Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
 	 	 	
þ	 	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the Quarterly Period Ended September 30, 2009
OR
 	 	 	
o	 	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the Transition Period from                      to                     
Commission File Number 0-24612
ADTRAN, INC.
(Exact name of Registrant as specified in its charter)
 	 	 	
Delaware	 	63-0918200	
(State of Incorporation)	 	(I.R.S. Employer	
 	 	Identification No.)	
901 Explorer Boulevard, Huntsville, Alabama 35806-2807
(Address of principal executive offices, including zip code)
(256) 963-8000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the Registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 	 	 	 	 	 	 	
Large Accelerated Filer þ	 	Accelerated Filer o	 	Non-accelerated Filer o	 	Smaller Reporting Company o	
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date:
 	 	 	
Class	 	Outstanding at October 26, 2009	
 	 	 	
Common Stock, $.01 Par Value	 	62,843,157 shares	

 

 

ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Three and Nine Months Ended September 30, 2009
Table of Contents
 	 	 	 	 	 	 	
Item	 	 	 	Page	 	
Number	 	 	 	Number	 	
 	 	 	 	 	 	 	
PART I. FINANCIAL INFORMATION	
 	 	 	 	 	 	 	
1	 	Financial Statements:	 	 	 	 	
 	 	 	 	 	 	 	
 	 	Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008	 	 	3	 	
 	 	 	 	 	 	 	
 	 	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008 — (Unaudited)	 	 	4	 	
 	 	 	 	 	 	 	
 	 	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 — (Unaudited)	 	 	5	 	
 	 	 	 	 	 	 	
 	 	Notes to Condensed Consolidated Financial Statements — (Unaudited)	 	 	6	 	
 	 	 	 	 	 	 	
2	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	19	 	
 	 	 	 	 	 	 	
3	 	Quantitative and Qualitative Disclosures About Market Risk	 	 	28	 	
 	 	 	 	 	 	 	
4	 	Controls and Procedures	 	 	29	 	
 	 	 	 	 	 	 	
PART II. OTHER INFORMATION	
 	 	 	 	 	 	 	
1A	 	Risk Factors	 	 	29	 	
 	 	 	 	 	 	 	
2	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	 	29	 	
 	 	 	 	 	 	 	
6	 	Exhibits	 	 	29	 	
 	 	 	 	 	 	 	
 	 	SIGNATURE	 	 	30	 	
 	 	 	 	 	 	 	
 	 	EXHIBIT INDEX	 	 	31	 	
 	 	 	 	 	 	 	
  Exhibit 31	
  Exhibit 32	
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN. ADTRAN and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report, our other filings with the Securities and Exchange Commission (SEC) and other communications with our stockholders. Generally, the words, “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “could” and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. They have also been discussed in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 with the SEC. Though we have attempted to list comprehensively these important factors, we caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or a combination of factors may have on our business.
You are further cautioned not to place undue reliance on these forward-looking statements because they speak only of our views as of the date that the statements were made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
 2 

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADTRAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	
 	 	September 30,	 	 	December 31,	 	
 	 	2009	 	 	2008	 	
 	 	(Unaudited)	 	 	 	 	
ASSETS	 	 	 	 	 	 	 	 	
Current Assets	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	25,236	 	 	$	41,909	 	
Short-term investments	 	 	169,480	 	 	 	96,277	 	
Accounts receivable, less allowance for doubtful accounts of $46 at September 30, 2009 and $38 at December 31, 2008	 	 	65,324	 	 	 	52,749	 	
Other receivables	 	 	4,143	 	 	 	2,896	 	
Inventory	 	 	44,696	 	 	 	47,406	 	
Prepaid expenses	 	 	2,924	 	 	 	2,974	 	
Deferred tax assets, net	 	 	8,498	 	 	 	8,653	 	
 	 	 	 	 	 	 	
Total current assets	 	 	320,301	 	 	 	252,864	 	
 	 	 	 	 	 	 	 	 	
Property, plant, and equipment, net	 	 	74,792	 	 	 	75,487	 	
Deferred tax assets, net	 	 	—	 	 	 	3,920	 	
Other assets	 	 	1,533	 	 	 	103	 	
Long-term investments	 	 	158,865	 	 	 	141,241	 	
 	 	 	 	 	 	 	
Total assets	 	$	555,491	 	 	$	473,615	 	

LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Current Liabilities	 	 	 	 	 	 	 	 	
Accounts payable	 	$	26,133	 	 	$	20,313	 	
Unearned revenue	 	 	6,122	 	 	 	6,141	 	
Accrued expenses	 	 	4,874	 	 	 	3,536	 	
Accrued wages and benefits	 	 	9,416	 	 	 	9,868	 	
Income tax payable, net	 	 	4,032	 	 	 	266	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	50,577	 	 	 	40,124	 	
 	 	 	 	 	 	 	 	 	
Deferred tax liabilities, net	 	 	1,272	 	 	 	—	 	
Other non-current liabilities	 	 	11,405	 	 	 	9,422	 	
Bonds payable	 	 	48,250	 	 	 	48,250	 	
 	 	 	 	 	 	 	
Total liabilities	 	 	111,504	 	 	 	97,796	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies (see Note 11)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Stockholders’ Equity	 	 	 	 	 	 	 	 	
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares issued at September 30, 2009 and December 31, 2008	 	 	797	 	 	 	797	 	
Additional paid-in capital	 	 	179,116	 	 	 	172,704	 	
Accumulated other comprehensive income (loss)	 	 	12,087	 	 	 	(1,009	)	
Retained earnings	 	 	636,889	 	 	 	603,600	 	
Less treasury stock at cost: 16,857 shares at September 30, 2009 and 17,493 shares at December 31, 2008	 	 	(384,902	)	 	 	(400,273	)	
 	 	 	 	 	 	 	
Total stockholders’ equity	 	 	443,987	 	 	 	375,819	 	
 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	 	$	555,491	 	 	$	473,615	 	
 	 	 	 	 	 	 	
See notes to condensed consolidated financial statements
 
 3 

Table of Contents

ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
 	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sales	 	$	128,062	 	 	$	137,195	 	 	$	359,954	 	 	$	388,263	 	
Cost of sales	 	 	53,605	 	 	 	55,512	 	 	 	146,347	 	 	 	156,946	 	

Gross profit	 	 	74,457	 	 	 	81,683	 	 	 	213,607	 	 	 	231,317	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general, and administrative expenses	 	 	25,001	 	 	 	26,317	 	 	 	73,583	 	 	 	77,573	 	
Research and development expenses	 	 	20,497	 	 	 	21,688	 	 	 	62,029	 	 	 	61,456	 	

Operating income	 	 	28,959	 	 	 	33,678	 	 	 	77,995	 	 	 	92,288	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and dividend income	 	 	1,798	 	 	 	2,187	 	 	 	5,273	 	 	 	6,689	 	
Interest expense	 	 	(613	)	 	 	(626	)	 	 	(1,825	)	 	 	(1,905	)	
Net realized investment gain (loss)	 	 	760	 	 	 	(47	)	 	 	(1,443	)	 	 	(151	)	
Other income, net	 	 	107	 	 	 	243	 	 	 	72	 	 	 	709	 	

Income before provision for income taxes	 	 	31,011	 	 	 	35,435	 	 	 	80,072	 	 	 	97,630	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	 	 	(9,428	)	 	 	(13,024	)	 	 	(24,466	)	 	 	(35,758	)	

Net income	 	$	21,583	 	 	$	22,411	 	 	$	55,606	 	 	$	61,872	 	

Weighted average shares outstanding — basic	 	 	62,762	 	 	 	63,096	 	 	 	62,417	 	 	 	63,975	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding — diluted	 	 	63,870	 	 	 	64,101	 	 	 	63,258	 	 	 	64,961	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share — basic	 	$	0.34	 	 	$	0.36	 	 	$	0.89	 	 	$	0.97	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per common share — diluted	 	$	0.34	 	 	$	0.35	 	 	$	0.88	 	 	$	0.95	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividend per share	 	$	0.09	 	 	$	0.09	 	 	$	0.27	 	 	$	0.27	 	
See notes to condensed consolidated financial statements
 
 4 

Table of Contents

ADTRAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended	 	
 	 	September 30,	 	
 	 	2009	 	 	2008	 	
Cash flows from operating activities:	 	 	 	 	 	 	 	 	
Net income	 	$	55,606	 	 	$	61,872	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	7,521	 	 	 	7,387	 	
Amortization of net premium on available-for-sale investments	 	 	2,626	 	 	 	1,482	 	
Net realized loss on long-term investments	 	 	1,443	 	 	 	151	 	
(Gain) loss on disposal of property, plant, and equipment	 	 	(32	)	 	 	62	 	
Stock-based compensation expense	 	 	4,995	 	 	 	6,001	 	
Deferred income taxes	 	 	(1,119	)	 	 	(587	)	
Tax benefits from stock option exercises	 	 	1,416	 	 	 	1,023	 	
Excess tax benefits from stock-based compensation arrangements	 	 	(906	)	 	 	(637	)	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	
Accounts receivable, net	 	 	(12,402	)	 	 	11,453	 	
Other receivables	 	 	(1,241	)	 	 	298	 	
Inventory	 	 	2,710	 	 	 	226	 	
Prepaid expenses and other assets	 	 	90	 	 	 	(817	)	
Accounts payable	 	 	5,792	 	 	 	2,404	 	
Accrued expenses and other liabilities	 	 	2,495	 	 	 	970	 	
Income tax payable, net	 	 	3,766	 	 	 	1,076	 	
 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	72,760	 	 	 	92,364	 	

