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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

 
x 	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the Quarterly Period Ended March 31, 2007
OR
 
¨	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   x     No   ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer   x     Accelerated Filer   ¨     Non-accelerated Filer   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
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 April 27, 2007	
Common Stock, $.01 Par Value	 	69,049,542 shares	

Table of Contents
ADTRAN, IN  C.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2007
Table of Contents

Item
Number	  	 	  	Page
Number	
	  	PART I. FINANCIAL INFORMATION	  		
			
1	  	Financial Statements:	  		
	  	Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006	  	3	
	  	Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 – (Unaudited)	  	4	
	  	Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 – (Unaudited)	  	5	
	  	Notes to Consolidated Financial Statements – (Unaudited)	  	6	
2	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	13	
3	  	Quantitative and Qualitative Disclosures About Market Risk	  	19	
4	  	Controls and Procedures	  	19	
			
	  	PART II. OTHER INFORMATION	  		
			
1A	  	Risk Factors	  	20	
2	  	Unregistered Sales of Equity Securities and Use of Proceeds	  	20	
6	  	Exhibits	  	20	
			
	  	SIGNATURES	  	21	
			
	  	EXHIBIT INDEX	  	22	
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 in our reports to 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 been discussed in Item 1A of Part I in our most recent Annual Report on Form 10-K filed on February 28, 2007 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.
 
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PART I. FINANCIAL INF  ORMATION
  
 ITEM 1. FINANCIAL STATEMENTS
ADT  RAN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

 	  	March 31,
2007	 	 	December 31,
2006	 	
 	  	(Unaudited)	 	 	 	 	
ASSETS	  				 				
Current Assets	  				 				
Cash and cash equivalents	  	$	24,168	 	 	$	40,147	 	
Short-term investments	  	 	131,005	 	 	 	99,700	 	
Accounts receivable, less allowance for doubtful accounts of $331 at March 31, 2007 and $210 at December 31, 2006	  	 	56,247	 	 	 	56,769	 	
Other receivables	  	 	3,803	 	 	 	7,481	 	
Income tax receivable, net	  	 	—  	 	 	 	1,446	 	
Inventory, net	  	 	48,898	 	 	 	53,117	 	
Prepaid expenses	  	 	2,417	 	 	 	2,590	 	
Deferred tax assets, net	  	 	7,772	 	 	 	7,915	 	
	  	 	 	 	 	 	 	 	
Total current assets	  	 	274,310	 	 	 	269,165	 	
			
Property, plant and equipment, net	  	 	79,555	 	 	 	80,194	 	
Other assets	  	 	526	 	 	 	534	 	
Long-term investments	  	 	182,467	 	 	 	189,765	 	
	  	 	 	 	 	 	 	 	
Total assets	  	$	536,858	 	 	$	539,658	 	

LIABILITIES AND STOCKHOLDERS’ EQUITY	  				 				
Current Liabilities	  				 				
Accounts payable	  	$	19,251	 	 	$	30,321	 	
Unearned revenue	  	 	5,370	 	 	 	5,802	 	
Accrued expenses	  	 	4,203	 	 	 	3,827	 	
Accrued payroll	  	 	7,002	 	 	 	9,579	 	
Income tax payable, net	  	 	4,900	 	 	 	—  	 	
	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	40,726	 	 	 	49,529	 	
			
Deferred tax liabilities, net	  	 	1	 	 	 	694	 	
Other non-current liabilities	  	 	6,363	 	 	 	4,667	 	
Bonds payable	  	 	48,812	 	 	 	48,812	 	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	95,902	 	 	 	103,702	 	
			
Commitments and contingencies (see Note 10)	  				 				
			
Stockholders’ Equity	  				 				
Common stock, par value $0.01 per share; 200,000 shares authorized;	  				 				
  79,652 shares issued at March 31, 2007 and December 31, 2006	  	 	797	 	 	 	797	 	
Additional paid in capital	  	 	140,527	 	 	 	141,541	 	
Accumulated other comprehensive income	  	 	3,641	 	 	 	2,696	 	
Retained earnings	  	 	533,638	 	 	 	524,136	 	
Less treasury stock at cost: 10,388 shares at March 31, 2007 and 10,180 shares at December 31, 2006	  	 	(237,647	)	 	 	(233,214	)	
	  	 	 	 	 	 	 	 	
Total stockholders’ equity	  	 	440,956	 	 	 	435,956	 	
	  	 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	  	$	536,858	 	 	$	539,658	 	
	  	 	 	 	 	 	 	 	
See notes to consolidated financial statements
 
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AD  TRAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

 	  	Three Months Ended
March 31,	 	
 	  	2007	 	 	2006	 	
Sales	  	$	110,312	 	 	$	108,648	 	
Cost of sales	  	 	44,522	 	 	 	44,140	 	
	  	 	 	 	 	 	 	 	
Gross profit	  	 	65,790	 	 	 	64,508	 	
			
Selling, general and administrative expenses	  	 	26,476	 	 	 	24,687	 	
Research and development expenses	  	 	18,358	 	 	 	17,766	 	
	  	 	 	 	 	 	 	 	
Operating income	  	 	20,956	 	 	 	22,055	 	
			
Interest income	  	 	2,908	 	 	 	3,498	 	
Interest expense	  	 	(619	)	 	 	(634	)	
Net realized investment gain	  	 	83	 	 	 	600	 	
Other income (expense)	  	 	298	 	 	 	(61	)	
Life insurance proceeds	  	 	1,000	 	 	 	—  	 	
	  	 	 	 	 	 	 	 	
