ADTRAN INC, 10-Q filed on 11/3/2011
Quarterly Report
Document and Entity Information (USD $)
9 Months Ended
Sep. 30, 2011
Oct. 20, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
ADTRAN INC 
 
 
Entity Central Index Key
0000926282 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Sep. 30, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q3 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1,693,956,687 
Entity Common Stock, Shares Outstanding
 
63,655,957 
 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Current Assets
 
 
Cash and cash equivalents
$ 32,526 
$ 31,677 
Short-term investments
121,389 
157,479 
Accounts receivable, less allowance for doubtful accounts of $4 and $162 at September 30, 2011 and December 31, 2010, respectively
89,631 
70,893 
Other receivables
12,487 
3,962 
Income tax receivable, net
2,741 
Inventory
87,313 
74,274 
Prepaid expenses
3,337 
3,270 
Deferred tax assets, net
12,247 
10,617 
Total Current Assets
358,930 
354,913 
Property, plant and equipment, net
75,698 
73,986 
Deferred tax assets, net
5,918 
Goodwill
4,445 
Other assets
8,201 
1,915 
Long-term investments
348,103 
261,160 
Total Assets
801,295 
691,974 
Current Liabilities
 
 
Accounts payable
33,150 
22,785 
Unearned revenue
18,708 
10,138 
Accrued expenses
6,703 
4,913 
Accrued wages and benefits
14,753 
12,125 
Income tax payable, net
1,916 
Total Current Liabilities
75,230 
49,961 
Deferred tax liabilities, net
10,350 
Other non-current liabilities
14,853 
11,841 
Bonds payable
46,500 
47,500 
Total Liabilities
136,583 
119,652 
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 63,655 shares outstanding at September 30, 2011 and 79,652 shares issued and 63,010 shares outstanding at December 31, 2010
797 
797 
Additional paid-in capital
210,779 
193,866 
Accumulated other comprehensive income
13,975 
26,948 
Retained earnings
815,730 
731,962 
Less treasury stock at cost: 15,997 and 16,642 shares at September 30, 2011 and December 31, 2010, respectively
(376,569)
(381,251)
Total Stockholders' Equity
664,712 
572,322 
Total Liabilities and Stockholders' Equity
$ 801,295 
$ 691,974 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Per Share data
Sep. 30, 2011
Dec. 31, 2010
Current Assets
 
 
Allowance for doubtful accounts
$ 4 
$ 162 
Stockholders' Equity
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000 
200,000 
Common stock, shares issued
79,652 
79,652 
Common stock, shares outstanding
63,655 
63,010 
Treasury stock, shares
15,997 
16,642 
Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Consolidated Statements of Income [Abstract]
 
 
 
 
Sales
$ 192,194 
$ 162,957 
$ 541,943 
$ 440,345 
Cost of sales
82,718 
65,658 
226,845 
178,389 
Gross Profit
109,476 
97,299 
315,098 
261,956 
Selling, general and administrative expenses
31,475 
29,452 
91,925 
85,111 
Research and development expenses
26,894 
22,802 
75,150 
67,838 
Operating Income
51,107 
45,045 
148,023 
109,007 
Interest and dividend income
2,037 
1,622 
5,829 
4,803 
Interest expense
(599)
(630)
(1,795)
(1,828)
Net realized investment gain
2,982 
3,399 
9,121 
8,055 
Other expense, net
(155)
(266)
(397)
(641)
Income before provision for income taxes
55,372 
49,170 
160,781 
119,396 
Provision for income taxes
(19,159)
(17,086)
(53,367)
(41,367)
Net Income
$ 36,213 
$ 32,084 
$ 107,414 
$ 78,029 
Weighted average shares outstanding - basic
64,023 
62,771 
64,300 
62,316 
Weighted average shares outstanding - diluted
64,961 
64,300 
65,697 
63,638 
Earnings per common share - basic
$ 0.57 
$ 0.51 
$ 1.67 
$ 1.25 
Earnings per common share - diluted
$ 0.56 
$ 0.50 
$ 1.63 
$ 1.23 
Dividends per share
$ 0.09 
$ 0.09 
$ 0.27 
$ 0.27 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
9 Months Ended
Sep. 30,
2011
2010
Cash flows from operating activities:
 
 
Net income
$ 107,414 
$ 78,029 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
8,435 
7,842 
Amortization of net premium on available-for-sale investments
4,697 
3,267 
Net realized gain on long-term investments
(9,121)
(8,055)
Net loss on disposal of property, plant and equipment
14 
Stock-based compensation expense
6,455 
5,227 
Deferred income taxes
128 
(1,624)
Tax benefit from stock option exercises
10,457 
4,459 
Excess tax benefits from stock-based compensation arrangements
(9,311)
(3,986)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(18,440)
(1,351)
Other receivables
(8,525)
(3,256)
Income tax receivable, net
2,741 
 
Inventory
(12,247)
(24,278)
Prepaid expenses and other assets
207 
(829)
Accounts payable
8,924 
1,188 
Accrued expenses and other liabilities
15,047 
7,525 
Income tax payable, net
1,916 
(1,121)
Net cash provided by operating activities
108,791 
63,046 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(9,531)
(7,375)
Proceeds from sales and maturities of available-for-sale investments
378,288 
221,173 
Purchases of available-for-sale investments
(443,275)
(272,383)
Acquisition of business, net of cash acquired
(22,762)
 
Net cash used in investing activities
(97,280)
(58,585)
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
33,631 
19,769 
Purchases of treasury stock
(35,178)
(10,330)
Dividend payments
(17,395)
(16,822)
Excess tax benefits from stock-based compensation arrangements
9,311 
3,986 
Net cash used in financing activities
(9,631)
(3,397)
Net increase in cash and cash equivalents
1,880 
1,064 
Effect of exchange rate changes
(1,031)
863 
Cash and cash equivalents, beginning of period
31,677 
24,135 
Cash and cash equivalents, end of period
$ 32,526 
$ 26,062 
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, 2010 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on February 25, 2011 with the SEC.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, estimated income tax contingencies, the fair value of stock-based compensation, 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 September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (ASU 2011-08). Existing accounting guidance requires that an entity perform a test for goodwill impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the fourth quarter. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-05 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.
During the nine months ended September 30, 2011, we adopted the following accounting standards, which had no material effect on our consolidated results of operations or financial condition:
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the criteria in Subtopic 605-25 of the ASC for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements are separated in more circumstances than under previously existing U.S. GAAP. ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable and replaced the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. ASU 2009 -13 also eliminated the residual method of allocation and required that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and required that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.
We generally sell our products and services separately, but in some circumstances products and services may be sold in bundles that contain multiple deliverables. A sale that includes multiple deliverables is evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to 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 cases, estimated selling price is determined based on the particular circumstances of the arrangement and is used to allocate revenues to each unit of accounting. Revenue is recognized incrementally as the necessary criteria for each item is met.
We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three or nine months ended September 30, 2011.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that Include Software Arrangements. ASU 2009-14 changed the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, ASU 2009-14 requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, ASU 2009-14 provides additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. ASU 2009-14 also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. ASU 2009-14 also provides further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three or nine months ended September 30, 2011.
Business Combinations
BUSINESS COMBINATIONS
2. BUSINESS COMBINATIONS
On August 4, 2011, we acquired all of the outstanding stock of Bluesocket, Inc., a provider of wireless network solutions with virtual control, for $23.8 million in cash. The acquisition provides us with IEEE802.11N enterprise class wireless LAN expertise, technology, and products to address the growing transition within small-medium enterprises and large enterprises to wireless networks and mobile devices. We have included the financial results of Bluesocket in our consolidated financial statements since the date of acquisition. Pro forma results of operations for the acquisition have not been presented because the effect of the acquisition was not material to our financial results. The preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date is as follows:
         
(In Thousands)        
 
       
Cash
  $ 1,027  
Accounts receivable
    297  
Inventory
    792  
Prepaid expenses
    357  
Property, plant and equipment
    173  
Deferred tax assets, net
    11,411  
Accounts payable
    (441 )
Unearned revenue
    (600 )
Accrued expenses
    (332 )
 
