ADTRAN INC, 10-Q filed on 11/5/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Oct. 20, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
ADTN 
 
Entity Registrant Name
ADTRAN INC 
 
Entity Central Index Key
0000926282 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
54,320,170 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Current Assets
 
 
Cash and cash equivalents
$ 58,415 
$ 58,298 
Short-term investments
55,587 
105,760 
Accounts receivable, less allowance for doubtful accounts of $116 and $130 at September 30, 2014 and December 31, 2013, respectively
99,341 
85,814 
Other receivables
27,262 
18,249 
Inventory
86,879 
90,111 
Prepaid expenses
5,579 
4,325 
Deferred tax assets, net
15,697 
17,083 
Total Current Assets
348,760 
379,640 
Property, plant and equipment, net
75,201 
76,739 
Deferred tax assets, net
12,991 
9,622 
Goodwill
3,492 
3,492 
Other assets
11,748 
11,180 
Long-term investments
298,542 
309,225 
Total Assets
750,734 
789,898 
Current Liabilities
 
 
Accounts payable
49,972 
48,282 
Unearned revenue
23,418 
22,205 
Accrued expenses
12,356 
12,776 
Accrued wages and benefits
17,591 
14,040 
Income tax payable, net
13,650 
5,002 
Total Current Liabilities
116,987 
102,305 
Non-current unearned revenue
13,822 
14,643 
Other non-current liabilities
23,548 
22,144 
Bonds payable
30,000 
46,200 
Total Liabilities
184,357 
185,292 
Commitments and contingencies (see Note 14)
   
   
Stockholders' Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 54,320 shares outstanding at September 30, 2014 and 79,652 shares issued and 56,918 shares outstanding at December 31, 2013
797 
797 
Additional paid-in capital
239,878 
233,511 
Accumulated other comprehensive income
5,721 
10,753 
Retained earnings
903,741 
884,451 
Less treasury stock at cost: 25,332 and 22,734 shares at September 30, 2014 and December 31, 2013, respectively
(583,760)
(524,906)
Total Stockholders' Equity
566,377 
604,606 
Total Liabilities and Stockholders' Equity
$ 750,734 
$ 789,898 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 116 
$ 130 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000 
200,000 
Common stock, shares issued
79,652 
79,652 
Common stock, shares outstanding
54,320 
56,918 
Treasury stock, shares
25,332 
22,734 
Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Income Statement [Abstract]
 
 
 
 
Sales
$ 162,892 
$ 177,404 
$ 486,025 
$ 482,650 
Cost of sales
84,635 
94,857 
243,181 
250,628 
Gross Profit
78,257 
82,547 
242,844 
232,022 
Selling, general and administrative expenses
32,438 
32,794 
100,165 
96,082 
Research and development expenses
33,324 
32,543 
99,547 
98,114 
Operating Income
12,495 
17,210 
43,132 
37,826 
Interest and dividend income
992 
1,579 
3,340 
5,021 
Interest expense
(150)
(581)
(525)
(1,737)
Net realized investment gain
2,687 
1,751 
7,219 
6,949 
Other income (expense), net
(963)
22 
(1,615)
(1,521)
Income before provision for income taxes
15,061 
19,981 
51,551 
46,538 
Provision for income taxes
(3,735)
(3,776)
(16,223)
(12,584)
Net Income
$ 11,326 
$ 16,205 
$ 35,328 
$ 33,954 
Weighted average shares outstanding - basic
54,521 
57,947 
55,552 
59,561 
Weighted average shares outstanding - diluted
54,824 
58,617 
55,976 
59,929 
Earnings per common share - basic
$ 0.21 
$ 0.28 
$ 0.64 
$ 0.57 
Earnings per common share - diluted
$ 0.21 
$ 0.28 
$ 0.63 
$ 0.57 
Dividend per share
$ 0.09 
$ 0.09 
$ 0.27 
$ 0.27 
Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 11,326 
$ 16,205 
$ 35,328 
$ 33,954 
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
(3,148)
2,562 
(2,850)
(780)
Foreign currency translation
(2,568)
(108)
(2,182)
(1,498)
Other Comprehensive Income (Loss), net of tax
(5,716)
2,454 
(5,032)
(2,278)
Comprehensive Income, net of tax
$ 5,610 
$ 18,659 
$ 30,296 
$ 31,676 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities:
 
 
Net income
$ 35,328 
$ 33,954 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
11,127 
11,021 
Amortization of net premium on available-for-sale investments
3,363 
4,688 
Net realized gain on long-term investments
(7,219)
(6,949)
Net loss on disposal of property, plant and equipment
109 
Stock-based compensation expense
6,296 
6,516 
Deferred income taxes
(122)
(1,296)
Tax benefit from stock option exercises
71 
113 
Excess tax benefits from stock-based compensation arrangements
(53)
(106)
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(15,957)
(25,844)
Other receivables
(10,576)
(3,724)
Inventory
2,413 
8,584 
Prepaid expenses and other assets
(4,095)
(417)
Accounts payable
3,563 
30,073 
Accrued expenses and other liabilities
7,507 
(4,339)
Income tax payable, net
9,265 
(678)
Net cash provided by operating activities
41,020 
51,602 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(8,162)
(6,123)
Proceeds from disposals of property, plant and equipment
 
Proceeds from sales and maturities of available-for-sale investments
187,013 
275,581 
Purchases of available-for-sale investments
(127,074)
(216,129)
Net cash provided by investing activities
51,778 
53,329 
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
2,311 
2,332 
Purchases of treasury stock
(62,144)
(104,147)
Dividend payments
(15,060)
(16,220)
Payments on long-term debt
(16,500)
 
Excess tax benefits from stock-based compensation arrangements
53 
106 
Net cash used in financing activities
(91,340)
(117,929)
Net increase (decrease) in cash and cash equivalents
1,458 
(12,998)
Effect of exchange rate changes
(1,341)
(1,148)
Cash and cash equivalents, beginning of period
58,298 
68,457 
Cash and cash equivalents, end of period
58,415 
54,311 
Supplemental disclosure of non-cash investing activities
 
 
Purchases of property, plant and equipment included in accounts payable
$ 598 
$ 494 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (ADTRAN) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2013 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on February 27, 2014 with the SEC.

Changes in Classifications

We corrected immaterial misclassifications between the operating and investing sections of our consolidated statements of cash flows and adjusted our cash flows for the nine months ended September 30, 2013 in these categories by $0.4 million in order to be consistent with the 2014 presentation.