Income before provision for income taxes	  	 	24,626	 	 	 	25,458	 	
			
Provision for income taxes	  	 	(7,698	)	 	 	(9,203	)	
	  	 	 	 	 	 	 	 	
Net income	  	$	16,928	 	 	$	16,255	 	
	  	 	 	 	 	 	 	 	
Weighted average shares outstanding – basic	  	 	69,358	 	 	 	76,655	 	
			
Weighted average shares outstanding – diluted	  	 	70,889	 	 	 	78,909	 	
			
Earnings per common share – basic	  	$	0.24	 	 	$	0.21	 	
			
Earnings per common share – diluted	  	$	0.24	 	 	$	0.21	 	
			
Dividend per share	  	$	0.09	 	 	$	0.09	 	
See notes to consolidated financial statements
 
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AD  TRAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

 	  	Three Months Ended
March 31,	 	
 	  	2007	 	 	2006	 	
Cash flows from operating activities:	  				 				
Net income	  	$	16,928	 	 	$	16,255	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				
Depreciation and amortization	  	 	2,628	 	 	 	2,737	 	
Gain on sale of long-term investments	  	 	(83	)	 	 	(600	)	
Loss on disposal of property, plant and equipment	  	 	65	 	 	 	2	 	
Stock-based compensation expense	  	 	2,239	 	 	 	1,967	 	
Deferred income taxes	  	 	(1,041	)	 	 	(773	)	
Tax benefits from stock option exercises	  	 	1,284	 	 	 	1,058	 	
Excess tax benefits from stock-based compensation arrangements	  	 	(1,082	)	 	 	(693	)	
Changes in operating assets and liabilities:	  				 				
Accounts receivable, net	  	 	522	 	 	 	3,927	 	
Other receivables	  	 	3,678	 	 	 	148	 	
Income tax receivable	  	 	1,446	 	 	 	—  	 	
Inventory, net	  	 	4,219	 	 	 	2,543	 	
Prepaid expenses and other assets	  	 	181	 	 	 	390	 	
Accounts payable	  	 	(11,070	)	 	 	(6,934	)	
Accrued expenses and other liabilities	  	 	(2,416	)	 	 	(3,617	)	
Income tax payable	  	 	5,190	 	 	 	7,046	 	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	22,688	 	 	 	23,456	 	
			
Cash flows from investing activities:	  				 				
Purchases of property, plant and equipment	  	 	(2,054	)	 	 	(1,422	)	
Proceeds from sales and maturities of available-for-sale investments	  	 	44,432	 	 	 	83,627	 	
Purchases of available-for-sale investments	  	 	(67,040	)	 	 	(104,074	)	
Acquisition of business	  	 	—  	 	 	 	(500	)	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(24,662	)	 	 	(22,369	)	
			
Cash flows from financing activities:	  				 				
Proceeds from stock option exercises	  	 	6,218	 	 	 	2,732	 	
Purchases of treasury stock	  	 	(15,188	)	 	 	—  	 	
Dividend payments	  	 	(6,236	)	 	 	(6,898	)	
Excess tax benefits from stock-based compensation arrangements	  	 	1,082	 	 	 	693	 	
	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(14,124	)	 	 	(3,473	)	
			
Net decrease in cash and cash equivalents	  	 	(16,098	)	 	 	(2,386	)	
Effect of exchange rate changes	  	 	119	 	 	 	(248	)	
	  	 	 	 	 	 	 	 	
Cash and cash equivalents, beginning of period	  	 	40,147	 	 	 	112,794	 	
Cash and cash equivalents, end of period	  	$	24,168	 	 	$	110,160	 	
	  	 	 	 	 	 	 	 	
See notes to consolidated financial statements
 
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A   DTRAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of ADTRAN ®  , Inc. and its subsidiaries (ADTRAN) have been prepared pursuant to the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The December 31, 2006 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 statement 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, 2006.
Changes in Classifications
Certain changes in classifications have been made to the prior period balances in order to conform to the current period’s presentation. These reclassifications consisted of an income statement reclassification of investment management fees from selling, general and administrative expenses to other income (expense), of $0.1 million in the three months ended March 31, 2006. In addition, there was a cash flow statement reclassification of unearned revenue from accounts payable to accrued expenses and other liabilities of $0.6 million in the three months ended March 31, 2006.
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, rebates, allowance for sales returns, determination of the deferred revenue components of multiple element sales arrangement, estimated income tax contingencies and the fair value of stock-based compensation. Actual amounts could differ significantly from these estimates.
Recent Accounting Pronouncements
Updates to recent accounting standards as disclosed in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2006 are as follows:
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide warranty goods or services. If the use of fair value is elected, any upfront cost and fees related to the item must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis even if a company has similar instruments that it elects not to measure at fair value. At the adoption date, unrealized gains and losses on existing items for which the fair value option has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes to fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by ADTRAN in the first quarter of 2008. We are currently determining whether fair value accounting is appropriate for any of our eligible items and cannot currently estimate the impact, if any, which SFAS 159 will have on our consolidated results of operation and financial condition.
 
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During the first quarter of 2007, we adopted the following accounting standards, none of which had a material effect on our consolidated results of operation or financial condition:
 
 	•	 	Emerging Issues Task Force (EITF) Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation) (EITF 06-3). We present these items within the scope of EITF 06-3 on a gross basis, and the amounts are not significant.	
 