     
Net assets acquired
    12,684  
 
       
Customer relationships
    1,700  
Developed technology
    3,590  
Intellectual property
    1,070  
Trade names
    300  
Goodwill
    4,445  
 
     
Total purchase price
  $ 23,789  
 
     
The net deferred tax assets acquired are primarily related to net operating losses and previously capitalized and unamortized research and development expense for tax deduction purposes.
The fair value of the customer relationships, developed technology and intellectual property acquired was calculated using an income approach (excess earnings method) and is being amortized using the straight-line method. The customer relationships and intellectual property are being amortized over an estimated useful life of 7 years and the developed technology is being amortized over an average estimated useful life of 4.5 years.
The fair value of the trade names acquired was calculated using an income approach (relief from royalty method) and is being amortized using the straight-line method over the estimate useful life of 4.5 years.
The goodwill of $4.4 million generated from this acquisition is primarily related to expected synergies and was assigned to our Enterprise Networks division. We are evaluating the tax treatment options associated with this transaction. Currently, we do not believe any of the goodwill will be deductible for U.S. federal income tax purposes.
During the three months ended September 30, 2011, we incurred acquisition related expenses and amortization of acquired intangibles of $1.0 million related to this acquisition.
Income Taxes
INCOME TAXES
3. INCOME TAXES
Our effective tax rate for the nine months ended September 30, 2011 was 33.2%. The difference between our effective tax rate and the federal statutory rate for the nine months ended September 30, 2011 is primarily attributable to a benefit for the research tax credit of 2.2 percentage points and a benefit for the manufacturer’s domestic production activities deduction of 2.0 percentage points, partially offset by state income tax provisions of 2.3 percentage points.
Our effective tax rate for the nine months ended September 30, 2010 was 34.6%. The difference between our effective tax rate and the federal statutory rate for the nine months ended September 30, 2010 is primarily attributable to a benefit for the manufacturer’s domestic production activities deduction of 2.5 percentage points, partially offset by state income tax provisions of 2.4 percentage points. The tax provision for the nine months ended September 30, 2010 did not include the benefit of the research tax credit, which expired on December 31, 2009. The credit was reinstated during the fourth quarter of 2010.
Stock-Based Compensation
STOCK-BASED COMPENSATION
4. STOCK-BASED COMPENSATION
The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB Accounting Standards Codification (ASC) for the three and nine months ended September 30, 2011 and 2010, which was recognized as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
 
                               
Stock-based compensation expense included in cost of sales
  $ 100     $ 69     $ 280     $ 210  
 
                       
Selling, general and administrative expense
    1,090       775       3,096       2,360  
Research and development expense
    1,100       886       3,079       2,657  
 
                       
Stock-based compensation expense included in operating expenses
    2,190       1,661       6,175       5,017  
 
                       
 
Total stock-based compensation expense
    2,290       1,730       6,455       5,227  
Tax benefit for expense associated with non-qualified options
    (302 )     (43 )     (1,018 )     (415 )
 
                       
Total stock-based compensation expense, net of tax
  $ 1,988     $ 1,687     $ 5,437     $ 4,812  
 
                       
The fair value of our stock options was estimated using the Black-Scholes model. The determination of the fair value of stock options on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.
The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2011 and 2010 are summarized as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Expected volatility
    38.31 %     39.75 %     38.31 %     40.92 %
Risk-free interest rate
    1.00 %     1.98 %     1.00 %     2.47 %
Expected dividend yield
    1.19 %     1.27 %     1.19 %     1.51 %
Expected life (in years)
    5.14       5.38       5.14       5.19  
Weighted-average estimated value
  $ 9.52     $ 9.72     $ 9.54     $ 8.29  
The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. There were no RSU grants during the nine months ended September 30, 2011 or 2010.
The fair value of restricted stock is equal to the closing price of our stock on the date of grant. There were no restricted stock grants during the nine months ended September 30, 2011 or 2010.
Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based upon historical experience and approximate 2.0% 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, 2011, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $23.0 million, which is expected to be recognized over an average remaining recognition period of 3.1 years.
The following table is a summary of our stock options outstanding as of December 31, 2010 and September 30, 2011 and the changes that occurred during the nine months ended September 30, 2011:
                                 
                    Weighted Avg.        
                    Remaining     Aggregate  
    Number of     Weighted Avg.     Contractual     Intrinsic  
(In thousands, except per share amounts)   Options     Exercise Price     Life In Years     Value  
Options outstanding, December 31, 2010
    6,234     $ 23.09       6.21     $ 81,561  
Options granted
    992     $ 30.47                  
Options cancelled/forfeited
    (58 )   $ 26.61                  
Options exercised
    (1,752 )   $ 19.36                  
 
                       
Options outstanding, September 30, 2011
    5,416     $ 25.61       7.01     $ 24,647  
 
                       
Options exercisable, September 30, 2011
    2,221     $ 23.30       4.63     $ 13,700  
 
                       
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2011. The aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.
The total pre-tax intrinsic value of options exercised during the three and nine month periods ended September 30, 2011 was $0.5 million and $39.5 million, respectively.
The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2010 and September 30, 2011 and the changes that occurred during the nine months ended September 30, 2011:
                 
            Weighted  
            Average  
    Number of     Grant Date  
(In thousands, except per share amounts)   Shares     Fair Value  
RSUs and restricted stock outstanding, December 31, 2010
    87     $ 28.46  
RSUs and restricted stock granted
        $  
RSUs and restricted stock vested
        $  
RSUs and restricted stock cancelled/forfeited
        $  
 
           
Unvested RSUs and restricted stock, September 30, 2011
    87     $ 28.46  
 
           
Investments
INVESTMENTS
5. INVESTMENTS
At September 30, 2011, 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
  $ 6,636     $ 113     $ (635 )   $ 6,114  
Corporate bonds
    178,560       316       (2,219 )     176,657  
Municipal fixed-rate bonds
    140,405       578       (37 )     140,946  
Municipal variable rate demand notes
    60,705                   60,705  
Fixed income bond fund
    526       165             691  
Marketable equity securities
    12,662       22,391       (1,076 )     33,977  
 
                       
Available-for-sale securities held at fair value
  $ 399,494     $ 23,563     $ (3,967 )   $ 419,090  
 
                         
Restricted investment held at cost
                            48,250  
Other investments held at cost
                            2,152  
 
                             
Total carrying value of available-for-sale investments
                          $ 469,492  
 
                             
At December 31, 2010, 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
  $ 3,483     $ 770     $ (7 )   $ 4,246  
Corporate bonds
    126,671       630       (229 )     127,072  
Municipal fixed-rate bonds
    71,212       268       (13 )     71,467  
Municipal variable rate demand notes
    116,745                   116,745  
Fixed income bond fund
    526       220             746  
Marketable equity securities
    11,486       36,657       (133 )     48,010  
 
                       
Available-for-sale securities held at fair value
  $ 330,123     $ 38,545     $ (382 )   $ 368,286  
 
                         
Restricted investment held at cost
                            48,250  
Other investments held at cost
                            2,103  
 
                             
Total carrying value of available-for-sale investments
                          $ 418,639  
 