Out of Period Adjustment

During the year ended December 31, 2013, we identified two adjustments in the acquired NSN (formerly Nokia Siemens Networks) Broadband Access business (NSN BBA business) relating to customer payment discounts for one customer, and recoverable VAT taxes on certain vendor freight invoices that should have been recorded in prior periods. These adjustments resulted from a $0.5 million understatement of net income in the first two quarters of 2013. We evaluated the impact of the adjustments on the results of our previously issued financial statements for each of the prior periods affected and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in 2013 and concluded that the impact is not material to our results for the year 2013. Accordingly, during the three months ended September 30, 2013 we recorded an out of period adjustment to correct these issues.

Use of Estimates

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

 

Recent Accounting Pronouncements

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

Income Taxes
Income Taxes

2. INCOME TAXES

Our effective tax rate increased from 27.0% in the nine months ended September 30, 2013 to 31.5% in the nine months ended September 30, 2014. The increase in the effective tax rate between the two periods is primarily attributable to the net effect of the exclusion of a benefit for the research tax credit, which expired on December 31, 2013, partially offset by the release of a valuation allowance attributable to a foreign subsidiary in 2014.

Pension Benefit Plan
Pension Benefit Plan

3. PENSION BENEFIT PLAN

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

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2014     2013     2014     2013  

Service cost

   $ 299      $ 297      $ 910      $ 891   

Interest cost

     209        185        640        554   

Expected return on plan assets

     (272     (250     (831     (751
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 236      $ 232      $ 719      $ 694   
  

 

 

   

 

 

   

 

 

   

 

 

 
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 for the three and nine months ended September 30, 2014 and 2013, which was recognized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2014     2013     2014     2013  

Stock-based compensation expense included in cost of sales

   $ 124      $ 118      $ 359      $ 334   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,048        1,024        3,089        3,129   

Research and development expense

     975        1,034        2,848        3,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     2,023        2,058        5,937        6,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,147        2,176        6,296        6,516   

Tax benefit for expense associated with non-qualified options

     (298     (307     (878     (924
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 1,849      $ 1,869      $ 5,418      $ 5,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

There were no options granted during the three months ended September 30, 2014 or the three and nine months ended September 30, 2013. The weighted-average assumptions and value of options granted for the nine months ended September 30, 2014 are summarized as follows:

 

     Nine Months Ended  
    

September 30, 2014

 

Expected volatility

     39.57

Risk-free interest rate

     1.86

Expected dividend yield

     1.38

Expected life (in years)

     6.25   

Weighted-average estimated value

   $ 9.28   

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

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

Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options are based upon historical experience and approximate 2.5% annually. We estimated a 0% forfeiture rate for our RSUs and restricted stock due to the limited number of recipients and historical experience for these awards.

 

As of September 30, 2014, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $11.6 million, which is expected to be recognized over an average remaining recognition period of 2.3 years.

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

 

(In thousands, except per share amounts)    Number of
Options
    Weighted Avg.
Exercise Price
     Weighted Avg.
Remaining
Contractual
Life In Years
     Aggregate
Intrinsic
Value
 

Options outstanding, December 31, 2013

     6,358      $ 24.43         6.60       $ 25,878   

Options granted

     2      $ 26.03         

Options cancelled/forfeited

     (203   $ 25.86         

Options exercised

     (117   $ 19.66         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, September 30, 2014

     6,040      $ 24.47         5.85       $ 5,699   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2014

     3,961      $ 25.14         4.59       $ 3,295   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing price of our stock on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2014. The aggregate intrinsic value will change based on the fair market value of our stock.

The total pre-tax intrinsic value of options exercised during the three and nine months ended September 30, 2014 was $0.1 million and $0.6 million, respectively.

Investments
Investments

5. INVESTMENTS

At September 30, 2014, we held the following securities and investments, recorded at either fair value or cost.

 

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

Deferred compensation plan assets

   $ 12,852       $ 2,660       $ (14   $ 15,498   

Corporate bonds

     102,196         345         (21     102,520   

Municipal fixed-rate bonds

     150,098         691         (16     150,773   

Municipal variable rate demand notes

     18,000         —           —          18,000   

Marketable equity securities

     26,542         9,996         (757     35,781   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 309,688       $ 13,692       $ (808   $ 322,572   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             30,000   

Other investments held at cost

             1,557   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 354,129   
          

 

 

 

At December 31, 2013, we held the following securities and investments, recorded at either fair value or cost.

 

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

Deferred compensation plan assets

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

Corporate bonds

     166,370         534         (45     166,859   

Municipal fixed-rate bonds

     135,773         583         (54     136,302   

Municipal variable rate demand notes

     8,310         —           —          8,310   

Marketable equity securities

     24,654         13,975         (177     38,452   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

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

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,689   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 414,985   
          

 

 

 

 

As of September 30, 2014, our corporate bonds and municipal fixed-rate bonds had the following contractual maturities:

 

(In thousands)    Corporate
bonds
     Municipal
fixed-rate
bonds
 

Less than one year

   $ 4,643       $ 31,631   

One to two years

     64,168         69,253   

Two to three years

     33,709         39,809   

Three to five years

     —           10,080   
  

 

 

    

 

 

 

Total

   $ 102,520       $ 150,773   
  

 

 

    

 

 

 

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

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

At September 30, 2014, we held a $30.0 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond). During the first quarter of 2014, we made a principal payment on the Bond of $16.5 million. At September 30, 2014, the estimated fair value of the Bond using a level 2 valuation technique was approximately $29.8 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. For more information on the Bond, see “Debt” under “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report.

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the three and nine months ended September 30, 2014 and 2013, other-than-temporary impairment charges were not significant.

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2014     2013     2014     2013  

Gross realized gains

   $ 2,728      $ 1,797      $ 7,363      $ 7,252   

Gross realized losses

   $ (41   $ (46   $ (144   $ (303

As of September 30, 2014 and 2013, gross unrealized losses related to individual securities in a continuous loss position for 12 months or longer were not significant.

