 
Ending Balance at Dec. 31, 2016
$ 479,517 
$ 797 
$ 252,957 
$ 921,942 
$ (683,991)
$ (12,188)
Ending Balance, Shares at Dec. 31, 2016
79,652 
79,652 
 
 
 
 
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Stock options exercised, shares
283 
60 
147 
PSUs and restricted stock vested, shares
42 
34 
35 
Treasury Stock [Member]
 
 
 
Purchase of treasury stock, shares
1,411 
3,967 
3,669 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities
 
 
 
Net income
$ 35,229 
$ 18,646 
$ 44,620 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,407 
14,245 
14,845 
Amortization of net premium on available-for-sale investments
643 
2,402 
4,360 
Net realized gain on long-term investments
(5,923)
(10,337)
(7,278)
Net loss on disposal of property, plant and equipment
22 
644 
142 
Gain on bargain purchase of a business
(3,542)
 
 
Stock-based compensation expense
6,695 
6,712 
8,563 
Deferred income taxes
(2,685)
(692)
(5,526)
Tax impact of stock option exercises
 
(40)
81 
Excess tax benefits from stock-based compensation arrangements
(2)
(3)
(63)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
(21,302)
14,918 
(3,910)
Other receivables
4,101 
11,704 
(19,298)
Inventory
(10,887)
(6,877)
2,144 
Prepaid expenses and other assets
(7,108)
(5,070)
(3,818)
Accounts payable
26,722 
(5,826)
9,973 
Accrued expenses and other liabilities
8,792 
(10,289)
(166)
Income taxes payable, net
(3,162)
(11,590)
11,168 
Net cash provided by operating activities
42,000 
18,547 
55,837 
Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(21,441)
(11,753)
(11,256)
Proceeds from disposals of property, plant and equipment
 
183 
Proceeds from sales and maturities of available-for-sale investments
225,075 
280,435 
230,019 
Purchases of available-for-sale investments
(209,172)
(188,921)
(142,695)
Acquisition of business
(943)
 
 
Net cash provided by (used in) investing activities
(6,481)
79,944 
76,069 
Cash flows from financing activities
 
 
 
Proceeds from stock option exercises
4,717 
961 
2,839 
Purchases of treasury stock
(25,817)
(66,160)
(80,576)
Dividend payments
(17,583)
(18,449)
(19,947)
Payments on long-term debt
(1,100)
(1,100)
(16,500)
Excess tax benefits from stock-based compensation arrangements
63 
Net cash used in financing activities
(39,781)
(84,745)
(114,121)
Net increase (decrease) in cash and cash equivalents
(4,262)
13,746 
17,785 
Effect of exchange rate changes
(393)
(2,635)
(2,644)
Cash and cash equivalents, beginning of year
84,550 
73,439 
58,298 
Cash and cash equivalents, end of year
79,895 
84,550 
73,439 
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the year for interest
575 
598 
758 
Cash paid during the year for income taxes
18,689 
20,139 
9,856 
Supplemental disclosure of non-cash investing activities
 
 
 
Purchases of property, plant and equipment included in accounts payable
$ 2,103 
$ 598 
$ 467 
Nature of Business and Summary of Significant Accounting Policies
Nature of Business and Summary of Significant Accounting Policies

Note 1 – Nature of Business and Summary of Significant Accounting Policies

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

Principles of Consolidation

Our consolidated financial statements include ADTRAN and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions, and determined the risk of material financial loss due to the exposure of such credit risk to be minimal. As of December 31, 2016, $77.9 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $27.8 million, compared to an estimated fair value of $28.1 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.

Investments with contractual maturities beyond one year, such as our variable rate demand notes, may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe we have the ability to quickly sell them to the remarketing agent, tender agent, or issuer at par value plus accrued interest in the event we decide to liquidate our investment in a particular variable rate demand note. All income generated from these investments was recorded as interest income. We have not been required to record any losses relating to variable rate demand notes.

Long-term investments represent a restricted certificate of deposit held at cost, deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency backed bonds, U.S. and foreign government bonds, variable rate demand notes, marketable equity securities, and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. We review our investment portfolio quarterly for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2016 and 2015 are classified as available-for-sale securities. See Note 4 of Notes to Consolidated Financial Statements for additional information.