Cash flows from investing activities:	 	 	 	 	 	 	 	 	
Purchases of property, plant, and equipment	 	 	(6,710	)	 	 	(6,982	)	
Proceeds from sales and maturities of available-for-sale investments	 	 	140,047	 	 	 	212,840	 	
Purchases of available-for-sale investments	 	 	(217,669	)	 	 	(199,249	)	
Acquisition of business, net of cash acquired	 	 	(1,370	)	 	 	—	 	
 	 	 	 	 	 	 	
Net cash (used in) provided by investing activities	 	 	(85,702	)	 	 	6,609	 	

Cash flows from financing activities:	 	 	 	 	 	 	 	 	
Proceeds from stock option exercises	 	 	12,673	 	 	 	3,520	 	
Purchases of treasury stock	 	 	(2,780	)	 	 	(57,923	)	
Dividend payments	 	 	(16,830	)	 	 	(17,290	)	
Payments on long-term debt	 	 	—	 	 	 	(250	)	
Excess tax benefits from stock-based compensation arrangements	 	 	906	 	 	 	637	 	
 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	(6,031	)	 	 	(71,306	)	

Net (decrease) increase in cash and cash equivalents	 	 	(18,973	)	 	 	27,667	 	
Effect of exchange rate changes	 	 	2,300	 	 	 	(843	)	
Cash and cash equivalents, beginning of period	 	 	41,909	 	 	 	13,941	 	

Cash and cash equivalents, end of period	 	$	25,236	 	 	$	40,765	 	
 	 	 	 	 	 	 	
See notes to condensed consolidated financial statements
 
 5 

Table of Contents
ADTRAN, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed 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, 2008 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
In the opinion of management, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 27, 2009 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. ADTRAN’s more significant estimates include the allowance for doubtful accounts, obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales agreements, estimated income tax contingencies, the fair value of stock-based compensation, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.
Business Combinations
On September 15, 2009, we acquired all of the outstanding stock of Objectworld Communications Corporation (Objectworld), a provider of unified communication solutions. The purpose of this acquisition was to acquire technology that will be integrated into our NetVanta ® product line. The purchase price was approximately $1.5 million in cash subject to certain post closing adjustments. There was minimal goodwill determined in the preliminary purchase price allocation. Objectworld’s financial statements have been included in our condensed consolidated statements of income and cash flows from the date of the acquisition to September 30, 2009 and our condensed consolidated balance sheet dated September 30, 2009.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (Codification) as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. This guidance is effective for interim periods ending after September 15, 2009. We adopted this guidance for the period ended September 30, 2009, with no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2009.
In October 2009, the FASB issued Update No. 2009-13, which amends the Revenue Recognition topic of the Codification. This update provides amendments to the criteria in Subtopic 605-25 of the Codification for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments establish a selling price hierarchy for determining the selling price of a deliverable and will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our consolidated results of operations and financial condition.
 
 6 

Table of Contents
In October 2009, the FASB issued Update No. 2009-14, which amends the Software topic of the Codification. The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Subtopic 985-605 of the Codification. In addition, the amendments in this update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance. In that regard, the amendments provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue guidance. The amendments also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software. The amendments also provide further guidance on how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of the software revenue guidance. These amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact the adoption of this update might have on our consolidated results of operations and financial condition.
During the first and second quarters of 2009, we adopted the following accounting guidance, none of which had a material effect on our consolidated results of operations or financial condition:
In December 2007, the FASB revised the authoritative guidance for business combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. The guidance establishes principles stipulating how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured. The guidance also expands the disclosure requirements related to the nature and financial impact of business combinations. We adopted this guidance as of January 1, 2009. We have applied this guidance to the business combination that occurred in the third quarter of 2009.
In December 2007, the FASB revised the authoritative guidance for consolidation, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The guidance also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. It also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners of a subsidiary. We adopted this guidance as of January 1, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2009.
In June 2008, the FASB revised the authoritative guidance for earnings per share, which establishes that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. In contrast, the right to receive dividends or dividend equivalents that the holder will forfeit if the award does not vest does not constitute a participation right and such an award does not meet the definition of a participating security in its current form (that is, prior to the requisite service having been rendered for the award). We adopted this guidance as of January 1, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2009.
 
 7 

Table of Contents
In April 2009, the FASB revised the authoritative guidance for financial instruments. The guidance requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This guidance is effective for interim periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009, and have provided the disclosures required for the period ending September 30, 2009.
In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures to provide additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes. This guidance is effective for interim periods ending after June 15, 2009. We adopted this guidance for the period ending June 30, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2009.
In April 2009, the FASB revised the authoritative guidance for investments in debt and equity securities to provide guidance in determining whether impairments in debt securities are other-than-temporary, and modifies the presentation and disclosures surrounding such instruments. This guidance is effective for interim periods ending after June 15, 2009. We adopted the provisions of this guidance for the period ending June 30, 2009. The adoption of this guidance had no effect on our consolidated results of operations and financial condition for the three and nine months ended September 30, 2009.
In May 2009, the FASB revised the authoritative guidance for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is effective for financial statements issued for interim and annual reporting periods ending after June 15, 2009. We adopted this guidance for the period ended June 30, 2009, and have provided the disclosures required for the period ending September 30, 2009.
2. INCOME TAXES
Our effective tax rate decreased from 36.6% in the nine months ended September, 2008 to 30.6% in the nine months ended September 30, 2009. During the first quarter of 2009, we completed a review of our estimated tax deductions for the years 2005, 2006 and 2007 relating to the deduction for manufacturer’s domestic production activities concerning the domestic content of the products that we manufacture, under Internal Revenue Code Section 199. This review resulted in a $1.7 million benefit for the first nine months of 2009, or a 2.1 percentage point decrease in our effective tax rate in the first nine months of 2009. Amended income tax returns were filed during the first quarter of 2009 in association with this benefit. This review also resulted in a higher domestic content deduction for the nine months ended September 30, 2009, which resulted in an additional 0.8 percentage point decrease in our effective tax rate in the first nine months of 2009. The tax provision for the first nine months of 2009 also included the benefit from the research and development tax credit. The tax provision rate for the first nine months of 2008 did not include the benefit from the research and development tax credit which had expired as of December 31, 2007. Legislation to extend the research and development tax credits to the tax years 2008 and 2009 was signed into law on October 3, 2008. The exclusion of the benefit from the research and development tax credits resulted in approximately a 2.0 percentage point increase in our effective tax rate in the first nine months of 2008.
 
 8 

Table of Contents
3. STOCK-BASED COMPENSATION
The following table summarizes the stock-based compensation expense related to stock options and restricted stock units (RSUs) under the Stock Compensation Topic of the FASB Codification, for the three and nine months ended September 30, 2009 and 2008, which was recognized as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
Stock-based compensation expense included in cost of sales	 	$	66	 	 	$	79	 	 	$	196	 	 	$	237	 	

Selling, general, and administrative expense	 	 	658	 	 	 	912	 	 	 	2,160	 	 	 	2,755	 	
Research and development expense	 	 	860	 	 	 	1,011	 	 	 	2,639	 	 	 	3,009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation expense included in operating expenses	 	 	1,518	 	 	 	1,923	 	 	 	4,799	 	 	 	5,764	 	

Total stock-based compensation expense	 	 	1,584	 	 	 	2,002	 	 	 	4,995	 	 	 	6,001	 	
Tax benefit for expense associated with non-qualified options	 	 	(157	)	 	 	(196	)	 	 	(453	)	 	 	(600	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total stock-based compensation expense, net of tax	 	$	1,427	 	 	$	1,806	 	 	$	4,542	 	 	$	5,401	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
The fair value of ADTRAN’s options was estimated using the Black-Scholes model. The determination of the fair value of stock options on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.
The weighted-average assumptions and value of options granted for the three and nine months ended September 30, 2009 and 2008 are summarized as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
 	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
Expected volatility	 	 	42.67	%	 	 	40.24	%	 	 	42.77	%	 	 	41.45	%	
Risk-free interest rate	 	 	2.11	%	 	 	2.88	%	 	 	1.54	%	 	 	3.06	%	
Expected dividend yield	 	 	1.68	%	 	 	1.42	%	 	 	2.26	%	 	 	1.57	%	
Expected life (in years)	 	 	4.62	 	 	 	4.56	 	 	 	4.84	 	 	 	4.89	 	
Weighted-average estimated value	 	$	7.13	 	 	$	8.42	 	 	$	5.08	 	 	$	8.05	 	
ADTRAN uses the Monte Carlo Simulation valuation technique to value its RSUs. No RSUs were granted to employees during the nine months ended September 30, 2009 or 2008.
Stock-based compensation expense recognized in our Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008 is based on options and RSUs ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based upon historical experience and approximate 5% annually. We estimated a 0% forfeiture rate for our RSUs due to the limited number of recipients and the lack of historical experience for these awards.
As of September 30, 2009, total compensation cost related to non-vested stock options and RSUs not yet recognized was approximately $10.1 million, which is expected to be recognized over an average remaining recognition period of 2.1 years using the ratable single-option approach.
 