 

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

 

     Fair Value Measurements at September 30, 2014 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

   $ 9,861       $ 9,861       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,498         15,498         —           —     

Available-for-sale debt securities

           

Corporate bonds

     102,520         —           102,520         —     

Municipal fixed-rate bonds

     150,773         —           150,773         —     

Municipal variable rate demand notes

     18,000         —           18,000         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     8,879         8,879         —           —     

Marketable equity securities – other

     26,902         26,902         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     322,572         51,279         271,293         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 332,433       $ 61,140       $ 271,293       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2013 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

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

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,123         15,123         —           —     

Available-for-sale debt securities

           

Corporate bonds

     166,859         —           166,859         —     

Municipal fixed-rate bonds

     136,302         —           136,302         —     

Municipal variable rate demand notes

     8,310         —           8,310         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     11,398         11,398         —           —     

Marketable equity securities – other

     27,054         27,054         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     365,046         53,575         311,471         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

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

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

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities

6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

As of September 30, 2014, we had forward contracts outstanding with notional amounts totaling €20.1 million ($25.4 million), which mature through 2014.

 

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

 

     Balance Sheet      September 30,     December 31,  
(In thousands)    Location      2014     2013  

Derivatives Not Designated as Hedging Instruments (Level 2):

       

Foreign exchange contracts – asset derivatives

     Other receivables       $ 99      $ 18   

Foreign exchange contracts – liability derivatives

     Accounts payable       $ (22   $ (15

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

 

         Three Months Ended      Nine Months Ended  
     Income Statement   September 30,      September 30,  
(In thousands)    Location   2014     2013      2014     2013  

Derivatives Not Designated as Hedging Instruments:

           

Foreign exchange contracts

   Other income (expense)   $ (191   $ 52       $ (739   $ (34
Inventory
Inventory

7. INVENTORY

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

 

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

Raw materials

   $ 37,856       $ 44,093   

Work in process

     3,920         3,484   

Finished goods

     45,103         42,534   
  

 

 

    

 

 

 

Total

   $ 86,879       $ 90,111   
  

 

 

    

 

 

 

We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At September 30, 2014 and December 31, 2013, raw materials reserves totaled $17.1 million and $16.9 million, respectively, and finished goods inventory reserves totaled $6.3 million and $6.1 million, respectively.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

8. GOODWILL AND INTANGIBLE ASSETS

We evaluate the carrying value of goodwill, generated from our acquisition of Bluesocket, Inc. and assigned to our Enterprise Networks division, during the fourth quarter of each year. We may perform additional evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There have been no impairment losses recorded since acquisition.

Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangibles acquired in conjunction with our acquisitions of Objectworld Communications Corporation on September 15, 2009, Bluesocket, Inc. on August 4, 2011, and the NSN BBA business on May 4, 2012.

 

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

 

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

Gross
Value

    

Accumulated
Amortization

   

Net Value

    

Gross
Value

    

Accumulated
Amortization

   

Net Value

 

Customer relationships

   $ 6,515       $ (2,013   $ 4,502       $ 6,996       $ (1,555   $ 5,441   

Developed technology

     6,127         (3,374     2,753         6,537         (2,692     3,845   

Intellectual property

     2,340         (1,436     904         2,340         (1,185     1,155   

Trade names

     270         (190     80         270         (145     125   

Other

     13         (10     3         14         (8     6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,265       $ (7,023   $ 8,242       $ 16,157       $ (5,585   $ 10,572   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense, all of which relates to business acquisitions, was $0.6 million for the three months ended September 30, 2014 and 2013, and $1.7 million and $1.8 million for the nine months ended September 30, 2014 and 2013, respectively.

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

 

(In thousands)   

Amount

 

Remainder of 2014

   $ 548   

2015

     2,071   

2016

     1,800   

2017

     1,235   

2018

     748   

Thereafter

     1,840   
  

 

 

 

Total

   $ 8,242   
  

 

 

 
Stockholders' Equity
Stockholders' Equity

9. STOCKHOLDERS’ EQUITY

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

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2013

   $  604,606   

Net income

     35,328   

Dividend payments

     (15,060

Dividends accrued for unvested restricted stock units

     1   

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

     (2,850

Foreign currency translation adjustment

     (2,182

Proceeds from stock option exercises

     2,311   

Purchase of treasury stock

     (62,144

Income tax benefit from exercise of stock options

     71   

Stock-based compensation expense

     6,296   
  

 

 

 

Balance, September 30, 2014

   $ 566,377   
  

 

 

 

 

Stock Repurchase Program

Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 40.0 million shares of our common stock. On May 14, 2014, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock (bringing the total shares authorized for repurchase to 45.0 million), which will commence upon completion of the repurchase plan announced May 1, 2013. This new authorization will be implemented through open market or private purchases from time to time as conditions warrant.

During the nine months ended September 30, 2014, we repurchased 2.7 million shares of our common stock at an average price of $22.68 per share. We currently have the authority to purchase an additional 5.7 million shares of our common stock under the current plans approved by the Board of Directors.

Stock Option Exercises

We issued 0.1 million shares of treasury stock during the nine months ended September 30, 2014 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $23.46. We received proceeds totaling $2.3 million from the exercise of these stock options during the nine months ended September 30, 2014.

Dividend Payments

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

 

Record Date

  

Payment Date

  

Per Share Amount

  

Total Dividend Paid

February 6, 2014

   February 20, 2014    $0.09    $5,102

May 1, 2014

   May 15, 2014    $0.09    $5,035

July 31, 2014

   August 14, 2014    $0.09    $4,923

Other Comprehensive Income

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

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

 

     Three Months Ended September 30, 2014  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

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

Other comprehensive income (loss) before reclassifications

     (1,602     —          (2,568     (4,170

Amounts reclassified from accumulated other comprehensive income

     (1,546     —          —          (1,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     (3,148     —          (2,568     (5,716
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,887      $ (891   $ (1,275   $ 5,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2013  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-

for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

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

Other comprehensive income (loss) before reclassifications

     3,522        —          (108     3,414   

Amounts reclassified from accumulated other comprehensive income

     (960     —          —          (960
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     2,562        —          (108     2,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Nine Months Ended September 30, 2014  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

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

Other comprehensive income (loss) before reclassifications

     1,316        —          (2,182     (866

Amounts reclassified from accumulated other comprehensive income

     (4,166     —          —          (4,166
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     (2,850     —          (2,182     (5,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,887      $ (891   $ (1,275   $ 5,721   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2013  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

   $  10,108      $ (1,952   $ 3,112      $ 11,268   

Other comprehensive income (loss) before reclassifications

     3,174        —          (1,498     1,676   

Amounts reclassified from accumulated other comprehensive income

     (3,954     —          —          (3,954
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     (780     —          (1,498     (2,278
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

