UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the Quarterly Period Ended September 30, 2016
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   ☒     No   ☐
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   ☒     No   ☐
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.
 
Large Accelerated Filer	☒	 	Accelerated Filer	☐	
Non accelerated Filer	☐	 	Smaller Reporting Company	☐	
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐     No   ☒
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 20, 2016	
Common Stock, $.01 Par Value	 	48,398,164 Shares	

 

 
ADTRAN, Inc.
Quarterly Report on Form 10-Q
For the Three and Nine Months Ended September 30, 2016
Table of Contents
 
Item
Number	 	 	 	Page
Number	
 	 	PART I. FINANCIAL INFORMATION	 	 	
 	 	 	 	 	
1	 	Financial Statements:	 	 	
 	 	Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 – (Unaudited)	 	3	
 	 	Consolidated Statements of Income for the three and nine months ended September 30, 2016 – (Unaudited)	 	4	
 	 	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 – (Unaudited)	 	5	
 	 	Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 – (Unaudited)	 	6	
 	 	Notes to Consolidated Financial Statements – (Unaudited)	 	7	
2	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	27	
3	 	Quantitative and Qualitative Disclosures About Market Risk	 	36	
4	 	Controls and Procedures	 	37	
 	 	 	 	 	
 	 	PART II. OTHER INFORMATION	 	 	
1A	 	Risk Factors	 	38	
2	 	Unregistered Sales of Equity Securities and Use of Proceeds	 	38	
6	 	Exhibits	 	39	
 	 	 	 	 	
 	 	SIGNATURE	 	40	
 	 	 	 	 	
 	 	EXHIBIT INDEX	 	41	
 
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, 2015 filed on February 24, 2016 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

 PART I. FINANCI AL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
ADTRAN, INC.
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
 
 	 	September 30,	 	 	December 31,	 	
 	 	2016	 	 	2015	 	
ASSETS	 	 	 	 	 	 	 	 	
Current Assets	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	66,292	 	 	$	84,550	 	
Short-term investments	 	 	55,516	 	 	 	34,396	 	
Accounts receivable, less allowance for doubtful accounts of $- at September 30, 2016
   and $19 at December 31, 2015	 	 	101,822	 	 	 	71,917	 	
Other receivables	 	 	12,159	 	 	 	19,321	 	
Income tax receivable, net	 	 	540	 	 	 	-	 	
Inventory, net	 	 	96,034	 	 	 	91,533	 	
Prepaid expenses and other current assets	 	 	14,477	 	 	 	10,145	 	
Deferred tax assets, net	 	 	17,963	 	 	 	18,924	 	
Total Current Assets	 	 	364,803	 	 	 	330,786	 	
Property, plant and equipment, net	 	 	78,078	 	 	 	73,233	 	
Deferred tax assets, net	 	 	17,263	 	 	 	18,091	 	
Goodwill	 	 	3,492	 	 	 	3,492	 	
Other assets	 	 	13,548	 	 	 	9,276	 	
Long-term investments	 	 	178,379	 	 	 	198,026	 	
Total Assets	 	$	655,563	 	 	$	632,904	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Current Liabilities	 	 	 	 	 	 	 	 	
Accounts payable	 	$	67,399	 	 	$	48,668	 	
Unearned revenue	 	 	15,744	 	 	 	16,615	 	
Accrued expenses	 	 	16,010	 	 	 	12,108	 	
Accrued wages and benefits	 	 	16,468	 	 	 	12,857	 	
Income tax payable, net	 	 	-	 	 	 	2,395	 	
Total Current Liabilities	 	 	115,621	 	 	 	92,643	 	
Non-current unearned revenue	 	 	7,105	 	 	 	7,965	 	
Other non-current liabilities	 	 	26,740	 	 	 	24,236	 	
Bonds payable	 	 	27,900	 	 	 	27,900	 	
Total Liabilities	 	 	177,366	 	 	 	152,744	 	
Commitments and contingencies (see Note 14)	 	 	 	 	 	 	 	 	
Stockholders’ Equity	 	 	 	 	 	 	 	 	
Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares
   issued and 48,392 shares outstanding at September 30, 2016 and 79,652 shares
   issued and 49,558 shares outstanding at December 31, 2015	 	 	797	 	 	 	797	 	
Additional paid-in capital	 	 	251,217	 	 	 	246,879	 	
Accumulated other comprehensive loss	 	 	(7,826	)	 	 	(8,969	)	
Retained earnings	 	 	920,395	 	 	 	906,772	 	
Less treasury stock at cost: 31,260 and 30,094 shares at September 30, 2016 and
   December 31, 2015, respectively	 	 	(686,386	)	 	 	(665,319	)	
Total Stockholders’ Equity	 	 	478,197	 	 	 	480,160	 	
Total Liabilities and Stockholders’ Equity	 	$	655,563	 	 	$	632,904	 	
 
