ADTRAN INC, 10-Q filed on 11/8/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 20, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
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
 
48,398,164 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current Assets
 
 
Cash and cash equivalents
$ 66,292 
$ 84,550 
Short-term investments
55,516 
34,396 
Accounts receivable, less allowance for doubtful accounts of $- at September 30, 2016 and $19 at December 31, 2015
101,822 
71,917 
Other receivables
12,159 
19,321 
Income tax receivable, net
540 
 
Inventory, net
96,034 
91,533 
Prepaid expenses and other current assets
14,477 
10,145 
Deferred tax assets, net
17,963 
18,924 
Total Current Assets
364,803 
330,786 
Property, plant and equipment, net
78,078 
73,233 
Deferred tax assets, net
17,263 
18,091 
Goodwill
3,492 
3,492 
Other assets
13,548 
9,276 
Long-term investments
178,379 
198,026 
Total Assets
655,563 
632,904 
Current Liabilities
 
 
Accounts payable
67,399 
48,668 
Unearned revenue
15,744 
16,615 
Accrued expenses
16,010 
12,108 
Accrued wages and benefits
16,468 
12,857 
Income tax payable, net
 
2,395 
Total Current Liabilities
115,621 
92,643 
Non-current unearned revenue
7,105 
7,965 
Other non-current liabilities
26,740 
24,236 
Bonds payable
27,900 
27,900 
Total Liabilities
177,366 
152,744 
Commitments and contingencies (see Note 14)
   
   
Stockholders’ Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 48,392 shares outstanding at September 30, 2016 and 79,652 shares issued and 49,558 shares outstanding at December 31, 2015
797 
797 
Additional paid-in capital
251,217 
246,879 
Accumulated other comprehensive loss
(7,826)
(8,969)
Retained earnings
920,395 
906,772 
Less treasury stock at cost: 31,260 and 30,094 shares at September 30, 2016 and December 31, 2015, respectively
(686,386)
(665,319)
Total Stockholders’ Equity
478,197 
480,160 
Total Liabilities and Stockholders’ Equity
$ 655,563 
$ 632,904 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 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
48,392,000 
49,558,000 
Treasury stock, shares
31,260,000 
30,094,000 
Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Sales
 
 
 
 
Products
$ 136,277 
$ 138,120 
$ 398,709 
$ 411,723 
Services
32,613 
19,958 
75,086 
49,328 
Total Sales
168,890 
158,078 
473,795 
461,051 
Cost of sales
 
 
 
 
Products
70,988 
75,969 
202,905 
231,739 
Services
22,094 
11,460 
50,333 
24,854 
Total Cost of Sales
93,082 
87,429 
253,238 
256,593 
Gross Profit
75,808 
70,649 
220,557 
204,458 
Selling, general and administrative expenses
33,716 
30,016 
97,367 
93,203 
Research and development expenses
31,962 
32,561 
92,727 
100,576 
Operating Income
10,130 
8,072 
30,463 
10,679 
Interest and dividend income
910 
839 
2,692 
2,680 
Interest expense
(143)
(151)
(430)
(448)
Net realized investment gain
1,316 
2,060 
4,154 
8,430 
Other income (expense), net
(246)
52 
(378)
(848)
Gain on bargain purchase of a business
3,550 
 
