ADTRAN INC, 10-Q filed on 8/5/2016
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2016
Jul. 22, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
ADTN 
 
Entity Registrant Name
ADTRAN INC 
 
Entity Central Index Key
0000926282 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
48,398,992 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Current Assets
 
 
Cash and cash equivalents
$ 70,914 
$ 84,550 
Short-term investments
50,867 
34,396 
Accounts receivable, less allowance for doubtful accounts of $19 at June 30, 2016 and December 31, 2015
89,386 
71,917 
Other receivables
11,676 
19,321 
Income tax receivable, net
2,405 
 
Inventory, net
86,936 
91,533 
Prepaid expenses and other current assets
13,563 
10,145 
Deferred tax assets, net
18,488 
18,924 
Total Current Assets
344,235 
330,786 
Property, plant and equipment, net
74,115 
73,233 
Deferred tax assets, net
19,127 
18,091 
Goodwill
3,492 
3,492 
Other assets
9,340 
9,276 
Long-term investments
186,249 
198,026 
Total Assets
636,558 
632,904 
Current Liabilities
 
 
Accounts payable
59,211 
48,668 
Unearned revenue
15,982 
16,615 
Accrued expenses
12,126 
12,108 
Accrued wages and benefits
15,702 
12,857 
Income tax payable, net
 
2,395 
Total Current Liabilities
103,021 
92,643 
Non-current unearned revenue
6,437 
7,965 
Other non-current liabilities
25,476 
24,236 
Bonds payable
27,900 
27,900 
Total Liabilities
162,834 
152,744 
Commitments and contingencies (see Note 13)
   
   
Stockholders’ Equity
 
 
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued and 48,712 shares outstanding at June 30, 2016 and 79,652 shares issued and 49,558 shares outstanding at December 31, 2015
797 
797 
Additional paid-in capital
249,851 
246,879 
Accumulated other comprehensive loss
(8,695)
(8,969)
Retained earnings
912,536 
906,772 
Less treasury stock at cost: 30,940 and 30,094 shares at June 30, 2016 and December 31, 2015, respectively
(680,765)
(665,319)
Total Stockholders’ Equity
473,724 
480,160 
Total Liabilities and Stockholders’ Equity
$ 636,558 
$ 632,904 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 19 
$ 19 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
79,652,000 
79,652,000 
Common stock, shares outstanding
48,712,000 
49,558,000 
Treasury stock, shares
30,940,000 
30,094,000 
Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Sales
 
 
 
 
Products
$ 138,549 
$ 144,098 
$ 262,432 
$ 273,603 
Services
24,152 
16,040 
42,473 
29,370 
Total Sales
162,701 
160,138 
304,905 
302,973 
Cost of sales
 
 
 
 
Products
67,844 
84,210 
131,917 
155,770 
Services
15,902 
7,682 
28,239 
13,394 
Total Cost of Sales
83,746 
91,892 
160,156 
169,164 
Gross Profit
78,955 
68,246 
144,749 
133,809 
Selling, general and administrative expenses
32,866 
32,123 
63,651 
63,187 
Research and development expenses
31,277 
35,479 
60,765 
68,015 
Operating Income
14,812 
644 
20,333 
2,607 
Interest and dividend income
927 
908 
1,782 
1,841 
Interest expense
(142)
(149)
(287)
(297)
Net realized investment gain
1,110 
3,255 
2,838 
6,370 
Other expense, net
(251)
(547)
(132)
(900)
Income before provision for income taxes
16,456 
4,111 
24,534 
9,621 
Provision for income taxes
(6,228)
(1,567)
(9,292)
(3,760)
Net Income
$ 10,228 
$ 2,544 
$ 15,242 
$ 5,861 
Weighted average shares outstanding – basic
48,831 
51,822 
49,026 
52,607 
Weighted average shares outstanding – diluted
49,048 
51,917 
49,218 
52,742 
Earnings per common share – basic
$ 0.21 
$ 0.05 
$ 0.31 
$ 0.11 
Earnings per common share – diluted
$ 0.21 
$ 0.05 
$ 0.31 
$ 0.11 
Dividend per share
$ 0.09 
$ 0.09 
$ 0.18 
$ 0.18 
Consolidated Statements of Comprehensive Income (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 10,228 
$ 2,544 
$ 15,242 
$ 5,861 
Other Comprehensive Income (Loss), net of tax:
 