 	•	 	FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48). See Note 2 to the Consolidated Financial Statements for more information.	
2. INCOME TAXES
On January 1, 2007, ADTRAN adopted the provisions of FIN 48, which requires a company to recognize the benefit of a tax position in its financial statements only if that position is “more likely than not” of being sustained on an audit basis solely on the technical merit of the position. In addition, FIN 48 requires annual qualitative and quantitative disclosures including a discussion of reasonably possible significant changes that might occur in the recognized tax benefits over the next twelve months as well as an annual roll-forward of all unrecognized tax benefits.
The adoption of FIN 48 resulted in a decrease to stockholders’ equity of $1.2 million on January 1, 2007 for unrecognized tax expense, of which $0.5 million is related to estimated interest and penalties. We will continue to account for interest and penalties as a part of income tax expense. Had these amounts been recognized in the income statement, it would have resulted in a 0.9% increase in the effective tax rate for the year ended December 31, 2006. The total liability for unrecognized tax positions as of January 1, 2007 amounted to $2.1 million. Subsequent to adoption of FIN 48, recognition, derecognition and changes in measurement in our unrecognized tax expense will be adjusted through the applicable period’s income statement.
As required, we analyze our uncertain tax positions on a “more likely than not” basis. This type of analysis requires estimates and assumptions to be made by management and is based on information available at that time. These estimates and assumptions may change as new information becomes available. We do not foresee any events in the next twelve months that would significantly change our current unrecognized tax expense balance. In addition, we have been audited by the Internal Revenue Service through the 2004 tax year and by the State of Alabama through the 2005 tax year.
3. STOCK-BASED COMPENSATION
On January 1, 2006, ADTRAN adopted the fair value recognition provision of SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS 123R), using the modified prospective transition method. The following table summarizes the stock-based compensation expense related to stock options under SFAS 123R for the three months ended March 31, 2007 and 2006, which was allocated as follows:

 	  	Three Months Ended March 31,	 	
 	  	2007	 	 	2006	 	
Cost of sales	  	$	93	 	 	$	83	 	
	  	 	 	 	 	 	 	 	
Stock-based compensation expense included in cost of sales	  	 	93	 	 	 	83	 	
			
Selling, general and administrative expense	  	 	1,079	 	 	 	957	 	
Research and development expense	  	 	1,067	 	 	 	927	 	
	  	 	 	 	 	 	 	 	
Stock-based compensation expense included in operating expenses	  	 	2,146	 	 	 	1,884	 	

Total stock-based compensation expense	  	 	2,239	 	 	 	1,967	 	
Tax benefit for expense associated with non-qualified options	  	 	(186	)	 	 	(256	)	
	  	 	 	 	 	 	 	 	
Total stock-based compensation expense, net of tax	  	$	2,053	 	 	$	1,711	 	

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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 for the three month periods ending March 31, 2007 and 2006 were determined as follows:
 
 	•	 	We based our estimate of expected volatility for the periods on the sequential historical daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the historical volatility approach was based on available data indicating our historical volatility is as equally representative of our future stock price trends as is implied volatility. We have no reason to believe the future volatility of our stock price is likely to differ significantly from its past volatility.	
 
 	•	 	The risk-free rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds on the date of grant having a remaining term equal to the expected life of the options granted.	
 
 	•	 	The dividend yield is based on our historical and expected dividend payouts.	
 
 	•	 	The expected life of our stock options is based on historical exercise and cancellation activity of our previous stock-based grants with a ten-year contractual term.	
The weighted-average assumptions and value of options granted for the three months ended March 31, 2007 and 2006, respectively, are summarized as follows:

 	  	Three Months Ended
March 31, 2007	 	 	Three Months Ended
March 31, 2006	 	
Expected volatility	  	 	46.02	%	 	 	49.20	%	
Risk-free interest rate	  	 	4.76	%	 	 	4.30	%	
Expected dividend yield	  	 	1.61	%	 	 	1.11	%	
Expected life (in years)	  	 	4.58	 	 	 	4.48	 	
Weighted-average estimated value	  	$	8.76	 	 	$	13.14	 	
Stock-based compensation expense recognized in our Consolidated Statements of Income for the three months ended March 31, 2007 is based on options ultimately expected to vest, and has been reduced for estimated forfeitures. These estimates were based upon historical experience and approximate 2.0% annually.
As of March 31, 2007, total compensation cost related to non-vested stock options not yet recognized was approximately $19.4 million, which is expected to be recognized over an average remaining recognition period of 2.7 years using the ratable single-option approach.
 
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The following schedule summarizes the activity in our stock-based compensation plans for the three months ended March 31, 2007:

 	  	Number of
Options	 	 	Weighted Avg.
Exercise Price	  	Weighted Avg.
Remaining
Contractual
Life In years	  	Aggregate
Intrinsic
Value	
Options outstanding, December 31, 2006	  	7,019	 	 	$	18.58	  	5.51	  	$	40,896	
Options granted	  	5	 	 	$	22.40	  		  			
Options cancelled/forfeited	  	(204	)	 	$	25.70	  		  			
Options exercised	  	(475	)	 	$	13.32	  		  			
	  	 	 	 	 	 	  	 	  	 	 	
Options outstanding, March 31, 2007	  	6,345	 	 	$	18.75	  	5.75	  	$	44,576	
	  	 	 	 	 	 	  	 	  	 	 	
Options exercisable, March 31, 2007	  	4,536	 	 	$	16.15	  	4.55	  	$	42,339	
	  	 	 	 	 	 	  	 	  	 	 	
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 March 31, 2007. The aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock. The total pretax intrinsic value of options exercised during the three month period ended March 31, 2007 was $4.5  million.
4. INVENTORY
At March 31, 2007 and December 31, 2006, inventory consisted of the following:

