ADTRAN INC, 10-K filed on 2/24/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 9, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
ADTN 
 
 
Entity Registrant Name
ADTRAN INC 
 
 
Entity Central Index Key
0000926282 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
53,440,375 
 
Entity Public Float
 
 
$ 1,228,547,070 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current Assets
 
 
Cash and cash equivalents
$ 73,439 
$ 58,298 
Short-term investments
46,919 
105,760 
Accounts receivable, less allowance for doubtful accounts of $136 and $130 at December 31, 2014 and 2013, respectively
86,158 
85,814 
Other receivables
35,639 
18,249 
Inventory, net
86,710 
90,111 
Prepaid expenses
5,129 
4,325 
Deferred tax assets, net
17,095 
17,083 
Total Current Assets
351,089 
379,640 
Property, plant and equipment, net
74,828 
76,739 
Deferred tax assets, net
17,694 
9,622 
Goodwill
3,492 
3,492 
Other assets
10,942 
11,180 
Long-term investments
280,649 
309,225 
Total Assets
738,694 
789,898 
Current Liabilities
 
 
Accounts payable
56,414 
48,282 
Unearned revenue
22,762 
22,205 
Accrued expenses
11,077 
12,776 
Accrued wages and benefits
13,855 
14,040 
Income tax payable, net
14,901 
5,002 
Total Current Liabilities
119,009 
102,305 
Non-current unearned revenue
10,948 
14,643 
Other non-current liabilities
30,924 
22,144 
Bonds payable
28,800 
46,200 
Total Liabilities
189,681 
185,292 
Commitments and contingencies (see Note 13)
   
   
Stockholders' Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 53,431 shares outstanding at December 31, 2014 and 79,652 shares issued and 56,918 shares outstanding at December 31, 2013
797 
797 
Additional paid-in capital
241,829 
233,511 
Accumulated other comprehensive income (loss)
(75)
10,753 
Retained earnings
907,751 
884,451 
Less treasury stock at cost: 26,221 and 22,734 shares at December 31, 2014 and 2013, respectively
(601,289)
(524,906)
Total Stockholders' Equity
549,013 
604,606 
Total Liabilities and Stockholders' Equity
$ 738,694 
$ 789,898 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 136 
$ 130 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
79,652,000 
79,652,000 
Common stock, shares outstanding
53,431,000 
56,918,000 
Treasury stock, shares
26,221,000 
22,734,000 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
Sales
$ 630,007 
$ 641,744 
$ 620,614 
Cost of sales
318,680 
332,858 
303,971 
Gross Profit
311,327 
308,886 
316,643 
Selling, general and administrative expenses
131,958 
129,366 
134,523 
Research and development expenses
132,258 
131,055 
125,951 
Operating Income
47,111 
48,465 
56,169 
Interest and dividend income
5,019 
7,012 
7,657 
Interest expense
(677)
(2,325)
(2,347)
Net realized investment gain
7,278 
8,614 
9,550 
Other income (expense), net
1,175 
(911)
183 
Gain on bargain purchase of a business
 
 
1,753 
Income before provision for income taxes
59,906 
60,855 
72,965 
Provision for income taxes
(15,286)
(15,061)
(25,702)
Net Income
$ 44,620 
$ 45,794 
$ 47,263 
Weighted average shares outstanding - basic
55,120 
59,001 
63,259 
Weighted average shares outstanding - diluted
55,482 
59,424 
63,774 
Earnings per common share - basic
$ 0.81 
$ 0.78 
$ 0.75 
Earnings per common share - diluted
$ 0.80 
$ 0.77 
$ 0.74 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
Net Income
$ 44,620 
$ 45,794 
$ 47,263 
Other Comprehensive Loss, net of tax:
 
 
 
Net unrealized gains (losses) on available-for-sale securities
(1,773)
629 
(52)
Defined benefit plan adjustments
(4,866)
1,061 
(1,952)
Foreign currency translation
(4,189)
(2,205)
170 
Other Comprehensive Loss, net of tax
(10,828)
(515)
(1,834)
Comprehensive Income, net of tax
$ 33,792 
$ 45,279 
$ 45,429 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Income [Member]
Beginning Balance at Dec. 31, 2011
$ 692,131 
$ 797 
$ 213,560 
$ 840,206 
$ (375,534)
$ 13,102 
Beginning Balance, Shares at Dec. 31, 2011
 
79,652 
 
 
 
 
Net Income
47,263 
 
 
47,263 
 
 
Other comprehensive loss, net of tax
(1,834)
 
 
 
 
(1,834)
Dividend payments
(22,813)
 
 
(22,813)
 
 
Dividends accrued for unvested restricted stock units
15 
 
 
15 
 
 
Stock options exercised
6,049 
 
 
2,659 
8,708 
 
Stock options exercised
(6,049)
 
 
(2,659)
(8,708)
 
Restricted stock units vested
212 
 
212 
547 
547 
 
Restricted stock units vested
(212)
 
(212)
(547)
(547)
 
Purchase of treasury stock
(39,362)
 
 
 
(39,362)
 
Income tax benefit from exercise of stock options
1,905 
 
1,905 
 
 
 
Stock-based compensation expense
9,264 
 
9,264 
 
 
 
Ending Balance at Dec. 31, 2012
692,406 
797 
224,517 
861,465 
(405,641)
11,268 
Ending Balance, Shares at Dec. 31, 2012
 
79,652 
 
 
 
 
Net Income
45,794 
 
 
45,794 
 
 
Other comprehensive loss, net of tax
(515)
 
 
 
 
(515)
Dividend payments
(21,412)
 
 
(21,412)
 
 
Dividends accrued for unvested restricted stock units
(23)
 
 
(23)
 
 
Stock options exercised
3,629 
 
 
762 
4,391 
 
Stock options exercised
(3,629)
 
 
(762)
(4,391)
 
Restricted stock units vested
248 
 
248 
611 
611 
 
Restricted stock units vested
(248)
 
(248)
(611)
(611)
 
Purchase of treasury stock
(124,267)
 
 
 
(124,267)
 
Income tax benefit from exercise of stock options
169 
 
169 
 
 
 
Stock-based compensation expense
9,073 
 
9,073 
 
 
 
Ending Balance at Dec. 31, 2013
604,606 
797 
233,511 
884,451 
(524,906)
10,753 
Ending Balance, Shares at Dec. 31, 2013
 
79,652 
 
 
 
 
Net Income
44,620 
 
 
44,620 
 
 
Other comprehensive loss, net of tax
(10,828)
 
 
 
 
(10,828)
Dividend payments
(19,947)
 
 
(19,947)
 
 
Dividends accrued for unvested restricted stock units
(19)
 
 
(19)
 
 
Stock options exercised
2,839 
 
 
558 
3,397 
 
Stock options exercised
(2,839)
 
 
(558)
(3,397)
 
Restricted stock units vested
326 
 
326 
796 
796 
 
Restricted stock units vested
(326)
 
(326)
(796)
(796)
 
Purchase of treasury stock
(80,576)
 
 
 
(80,576)
 
Income tax benefit from exercise of stock options
81 
 
81 
 
 
 
Stock-based compensation expense
8,563 
 
8,563 
 
 
 
Ending Balance at Dec. 31, 2014
$ 549,013 
$ 797 
$ 241,829 
$ 907,751 
$ (601,289)
$ (75)
Ending Balance, Shares at Dec. 31, 2014
 
79,652 
 
 
 
 
Consolidated Statements of Changes in Stockholders' Equity (Parenthetical)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Purchase of treasury stock, shares
3,669 
5,608 
1,786 
Treasury stock, shares issued
182 
217 
393 
Treasury Stock [Member]
 
 
 
Purchase of treasury stock, shares
3,669 
5,608 
1,786 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities
 
 
 
Net Income
$ 44,620 
$ 45,794 
$ 47,263 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,845 
14,628 
14,079 
Amortization of net premium on available-for-sale investments
4,360 
5,956 
8,257 
Net realized gain on long-term investments
(7,278)
(8,614)
(9,550)
Net (gain) loss on disposal of property, plant and equipment
142 
(214)
Gain on bargain purchase of a business
 
 
(1,753)
Stock-based compensation expense
8,563 
9,073 
9,264 
Deferred income taxes
(5,526)
(4,058)
(3,785)
Tax benefit from stock option exercises
81 
169 
1,905 
Excess tax benefits from stock-based compensation arrangements
(63)
(158)
(1,456)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
(2,769)
(5,541)
(2,847)
Other receivables
(20,439)
(1,549)
2,977 
Inventory
1,953 
10,265 
8,333 
Prepaid expenses and other assets
(3,627)
(11)
(1,045)
Accounts payable
9,973 
5,206 
7,510 
Accrued expenses and other liabilities
(166)
(15,146)
8,895 
Income taxes payable, net
11,168 
3,747 
(1,960)
Net cash provided by operating activities
55,837 
59,764 
85,873 
Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(11,256)
(8,173)
(12,320)
Proceeds from disposals of property, plant and equipment
 
266 
Proceeds from sales and maturities of available-for-sale investments
230,019 
343,567 
282,039 
Purchases of available-for-sale investments
(142,695)
(261,625)
(282,740)
Acquisition of business, net of cash acquired
 
 
7,496 
Net cash provided by (used in) investing activities
76,069 
73,769 
(5,259)
Cash flows from financing activities
 
 
 
Proceeds from stock option exercises
2,839 
3,629 
6,049 
Purchases of treasury stock
(80,576)
(124,267)
(39,362)
Dividend payments
(19,947)
(21,412)
(22,813)
Payments on long-term debt
(16,500)
(500)
Excess tax benefits from stock-based compensation arrangements
63 
158 
1,456 
Net cash used in financing activities
(114,121)
(141,892)
(55,170)
Net increase (decrease) in cash and cash equivalents
17,785 
(8,359)
25,444 
Effect of exchange rate changes
(2,644)
(1,800)
34 
Cash and cash equivalents, beginning of year
58,298 
68,457 
42,979 
Cash and cash equivalents, end of year
73,439 
58,298 
68,457 
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the year for interest
758 
2,325 
2,348 
Cash paid during the year for income taxes
9,856 
15,431 
31,021 
Supplemental disclosure of non-cash investing activities
 
 
 
Purchases of property, plant and equipment included in accounts payable
$ 467 
$ 444 
$ 108 
Nature of Business and Summary of Significant Accounting Policies
Nature of Business and Summary of Significant Accounting Policies

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

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

Principles of Consolidation

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

Changes in Classifications

We corrected immaterial misclassifications between the operating and investing sections of our consolidated statements of cash flows and adjusted our 2012 cash flows in these categories by $0.2 million, in order to be consistent with the 2014 and 2013 presentation.