                             
At September 30, 2011, we held $6.1 million of deferred compensation plan assets, carried at fair value.
At September 30, 2011, we held $176.7 million of corporate bonds. These bonds are classified as available-for-sale and had an average duration of 0.9 years at September 30, 2011. At September 30, 2011, approximately 1% of our corporate bond portfolio had a credit rating of AAA, 13% had a credit rating of AA, 48% had a credit rating of A, and 38% had a credit rating of BBB. Because our bond portfolio has a high quality rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.
At September 30, 2011, we held $140.9 million of municipal fixed-rate bonds. These bonds are classified as available-for-sale and had an average duration of 1.1 years at September 30, 2011. At September 30, 2011, approximately 16% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 66% had a credit rating of AA, and 18% had a credit rating of A. Because our bond portfolio has a high quality rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.
At September 30, 2011, we held $60.7 million of municipal variable rate demand notes, all of which were classified as available-for-sale. At September 30, 2011, 14% of our municipal variable rate demand notes had a credit rating of AAA, 72% had a credit rating of AA, 14% had a credit rating of A, and all contained put options of seven days. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these securities and we believe that we have the ability to quickly liquidate them. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We believe we have the ability to sell our variable rate demand notes 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. At September 30, 2011, approximately 40% of our variable rate demand notes were supported by letters of credit from banks that we believe to be in good financial condition. The remaining 60% of our variable rate demand notes were supported by standby purchase agreements. As a result of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments. All income generated from these investments was recorded as interest income. We have not recorded any losses relating to municipal variable rate demand notes.
At September 30, 2011, we held $0.7 million of a fixed income bond fund.
At September 30, 2011, we held $34.0 million of marketable equity securities, including a single security, of which we held 1.2 million shares, carried at a fair value of $21.3 million. We sold 0.3 million shares of this security during the nine months ended September 30, 2011. The sale of this security resulted in proceeds of $6.1 million and a realized gain of $6.0 million. This single security traded an average of approximately 0.9 million shares per day in the first nine months of 2011 in an active market on a European stock exchange. This single security comprises $20.9 million of the gross unrealized gains included in the fair value of our marketable equity securities at September 30, 2011. The remaining $1.5 million of gross unrealized gains and $1.1 million of gross unrealized losses at September 30, 2011 were spread amongst more than 400 equity securities.
At September 30, 2011, we held a $48.3 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond). At September 30, 2011, the estimated fair value of the Bond was approximately $48.3 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of A+. 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. For more information on the Bond, see “Debt” under “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report.
At September 30, 2011, we held $2.2 million of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer. The fair value of these investments was estimated to be approximately $10.4 million at September 30, 2011, based on unobservable inputs including information supplied by the company and the fund managers. We have committed to invest up to an aggregate of $7.9 million in the two private equity funds, and we have contributed $8.4 million as of September 30, 2011, of which $7.7 million has been applied toward these commitments. As of September 30, 2011, we have received distributions related to these two private equity funds of $8.5 million, of which $2.0 million was recorded as investment income. These investments are carried at cost, net of distributions, with distributions in excess of our investment recorded as investment income. The remaining commitment under the funds is $0.2 million, which expires in 2013. We have not been required to record any impairment losses related to these investments during the nine months ended September 30, 2011.
We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. As a result of our review, we recorded an other-than-temporary impairment charge of $32 thousand during the nine months ended September 30, 2011 related to seven marketable equity securities. For the nine months ended September 30, 2010, we recorded an other-than-temporary impairment charge of $43 thousand related to five marketable equity securities.
In accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC, we have categorized our cash equivalents held in money market funds and our investments held at fair value into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique for the cash equivalents and investments as follows: Level 1 — Values based on unadjusted quoted prices for identical assets or liabilities in an active market; Level 2 — Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3 — Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees.
                                 
    Fair Value Measurements at September 30, 2011 Using  
            Quoted Prices              
            in Active     Significant        
            Market for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
(In thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
Cash equivalents
                               
Money market funds
  $ 7,898     $ 7,898     $     $  
 
                       
 
                               
Available-for-sale securities
                               
Deferred compensation plan assets
    6,114       6,114              
Available-for-sale debt securities
                               
Corporate bonds
    176,657             176,657        
Municipal fixed-rate bonds
    140,946             140,946        
Municipal variable rate demand notes
    60,705             60,705        
Fixed income bond fund
    691       691              
Available-for-sale marketable equity securities
                               
Equity securities — technology industry
    22,701       22,701              
Equity securities — other
    11,276       11,276              
 
                       
Available-for-sale securities
    419,090       40,782       378,308        
 
                       
Total
  $ 426,988     $ 48,680     $ 378,308     $  
 
                       
                                 
    Fair Value Measurements at December 31, 2010 Using  
            Quoted Prices              
            in Active     Significant        
            Market for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
(In thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
Cash equivalents
                               
Money market funds
  $ 14,532     $ 14,532     $     $  
 
                       
 
                               
Available-for-sale securities
                               
Deferred compensation plan assets
    4,246       4,246              
Available-for-sale debt securities
                               
Corporate bonds
    127,072             127,072        
Municipal fixed-rate bonds
    71,467             71,467        
Municipal variable rate demand notes
    116,745             116,745        
Fixed income bond fund
    746       746              
Available-for-sale marketable equity securities
                               
Equity securities — technology industry
    35,596       35,596              
Equity securities — other
    12,414       12,414              
 
                       
Available-for-sale securities
    368,286       53,002       315,284        
 
                       
Total
  $ 382,818     $ 67,534     $ 315,284     $  
 
                       
As of September 30, 2011 and December 31, 2010, the fair value of the investments in available-for-sale Level 2 corporate bonds and municipal fixed-rate bonds was $317.6 million and $198.5 million, respectively. The fair value of these 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.
As of September 30, 2011 and December 31, 2010, the fair value of the investments in available-for-sale Level 2 municipal variable rate demand notes was $60.7 million and $116.7 million, respectively. These securities have a structure that implies a standard expected market price. The frequent interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.
Inventory
INVENTORY
6. INVENTORY
At September 30, 2011 and December 31, 2010, inventory consisted of the following:
                 
    September 30,     December 31,  
(In thousands)   2011     2010  
Raw materials
  $ 43,938     $ 43,897  
Work in process
    4,806       2,871  
Finished goods
    38,569       27,506  
 
           
Total
  $ 87,313     $ 74,274  
 
           
We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At September 30, 2011 and December 31, 2010, raw materials reserves totaled $8.1 million and $7.3 million, respectively, and finished goods inventory reserves totaled $2.1 million and $1.6 million, respectively.
Goodwill and Intangible Assets
GOODWILL AND INTANGIBLE ASSETS
7. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill included in our Enterprise Networks division for the nine months ended September 30, 2011 are as follows:
         
(In thousands)        
Balance, December 31, 2010
  $  
Acquisitions
    4,445  
Impairment losses
     
 
     
Balance, September 30, 2011
  $ 4,445  
 
     
 
       
Balance as of September 30, 2011:
       
Goodwill
  $ 4,445  
Accumulated impairment losses
     
 
     
Total goodwill
  $ 4,445  
 
     
We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured.
The following table presents our intangible assets as of September 30, 2011 and December 31, 2010. Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangibles acquired with our acquisition of Objectworld Communications Corporation on September 15, 2009 and Bluesocket, Inc. on August 4, 2011.
                                                 
    September 30, 2011     December 31, 2010  
    Gross     Accumulated             Gross     Accumulated        
(In thousands)   Value     Amortization     Net Value     Value     Amortization     Net Value  
Customer relationships
  $ 1,793     $ 133     $ 1,660     $ 93     $ 60     $ 33  
Developed technology
    3,590       121       3,469                    
Intellectual property
    2,480       437       2,043       1,410       260       1,150  
Trade names
    300       11       289                    
 
                                   
Total
  $ 8,163     $ 702     $ 7,461     $ 1,503     $ 320     $ 1,183  
 
                                   
Amortization expense was $0.3 million and $0.4 million for the three and nine months ended September 30, 2011, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2010, respectively.
As of September 30, 2011, the estimated future amortization expense of intangible assets is as follows:
         
(In thousands)   Amount  
Remainder of 2011
  $ 347  
2012
    1,389  
2013
    1,389  
2014
    1,228  
2015
    1,117  
2016 and thereafter
    1,991  
 
     
Total
  $ 7,461  
 
     
Stockholders' Equity
STOCKHOLDERS' EQUITY
8. STOCKHOLDERS’ EQUITY
A summary of the changes in stockholders’ equity for the nine months ended September 30, 2011 is as follows:
         
    Stockholders’  
(In thousands)   Equity  
Balance, December 31, 2010
  $ 572,322  
Net income
    107,414  
Dividend payments
    (17,395 )
Dividends accrued for unvested restricted stock units
    (22 )
Net change in unrealized gains (losses) on marketable securities (net of deferred taxes)
    (11,259 )
Reclassification adjustment for amounts included in net income (net of deferred taxes)
    (682 )
Foreign currency translation adjustment
    (1,031 )
Proceeds from stock option exercises
    33,631  
Tax benefits from stock option exercises
    10,457  
Stock-based compensation expense
    6,455  
Purchases of treasury stock
    (35,178 )
 