 9 

Table of Contents
The following schedule summarizes the activity in our stock option plans for the nine months ended September 30, 2009:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 		
 	 	 	 	 	 	 	 	 	 	Weighted Avg.	 	 	 	 		
 	 	 	 	 	 	 	 	 	 	Remaining	 	 	Aggregate	 		
 	 	Number of	 	 	Weighted Avg.	 	 	Contractual	 	 	Intrinsic	 		
(In thousands, except per share amounts)	 	Options	 	 	Exercise Price	 	 	Life in Years	 	 	Value	 		
Options outstanding, December 31, 2008	 	 	6,826	 	 	$	19.43	 	 	 	5.79	 	 	$	6,889	 		
Options granted	 	 	15	 	 	$	16.10	 	 	 	 	 	 	 	 	 		
Options cancelled/forfeited	 	 	(41	)	 	$	23.23	 	 	 	 	 	 	 	 	 		
Options exercised	 	 	(795	)	 	$	15.99	 	 	 	 	 	 	 	 	 		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Options outstanding, September 30, 2009	 	 	6,005	 	 	$	19.84	 	 	 	5.53	 	 	$	32,626	 		
 	 	 	 	 	 	 	 	 	 	 	 	 		
Options exercisable, September 30, 2009	 	 	3,878	 	 	$	19.77	 	 	 	4.23	 	 	$	23,254	 		
 	 	 	 	 	 	 	 	 	 	 	 	 		
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2009. The aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock. The total pre-tax intrinsic value of options exercised during the three and nine month periods ended September 30, 2009 was $2.8 and $4.6 million, respectively.
4. INVESTMENTS
At September 30, 2009, we held the following securities and investments, recorded at either fair value or cost.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Fair Value /	 	
 	 	Amortized	 	 	Gross Unrealized	 	 	Carrying	 	
(In thousands)	 	Cost	 	 	Gains	 	 	Losses	 	 	Value	 	
Deferred compensation plan assets investments	 	$	2,796	 	 	$	430	 	 	$	(8	)	 	$	3,218	 	
Municipal fixed-rate bonds	 	 	139,854	 	 	 	1,160	 	 	 	(12	)	 	 	141,002	 	
Municipal variable rate demand notes	 	 	88,006	 	 	 	—	 	 	 	—	 	 	 	88,006	 	
Corporate bonds (FDIC guaranteed)	 	 	20,174	 	 	 	356	 	 	 	—	 	 	 	20,530	 	
Fixed income bond fund	 	 	866	 	 	 	254	 	 	 	—	 	 	 	1,120	 	
Marketable equity securities	 	 	8,823	 	 	 	14,875	 	 	 	(187	)	 	 	23,511	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities held at fair value	 	$	260,519	 	 	$	17,075	 	 	$	(207	)	 	$	277,387	 	

Restricted investments held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	48,750	 	
 		
Other investments held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,208	 	

Total carrying value of available-for-sale securities and investments held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	$	328,345	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
At September 30, 2009, we held $3.2 million of deferred compensation plan assets, carried at fair value.
At September 30, 2009, we held $141.0 million of municipal fixed-rate bonds. At September 30, 2009, approximately 54% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 41% had a credit rating of AA, and the remaining 5% had a credit rating of A. These bonds are classified as available-for-sale investments and had an average duration of 1.0 years at September 30, 2009. Because our bond portfolio has a high quality rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.
 
 10 

Table of Contents
At September 30, 2009, we held $88.0 million of municipal variable rate demand notes, all of which are classified as available-for-sale short-term investments. At September 30, 2009, 95% of our municipal variable rate demand notes had a credit rating of VMIG-1 or A-1+ with the remaining 5% rated A-2 and all contained put options of seven days. Thus, despite the long-term nature of their stated contractual maturities, we believe we have the ability to quickly liquidate these securities. Our investments in these securities are recorded at fair value, and the interest rates reset every seven days. We have the ability to sell our variable rate demand notes to the remarketing agent, tender agent or issuer at par value plus accrued interest in the event we decide to liquidate our investment in a particular variable rate demand note. Approximately 20% of our variable rate demand notes are supported by letters of credit from banks that we believe to be in good financial condition. The remaining 80% of our variable rate demand notes are supported by standby purchase agreements. As a result of all of these factors, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments at September 30, 2009. 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.
At September 30, 2009, we held $20.5 million of corporate bonds issued by various banks that are guaranteed by the Federal Deposit Insurance Corporation (FDIC). These bonds are classified as available-for-sale and had an average duration of 2.4 years at September 30, 2009. All of these bonds had a credit rating of AAA at September 30, 2009. Because of the high quality and short duration of these issues, we are able to obtain prices for these bonds derived from observable market inputs on a daily basis.
At September 30, 2009, we held $1.1 million of a fixed income bond fund.
At September 30, 2009, we held $23.5 million of marketable equity securities, including a single security, of which we held 2.0 million shares, carried at a fair value of $13.8 million. We sold 470 thousand shares of this security during the nine months ended September 30, 2009. The sales resulted in proceeds of $1.7 million and a realized gain of $1.5 million. This single security traded approximately 245 thousand shares per day in the first nine months of 2009, in an active market on a European stock exchange. This single security carried $13.1 million of the gross unrealized gains included in the fair market value of our marketable equity securities at September 30, 2009. The remaining $1.8 million of unrealized gains and $0.2 million of gross unrealized losses were spread among more than 375 securities.
At September 30, 2009, we held a $48.8 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond). At September 30, 2009, the estimated fair value of the Bond was approximately $48.2 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AA. ADTRAN has the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. For more information on the Bond, see “Debt” under “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report.
 
 11 

Table of Contents
At September 30, 2009, we held $2.2 million of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer. The fair value of these investments was estimated to be approximately $9.7 million at September 30, 2009, based on unobservable inputs including information supplied by the companies. We have committed to invest up to an aggregate of $7.9 million in the two private equity funds, and we have contributed $7.9 million as of September 30, 2009, of which $7.4 million has been applied toward these commitments. As of September 30, 2009, we have received distributions related to these two private equity funds of $6.3 million, of which $0.6 million was recorded as a realized investment gain. These investments are carried at cost, net of distributions, with distributions in excess of our investment recorded as a realized investment gain. The duration of each of the commitments in the equity funds is ten years with $0.2 million expiring in 2010 and $0.3 million expiring in 2012.
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. Because of the strained credit markets and deterioration in the equity markets experienced beginning in the fourth quarter of 2008, we expanded the impairment review of our investments to assess the impact of these factors on our ability to recover our cost of every security whose value had declined from its original or adjusted cost by more than 25%, regardless of the historical duration of the decline. We then evaluated individual securities to determine the amount of the write-down, if any. As a result of our review, we recorded an other-than-temporary impairment charge of $40 thousand and $2.0 million during the three and nine months ending September 30, 2009, respectively, related to 10 and 117 marketable equity securities. In addition to the impairment charge we recorded on our marketable equity securities, we recorded an impairment of $0.4 million related to our investment in a fixed income bond fund and $0.5 million related to the investments associated with our deferred compensation plan during the nine months ending September 30, 2009 as a result of similar reviews. There were no such charges during the three months ended September 30, 2009 related to the fixed income bond fund or deferred compensation plan assets. As long as current market conditions continue to exist, we will continue to complete a similar review of individual securities for impairment each quarter. For the three and nine months ended September 30, 2008, we recorded charges of $0.1 million and $0.6 million, respectively, related to the impairment of 7 and 29 publicly traded equity securities.
 
 12 

Table of Contents
In accordance with the Fair Value Measurements and Disclosures Topic of the FASB Codification, 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 for substantially the full term of the asset or liability; Level 3 — Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Fair Value Measurements at September 30, 2009 Using	 	
 	 	 	 	 	 	Quoted Prices	 	 	Significant	 	 	 	 	
 	 	 	 	 	 	in Active	 	 	Other	 	 	Significant	 	
 	 	 	 	 	 	Markets for	 	 	Observable	 	 	Unobservable	 	
 	 	Fair	 	 	Identical Assets	 	 	Inputs	 	 	Inputs	 	
(In thousands)	 	Value	 	 	(Level 1)	 	 	(Level 2)	 	 	(Level 3)	 	
Cash equivalents	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market funds	 	$	14,376	 	 	$	14,376	 	 	$	—	 	 	$	—	 	

Available-for-sale securities held at fair value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred compensation plan assets	 	 	3,218	 	 	 	3,218	 	 	 	—	 	 	 	—	 	
Municipal fixed-rate bonds	 	 	141,002	 	 	 	—	 	 	 	141,002	 	 	 	—	 	
Municipal variable rate demand notes	 	 	88,006	 	 	 	—	 	 	 	88,006	 	 	 	—	 	
Corporate bonds (FDIC guaranteed)	 	 	20,530	 	 	 	—	 	 	 	20,530	 	 	 	—	 	
Fixed income bond fund	 	 	1,120	 	 	 	1,120	 	 	 	—	 	 	 	—	 	
Marketable equity securities	 	 	23,511	 	 	 	23,511	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities held at fair value	 	$	277,387	 	 	$	27,849	 	 	$	249,538	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	291,763	 	 	$	42,225	 	 	$	249,538	 	 	$	—	 	