 
 
 
Net unrealized losses on available-for-sale securities
(165)
(1,783)
(420)
(2,286)
Defined benefit plan adjustments
22 
72 
67 
140 
Foreign currency translation
(601)
872 
627 
(2,446)
Other Comprehensive Income (Loss), net of tax
(744)
(839)
274 
(4,592)
Comprehensive Income, net of tax
$ 9,484 
$ 1,705 
$ 15,516 
$ 1,269 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Cash flows from operating activities:
 
 
Net income
$ 15,242 
$ 5,861 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
6,689 
7,256 
Amortization of net premium on available-for-sale investments
376 
1,578 
Net realized investment gain
(2,838)
(6,370)
Net loss on disposal of property, plant and equipment
160 
Stock-based compensation expense
3,109 
3,114 
Deferred income taxes
(354)
(1,743)
Tax benefit from stock option exercises
 
(23)
Excess tax benefits from stock-based compensation arrangements
 
38 
Changes in operating assets and liabilities:
 
 
Accounts receivable, net
(17,192)
(2,003)
Other receivables
7,876 
(119)
Inventory
4,938 
(14,254)
Prepaid expenses and other assets
(4,263)
(1,433)
Accounts payable
10,354 
30,938 
Accrued expenses and other liabilities
1,474 
2,175 
Income tax payable/receivable, net
(4,799)
(3,961)
Net cash provided by operating activities
20,617 
21,214 
Cash flows from investing activities:
 
 
Purchases of property, plant and equipment
(6,679)
(5,392)
Proceeds from disposals of property, plant and equipment
 
Proceeds from sales and maturities of available-for-sale investments
109,993 
120,422 
Purchases of available-for-sale investments
(112,903)
(62,626)
Net cash provided by (used in) investing activities
(9,589)
52,412 
Cash flows from financing activities:
 
 
Proceeds from stock option exercises
541 
833 
Purchases of treasury stock
(16,579)
(49,307)
Dividend payments
(8,860)
(9,509)
Excess tax benefits from stock-based compensation arrangements
 
(38)
Net cash used in financing activities
(24,898)
(58,021)
Net increase (decrease) in cash and cash equivalents
(13,870)
15,605 
Effect of exchange rate changes
234 
(1,829)
Cash and cash equivalents, beginning of period
84,550 
73,439 
Cash and cash equivalents, end of period
70,914 
87,215 
Supplemental disclosure of non-cash investing activities:
 
 
Purchases of property, plant and equipment included in accounts payable
$ 554 
$ 270 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of ADTRAN®, Inc. and its subsidiaries (ADTRAN) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2015 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

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

Use of Estimates

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

Income Taxes
Income Taxes

2. INCOME TAXES

Our effective tax rate decreased from 39.1% in the six months ended June 30, 2015 to 37.9% in the six months ended June 30, 2016. The decrease in the effective tax rate between the two periods is primarily attributable to the research and development tax credit being made permanent.

Pension Benefit Plan
Pension Benefit Plan

 

 

3. PENSION BENEFIT PLAN

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

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Service cost

 

$

310

 

 

$

324

 

 

$

607

 

 

$

664

 

Interest cost

 

 

184

 

 

 

152

 

 

 

360

 

 

 

311

 

Expected return on plan assets

 

 

(271

)

 

 

(250

)

 

 

(530

)

 

 

(511

)

Amortization of actuarial losses

 

 

45

 

 

 

100

 

 

 

88

 

 

 

205

 

Net periodic pension cost

 

$

268

 

 

$

326

 

 

$

525

 

 

$

669

 

 

Stock-Based Compensation
Stock-Based Compensation

4. STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock for the three and six months ended June 30, 2016 and 2015, which was recognized as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock-based compensation expense included in cost of

   sales

 

$

95

 

 

$

53

 

 

$

194

 

 

$

143

 

Selling, general and administrative expense

 

 

788

 

 

 

723

 

 

 

1,557

 

 

 

1,414

 

Research and development expense

 

 

668

 

 

 

699

 

 

 

1,358

 

 

 

1,557

 

Stock-based compensation expense included in operating

   expenses

 

 

1,456

 

 

 

1,422

 

 

 

2,915

 

 

 

2,971

 

Total stock-based compensation expense

 

 

1,551

 

 

 

1,475

 

 

 

3,109

 

 

 

3,114

 