     
Balance, September 30, 2011
  $ 664,712  
 
     
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 30 million shares of our common stock. During the nine months ended September 30, 2011, we repurchased 1.1 million shares of our common stock at an average price of $31.98 per share. We have the authority to purchase an additional 0.9 million shares of our common stock under the plan approved by the Board of Directors on April 14, 2008.
On October 11, 2011, we announced that our Board of Directors had authorized the repurchase of an additional 5.0 million shares of our common stock to commence upon completion of the repurchase plan announced on April 14, 2008. Upon completion of the current plan, under which we have the remaining authority to purchase 0.9 million shares, the new plan to repurchase 5.0 million shares will be implemented through open market or private purchases from time to time as conditions warrant.
Stock Option Exercises
We issued 1.8 million shares of treasury stock during the nine months ended September 30, 2011 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $10.50 to $36.64. We received proceeds totaling $33.6 million from the exercise of these stock options during the nine months ended September 30, 2011.
Dividend Payments
During the nine months ended September 30, 2011, we paid cash dividends as follows (in thousands except per share amount):
                         
Record Date   Payment Date     Per Share Amount     Total Dividend Paid  
February 3, 2011
  February 17, 2011     $ 0.09     $ 5,775  
April 28, 2011
  May 12, 2011   $ 0.09     $ 5,821  
July 28, 2011
  August 11, 2011   $ 0.09     $ 5,799  
Comprehensive Income
Comprehensive income consists of net income, net change in unrealized gains and losses on marketable securities, reclassification adjustments for amounts included in net income related to impaired securities and foreign currency translation adjustments.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
 
Net income
  $ 36,213     $ 32,084     $ 107,414     $ 78,029  
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax benefit (expense) of $3,533 and $(2,538) for the three months ended September 30, 2011 and 2010, respectively, and $6,235 and $(1,907) for the nine months ended September 30, 2011 and 2010, respectively
    (5,468 )     4,230       (11,259 )     3,174  
Reclassification adjustment for amounts included in net income, net of deferred tax benefit of $195 and $47 for the three months ended September 30, 2011 and 2010, respectively, and $381 and $174 for the nine months ended September 30, 2011 and 2010, respectively
    (287 )     (80 )     (682 )     (292 )
Foreign currency translation adjustment
    (1,487 )     1,465       (1,031 )     863  
 
                       
Total comprehensive income
  $ 28,971     $ 37,699     $ 94,442     $ 81,774  
 
                       
Earnings Per Share
EARNINGS PER SHARE
9. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 is as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands, except per share amounts)   2011     2010     2011     2010  
Numerator
                               
Net income
  $ 36,213     $ 32,084     $ 107,414     $ 78,029  
 
                       
Denominator
                               
Weighted average number of shares — basic
    64,023       62,771       64,300       62,316  
Effect of dilutive securities
                               
Stock options
    882       1,491       1,346       1,286  
Restricted stock and restricted stock units
    56       38       51       36  
 
                       
Weighted average number of shares — diluted
    64,961       64,300       65,697       63,638  
 
                       
 
                               
Net income per share — basic
  $ 0.57     $ 0.51     $ 1.67     $ 1.25  
Net income per share — diluted
  $ 0.56     $ 0.50     $ 1.63     $ 1.23  
Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 1.5 million and 0.5 million for the three months ended September 30, 2011 and 2010, respectively, and 1.0 million and 2.0 million for the nine months ended September 30, 2011 and 2010, respectively.
Segment Information
SEGMENT INFORMATION
10. SEGMENT INFORMATION
We operate in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other expense, net and provision for income taxes are reported on an entity-wide basis only. There are no inter-segment revenues.
The following table presents information about the reported sales and gross profit of our reportable segments for the three and nine months ended September 30, 2011 and 2010. Asset information by reportable segment is not reported, since we do not produce such information internally.
                                 
    Three Months Ended  
    September 30, 2011     September 30, 2010  
(In thousands)   Sales     Gross Profit     Sales     Gross Profit  
Carrier Networks
  $ 152,492     $ 85,944     $ 128,581     $ 77,372  
Enterprise Networks
    39,702       23,532       34,376       19,927  
 
                       
Total
  $ 192,194     $ 109,476     $ 162,957     $ 97,299  
 
                       
                                 
    Nine Months Ended  
    September 30, 2011     September 30, 2010  
(In thousands)   Sales     Gross Profit     Sales     Gross Profit  
Carrier Networks
  $ 435,344     $ 252,908     $ 345,684     $ 206,910  
Enterprise Networks
    106,599       62,190       94,661       55,046  
 
                       
Total
  $ 541,943     $ 315,098     $ 440,345     $ 261,956  
 
                       
Sales by Product
Our three major product categories are Carrier Systems, Business Networking and Loop Access.
Carrier Systems products are used by communications service providers to provide data, voice and video services to consumers and enterprises. The Carrier Systems category includes our broadband access products comprised of Total Access® 5000 multi-service access and aggregation platform products, Total Access 1100/1200 Series Fiber-To-The-Node (FTTN) products, and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access products are used by service providers to deliver high-speed Internet access, Voice over Internet Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from the central office or remote terminal locations to customer premises. The Carrier Systems category also includes our optical access products. These products consist of optical access multiplexers including our family of OPTI products, our family of 8000 series products and our Optical Networking Edge (ONE) products. Optical access products are used to deliver higher bandwidth services, or to aggregate large numbers of low bandwidth services for transportation across fiber optic infrastructure. Total Access 1500 products, 303 concentrator products, M13 multiplexer products, and a number of mobile backhaul products are also included in the Carrier Systems product category.
Business Networking products provide access to telecommunication services, facilitating the delivery of converged services and Unified Communications to the small and mid-sized enterprises (SME) market. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network Terminals (ONTs), Virtual Wireless LAN products and NetVanta product lines. NetVanta products include multi-service routers, managed Ethernet switches, IP Private Branch Exchange (PBX) products, IP phone products, Unified Communications solutions, Unified Threat Management (UTM) solutions, and Carrier Ethernet Network Terminating Equipment (NTE). IAD products consist of our Total Access 600 Series and the Total Access 850.
Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. The Loop Access category includes products such as: Digital Data Service (DDS) and Integrated Services Digital Network (Total Reach) products, High bit-rate Digital Subscriber Line (HDSL) products including Total Access 3000 HDSL and Time Division Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service Units, and TRACER fixed wireless products.
The table below presents sales information by product category for the three and nine months ended September 30, 2011 and 2010.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
Carrier Systems
  $ 119,979     $ 76,349     $ 319,018     $ 207,590  
Business Networking
    44,919       33,830       116,981       92,452  
Loop Access
    27,296       52,778       105,944       140,303  
 
                       
Total
  $ 192,194     $ 162,957     $ 541,943     $ 440,345  
 
                       
In addition, we identify subcategories of product revenues, which we divide into growth products, representing our primary growth areas, and traditional products. Our growth products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our traditional products include HDSL products (included in Loop Access) and other products not included in the aforementioned growth products.
Subcategory revenues included in the above are as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
Growth Products
                               
Broadband Access (included in Carrier Systems)
  $ 86,954     $ 45,099     $ 215,798     $ 126,432  
Optical Access (included in Carrier Systems)
    22,298       18,619       65,222       46,006  
Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)
    42,506       29,475       108,418       79,560  
 
                       
Total
    151,758       93,193       389,438       251,998  
 
                               
Traditional Products
                               
HDSL (does not include T1) (included in Loop Access)
    25,297       49,383       100,291       131,487  
Other products (excluding HDSL)
    15,139       20,381       52,214       56,860  
 
                       
Total
    40,436       69,764       152,505       188,347  
 
                               
 
                       
Total
  $ 192,194     $ 162,957     $ 541,943     $ 440,345  
 
                       
Sales by Geographic Region
The table below presents sales information by geographic area for the three and nine months ended September 30, 2011 and 2010. International sales correlate to shipments with a non-U.S. destination.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
United States
  $ 170,343     $ 154,648     $ 484,260     $ 416,994  
International
    21,851       8,309       57,683       23,351  
 
                       
Total
  $ 192,194     $ 162,957     $ 541,943     $ 440,345  
 
                       
Liability for Warranty Returns
LIABILITY FOR WARRANTY RETURNS
11. LIABILITY FOR WARRANTY RETURNS
Our products generally include warranties of one to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to systems products. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $3.9 million at September 30, 2011 and $3.3 million at December 31, 2010. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.
A summary of warranty expense and write-off activity for the nine months ended September 30, 2011 and 2010 is as follows:
                 