(In thousands)    Three Months Ended September 30, 2014  

Details about Accumulated Other

Comprehensive Income Components

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

Income Is Presented
 

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

    

Net realized gain on sales of securities

   $ 2,565        Net realized investment gain   

Impairment expense

     (30     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     2,535     

Tax (expense) benefit

     (989  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 1,546     
  

 

 

   

 

(In thousands)    Three Months Ended September 30, 2013  

Details about Accumulated Other

Comprehensive Income Components

   Amount Reclassified
from Accumulated
Other Comprehensive
Income
   

Affected Line Item in the
Statement Where Net

Income Is Presented

 

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

    

Net realized gain on sales of securities

   $ 1,583        Net realized investment gain   

Impairment expense

     (9     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     1,574     

Tax (expense) benefit

     (614  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 960     
  

 

 

   

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

 

(In thousands)    Nine Months Ended September 30, 2014  

Details about Accumulated Other

Comprehensive Income Components

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

Income Is Presented
 

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

    

Net realized gain on sales of securities

   $ 6,895        Net realized investment gain   

Impairment expense

     (64     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     6,831     

Tax (expense) benefit

     (2,665  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 4,166     
  

 

 

   

 

(In thousands)    Nine Months Ended September 30, 2013  

Details about Accumulated Other

Comprehensive Income Components

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

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

    

Net realized gain on sales of securities

   $ 6,496        Net realized investment gain   

Impairment expense

     (13     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     6,483     

Tax (expense) benefit

     (2,529  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 3,954     
  

 

 

   

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

 

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

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

   $ (2,626   $ 1,024       $ (1,602   $ 5,774      $ (2,252   $ 3,522   

Reclassification adjustment for amounts included in net income

     (2,535     989         (1,546     (1,574     614        (960

Foreign currency translation adjustment

     (2,568     —           (2,568     (108     —          (108
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (7,729   $ 2,013       $ (5,716   $ 4,092      $ (1,638   $ 2,454   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

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

   $ 2,157      $ (841   $ 1,316      $ 5,203      $ (2,029   $ 3,174   

Reclassification adjustment for amounts included in net income

     (6,831     2,665        (4,166     (6,483     2,529        (3,954

Foreign currency translation adjustment

     (2,182     —          (2,182     (1,498     —          (1,498
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (6,856   $ 1,824      $ (5,032   $ (2,778   $ 500      $ (2,278
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Earnings Per Share
Earnings Per Share

10. EARNINGS PER SHARE

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands, except per share amounts)    2014      2013      2014      2013  

Numerator

           

Net income

   $ 11,326       $ 16,205       $ 35,328       $ 33,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     54,521         57,947         55,552         59,561   

Effect of dilutive securities

           

Stock options

     266         613         402         321   

Restricted stock and restricted stock units

     37         57         22         47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     54,824         58,617         55,976         59,929   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.21       $ 0.28       $ 0.64       $ 0.57   

Net income per share – diluted

   $ 0.21       $ 0.28       $ 0.63       $ 0.57   

Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 4.5 million and 2.5 million for the three months ended September 30, 2014 and 2013, respectively, and 3.1 million and 3.3 million for the nine months ended September 30, 2014 and 2013, respectively.

Segment Information
Segment Information

11. SEGMENT INFORMATION

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

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

 

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

Carrier Networks

   $ 132,972       $ 61,687       $ 141,278       $ 63,066   

Enterprise Networks

     29,920         16,570         36,126         19,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,892       $ 78,257       $ 177,404       $ 82,547   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30, 2014      September 30, 2013  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 394,589       $ 191,093       $ 374,498       $ 172,570   

Enterprise Networks

     91,436         51,751         108,152         59,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 486,025       $ 242,844       $ 482,650       $ 232,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Sales by Product

Our three major product categories are Carrier Systems, Business Networking and Loop Access.

Carrier Systems products are used by communications service providers to provide data, voice and video services to consumers and enterprises. This category includes the following product areas and related services:

 

    Broadband Access

 

    Total Access® 5000 Multi-Service Access Node (MSAN)

 

    hiX family of MSANs

 

    Total Access 1100/1200 Series of Fiber to the Node (FTTN) products

 

    Ultra Broadband Ethernet (UBE)

 

    Digital Subscriber Line Access Multiplexer (DSLAM) products

 

    Optical

 

    Optical Networking Edge (ONE)

 

    NetVanta 8000 Series of Fiber Ethernet Access Devices (EAD)

 

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

 

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

 

    TDM systems

Business Networking products provide access to communication services and facilitate the delivery of cloud connectivity and enterprise communications to distributed enterprises and small and medium-sized businesses. This category includes the following product areas and related services:

 

    Internetworking products

 

    Total Access IP Business Gateways

 

    Optical Network Terminals (ONTs)

 

    Bluesocket® virtual Wireless LAN (vWLAN®)

 

    NetVanta®

 

  - Multiservice Routers

 

  - Managed Ethernet Switches

 

  - IP Business Gateways

 

  - Unified Communications (UC) solutions

 

  - Carrier Ethernet Network Terminating Equipment (NTE)

 

    Network Management Solutions

 

    Integrated Access Devices (IADs)

Loop Access products are used by carrier and enterprise customers for access to copper-based communications networks. This category includes the following product areas and related services:

 

    High bit-rate Digital Subscriber Line (HDSL) products

 

    Digital Data Service (DDS)

 

    Integrated Services Digital Network (ISDN) products

 

    T1/E1/T3 Channel Service Units/Data Service Units (CSUs/DSUs)

 

    TRACER fixed-wireless products

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2014      2013      2014      2013  

Carrier Systems

   $ 113,950       $ 120,778       $ 342,327       $ 319,119   

Business Networking

     39,746         44,213         119,634         127,668   

Loop Access

     9,196         12,413         24,064         35,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,892       $ 177,404       $ 486,025       $ 482,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2014      2013      2014      2013  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 96,084       $ 98,132       $ 285,920       $ 251,994   

Optical (included in Carrier Systems)

     13,686         16,640         42,308         41,500   

Internetworking (included in Business Networking)

     38,630         43,329         116,562         124,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     148,400         158,101         444,790         417,657   

Legacy Products

           

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

     8,400         11,487         22,075         33,183   

Other products (excluding HDSL)

     6,092         7,816         19,160         31,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     14,492         19,303         41,235         64,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,892       $ 177,404       $ 486,025       $ 482,650   
  

 

 