3,550 
 
Income before provision for income taxes
15,517 
10,872 
40,051 
20,493 
Provision for income taxes
(3,102)
(3,805)
(12,394)
(7,565)
Net Income
$ 12,415 
$ 7,067 
$ 27,657 
$ 12,928 
Weighted average shares outstanding – basic
48,470 
49,862 
48,839 
51,682 
Weighted average shares outstanding – diluted
48,678 
49,927 
49,036 
51,792 
Earnings per common share – basic
$ 0.26 
$ 0.14 
$ 0.57 
$ 0.25 
Earnings per common share – diluted
$ 0.26 
$ 0.14 
$ 0.56 
$ 0.25 
Dividend per share
$ 0.09 
$ 0.09 
$ 0.27 
$ 0.27 
Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 12,415 
$ 7,067 
$ 27,657 
$ 12,928 
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Net unrealized losses on available-for-sale securities
258 
(4,291)
(162)
(6,577)
Defined benefit plan adjustments
36 
71 
103 
211 
Foreign currency translation
575 
(1,351)
1,202 
(3,797)
Other Comprehensive Income (Loss), net of tax
869 
(5,571)
1,143 
(10,163)
Comprehensive Income, net of tax
$ 13,284 
$ 1,496 
$ 28,800 
$ 2,765 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities:
 
 
Net income
$ 27,657 
$ 12,928 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
10,260 
10,765 
Amortization of net premium on available-for-sale investments
489 
2,085 
Net realized investment gain
(4,154)
(8,430)
Net loss on disposal of property, plant and equipment
21 
189 
Gain on bargain purchase of a business
(3,550)
 
Stock-based compensation expense
4,601 
4,788 
Deferred income taxes
(447)
(2,332)
Tax benefit from stock option exercises
(16)
(40)
Excess tax benefits from stock-based compensation arrangements
 
(3)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(29,370)
843 
Other receivables
7,475 
10,532 
Inventory
(683)
(14,945)
Prepaid expenses and other assets
(5,180)
(1,665)
Accounts payable
16,363 
13,687 
Accrued expenses and other liabilities
7,307 
(3,996)
Income tax payable/receivable, net
(2,941)
(1,137)
Net cash provided by operating activities
27,832 
23,269 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(12,684)
(7,843)
Proceeds from disposals of property, plant and equipment
 
122 
Proceeds from sales and maturities of available-for-sale investments
141,103 
189,728 
Purchases of available-for-sale investments
(139,181)
(113,227)
Acquisition of business
(943)
 
Net cash provided by (used in) investing activities
(11,705)
68,780 
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
1,076 
907 
Purchases of treasury stock
(22,917)
(65,808)
Dividend payments
(13,230)
(13,989)
Excess tax benefits from stock-based compensation arrangements
 
Net cash used in financing activities
(35,071)
(78,887)
Net increase (decrease) in cash and cash equivalents
(18,944)
13,162 
Effect of exchange rate changes
686 
(2,914)
Cash and cash equivalents, beginning of period
84,550 
73,439 
Cash and cash equivalents, end of period
66,292 
83,687 
Supplemental disclosure of non-cash investing activities:
 
 
Purchases of property, plant and equipment included in accounts payable
$ 1,174 
$ 1,303 
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, 2015 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

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

Use of Estimates

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

Business Combinations
Business Combinations

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 $3.6 million, net of income taxes, subject to customary working capital adjustments between the parties. The bargain purchase gain of $3.6 million represents the excess fair value of the net assets acquired over the consideration exchanged. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and pro forma data for future periods and have concluded that our valuation procedures and resulting measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2016 Consolidated Statements of Income.

 

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

 

(In Thousands)

 

 

 

Assets

 

 

 

  Inventory

 

3,272

 

  Property, plant and equipment

 

352

 

  Intangible assets

 

4,700

 

Total assets acquired

 

8,324

 

 

 

 

 

Liabilities

 

 

 

  Accounts payable

 

(1,378

)

  Warranty payable

 

(61

)

  Accrued wages and benefits

 

(122

)

  Deferred income taxes

 

(2,270

)

Total liabilities assumed

 

(3,831

)

 

 

 

 

Total net assets

 

4,493

 

  Gain on bargain purchase of a business, net of tax

 

(3,550

)

Total purchase price

$

943

 

 

The details of the acquired intangible assets are as follows:

 

In thousands

Value

 

 

Life (years)

Supply agreement

$

1,400

 

 

0.8

Customer relationships

 

1,200

 