Nine Months Ended September 30,            
(In thousands)   2011     2010  
Balance at beginning of period
  $ 3,304     $ 2,833  
Plus: Amounts charged to cost and expenses
    2,306       2,544  
Less: Deductions
    (1,743 )     (2,137 )
 
           
Balance at end of period
  $ 3,867     $ 3,240  
 
           
Related Party Transactions
RELATED PARTY TRANSACTIONS
12. RELATED PARTY TRANSACTIONS
We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. For the three and nine month periods ended September 30, 2011 and 2010, we incurred fees of $10 thousand per month for these legal services.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment disputes, patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek damages or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2011, of which $7.7 million has been applied to these commitments. See Note 5 of Notes to Consolidated Financial Statements for additional information.
Subsequent Events
SUBSEQUENT EVENTS
14. SUBSEQUENT EVENTS
On October 11, 2011, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on October 27, 2011. The payment date will be November 10, 2011. The quarterly dividend payment will be approximately $5.7 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.
On October 11, 2011, we announced that our Board of Directors had authorized the repurchase of an additional 5.0 million shares of our common stock to commence upon completion of the repurchase plan announced on April 14, 2008. Upon completion of the current plan, under which we have the remaining authority to purchase 0.9 million shares, the new plan to repurchase 5.0 million shares will be implemented through open market or private purchases from time to time as conditions warrant.
Summary of Significant Accounting Policies (Policies)
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, 2010 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2010, filed on February 25, 2011 with the SEC.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, estimated income tax contingencies, the fair value of stock-based compensation, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (ASU 2011-08). Existing accounting guidance requires that an entity perform a test for goodwill impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any. ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the fourth quarter. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. While ASU 2011-05 changes the presentation of comprehensive income, it does not change the components that are recognized in net income or comprehensive income under current accounting guidance. This update is effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with early adoption permitted. We plan to adopt this amendment during the first quarter of 2012. Since ASU 2011-05 affects presentation only, it will have no effect on our consolidated results of operations or financial condition.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This update is effective for annual periods beginning after December 15, 2011. We do not expect the adoption of this amendment will have a material impact on our consolidated results of operations or financial condition.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 provides amendments to the criteria in Subtopic 605-25 of the ASC for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements are separated in more circumstances than under previously existing U.S. GAAP. ASU 2009-13 established a selling price hierarchy for determining the selling price of a deliverable and replaced the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. ASU 2009 -13 also eliminated the residual method of allocation and required that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and required that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis.
We generally sell our products and services separately, but in some circumstances products and services may be sold in bundles that contain multiple deliverables. A sale that includes multiple deliverables is evaluated to determine the units of accounting, and the revenue from the arrangement is allocated to each item requiring separate revenue recognition based on the relative selling price and corresponding terms of the contract. We strive to 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 cases, estimated selling price is determined based on the particular circumstances of the arrangement and is used to allocate revenues to each unit of accounting. Revenue is recognized incrementally as the necessary criteria for each item is met.
We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three or nine months ended September 30, 2011.
In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that Include Software Arrangements. ASU 2009-14 changed the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the ASC. In addition, ASU 2009-14 requires that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, ASU 2009-14 provides additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. ASU 2009-14 also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. ASU 2009-14 also provides further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. We adopted this amendment during the first quarter of 2011. The adoption of this amendment had no effect on our consolidated results of operations and financial condition for the three or nine months ended September 30, 2011.
Business Combinations (Tables)
Estimated fair value of the net assets acquired and liabilities assumed
         
(In Thousands)        
 
       
Cash
  $ 1,027  
Accounts receivable
    297  
Inventory
    792  
Prepaid expenses
    357  
Property, plant and equipment
    173  
Deferred tax assets, net
    11,411  
Accounts payable
    (441 )
Unearned revenue
    (600 )
Accrued expenses
    (332 )
 
     
Net assets acquired
    12,684  
 
       
Customer relationships
    1,700  
Developed technology
    3,590  
Intellectual property
    1,070  
Trade names
    300  
Goodwill
    4,445  
 
     
Total purchase price
  $ 23,789  
 
     
Stock-Based Compensation (Tables)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
 
                               
Stock-based compensation expense included in cost of sales
  $ 100     $ 69     $ 280     $ 210  
 
                       
Selling, general and administrative expense
    1,090       775       3,096       2,360  
Research and development expense
    1,100       886       3,079       2,657  
 
                       
Stock-based compensation expense included in operating expenses
    2,190       1,661       6,175       5,017  
 
                       
 
Total stock-based compensation expense
    2,290       1,730       6,455       5,227  
Tax benefit for expense associated with non-qualified options
    (302 )     (43 )     (1,018 )     (415 )
 
                       
Total stock-based compensation expense, net of tax
  $ 1,988     $ 1,687     $ 5,437     $ 4,812  
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Expected volatility
    38.31 %     39.75 %     38.31 %     40.92 %
Risk-free interest rate
    1.00 %     1.98 %     1.00 %     2.47 %
Expected dividend yield
    1.19 %     1.27 %     1.19 %     1.51 %
Expected life (in years)
    5.14       5.38       5.14       5.19  
Weighted-average estimated value
  $ 9.52     $ 9.72     $ 9.54     $ 8.29  
                                 
                    Weighted Avg.        
                    Remaining     Aggregate  
    Number of     Weighted Avg.     Contractual     Intrinsic  
(In thousands, except per share amounts)   Options     Exercise Price     Life In Years     Value  
Options outstanding, December 31, 2010
    6,234     $ 23.09       6.21     $ 81,561  
Options granted
    992     $ 30.47                  
Options cancelled/forfeited
    (58 )   $ 26.61                  
Options exercised
    (1,752 )   $ 19.36                  
 
                       
Options outstanding, September 30, 2011
    5,416     $ 25.61       7.01     $ 24,647  
 
                       
Options exercisable, September 30, 2011
    2,221     $ 23.30       4.63     $ 13,700  
 
                       
                 
            Weighted  
            Average  
    Number of     Grant Date  
(In thousands, except per share amounts)   Shares     Fair Value  
RSUs and restricted stock outstanding, December 31, 2010
    87     $ 28.46  
RSUs and restricted stock granted
        $  
RSUs and restricted stock vested
        $  
RSUs and restricted stock cancelled/forfeited
        $  
 
           
Unvested RSUs and restricted stock, September 30, 2011
    87     $ 28.46  
 
           
Investments (Tables)
                                 
    Amortized     Gross Unrealized     Carrying  
(In thousands)   Cost     Gains     Losses     Value  
Deferred compensation plan assets
  $ 6,636     $ 113     $ (635 )   $ 6,114  
Corporate bonds
    178,560       316       (2,219 )     176,657  
Municipal fixed-rate bonds
    140,405       578       (37 )     140,946  
Municipal variable rate demand notes
    60,705                   60,705  
Fixed income bond fund
    526       165             691  
Marketable equity securities
    12,662       22,391       (1,076 )     33,977  
 
                       
Available-for-sale securities held at fair value
  $ 399,494     $ 23,563     $ (3,967 )   $ 419,090  
 
                         
Restricted investment held at cost
                            48,250  
Other investments held at cost
                            2,152  
 
                             
Total carrying value of available-for-sale investments
                          $ 469,492  
 
                             
                                 
    Amortized     Gross Unrealized     Carrying  
(In thousands)   Cost     Gains     Losses     Value  
Deferred compensation plan assets
  $ 3,483     $ 770     $ (7 )   $ 4,246  
Corporate bonds
    126,671       630       (229 )     127,072  
Municipal fixed-rate bonds
    71,212       268       (13 )     71,467  
Municipal variable rate demand notes
    116,745                   116,745  
Fixed income bond fund
    526       220             746  
Marketable equity securities
    11,486       36,657       (133 )     48,010  
 
                       
Available-for-sale securities held at fair value
  $ 330,123     $ 38,545     $ (382 )   $ 368,286  
 
                         
Restricted investment held at cost
                            48,250  
Other investments held at cost
                            2,103  
 
                             
Total carrying value of available-for-sale investments
                          $ 418,639  
 