    

 

 

    

 

 

    

 

 

 
Liability for Warranty Returns
Liability for Warranty Returns

12. LIABILITY FOR WARRANTY RETURNS

Our products generally include warranties of 90 days to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to systems products. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $8.6 million at September 30, 2014 and $9.0 million at December 31, 2013. The decrease from December 31, 2013 to September 30, 2014 includes a $1.5 million decrease related to the settlement of an outstanding warranty claim, which corresponds to a reduction in Other Receivables. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

 

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

 

     Nine Months Ended  
     September 30,  
(In thousands)    2014     2013  

Balance at beginning of period

   $ 8,977      $ 9,653   

Plus: Amounts charged to cost and expenses

     2,770        2,078   

Less: Deductions

     (3,099     (3,120
  

 

 

   

 

 

 

Balance at end of period

   $ 8,648      $ 8,611   
  

 

 

   

 

 

 

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

Related Party Transactions
Related Party Transactions

13. RELATED PARTY TRANSACTIONS

We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. The services of our director emeritus ended with his death on September 7, 2014. We incurred fees of $10 thousand and $30 thousand for the three months ended September 30, 2014 and 2013, respectively, and $70 thousand and $90 thousand for the nine months ended September 30, 2014 and 2013, respectively, for these legal services.

Commitments and Contingencies
Commitments and Contingencies

14. COMMITMENTS AND CONTINGENCIES

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

We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2014, of which $7.7 million has been applied to these commitments.

Subsequent Events
Subsequent Events

15. SUBSEQUENT EVENTS

On October 14, 2014, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on October 30, 2014. The payment date will be November 13, 2014. The quarterly dividend payment will be approximately $4.9 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.

During the fourth quarter and as of November 5, 2014, we have repurchased 0.2 million shares of our common stock through open market purchases at an average cost of $20.47 per share. We currently have the authority to purchase an additional 5.5 million shares of our common stock under the current plan approved by the Board of Directors.

Summary of Significant Accounting Policies (Policies)

Basis of Presentation

The accompanying unaudited consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (ADTRAN) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2013 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on February 27, 2014 with the SEC.

Changes in Classifications

We corrected immaterial misclassifications between the operating and investing sections of our consolidated statements of cash flows and adjusted our cash flows for the nine months ended September 30, 2013 in these categories by $0.4 million in order to be consistent with the 2014 presentation.

Out of Period Adjustment

During the year ended December 31, 2013, we identified two adjustments in the acquired NSN (formerly Nokia Siemens Networks) Broadband Access business (NSN BBA business) relating to customer payment discounts for one customer, and recoverable VAT taxes on certain vendor freight invoices that should have been recorded in prior periods. These adjustments resulted from a $0.5 million understatement of net income in the first two quarters of 2013. We evaluated the impact of the adjustments on the results of our previously issued financial statements for each of the prior periods affected and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in 2013 and concluded that the impact is not material to our results for the year 2013. Accordingly, during the three months ended September 30, 2013 we recorded an out of period adjustment to correct these issues.

Use of Estimates

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

Recent Accounting Pronouncements

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

Other Comprehensive Income

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

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

We evaluate the carrying value of goodwill, generated from our acquisition of Bluesocket, Inc. and assigned to our Enterprise Networks division, during the fourth quarter of each year. We may perform additional evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There have been no impairment losses recorded since acquisition.

Our products generally include warranties of 90 days to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to systems products. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods.

Pension Benefit Plan (Tables)
Summarization of Components of Net Periodic Pension Cost

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2014     2013     2014     2013  

Service cost

   $ 299      $ 297      $ 910      $ 891   

Interest cost

     209        185        640        554   

Expected return on plan assets

     (272     (250     (831     (751
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 236      $ 232      $ 719      $ 694   
  

 

 

   

 

 

   

 

 

   

 

 

 
Stock-Based Compensation (Tables)

The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock for the three and nine months ended September 30, 2014 and 2013, which was recognized as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2014     2013     2014     2013  

Stock-based compensation expense included in cost of sales

   $ 124      $ 118      $ 359      $ 334   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expense

     1,048        1,024        3,089        3,129   

Research and development expense

     975        1,034        2,848        3,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense included in operating expenses

     2,023        2,058        5,937        6,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

     2,147        2,176        6,296        6,516   

Tax benefit for expense associated with non-qualified options

     (298     (307     (878     (924
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense, net of tax

   $ 1,849      $ 1,869      $ 5,418      $ 5,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Nine Months Ended  
    

September 30, 2014

 

Expected volatility

     39.57

Risk-free interest rate

     1.86

Expected dividend yield

     1.38

Expected life (in years)

     6.25   

Weighted-average estimated value

   $ 9.28   

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

 

(In thousands, except per share amounts)    Number of
Options
    Weighted Avg.
Exercise Price
     Weighted Avg.
Remaining
Contractual
Life In Years
     Aggregate
Intrinsic
Value
 

Options outstanding, December 31, 2013

     6,358      $ 24.43         6.60       $ 25,878   

Options granted

     2      $ 26.03         

Options cancelled/forfeited

     (203   $ 25.86         

Options exercised

     (117   $ 19.66         
  

 

 

   

 

 

    

 

 

    

 

 

 

Options outstanding, September 30, 2014

     6,040      $ 24.47         5.85       $ 5,699   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable, September 30, 2014

     3,961      $ 25.14         4.59       $ 3,295   
  

 

 

   

 

 

    

 

 

    

 

 

 
Investments (Tables)

At September 30, 2014, we held the following securities and investments, recorded at either fair value or cost.

 

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

Deferred compensation plan assets

   $ 12,852       $ 2,660       $ (14   $ 15,498   

Corporate bonds

     102,196         345         (21     102,520   

Municipal fixed-rate bonds

     150,098         691         (16     150,773   

Municipal variable rate demand notes

     18,000         —           —          18,000   

Marketable equity securities

     26,542         9,996         (757     35,781   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

   $ 309,688       $ 13,692       $ (808   $ 322,572   
  

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             30,000   

Other investments held at cost

             1,557   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 354,129   
          

 

 

 

At December 31, 2013, we held the following securities and investments, recorded at either fair value or cost.