 

6

Developed technology

 

800

 

 

10

License

 

500

 

 

1.3

Patent

 

500

 

 

7.3

Non-compete

 

200

 

 

2.3

Trade name

 

100

 

 

2

Total

$

4,700

 

 

 

 

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

 

 

September 13 to

 

(In thousands)

September 30, 2016

 

Revenue

$

1,291

 

Pre-tax loss

$

(70

)

 

 

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Pro forma revenue

 

$

170,498

 

 

$

159,375

 

 

$

478,184

 

 

$

463,916

 

Pro forma pre-tax income

 

$

11,778

 

 

$

10,294

 

 

$

35,771

 

 

$

21,826

 

 

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

Income Taxes
Income Taxes

3. INCOME TAXES

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

Pension Benefit Plan
Pension Benefit Plan

 

4. PENSION BENEFIT PLAN

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Service cost

 

$

305

 

 

$

328

 

 

$

912

 

 

$

992

 

Interest cost

 

 

182

 

 

 

153

 

 

 

542

 

 

 

464

 

Expected return on plan assets

 

 

(266

)

 

 

(252

)

 

 

(796

)

 

 

(763

)

Amortization of actuarial losses

 

 

44

 

 

 

102

 

 

 

132

 

 

 

307

 

Net periodic pension cost

 

$

265

 

 

$

331

 

 

$

790

 

 

$

1,000

 

 

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, 2016 and 2015, which was recognized as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock-based compensation expense included in cost of

   sales

 

$

88

 

 

$

59

 

 

$

282

 

 

$

202

 

Selling, general and administrative expense

 

 

765

 

 

 

812

 

 

 

2,322

 

 

 

2,226

 

Research and development expense

 

 

639

 

 

 

803

 

 

 

1,997

 

 

 

2,360

 

Stock-based compensation expense included in operating

   expenses

 

 

1,404

 

 

 

1,615

 

 

 

4,319

 

 

 

4,586

 

Total stock-based compensation expense

 

 

1,492

 

 

 

1,674

 

 

 

4,601

 

 

 

4,788

 

Tax benefit for expense associated with non-qualified

   options

 

 

(218

)

 

 

(218

)

 

 

(643

)

 

 

(620

)

Total stock-based compensation expense, net of tax

 

$

1,274

 

 

$

1,456

 

 

$

3,958

 

 

$

4,168

 

 

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected volatility

 

 

34.55

%

 

 

34.80

%

 

 

34.66

%

 

 

36.24

%

Risk-free interest rate

 

 

1.20

%

 

 

1.84

%

 

 

1.28

%

 

 

1.70

%

Expected dividend yield

 

 

1.83

%

 

 

2.13

%

 

 

1.88

%

 

 

1.94

%

Expected life (in years)

 

 

6.21

 

 

 

6.24

 

 

 

6.24

 

 

 

6.32

 

Weighted-average estimated value

 

$

5.64

 

 

$

4.89

 

 

$

5.50

 

 

$

5.89

 

 

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

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

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

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

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

 

(In thousands, except per share amounts)

 

Number of

Options

 

 

Weighted Avg.

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual

Life In Years

 

 

Aggregate

Intrinsic Value

 

Options outstanding, December 31, 2015

 

 

7,108

 

 

$

21.97

 

 

 

6.42

 

 

$

3,284

 

Options granted

 

 

2

 

 

$

19.19

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(65

)

 

$

16.49

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(78

)

 

$

17.93

 

 

 

 

 

 

 

 

 

Options expired

 

 

(142

)

 

$

25.49

 

 

 

 

 

 

 

 

 

Options outstanding, September 30, 2016

 

 

6,825

 

 

$

22.01

 

 

 

5.69

 

 

$

7,675

 

Options vested and expected to vest, September 30, 2016

 

 

6,729

 

 

$

22.09

 

 

 

5.65

 

 