                             
                                 
    Fair Value Measurements at September 30, 2011 Using  
            Quoted Prices              
            in Active     Significant        
            Market for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
(In thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
Cash equivalents
                               
Money market funds
  $ 7,898     $ 7,898     $     $  
 
                       
 
                               
Available-for-sale securities
                               
Deferred compensation plan assets
    6,114       6,114              
Available-for-sale debt securities
                               
Corporate bonds
    176,657             176,657        
Municipal fixed-rate bonds
    140,946             140,946        
Municipal variable rate demand notes
    60,705             60,705        
Fixed income bond fund
    691       691              
Available-for-sale marketable equity securities
                               
Equity securities — technology industry
    22,701       22,701              
Equity securities — other
    11,276       11,276              
 
                       
Available-for-sale securities
    419,090       40,782       378,308        
 
                       
Total
  $ 426,988     $ 48,680     $ 378,308     $  
 
                       
                                 
    Fair Value Measurements at December 31, 2010 Using  
            Quoted Prices              
            in Active     Significant        
            Market for     Other     Significant  
            Identical     Observable     Unobservable  
            Assets     Inputs     Inputs  
(In thousands)   Fair Value     (Level 1)     (Level 2)     (Level 3)  
Cash equivalents
                               
Money market funds
  $ 14,532     $ 14,532     $     $  
 
                       
 
                               
Available-for-sale securities
                               
Deferred compensation plan assets
    4,246       4,246              
Available-for-sale debt securities
                               
Corporate bonds
    127,072             127,072        
Municipal fixed-rate bonds
    71,467             71,467        
Municipal variable rate demand notes
    116,745             116,745        
Fixed income bond fund
    746       746              
Available-for-sale marketable equity securities
                               
Equity securities — technology industry
    35,596       35,596              
Equity securities — other
    12,414       12,414              
 
                       
Available-for-sale securities
    368,286       53,002       315,284        
 
                       
Total
  $ 382,818     $ 67,534     $ 315,284     $  
 
                       
Inventory (Tables)
Inventory
                 
    September 30,     December 31,  
(In thousands)   2011     2010  
Raw materials
  $ 43,938     $ 43,897  
Work in process
    4,806       2,871  
Finished goods
    38,569       27,506  
 
           
Total
  $ 87,313     $ 74,274  
 
           
Goodwill and Intangible Assets (Tables)
         
(In thousands)        
Balance, December 31, 2010
  $  
Acquisitions
    4,445  
Impairment losses
     
 
     
Balance, September 30, 2011
  $ 4,445  
 
     
 
       
Balance as of September 30, 2011:
       
Goodwill
  $ 4,445  
Accumulated impairment losses
     
 
     
Total goodwill
  $ 4,445  
 
     
                                                 
    September 30, 2011     December 31, 2010  
    Gross     Accumulated             Gross     Accumulated        
(In thousands)   Value     Amortization     Net Value     Value     Amortization     Net Value  
Customer relationships
  $ 1,793     $ 133     $ 1,660     $ 93     $ 60     $ 33  
Developed technology
    3,590       121       3,469                    
Intellectual property
    2,480       437       2,043       1,410       260       1,150  
Trade names
    300       11       289                    
 
                                   
Total
  $ 8,163     $ 702     $ 7,461     $ 1,503     $ 320     $ 1,183  
 
                                   
         
(In thousands)   Amount  
Remainder of 2011
  $ 347  
2012
    1,389  
2013
    1,389  
2014
    1,228  
2015
    1,117  
2016 and thereafter
    1,991  
 
     
Total
  $ 7,461  
 
     
Stockholders' Equity (Tables)
         
    Stockholders’  
(In thousands)   Equity  
Balance, December 31, 2010
  $ 572,322  
Net income
    107,414  
Dividend payments
    (17,395 )
Dividends accrued for unvested restricted stock units
    (22 )
Net change in unrealized gains (losses) on marketable securities (net of deferred taxes)
    (11,259 )
Reclassification adjustment for amounts included in net income (net of deferred taxes)
    (682 )
Foreign currency translation adjustment
    (1,031 )
Proceeds from stock option exercises
    33,631  
Tax benefits from stock option exercises
    10,457  
Stock-based compensation expense
    6,455  
Purchases of treasury stock
    (35,178 )
 
     
Balance, September 30, 2011
  $ 664,712  
 
     
                         
Record Date   Payment Date     Per Share Amount     Total Dividend Paid  
February 3, 2011
  February 17, 2011     $ 0.09     $ 5,775  
April 28, 2011
  May 12, 2011   $ 0.09     $ 5,821  
July 28, 2011
  August 11, 2011   $ 0.09     $ 5,799  
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
 
Net income
  $ 36,213     $ 32,084     $ 107,414     $ 78,029  
Net change in unrealized gains (losses) related to marketable securities, net of deferred tax benefit (expense) of $3,533 and $(2,538) for the three months ended September 30, 2011 and 2010, respectively, and $6,235 and $(1,907) for the nine months ended September 30, 2011 and 2010, respectively
    (5,468 )     4,230       (11,259 )     3,174  
Reclassification adjustment for amounts included in net income, net of deferred tax benefit of $195 and $47 for the three months ended September 30, 2011 and 2010, respectively, and $381 and $174 for the nine months ended September 30, 2011 and 2010, respectively
    (287 )     (80 )     (682 )     (292 )
Foreign currency translation adjustment
    (1,487 )     1,465       (1,031 )     863  
 
                       
Total comprehensive income
  $ 28,971     $ 37,699     $ 94,442     $ 81,774  
 
                       
Earnings Per Share (Tables)
Earnings per share
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands, except per share amounts)   2011     2010     2011     2010  
Numerator
                               
Net income
  $ 36,213     $ 32,084     $ 107,414     $ 78,029  
 
                       
Denominator
                               
Weighted average number of shares — basic
    64,023       62,771       64,300       62,316  
Effect of dilutive securities
                               
Stock options
    882       1,491       1,346       1,286  
Restricted stock and restricted stock units
    56       38       51       36  
 
                       
Weighted average number of shares — diluted
    64,961       64,300       65,697       63,638  
 
                       
 
                               
Net income per share — basic
  $ 0.57     $ 0.51     $ 1.67     $ 1.25  
Net income per share — diluted
  $ 0.56     $ 0.50     $ 1.63     $ 1.23  
Segment Information (Tables)
                                 
    Three Months Ended  
    September 30, 2011     September 30, 2010  
(In thousands)   Sales     Gross Profit     Sales     Gross Profit  
Carrier Networks
  $ 152,492     $ 85,944     $ 128,581     $ 77,372  
Enterprise Networks
    39,702       23,532       34,376       19,927  
 
                       
Total
  $ 192,194     $ 109,476     $ 162,957     $ 97,299  
 
                       
                                 
    Nine Months Ended  
    September 30, 2011     September 30, 2010  
(In thousands)   Sales     Gross Profit     Sales     Gross Profit  
Carrier Networks
  $ 435,344     $ 252,908     $ 345,684     $ 206,910  
Enterprise Networks
    106,599       62,190       94,661       55,046  
 
                       
Total
  $ 541,943     $ 315,098     $ 440,345     $ 261,956  
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
Carrier Systems
  $ 119,979     $ 76,349     $ 319,018     $ 207,590  
Business Networking
    44,919       33,830       116,981       92,452  
Loop Access
    27,296       52,778       105,944       140,303  
 
                       
Total
  $ 192,194     $ 162,957     $ 541,943     $ 440,345  
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
Growth Products
                               
Broadband Access (included in Carrier Systems)
  $ 86,954     $ 45,099     $ 215,798     $ 126,432  
Optical Access (included in Carrier Systems)
    22,298       18,619       65,222       46,006  
Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)
    42,506       29,475       108,418       79,560  
 
                       
Total
    151,758       93,193       389,438       251,998  
 
                               
Traditional Products
                               
HDSL (does not include T1) (included in Loop Access)
    25,297       49,383       100,291       131,487  
Other products (excluding HDSL)
    15,139       20,381       52,214       56,860  
 
                       
Total
    40,436       69,764       152,505       188,347  
 
                               
 