Accounts Receivable

We record accounts receivable at net realizable value. Prior to establishing payment terms for a new customer, we evaluate the credit risk of the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection experience and other financial factors. At December 31, 2016, three customers accounted for 63.3% of our total accounts receivable. At December 31, 2015, three customers accounted for 37.3% of our total accounts receivable.

We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required payments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events and our historical experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, we may be required to record an allowance for doubtful accounts. If circumstances change with regard to individual receivable balances that have previously been determined to be uncollectible (and for which a specific reserve has been established), a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was nil and $19 thousand at December 31, 2016 and December 31, 2015, respectively.

Other Receivables

Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers, accrued interest on investments and on a restricted certificate of deposit, amounts due from various jurisdictions for value-added tax, and amounts due from employee stock option exercises.

Inventory

Inventory is carried at the lower of cost or market, with cost being determined using the first-in, first-out method. Standard costs for material, labor and manufacturing overhead are used to value inventory. Standard costs are updated at least quarterly; therefore, inventory costs approximate actual costs at the end of each reporting period. 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, market conditions and age. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory reserve. See Note 6 of Notes to Consolidated Financial Statements for additional information.

Property, Plant and Equipment

Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven years, engineering machinery and equipment from three to seven years, and computer software from three to five years. Expenditures for repairs and maintenance are charged to expense as incurred. Betterments that materially prolong the lives of the assets are capitalized. Gains and losses on the disposal of property, plant and equipment are recorded in operating income. See Note 7 of Notes to Consolidated Financial Statements for additional information.

Liability for Warranty

Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. During 2016, we incurred an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier. The liability for warranty obligations totaled $8.5 million and $8.7 million at December 31, 2016 and 2015, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

A summary of warranty expense and write-off activity for the years ended December 31, 2016, 2015 and 2014 is as follows:

 

Year Ended December 31,

 

2016

 

 

2015

 

 

2014

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

8,739

 

 

$

8,415

 

 

$

8,977

 

Plus: Amounts charged to cost and expenses

 

 

8,561

 

 

 

2,998

 

 

 

3,103

 

Less: Deductions

 

 

(8,752

)

 

 

(2,674

)

 

 

(3,665

)

Balance at end of period

 

$

8,548

 

 

$

8,739

 

 

$

8,415

 

 

Pension Benefit Plan Obligations

We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future expenses and obligations.

Stock-Based Compensation

We have two Board and stockholder approved stock incentive plans from which stock options and other awards are available for grant to employees and directors. All employee and director stock options granted under our stock option plans have an exercise price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. There are currently no vesting provisions tied to performance or market conditions for any stock awards. Vesting for all outstanding award grants is based only on continued service as an employee or director of ADTRAN. All of our outstanding stock option awards are classified as equity awards.

Under the provisions of our approved plans, we made grants of performance stock units to certain of our executive officers in 2016, 2015, and 2014. The performance stock units are subject to a market condition based on the relative total shareholder return of ADTRAN against all the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The performance stock units are converted into shares of common stock upon vesting. Depending on the relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. The recipients of the performance stock units also earn dividend credits during the performance period, which are paid in cash upon the issuance of common stock for the restricted stock units.

Stock-based compensation expense recognized in 2016, 2015 and 2014 was approximately $6.7 million, $6.7 million and $8.6 million, respectively. As of December 31, 2016, total compensation cost related to non-vested stock options, restricted stock units, performance stock units and restricted stock not yet recognized was approximately $16.4 million, which is expected to be recognized over an average remaining recognition period of 2.9 years. See Note 3 of Notes to Consolidated Financial Statements for additional information.

Impairment of Long-Lived Assets

We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no impairment losses recognized during 2016, 2015 or 2014.