Tax benefit for expense associated with non-qualified

   options

 

 

(213

)

 

 

(222

)

 

 

(425

)

 

 

(402

)

Total stock-based compensation expense, net of tax

 

$

1,338

 

 

$

1,253

 

 

$

2,684

 

 

$

2,712

 

 

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

There were no options granted during the three months ended June 30, 2015. The weighted-average assumptions and value of options granted for the three and six months ended June 30, 2016 and the six months ended June 30, 2015 are as follows:

 

 

 

Three and Six Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Expected volatility

 

 

34.74

%

 

 

38.75

%

Risk-free interest rate

 

 

1.33

%

 

 

1.46

%

Expected dividend yield

 

 

1.91

%

 

 

1.60

%

Expected life (in years)

 

 

6.26

 

 

 

6.47

 

Weighted-average estimated value

 

$

5.42

 

 

$

7.63

 

 

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

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

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

As of June 30, 2016, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $11.5 million, which is expected to be recognized over an average remaining recognition period of 2.4 years.

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

 

(In thousands, except per share amounts)

 

Number of

Options

 

 

Weighted Avg.

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual

Life In Years

 

 

Aggregate

Intrinsic Value

 

Options outstanding, December 31, 2015

 

 

7,108

 

 

$

21.97

 

 

 

6.42

 

 

$

3,284

 

Options granted

 

 

1

 

 

$

18.83

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(33

)

 

$

16.58

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(42

)

 

$

17.88

 

 

 

 

 

 

 

 

 

Options expired

 

 

(54

)

 

$

25.65

 

 

 

 

 

 

 

 

 

Options outstanding, June 30, 2016

 

 

6,980

 

 

$

22.00

 

 

 

5.93

 

 

$

6,522

 

Options vested and expected to vest, June 30, 2016

 

 

6,865

 

 

$

22.09

 

 

 

5.88

 

 

$

6,260

 

Options exercisable, June 30, 2016

 

 

4,420

 

 

$

24.35

 

 

 

4.44

 

 

$

2,298

 

 

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

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

Investments
Investments

5. INVESTMENTS

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

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,516

 

 

$

1,628

 

 

$

(49

)

 

$

13,095

 

Corporate bonds

 

 

54,044

 

 

 

149

 

 

 

(61

)

 

 

54,132

 

Municipal fixed-rate bonds

 

 

16,889

 

 

 

59

 

 

 

-

 

 

 

16,948

 

Asset-backed bonds

 

 

23,526

 

 

 

53

 

 

 

(6

)

 

 

23,573

 

Mortgage/Agency-backed bonds

 

 

19,214

 

 

 

44

 

 

 

(39

)

 

 

19,219

 

U.S. Government bonds

 

 

33,498

 

 

 

308

 

 

 

-

 

 

 

33,806

 

Variable rate demand notes

 

 

11,740

 

 

 

-

 

 

 

-

 

 

 

11,740

 

Marketable equity securities

 

 

32,948

 

 

 

1,901

 

 

 

(1,478

)

 

 

33,371

 

Available-for-sale securities held at fair value

 

$

203,375

 

 

$

4,142

 

 

$

(1,633

)

 

$

205,884

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,232

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

237,116

 

 

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

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,325

 

 

$

1,575

 

 

$

(66

)

 

$

12,834

 

Corporate bonds

 

 

58,328

 

 

 

20

 

 

 

(734

)

 

 

57,614

 

Municipal fixed-rate bonds

 

 

26,414

 

 

 

28

 

 

 

(18

)

 

 

26,424

 

Asset-backed bonds

 

 

19,281

 

 

 

2

 

 

 

(44

)

 

 

19,239

 

Mortgage/Agency-backed bonds

 

 

15,463

 

 

 

1

 

 

 

(91

)

 

 

15,373

 

U.S. Government bonds

 

 

35,646

 

 

 

-

 

 

 

(248

)

 

 

35,398

 

Marketable equity securities

 

 

31,643

 

 

 

4,301

 

 

 

(1,693

)

 

 

34,251

 

Available-for-sale securities held at fair value

 

$

198,100

 

 

$

5,927

 

 

$

(2,894

)

 

$

201,133

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,289

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

232,422

 

 

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

 

(In thousands)

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-

backed

bonds

 

 

Mortgage /

Agency-

backed bonds

 

 

U.S. Government

bonds

 

Less than one year

 

$

20,729

 