                       
Total
  $ 192,194     $ 162,957     $ 541,943     $ 440,345  
 
                       
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(In thousands)   2011     2010     2011     2010  
United States
  $ 170,343     $ 154,648     $ 484,260     $ 416,994  
International
    21,851       8,309       57,683       23,351  
 
                       
Total
  $ 192,194     $ 162,957     $ 541,943     $ 440,345  
 
                       
Liability for Warranty Returns (Tables)
Summary of warranty expense and write-off activity
                 
Nine Months Ended September 30,            
(In thousands)   2011     2010  
Balance at beginning of period
  $ 3,304     $ 2,833  
Plus: Amounts charged to cost and expenses
    2,306       2,544  
Less: Deductions
    (1,743 )     (2,137 )
 
           
Balance at end of period
  $ 3,867     $ 3,240  
 
           
Business Combinations (Details) (USD $)
In Thousands
Sep. 30, 2011
Estimated fair value of the net assets acquired and liabilities assumed
 
Goodwill
$ 4,400 
Customer relationships [Member] |
Bluesocket [Member]
 
Estimated fair value of the net assets acquired and liabilities assumed
 
Intangible assets
1,700 
Developed technology [Member] |
Bluesocket [Member]
 
Estimated fair value of the net assets acquired and liabilities assumed
 
Intangible assets
3,590 
Intellectual Property [Member] |
Bluesocket [Member]
 
Estimated fair value of the net assets acquired and liabilities assumed
 
Intangible assets
1,070 
Trade names [Member] |
Bluesocket [Member]
 
Estimated fair value of the net assets acquired and liabilities assumed
 
Intangible assets
300 
Bluesocket [Member]
 
Estimated fair value of the net assets acquired and liabilities assumed
 
Cash
1,027 
Accounts receivable
297 
Inventory
792 
Prepaid expenses
357 
Property, plant and equipment
173 
Deferred tax assets, net
11,411 
Accounts payable
(441)
Unearned revenues
(600)
Accrued expenses
(332)
Net assets acquired
12,684 
Goodwill
4,445 
Total purchase price
$ 23,789 
Business Combinations (Details Textuals) (USD $)
9 Months Ended
Sep. 30,
Sep. 30, 2011
Aug. 4, 2011
2011
Customer relationships [Member]
Year
2011
Developed technology [Member]
Year
2011
Intellectual Property [Member]
Year
2011
Trade names [Member]
Year
Business Combination (Textuals) [Abstract]
 
 
 
 
 
 
Acquisition cost
 
$ 23,800,000 
 
 
 
 
Average estimated useful life
 
 
4.5 
4.5 
Goodwill
4,400,000 
 
 
 
 
 
Acquisition related expenses and amortization of acquired intangibles
$ 1,000,000 
 
 
 
 
 
Income Taxes (Details)
9 Months Ended
Sep. 30,
2011
2010
Income Taxes (Textuals) [Abstract]
 
 
Effective tax rate
33.20% 
34.60% 
Decrease in effective tax rate due to research tax credit
2.20% 
 
Decrease in effective tax rate due to manufacturers deduction
2.00% 
2.50% 
Increase in effective tax rate due to state income tax provisions
2.30% 
2.40% 
Stock-Based Compensation (Details) (USD $)
In Thousands
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
 
 
 
 
Stock-based compensation expense
$ 2,290 
$ 1,730 
$ 6,455 
$ 5,227 
Tax benefit for expense associated with non-qualified options
(302)
(43)
(1,018)
(415)
Total stock-based compensation expense, net of tax
1,988 
1,687 
5,437 
4,812 
Cost of Sales [Member]
 
 
 
 
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
 
 
 
 
Stock-based compensation expense
100 
69 
280 
210 
Selling, General and Administrative Expense [Member]
 
 
 
 
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
 
 
 
 
Stock-based compensation expense
1,090 
775 
3,096 
2,360 
Research and Development Expense [Member]
 
 
 
 
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
 
 
 
 
Stock-based compensation expense
1,100 
886 
3,079 
2,657 
Operating Expenses [Member]
 
 
 
 
Stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock under the Stock Compensation Topic of the FASB (ASC)
 
 
 
 
Stock-based compensation expense
$ 2,190 
$ 1,661 
$ 6,175 
$ 5,017 
Stock-Based Compensation (Details 1)
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
Year
2010
Year
2011
Year
EquitySecurities
Segments
ProductCategories
2010
EquitySecurities
Year
Weighted-average assumptions and value of options granted
 
 
 
 
Expected volatility
38.31% 
39.75% 
38.31% 
40.92% 
Risk-free interest rate
1.00% 
1.98% 
1.00% 
2.47% 
Expected dividend yield
1.19% 
1.27% 
1.19% 
1.51% 
Expected life (in years)
5.14 
5.38 
5.14 
5.19 
Weighted-average estimated value
$ 9.52 
$ 9.72 
$ 9.54 
$ 8.29 
Stock-Based Compensation (Details 2) (USD $)
In Thousands, except Per Share data, unless otherwise specified
9 Months Ended
Sep. 30, 2011
Year
EquitySecurities
Segments
ProductCategories
EquityFunds
Activity in stock option plans
 
Number of options, Outstanding, Beginning Balance
6,234 
Weighted Average Exercise Price, Outstanding, Beginning Balance
$ 23.09 
Weighted Average Remaining Contractual Life In Years, Outstanding, Beginning Balance
6.21 
Aggregate Intrinsic Value, Outstanding, Beginning Balance
$ 81,561 
Number of Options, granted
992 
Weighted Average Exercise Price, granted
$ 30.47 
Weighted Average Remaining Contractual Life In Years, Outstanding, Ending Balance
7.01 
Number of Options, cancelled/forfeited
(58)
Weighted Average Exercise Price, cancelled/forfeited
$ 26.61 
Number of Options, exercised
(1,752)
Weighted Average Exercise Price, exercised
$ 19.36 
Number of options, Outstanding, Ending Balance
5,416 
Weighted Average Exercise Price, Outstanding, Ending Balance
$ 25.61 
Aggregate Intrinsic Value, Outstanding, Ending Balance
24,647 
Number of Options, Options exercisable
2,221 
Weighted Average Exercise Price, Options exercisable
$ 23.30 
Weighted Average Remaining Contractual Life In Years, Options exercisable
4.63 
Aggregate Intrinsic Value, Options exercisable
$ 13,700 
Stock-Based Compensation (Details 3) (USD $)
In Thousands, except Per Share data
9 Months Ended
Sep. 30, 2011
Summary of RSUs and restricted stock outstanding
 
Number of Shares, RSUs and restricted stock outstanding, Beginning Balance
87 
Weighted Average Grant Date Fair Value, RSUs and restricted stock outstanding, Beginning Balance
$ 28.46 
Number of shares, RSUs and restricted stock granted
Weighted Average Grant Date Fair Value, RSUs and restricted stock granted
$ 0 
Number of shares, RSUs and restricted stock vested
Weighted Average Grant Date Fair Value, RSUs and restricted stock vested
$ 0 
Number of shares, RSUs and restricted stock cancelled/forfeited
Weighted Average Grant Date Fair Value, RSUs and restricted stock cancelled/forfeited
$ 0 
Number of Shares, unvested RSUs and restricted stock, Ending balance
87 
Weighted Average Grant Date Fair Value, unvested RSUs and restricted stock, Ending balance
$ 28.46 
Stock-Based Compensation (Details Textuals) (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
9 Months Ended
Sep. 30,
3 Months Ended
Sep. 30, 2011
2011
Year
EquitySecurities
Segments
ProductCategories
EquityFunds
2011
Restricted Stock Units (RSUs) [Member]
2010
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Restricted stock unit granted
 
Stock-Based Compensation (Textuals) [Abstract]
 
 
 
 
Estimated forfeitures for stock options
 
2.00% 
 
 
Forfeitures rate for restricted stock units
 
0.00% 
 
 
Total compensation cost related to non-vested stock options
$ 23.0 
$ 23.0 
 
 
Recognition period of non-vested compensation cost
 
3.1 
 
 
Total pre-tax intrinsic value of options exercised
$ 0.5 
$ 39.5 
 
 
Investments (Details) (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
$ 399,494 
$ 330,123 
Available-for-sale Securities, Gross Unrealized Gains
23,563 
38,545 
Available-for-sale Securities, Gross Unrealized Losses
(3,967)
(382)
Available-for-sale securities, Fair Value/Carrying value
419,090 
368,286 
Restricted investment held at cost
48,250 
48,250 
Other investments held at cost
2,152 
2,103 
Total carrying value of available-for-sale investments
469,492 
418,639 
Deferred compensation plan assets [Member]
 