Additionally, changes in classifications have been made to the prior period balances in other comprehensive income to conform to the current period’s presentation as a result of our adoption of Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income.

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 $0.4 million understatement of net income in 2012. We evaluated the impact of the adjustments on the results of our previously issued financial statements for the prior period affected and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in the current year and concluded that the impact was not material to our results for the year 2013. Accordingly, during the year ended December 31, 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 pension liability, fair value of investments, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions, and determined the risk of material financial loss due to the exposure of such credit risk to be minimal. As of December 31, 2014, $69.6 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits.

 

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $30.0 million, compared to an estimated fair value of $29.7 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.

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

Long-term investments represent a restricted certificate of deposit held at cost, municipal fixed-rate bonds, corporate bonds, deferred compensation plan assets, marketable equity securities, and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. We periodically review our investment portfolio for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2014 and 2013 are classified as available-for-sale securities. See Note 4 of Notes to Consolidated Financial Statements for additional information.

Accounts Receivable

We record accounts receivable at net realizable value. Prior to issuing payment terms to a new customer, we perform a detailed credit review of the customer. Credit limits are established for each new customer based on the results of this credit review. Payment terms are established for each new customer, and collection experience is reviewed periodically in order to determine if the customer’s payment terms and credit limits need to be revised. At December 31, 2014, two customers accounted for 24.5% of our total accounts receivable. At December 31, 2013, one customer accounted for 13.1% of our total accounts receivable.

We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required payments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events and our historical experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, we may be required to record an allowance for doubtful accounts. If circumstances change with regard to individual receivable balances that have previously been determined to be uncollectible (and for which a specific reserve has been established), a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was $0.1 million at December 31, 2014 and December 31, 2013.

Other Receivables

Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers, accrued interest on investments and on a restricted certificate of deposit, amounts due from various jurisdictions for value-added tax, and amounts due from employee stock option exercises. At December 31, 2014 and 2013, other receivables also included a receivable due from NSN related to working capital items settled during the fourth quarter of 2014 and collected in January 2015.

Inventory

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

 

Property, Plant and Equipment

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

Liability for Warranty

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 $8.4 million and $9.0 million at December 31, 2014 and 2013, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

A summary of warranty expense and write-off activity for the years ended December 31, 2014, 2013 and 2012 is as follows:

 

Year Ended December 31,    2014      2013      2012  
(In thousands)                     

Balance at beginning of period

   $ 8,977       $ 9,653       $ 4,118   

Plus: Amounts charged to cost and expenses

     3,103         4,051         5,363   

 Amounts assumed on acquisition

     —           —           3,781   

Less: Deductions

     (3,665      (4,727      (3,609
  

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 8,415    $ 8,977    $ 9,653   
  

 

 

    

 

 

    

 

 

 

Pension Benefit Plan Obligations

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

Stock-Based Compensation

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

Under the provisions of our approved plans, we made grants of performance-based restricted stock units to certain of our executive officers in 2014, 2013, and 2012. The restricted stock units are subject to a market condition based on the relative total shareholder return of ADTRAN against all the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The restricted stock units are converted into shares of common stock upon vesting. Depending on the relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. The recipients of the restricted stock units also earn dividend credits during the performance period, which will be paid in cash upon the issuance of common stock for the restricted stock units.

 

Stock-based compensation expense recognized in 2014, 2013 and 2012 was approximately $8.6 million, $9.1 million and $9.3 million, respectively. As of December 31, 2014, total compensation cost related to non-vested stock options, restricted stock units and restricted stock not yet recognized was approximately $17.7 million, which is expected to be recognized over an average remaining recognition period of 2.8 years. See Note 3 of Notes to Consolidated Financial Statements for additional information.

Impairment of Long-Lived Assets

We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no impairment losses recognized during 2014, 2013 or 2012.

Goodwill and Purchased Intangible Assets

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses recognized during 2014, 2013 or 2012. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is recorded over the estimated useful lives of the respective assets, which is 2.5 to 14 years.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, the enhancement of current products, and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $132.3 million, $131.1 million and $126.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Other Comprehensive Income

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

 

The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2012, 2013 and 2014:

 

(In thousands)    Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
     Defined
Benefit Plan
Adjustments
     Foreign
Currency
Adjustments
     Total  

Balance at December 31, 2011

   $ 10,160       $ —         $ 2,942       $ 13,102   

Other comprehensive income (loss) before reclassifications

     5,426         (1,952      170         3,644   

Amounts reclassified from accumulated other comprehensive income

     (5,478      —           —           (5,478
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

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

Other comprehensive income (loss) before reclassifications

  5,508      1,061      (2,205   4,364   

Amounts reclassified from accumulated other comprehensive income

  (4,879   —        —        (4,879
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

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

Other comprehensive income (loss) before reclassifications

  2,363      (4,866   (4,189   (6,692

Amounts reclassified from accumulated other comprehensive income

  (4,136   —        —        (4,136
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$ 8,964    $ (5,757 $ (3,282 $ (75
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the years ended December 31, 2014, 2013 and 2012:

 

(In thousands)    2014

Details about Accumulated Other Comprehensive
Income Components

   Amount Reclassified
from Accumulated Other
Comprehensive Income
    

Affected Line Item in the
Statement Where Net Income
Is Presented

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

     

Net realized gain on sales of securities

   $ 6,895       Net realized investment gain

Impairment expense

     (115    Net realized investment gain
  

 

 

    

Total reclassifications for the period, before tax

  6,780   

Tax (expense) benefit

  (2,644
  

 

 

    

Total reclassifications for the period, net of tax

$ 4,136   
  

 

 

    

 

(In thousands)    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

   $ 8,023       Net realized investment gain

Impairment expense

     (25    Net realized investment gain
  

 

 

    

Total reclassifications for the period, before tax

  7,998   

Tax (expense) benefit

  (3,119
  

 

 

    

Total reclassifications for the period, net of tax

$ 4,879   
  

 

 

    

 

(In thousands)    2012

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

   $ 9,662      Net realized investment gain

Impairment expense

     (682   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     8,980     

Tax (expense) benefit

     (3,502  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 5,478     
  

 

 

   

The following tables present the tax effects related to the change in each component of other comprehensive income for the years ended December 31, 2014, 2013 and 2012:

 

     2014  
(In thousands)        Before-Tax    
Amount
    Tax
    (Expense)    
Benefit
        Net-of-Tax     
Amount
 

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

   $ 3,874      $ (1,511   $ 2,363   

Reclassification adjustment for amounts included in net income

     (6,780     2,644        (4,136

Defined benefit plan adjustments

     (7,052     2,186        (4,866

Foreign currency translation adjustment

     (4,189     —          (4,189
  

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (14,147   $ 3,319      $ (10,828
  

 

 

   

 

 

   

 

 

 

 

     2013  
(In thousands)        Before-Tax    
Amount
    Tax
    (Expense)    
Benefit
        Net-of-Tax     
Amount
 

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

   $ 9,030      $ (3,522   $ 5,508   

Reclassification adjustment for amounts included in net income

     (7,998     3,119        (4,879

Defined benefit plan adjustments

     1,061        —          1,061   

Foreign currency translation adjustment

     (2,205     —          (2,205
  

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (112   $ (403   $ (515
  

 

 

   

 

 

   

 

 

 

 

     2012  
(In thousands)        Before-Tax    
Amount
    Tax
    (Expense)    
Benefit
        Net-of-Tax     
Amount
 

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

   $ 8,895      $ (3,469   $ 5,426   

Reclassification adjustment for amounts included in net income

     (8,980     3,502        (5,478

Defined benefit plan adjustments

     (1,952     —          (1,952

Foreign currency translation adjustment

     170        —          170   
  

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (1,867   $ 33      $ (1,834
  

 

 

   

 

 

   

 

 

 

 

Income Taxes

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

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

Foreign Currency

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

Revenue Recognition

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

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

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

 

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and unearned revenues relating to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one to five years, primarily on Enterprise Networks Division products sold through distribution channels. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to Carrier Networks Division customers under contracts with terms up to ten years.

Other Income (Expense), Net

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

Earnings per Share

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

Dividends

The Board of Directors presently anticipates that it will declare a regular quarterly dividend as long as the current tax treatment of dividends exists and adequate levels of liquidity are maintained. During the years ended December 31, 2014, 2013 and 2012, we paid $19.9 million, $21.4 million and $22.8 million, respectively, in shareholder dividends. On January 20, 2015, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the close of business on February 5, 2015. The ex-dividend date was February 3, 2015 and the payment date was February 19, 2015. The quarterly dividend payment was $4.8 million.