 	  	March 31,
2007	 	 	December 31,
2006	 	
Raw materials	  	$	32,062	 	 	$	30,136	 	
Work in progress	  	 	1,819	 	 	 	4,870	 	
Finished goods	  	 	21,924	 	 	 	25,153	 	
Inventory reserves	  	 	(6,907	)	 	 	(7,042	)	
	  	 	 	 	 	 	 	 	
Inventory, net	  	$	48,898	 	 	$	53,117	 	
	  	 	 	 	 	 	 	 	
5. STOCKHOLDERS’ EQUITY
A summary of the changes in stockholders’ equity for the three months ended March 31, 2007 is as follows:

 	  	Stockholders’ Equity	 	
Balance, December 31, 2006	  	$	435,956	 	
Net income	  	 	16,928	 	
Dividend payments	  	 	(6,236	)	
Change in net unrealized gains on marketable securities (net of deferred taxes)	  	 	826	 	
Unrealized foreign currency translation (net of deferred taxes)	  	 	119	 	
Provision for uncertain income tax positions	  	 	(1,190	)	
Exercise of stock options	  	 	6,218	 	
Income tax benefit from exercise of stock options	  	 	1,284	 	
Stock-based compensation	  	 	2,239	 	
Purchase of treasury stock	  	 	(15,188	)	
	  	 	 	 	
Balance, March 31, 2007	  	$	440,956	 	

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Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase transactions. As of March 31, 2007, the Board of Directors had authorized cumulative repurchases of up to 24 million shares of common stock. During the three months ended March 31, 2007, we repurchased 677,825 shares at an average price of $22.41 per share under the repurchase plan approved by the Board of Directors on July 17, 2006. We currently have the authority to purchase an additional 1,610,356 shares under this plan.
We issued 470,020 shares of treasury stock to fulfill stock option exercises during the three months ended March 31, 2007 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $8.70 to $22.17. We received proceeds totaling $6.2 million from the exercise of these stock options during the first three months of 2007.
Dividend Payments
During 2007, ADTRAN has paid cash dividends as follows:

Record Date	  	Payment Date	  	Per Share Amount	  	Total Dividend Paid	
February 8, 2007	  	February 22, 2007	  	$	0.09	  	$	6,236	
Comprehensive Income
Comprehensive income consists of net income, unrealized foreign currency translation adjustments and unrealized gains and losses on marketable securities.

 	  	Three Months Ended March 31,	 	
 	  	2007	  	2006	 	
Net income	  	$	16,928	  	$	16,255	 	
Foreign currency translation gain (loss), net of deferred taxes	  	 	119	  	 	(248	)	
Change in unrealized gain on available-for-sale securities, net of deferred taxes	  	 	826	  	 	(465	)	
	  	 	 	  	 	 	 	
Total comprehensive income	  	$	17,873	  	$	15,542	 	
	  	 	 	  	 	 	 	
6. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006 is as follows:

 	  	Three Months Ended March 31,	
 	  	2007	  	2006	
Numerator	  			  			
Net Income	  	$	16,928	  	$	16,255	
	  	 	 	  	 	 	
Denominator	  			  			
Weighted average number of shares - basic	  	 	69,358	  	 	76,655	
Effect of dilutive securities - stock options	  	 	1,531	  	 	2,254	
	  	 	 	  	 	 	
Weighted average number of shares - diluted	  	 	70,889	  	 	78,909	
	  	 	 	  	 	 	
Net income per share - basic	  	$	0.24	  	$	0.21	
Net income per share - diluted	  	$	0.24	  	$	0.21	
Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 2,792 and 1,950 for the three months ended March 31, 2007 and 2006, respectively.
 
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7. 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, as well as research and development expenses, interest income/expense, net realized investment gain/loss, other income/expense, and provision for income taxes are reported on an entity wide basis only. There are no inter-segment revenues.
The following table presents information about the sales and gross profit of our reportable segments for the three months ended March 31, 2007 and 2006. Asset information by reportable segment is not reported, since ADTRAN does not produce such information internally.

 	  	Three Months Ended	
 	  	March 31, 2007	  	March 31, 2006	
 	  	Sales	  	Gross Profit	  	Sales	  	Gross Profit	
Carrier Networks	  	$	84,446	  	$	50,789	  	$	81,219	  	$	48,014	
Enterprise Networks	  	 	25,866	  	 	15,001	  	 	27,429	  	 	16,494	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	110,312	  	$	65,790	  	$	108,648	  	$	64,508	
Sales by Geographic Region
The table below presents sales information by geographic region for the three months ended March 31, 2007 and 2006.

 	  	Three Months Ended	
 	  	March 31, 2007	  	March 31, 2006	
United States	  	$	102,472	  	$	102,931	
International	  	 	7,840	  	 	5,717	
	  	 	 	  	 	 	
Total	  	$	110,312	  	$	108,648	
	  	 	 	  	 	 	
Sales by Product
In January 2007, we announced we would begin reporting new product categories in order to increase transparency in major product areas. The new product categories are:
 
 	•	 	Loop Access,	
 
 	•	 	Carrier Systems, and	
 
 	•	 	Business Networking.	
Loop Access products are used by carrier and enterprise customers for access to today’s copper-based telecommunications network. Loop Access includes DDS and ISDN Total reach products, HDSL products including TA 3000 based HDSL and TDM-SHDSL products, T1/E1/T3, CSUs/DSUs, and Tracer fixed wireless products.
Carrier Systems products are used by carrier customers for increasing bandwidth and for delivery of carrier services to consumers and enterprises. Carrier Systems includes all broadband access products, including DSLAM products and Total Access 5000 products. This category also includes optical access products, narrowband access platforms, 303 concentrator products, M13 multiplexer products, and wireless backhaul grooming products.
Business Networking products provide enterprises access to today’s telecommunication networks and facilitate networking capabilities for voice and data. Business Networking includes integrated access devices and Internetworking products. Internetworking products include IP access routers, Ethernet switches, IP PBX products, and multi-service access gateways.
The table below presents sales information by product for the three months ended March 31, 2007 and 2006.
 