 


Goodwill and Purchased Intangible Assets

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in 2016, we concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses recognized since the acquisition in 2011. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is recorded over the estimated useful lives of the respective assets, which is 9 months to 14 years.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, the enhancement of current products, and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $124.8 million, $129.9 million and $132.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Other Comprehensive Income

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

The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2014, 2015 and 2016:

 

(In thousands)

 

Unrealized

Gains (Losses)

on Available-

for-Sale

Securities

 

 

Defined

Benefit Plan

Adjustments

 

 

Foreign

Currency

Adjustments

 

 

Total

 

Balance at December 31, 2013

 

$

10,737

 

 

$

(891

)

 

$

907

 

 

$

10,753

 

Other comprehensive income (loss) before

   reclassifications

 

 

2,363

 

 

 

(4,866

)

 

 

(4,189

)

 

 

(6,692

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(4,136

)

 

 

 

 

 

 

 

 

(4,136

)

Balance at December 31, 2014

 

 

8,964

 

 

 

(5,757

)

 

 

(3,282

)

 

 

(75

)

Other comprehensive income (loss) before

   reclassifications

 

 

(844

)

 

 

1,589

 

 

 

(3,724

)

 

 

(2,979

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(6,188

)

 

 

273

 

 

 

 

 

 

(5,915

)

Balance at December 31, 2015

 

 

1,932

 

 

 

(3,895

)

 

 

(7,006

)

 

 

(8,969

)

Other comprehensive income (loss) before

   reclassifications

 

 

1,515

 

 

 

(1,229

)

 

 

(569

)

 

 

(283

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

(3,043

)

 

 

107

 

 

 

 

 

 

(2,936

)

Balance at December 31, 2016

 

$

404

 

 

$

(5,017

)

 

$

(7,575

)

 

$

(12,188

)

 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the years ended December 31, 2016, 2015 and 2014:

 

(In thousands)

 

2016

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Income

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

5,408

 

 

Net realized investment gain

Impairment expense

 

 

(419

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial losses

 

 

(156

)

 

(1)

Total reclassifications for the period, before tax

 

 

4,833

 

 

 

Tax (expense) benefit

 

 

(1,897

)

 

 

Total reclassifications for the period, net of tax

 

$

2,936

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 11 of Notes to Consolidated Financial Statements.

 

(In thousands)

 

2015

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Income

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

10,348

 

 

Net realized investment gain

Impairment expense

 

 

(203

)

 

Net realized investment gain

Defined benefit plan adjustments – actuarial losses

 

 

(396

)

 

(1)

Total reclassifications for the period, before tax

 

 

9,749

 

 

 

Tax (expense) benefit

 

 

(3,834

)

 

 

Total reclassifications for the period, net of tax

 

$

5,915

 

 

 

 

(1)

Included in the computation of net periodic pension cost. See Note 11 of Notes to Consolidated Financial Statements.

 

(In thousands)

 

2014

Details about Accumulated Other Comprehensive

Income Components

 

Amount Reclassified

from Accumulated Other

Comprehensive Income

 

 

Affected Line Item in the

Statement Where Net Income

Is Presented

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

 

 

 

 

 

 

Net realized gain on sales of securities

 

$

6,895

 

 

Net realized investment gain

Impairment expense

 

 

(115

)

 

Net realized investment gain

Total reclassifications for the period, before tax

 

 

6,780

 

 

 

Tax (expense) benefit

 

 

(2,644

)

 

 

Total reclassifications for the period, net of tax

 

$

4,136

 

 

 

 

The following tables present the tax effects related to the change in each component of other comprehensive income for the years ended December 31, 2016, 2015 and 2014:

 

 

 

2016

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

2,484

 

 

$

(969

)

 

$

1,515

 

Reclassification adjustment for amounts related to available-for-sale investments included in net income

 

 

(4,989

)

 

 

1,946

 

 

 

(3,043

)

Defined benefit plan adjustments

 

 

(1,782

)

 

 

553

 

 

 

(1,229

)

Reclassification adjustment for amounts related to defined benefit plan adjustments included in net income

 

 

156

 

 

 

(49

)

 

 

107

 

Foreign currency translation adjustment

 

 

(569

)

 

 

 

 

 

(569

)

Total Other Comprehensive Income (Loss)

 

$

(4,700

)

 

$

1,481

 

 

$

(3,219

)

 

 