$

7,414

 

Options exercisable, September 30, 2016

 

 

4,322

 

 

$

24.40

 

 

 

4.19

 

 

$

2,719

 

 

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

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

Investments
Investments

6. INVESTMENTS

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

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,656

 

 

$

2,172

 

 

$

(20

)

 

$

13,808

 

Corporate bonds

 

 

59,900

 

 

 

136

 

 

 

(50

)

 

 

59,986

 

Municipal fixed-rate bonds

 

 

17,589

 

 

 

54

 

 

 

(4

)

 

 

17,639

 

Asset-backed bonds

 

 

22,564

 

 

 

72

 

 

 

(23

)

 

 

22,613

 

Mortgage/Agency-backed bonds

 

 

15,055

 

 

 

24

 

 

 

(43

)

 

 

15,036

 

U.S. government bonds

 

 

28,437

 

 

 

168

 

 

 

-

 

 

 

28,605

 

Foreign government bonds

 

 

6,428

 

 

 

3

 

 

 

(1

)

 

 

6,430

 

Variable rate demand notes

 

 

12,315

 

 

 

-

 

 

 

-

 

 

 

12,315

 

Marketable equity securities

 

 

26,975

 

 

 

1,468

 

 

 

(1,076

)

 

 

27,367

 

Available-for-sale securities held at fair value

 

$

200,919

 

 

$

4,097

 

 

$

(1,217

)

 

$

203,799

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,900

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,196

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

233,895

 

 

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

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,325

 

 

$

1,575

 

 

$

(66

)

 

$

12,834

 

Corporate bonds

 

 

58,328

 

 

 

20

 

 

 

(734

)

 

 

57,614

 

Municipal fixed-rate bonds

 

 

26,414

 

 

 

28

 

 

 

(18

)

 

 

26,424

 

Asset-backed bonds

 

 

19,281

 

 

 

2

 

 

 

(44

)

 

 

19,239

 

Mortgage/Agency-backed bonds

 

 

15,463

 

 

 

1

 

 

 

(91

)

 

 

15,373

 

U.S. Government bonds

 

 

35,646

 

 

 

-

 

 

 

(248

)

 

 

35,398

 

Marketable equity securities

 

 

31,643

 

 

 

4,301

 

 

 

(1,693

)

 

 

34,251

 

Available-for-sale securities held at fair value

 

$

198,100

 

 

$

5,927

 

 

$

(2,894

)

 

$

201,133

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,289

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

232,422

 

 

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

 

(In thousands)

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-

backed

bonds

 

 

Mortgage /

Agency-

backed bonds

 

 

U.S. government

bonds

 

 

Foreign government bonds

 

Less than one year

 

$

22,993

 

 

$

12,156

 

 

$

-

 

 

$

-

 

 

$

2,952

 

 

$

5,100

 

One to two years

 

 

24,504

 

 

 

3,186

 

 

 

1,094

 

 

 

1,385

 

 

 

9,096

 

 

 

1,330

 

Two to three years

 

 

9,296

 

 

 

858

 

 

 

8,989

 

 

 

2,004

 

 

 

4,573

 

 

 

-

 

Three to five years

 

 

3,193

 

 

 

1,439

 

 

 

9,739

 

 

 

-

 

 

 

11,984

 

 

 

-

 

Five to ten years

 

 

-

 

 

 

-

 

 

 

2,614

 

 

 

1,448

 

 

 

-

 

 

 

-

 

More than ten years

 

 

-

 

 

 

-

 

 

 

177

 

 

 

10,199

 

 

 

-

 

 

 

-

 

Total

 

$

59,986

 

 

$

17,639

 

 

$

22,613

 

 

$

15,036

 

 

$

28,605

 

 

$

6,430

 

 

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

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

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

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

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Gross realized gains

 

$

1,346

 

 

$

2,251

 

 

$

5,226

 

 

$

8,856

 