Business Combinations

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

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board 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.

Business Combinations
Business Combinations

Note 2 – Business Combinations

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

Upon acquisition, we received a cash payment of $7.5 million from NSN and recorded a bargain purchase gain of $1.8 million, net of income taxes, subject to customary working capital adjustments between the parties as defined in the purchase agreement. During the fourth quarter of 2014, the parties settled final working capital items, and as a result, we recorded a $2.4 million gain in other income (expense), net. Additionally, $3.5 million is included in other receivables at December 31, 2014 for additional consideration due from NSN for settlement of the working capital items. The bargain purchase gain of $1.8 million represents the excess of the consideration exchanged over the fair value of the assets acquired and liabilities assumed. We have assessed the recognition and measurements of the assets acquired and liabilities assumed based on historical and pro forma data for future periods and have concluded that our valuation procedures and resulting measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2012 Consolidated Statements of Income.

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

 

(In Thousands)       

Other receivables

   $ 9,486   

Inventory

     21,068   

Property, plant and equipment

     5,035   

Accounts payable

     (5,194

Unearned revenue

     (18,203

Accrued expenses

     (3,361

Accrued wages and benefits

     (2,251

Deferred tax liability

     (788

Non-current unearned revenue

     (19,886
  

 

 

 

Net liabilities assumed

     (14,094

Customer relationships

     5,162   

Developed technology

     3,176   

Other

     13   

Gain on bargain purchase of a business, net of tax

     (1,753
  

 

 

 

Net consideration received from seller

   $ (7,496
  

 

 

 

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

For the years ended December 31, 2014, 2013 and 2012, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $2.5 million, $2.9 million, and $7.9 million, respectively, related to this acquisition.

The following supplemental pro forma information presents the financial results of the combined entity for the years ended December 31, 2012 and 2011. The pro forma results of the acquired NSN BBA business for the period January 1, 2012 to May 4, 2012 and January 1, 2011 to December 31, 2011 were not included in our consolidated financial results for the years ended December 31, 2012 or 2011. There were no material, non-recurring pro forma adjustments to the historical data.

This supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition of the NSN BBA business been completed on January 1, 2011, nor are they indicative of any future results.

 

(In thousands) (Unaudited)    2012      2011  

Pro forma revenue

   $ 672,044       $ 913,485   

Pro forma pre-tax income

   $ 57,906       $ 169,162   

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

   1.00/$1.29       1.00/$1.38   

Stock Incentive Plans
Stock Incentive Plans

Note 3 – Stock Incentive Plans

Stock Incentive Program Descriptions

Our Board of Directors adopted the 1996 Employee Incentive Stock Option Plan (1996 Plan) effective February 14, 1996, as amended, under which 17.0 million shares of common stock were authorized for issuance to certain employees and officers through incentive stock options and non-qualified stock options. Options granted under the 1996 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four or five-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 1996 Plan expired February 14, 2006, and all options outstanding under the 1996 Plan at December 31, 2014 expire during 2015.

On January 23, 2006, the Board of Directors adopted the 2006 Employee Stock Incentive Plan (2006 Plan), which authorizes 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. The 2006 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2014 under the 2006 Plan range from 2016 to 2024.

Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. The 2010 Directors Plan provides that the Company may issue stock options, restricted stock and restricted stock units to our non-employee directors. Stock awards issued under the 2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan have a ten-year contractual term. We also currently have options outstanding under the 2005 Directors Stock Option Plan. Expiration dates of options outstanding under both plans at December 31, 2014 range from 2015 to 2019.

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

 

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

Options outstanding, December 31, 2013

     6,358       $ 24.43         6.60       $ 25,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options granted

  1,181    $ 18.98   

Options forfeited

  (150 $ 23.28   

Options cancelled

  (261 $ 24.87   

Options exercised

  (147 $ 19.27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding, December 31, 2014

  6,981    $ 23.62      6.45    $ 10,625   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options vested and expected to vest, December 31, 2014

  6,787    $ 23.69      6.38    $ 9,381   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable, December 31, 2014

  4,397    $ 25.15      4.99    $ 5,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

All of the options above were issued at exercise prices that approximate fair market value at the date of grant. At December 31, 2014, 5.2 million options were available for grant under the shareholder approved plans.

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of 2014 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2014. The amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during 2014, 2013 and 2012 was $0.7 million, $1.1 million and $4.5 million, respectively. The fair value of options fully vesting during 2014, 2013 and 2012 was $7.7 million.

 

The following table further describes our stock options outstanding as of December 31, 2014:

 

     Options Outstanding      Options Exercisable  

Range of Exercise Prices

   Options
Outstanding at
12/31/14

(In thousands)
     Weighted Avg.
Remaining
Contractual Life
in Years
     Weighted
Average
Exercise
Price
     Options
Exercisable at
12/31/14

(In thousands)
     Weighted
Average
Exercise
Price
 

$14.88 – 18.07

     1,340         6.40       $ 16.36         895       $ 16.06   

$18.08 – 22.40

     1,201         9.71       $ 19.02         28       $ 21.35   

$22.41 – 23.46

     1,415         3.65       $ 23.12         1,415       $ 23.12   

$23.47 – 30.04

     1,421         6.71       $ 25.47         671       $ 27.20   

$30.05 – 41.92

     1,604         6.30       $ 31.94         1,388       $ 32.17   
  

 

 

          

 

 

    
     6,981               4,397      
  

 

 

          

 

 

    

Restricted Stock Program

On November 6, 2008, the Compensation Committee of the Board of Directors approved the Performance Shares Agreement under the 2006 Plan which sets forth the terms and conditions of awards of performance-based restricted stock units (RSUs). Of the 13.0 million shares of common stock authorized for issuance under the 2006 Plan, up to 3.0 million shares of common stock may be granted to certain employees and officers for awards other than stock options, including RSUs. The number of shares of common stock earned by a recipient pursuant to the RSUs is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the RSUs, with the shares earned distributed upon the vesting of the RSUs at the end of the three-year performance period. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. A portion of the granted RSUs also vest and the underlying shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2006 Plan. The recipients of the RSUs receive dividend credits based on the shares of common stock underlying the RSUs. The dividend credits are vested and earned in the same manner as the RSUs and are paid in cash upon the issuance of common stock for the RSUs.

The following table is a summary of our RSUs and restricted stock outstanding as of December 31, 2013 and 2014 and the changes that occurred during 2014:

 

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

Unvested RSUs and restricted stock outstanding, December 31, 2013

     95      $ 28.38   
  

 

 

   

 

 

 

RSUs and restricted stock granted

     50      $ 21.97   

RSUs and restricted stock vested

     (24   $ 34.56   

Adjustments to shares granted due to shares earned at vesting

     (17   $ 38.73   
  

 

 

   

 

 

 

Unvested RSUs and restricted stock outstanding, December 31, 2014

     104      $ 22.81   
  

 

 

   

 

 

 

At December 31, 2014, total compensation cost related to the non-vested portion of RSUs and restricted stock not yet recognized was approximately $1.6 million, which is expected to be recognized over an average remaining recognition period of 1.9 years.

Valuation and Expense Information

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

 

The following table summarizes stock-based compensation expense related to stock options, RSUs and restricted stock for the years ended December 31, 2014, 2013 and 2012, which was recognized as follows:

 

(In thousands)    2014      2013      2012  

Stock-based compensation expense included in cost of sales

   $ 479       $ 465       $ 422   
  

 

 

    

 

 

    

 

 

 

Selling, general and administrative expense

  4,185      4,443      4,351   

Research and development expense

  3,899      4,165      4,491   
  

 

 

    

 

 

    

 

 

 

Stock-based compensation expense included in operating expenses

  8,084      8,608      8,842   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

  8,563      9,073      9,264   

Tax benefit for expense associated with non-qualified options

  (1,157   (1,298   (1,234
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense, net of tax

$ 7,406    $ 7,775    $ 8,030   
  

 

 

    

 

 

    

 

 

 

At December 31, 2014, total compensation cost related to non-vested stock options not yet recognized was approximately $16.0 million, which is expected to be recognized over an average remaining recognition period of 2.9 years.

The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors. There were no material changes made during 2014 to the methodology used to determine our assumptions.

The weighted-average estimated fair value of stock options granted to employees during the years ended December 31, 2014, 2013 and 2012 was $6.31 per share, $8.35 per share and $5.60 per share, respectively, with the following weighted-average assumptions:

 

     2014     2013     2012  

Expected volatility

     39.05     39.92     39.46

Risk-free interest rate

     1.79     1.71     0.96

Expected dividend yield

     1.90     1.52     2.05

Expected life (in years)

     6.33        6.36        6.18   

We based our estimate of expected volatility for the years ended December 31, 2014, 2013 and 2012 on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility method was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is our implied volatility. We have no reason to believe the future volatility of our stock price is likely to differ from its past volatility.

The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our historical and expected dividend payouts.

The expected life of our stock options is based upon historical exercise and cancellation activity of our previous stock-based grants with a ten-year contractual term.

The RSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated fair value of the RSUs granted to employees during the years ended December 31, 2014, 2013 and 2012 was $22.11 per share, $27.72 per share and $19.46 per share, respectively, with the following assumptions:

 

     2014     2013     2012  

Expected volatility

     36.40     38.83     37.75

Risk-free interest rate

     0.96     0.61     0.38

Expected dividend yield

     1.89     1.52     2.12

Stock-based compensation expense recognized in our Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 is based on RSUs and options ultimately expected to vest, and has been reduced for estimated forfeitures. Estimates for forfeiture rates are based upon historical experience and are evaluated quarterly. We expect our forfeiture rate for stock option awards to be approximately 3.1% 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.