 

2015

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

(1,384

)

 

$

540

 

 

$

(844

)

Reclassification adjustment for amounts related to available-

   for-sale investments included in net income

 

 

(10,145

)

 

 

3,957

 

 

 

(6,188

)

Defined benefit plan adjustments

 

 

2,303

 

 

 

(714

)

 

 

1,589

 

Reclassification adjustment for amounts related to defined

   benefit plan adjustments included in net income

 

 

396

 

 

 

(123

)

 

 

273

 

Foreign currency translation adjustment

 

 

(3,724

)

 

 

 

 

 

(3,724

)

Total Other Comprehensive Income (Loss)

 

$

(12,554

)

 

$

3,660

 

 

$

(8,894

)

 

 

 

2014

 

(In thousands)

 

Before-Tax

Amount

 

 

Tax

(Expense)

Benefit

 

 

Net-of-Tax

Amount

 

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

 

$

3,874

 

 

$

(1,511

)

 

$

2,363

 

Reclassification adjustment for amounts related to available-

   for-sale investments included in net income

 

 

(6,780

)

 

 

2,644

 

 

 

(4,136

)

Defined benefit plan adjustments

 

 

(7,052

)

 

 

2,186

 

 

 

(4,866

)

Foreign currency translation adjustment

 

 

(4,189

)

 

 

 

 

 

(4,189

)

Total Other Comprehensive Income (Loss)

 

$

(14,147

)

 

$

3,319

 

 

$

(10,828

)

 

Income Taxes

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain.  We adjust these reserves, including any impact on the related interest and penalties, as facts and circumstances change.

Foreign Currency

We record transactions denominated in foreign currencies on a monthly basis using exchange rates from throughout the year. Assets and liabilities denominated in foreign currencies are translated at the balance sheet dates using the closing rates of exchange between those foreign currencies and the functional currency with any transaction gains or losses reported in other income (expense). Our primary exposures to foreign currency exchange rate movements are with our German subsidiary, whose functional currency is the Euro, our Australian subsidiary, whose functional currency is the Australian dollar, and our Mexican subsidiary, whose functional currency is the U.S. dollar. Adjustments resulting from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).

Revenue Recognition

Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the product price is fixed or determinable, collection of the resulting receivable is reasonably assured, and product returns are reasonably estimable. For product sales, revenue is generally recognized upon shipment of the product to our customer in accordance with the title transfer terms of the sales agreement, generally Ex Works, per International Commercial Terms. In the case of consigned inventory, revenue is recognized when the end customer assumes ownership of the product. Contracts that contain multiple deliverables are evaluated to determine the units of accounting, and the consideration from the arrangement is allocated to each unit of accounting based on the relative selling price and corresponding terms of the contract. We use vendor-specific objective evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence of selling price because of the extent of customization among competing products or services from other companies. In these instances, we use best estimates to allocate consideration to each respective unit of accounting. These estimates include analysis of respective bills of material and review and analysis of similar product and service offerings. We record revenue associated with installation services when respective contractual obligations are complete. In instances where customer acceptance is required, revenue is deferred until respective acceptance criteria have been met. Contracts that include both installation services and product sales are evaluated for revenue recognition in accordance with contract terms. As a result, installation services may be considered a separate deliverable or may be considered a combined single unit of accounting with the delivered product. Generally, either the purchaser, ADTRAN, or a third party can perform the installation of our products. Shipping fees are recorded as revenue and the related cost is included in cost of sales. Sales taxes invoiced to customers are included in revenues, and represent less than one percent of total revenues. The corresponding sales taxes paid are included in cost of goods sold. Value added taxes collected from customers in international jurisdictions are recorded in accrued expenses as a liability. Revenue is recorded net of discounts. Sales returns are recorded as a reduction of revenue and accrued based on historical sales return experience, which we believe provides a reasonable estimate of future returns.

A portion of our products are sold to a non-exclusive distribution network of major technology distributors in the United States. These large organizations then distribute or provide fulfillment services to an extensive network of VARs and SIs. VARs and SIs may be affiliated with us as a channel partner, or they may purchase from the distributor in an unaffiliated fashion. Additionally, with certain limitations our distributors may return unused and unopened product for stock-balancing purposes when such returns are accompanied by offsetting orders for products of equal or greater value.