 	 	Fair Value Measurements at December 31, 2008 Using	 	
 	 	 	 	 	 	Quoted Prices	 	 	Significant	 	 	 	 	
 	 	 	 	 	 	in Active	 	 	Other	 	 	Significant	 	
 	 	 	 	 	 	Markets for	 	 	Observable	 	 	Unobservable	 	
 	 	Fair	 	 	Identical Assets	 	 	Inputs	 	 	Inputs	 	
(In thousands)	 	Value	 	 	(Level 1)	 	 	(Level 2)	 	 	(Level 3)	 	
Cash equivalents	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market funds	 	$	25,389	 	 	$	25,389	 	 	$	—	 	 	$	—	 	

Available-for-sale securities held at fair value	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred compensation plan assets	 	 	2,457	 	 	 	2,457	 	 	 	—	 	 	 	—	 	
Government agency security	 	 	1,999	 	 	 	—	 	 	 	1,999	 	 	 	—	 	
Municipal fixed-rate bonds	 	 	116,943	 	 	 	—	 	 	 	116,943	 	 	 	—	 	
Municipal variable rate demand notes	 	 	52,633	 	 	 	—	 	 	 	52,633	 	 	 	—	 	
Fixed income bond fund	 	 	884	 	 	 	884	 	 	 	—	 	 	 	—	 	
Marketable equity securities	 	 	11,644	 	 	 	11,644	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Available-for-sale securities held at fair value	 	$	186,560	 	 	$	14,985	 	 	$	171,575	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	211,949	 	 	$	40,374	 	 	$	171,575	 	 	$	—	 	

 13 

Table of Contents
5. INVENTORY
At September 30, 2009 and December 31, 2008, inventory consisted of the following:
 	 	 	 	 	 	 	 	 	
 	 	September 30,	 	 	December 31,	 	
(In thousands)	 	2009	 	 	2008	 	
Raw materials	 	$	32,915	 	 	$	32,591	 	
Work in progress	 	 	2,778	 	 	 	1,552	 	
Finished goods	 	 	16,683	 	 	 	20,991	 	
Inventory reserves	 	 	(7,680	)	 	 	(7,728	)	
 	 	 	 	 	 	 	
Total	 	$	44,696	 	 	$	47,406	 	
 	 	 	 	 	 	 	
6. STOCKHOLDERS’ EQUITY
A summary of the changes in stockholders’ equity for the nine months ended September 30, 2009 is as follows:
 	 	 	 	 	
 	 	Stockholders’	 	
(In thousands)	 	Equity	 	
Balance, December 31, 2008	 	$	375,819	 	
Net income	 	 	55,606	 	
Dividend payments	 	 	(16,830	)	
Dividends accrued for unvested restricted stock units	 	 	(8	)	
Change in unrealized gains and losses on marketable securities (net of deferred taxes)	 	 	9,705	 	
Reclassification adjustment for amounts included in net income (net of deferred taxes)	 	 	1,091	 	
Foreign currency translation adjustment	 	 	2,300	 	
Proceeds from stock option exercises	 	 	12,673	 	
Tax benefits from stock option exercises	 	 	1,416	 	
Stock-based compensation expense	 	 	4,995	 	
Purchases of treasury stock	 	 	(2,780	)	
 	 	 	 	
Balance, September 30, 2009	 	$	443,987	 	
 	 	 	 	
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions of up to 30 million shares of our common stock. During the nine months ended September 30, 2009, we repurchased 0.2 million shares of our common stock at an average price of $17.50 per share. We have the authority to purchase an additional 3.3 million shares of our common stock under the plan approved by the Board of Directors on April 14, 2008.
Stock Option Exercises
We issued 0.8 million shares of treasury stock during the nine months ended September 30, 2009 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $8.70 to $23.02. We received proceeds totaling $12.7 million from the exercise of these stock options during the first nine months of 2009.
Dividend Payments
During 2009, ADTRAN has paid cash dividends as follows (in thousands except per share amounts):
 	 	 	 	 	 	 	 	 	 	 	
Record Date	 	Payment Date	 	Per Share Amount	 	 	Total Dividend Paid	 	

February 5, 2009	 	February 19, 2009	 	$	0.09	 	 	$	5,568	 	
April 30, 2009	 	May 14, 2009	 	$	0.09	 	 	$	5,611	 	
July 30, 2009	 	August 13, 2009	 	$	0.09	 	 	$	5,651	 	
 
 14 

Table of Contents
Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, reclassification adjustments for amounts included in net income and unrealized gains and losses on marketable securities.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
Net income	 	$	21,583	 	 	$	22,411	 	 	$	55,606	 	 	$	61,872	 	
Foreign currency translation adjustment	 	 	679	 	 	 	(1,468	)	 	 	2,300	 	 	 	(843	)	
Reclassification adjustment for amounts included in net income, net of deferred taxes	 	 	(450	)	 	 	48	 	 	 	1,091	 	 	 	191	 	
Change in unrealized gains and losses on marketable securities, net of deferred taxes	 	 	5,510	 	 	 	(2,994	)	 	 	9,705	 	 	 	(5,056	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	$	27,322	 	 	$	17,997	 	 	$	68,702	 	 	$	56,164	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
7. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2009 and 2008 is as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands, except per share amounts)	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
Numerator	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	21,583	 	 	$	22,411	 	 	$	55,606	 	 	$	61,872	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares — basic	 	 	62,762	 	 	 	63,096	 	 	 	62,417	 	 	 	63,975	 	
Effect of dilutive securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock options	 	 	1,099	 	 	 	1,005	 	 	 	835	 	 	 	986	 	
Restricted stock units	 	 	9	 	 	 	—	 	 	 	6	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares — diluted	 	 	63,870	 	 	 	64,101	 	 	 	63,258	 	 	 	64,961	 	

Net income per share — basic	 	$	0.34	 	 	$	0.36	 	 	$	0.89	 	 	$	0.97	 	
Net income per share — diluted	 	$	0.34	 	 	$	0.35	 	 	$	0.88	 	 	$	0.95	 	
Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 2.6 million and 3.3 million for the three months ended September 30, 2009 and 2008, respectively. Anti-dilutive options totaled 3.8 million and 3.5 million for the nine months ended September 30, 2009 and 2008, respectively.
8. SEGMENT INFORMATION
ADTRAN operates in two reportable segments: (1) the Carrier Networks Division and (2) the Enterprise Networks Division. We evaluate the performance of our segments based on gross profit; therefore, selling, general, and administrative expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other income, net and provision for income taxes are reported on an entity-wide basis only. There are no inter-segment revenues.
 
 15 

Table of Contents

The following table presents information about the reported sales and gross profit of our reportable segments for the three and nine months ended September 30, 2009 and 2008. Asset information by reportable segment is not reported, since ADTRAN does not produce such information internally.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	September 30, 2009	 	 	September 30, 2008	 	
(In thousands)	 	Sales	 	 	Gross Profit	 	 	Sales	 	 	Gross Profit	 	
Carrier Networks	 	$	98,643	 	 	$	56,706	 	 	$	106,394	 	 	$	63,549	 	
Enterprise Networks	 	 	29,419	 	 	 	17,751	 	 	 	30,801	 	 	 	18,134	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	128,062	 	 	$	74,457	 	 	$	137,195	 	 	$	81,683	 	

 	 	Nine Months Ended	 	
 	 	September 30, 2009	 	 	September 30, 2008	 	
(In thousands)	 	Sales	 	 	Gross Profit	 	 	Sales	 	 	Gross Profit	 	
Carrier Networks	 	$	277,493	 	 	$	164,469	 	 	$	305,457	 	 	$	183,507	 	
Enterprise Networks	 	 	82,461	 	 	 	49,138	 	 	 	82,806	 	 	 	47,810	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	359,954	 	 	$	213,607	 	 	$	388,263	 	 	$	231,317	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Sales by Geographic Region
The table below presents sales information by geographic region for the three and nine months ended September 30, 2009 and 2008.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
(In thousands)	 	September 30, 2009	 	 	September 30, 2008	 	 	September 30, 2009	 	 	September 30, 2008	 	
United States	 	$	121,403	 	 	$	129,357	 	 	$	339,906	 	 	$	366,218	 	
International	 	 	6,659	 	 	 	7,838	 	 	 	20,048	 	 	 	22,045	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	128,062	 	 	$	137,195	 	 	$	359,954	 	 	$	388,263	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Sales by Product
Our three major product categories are Carrier Systems, Business Networking and Loop Access.
Carrier Systems products are used by telecommunications service providers to provide last mile access in support of data, voice and video services to consumers and enterprises. The Carrier Systems category includes our broadband access products comprising Total Access ® 5000 multi-access and aggregation platform products, Fiber-To-The-Node (FTTN) products and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access products are used by service providers to deliver high speed Internet access, Voice over Internet Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from central office or remote terminal locations to customer premises. The Carrier Systems category also includes our optical access products. These products consist of optical access multiplexers including our family of OPTI ® products. Optical access products are used to deliver higher bandwidth services, or to aggregate large numbers of low bandwidth services for transportation across fiber optic infrastructure. Total Access ® 1500 products, 303 concentrator products, M13 multiplexer products and wireless network backhaul products are also included in the Carrier Systems product category.
Business Networking products provide enterprises access to telecommunication networks and facilitate networking capabilities for voice, data and video networks. The Business Networking category includes Internetworking products and Integrated Access Devices (IADs). Internetworking products consist of our IP Business Gateways, gigabit passive optical network termination products (GPON ONTs), and NetVanta ® product lines. NetVanta ® products include IP multi-service access routers, Ethernet switches, Internet security/firewall appliances, IP Private Branch Exchange (PBX) products, IP phone products and Carrier Ethernet Network Terminating Equipment.
 