 

$

10,473

 

 

$

-

 

 

$

4,972

 

 

$

2,953

 

One to two years

 

 

24,884

 

 

 

4,488

 

 

 

822

 

 

 

2,569

 

 

 

7,481

 

Two to three years

 

 

6,099

 

 

 

1,536

 

 

 

9,077

 

 

 

2,058

 

 

 

11,344

 

Three to five years

 

 

2,420

 

 

 

451

 

 

 

10,991

 

 

 

-

 

 

 

12,028

 

Five to ten years

 

 

-

 

 

 

-

 

 

 

2,506

 

 

 

1,036

 

 

 

-

 

More than ten years

 

 

-

 

 

 

-

 

 

 

177

 

 

 

8,584

 

 

 

-

 

Total

 

$

54,132

 

 

$

16,948

 

 

$

23,573

 

 

$

19,219

 

 

$

33,806

 

 

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

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

 

At June 30, 2016, we held a $30.0 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond), which totaled $28.9 million at June 30, 2016 and December 31, 2015. At June 30, 2016, the estimated fair value of the Bond using a level 2 valuation technique was approximately $29.4 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due.

We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the three and six months ended June 30, 2016 and 2015, other-than-temporary impairment charges were not significant.

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Gross realized gains

 

$

1,517

 

 

$

3,459

 

 

$

3,881

 

 

$

6,604

 

Gross realized losses

 

$

(407

)

 

$

(204

)

 

$

(1,043

)

 

$

(234

)

 

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

 

 

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

 

 

 

Fair Value Measurements at June 30, 2016 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,915

 

 

$

1,915

 

 

$

-

 

 

$

-

 

Commercial Paper

 

 

15,996

 

 

 

-

 

 

 

15,996

 

 

 

-

 

Cash equivalents

 

 

17,911

 

 

 

1,915

 

 

 

15,996

 

 

 

-

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

13,095

 

 

 

13,095

 

 

 

-

 

 

 

-

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

54,132

 

 

 

-

 

 

 

54,132

 

 

 

-

 

Municipal fixed-rate bonds

 

 

16,948

 

 

 

-

 

 

 

16,948

 

 

 

-

 

Asset-backed bonds

 

 

23,573

 

 

 

-

 

 

 

23,573

 

 

 

-

 

Mortgage/Agency-backed bonds

 

 

19,219

 

 

 

-

 

 

 

19,219

 

 

 

-

 

U.S. Government bonds

 

 

33,806

 

 

 

33,806

 

 

 

-

 

 

 

-

 

Variable rate demand notes

 

 

11,740

 

 

 

-

 

 

 

11,740

 

 

 

-

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – technology industry

 

 

4,386

 

 

 

4,386

 

 

 

-

 

 

 

-

 

Marketable equity securities – other

 

 

28,985

 

 

 

28,985

 

 

 

-

 

 

 

-

 

Available-for-sale securities

 

 

205,884

 

 

 

80,272

 

 

 

125,612

 

 

 

-

 

Total

 

$

223,795

 

 

$

82,187

 

 

$

141,608

 

 

$

-

 

 

 

 

Fair Value Measurements at December 31, 2015 Using

 

(In thousands)

 

Fair Value

 

 

Quoted Prices

in Active

Market for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,271

 

 

$

1,271

 

 

$

-

 

 

$

-

 

Commercial Paper

 

 

11,696

 

 

 

-

 

 

 

11,696

 

 

 

-

 

Cash equivalents

 

 

12,967

 

 

 

1,271

 

 

 

11,696

 

 

 

-

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan assets

 

 

12,834

 

 

 

12,834

 

 

 

-

 

 

 

-

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

57,614

 

 

 

-

 

 

 

57,614

 

 

 

-

 

Municipal fixed-rate bonds

 

 

26,424

 

 

 

-

 

 

 

26,424

 

 

 

-

 

Asset-backed bonds

 

 

19,239

 

 

 

-

 

 

 

19,239

 

 

 

-

 

Mortgage/Agency-backed bonds

 

 

15,373

 

 

 

-

 

 

 

15,373

 

 

 

-

 

U.S. Government bonds

 

 

35,398

 

 

 

35,398

 

 

 

-

 

 

 

-

 

Available-for-sale marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities – technology industry

 

 

5,384

 

 

 

5,384

 

 

 

-

 

 

 

-

 