We participate in cooperative advertising and market development programs with certain customers. We use these programs to reimburse customers for certain forms of advertising, and in general, to allow our customers credits up to a specified percentage of their net purchases. Our costs associated with these programs are estimated and included in marketing expenses in our consolidated statements of income. We also participate in rebate programs to provide sales incentives for certain products. Our costs associated with these programs are estimated and accrued at the time of sale, and are recorded as a reduction of sales in our consolidated statements of income.

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and unearned revenues relating to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one to five years. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to customers under contracts with terms up to ten years. When we defer revenue related to multiple-element contracts where we still have contractual obligations, we also defer the related costs. Deferred costs are included in prepaid expenses and other assets and totaled $10.7 million and $5.2 million at December 31, 2016 and 2015, respectively.

Other Income (Expense), Net

Other income (expense), net, is comprised primarily of miscellaneous income and expense, gains and losses on foreign currency transactions, and investment account management fees. For the year ended December 31, 2014, other income (expense), net included a $2.4 million gain related to the settlement of working capital items from an acquisition transaction that closed in 2012.

Earnings per Share

Earnings per common share, and earnings per common share assuming dilution, are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 14 of Notes to Consolidated Financial Statements for additional information.

Dividends

During 2016, 2015 and 2014, we paid shareholder dividends totaling $17.6 million, $18.4 million and $19.9 million, respectively. The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and adequate levels of liquidity are maintained. The following table shows dividends paid to our shareholders in each quarter of 2016, 2015 and 2014.

 

Dividends per Common Share

 

 

 

2016

 

 

2015

 

 

2014

 

First Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Second Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Third Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

Fourth Quarter

 

$

0.09

 

 

$

0.09

 

 

$

0.09

 

 

On January 17, 2017, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the close of business on February 2, 2017. The ex-dividend date was January 31, 2017 and the payment date was February 16, 2017. The quarterly dividend payment was $4.4 million.

Business Combinations

We use the acquisition method to account for business combinations. Under the acquisition method of accounting, we recognize the assets acquired and liabilities assumed at their fair value on the acquisition date. Goodwill is measured as the excess of the consideration transferred over the net assets acquired. Costs incurred to complete the business combination, such as legal, accounting or other professional fees, are charged to general and administrative expenses as they are incurred.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identified implementation issues; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We plan to adopt ASU 2014-09 and the related ASUs on January 1, 2018, and we are currently evaluating the transition method that will be elected. We are continuing to evaluate the potential impact of these ASUs, and we believe the most significant potential impact relates to our accounting for software license and installation services revenues. We do not believe there will be a significant impact to product or maintenance revenues.

In July 2015, the FASB issued Accounting Standards Update No.  2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We adopted ASU 2015-05 in the first quarter of 2017, and there was no material impact on our financial position, results of operations and cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of accounting for share-based compensation arrangements, including income tax effects, the classification of tax-related cash flows on the statement of cash flows, and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. We adopted ASU 2016-09 in the first quarter of 2017, and there was no material impact on our financial position, results of operations and cash flows.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after January 1, 2017. The amendments should be applied prospectively. We do not expect the adoption of ASU 2017-04 will have a material impact on our financial position, results of operations or cash flows.

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

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

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 amends the existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively to all periods presented. We elected to early adopt ASU 2015-17 during the fourth quarter of 2016, and we applied the guidance retrospectively to all periods presented. As a result, $17.3 million and $18.9 million were reclassified from current deferred tax assets to non-current deferred tax assets at December 31, 2016 and 2015, respectively.

Business Combinations
Business Combinations

Note 2 – Business Combinations

On September 13, 2016, we acquired key fiber access products, technologies and service relationships from subsidiaries of CommScope, Inc. for $0.9 million in cash. This acquisition will enhance our solutions for the cable MSO industry and will provide cable operators with the scalable solutions, services and support they require to compete in the multi-gigabit service delivery market. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Network Solutions reportable segment, and in the Access & Aggregation and Customer Devices categories.