 16 

Table of Contents

Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks. The Loop Access category includes products such as Digital Data Service (DDS) and Integrated Services Digital Network (Total Reach ® ) products, High bit-rate Digital Subscriber Line (HDSL) products including Total Access ® 3000 based HDSL and Time Division Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service Units, and TRACER ® fixed wireless products.
The table below presents sales information by product category for the three and nine months ended September 30, 2009 and 2008.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
Carrier Systems	 	$	59,865	 	 	$	53,880	 	 	$	158,804	 	 	$	162,766	 	
Business Networking	 	 	26,124	 	 	 	25,385	 	 	 	72,568	 	 	 	68,142	 	
Loop Access	 	 	42,073	 	 	 	57,930	 	 	 	128,582	 	 	 	157,355	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	128,062	 	 	$	137,195	 	 	$	359,954	 	 	$	388,263	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
In addition, we identify sub-categories of product revenues, which we divide into growth products, representing our primary growth areas, and traditional products. Our growth products consist of broadband access and optical access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our traditional products include HDSL products (included in Loop Access) and other products.
Subcategory revenues included in the above are as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2009	 	 	2008	 	 	2009	 	 	2008	 	
Growth Products	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Broadband Access (included in Carrier Systems)	 	$	29,518	 	 	$	22,958	 	 	$	83,128	 	 	$	82,869	 	
Optical Access (included in Carrier Systems)	 	 	20,094	 	 	 	16,707	 	 	 	44,260	 	 	 	41,256	 	
Internetworking (NetVanta & Multi-service Access Gateways) (included in Business Networking)	 	 	21,276	 	 	 	19,185	 	 	 	57,018	 	 	 	50,084	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	70,888	 	 	 	58,850	 	 	 	184,406	 	 	 	174,209	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Traditional Products	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
HDSL (does not include T1) (included in Loop Access)	 	 	37,610	 	 	 	50,806	 	 	 	114,880	 	 	 	138,104	 	
Other traditional products (excluding HDSL)	 	 	19,564	 	 	 	27,539	 	 	 	60,668	 	 	 	75,950	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	57,174	 	 	 	78,345	 	 	 	175,548	 	 	 	214,054	 	

Total	 	$	128,062	 	 	$	137,195	 	 	$	359,954	 	 	$	388,263	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
9. LIABILITY FOR WARRANTY RETURNS
Our products generally include warranties of one to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to systems products. These products will require more warranty repairs to be completed at the installed location due to their size and complexity, rather than at a manufacturing site or repair depot. This field service obligation, as well as the increasing complexity of our products, may 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 higher 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.
 
 17 

Table of Contents

The liability for warranty returns totaled $2.8 million at September 30, 2009 and December 31, 2008. These liabilities are included in accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
A summary of warranty expense and write-off activity for the nine months ended September 30, 2008 and 2009 is as follows:
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended	 	
(In thousands)	 	September 30, 2009	 	 	September 30, 2008	 	
Balance at beginning of period	 	$	2,812	 	 	$	2,944	 	
Plus: Amounts acquired or charged to cost and expenses	 	 	1,849	 	 	 	1,731	 	
Less: Deductions	 	 	(1,825	)	 	 	(1,780	)	
 	 	 	 	 	 	 	
Balance at end of period	 	$	2,836	 	 	$	2,895	 	
 	 	 	 	 	 	 	
10. RELATED PARTY TRANSACTIONS
We employ the law firm of our director emeritus for legal services. All bills for services rendered by this firm are reviewed and approved by our chief financial officer. We believe that the fees for such services are comparable to those charged by other firms for services rendered to us. We paid $30 thousand during the three month periods ended September 30, 2009 and 2008 for legal services rendered. We paid $80 thousand during the nine month period ended September 30, 2009 and $90 thousand during the nine month period ended September 30, 2008 for legal services rendered.
11. 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 contractual agreements with customers or suppliers, liquidated damages related to our delivery or product performance under customer contracts and other commercial disputes. In some cases, claimants seek damages, or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $7.9 million to date, of which $7.4 million has been applied to these commitments. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional information.
12. SUBSEQUENT EVENTS
On October 13, 2009, ADTRAN announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on October 29, 2009. The payment date will be November 12, 2009. The quarterly dividend payment will be approximately $5.7 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.
We have evaluated all subsequent events through November 4, 2009, the date the financial statements were issued.
 
 18 

Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.
OVERVIEW
ADTRAN, Inc. designs, manufactures, markets and services network access solutions for communications networks. Our solutions are widely deployed by providers of telecommunications services (serviced by our Carrier Networks Division), and small and mid-sized businesses and enterprises (serviced by our Enterprise Networks Division), and enable voice, data, video and Internet communications across copper, fiber and wireless networks. Many of these solutions are currently in use by every major United States service provider and many global ones, as well as by many public, private and governmental organizations worldwide.
Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors. An important part of our strategy is to reduce the cost of each succeeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, low-cost provider of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.
Our three major product categories are Carrier Systems, Business Networking and Loop Access. Carrier Systems products are used by telecommunications service providers to provide last mile access in support of data, voice and video services to consumers and enterprises. Business Networking products provide enterprises access to telecommunication networks and facilitate networking capabilities for voice, data and video networks. Loop Access products are used by carrier and enterprise customers for access to copper-based telecommunications networks.
In addition, we identify sub-categories of product revenues, which we divide into growth products, representing our primary growth areas, and traditional products. Our growth products consist of Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking products (included in Business Networking) and our traditional products include HDSL products (included in Loop Access) and other products. Many of our customers are migrating their networks to deliver higher bandwidth services by utilizing newer technologies. We believe that products in our primary growth areas position the Company well for this migration. We anticipate that revenues of many of our traditional products, including HDSL, may continue for years because of the time required for our customers to transition to newer technologies.
See Note 8 of Notes to Condensed Consolidated Financial Statements in this report for further information regarding these product categories.
Sales were $128.1 million and $360.0 million for the three and nine months ended September 30, 2009 compared to $137.2 million and $388.3 million for the three and nine months ended September 30, 2008. Product revenues for our three primary growth areas, Broadband Access, Optical Access and Internetworking, were $70.9 million and $184.4 million for the three and nine months ended September 30, 2009 compared to $58.9 million and $174.2 million for the three and nine months ended September 30, 2008. Our gross margin decreased for the three and nine months ended September 30, 2009 to 58.1% and 59.3% respectively, compared to 59.5% and 59.6% for the three and nine months ended September 30, 2008. Our operating margin decreased to 22.6% and 21.7% for the three and nine months ended September 30, 2009 from 24.5% and 23.8% for the three and nine months ended September 30, 2008. Net income was $21.6 million and $55.6 million for the three and nine months ended September 30, 2009 compared to $22.4 million and $61.9 million for the three and nine months ended September 30, 2008. Our effective tax rate decreased from 36.8% and 36.6% for the three and nine months ended September 30, 2008 to 30.4% and 30.6% for the three and nine months ended September 30, 2009.
 
 19 

Table of Contents

Earnings per share, assuming dilution, were $0.34 and $0.88 for the three and nine months ended September 30, 2009 compared to $0.35 and $0.95 for the three and nine months ended September 30, 2008. Earnings per share for the three and nine months ended September 30, 2009 compared to the same period in 2008 reflects a lower weighted average number of shares outstanding in 2009 due to stock repurchases under the share repurchase plans approved by our Board of Directors.
Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly in future periods due to a number of factors. We normally operate with very little order backlog. A majority of our sales in each quarter result from orders booked in that quarter and firm purchase orders released in that quarter by customers under agreements containing non-binding purchase commitments. Many of our customers require prompt delivery of products. This results in a limited backlog of orders for our products and requires us to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for our products declines, or if potential sales in any quarter do not occur as anticipated, our financial results could be adversely affected. Operating expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results in a given quarter.
Our operating results may also fluctuate as a result of a number of other factors, including increased competition, customer order patterns, changes in product mix, timing differences between price decreases and product cost reductions, product warranty returns, and announcements of new products by us or our competitors. Additionally, maintaining sufficient inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of such inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements which may impact our operating results in a given quarter.
Accordingly, our historical financial performance is not necessarily a meaningful indicator of future results, and, in general, management expects that our financial results may vary from period to period. A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. These factors have also been discussed in more detail in Item 1A of Part I in our most recent Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 27, 2009 with the SEC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed significantly from those detailed in our most recent Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 27, 2009 with the SEC.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements in Item 1 of this Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operation and financial condition, which is incorporated herein by reference.
 