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 	  	Three Months Ended	
 	  	March 31, 2007	  	March 31, 2006	
Loop Access	  	$	51,248	  	$	43,260	
Carrier Systems	  	 	39,564	  	 	44,051	
Business Networking	  	 	19,500	  	 	21,337	
	  	 	 	  	 	 	
Total	  	$	110,312	  	$	108,648	
	  	 	 	  	 	 	
Additionally, we are providing sub-categories of product revenues for broadband access and optical access products (both included in Carrier Systems) and Internetworking products (included in Business Networking) to provide greater transparency into our primary growth areas. Also, we are providing HDSL revenues (included in Loop Access) as a sub-category.
Subcategory revenues included in the above are as follows:

 	  	Three Months Ended	
 	  	March 31, 2007	  	March 31, 2006	
Broadband Access (included in Carrier Systems)	  	$	18,271	  	$	21,002	
Optical Access (included in Carrier Systems)	  	 	8,617	  	 	8,424	
			
Internetworking (Netvanta & Multi-service Access Gateways) (included in Business Networking)	  	 	11,092	  	 	8,429	
HDSL (does not include T1) (included in Loop Access)	  	 	43,752	  	 	35,664	
8. LIABILITY FOR WARRANTY RETURNS
Our products generally include warranties of one to ten years for product defects. We accrue for warranty returns based on our estimate of the cost to repair or replace the defective products at the time revenue is recognized. 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 could require more warranty cost to be incurred 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, will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be 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. The liability for warranty returns totaled $3,079 and $3,045 at March 31, 2007 and December 31, 2006, respectively. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.

 	  	March 31, 2007	 	
Balance at beginning of period	  	$	3,045	 	
Plus: amounts charged to cost and expenses	  	 	493	 	
Less: deductions	  	 	(459	)	
	  	 	 	 	
Balance at end of period	  	$	3,079	 	
	  	 	 	 	
9. 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 each of the three month periods ended March 31, 2007 and 2006 for legal services rendered.
 
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Our Chairman and former Chief Executive Officer, Mark C. Smith, passed away on March 27, 2007. We held, and are the beneficiary of, a life insurance policy of $1.0 million on his life, and have recorded such amount in our first quarter results.
10. COMMITMENTS AND CONTINGENCIES
We have certain contingent liabilities from time to time from litigation for employment or other matters arising in the normal course of business. Although the outcome of any litigation can never be certain, it is our opinion that the outcome of such contingencies will not materially affect our business, operations, financial condition or cash flows.
We have committed to invest up to an aggregate of $7,850 in two private equity funds, of which $6,521 has been invested to date. The duration of each of these commitments is ten years with $285 expiring in 2010 and $1,044 expiring in 2012.
11. SUBSEQUENT EVENTS
On April 16, 2007, ADTRAN announced that its 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 May 3, 2007. The payment date will be May 17, 2007. The quarterly dividend payment will be approximately $6.2 million. The board of directors presently anticipates that it will declare a regular quarterly dividend  so long as the present tax treatment of dividends exists and adequate levels of liquidity are maintained.
ITEM 2. MANAGEMEN  T’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’s co-founder and Chairman of the Board, Mark C. Smith died suddenly on March 27, 2007. Mr. Smith served as our CEO from inception in January 1986 until his retirement as CEO in September 2005.
ADTRAN develops and provides network access solutions for communications networks. Widely deployed by carriers, small and mid-sized businesses and enterprises, our solutions enable voice, data, video, and Internet communications across copper, fiber and wireless networks. Many of these solutions are currently in use by every major U.S. service provider and many global ones, as well as by many public, private and governmental organizations worldwide.
An important part of ADTRAN’s strategy is to reduce the cost of each succeeding product generation and then to lower the product’s selling price based on the cost savings achieved. As a part of this strategy, we seek in most instances to be the 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 ADTRAN to sell succeeding generations of products to existing customers, while increasing our market share by selling these enhanced products to new customers.
In January 2007, we announced we would begin reporting new product categories in order to increase transparency in major product areas. The new product categories are:
 