We recorded a bargain purchase gain of $3.5 million, net of income taxes, subject to customary working capital adjustments between the parties. The bargain purchase gain represents the excess fair value of the net assets acquired over the consideration exchanged. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and pro forma data for future periods and have concluded that our valuation procedures and resulting measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2016 Consolidated Statements of Income.

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

 

(In Thousands)

 

 

 

 

Assets

 

 

 

 

Inventory

 

$

3,131

 

Property, plant and equipment

 

 

352

 

Intangible assets

 

 

4,700

 

Total assets acquired

 

 

8,183

 

Liabilities

 

 

 

 

Accounts payable

 

 

(1,250

)

Warranty payable

 

 

(61

)

Accrued wages and benefits

 

 

(122

)

Deferred income taxes

 

 

(2,265

)

Total liabilities assumed

 

 

(3,698

)

Total net assets

 

 

4,485

 

Gain on bargain purchase of a business, net of tax

 

 

(3,542

)

Total purchase price

 

$

943

 

 

The details of the acquired intangible assets are as follows:

 

In thousands

 

Value

 

 

Life (years)

 

Supply agreement

 

$

1,400

 

 

 

0.8

 

Customer relationships

 

 

1,200

 

 

 

6.0

 

Developed technology

 

 

800

 

 

 

10.0

 

License

 

 

500

 

 

 

1.3

 

Patent

 

 

500

 

 

 

7.3

 

Non-compete

 

 

200

 

 

 

2.3

 

Trade name

 

 

100

 

 

 

2.0

 

Total

 

$

4,700

 

 

 

 

 

 

The actual revenue and net loss included in our Consolidated Statements of Income for the period September 13, 2016 to December 31, 2016 are as follows:

 

(In thousands)

 

September 13 to

December 31,

2016

 

Revenue

 

$

2,768

 

Net loss

 

$

(805

)

 

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

 

(In thousands)

 

2016

 

 

2015

 

Pro forma revenue

 

$

641,170

 

 

$

603,923

 

Pro forma net income

 

$

31,212

 

 

$

22,945

 

 

For the year ended December 31, 2016, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $1.0 million related to this acquisition.

Stock-Based Compensation
Stock-Based Compensation

Note 3 – Stock-Based Compensation

Stock Incentive Program Descriptions

On January 23, 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (2006 Plan), which authorized 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units (RSUs). The 2006 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 2006 Plan was replaced on May 13, 2015 by the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan). Expiration dates of options outstanding at December 31, 2016 under the 2006 Plan range from 2017 to 2024.

Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. Under the 2010 Directors Plan, the Company may issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2016 under the 2010 Directors Plan range from 2017 to 2019.

On January 20, 2015, the Board of Directors adopted the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan), which authorizes 7.7 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, performance stock units (PSUs), restricted stock and RSUs. The 2015 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 13, 2015. PSUs, restricted stock and RSUs granted under the 2015 Plan reduce the shares authorized for issuance under the 2015 Plan by 2.5 shares of common stock for each share underlying the award. Options granted under the 2015 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2015 under the 2015 Plan range from 2025 to 2026.

The following table summarizes stock-based compensation expense related to stock options, PSUs, restricted stock and RSUs for the years ended December 31, 2016, 2015 and 2014, which was recognized as follows:

 

(In thousands)

 

2016

 

 

2015

 

 

2014

 

Stock-based compensation expense included in cost of

   sales

 

$

389

 

 

$

280

 

 

$

479

 

Selling, general and administrative expense

 

 

3,341

 

 

 

3,261

 

 

 

4,185

 

Research and development expense

 

 

2,965

 

 

 

3,171

 

 

 

3,899

 

Stock-based compensation expense included in operating

   expenses

 

 

6,306

 

 

 

6,432

 

 

 

8,084

 

Total stock-based compensation expense

 

 

6,695

 

 

 

6,712

 

 

 

8,563

 

Tax benefit for expense associated with non-qualified

   options

 

 

(963

)

 

 

(862

)

 

 

(1,157

)

Total stock-based compensation expense, net of tax

 

$

5,732

 

 

$

5,850

 

 

$

7,406

 

Stock-based compensation expense recognized in our Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014 is based on stock options, PSUs, restricted stock and RSUs ultimately expected to vest, and has been reduced for estimated forfeitures. Estimates for forfeiture rates are based upon historical experience and are evaluated quarterly. We expect our forfeiture rate for stock options and RSUs to be approximately 3.7% annually. We estimated a 0% forfeiture rate for our PSUs and restricted stock due to the limited number of recipients and historical experience for these awards.