Investments
Investments

Note 4 – Investments

At December 31, 2014, we held the following securities and investments, recorded at either fair value or cost:

 

     Amortized
Cost
    

 

Gross Unrealized

     Fair Value /
Carrying
Value
 
(In thousands)       Gains      Losses     

Deferred compensation plan assets

   $ 13,897       $ 2,409       $ (12    $ 16,294   

Corporate bonds

     111,261         186         (186      111,261   

Municipal fixed-rate bonds

     127,341         480         (34      127,787   

Municipal variable rate demand notes

     2,465         —           —           2,465   

Marketable equity securities

     26,399         12,395         (539      38,255   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities held at fair value

$ 281,363    $ 15,470    $ (771 $ 296,062   
  

 

 

    

 

 

    

 

 

    

Restricted investment held at cost

  30,000   

Other investments held at cost

  1,506   
           

 

 

 

Total carrying value of available-for-sale investments

$ 327,568   
           

 

 

 

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

 

     Amortized
Cost
    

 

Gross Unrealized

     Fair Value /
Carrying
Value
 
(In thousands)       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 December 31, 2014, corporate and municipal fixed-rate bonds had the following contractual maturities:

 

(In thousands)

   Corporate
bonds
     Municipal
fixed-rate bonds
 

Less than one year

   $ 20,413       $ 22,730   

One to two years

     67,732         69,680   

Two to three years

     23,116         34,160   

Three to five years

     —           1,217   
  

 

 

    

 

 

 

Total

$ 111,261    $ 127,787   
  

 

 

    

 

 

 

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

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For each of the years ended December 31, 2014, 2013 and 2012, we recorded a charge of $0.1 million, $25 thousand and $0.7 million, respectively, related to the other-than-temporary impairment of certain marketable equity securities and our deferred compensation plan assets.

 

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 for the years ended December 31, 2014, 2013 and 2012:

 

Year Ended December 31,

(In thousands)

   2014      2013      2012  

Gross realized gains

   $ 7,586       $ 8,932       $ 11,006   

Gross realized losses

   $ (308    $ (318    $ (1,456

The following table presents the breakdown of investments with unrealized losses at December 31, 2014:

 

(In thousands)    Continuous Unrealized
Loss Position for Less
than 12 Months
    Continuous Unrealized
Loss Position for 12
Months or Greater
    Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Deferred compensation plan assets

   $ 49       $ (3   $ 278       $ (9   $ 327       $ (12

Corporate bonds

     31,021         (186     —           —          31,021         (186

Municipal fixed-rate bonds

     30,339         (34     —           —          30,339         (34

Marketable equity securities

     4,824         (478     208         (61     5,032         (539
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 66,233    $ (701 $ 486    $ (70 $ 66,719    $ (771
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the breakdown of investments with unrealized losses at December 31, 2013:

 

(In thousands)    Continuous Unrealized
Loss Position for Less
than 12 Months
    Continuous Unrealized
Loss Position for 12
Months or Greater
    Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Deferred compensation plan assets

   $ 48       $ (6   $ 409       $ (18   $ 457       $ (24

Corporate bonds

     20,697         (45     —           —          20,697         (45

Municipal fixed-rate bonds

     13,733         (54     —           —          13,733         (54

Marketable equity securities

     2,758         (173     31         (4     2,789         (177
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 37,236    $ (278 $ 440    $ (22 $ 37,676    $ (300
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The increase in unrealized losses during 2014, as reflected in the table above result from changes in market positions associated with our equity investment portfolio. At December 31, 2014, a total of 265 of our marketable equity securities were in an unrealized loss position.

 

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 December 31, 2014 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

           

Money market funds

   $ 1,163       $ 1,163       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Deferred compensation plan assets

     16,294         16,294         —           —     

Available-for-sale debt securities

           

Corporate bonds

     111,261         —           111,261         —     

Municipal fixed-rate bonds

     127,787         —           127,787         —     

Municipal variable rate demand notes

     2,465         —           2,465         —     

Available-for-sale marketable equity securities

           

Marketable equity securities – technology industry

     9,661         9,661         —           —     

Marketable equity securities – other

     28,594         28,594         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     296,062         54,549         241,513         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 297,225       $ 55,712       $ 241,513       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Measurements at December 31, 2013 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Markets 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

Note 5 – Derivative Instruments and Hedging Activities

We have certain international customers who are billed in their local 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 December 31, 2014, we had forward contracts outstanding with notional amounts totaling €12.5 million ($15.1 million), which mature at various times throughout early 2015.

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

 

(In thousands)    Balance Sheet
Location
   2014     2013  

Derivatives Not Designated as Hedging Instruments (Level 2):

       

Foreign exchange contracts – asset derivatives

   Other receivables    $ 249      $ 18   

Foreign exchange contracts – liability derivatives

   Accounts payable    $ (10   $ (15

The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the years ended December 31, 2014 and 2013 were as follows:

 

(In thousands)   

Income Statement

Location

   2014      2013  

Derivatives Not Designated as Hedging Instruments:

        

Foreign exchange contracts

   Other income (expense)    $ 1,852       $ 750   

Inventory
Inventory

Note 6 – Inventory

At December 31, 2014 and 2013, inventory was comprised of the following:

 

(In thousands)    2014      2013  

Raw materials

   $ 34,831       $ 44,093   

Work in process

     3,750         3,484   

Finished goods

     48,129         42,534   
  

 

 

    

 

 

 

Total Inventory, net

   $ 86,710       $ 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 December 31, 2014 and 2013, raw materials reserves totaled $16.9 million, and finished goods inventory reserves totaled $7.8 million and $6.1 million, respectively.

Property, Plant and Equipment
Property, Plant and Equipment

Note 7 – Property, Plant and Equipment

At December 31, 2014 and 2013, property, plant and equipment were comprised of the following:

 

(In thousands)    2014     2013  

Land

   $ 4,575      $ 4,263   

Building and land improvements

     22,374        21,776   

Building

     68,301        68,479   

Furniture and fixtures

     16,468        16,465   

Computer hardware and software

     74,603        70,468   

Engineering and other equipment

     109,501        104,584   
  

 

 

   

 

 

 

Total Property, Plant and Equipment

     295,822        286,035   

Less accumulated depreciation

     (220,994     (209,296
  

 

 

   

 

 

 

Total Property, Plant and Equipment, net

   $ 74,828      $ 76,739   
  

 

 

   

 

 

 

Depreciation expense was $12.5 million, $12.2 million and $12.1 million in 2014, 2013 and 2012, respectively.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 8 – Goodwill and Intangible Assets

Goodwill, all of which relates to our acquisition of Bluesocket, Inc. and is included in our Enterprise Networks division, was $3.5 million at December 31, 2014 and 2013. We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in 2014, we concluded that it was not necessary to perform the two-step impairment test. There were no impairment losses recognized during 2014, 2013, or 2012.

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

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

 

(In thousands)    2014      2013  
     Gross Value      Accumulated
Amortization
    Net Value      Gross
Value
     Accumulated
Amortization
    Net Value  

Customer relationships

   $ 6,310       $ (2,136   $ 4,174       $ 6,996       $ (1,555   $ 5,441   

Developed technology

     6,005         (3,577     2,428         6,537         (2,692     3,845   

Intellectual property

     2,340         (1,520     820         2,340         (1,185     1,155   

Trade names

     270         (205     65         270         (145     125   

Other

     12         (11     1         14         (8     6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 14,937       $ (7,449   $ 7,488       $ 16,157       $ (5,585   $ 10,572   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense was $2.3 million, $2.4 million and $2.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

As of December 31, 2014, the estimated future amortization expense of intangible assets is as follows:

 

(In thousands)    Amount  

2015

   $ 2,027   

2016

     1,757   

2017

     1,209   

2018

     732   

2019

     336   

Thereafter

     1,427   
  

 

 

 

Total

   $ 7,488   
  

 

 

Alabama State Industrial Development Authority Financing and Economic Incentives
Alabama State Industrial Development Authority Financing and Economic Incentives

Note 9 – Alabama State Industrial Development Authority Financing and Economic Incentives

In conjunction with an expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive program offered by the State of Alabama Industrial Development Authority (the “Authority”). Pursuant to the program, on January 13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of the bonds to ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the “Bank”). Wachovia Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of Tennessee) (the “Bondholder”), which was acquired by Wells Fargo & Company on December 31, 2008, purchased the original bonds from the Bank and made further advances to the Authority, bringing the total amount outstanding to $50.0 million. An Amended and Restated Taxable Revenue Bond (“Amended and Restated Bond”) was issued and the original financing agreement was amended. The Amended and Restated Bond bears interest, payable monthly. The interest rate is 2% per annum. The Amended and Restated Bond matures on January 1, 2020. The estimated fair value of the bond using a level 2 valuation technique at December 31, 2014 was approximately $29.7 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. We are required to make payments to the Authority in amounts necessary to pay the interest on the Amended and Restated Bond. Included in long-term investments at December 31, 2014 is $30.0 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit against the principal of this bond, and we have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness.

In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings that we are required to remit to the state for those employment positions that qualify under the program. For the years ended December 31, 2014, 2013 and 2012, we realized economic incentives related to payroll withholdings totaling $1.3 million, $1.3 million and $1.4 million, respectively.