Gross realized losses

 

$

(30

)

 

$

(191

)

 

$

(1,072

)

 

$

(426

)

 

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

 

 

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

 

 

 

Fair Value Measurements at September 30, 2016 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,032

 

 

$

2,032

 

 

$

-

 

 

$

-

 

Commercial Paper

 

 

3,585

 

 

 

-

 

 

 

3,585

 

 

 

-

 

Cash equivalents

 

 

5,617

 

 

 

2,032

 

 

 

3,585

 

 

 

-

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

13,808

 

 

 

13,808

 

 

 

-

 

 

 

-

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

59,986

 

 

 

-

 

 

 

59,986

 

 

 

-

 

Municipal fixed-rate bonds

 

 

17,639

 

 

 

-

 

 

 

17,639

 

 

 

-

 

Asset-backed bonds

 

 

22,613

 

 

 

-

 

 

 

22,613

 

 

 

-

 

Mortgage/Agency-backed bonds

 

 

15,036

 

 

 

-

 

 

 

15,036

 

 

 

-

 

U.S. government bonds

 

 

28,605

 

 

 

28,605

 

 

 

-

 

 

 

-

 

Foreign government bonds

 

 

6,430

 

 

 

-

 

 

 

6,430

 

 

 

-

 

Variable rate demand notes

 

 

12,315

 

 

 

-

 

 

 

12,315

 

 

 

-

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – technology industry

 

 

3,693

 

 

 

3,693

 

 

 

-

 

 

 

-

 

Marketable equity securities – other

 

 

23,674

 

 

 

23,674

 

 

 

-

 

 

 

-

 

Available-for-sale securities

 

 

203,799

 

 

 

69,780

 

 

 

134,019

 

 

 

-

 

Total

 

$

209,416

 

 

$

71,812

 

 

$

137,604

 

 

$

-

 

 

 

 

Fair Value Measurements at December 31, 2015 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,271

 

 

$

1,271

 

 

$

-

 

 

$

-

 

Commercial Paper

 

 

11,696

 

 

 

-

 

 

 

11,696

 

 

 

-

 

Cash equivalents

 

 

12,967

 

 

 

1,271

 

 

 

11,696

 

 

 

-

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

12,834

 

 

 

12,834

 

 

 

-

 

 

 

-

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

57,614

 

 

 

-

 

 

 

57,614

 

 

 

-

 

Municipal fixed-rate bonds

 

 

26,424

 

 

 

-

 

 

 

26,424

 

 

 

-

 

Asset-backed bonds

 

 

19,239

 

 

 

-

 

 

 

19,239

 

 

 

-

 

Mortgage/Agency-backed bonds

 

 

15,373

 

 

 

-

 

 

 

15,373

 

 

 

-

 

U.S. government bonds

 

 

35,398

 

 

 

35,398

 

 

 

-

 

 

 

-

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – technology industry

 

 

5,384

 

 

 

5,384

 

 

 

-

 

 

 

-

 

Marketable equity securities – other

 

 

28,867

 

 

 

28,867

 

 

 

-

 

 

 

-

 

Available-for-sale securities

 

 

201,133

 

 

 

82,483

 

 

 

118,650

 

 

 

-

 

Total

 

$

214,100

 

 

$

83,754

 

 

$

130,346

 

 

$

-

 

The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are obtained from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.

 

Our variable rate demand notes have a structure that implies a standard expected market price. The frequent interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.

 

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as these are remeasured to the functional currency through profit and loss. When appropriate, we enter into various derivative transactions to enhance our ability to manage the volatility relating to these typical business exposures. We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments do not qualify for hedge accounting, and accordingly, all changes in the fair value of the instruments are recognized as other income (expense) in the Consolidated Statements of Income. Our derivative instruments are not subject to master netting arrangements and are not offset in the Consolidated Balance Sheets.

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

 

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

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Income Statement

 

September 30,