Stock Options

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

 

(In thousands, except per share amounts)

 

Number of

Options

 

 

Weighted

Average

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual Life

in Years

 

 

Aggregate

Intrinsic Value

 

Options outstanding, December 31, 2015

 

 

7,108

 

 

$

21.97

 

 

 

6.42

 

 

$

3,284

 

Options granted

 

 

19

 

 

$

18.24

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(283

)

 

$

16.66

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(93

)

 

$

17.90

 

 

 

 

 

 

 

 

 

Options expired

 

 

(413

)

 

$

23.96

 

 

 

 

 

 

 

 

 

Options outstanding, December 31, 2016

 

 

6,338

 

 

$

22.14

 

 

 

5.63

 

 

$

16,972

 

Options vested and expected to vest, December 31, 2016

 

 

6,276

 

 

$

22.20

 

 

 

5.60

 

 

$

16,606

 

Options exercisable, December 31, 2016

 

 

4,757

 

 

$

23.67

 

 

 

4.73

 

 

$

9,137

 

 

At December 31, 2016, total compensation cost related to non-vested stock options not yet recognized was approximately $7.5 million, which is expected to be recognized over an average remaining recognition period of 2.1 years.

 

All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At December 31, 2016, 5.6 million options were available for grant under the shareholder approved plans.

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 2016 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 December 31, 2016. The amount of 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 2016, 2015 and 2014 was $1.1 million, $0.1 million and $0.7 million, respectively. The fair value of options fully vesting during 2016, 2015 and 2014 was $5.7 million, $6.6 million and $7.7 million, respectively.

The following table further describes our stock options outstanding as of December 31, 2016:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Range of

Exercise Prices

 

Options

Outstanding at

12/31/16

(In thousands)

 

 

Weighted Avg.

Remaining

Contractual Life

in Years

 

 

Weighted

Average

Exercise

Price

 

 

Options

Exercisable at

12/31/16

(In thousands)

 

 

Weighted

Average

Exercise

Price

 

$14.88 – 18.96

 

 

2,101

 

 

 

6.78

 

 

$

15.82

 

 

 

1,217

 

 

$

16.14

 

$18.97 – 23.45

 

 

1,380

 

 

 

5.79

 

 

$

20.17

 

 

 

881

 

 

$

20.84

 

$23.46 – 30.35

 

 

1,491

 

 

 

5.08

 

 

$

23.89

 

 

 

1,293

 

 

$

23.92

 

$30.36 – 41.92

 

 

1,366

 

 

 

4.29

 

 

$

31.94

 

 

 

1,366

 

 

$

31.94

 

 

 

 

6,338

 

 

 

 

 

 

 

 

 

 

 

4,757

 

 

 

 

 

 


PSUs, restricted stock and RSUs

Under the 2015 Plan, awards other than stock options, including PSUs, restricted stock and RSUs, may be granted to certain employees and officers. Under our PSU program, the number of shares of common stock earned by a recipient pursuant to the PSUs is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the PSUs, with the shares earned distributed upon the vesting of the PSUs at the end of the three-year performance period. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. A portion of the granted PSUs also vest and the underlying shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2015 Plan. The recipients of the PSUs receive dividend credits based on the shares of common stock underlying the PSUs. The dividend credits are vested and earned in the same manner as the PSUs and are paid in cash upon the issuance of common stock for the PSUs. The fair value of restricted stock and RSUs is equal to the closing price of our stock on the business day immediately preceding the grant date. Restricted stock and RSUs vest ratably over one year and four year periods, respectively.