 

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

Deferred compensation plan assets

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

Corporate bonds

     166,370         534         (45     166,859   

Municipal fixed-rate bonds

     135,773         583         (54     136,302   

Municipal variable rate demand notes

     8,310         —           —          8,310   

Marketable equity securities

     24,654         13,975         (177     38,452   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities held at fair value

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

 

 

    

 

 

    

 

 

   

Restricted investment held at cost

             48,250   

Other investments held at cost

             1,689   
          

 

 

 

Total carrying value of available-for-sale investments

           $ 414,985   
          

 

 

 

As of September 30, 2014, our corporate bonds and municipal fixed-rate bonds had the following contractual maturities:

 

(In thousands)    Corporate
bonds
     Municipal
fixed-rate
bonds
 

Less than one year

   $ 4,643       $ 31,631   

One to two years

     64,168         69,253   

Two to three years

     33,709         39,809   

Three to five years

     —           10,080   
  

 

 

    

 

 

 

Total

   $ 102,520       $ 150,773   
  

 

 

    

 

 

 

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

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2014     2013     2014     2013  

Gross realized gains

   $ 2,728      $ 1,797      $ 7,363      $ 7,252   

Gross realized losses

   $ (41   $ (46   $ (144   $ (303

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, 2014 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

   $ 9,861       $ 9,861       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,498         15,498         —           —     

Available-for-sale debt securities

           

Corporate bonds

     102,520         —           102,520         —     

Municipal fixed-rate bonds

     150,773         —           150,773         —     

Municipal variable rate demand notes

     18,000         —           18,000         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     8,879         8,879         —           —     

Marketable equity securities – other

     26,902         26,902         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     322,572         51,279         271,293         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 332,433       $ 61,140       $ 271,293       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2013 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Market for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

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

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     15,123         15,123         —           —     

Available-for-sale debt securities

           

Corporate bonds

     166,859         —           166,859         —     

Municipal fixed-rate bonds

     136,302         —           136,302         —     

Municipal variable rate demand notes

     8,310         —           8,310         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     11,398         11,398         —           —     

Marketable equity securities – other

     27,054         27,054         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     365,046         53,575         311,471         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 
Derivative Instruments and Hedging Activities (Tables)

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

 

     Balance Sheet      September 30,     December 31,  
(In thousands)    Location      2014     2013  

Derivatives Not Designated as Hedging Instruments (Level 2):

       

Foreign exchange contracts – asset derivatives

     Other receivables       $ 99      $ 18   

Foreign exchange contracts – liability derivatives

     Accounts payable       $ (22   $ (15

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

 

         Three Months Ended      Nine Months Ended  
     Income Statement   September 30,      September 30,  
(In thousands)    Location   2014     2013      2014     2013  

Derivatives Not Designated as Hedging Instruments:

           

Foreign exchange contracts

   Other income (expense)   $ (191   $ 52       $ (739   $ (34
Inventory (Tables)
Components of Inventory

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

 

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

Raw materials

   $ 37,856       $ 44,093   

Work in process

     3,920         3,484   

Finished goods

     45,103         42,534   
  

 

 

    

 

 

 

Total

   $ 86,879       $ 90,111   
  

 

 

    

 

 

 
Goodwill and Intangible Assets (Tables)

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

 

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

Gross
Value

    

Accumulated
Amortization

   

Net Value

    

Gross
Value

    

Accumulated
Amortization

   

Net Value

 

Customer relationships

   $ 6,515       $ (2,013   $ 4,502       $ 6,996       $ (1,555   $ 5,441   

Developed technology

     6,127         (3,374     2,753         6,537         (2,692     3,845   

Intellectual property

     2,340         (1,436     904         2,340         (1,185     1,155   

Trade names

     270         (190     80         270         (145     125   

Other

     13         (10     3         14         (8     6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,265       $ (7,023   $ 8,242       $ 16,157       $ (5,585   $ 10,572   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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

 

(In thousands)   

Amount

 

Remainder of 2014

   $ 548   

2015

     2,071   

2016

     1,800   

2017

     1,235   

2018

     748   

Thereafter

     1,840   
  

 

 

 

Total

   $ 8,242   
  

 

 

 
Stockholders' Equity (Tables)

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

 

(In thousands)    Stockholders’
Equity
 

Balance, December 31, 2013

   $  604,606   

Net income

     35,328   

Dividend payments

     (15,060

Dividends accrued for unvested restricted stock units

     1   

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

     (2,850

Foreign currency translation adjustment

     (2,182

Proceeds from stock option exercises

     2,311   

Purchase of treasury stock

     (62,144

Income tax benefit from exercise of stock options

     71   

Stock-based compensation expense

     6,296   
  

 

 

 

Balance, September 30, 2014

   $ 566,377   
  

 

 

 

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

 

Record Date

  

Payment Date

  

Per Share Amount

  

Total Dividend Paid

February 6, 2014

   February 20, 2014    $0.09    $5,102

May 1, 2014

   May 15, 2014    $0.09    $5,035

July 31, 2014

   August 14, 2014    $0.09    $4,923

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

 

     Three Months Ended September 30, 2014  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

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

Other comprehensive income (loss) before reclassifications

     (1,602     —          (2,568     (4,170

Amounts reclassified from accumulated other comprehensive income

     (1,546     —          —          (1,546
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     (3,148     —          (2,568     (5,716
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,887      $ (891   $ (1,275   $ 5,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2013  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-

for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

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

Other comprehensive income (loss) before reclassifications

     3,522        —          (108     3,414   

Amounts reclassified from accumulated other comprehensive income

     (960     —          —          (960
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     2,562        —          (108     2,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Nine Months Ended September 30, 2014  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

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

Other comprehensive income (loss) before reclassifications

     1,316        —          (2,182     (866

Amounts reclassified from accumulated other comprehensive income

     (4,166     —          —          (4,166
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     (2,850     —          (2,182     (5,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 7,887      $ (891   $ (1,275   $ 5,721   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2013  
(In thousands)   

Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities

   

Defined
Benefit Plan
Adjustments

   

Foreign
Currency
Adjustments

   

Total

 

Beginning balance

   $  10,108      $ (1,952   $ 3,112      $ 11,268   

Other comprehensive income (loss) before reclassifications

     3,174        —          (1,498     1,676   

Amounts reclassified from accumulated other comprehensive income

     (3,954     —          —          (3,954
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income(loss)

     (780     —          (1,498     (2,278
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,328      $ (1,952   $ 1,614      $ 8,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(In thousands)    Three Months Ended September 30, 2014  

Details about Accumulated Other

Comprehensive Income Components

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

Income Is Presented
 

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

    