We made a principal payment of $16.5 million for the year ended December 31, 2014. We did not make a principal payment for the year-ended December 31, 2013. At December 31, 2014, $1.2 million of the bond debt was classified as a current liability in accounts payable in the Consolidated Balance Sheets.

Income Taxes
Income Taxes

Note 10 – Income Taxes

A summary of the components of the provision for income taxes for the years ended December 31, 2014, 2013 and 2012 is as follows:

 

(In thousands)    2014     2013     2012  

Current

      

Federal

   $ 7,626      $ 15,641      $ 26,225   

State

     599        2,041        3,766   

International

     12,587        1,437        (504
  

 

 

   

 

 

   

 

 

 

Total Current

     20,812        19,119        29,487   

Deferred

      

Federal

     (1,083     (3,606     (3,395

State

     (123     (412     (388

International

     (4,320     (40     (2
  

 

 

   

 

 

   

 

 

 

Total Deferred

     (5,526     (4,058     (3,785
  

 

 

   

 

 

   

 

 

 

Total Provision for Income Taxes

   $ 15,286      $ 15,061      $ 25,702   
  

 

 

   

 

 

   

 

 

 

 

Our effective income tax rate differs from the federal statutory rate due to the following:

 

     2014     2013     2012  

Tax provision computed at the federal statutory rate

     35.00     35.00     35.00

State income tax provision, net of federal benefit

     2.69        3.98        3.78   

Federal research credits

     (4.05     (9.24     —     

Foreign taxes

     (7.26     (2.93     3.80   

Tax-exempt income

     (1.25     (1.11     (1.01

State tax incentives

     (2.21     (2.19     (4.46

Stock-based compensation

     3.06        2.97        2.36   

Domestic production activity deduction

     (1.15     (1.80     (3.21

Other, net

     0.69        0.07        (1.03
  

 

 

   

 

 

   

 

 

 

Effective Tax Rate

     25.52     24.75     35.23
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes for the years ended December 31, 2014, 2013 and 2012 is as follows:

 

(In thousands)    2014      2013      2012  

U.S. entities

   $ 23,812       $ 51,752       $ 80,926   

International entities

     36,094         9,103         (7,961
  

 

 

    

 

 

    

 

 

 

Total

   $ 59,906       $ 60,855       $ 72,965   
  

 

 

    

 

 

    

 

 

 

Income before provision for income taxes for international entities reflects income based on statutory transfer pricing agreements. This amount does not correlate to consolidated international revenues, many of which occur from our U.S. entity.

Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The principal components of our current and non-current deferred taxes are as follows:

 

(In thousands)    2014     2013  

Current deferred tax assets

    

Accounts receivable

   $ 53      $ 51   

Inventory

     10,405        9,877   

Accrued expenses

     6,637        7,155   
  

 

 

   

 

 

 

Total Current Deferred Tax Assets

     17,095        17,083   

Non-current deferred tax assets

    

Accrued expenses

     1,232        140   

Deferred compensation

     6,424        5,972   

Stock-based compensation

     5,832        5,331   

Uncertain tax positions related to state taxes and related interest

     1,176        1,107   

Pensions

     4,844        301   

Foreign losses

     3,547        5,702   

State losses and credit carry-forwards

     4,023        3,737   

Federal loss and research carry-forwards

     6,998        8,322   

Valuation allowance

     (7,463     (8,842
  

 

 

   

 

 

 

Total Non-current Deferred Tax Assets

     26,613        21,770   
  

 

 

   

 

 

 

Total Deferred Tax Assets

   $ 43,708      $ 38,853   
  

 

 

   

 

 

 

Non-current deferred tax liabilities

    

Property, plant and equipment

   $ (3,632   $ (5,499

Intellectual property

     (711     (1,006

Investments

     (4,576     (5,643
  

 

 

   

 

 

 

Total Non-current Deferred Tax Liabilities

   $ (8,919   $ (12,148
  

 

 

   

 

 

 

Net Deferred Tax Assets

   $ 34,789      $ 26,705   
  

 

 

   

 

 

 

At December 31, 2014 and 2013, non-current deferred taxes related to our investments and our defined benefit pension plan, reflect deferred taxes on the net unrealized gains on available-for-sale investments and deferred taxes on unrealized losses in our pension plan. The net change in non-current deferred taxes associated with these items, a deferred tax benefit of $3.3 million in 2014 and a deferred tax expense of $0.4 million in 2013, is recorded as an adjustment to other comprehensive income, presented in the Consolidated Statements of Comprehensive Income.

 

Based upon our results of operations in 2014 and expected profitability in future years in a certain international jurisdiction, we concluded that it is more likely than not certain foreign deferred tax assets will be realized. A reversal of the valuation allowance on these deferred tax assets, which includes a change in estimate of the years beginning balance, resulted in a deferred income tax benefit totaling $4.6 million in 2014. As of December 31, 2014, the remaining valuation allowance primarily relates to deferred tax assets related to state credit carry-forwards from tax credits in excess of our annual tax liability to an individual state where we do not generate sufficient state income to offset the credit and net operating losses in foreign jurisdictions. We believe it is more likely than not that we will not realize the full benefits of the deferred tax assets arising from these losses and credits, and accordingly, we have provided a valuation allowance against these deferred tax assets. The deferred tax assets for foreign and domestic carry-forwards, unamortized research and development costs, and state credit carry-forwards of $15.5 million will expire between 2015 and 2030. The loss carry-forwards were acquired through acquisitions in 2009 and 2011. We will continue to assess the realization of our deferred tax assets and related valuations allowances. We do not provide for U.S. income tax on undistributed earnings of our foreign operations, whose earnings are intended to be permanently reinvested. These earnings are not required to service debt or fund our U.S. operations. It is impracticable to determine the amount of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries.

During 2014, 2013 and 2012, we recorded an income tax benefit of $0.1 million, $0.2 million and $1.9 million, respectively, as an adjustment to equity. This deduction is calculated on the difference between the exercise price of stock option exercises and the market price of the underlying common stock upon exercise.

The change in the unrecognized income tax benefits for the years ended December 31, 2014, 2013 and 2012 is reconciled below:

 

(In thousands)    2014     2013     2012  

Balance at beginning of period

   $ 3,240      $ 2,926      $ 2,970   

Increases for tax position related to:

      

Prior years

     —          89        965   

Current year

     522        549        302   

Decreases for tax positions related to:

      

Prior years

     —          —          (49

Settlements with taxing authorities

     —          (141     (507

Expiration of applicable statute of limitations

     (428     (183     (755
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 3,334      $ 3,240      $ 2,926   
  

 

 

   

 

 

   

 

 

 

As of December 31, 2014, 2013, and 2012, our total liability for unrecognized tax benefits was $3.3 million, $3.2 million, and $2.9 million, respectively, of which $2.6 million, $2.5 million, and $2.2 million, respectively, would reduce our effective tax rate if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2014, 2013 and 2012, the balances of accrued interest and penalties were $1.0 million, $1.0 million and $0.8 million, respectively.

We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions and several foreign jurisdictions. We are currently under audit by the Internal Revenue Service. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years prior to 2011.

Employee Benefit Plans
Employee Benefit Plans

Note 11 – Employee Benefit Plans

Pension Benefit Plan

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

The pension benefit plan obligations and funded status at December 31, 2014 and 2013, are as follows:

 

(In thousands)    2014     2013  

Change in projected benefit obligation:

    

Projected benefit obligation at beginning of period

   $ (23,354   $ (21,181

Service cost

     (1,189     (1,198

Interest cost

     (836     (745

Actuarial gain (loss)

     (8,166     779   

Benefit payments

     2        1   

Effects of foreign currency exchange rate changes

     3,036        (1,010
  

 

 

   

 

 

 

Projected benefit obligation at end of period

   $ (30,507   $ (23,354
  

 

 

   

 

 

 

Change in plan assets:

    

Fair value of plan assets at beginning of period

   $ 20,773      $ 18,620   

Actual return on plan assets

     2,315        1,281   

Effects of foreign currency exchange rate changes

     (2,750     872   
  

 

 

   

 

 

 

Fair value of plan assets at end of period

   $ 20,338      $ 20,773   
  

 

 

   

 

 

 

Funded status at end of period

   $ (10,169   $ (2,581
  

 

 

   

 

 

 

The accumulated benefit obligation was $29.2 million and $22.9 million at December 31, 2014 and 2013, respectively. The increase in the accumulated benefit obligation and actuarial loss is primarily attributable to a decrease in the discount rate used in 2014 to determine the accumulated benefit obligation.

The net amounts recognized in the balance sheet for the unfunded pension liability as of December 31, 2014 and 2013 are as follows:

 

(In thousands)    2014     2013  

Current liability

   $ —        $ —     

Non-current liability

     (10,169     (2,581
  

 

 

   

 

 

 

Total

   $ (10,169   $ (2,581
  

 

 

   

 

 

 

 

The components of net periodic pension cost and amounts recognized in other comprehensive income for the years ended December 31, 2014 and 2013 and the period May 4, 2012 to December 31, 2012 are as follows:

 

(In thousands)   Year Ended
December 31, 2014
    Year Ended
December 31, 2013
    May 4, 2012 to
December 31, 2012
 

Net periodic benefit cost:

     

Service cost

  $ 1,189      $ 1,198      $ 766   

Interest cost

    836        745        494   

Expected return on plan assets

    (1,086     (1,010     (674
 

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  939      933      586   
 

 

 

   

 

 

   

 

 

 

Other changes in plan assets and benefit obligations recognized in other comprehensive income:

 

 

 

   

 

 

   

 

 

 

Net actuarial (gain) loss

  7,052      (1,061   1,952   
 

 

 

   

 

 

   

 

 

 

Total recognized in net periodic benefit cost and other comprehensive income

$ 7,991    $ (128 $ 2,538   
 

 

 

   

 

 

   

 

 

 

The amounts recognized in accumulated other comprehensive income as of December 31, 2014 and 2013 are as follows:

 

(In thousands)    2014      2013  

Net actuarial (gain) loss

   $ 7,943       $ 891   

The defined benefit pension plan is accounted for on an actuarial basis, which requires the selection of various assumptions, including an expected rate of return on plan assets and a discount rate. The expected return on our German plan assets that is utilized in determining the benefit obligation and net periodic benefit cost is derived from periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks using standard deviations and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return.