 	•	 	Loop Access,	
 
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 	•	 	Carrier Systems, and	
 
 	•	 	Business Networking.	
Loop Access products are used by carrier and enterprise customers for access to today’s copper-based telecommunications network. Loop Access includes DDS and ISDN Total reach products, HDSL products including TA 3000 based HDSL and TDM-SHDSL products, T1/E1/T3, CSUs/DSUs, and Tracer fixed wireless products.
Carrier Systems products are used by carrier customers for increasing bandwidth and for delivery of carrier services to consumers and enterprises. Carrier Systems includes all broadband access products, including DSLAM products and Total Access 5000 products. This category also includes optical access products, narrowband access platforms, 303 concentrator products, M13 multiplexer products, and wireless backhaul grooming products.
Business Networking products provide enterprises access to today’s telecommunication networks and facilitate networking capabilities for voice and data. Business Networking includes integrated access devices and Internetworking products. Internetworking products include IP access routers, Ethernet switches, IP PBX products, and multi-service access gateways.
Sales were $110.3 million for the quarter compared to $108.6 million for the first quarter of 2006. Net income was $16.9 million for the first quarter of 2007 compared to $16.3 million for the first quarter of 2006. Earnings per share, assuming dilution, were $0.24 for the first quarter of 2007 compared to $0.21 for the first quarter of 2006. The results for the first quarter of 2007 included a benefit of $0.9 million in “Provision for Income Taxes” primarily relating to closure of tax audits from prior years. The results also included a one-time, pre-tax life insurance benefit of $1.0 million. These two items increased earnings per share, assuming dilution, by approximately $0.02 in the first quarter of 2007.
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. Furthermore, a majority of customers typically require prompt delivery of products. This results in a limited backlog of orders for these products and requires us to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for ADTRAN’s 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 ADTRAN’s financial results in a given quarter. Furthermore, 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.
ADTRAN’s 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 ADTRAN or our competitors. Accordingly, ADTRAN’s historical financial performance is not necessarily a meaningful indicator of future results, and, in general, management expects that ADTRAN’s financial results may vary from period to period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Except as set forth below, 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, 2006.
 
 	•	 	For purposes of recording and analyzing our uncertain tax provisions, we recognize the benefit of a tax position in our financial statements only if that position is “more likely than not” of being sustained on an audit basis solely on the technical merit of the position as is required by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48). This type of analysis requires estimates and assumptions to be made by management and is based on information available at that time. Circumstances may change and additional data may become available over time, which could result in changes to these estimates and assumptions and thereby materially	
 
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 	impact our tax provision. If estimates change and we use different assumptions in the application of FIN 48 in future periods, it could materially impact our future results of operations and financial condition. Refer to Note 2 to the Consolidated Financial Statements in this Form 10-Q for more information regarding uncertain tax provisions.	
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.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
SALES
ADTRAN’s sales increased 1.6% from $108.6 million in the three months ended March 31, 2006 to $110.3 million in the three months ended March 31, 2007. The increase in sales is primarily attributable to an increase in sales of our Loop Access products, partially offset by a decrease in sales of our Carrier Systems and Business Networking products. The increase in sales of Loop Access products is primarily attributable to an increase in HDSL product revenues, partially offset by a decline in enterprise T1 product revenues. The decrease in Carrier Systems product revenue is primarily attributable to a decrease in M13 multiplexer, TA 1500 and Broadband Access product revenues, partially offset by an increase in Optical Access product revenues. The decrease in Business Networking product revenues is primarily attributable to a decrease in traditional integrated access device (IAD) revenues, partially offset by an increase in Internetworking product revenues.
Carrier Networks sales increased 3.9% from $81.2 million in the three months ended March 31, 2006 to $84.4 million in the three months ended March 31, 2007. The quarter-over-quarter increase in Carrier Networks sales is primarily attributable to an increase in HDSL and Optical Access product revenues partially offset by a decline in Broadband Access product revenues. Carrier Networks sales as a percentage of total sales increased from 74.8% in the first quarter of 2006 to 76.5% in the first quarter of 2007.
Enterprise Networks sales decreased 5.5% from $27.4 million in the three months ended March 31, 2006 to $25.9 million in the three months ended March 31, 2007. The quarter-over-quarter decrease in Enterprise Networks sales is primarily attributable to decreases in enterprise T1 and traditional IAD product revenues, partially offset by an increase in Internetworking product revenues. Enterprise Networks sales as a percentage of total sales decreased from 25.2% in the first quarter of 2006 to 23.5% in the first quarter of 2007.
International sales, which are included in the Carrier Networks and Enterprise Networks amounts discussed above, increased 36.8% from $5.7 million in the three months ended March 31, 2006 to $7.8 million in the three months ended March 31, 2007. International sales, as a percentage of total sales, increased from 5.3% in the first quarter of 2006 to 7.1% in the first quarter of 2007. This increase is primarily attributable to an increase in international Broadband Access revenues.
COST OF SALES
Cost of sales, as a percentage of sales, decreased from 40.6% in the three months ended March 31, 2006 to 40.4% in the three months ended March 31, 2007. The decrease in cost of sales as a percentage of sales is primarily related to a favorable product mix and higher sales volumes.
Carrier Networks cost of sales, as a percent of division sales, decreased from 40.9% in the three months ended March 31, 2006 to 39.9% in the three months ended March 31, 2007. This decrease is primarily related to a favorable product mix and timing differences between the recognition of cost reductions and lowering of product selling prices.
 