Net realized gain on sales of securities

   $ 2,565        Net realized investment gain   

Impairment expense

     (30     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     2,535     

Tax (expense) benefit

     (989  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 1,546     
  

 

 

   

 

(In thousands)    Three Months Ended September 30, 2013  

Details about Accumulated Other

Comprehensive Income Components

   Amount Reclassified
from Accumulated
Other Comprehensive
Income
   

Affected Line Item in the
Statement Where Net

Income Is Presented

 

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

    

Net realized gain on sales of securities

   $ 1,583        Net realized investment gain   

Impairment expense

     (9     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     1,574     

Tax (expense) benefit

     (614  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 960     
  

 

 

   

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

 

(In thousands)    Nine Months Ended September 30, 2014  

Details about Accumulated Other

Comprehensive Income Components

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

Income Is Presented
 

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

    

Net realized gain on sales of securities

   $ 6,895        Net realized investment gain   

Impairment expense

     (64     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     6,831     

Tax (expense) benefit

     (2,665  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 4,166     
  

 

 

   

 

(In thousands)    Nine Months Ended September 30, 2013  

Details about Accumulated Other

Comprehensive Income Components

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

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

    

Net realized gain on sales of securities

   $ 6,496        Net realized investment gain   

Impairment expense

     (13     Net realized investment gain   
  

 

 

   

Total reclassifications for the period, before tax

     6,483     

Tax (expense) benefit

     (2,529  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 3,954     
  

 

 

   

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

 

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

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

   $ (2,626   $ 1,024       $ (1,602   $ 5,774      $ (2,252   $ 3,522   

Reclassification adjustment for amounts included in net income

     (2,535     989         (1,546     (1,574     614        (960

Foreign currency translation adjustment

     (2,568     —           (2,568     (108     —          (108
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (7,729   $ 2,013       $ (5,716   $ 4,092      $ (1,638   $ 2,454   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

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

   $ 2,157      $ (841   $ 1,316      $ 5,203      $ (2,029   $ 3,174   

Reclassification adjustment for amounts included in net income

     (6,831     2,665        (4,166     (6,483     2,529        (3,954

Foreign currency translation adjustment

     (2,182     —          (2,182     (1,498     —          (1,498
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (6,856   $ 1,824      $ (5,032   $ (2,778   $ 500      $ (2,278
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands, except per share amounts)    2014      2013      2014      2013  

Numerator

           

Net income

   $ 11,326       $ 16,205       $ 35,328       $ 33,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of shares – basic

     54,521         57,947         55,552         59,561   

Effect of dilutive securities

           

Stock options

     266         613         402         321   

Restricted stock and restricted stock units

     37         57         22         47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     54,824         58,617         55,976         59,929   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.21       $ 0.28       $ 0.64       $ 0.57   

Net income per share – diluted

   $ 0.21       $ 0.28       $ 0.63       $ 0.57   
Segment Information (Tables)

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

 

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

Carrier Networks

   $ 132,972       $ 61,687       $ 141,278       $ 63,066   

Enterprise Networks

     29,920         16,570         36,126         19,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,892       $ 78,257       $ 177,404       $ 82,547   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended  
     September 30, 2014      September 30, 2013  
(In thousands)    Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 394,589       $ 191,093       $ 374,498       $ 172,570   

Enterprise Networks

     91,436         51,751         108,152         59,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 486,025       $ 242,844       $ 482,650       $ 232,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2014      2013      2014      2013  

Carrier Systems

   $ 113,950       $ 120,778       $ 342,327       $ 319,119   

Business Networking

     39,746         44,213         119,634         127,668   

Loop Access

     9,196         12,413         24,064         35,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,892       $ 177,404       $ 486,025       $ 482,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
(In thousands)    2014      2013      2014      2013  

Core Products

           

Broadband Access (included in Carrier Systems)

   $ 96,084       $ 98,132       $ 285,920       $ 251,994   

Optical (included in Carrier Systems)

     13,686         16,640         42,308         41,500   

Internetworking (included in Business Networking)

     38,630         43,329         116,562         124,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     148,400         158,101         444,790         417,657   

Legacy Products

           

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

     8,400         11,487         22,075         33,183   

Other products (excluding HDSL)

     6,092         7,816         19,160         31,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     14,492         19,303         41,235         64,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,892       $ 177,404       $ 486,025       $ 482,650   
  

 

 

    

 

 

    

 

 

    

 

 

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

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

 

     Nine Months Ended  
     September 30,  
(In thousands)    2014     2013  

Balance at beginning of period

   $ 8,977      $ 9,653   

Plus: Amounts charged to cost and expenses

     2,770        2,078   

Less: Deductions

     (3,099     (3,120
  

 

 

   

 

 

 

Balance at end of period

   $ 8,648      $ 8,611   
  

 

 

   

 

 

 
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Adjustments to Operating Activities [Member]
Sep. 30, 2014
Adjustments to Investing Activities [Member]
Sep. 30, 2013
Immaterial Corrections [Member]
Summary of Significant Accounting Policy [Line Items]
 
 
 
Prior period reclassification adjustment
$ 0.4 
$ 0.4 
 
Understatement of net income in the first two quarters of 2013
 
 
$ 0.5 
Income Taxes - Additional Information (Detail)
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Income Tax Disclosure [Abstract]
 
 
Effective tax rate
31.50% 
27.00% 
Pension Benefit Plan - Summarization of Components of Net Periodic Pension Cost (Detail) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Compensation and Retirement Disclosure [Abstract]
 
 
 
 
Service cost
$ 299 
$ 297 
$ 910 
$ 891 
Interest cost
209 
185 
640 
554 
Expected return on plan assets
(272)
(250)
(831)
(751)
Net periodic pension cost
$ 236 
$ 232 
$ 719 
$ 694 
Stock-Based Compensation - Additional Information (Detail) (USD $)
In Millions, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Number of Options, granted
2,000 
Estimated forfeitures for stock options
 
 
2.50% 
 
Forfeiture rate for RSUs and restricted stock
 
 
0.00% 
 
Compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized
$ 11.6 
 
$ 11.6 
 
Recognition period of non-vested compensation cost
 
 
2 years 3 months 18 days 
 
Total pre-tax intrinsic value of options exercised
$ 0.1 
 
$ 0.6 
 
Restricted Stock Units (RSUs) [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Number of RSUs and restricted stock grants in period
Number of RSUs and restricted stock forfeitures in period
Number of RSUs and restricted stock vesting in period
Restricted Stock [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Number of RSUs and restricted stock grants in period
 