 20 

Table of Contents

RESULTS OF OPERATIONS — THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008
SALES
ADTRAN’s sales decreased 6.7% from $137.2 million in the three months ended September 30, 2008 to $128.1 million in the three months ended September 30, 2009, and decreased 7.3% from $388.3 million in the nine months ended September 30, 2008 to $360.0 million in the nine months ended September 30, 2009.
Carrier Networks sales decreased 7.3% from $106.4 million in the three months ended September 30, 2008 to $98.6 million in the three months ended September 30, 2009. Carrier Networks sales decreased 9.2% from $305.5 million in the nine months ended September 30, 2008 to $277.5 million in the nine months ended September 30, 2009. The decrease in Carrier Networks sales for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is primarily attributable to decreases in sales of HDSL and other traditional TDM products, partially offset by increases in Broadband and Optical Access products. The decrease in Carrier Networks sales for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is primarily attributable to decreases in sales of HDSL, DDS, and other traditional TDM products, partially offset by an increase in Optical Access products.
Enterprise Networks sales decreased 4.5% from $30.8 million in the three months ended September 30, 2008 to $29.4 million in the three months ended September 30, 2009 and decreased 0.4% from $82.8 million in the nine months ended September 30, 2008 to $82.5 million in the nine months ended September 30, 2009. The decrease in Enterprise Networks sales for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is primarily attributable to a decrease in traditional IAD and enterprise T1 products, partially offset by an increase in Internetworking products sales. The decrease in Enterprise Networks sales for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is primarily attributable to a decrease in traditional IAD and enterprise T1 products, partially offset by an increase in Internetworking products sales. Internetworking product sales were 69.3% and 66.3% of Enterprise Network sales in the three and nine months ended September 30, 2009 compared with 59.5% and 58.3% in the three and nine months ended September 30, 2008. Traditional products primarily comprise the remainder of Enterprise Networks sales. Enterprise Networks sales as a percentage of total sales increased from 22.4% for the three months ended September 30, 2008 to 23.0% for the three months ended September 30, 2009 and increased from 21.3% for the nine months ended September 30, 2008 to 22.9% for the nine months ended September 30, 2009.
International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, decreased 15.0% from $7.8 million in the three months ended September 30, 2008 to $6.7 million in the three months ended September 30, 2009 and decreased 9.1% from $22.0 million in the nine months ended September 30, 2008 to $20.0 million in the nine months ended September 30, 2009. International sales, as a percentage of total sales, decreased from 5.7% for the three months ended September 30, 2008 to 5.2% for the three months ended September 30, 2009, and decreased from 5.7% for the nine months ended September 30, 2008 to 5.6% for the nine months ended September 30, 2009. International sales decreased in the three and nine month periods of 2009 compared to the 2008 periods due primarily to slowing macroeconomic conditions.
Carrier Systems product sales increased $6.0 million in the three months ended September 30, 2009 compared to the three months ended September 30, 2008 primarily due to increases in Broadband and Optical Access products, partially offset by decreases in traditional TDM products. Carrier Systems product sales decreased $4.0 million in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to decreases in sales of traditional TDM products, partially offset by an increase in Optical Access products.
Business Networking product sales increased $0.7 million and $4.4 million in the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 primarily due to an increase in sales of Internetworking products, partially offset by a decrease in sales of traditional IAD products.
Loop Access product sales decreased $15.9 million and $28.8 million in the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 primarily due to decreases in sales of HDSL, DDS, enterprise T1 products, and wireless products.
 
 21 

Table of Contents

COST OF SALES
As a percentage of sales, cost of sales increased from 40.5% in the three months ended September 30, 2008 to 41.9% in the three months ended September 30, 2009 and increased from 40.4% in the nine months ended September 30, 2008 to 40.7% in the nine months ended September 30, 2009. The increases for the three and nine month periods ended September 30, 2009 were primarily related to costs incurred to expedite delivery of materials and costs related to a new product release, which were partially offset by cost reductions generated through improved manufacturing efficiencies.
Carrier Networks cost of sales, as a percent of division sales, increased from 40.3% in the three months ended September 30, 2008 to 42.5% in the three months ended September 30, 2009 and increased from 39.9% in the nine months ended September 30, 2008 to 40.7% in the nine months ended September 30, 2009. The increases for the three and nine month periods ended September 30, 2009 were primarily related to costs incurred to expedite delivery of materials and costs related to a new product release.
Enterprise Networks cost of sales, as a percent of division sales, decreased from 41.1% in the three months ended September 30, 2008 to 39.7% in the three months ended September 30, 2009 and decreased from 42.3% in the nine months ended September 30, 2008 to 40.4% in the nine months ended September 30, 2009. These decreases for the three and nine month periods ended September 30, 2009 were primarily related to lower production costs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased 5.0% from $26.3 million in the three months ended September 30, 2008 to $25.0 million in the three months ended September 30, 2009 and decreased 5.1% from $77.6 million in the nine months ended September 30, 2008 to $73.6 million in the nine months ended September 30, 2009. The decrease in selling, general, and administrative expenses for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 is primarily related to a reduction in discretionary expenditures including temporary labor, travel, and various promotional expenses.
Selling, general, and administrative expenses as a percentage of sales increased from 19.2% in the three months ended September 30, 2008 to 19.5% in the three months ended September 30, 2009 and increased from 20.0% in the nine months ended September 30, 2008 to 20.4% in the nine months ended September 30, 2009, due primarily to a decrease in sales.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 5.5% from $21.7 million in the three months ended September 30, 2008 to $20.5 million in the three months ended September 30, 2009 and increased 0.9% from $61.5 million in the nine months ended September 30, 2008 to $62.0 million in the nine months ended September 30, 2009. The decrease in research and development expenses for the three months ended September 30, 2009 compared to September 30, 2008 primarily reflects lower employee benefits costs and lower design and testing costs. The increase in research and development expenses for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily reflects increased staffing, engineering and testing expense primarily related to customer specific product development activities, as well as costs related to product approvals primarily for one or more of the top three U.S. carriers.
As a percentage of sales, research and development expenses increased from 15.8% in the three months ended September 30, 2008 to 16.0% in the three months ended September 30, 2009 and increased from 15.8% in the nine months ended September 30, 2008 to 17.2% in the nine months ended September 30, 2009.
ADTRAN expects to continue to incur research and development expenses in connection with its new and existing products and its expansion into international markets. ADTRAN continually evaluates new product opportunities and engages in intensive research and product development efforts which provide for new product development, enhancement of existing products and product cost reductions. ADTRAN expenses all product research and development costs as incurred. As a result, ADTRAN may incur significant research and development expenses prior to the receipt of revenues from a major new product group or market expansion.
 
 22 

Table of Contents

INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased 17.8% from $2.2 million in the three months ended September 30, 2008 to $1.8 million in the three months ended September 30, 2009 and decreased 21.2% from $6.7 million in the nine months ended September 30, 2008 to $5.3 million in the nine months ended September 30, 2009. The decrease is primarily driven by a 57% reduction in the average rate of return on our investments for the nine month period of 2009 compared to 2008 as a result of lower interest rates, partially offset by a 38% increase in our average investment balances.
INTEREST EXPENSE
Interest expense, which is primarily related to our taxable revenue bond, remained relatively constant at $0.6 million for the three months ended September 30, 2008 and 2009 and $1.9 million and $1.8 million for the nine months ended September 30, 2008 and September 30, 2009, respectively. See “Liquidity and Capital Resources” below for additional information on our revenue bond.
NET REALIZED INVESTMENT GAIN (LOSS)
Net realized investment gain (loss) changed from a $47 thousand loss in the three months ended September 30, 2008 to a $0.8 million gain in the three months ended September 30, 2009 and increased from a $0.2 million loss in the nine months ended September 30, 2008 to a $1.4 million loss in the nine months ended September 30, 2009. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.
OTHER INCOME, NET
Other income, net, comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees and scrap raw material sales, decreased from $0.2 million in the three months ended September 30, 2008 to $0.1 million in the three months ended September 30, 2009 and decreased from $0.7 million in the nine months ended September 30, 2008 to $72 thousand in the nine months ended September 30, 2009.
INCOME TAXES
Our effective tax rate decreased from 36.8% in the three months ended September 30, 2008 to 30.4% in the three months ended September 30, 2009 and from 36.6% in the nine months ended September 30, 2008 to 30.6% in the nine months ended September 30, 2009. During the first quarter of 2009, we completed a review of our estimated tax deductions for the years 2005, 2006, and 2007 relating to the deduction for manufacturer’s domestic production activities concerning the domestic content of the products that we manufacture, under Internal Revenue Code Section 199. This review resulted in a $1.7 million benefit for the first nine months of 2009, or a 2.1 percentage point decrease in our effective tax rate in the first nine months of 2009. Amended income tax returns were filed during the first quarter of 2009 in association with this benefit. This review also resulted in a higher domestic content deduction for the nine months ended September 30, 2009, which resulted in an additional 0.8 percentage point decrease in our effective tax rate in the first nine months of 2009. The tax provision for the first nine months of 2009 also included the benefit from the research and development tax credit. The tax provision rate for the first nine months of 2008 did not include the benefit from the research and development tax credit which had expired as of December 31, 2007. Legislation to extend the research and development tax credits to the tax years 2008 and 2009 was signed into law on October 3, 2008. The exclusion of the benefit from the research and development tax credits resulted in approximately a 2.0 percentage point increase in our effective tax rate in the first nine months of 2008.
NET INCOME
As a result of the above factors, net income decreased $0.8 million from $22.4 million in the three months ended September 30, 2008 to $21.6 million in the three months ended September 30, 2009 and decreased $6.3 million from $61.9 million in the nine months ended September 30, 2008 to $55.6 million in the nine months ended September 30, 2009.
As a percentage of sales, net income increased from 16.3% in the three months ended September 30, 2008 to 16.9% in the three months ended September 30, 2009 and decreased from 15.9% in the nine months ended September 30, 2008 to 15.4% in the nine months ended September 30, 2009.
 