Another key assumption in determining net pension expense is the assumed discount rate to be used to discount plan obligations. The discount rate has been derived from the returns of high-quality, corporate bonds denominated in Euro currency with durations close to the duration of our pension obligations.

The weighted-average assumptions that were used to determine the net periodic benefit cost for the years ended December 31, 2014 and 2013 and the period May 4, 2012 to December 31, 2012 are as follows:

 

    Year Ended
December 31, 2014
    Year Ended
December 31, 2013
    May 4, 2012 to
December 31, 2012
 

Discount rates

    3.70     3.50     3.96

Rate of compensation increase

    2.25     2.25     2.25

Expected long-term rates of return

    5.40     5.40     5.40

The weighted-average assumptions that were used to determine the benefit obligation at December 31, 2014 and 2013:

 

     2014     2013  

Discount rates

     2.20     3.70

Rate of compensation increase

     2.25     2.25

Actuarial gains and losses are recorded in accumulated other comprehensive income. To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component of net periodic pension cost over the remaining service period of active participants. We estimate that $0.4 million will be amortized from accumulated other comprehensive income into net periodic pension cost in 2015 for the net actuarial loss.

 

We do not anticipate making a contribution to our pension plan in 2015. The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid to participants:

 

(In thousands)  

2015

   $ 249   

2016

     284   

2017

     459   

2018

     628   

2019

     812   

2020 – 2023

     5,444   
  

 

 

 

Total

   $ 7,876   
  

 

 

 

We have categorized our cash equivalents 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 December 31, 2014 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

   $ 4       $ 4       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Bond funds:

           

Corporate bonds

     12,587         12,587         —           —     

Government bonds

     2,172         2,172         —           —     

Equity funds:

           

Large cap blend

     4,488         4,488         —           —     

Large cap value

     268         268         —           —     

Balanced fund

     819         819         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     20,334         20,334         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,338       $ 20,338       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2013 Using  
(In thousands)    Fair Value      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash equivalents

   $ 4       $ 4       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

           

Bond funds:

           

Corporate bonds

     12,976         12,976         —           —     

Government bonds

     1,915         1,915         —           —     

Equity funds:

           

Large cap blend

     4,720         4,720         —           —     

Large cap value

     287         287         —           —     

Balanced fund

     871         871         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

     20,769         20,769         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,773       $ 20,773       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investments guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by asset class, which is currently 75% for bond funds and 25% for equity funds.

The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.

The investment policy is periodically reviewed by us and a designated third-party fiduciary for investment matters. The policy is established and administered in a manner that is compliant at all times with applicable government regulations.

401(k) Savings Plan

We maintain the ADTRAN, Inc. 401(k) Retirement Plan (Savings Plan) for the benefit of our eligible employees. The Savings Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (Code), and is intended to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for retirement by contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to contribute a “safe harbor” amount each year. We match up to 4% of employee contributions (100% of an employee’s first 3% of contributions and 50% of their next 2% of contributions), beginning on the employee’s one year anniversary date. In calculating our matching contribution, we only use compensation up to the statutory maximum under the Code ($260 thousand for 2014). All contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributions and plan administration costs for the Savings Plan amounted to approximately $4.5 million, $4.5 million and $4.6 million in 2014, 2013 and 2012, respectively.

Deferred Compensation Plans

We maintain the ADTRAN, Inc. Deferred Compensation Plan (Deferred Compensation Plan). This plan is offered as a supplement to our tax-qualified 401(k) plan and is available to certain executive management employees who have been designated by our Board of Directors. The deferred compensation plan allows participants to defer all or a portion of certain specified bonuses and up to 25% of remaining cash compensation, and permits us to make matching contributions on a discretionary basis, without the limitations that apply to the 401(k) plan. To date, we have not made any matching contributions under this plan.

We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees for the purpose of providing deferred compensation for certain executive management employees. Participants may elect to defer all or a portion of their vested Performance Share awards to the Plan. Such deferrals shall continue to be held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment pursuant to an election made by the Participant.

 

We have set aside the plan assets for both plans in a rabbi trust (Trust) and all contributions are credited to bookkeeping accounts for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The assets of the Trust are deemed to be invested in pre-approved mutual funds as directed by each participant, and the participant’s bookkeeping account is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be distributed six months after termination of employment in a single lump sum payment or annual installments paid over a three or ten year term. Distributions will be made on a pro rata basis from each of the hypothetical investments of the Participant’s account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.

Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money market instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the Trust and the amounts payable to the plan participants are as follows:

 

(In thousands)    2014      2013  

Fair Value of Plan Assets

     

Long-term Investments

   $ 16,294       $ 15,123   
  

 

 

    

 

 

 

Total Fair Value of Plan Assets

   $ 16,294       $ 15,123   
  

 

 

    

 

 

 

Amounts Payable to Plan Participants

     

Non-current Liabilities

   $ 16,294       $ 15,123   
  

 

 

    

 

 

 

Total Amounts Payable to Plan Participants

   $ 16,294       $ 15,123   
  

 

 

    

 

 

 

Interest and dividend income of the Trust have been included in interest and dividend income in the accompanying 2014, 2013 and 2012 Consolidated Statements of Income. Changes in the fair value of the plan assets held by the Trust have been included in accumulated other comprehensive income in the accompanying 2014 and 2013 Consolidated Balance Sheets. Changes in the fair value of the deferred compensation liability are included as selling, general and administrative expense in the accompanying 2014, 2013 and 2012 Consolidated Statements of Income. Based on the changes in the total fair value of the Trust’s assets, we recorded deferred compensation expense in 2014, 2013 and 2012 of $0.7 million, $2.8 million and $0.9 million, respectively.

Retiree Medical Coverage

We provide medical, dental and prescription drug coverage to one retired former officer and his spouse, for his life, on the same terms as provided to our active officers, and to the spouse of a former deceased officer for up to 30 years. At December 31, 2014 and 2013, this liability totaled $0.2 million.

Segment Information and Major Customers
Segment Information and Major Customers

Note 12 – Segment Information and Major Customers

We operate in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. The accounting policies of the segments are the same as those described in the “Nature of Business and Summary of Significant Accounting Policies” (see Note 1) to the extent that such policies affect the reported segment information. We evaluate the performance of our segments based on gross profit; therefore, selling, general and administrative expense, research and development expenses, interest income and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on an entity-wide basis only. There are no inter-segment revenues.

The following table presents information about the reported sales and gross profit of our reportable segments for each of the years ended December 31, 2014, 2013 and 2012. Asset information by reportable segment is not reported, since we do not produce such information internally.

Sales and Gross Profit by Market Segment

 

(In thousands)    2014      2013      2012  
     Sales      Gross Profit      Sales      Gross Profit      Sales      Gross Profit  

Carrier Networks

   $ 510,373       $ 243,211       $ 500,733       $ 233,206       $ 492,096       $ 247,380   

Enterprise Networks

     119,634         68,116         141,011         75,680         128,518         69,263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 630,007       $ 311,327       $ 641,744       $ 308,886       $ 620,614       $ 316,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 Series of Multi-Service Access Node (MSAN)

 

    hiX 5600 Series of MSANs

 

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

 

    hiX 1100 Series of Fiber to the Node (FTTN) products

 

    VDSL2 Vectoring based Digital Subscriber Line Access Multiplexer (DSLAM) products

 

    ADTRAN 500 Series of FTTdp G.fast Distribution Point Units (DPU)

 

    Optical

 

    Optical Networking Edge (ONE)

 

    NetVanta 8000 Series of Fiber Ethernet Access Devices (EAD)

 

    NetVanta 8400 Series of 10Gig Multi-service Edge Switches

 

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

 

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

 

    Time Division Multiplexed (TDM) systems

Business Networking products provide access to communication services and facilitate the delivery of cloud connectivity and enterprise communications to the small and mid-sized enterprise (SME) market. 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®

 

    Access Routers

 

    Enterprise Session Border Controllers (eSBC)

 

    Managed Ethernet Switches

 

    IP Business Gateways

 

    Unified Communications (UC) solutions

 

    Carrier Ethernet Network Terminating Equipment (NTE)

 

    Carrier Ethernet Routers and Gateways

 

    Network Management Solutions

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 years ended December 31, 2014, 2013 and 2012:

 

(In thousands)    2014      2013      2012  

Carrier Systems

   $ 442,664       $ 427,850       $ 399,646   

Business Networking

     156,980         168,871         149,304   

Loop Access

     30,363         45,023         71,664   
  

 

 

    

 

 

    

 

 

 

Total

$ 630,007    $ 641,744    $ 620,614   
  

 

 

    

 

 

    

 

 

 

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 years ended December 31, 2014, 2013 and 2012:

 

(In thousands)    2014      2013      2012  

Core Products

        

Broadband Access (included in Carrier Systems)

   $ 368,464       $ 340,560       $ 320,076   

Optical (included in Carrier Systems)

     55,374         55,615         51,755   

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

     152,223         164,422         142,958   
  

 

 

    

 

 

    

 

 

 

Subtotal

$ 576,061    $ 560,597    $ 514,789   

Legacy Products

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

  27,829      41,666      66,974   

Other products (excluding HDSL)

  26,117      39,481      38,851   
  

 

 

    

 

 

    

 

 

 

Subtotal

$ 53,946    $ 81,147    $ 105,825   
  

 

 

    

 

 

    

 

 

 

Total

$ 630,007    $ 641,744    $ 620,614   
  

 

 

    

 

 

    

 

 

 

The following table presents sales information by geographic area for the years ended December 31, 2014, 2013 and 2012. International sales correlate to shipments with a non-U.S. destination.