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Enterprise Networks cost of sales, as a percent of division sales, increased from 39.8% in the three months ended March 31, 2006 to 42.1% in the three months ended March 31, 2007. The increase is primarily related to lower net selling prices of traditional IAD products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 7.3% from $24.7 million in the three months ended March 31, 2006 to $26.5 million in the three months ended March 31, 2007. As a percentage of sales, selling, general and administrative expenses increased from 22.7% of sales in 2006 to 24.0% of sales in 2007. Increases in selling, general and administrative expenses are primarily related to increased domestic and international sales and marketing expenses. Selling, general and administrative expenses as a percent of sales will fluctuate whenever there is a significant fluctuation in revenues during the periods being compared.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 3.4% from $17.8 million in the three months ended March 31, 2006 to $18.4 million in the three months ended March 31, 2007. As a percentage of sales, research and development expenses increased from 16.4% of sales in 2006 to 16.6% of sales in 2007. Increases in research and development expenses are primarily related to increased expenses associated with customer-specific product development activities. Research and development expenses as a percent of sales will fluctuate whenever there is a significant fluctuation in revenues during the periods being compared.
ADTRAN expects to continue to incur research and development expenses in connection with its new products and its expansion into international markets. ADTRAN continually evaluates new product opportunities and engages in intensive research and product development efforts. 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.
INTEREST INCOME
Interest income decreased 17.1% from $3.5 million in the three months ended March 31, 2006 to $2.9 million in the three months ended March 31, 2007. This decrease is primarily related to lower investment balances due to cash used to repurchase our stock, partially offset by higher interest rates earned on our fixed income securities.
INTEREST EXPENSE
Interest expense on our taxable revenue bond remained relatively constant at $0.6 million in each of the three months ended March 31, 2007 and 2006. See “Liquidity and Capital Resources” below for additional information on our revenue bond.
NET REALIZED INVESTMENT GAIN
Net realized investment gain decreased from $0.6 million in the three months ended March 31, 2006 to $0.1 million in the three months ended March 31, 2007. These changes primarily resulted from the sale of securities associated with the continuing realignment of our investment portfolio.
OTHER INCOME (EXPENSE)
Other income (expense) comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees and scrap raw material sales, increased from $0.1 million of expense in the three months ended March 31, 2006 to $0.3 million of income in the three months ended March 31, 2007.
LIFE INSURANCE PROCEEDS
We realized a non-recurring gain on life insurance proceeds during the first quarter of 2007 of $1.0 million as a result of the death of our co-founder and Chairman of the Board, Mark Smith.
INCOME TAXES
Our effective tax rate decreased from 36.2% in the three months ended March 31, 2006 to 31.3% in the three months ended March 31, 2007. This decrease is primarily a result of the research and development tax credits that were enacted late in 2006, and therefore were available in 2007, and the closure of tax audits from prior years.
 
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Additionally, the recognition of stock-based compensation expense associated with the adoption of SFAS 123R has created unfavorable permanent differences that must be considered when calculating the effective tax rate for the year. These unfavorable differences are related to the portion of stock-based compensation for which a tax deduction is not generally available (incentive stock options). Disqualifying dispositions of these incentive stock options will give rise to a tax deduction and a favorable permanent difference in the period of exercise. However, we cannot estimate when, or guarantee that disqualifying dispositions will occur.
NET INCOME
As a result of the above factors, net income increased $0.6 million from $16.3 million in the three months ended March 31, 2006 to $16.9 million in the three months ended March 31, 2007. As a percentage of sales, net income increased from 15.0% in the three months ended March 31, 2006 to 15.3% in the three months ended March 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At March 31, 2007, our cash and cash equivalents of $24.2 million and short-term investments of $131.0 million placed our short-term liquidity at $155.2 million. At December 31, 2006, our cash and cash equivalents of $40.1 million and short-term investments of $99.7 million placed our short-term liquidity in at $139.8 million.
Operating Activities
Our working capital, which consists of current assets less current liabilities, increased from $219.6 million as of December 31, 2006 to $233.6 million as of March 31, 2007. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, increased from 3.97 as of December 31, 2006 to 5.19 as of March 31, 2007. The current ratio, defined as current assets divided by current liabilities, increased from 5.43 as of December 31, 2006 to 6.74 as of March 31, 2007. These liquidity ratios will fluctuate with business growth and as our inventory, accounts payable and income tax position change.
As of December 31, 2006, we had a net income tax receivable of $1.4 million, primarily related to overpayment of estimated taxes, as a result of retroactive federal research and development tax credits that were enacted late in 2006. As of March 31, 2007, we had a net income tax payable of $4.9 million, primarily related to current year taxable income.
Net accounts receivable decreased 1.0% from December 31, 2006 to March 31, 2007, primarily due to improved collections. Our allowance for doubtful accounts remained relatively stable at $0.3 million at March 31, 2007 and $0.2 million at December 31, 2006. Quarterly accounts receivable days sales outstanding decreased one day from 47 days as of December 31, 2006 to 46 days as of March 31, 2007. A steady level of shipments and good collection performance throughout a quarter will result in reduced DSO, compared with higher levels of shipments toward the end of the quarter, which results in a temporary increase in accounts receivable and increased DSO.
Quarterly inventory turnover decreased from 3.60 turns as of December 31, 2006 to 3.49 turns as of March 31, 2007. Inventory levels will fluctuate as we attempt to maintain sufficient inventory levels to ensure competitive lead times while guarding against the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.
Accounts payable decreased 36.5% from December 31, 2006 to March 31, 2007 and accrued expenses increased 9.8% from December 31, 2006 to March 31, 2007. These changes are primarily related to the variations in the timing of payments and increased payroll tax liabilities.
Investing Activities
At March 31, 2007, our long-term investments decreased by 3.8% to $182.5 million from $189.8 million at December 31, 2006. This decrease is primarily attributable to repositioning maturing long-term fixed income investments into short-term fixed income investments.
 