 23 

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At September 30, 2009, cash on hand was $25.2 million and short-term investments were $169.5 million, which resulted in available short-term liquidity of $194.7 million. At December 31, 2008, our cash on hand of $41.9 million and short-term investments of $96.3 million resulted in available short-term liquidity of $138.2 million. The increase in liquidity from December 31, 2008 to September 30, 2009 primarily reflects an increase in investments of variable rate demand notes purchased as a result of cash generated from operations.
Operating Activities
Our working capital, which consists of current assets less current liabilities, increased 26.8% from $212.7 million as of December 31, 2008 to $269.7 million as of September 30, 2009. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, increased from 4.76 as of December 31, 2008 to 5.14 as of September 30, 2009. The current ratio, defined as current assets divided by current liabilities, increased from 6.30 as of December 31, 2008 to 6.33 as of September 30, 2009. The quick ratio and the current ratio increased primarily due to an increase in short-term investments of $73.2 million.
Net accounts receivable increased 23.8% from $52.7 million at December 31, 2008 to $65.3 million at September 30, 2009. Our allowance for doubtful accounts was $38 thousand at December 31, 2008 and $46 thousand at September 30, 2009. Quarterly accounts receivable days sales outstanding (DSO) increased from 43 days as of December 31, 2008 to 47 days as of September 30, 2009. Net accounts receivable and DSO increased for the quarter ended September 30, 2009 due to the timing of sales during the quarter.
Quarterly inventory turnover increased from 3.8 turns as of December 31, 2008 to 4.6 turns as of September 30, 2009. Inventory decreased 5.7% from December 31, 2008 to September 30, 2009. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory to ensure competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.
Accounts payable increased 28.7% from $20.3 million at December 31, 2008 to $26.1 million at September 30, 2009. Generally, the change in accounts payable is due to variations in the timing of the receipt of supplies, inventory and services and our subsequent payments for these purchases.
Investing Activities
Capital expenditures totaled approximately $6.7 million and $7.0 million for the nine months ended September 30, 2009 and 2008, respectively. These expenditures were primarily used to purchase manufacturing equipment, test equipment, computer software, and computer hardware.
Our combined short-term and long-term investments increased $90.8 million from $237.5 million at December 31, 2008 to $328.3 million at September 30, 2009, primarily reflecting our investment of cash generated from operations.
We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal risk of loss. At September 30, 2009, these investments included municipal variable rate demand notes of $88.0 million, municipal fixed-rate bonds of $141.0 million and corporate bonds of $20.5 million that are guaranteed by the Federal Deposit Insurance Corporation (FDIC) and issued by various banks. At December 31, 2008, these investments included municipal variable rate demand notes of $52.6 million, municipal fixed-rate bonds of $116.9 million and a government agency security of $2.0 million.
Our municipal variable rate demand notes are classified as available-for-sale short-term investments and 95% had a credit rating of VMIG-1 or A-1+ with the remaining 5% rated A-2 at September 30, 2009. Despite the long-term nature of their stated contractual maturities, we believe that we have the ability to quickly liquidate these securities. Our investments in these securities are recorded at fair value and the interest rates reset every seven days. As a result, we had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments. All income generated from these investments was recorded as interest income. We have not been required to record any losses relating to municipal variable rate demand notes.
 
 24 

Table of Contents

At September 30, 2009, approximately 54% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 41% had a credit rating of AA, and the remaining 5% had a credit rating of A. These bonds are classified as available-for-sale investments and had an average duration of 1.0 years at September 30, 2009. Because our bond portfolio has a high quality rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.
At September 30, 2009, we held $20.5 million of corporate bonds issued by various banks that are guaranteed by the FDIC. These bonds are classified as available-for-sale and had an average duration of 2.4 years at September 30, 2009. All of these bonds had a credit rating of AAA at September 30, 2009. Because of the high quality and short duration of these issues, we are able to obtain prices for these bonds derived from observable market inputs on a daily basis.
Our long-term investments increased 12.5% from $141.2 million at December 31, 2008 to $158.9 million at September 30, 2009. The primary reason for the increase in our long-term investments during the first nine months of 2009 was a 453% increase in fair value of a single equity security. Long-term investments at September 30, 2009 and December 31, 2008 included an investment in a certificate of deposit of $48.8 million which serves as collateral for our revenue bonds, as discussed below. We have various equity investments included in long-term investments at a cost of $8.8 million and $12.0 million, and with a fair value of $23.5 million and $11.6 million, at September 30, 2009 and December 31, 2008, respectively, including a single equity security, of which we held 2.0 million shares, carried at $13.8 million at September 30, 2009 and 2.5 million shares carried at $2.5 million of fair value December 31, 2008. We sold 470 thousand shares of this security during the nine months ended September 30, 2009. The sales resulted in proceeds of $1.7 million and a realized gain of $1.5 million. The single security traded approximately 245 thousand shares per day in the first nine months of 2009, in an active market on a European stock exchange. Of the gross unrealized gains included in the fair value of our marketable securities at September 30, 2009, this single security carried $13.1 million of this unrealized gain. Long-term investments at September 30, 2009 also include $3.2 million related to our deferred compensation plan; $2.2 million of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer; and a $1.1 million investment in a fixed income bond fund.
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. Because of the strained credit markets and deterioration in the equity markets experienced beginning in the fourth quarter of 2008, we expanded the impairment review of our investments to assess the impact of these factors on our ability to recover our cost of every security whose value had declined from its original or adjusted cost by more than 25%, regardless of the historical duration of the decline. We then evaluated individual securities to determine the amount of the write-down, if any. As a result of our review, we recorded an other-than-temporary impairment charge of $40 thousand during the third quarter of 2009 related to ten marketable equity securities and $2.0 million during the first nine months of 2009 related to 117 marketable equity securities. In addition to the impairment charge we recorded on our marketable equity securities, we recorded an impairment of $0.4 million related to our investment in a fixed income bond fund and $0.5 million related to our deferred compensation plan during the nine months ending September 30, 2009 as a result of similar reviews. There were no such charges during the three months ended September 30, 2009 related to the fixed income bond fund or deferred compensation plan assets. As long as current market conditions continue to exist, we will continue to complete a similar review of individual securities for impairment each quarter. For the nine months ended September 30, 2008, we had a charge of $0.6 million related to the impairment of 29 publicly traded equity securities.
 
 25 

Table of Contents

Financing Activities
Dividends
In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity. During the nine months ended September 30, 2009, we paid dividends totaling $16.8 million.
Debt
We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond) which totaled $48.8 million at September 30, 2009 and December 31, 2008. At September 30, 2009, the estimated fair value of the Bond was approximately $48.2 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AA. Included in long-term investments are restricted funds in the amount of $48.8 million at September 30, 2009 and December 31, 2008, which is a collateral deposit against the principal amount of the Bond. 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 5% 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 principal and interest on the amounts currently outstanding. Due to continued positive cash flow from operating activities, we made a business decision to begin an early partial redemption of the Bond. It is our intent to make annual principal payments in addition to the interest amounts that are due. In connection with this decision, $0.5 million of the Bond debt has been classified as a current liability in the Condensed Consolidated Balance Sheet.
Stock Repurchase Program
During the nine months ended September 30, 2009, we repurchased 0.2 million shares of our common stock at an average price of $17.50 per share under the repurchase plans approved by our Board of Directors. Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions. We have the authority to purchase an additional 3.3 million shares of our common stock under the plan approved by the Board of Directors on April 14, 2008. To accommodate employee stock option exercises, we issued 0.8 million shares of treasury stock for $12.7 million during the nine months ended September 30, 2009. During the nine months ended September 30, 2008, we issued 0.3 million shares of treasury stock for $3.5 million.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources. During the nine months ended September 30, 2009, there have been no material changes in contractual obligations and commercial commitments from those discussed in our most recent Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 with the SEC.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $7.9 million as of September 30, 2009, of which $7.4 million has been applied to these commitments. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional information.
We intend to finance our operations with cash flow from operations. We have used, and expect to continue to use, the cash generated from operations for working capital, purchases of treasury stock, dividend payments, and other general corporate purposes, including (i) product development activities to enhance our existing products and develop new products and (ii) expansion of sales and marketing activities. We believe our cash and cash equivalents, investments and cash generated from operations to be adequate to meet our operating and capital needs for the foreseeable future.
FACTORS THAT COULD AFFECT OUR FUTURE RESULTS
The following are some of the risks that could affect our financial performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements:

•	 	Our operating results may fluctuate in future periods, which may adversely affect our stock price.	

•	 	Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.	

•	 	General economic conditions may reduce our revenues and harm our operating results.	