Marketable equity securities – other

 

 

28,867

 

 

 

28,867

 

 

 

-

 

 

 

-

 

Available-for-sale securities

 

 

201,133

 

 

 

82,483

 

 

 

118,650

 

 

 

-

 

Total

 

$

214,100

 

 

$

83,754

 

 

$

130,346

 

 

$

-

 

 

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

 

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

Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities

6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as these are remeasured to the functional currency through profit and loss. When appropriate, we enter into various derivative transactions to enhance our ability to manage the volatility relating to these typical business exposures. We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments do not qualify for hedge accounting, and accordingly, all changes in the fair value of the instruments are recognized as other income (expense) in the Consolidated Statements of Income. 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 June 30, 2016, we had forward contracts outstanding with notional amounts totaling €6.0 million ($6.7 million), which mature in the third quarter of 2016.

The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of June 30, 2016 and December 31, 2015 were as follows:

 

(In thousands)

 

Balance Sheet Location

 

June 30,

2016

 

 

December 31,

2015

 

Derivatives Not Designated as Hedging Instruments (Level 2):

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts – asset derivatives

 

Other receivables

 

$

188

 

 

$

-

 

 

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

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

Income Statement

 

June 30,

 

 

June 30,

 

(In thousands)

 

Location

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Derivatives Not Designated as Hedging Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income (expense)

 

$

237

 

 

$

(1,299

)

 

$

190

 

 

$

177

 

 

Inventory
Inventory

7. INVENTORY

At June 30, 2016 and December 31, 2015, inventory consisted of the following:

 

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2016

 

 

2015

 

Raw materials

 

$

35,761

 

 

$

34,223

 

Work in process

 

 

2,322

 

 

 

2,893

 

Finished goods

 

 

48,853

 

 

 

54,417

 

Total

 

$

86,936

 

 

$

91,533

 

 

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 June 30, 2016 and December 31, 2015, raw materials reserves totaled $18.0 million and $17.5 million, respectively, and finished goods inventory reserves totaled $9.8 million and $9.2 million, respectively.

 

Goodwill and Intangible Assets
Goodwill and Intangible Assets

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill, all of which relates to our acquisition of Bluesocket, Inc., was $3.5 million at June 30, 2016 and December 31, 2015, and was previously recorded in our Enterprise Networks reportable segment. As a result of our new reporting structure, which is discussed further in Note 11, we reallocated goodwill from our Enterprise Networks reportable segment to our two, new reportable segments – Network Solutions and Services & Support. As a result, goodwill of $3.1 million and $0.4 million was reallocated to our Network Solutions and Services & Support reportable segments, respectively.

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 2015, we concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses recognized since the acquisition in 2011.

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

The following table presents our intangible assets as of June 30, 2016 and December 31, 2015:

 

(In thousands)

 

June 30, 2016

 

 

December 31, 2015

 

 

 

Gross

Value

 

 

Accumulated Amortization

 

 

Net Value

 

 

Gross

Value

 

 

Accumulated Amortization

 

 

Net Value

 

Customer relationships

 

$

5,925

 

 

$

(2,966

)

 

$

2,959

 

 

$

5,828

 

 

$

(2,627

)

 

$

3,201

 

Developed technology

 

 

5,778

 

 

 

(4,767

)

 

 

1,011

 

 

 

5,720

 

 

 

(4,329

)

 

 

1,391

 

Intellectual property

 

 

2,340

 

 

 

(2,021

)

 

 

319

 

 

 

2,340

 

 

 

(1,854

)

 

 

486

 

Trade names

 

 

270

 

 

 

(270

)

 

 

-

 

 

 

270

 

 

 

(265

)

 

 

5

 

Total

 

$

14,313

 

 

$

(10,024

)

 

$

4,289

 

 

$

14,158

 

 

$

(9,075

)

 

$

5,083

 

 

Amortization expense, all of which relates to business acquisitions, was $0.4 million and $0.5 million for the three months ended June 30, 2016 and 2015, respectively, and $0.9 million and $1.0 million for the six months ended June 30, 2016 and 2015, respectively.

As of June 30, 2016, the estimated future amortization expense of our intangible assets is as follows:

 

(In thousands)

 

Amount

 

Remainder of 2016

 

$

807

 

2017

 

 

1,162

 

2018

 

 

702

 

2019

 

 

308

 

2020

 

 

285

 

Thereafter