 

(In thousands)    2014      2013      2012  

United States

   $ 381,382       $ 455,996       $ 470,369   

Germany

     150,987         97,151         26,918   

Other international

     97,638         88,597         123,327   
  

 

 

    

 

 

    

 

 

 

Total

$ 630,007    $ 641,744    $ 620,614   
  

 

 

    

 

 

    

 

 

 

Customers comprising more than 10% of revenue can change from year to year. Single customers comprising more than 10% of our revenue in 2014 included two customers at 21% and 14%. Single customers comprising more than 10% of our revenue in 2013 included two customers at 17% and 14%. Only a single customer comprised more than 10% of our revenue in 2012 at 23%. No other customer accounted for 10% or more of our sales in 2014, 2013 or 2012. Our five largest customers, other than those with more than 10 percent of revenues disclosed above, can change from year to year. These customers represented 22%, 22%, and 34% of total revenue in 2014, 2013 and 2012, respectively. Revenues in this disclosure do not include distributor agents who predominately provide fulfillment services to end users. In such cases where known, that revenue is associated with the end user.

As of December 31, 2014, long-lived assets, net totaled $74.8 million, which includes $70.0 million held in the United States and $4.8 million held outside the United States. As of December 31, 2013, long-lived assets, net totaled $76.7 million, which includes $71.2 million held in the United States and $5.5 million held outside the United States.

Commitments and Contingencies
Commitments and Contingencies

Note 13 – Commitments and Contingencies

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

We lease office space and equipment under operating leases which expire at various dates through 2025. As of December 31, 2014, future minimum rental payments under non-cancelable operating leases with original maturities of greater than 12 months are as follows:

 

(In thousands)  

2015

   $ 4,894   

2016

     3,701   

2017

     3,190   

2018

     1,563   

Thereafter

     5,340   
  

 

 

 

Total

   $ 18,688   
  

 

 

 

Rental expense was $4.7 million, $4.8 million and $3.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Earnings per Share
Earnings per Share

Note 14 – Earnings per Share

A summary of the calculation of basic and diluted earnings per share (EPS) for the years ended December 31, 2014, 2013 and 2012 is as follows:

 

(In thousands, except for per share amounts)    2014      2013      2012  

Numerator

        

Net Income

   $ 44,620       $ 45,794       $ 47,263   
  

 

 

    

 

 

    

 

 

 

Denominator

        

Weighted average number of shares – basic

     55,120         59,001         63,259   

Effect of dilutive securities:

        

Stock options

     304         390         488   

Restricted stock and restricted stock units

     58         33         27   
  

 

 

    

 

 

    

 

 

 

Weighted average number of shares – diluted

     55,482         59,424         63,774   
  

 

 

    

 

 

    

 

 

 

Net income per share – basic

   $ 0.81       $ 0.78       $ 0.75   

Net income per share – diluted

   $ 0.80       $ 0.77       $ 0.74   

For each of the years ended December 31, 2014, 2013 and 2012, 4.4 million, 3.2 million and 3.2 million stock options were outstanding but were not included in the computation of that year’s diluted EPS because the options’ exercise prices were greater than the average market price of the common shares, therefore making them anti-dilutive under the treasury stock method.

Summarized Quarterly Financial Data (Unaudited)
Summarized Quarterly Financial Data (Unaudited)

Note 15 – Summarized Quarterly Financial Data (Unaudited)

The following table presents unaudited quarterly operating results for each of our last eight fiscal quarters. This information has been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the data.

Unaudited Quarterly Operating Results

(In thousands, except for per share amounts)

 

Three Months Ended    March 31, 2014      June 30, 2014      September 30, 2014      December 31, 2014  

Net sales

   $ 147,004       $ 176,129       $ 162,892       $ 143,982   

Gross profit

   $ 77,790       $ 86,797       $ 78,257       $ 68,483   

Operating income

   $ 11,298       $ 19,339       $ 12,495       $ 3,979   

Net income

   $ 9,607       $ 14,395       $ 11,326       $ 9,292   

Earnings per common share

   $ 0.17       $ 0.26       $ 0.21       $ 0.17   

Earnings per common share assuming dilution (1)

   $ 0.17       $ 0.26       $ 0.21       $ 0.17   

 

Three Months Ended    March 31, 2013      June 30, 2013      September 30, 2013      December 31, 2013  

Net sales

   $ 143,013       $ 162,233       $ 177,404       $ 159,094   

Gross profit

   $ 69,677       $ 79,798       $ 82,547       $ 76,864   

Operating income

   $ 6,563       $ 14,053       $ 17,210       $ 10,639   

Net income

   $ 7,890       $ 9,859       $ 16,205       $ 11,840   

Earnings per common share

   $ 0.13       $ 0.17       $ 0.28       $ 0.21   

Earnings per common share assuming dilution (1)

   $ 0.13       $ 0.17       $ 0.28       $ 0.20   

 

(1)  Assumes exercise of dilutive stock options calculated under the treasury stock method.
Related Party Transactions
Related Party Transactions

Note 16 – Related Party Transactions

We employed the law firm of our director emeritus for legal services. All bills for services rendered by this firm were 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. For the years ended 2014, 2013 and 2012, we incurred fees of $0.1 million for these legal services.

Subsequent Events
Subsequent Events

Note 17 – Subsequent Events

On January 20, 2015, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the close of business on February 5, 2015. The quarterly dividend payment was $4.8 million and was paid on February 19, 2015. 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.

Schedule II - Valuation and Qualifying Accounts
Schedule II - Valuation and Qualifying Accounts

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

 

Column A

   Column B      Column C      Column D     Column E      Column F  
(In thousands)    Balance at
Beginning
of Period
     Assumed
on
Acquisition
     Charged to
Costs &
Expenses
    Deductions      Balance at
End

of Period
 

Year ended December 31, 2014

             

Allowance for Doubtful Accounts

   $ 130         —           23        17       $ 136   

Inventory Reserve

   $ 22,993         —           2,549        860       $ 24,682   

Warranty Liability

   $ 8,977         —           3,103        3,665       $ 8,415   

Deferred Tax Asset Valuation Allowance

   $ 8,842         —           283        1,662       $ 7,463   

Year ended December 31, 2013

             

Allowance for Doubtful Accounts

   $ 6         —           136        12       $ 130   

Inventory Reserve

   $ 11,957         —           11,457        421       $ 22,993   

Warranty Liability

   $ 9,653         —           4,051        4,727       $ 8,977   

Deferred Tax Asset Valuation Allowance

   $ 10,939         —           (1,056     1,041       $ 8,842   

Year ended December 31, 2012

             

Allowance for Doubtful Accounts

   $ 8         —           38        40       $ 6   

Inventory Reserve

   $ 9,419         —           3,042        504       $ 11,957   

Warranty Liability

   $ 4,118         3,781         5,363        3,609       $ 9,653   

Deferred Tax Asset Valuation Allowance

   $ 7,585         —           3,594        240       $ 10,939   
Nature of Business and Summary of Significant Accounting Policies (Policies)

Principles of Consolidation

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

Changes in Classifications

We corrected immaterial misclassifications between the operating and investing sections of our consolidated statements of cash flows and adjusted our 2012 cash flows in these categories by $0.2 million, in order to be consistent with the 2014 and 2013 presentation.

Additionally, changes in classifications have been made to the prior period balances in other comprehensive income to conform to the current period’s presentation as a result of our adoption of Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Comprehensive Income.

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 $0.4 million understatement of net income in 2012. We evaluated the impact of the adjustments on the results of our previously issued financial statements for the prior period affected and concluded that the impact was not material. We also evaluated the impact of the cumulative effect of the adjustments in the current year and concluded that the impact was not material to our results for the year 2013. Accordingly, during the year ended December 31, 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 pension liability, fair value of investments, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-for-sale with original maturities of three months or less. We maintain depository investments with certain financial institutions. Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions, and determined the risk of material financial loss due to the exposure of such credit risk to be minimal. As of December 31, 2014, $69.6 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess of government provided insured depository limits.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount reported for bonds payable was $30.0 million, compared to an estimated fair value of $29.7 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.

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

Long-term investments represent a restricted certificate of deposit held at cost, municipal fixed-rate bonds, corporate bonds, deferred compensation plan assets, marketable equity securities, and other equity investments. Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are computed under the specific identification method and are included in current income. We periodically review our investment portfolio for investments considered to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2014 and 2013 are classified as available-for-sale securities. See Note 4 of Notes to Consolidated Financial Statements for additional information.