•	 	Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.	
 
 26 

Table of Contents

•	 	We expect gross margin to vary over time, and our level of product gross margin may not be sustainable.	

•	 	We must continue to update and improve our products and develop new products in order to compete and to keep pace with improvements in telecommunications technology.	

•	 	Our products may not continue to comply with the regulations governing their sale, which may harm our business.	

•	 	Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely impact our results of operations.	

•	 	If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could harm our business.	

•	 	We primarily engage in research and development to improve the application of developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts who may focus on more leading edge development.	

•	 	We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income.	

•	 	The lengthy approval process required by Incumbent Local Exchange Carriers (ILECs) and other service providers could result in fluctuations in our revenue.	

•	 	Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in Asia may result in us not meeting our cost, quality or performance standards.	

•	 	Our dependence on a limited number of suppliers may prevent us from delivering our products on a timely basis, which could have a material adverse effect on customer relations and operating results.	

•	 	We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market share.	

•	 	Our estimates regarding future warranty obligations may change due to product failure rates, shipment volumes, field service obligations and other rework costs incurred in correcting product failures. If our estimates change, the liability for warranty obligations may be increased or decreased, impacting future cost of goods sold.	

•	 	Managing our inventory is complex and may include write-downs of excess or obsolete inventory.	

•	 	Increased sales volume in international markets could result in increased costs or loss of revenue due to factors inherent in these markets.	

•	 	We may be adversely affected by fluctuations in currency exchange rates.	

•	 	Our success depends on our ability to reduce the selling prices of succeeding generations of our products.	

•	 	Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality and commercial value of our products.	

•	 	Software under license from third parties for use in certain of our products may not continue to be available to us on commercially reasonable terms.	

•	 	We may incur liabilities or become subject to litigation that would have a material effect on our business.	

•	 	Consolidation and deterioration in the competitive service provider market could result in a significant decrease in our revenue.	

•	 	We depend on distributors who maintain inventories of our products. If the distributors reduce their inventories of these products, our sales could be adversely affected.	

•	 	If we are unable to successfully develop relationships with system integrators, service providers, and enterprise value added resellers, our sales may be negatively affected.	

•	 	If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial statements could be materially impacted.	

•	 	Changes in our effective tax rate or assessments arising from tax audits may have an adverse impact on our results.	

•	 	Our success depends on attracting and retaining key personnel.	

•	 	While we believe our control over financial reporting is adequate, a failure to maintain effective internal control over financial reporting as our business expands could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.	

•	 	The price of our common stock has been volatile and may continue to fluctuate significantly.	
The foregoing list of risks is not exclusive. For a more detailed description of the risk factors associated with our business, see Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 27, 2009 with the SEC.
 
 27 

Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates and prices of marketable equity and fixed-income securities. The primary objective of the large majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly increasing risk. To achieve this objective, a majority of our marketable securities are investment grade, municipal, fixed-rate bonds, municipal variable rate demand notes and municipal money market instruments denominated in United States dollars. At September 30, 2009, 95% of our municipal variable rate demand notes had a credit rating of VMIG-1 or A-1+ while the remaining 5% had a rating of A-2. Approximately 54% of our municipal fixed-rate bonds had a credit rating of AAA, 41% had a credit rating of AA, and the remaining 5% had a credit rating of A. We also held $20.5 million of corporate bonds that are guaranteed by the Federal Deposit Insurance Corporation and issued by various banks. At September 30, 2009, all of our corporate bonds had a credit rating of AAA.
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 financial institutions, and determined the risk of material financial loss due to exposure of such credit risk to be minimal. As of September 30, 2009, $18.9 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. The Temporary Liquidity Guarantee Program adopted during 2008 by the Federal Deposit Insurance Corporation provides full coverage of our domestic depository accounts through December 2009.
As of September 30, 2009, approximately $239.7 million of our cash and investments may be directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (bps), 100 bps and 150 bps for the entire year, while all other variables remain constant. At September 30, 2009, we held $106.3 million of cash and money market instruments and municipal variable rate demand notes where a change in interest rates would impact our interest income. Hypothetical 50 bps, 100 bps and 150 bps declines in interest rates as of September 30, 2009 would reduce annualized interest income on our cash and money market instruments and municipal variable rate demand notes by approximately $0.5 million, $1.1 million and $1.6 million, respectively. In addition, we held $133.4 million of fixed-rate municipal bonds and corporate bonds whose fair values may be directly affected by a change in interest rates. Hypothetical 50 bps, 100 bps and 150 bps increases in interest rates as of September 30, 2009 would reduce the fair value of our municipal fixed-rate bonds and corporate bonds by approximately $0.8 million, $1.5 million and $2.3 million, respectively.
As of September 30, 2008, interest income on approximately $89.8 million of our cash and investments was subject to being directly affected by changes in interest rates. We performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (bps), 100 bps and 150 bps, while all other variables remain constant. Hypothetical 50 bps, 100 bps and 150 bps declines in interest rates as of September 30, 2008 would have reduced annualized interest income on our cash, money market instruments and municipal variable rate demand notes by approximately $0.4 million, $0.9 million and $1.3 million, respectively. In addition, hypothetical 50 bps, 100 bps and 150 bps increases in interest rates as of September 30, 2008 would have reduced the fair value of our municipal fixed-rate bonds by approximately $0.4 million, $0.9 million and $1.3 million, respectively.
For further information about the fair value of our available-for-sale investments as of September 30, 2009 see Note 4 of Notes to Condensed Consolidated Financial Statements.
 
 28 

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES
(a)  Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for ADTRAN. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective.
(b)  Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
A list of factors that could materially affect our business, financial condition or operating results is included under “Factors That Could Affect Our Future Results” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 2 of Part I of this report. There have been no material changes to the risk factors as disclosed in Item 1A of Part I of our most recent Annual Report on Form 10-K for the year ended December 31, 2008 filed on February 27, 2009 with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth ADTRAN’s repurchases of its common stock for the months indicated.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Total Number of	 	 	Maximum Number	 	
 	 	Total	 	 	Average	 	 	Shares Purchased	 	 	of Shares that May	 	
 	 	Number of	 	 	Price	 	 	as Part of Publicly	 	 	Yet Be Purchased	 	
 	 	Shares	 	 	Paid per	 	 	Announced Plans	 	 	Under the Plans or	 	
Period	 	Purchased	 	 	Share	 	 	or Programs (1)	 	 	Programs	 	
July 1, 2009 – July 31, 2009	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,354,991	 	
August 1, 2009 – August 31, 2009	 	 	60,300	 	 	$	22.37	 	 	 	60,300	 	 	 	3,294,691	 	
September 1, 2009 – September 30, 2009	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,294,691	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	60,300	 	 	 	 	 	 	 	60,300	 	 	 	 	 	

(1)	 	On April 14, 2008, ADTRAN’s Board of Directors approved additional repurchases of up to 5,000,000 share of its common stock. This plan will be implemented through open market purchases from time to time as conditions warrant.	
ITEM 6. EXHIBITS
Exhibits.
 	 	 	 	 	
Exhibit No.	 	Description	
 	31	 	 	Rule 13a-14(a)/15d-14(a) Certifications	
 	 	 	 	 	
 	32	 	 	Section 1350 Certifications	
 
 29 

Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 	 	 	 	 	
 	ADTRAN, INC.
(Registrant)
 	 	
Date: November 4, 2009 	/s/ James E. Matthews  	 	
 	James E. Matthews 	 	
 	Senior Vice President — Finance,
Chief Financial Officer, Treasurer,
Secretary and Director 	 	
 
 30 

Table of Contents

EXHIBIT INDEX
 	 	 	 	 	
Exhibit No.	 	Description	
 	 	 	 	 	
 	31	 	 	Rule 13a-14(a)/15d-14(a) Certifications	
 	 	 	 	 	
 	32	 	 	Section 1350 Certifications	
 
 31 

Exhibit 31
CERTIFICATIONS
I, Thomas R. Stanton, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ADTRAN, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2009
 	 	 	 	 	
 	/s/ Thomas R. Stanton  	 	
 	Thomas R. Stanton 	 	
 	Chief Executive Officer and Chairman of the Board 	 	

 

 	 	 	 	 	
I, James E. Matthews, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ADTRAN, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2009
 	 	 	 	 	
 	/s/ James E. Matthews  	 	
 	James E. Matthews 	 	
 	Senior Vice President — Finance,
Chief Financial Officer, Treasurer,
Secretary and Director 	 	

Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ADTRAN, Inc. (the “Company”) on Form 10-Q for the quarter ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas R. Stanton, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 	 	 	 	 	
 	 	/s/ Thomas R. Stanton
 	 	 	
 	 	Thomas R. Stanton	 	 	
 	 	Chief Executive Officer and Chairman of the Board	 	 	
 	 	November 4, 2009	 	 	

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of ADTRAN, Inc. (the “Company”) on Form 10-Q for the quarter ending September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Matthews, Senior Vice President — Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 	 	 	 	 	
 	 	/s/ James E. Matthews
 	 	 	
 	 	James E. Matthews	 	 	
 	 	Senior Vice President — Finance,	 	 	
 	 	Chief Financial Officer, Treasurer,	 	 	
 	 	Secretary and Director	 	 	
 	 	November 4, 2009