 
4,000 
 
Number of RSUs and restricted stock forfeitures in period
Number of RSUs and restricted stock vesting in period
Restricted stock grants , fair value
 
 
$ 21.30 
 
Stock-Based Compensation - Summary of Weighted-Average Assumptions and Value of Options Granted (Detail)
9 Months Ended
Sep. 30, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
Expected volatility
39.57% 
Risk-free interest rate
1.86% 
Expected dividend yield
1.38% 
Expected life (in years)
6 years 3 months 
Weighted-average estimated value
$ 9.28 
Stock-Based Compensation - Summary of Stock Options Outstanding (Detail) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Dec. 31, 2013
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
 
 
 
 
Number of Options, outstanding, Beginning Balance
 
 
6,358,000 
 
 
Number of Options, granted
2,000 
 
Number of Options, cancelled/forfeited
 
 
(203,000)
 
 
Number of Options, exercised
 
 
(117,000)
 
 
Number of Options, outstanding, Ending Balance
6,040,000 
 
6,040,000 
 
6,358,000 
Number of Options, Options exercisable
3,961,000 
 
3,961,000 
 
 
Weighted Average Exercise Price, outstanding, Beginning Balance
 
 
$ 24.43 
 
 
Weighted Average Exercise Price, granted
 
 
$ 26.03 
 
 
Weighted Average Exercise Price, cancelled/forfeited
 
 
$ 25.86 
 
 
Weighted Average Exercise Price, exercised
 
 
$ 19.66 
 
 
Weighted Average Exercise Price, outstanding, Ending Balance
$ 24.47 
 
$ 24.47 
 
$ 24.43 
Weighted Average Exercise Price, Options exercisable
$ 25.14 
 
$ 25.14 
 
 
Weighted Average Remaining Contractual Life In Years, Options outstanding
 
 
5 years 10 months 6 days 
 
6 years 7 months 6 days 
Weighted Average Remaining Contractual Life In Years, Options exercisable
 
 
4 years 7 months 2 days 
 
 
Aggregate Intrinsic Value, Options outstanding, Beginning Balance
$ 5,699 
 
$ 5,699 
 
$ 25,878 
Aggregate Intrinsic Value, Options exercisable
$ 3,295 
 
$ 3,295 
 
 
Investments - Securities and Investments, Recorded at Either Fair Value or Cost (Detail) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
$ 309,688 
$ 347,407 
Gross Unrealized Gains
13,692 
17,939 
Gross Unrealized Losses
(808)
(300)
Available-for-sale-securities, Fair Value/Carrying Value
322,572 
365,046 
Restricted investment held at cost
30,000 
48,250 
Other investments held at cost
1,557 
1,689 
Total carrying value of available-for-sale investments
354,129 
414,985 
Deferred Compensation Plan Assets [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
12,852 
12,300 
Gross Unrealized Gains
2,660 
2,847 
Gross Unrealized Losses
(14)
(24)
Available-for-sale-securities, Fair Value/Carrying Value
15,498 
15,123 
Corporate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
102,196 
166,370 
Gross Unrealized Gains
345 
534 
Gross Unrealized Losses
(21)
(45)
Available-for-sale-securities, Fair Value/Carrying Value
102,520 
166,859 
Municipal Fixed-Rate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
150,098 
135,773 
Gross Unrealized Gains
691 
583 
Gross Unrealized Losses
(16)
(54)
Available-for-sale-securities, Fair Value/Carrying Value
150,773 
136,302 
Municipal Variable Rate Demand Notes [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
18,000 
8,310 
Available-for-sale-securities, Fair Value/Carrying Value
18,000 
8,310 
Marketable Equity Securities [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
26,542 
24,654 
Gross Unrealized Gains
9,996 
13,975 
Gross Unrealized Losses
(757)
(177)
Available-for-sale-securities, Fair Value/Carrying Value
$ 35,781 
$ 38,452 
Investments - Contractual Maturities of Corporate and Municipal Fixed-Rate Bonds (Detail) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale-securities, Fair Value/Carrying Value
$ 322,572 
$ 365,046 
Corporate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Less than one year
4,643 
 
One to two years
64,168 
 
Two to three years
33,709 
 
Three to five years
   
 
Available-for-sale-securities, Fair Value/Carrying Value
102,520 
166,859 
Municipal Fixed-Rate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Less than one year
31,631 
 
One to two years
69,253 
 
Two to three years
39,809 
 
Three to five years
10,080 
 
Available-for-sale-securities, Fair Value/Carrying Value
$ 150,773 
$ 136,302 
Investments - Additional Information (Detail) (USD $)
3 Months Ended 9 Months Ended
Mar. 31, 2014
Sep. 30, 2014
Dec. 31, 2013
Schedule of Investments [Line Items]
 
 
 
Restricted certificate of deposit held
 
$ 30,000,000 
$ 48,250,000 
Principal payment on the Bond
16,500,000 
16,500,000 
 
Identification of potential other-than-temporary impairments
 
25.00% 
 
Alabama State Industrial Development Authority [Member] |
Taxable Revenue Bond [Member] |
Significant Other Observable Inputs (Level 2) [Member]
 
 
 
Schedule of Investments [Line Items]
 
 
 
Estimated fair value of bond
 
$ 29,800,000 
 
Investment [Member] |
Issuer Concentration [Member] |
Market Value of Total Investment Portfolio [Member]
 
 
 
Schedule of Investments [Line Items]
 
 
 
Investment concentration risk percentage
 
5.00% 
 
Investments - Gross Realized Gains and Losses on Sale of Securities (Detail) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Investments, Debt and Equity Securities [Abstract]
 
 
 
 
Gross realized gains
$ 2,728 
$ 1,797 
$ 7,363 
$ 7,252 
Gross realized losses
$ (41)
$ (46)
$ (144)
$ (303)
Investments - Fair Value Measurements of Cash Equivalents Held in Money Market Funds and Investments (Detail) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale securities
$ 322,572 
$ 365,046 
Deferred Compensation Plan Assets [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale securities
15,498 
15,123 
Corporate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale securities
102,520 
166,859 
Municipal Fixed-Rate Bonds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale securities
150,773 
136,302 
Municipal Variable Rate Demand Notes [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Available-for-sale securities
18,000 
8,310 
Fair Value, Measurements, Recurring [Member]