The following table is a summary of our PSUs, restricted stock and RSUs outstanding as of December 31, 2015 and 2016 and the changes that occurred during 2016:

 

(In thousands, except per share amounts)

 

Number of

shares

 

 

Weighted

Average Grant

Date Fair Value

 

Unvested PSUs, restricted stock and RSUs outstanding,

   December 31, 2015

 

 

106

 

 

$

21.09

 

PSUs, restricted stock and RSUs granted

 

 

460

 

 

$

20.63

 

PSUs, restricted stock and RSUs vested

 

 

(46

)

 

$

22.50

 

PSUs, restricted stock and RSUs forfeited

 

 

(1

)

 

$

20.00

 

Unvested RSUs and restricted stock outstanding,

   December 31, 2016

 

 

519

 

 

$

20.51

 

 

At December 31, 2016, total compensation cost related to the non-vested portion of PSUs, restricted stock and RSUs not yet recognized was approximately $8.9 million, which is expected to be recognized over an average remaining recognition period of 3.6 years.

Valuation and Expense Information

We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair value of stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options. We use a Monte Carlo Simulation valuation method to value our performance-based PSUs. The fair value of RSUs and restricted stock issued is equal to the closing price of our stock on the date of grant. We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which may materially impact our fair value determination.

The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors. There were no changes made during 2016 to the methodology used to determine our assumptions.

The weighted-average estimated fair value of stock options granted to employees during the years ended December 31, 2016, 2015 and 2014 was $5.22 per share, $4.28 per share and $6.31 per share, respectively, with the following weighted-average assumptions:

 

 

 

2016

 

 

2015

 

 

2014

 

Expected volatility

 

 

34.79

%

 

 

34.57

%

 

 

39.05

%

Risk-free interest rate

 

 

1.36

%

 

 

1.81

%

 

 

1.79

%

Expected dividend yield

 

 

1.98

%

 

 

2.35

%

 

 

1.90

%

Expected life (in years)

 

 

6.25

 

 

 

6.23

 

 

 

6.33

 

 

We based our estimate of expected volatility for the years ended December 31, 2016, 2015 and 2014 on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility method was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is our implied volatility. We have no reason to believe the future volatility of our stock price is likely to differ from its past volatility. The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our historical and expected dividend payouts. The expected life of our stock options is based upon historical exercise and forfeiture activity of our previous stock-based grants with a ten-year contractual term.

The PSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated fair value of the PSUs granted to employees during the years ended December 31, 2016, 2015 and 2014 was $23.50 per share, $17.64 per share and $22.11 per share, respectively, with the following assumptions:

 

 

 

2016

 

 

2015

 

 

2014

 

Expected volatility

 

 

29.79

%

 

 

31.34

%

 

 

36.40

%

Risk-free interest rate

 

 

1.17

%

 

 

1.20

%

 

 

0.96

%

Expected dividend yield

 

 

1.80

%

 

 

2.35

%

 

 

1.89

%

 

Investments
Investments

Note 4 – Investments

At December 31, 2016, we held the following securities and investments, recorded at either fair value or cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value /

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

12,367

 

 

$

2,271

 

 

$

(42

)

 

$

14,596

 

Corporate bonds

 

 

66,522

 

 

 

64

 

 

 

(174

)

 

 

66,412

 

Municipal fixed-rate bonds

 

 

11,799

 

 

 

12

 

 

 

(37

)

 

 

11,774

 

Asset-backed bonds

 

 

10,201

 

 

 

19

 

 

 

(14

)

 

 

10,206

 

Mortgage/Agency-backed bonds

 

 

13,080

 

 

 

15

 

 

 

(91

)

 

 

13,004

 

U.S. government bonds

 

 

30,022

 

 

 

15

 

 

 

(270

)

 

 

29,767

 

Foreign government bonds

 

 

3,729

 

 

 

2

 

 

 

(1

)

 

 

3,730

 

Variable rate demand notes

 

 

11,855

 

 

 

 

 

 

 

 

 

11,855

 

Marketable equity securities

 

 

30,571

 

 

 

311

 

 

 

(1,503

)

 

 

29,379

 

Available-for-sale securities held at fair value

 

$

190,146