 
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
6,636 
3,483 
Available-for-sale Securities, Gross Unrealized Gains
113 
770 
Available-for-sale Securities, Gross Unrealized Losses
(635)
(7)
Available-for-sale securities, Fair Value/Carrying value
6,114 
4,246 
Corporate bonds [Member]
 
 
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
178,560 
126,671 
Available-for-sale Securities, Gross Unrealized Gains
316 
630 
Available-for-sale Securities, Gross Unrealized Losses
(2,219)
(229)
Available-for-sale securities, Fair Value/Carrying value
176,657 
127,072 
Municipal fixed-rate bonds [Member]
 
 
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
140,405 
71,212 
Available-for-sale Securities, Gross Unrealized Gains
578 
268 
Available-for-sale Securities, Gross Unrealized Losses
(37)
(13)
Available-for-sale securities, Fair Value/Carrying value
140,946 
71,467 
Municipal variable rate demand notes [Member]
 
 
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
60,705 
116,745 
Available-for-sale Securities, Gross Unrealized Gains
Available-for-sale Securities, Gross Unrealized Losses
Available-for-sale securities, Fair Value/Carrying value
60,705 
116,745 
Fixed income bond fund [Member]
 
 
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
526 
526 
Available-for-sale Securities, Gross Unrealized Gains
165 
220 
Available-for-sale Securities, Gross Unrealized Losses
Available-for-sale securities, Fair Value/Carrying value
691 
746 
Marketable equity securities [Member]
 
 
Securities and investments recorded at either fair value or cost
 
 
Available-for-sale Securities, Amortized Cost
12,662 
11,486 
Available-for-sale Securities, Gross Unrealized Gains
22,391 
36,657 
Available-for-sale Securities, Gross Unrealized Losses
(1,076)
(133)
Available-for-sale securities, Fair Value/Carrying value
$ 33,977 
$ 48,010 
Investments (Details 1) (Fair Value, Measurements, Recurring [Member], USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
$ 419,090 
$ 368,286 
Total
426,988 
382,818 
Quoted Prices in Active Market for Identical Assets(Level 1) [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
40,782 
53,002 
Total
48,680 
67,534 
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Money market funds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Money market funds
7,898 
14,532 
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Deferred compensation plan assets [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
6,114 
4,246 
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Corporate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Municipal fixed-rate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Municipal variable rate demand notes [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Fixed income bond fund [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
691 
746 
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Equity securities - technology industry [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
22,701 
35,596 
Quoted Prices in Active Market for Identical Assets(Level 1) [Member] |
Equity securities - other [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
11,276 
12,414 
Significant Other Observable Inputs (Level 2) [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
378,308 
315,284 
Total
378,308 
315,284 
Significant Other Observable Inputs (Level 2) [Member] |
Money market funds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Money market funds
Significant Other Observable Inputs (Level 2) [Member] |
Deferred compensation plan assets [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Other Observable Inputs (Level 2) [Member] |
Corporate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
176,657 
127,072 
Significant Other Observable Inputs (Level 2) [Member] |
Municipal fixed-rate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
140,946 
71,467 
Significant Other Observable Inputs (Level 2) [Member] |
Municipal variable rate demand notes [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
60,705 
116,745 
Significant Other Observable Inputs (Level 2) [Member] |
Fixed income bond fund [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Other Observable Inputs (Level 2) [Member] |
Equity securities - technology industry [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Other Observable Inputs (Level 2) [Member] |
Equity securities - other [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Total
Significant Unobservable Inputs (Level 3) [Member] |
Money market funds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Money market funds
Significant Unobservable Inputs (Level 3) [Member] |
Deferred compensation plan assets [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member] |
Corporate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member] |
Municipal fixed-rate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member] |
Municipal variable rate demand notes [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member] |
Fixed income bond fund [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member] |
Equity securities - technology industry [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Significant Unobservable Inputs (Level 3) [Member] |
Equity securities - other [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
Money market funds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Money market funds
7,898 
14,532 
Deferred compensation plan assets [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
6,114 
4,246 
Corporate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
176,657 
127,072 
Municipal fixed-rate bonds [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
140,946 
71,467 
Municipal variable rate demand notes [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
60,705 
116,745 
Fixed income bond fund [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
691 
746 
Equity securities - technology industry [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
22,701 
35,596 
Equity securities - other [Member]
 
 
Fair value measurement of cash equivalents held in money market funds and our investments
 
 
Available-for-sale securities
$ 11,276 
$ 12,414 
Investments (Details Textuals) (USD $)
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
Year
EquityFunds
2010
2011
Year
EquitySecurities
Segments
ProductCategories
EquityFunds
2010
EquitySecurities
Year
Dec. 31, 2010
Schedule of available for sale securities (Textuals) [Abstract]
 
 
 
 
 
Available-for-sale securities, carrying value
$ 419,090,000 
 
$ 419,090,000 
 
$ 368,286,000 
Gross unrealized gain on marketable equity securities
23,563,000 
 
23,563,000 
 
38,545,000 
Gross unrealized losses on marketable equity securities
3,967,000 
 
3,967,000 
 
382,000 
Schedule of Investments [Line Items]
 
 
 
 
 
Net realized gain on long-term investments
2,982,000 
3,399,000 
9,121,000 
8,055,000 
 
Investments (Textuals) [Abstract]
 
 
 
 
 
Proceeds from sale of Marketable equity securities
 
 
6,100,000 
 
 
Realized gain from sale of marketable equity securities
 
 
6,000,000 
 
 
Restricted certificate of deposit held
48,250,000 
 
48,250,000 
 
48,250,000 
Estimated fair value of bond
48,300,000 
 
48,300,000 
 
 
Other investments carried at cost
2,152,000 
 
2,152,000 
 
2,103,000 
Number of private equity funds
 
 
 
Fair value of other investments
10,400,000 
 
10,400,000 
 
 
Aggregate Investment committed in private equity funds
7,900,000 
 
7,900,000 
 
 
Commitments towards private equity funds
7,700,000 
 
7,700,000 
 
 
Receipt of distribution related to the private equity funds
2,000,000 
 
2,000,000 
 
 
Private equity funds Commitments expired in 2013
 
 
200,000 
 
 
Securities considered for impairment test
 
 
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. 
 
 
Number of marketable equity securities
 
 
 
Deferred compensation plan assets [Member]
 
 
 
 
 
Schedule of available for sale securities (Textuals) [Abstract]
 
 
 
 
 
Available-for-sale securities, carrying value
6,114,000 
 
6,114,000 
 
4,246,000 
Gross unrealized gain on marketable equity securities
113,000 
 
113,000 
 
770,000 
Gross unrealized losses on marketable equity securities
635,000 
 
635,000 
 
7,000 
Corporate bonds [Member]
 
 
 
 
 
Schedule of available for sale securities (Textuals) [Abstract]
 
 
 
 
 
Available-for-sale securities, carrying value
176,657,000 
 
176,657,000 
 
127,072,000 
Duration of available-for-sale debt securities (in years)
0.9 
 
0.9 
 
 
Gross unrealized gain on marketable equity securities
316,000 
 
316,000 
 
630,000 
Gross unrealized losses on marketable equity securities
2,219,000 
 
2,219,000 
 
229,000 
Corporate bonds [Member] |
Significant Other Observable Inputs (Level 2) [Member]
 
 
 
 
 
Schedule of available for sale securities (Textuals) [Abstract]
 
 
 
 
 
Available-for-sale securities
317,600,000 
 
317,600,000 
 
198,500,000 
Corporate bonds [Member] |
AAA Rating [Member]
 
 
 
 
 
Schedule of available for sale securities (Textuals) [Abstract]
 
 
 
 
 
Percentage of marketable securities under credit rating categories
1.00% 
 
1.00% 
 
 
Corporate bonds [Member] |
AA Rating [Member]