Accounts Receivable

We record accounts receivable at net realizable value. Prior to issuing payment terms to a new customer, we perform a detailed credit review of the customer. Credit limits are established for each new customer based on the results of this credit review. Payment terms are established for each new customer, and collection experience is reviewed periodically in order to determine if the customer’s payment terms and credit limits need to be revised. At December 31, 2014, two customers accounted for 24.5% of our total accounts receivable. At December 31, 2013, one customer accounted for 13.1% of our total accounts receivable.

We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required payments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable balances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events and our historical experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, we may be required to record an allowance for doubtful accounts. If circumstances change with regard to individual receivable balances that have previously been determined to be uncollectible (and for which a specific reserve has been established), a reduction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was $0.1 million at December 31, 2014 and December 31, 2013.

Other Receivables

Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers, accrued interest on investments and on a restricted certificate of deposit, amounts due from various jurisdictions for value-added tax, and amounts due from employee stock option exercises. At December 31, 2014 and 2013, other receivables also included a receivable due from NSN related to working capital items settled during the fourth quarter of 2014 and collected in January 2015.

Inventory

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

Property, Plant and Equipment

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

Liability for Warranty

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 $8.4 million and $9.0 million at December 31, 2014 and 2013, respectively. These liabilities are included in accrued expenses in the accompanying consolidated balance sheets.

A summary of warranty expense and write-off activity for the years ended December 31, 2014, 2013 and 2012 is as follows:

 

Year Ended December 31,    2014      2013      2012  
(In thousands)                     

Balance at beginning of period

   $ 8,977       $ 9,653       $ 4,118   

Plus: Amounts charged to cost and expenses

     3,103         4,051         5,363   

 Amounts assumed on acquisition

     —           —           3,781   

Less: Deductions

     (3,665      (4,727      (3,609
  

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 8,415    $ 8,977    $ 9,653   
  

 

 

    

 

 

    

 

 

 

Pension Benefit Plan Obligations

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

Stock-Based Compensation

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

Under the provisions of our approved plans, we made grants of performance-based restricted stock units to certain of our executive officers in 2014, 2013, and 2012. The restricted stock units are subject to a market condition based on the relative total shareholder return of ADTRAN against all the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The restricted stock units are converted into shares of common stock upon vesting. Depending on the relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method. The recipients of the restricted stock units also earn dividend credits during the performance period, which will be paid in cash upon the issuance of common stock for the restricted stock units.

 

Stock-based compensation expense recognized in 2014, 2013 and 2012 was approximately $8.6 million, $9.1 million and $9.3 million, respectively. As of December 31, 2014, total compensation cost related to non-vested stock options, restricted stock units and restricted stock not yet recognized was approximately $17.7 million, which is expected to be recognized over an average remaining recognition period of 2.8 years. See Note 3 of Notes to Consolidated Financial Statements for additional information.

Impairment of Long-Lived Assets

We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no impairment losses recognized during 2014, 2013 or 2012.

Goodwill and Purchased Intangible Assets

We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether goodwill is impaired, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we determine that the two-step quantitative test is necessary, then we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, then the amount of the impairment loss is measured. There were no impairment losses recognized during 2014, 2013 or 2012. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is recorded over the estimated useful lives of the respective assets, which is 2.5 to 14 years.

Research and Development Costs

Research and development costs include compensation for engineers and support personnel, outside contracted services, depreciation and material costs associated with new product development, the enhancement of current products, and product cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development efforts. Research and development costs totaled $132.3 million, $131.1 million and $126.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Other Comprehensive Income

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

 

The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2012, 2013 and 2014:

 

(In thousands)    Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
     Defined
Benefit Plan
Adjustments
     Foreign
Currency
Adjustments
     Total  

Balance at December 31, 2011

   $ 10,160       $ —         $ 2,942       $ 13,102   

Other comprehensive income (loss) before reclassifications

     5,426         (1,952      170         3,644   

Amounts reclassified from accumulated other comprehensive income

     (5,478      —           —           (5,478
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

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

Other comprehensive income (loss) before reclassifications

  5,508      1,061      (2,205   4,364   

Amounts reclassified from accumulated other comprehensive income

  (4,879   —        —        (4,879
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

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

Other comprehensive income (loss) before reclassifications

  2,363      (4,866   (4,189   (6,692

Amounts reclassified from accumulated other comprehensive income

  (4,136   —        —        (4,136
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2014

$ 8,964    $ (5,757 $ (3,282 $ (75
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the details of reclassifications out of accumulated other comprehensive income for the years ended December 31, 2014, 2013 and 2012:

 

(In thousands)    2014

Details about Accumulated Other Comprehensive
Income Components

   Amount Reclassified
from Accumulated Other
Comprehensive Income
    

Affected Line Item in the
Statement Where Net Income
Is Presented

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

     

Net realized gain on sales of securities

   $ 6,895       Net realized investment gain

Impairment expense

     (115    Net realized investment gain
  

 

 

    

Total reclassifications for the period, before tax

  6,780   

Tax (expense) benefit

  (2,644
  

 

 

    

Total reclassifications for the period, net of tax

$ 4,136   
  

 

 

    

 

(In thousands)    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

   $ 8,023       Net realized investment gain

Impairment expense

     (25    Net realized investment gain
  

 

 

    

Total reclassifications for the period, before tax

  7,998   

Tax (expense) benefit

  (3,119
  

 

 

    

Total reclassifications for the period, net of tax

$ 4,879   
  

 

 

    

 

(In thousands)    2012

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

   $ 9,662      Net realized investment gain

Impairment expense

     (682   Net realized investment gain
  

 

 

   

Total reclassifications for the period, before tax

     8,980     

Tax (expense) benefit

     (3,502  
  

 

 

   

Total reclassifications for the period, net of tax

   $ 5,478     
  

 

 

   

The following tables present the tax effects related to the change in each component of other comprehensive income for the years ended December 31, 2014, 2013 and 2012:

 

     2014  
(In thousands)        Before-Tax    
Amount
    Tax
    (Expense)    
Benefit
        Net-of-Tax     
Amount
 

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

   $ 3,874      $ (1,511   $ 2,363   

Reclassification adjustment for amounts included in net income

     (6,780     2,644        (4,136

Defined benefit plan adjustments

     (7,052     2,186        (4,866

Foreign currency translation adjustment

     (4,189     —          (4,189
  

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (14,147   $ 3,319      $ (10,828
  

 

 

   

 

 

   

 

 

 

 

     2013  
(In thousands)        Before-Tax    
Amount
    Tax
    (Expense)    
Benefit
        Net-of-Tax     
Amount
 

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

   $ 9,030      $ (3,522   $ 5,508   

Reclassification adjustment for amounts included in net income

     (7,998     3,119        (4,879

Defined benefit plan adjustments

     1,061        —          1,061   

Foreign currency translation adjustment

     (2,205     —          (2,205
  

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (112   $ (403   $ (515
  

 

 

   

 

 

   

 

 

 

 

     2012  
(In thousands)        Before-Tax    
Amount
    Tax
    (Expense)    
Benefit
        Net-of-Tax     
Amount
 

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

   $ 8,895      $ (3,469   $ 5,426   

Reclassification adjustment for amounts included in net income

     (8,980     3,502        (5,478

Defined benefit plan adjustments

     (1,952     —          (1,952

Foreign currency translation adjustment

     170        —          170   
  

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

   $ (1,867   $ 33      $ (1,834
  

 

 

   

 

 

   

 

 

 

Income Taxes

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

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

Foreign Currency

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

Revenue Recognition

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

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

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

Unearned Revenue

Unearned revenue primarily represents customer billings on our maintenance service programs and unearned revenues relating to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from one to five years, primarily on Enterprise Networks Division products sold through distribution channels. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to Carrier Networks Division customers under contracts with terms up to ten years.

Other Income (Expense), Net

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

Earnings per Share

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

Dividends

The Board of Directors presently anticipates that it will declare a regular quarterly dividend as long as the current tax treatment of dividends exists and adequate levels of liquidity are maintained. During the years ended December 31, 2014, 2013 and 2012, we paid $19.9 million, $21.4 million and $22.8 million, respectively, in shareholder dividends. On January 20, 2015, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of record at the close of business on February 5, 2015. The ex-dividend date was February 3, 2015 and the payment date was February 19, 2015. The quarterly dividend payment was $4.8 million.

Business Combinations

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

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board 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.

Nature of Business and Summary of Significant Accounting Policies (Tables)

A summary of warranty expense and write-off activity for the years ended December 31, 2014, 2013 and 2012 is as follows:

 

Year Ended December 31,    2014      2013      2012  
(In thousands)                     

Balance at beginning of period

   $ 8,977       $ 9,653       $ 4,118   

Plus: Amounts charged to cost and expenses

     3,103         4,051         5,363   

 Amounts assumed on acquisition

     —           —           3,781   

Less: Deductions

     (3,665      (4,727      (3,609
  

 

 

    

 

 

    

 

 

 

Balance at end of period

$ 8,415    $ 8,977    $ 9,653   
  

 

 

    

 

 

    

 

 

 

The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years ended December 31, 2012, 2013 and 2014:

 

(In thousands)    Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
     Defined
Benefit Plan
Adjustments
     Foreign
Currency
Adjustments
     Total  

Balance at December 31, 2011

   $ 10,160       $ —         $ 2,942       $ 13,102   

Other comprehensive income (loss) before reclassifications

     5,426         (1,952      170         3,644   

Amounts reclassified from accumulated other comprehensive income

     (5,478      —           —           (5,478
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

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

Other comprehensive income (loss) before reclassifications

  5,508      1,061      (2,205   4,364   

Amounts reclassified from accumulated other comprehensive income

  (4,879   —        —        (4,879
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

$ 10,737    $ (891 $ 907    $ 10,753