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Restricted investment balances at March 31, 2007 included $49.5 million in a restricted certificate of deposit and $2.7 million in deferred compensation plan assets. Restricted investment balances at December 31, 2006 included $49.5 million invested in a restricted certificate of deposit and $2.6 million of deferred compensation plan assets.
Capital expenditures totaled approximately $2.1 million and $1.4 million for the three months ended March 31, 2007 and 2006, respectively. These expenditures were primarily used for the purchase of computer hardware and software and manufacturing and test equipment.
Financing Activities
In July 2003, our board of directors elected to begin declaring quarterly dividends on our common stock, and anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and adequate levels of liquidity are maintained. During the three months ended March 31, 2007, ADTRAN paid dividends totaling $6.2 million.
Debt
We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond) which totaled $49.5 million at March 31, 2007 and December 31, 2006. Included in long-term investments are restricted funds in the amount of $49.5 million at March 31, 2007 and December 31, 2006, which is a collateral deposit against the principal amount of the Bond. 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, as evidenced by a $0.5 million principal payment in the third quarter of 2006. It is our intent to make annual principal payments of between $0.5 million and $5.0 million per year in addition to the interest amounts that are due. In connection with this decision, $0.7 million of the Bond debt has been reclassified to a current liability in the Consolidated Balance Sheet.
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 three months ended March 31, 2007, there have been no material changes in contractual obligations and commercial commitments from those discussed in our most recent Form 10-K filed on February 28, 2007. We have committed to invest up to an aggregate of $7.9 million in two private equity funds, of which $6.5 million has been invested to date. The duration of each of these commitments is ten years with $0.3 million expiring in 2010 and $1.1 million expiring in 2012.
Stock Repurchase Program
During the three months ended March 31, 2007, we repurchased 677,825 shares at an average price of $22.41 per share under the repurchase plan approved by our Board of Directors on July 17, 2006. We have the authority to purchase an additional 1,610,356 shares under this plan.
We issued 470,020 shares of treasury stock for $6.2 million during the three months ended March 31, 2007 to accommodate employee stock option exercises. During 2006, we issued 357,296 shares of treasury stock for $4.4 million to accommodate employee stock option exercises.
We intend to finance our operations with cash flows from operations. We have used, and expect to continue to use, the cash generated from operations for working capital, 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.
 
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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.	
 
 	•	 	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 telecommunication technology.	
 
 	•	 	We do not engage in long-term research and development efforts, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater research and development efforts.	
 
 	•	 	We depend heavily on sales to certain customers; the loss of any of these customers would significantly reduce our revenues and net income.	
 
 	•	 	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.	
 
 	•	 	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 returns may be increased or decreased, impacting future cost of goods sold.	
 
 	•	 	The lengthy approval process required by Incumbent Local Exchange Carriers (ILECs) and other carriers could result in fluctuations in our revenues.	
 
 	•	 	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.	
 
 	•	 	Increased sales volume in international markets could result in increased costs or loss of revenue due to factors inherent in these markets.	
 
 	•	 	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 commercialization of our products.	
 
 	•	 	Continued 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.	
 
 	•	 	Our success depends on attracting and retaining key personnel.	
 
 	•	 	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, 2006.
ITEM 3. QUANTI  TATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ADTRAN has not conducted transactions, established commitments or  entered into relationships requiring disclosures beyond those provided elsewhere in this Form 10-Q.
ITEM 4. CONT  ROLS 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)
 
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and 15d-15(e)) for the company. 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. O  THER INFORMATION
ITEM 1A. RI  SK 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 filed on February 28, 2007.
 
ITEM 2. UNREGISTERE  D SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth ADTRAN’s repurchases or deemed repurchases (swaps) of its common stock for the months indicated.

Period	  	Total
Number of
Shares
Purchased	 	 	Average
Price Paid
per Share	 	 	Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)	  	Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs	
January 1, 2007—January 31, 2007	  	—  	 	 	 	—  	 	 	—  	  	2,288,181	
February 1, 2007—February 28, 2007	  	682,231 	(2)	 	$	22.41 	(2)	 	677,825	  	1,610,356	
March 1, 2007—March 31, 2007	  	—  	 	 	 	—  	 	 	—  	  	1,610,356	
	  	 	 	 	 	 	 	 	 	  		
Total	  	682,231	 	 	$	22.41	 	 	677,825	  		

(1)	On July 17, 2006, ADTRAN’s Board of Directors approved the repurchase of up to 5,000,000 shares of its common stock. This plan is being implemented through open market purchases from time to time as conditions warrant.	
(2)	Includes 4,406 shares delivered to ADTRAN as payment of the exercise price for employee stock options. None of the transactions with respect to these shares were made in the open market. The average price paid per share with respect to these transactions is based on the closing price of the common stock on the NASDAQ National Market on the date of the transaction.	
ITEM 6. E  XHIBITS
Exhibits.

Exhibit No.	 	Description	
31	 	Rule 13a-14(a)/15d-14(a) Certifications	
		
32	 	Section 1350 Certifications	
 
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 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: May 1, 2007	 		 		 	/s/ James E. Matthews	
	 		 		 	James E. Matthews	
	 		 		 	Senior Vice President – Finance,
Chief Financial Officer, Treasurer,
and Secretary	
 
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 EXHIBIT INDEX

Exhibit No.	 	Description	
31	 	Rule 13a-14(a)/15d-14(a) Certifications	
32	 	Section 1350 Certifications	
 
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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: May 1, 2007

/s/ Thomas R. Stanton	
Thomas R. Stanton	
Chief Executive Officer	
 
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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: May 1, 2007

/s/ James E. Matthews	
James E. Matthews	
Senior Vice President – Finance,
Chief Financial Officer, Treasurer,
and Secretary	
 
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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 March 31, 2007 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	
May 1, 2007	
 
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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 March 31, 2007 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,
and Secretary	
May 1, 2007	
 
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