See notes to consolidated financial statements
3

ADTRAN, INC.
 CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
 	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Sales	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Products	 	$	136,277	 	 	$	138,120	 	 	$	398,709	 	 	$	411,723	 	
Services	 	 	32,613	 	 	 	19,958	 	 	 	75,086	 	 	 	49,328	 	
Total Sales	 	 	168,890	 	 	 	158,078	 	 	 	473,795	 	 	 	461,051	 	
Cost of sales	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Products	 	 	70,988	 	 	 	75,969	 	 	 	202,905	 	 	 	231,739	 	
Services	 	 	22,094	 	 	 	11,460	 	 	 	50,333	 	 	 	24,854	 	
Total Cost of Sales	 	 	93,082	 	 	 	87,429	 	 	 	253,238	 	 	 	256,593	 	
Gross Profit	 	 	75,808	 	 	 	70,649	 	 	 	220,557	 	 	 	204,458	 	
Selling, general and administrative expenses	 	 	33,716	 	 	 	30,016	 	 	 	97,367	 	 	 	93,203	 	
Research and development expenses	 	 	31,962	 	 	 	32,561	 	 	 	92,727	 	 	 	100,576	 	
Operating Income	 	 	10,130	 	 	 	8,072	 	 	 	30,463	 	 	 	10,679	 	
Interest and dividend income	 	 	910	 	 	 	839	 	 	 	2,692	 	 	 	2,680	 	
Interest expense	 	 	(143	)	 	 	(151	)	 	 	(430	)	 	 	(448	)	
Net realized investment gain	 	 	1,316	 	 	 	2,060	 	 	 	4,154	 	 	 	8,430	 	
Other income (expense), net	 	 	(246	)	 	 	52	 	 	 	(378	)	 	 	(848	)	
Gain on bargain purchase of a business	 	 	3,550	 	 	 	—	 	 	 	3,550	 	 	 	—	 	
Income before provision for income taxes	 	 	15,517	 	 	 	10,872	 	 	 	40,051	 	 	 	20,493	 	
Provision for income taxes	 	 	(3,102	)	 	 	(3,805	)	 	 	(12,394	)	 	 	(7,565	)	
Net Income	 	$	12,415	 	 	$	7,067	 	 	$	27,657	 	 	$	12,928	 	
Weighted average shares outstanding – basic	 	 	48,470	 	 	 	49,862	 	 	 	48,839	 	 	 	51,682	 	
Weighted average shares outstanding – diluted	 	 	48,678	 	 	 	49,927	 	 	 	49,036	 	 	 	51,792	 	
Earnings per common share – basic	 	$	0.26	 	 	$	0.14	 	 	$	0.57	 	 	$	0.25	 	
Earnings per common share – diluted	 	$	0.26	 	 	$	0.14	 	 	$	0.56	 	 	$	0.25	 	
Dividend per share	 	$	0.09	 	 	$	0.09	 	 	$	0.27	 	 	$	0.27	 	
 
See notes to consolidated financial statements

4

ADTRAN, INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
 	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Net Income	 	$	12,415	 	 	$	7,067	 	 	$	27,657	 	 	$	12,928	 	
Other Comprehensive Income (Loss), net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized losses on available-for-sale securities	 	 	258	 	 	 	(4,291	)	 	 	(162	)	 	 	(6,577	)	
Defined benefit plan adjustments	 	 	36	 	 	 	71	 	 	 	103	 	 	 	211	 	
Foreign currency translation	 	 	575	 	 	 	(1,351	)	 	 	1,202	 	 	 	(3,797	)	
Other Comprehensive Income (Loss), net of tax	 	 	869	 	 	 	(5,571	)	 	 	1,143	 	 	 	(10,163	)	
Comprehensive Income, net of tax	 	$	13,284	 	 	$	1,496	 	 	$	28,800	 	 	$	2,765	 	
 
See notes to consolidated financial statements

5

ADTRAN, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 	 	Nine Months Ended	 	
 	 	September 30,	 	
 	 	2016	 	 	2015	 	
Cash flows from operating activities:	 	 	 	 	 	 	 	 	
Net income	 	$	27,657	 	 	$	12,928	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	10,260	 	 	 	10,765	 	
Amortization of net premium on available-for-sale investments	 	 	489	 	 	 	2,085	 	
Net realized investment gain	 	 	(4,154	)	 	 	(8,430	)	
Net loss on disposal of property, plant and equipment	 	 	21	 	 	 	189	 	
Gain on bargain purchase of a business	 	 	(3,550	)	 	 	-	 	
Stock-based compensation expense	 	 	4,601	 	 	 	4,788	 	
Deferred income taxes	 	 	(447	)	 	 	(2,332	)	
Tax benefit from stock option exercises	 	 	(16	)	 	 	(40	)	
Excess tax benefits from stock-based compensation arrangements	 	 	-	 	 	 	(3	)	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	
Accounts receivable, net	 	 	(29,370	)	 	 	843	 	
Other receivables	 	 	7,475	 	 	 	10,532	 	
Inventory	 	 	(683	)	 	 	(14,945	)	
Prepaid expenses and other assets	 	 	(5,180	)	 	 	(1,665	)	
Accounts payable	 	 	16,363	 	 	 	13,687	 	
Accrued expenses and other liabilities	 	 	7,307	 	 	 	(3,996	)	
Income tax payable/receivable, net	 	 	(2,941	)	 	 	(1,137	)	
Net cash provided by operating activities	 	 	27,832	 	 	 	23,269	 	
Cash flows from investing activities:	 	 	 	 	 	 	 	 	
Purchases of property, plant and equipment	 	 	(12,684	)	 	 	(7,843	)	
Proceeds from disposals of property, plant and equipment	 	 	-	 	 	 	122	 	
Proceeds from sales and maturities of available-for-sale investments	 	 	141,103	 	 	 	189,728	 	
Purchases of available-for-sale investments	 	 	(139,181	)	 	 	(113,227	)	
Acquisition of business	 	 	(943	)	 	 	-	 	
Net cash provided by (used in) investing activities	 	 	(11,705	)	 	 	68,780	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	
Proceeds from stock option exercises	 	 	1,076	 	 	 	907	 	
Purchases of treasury stock	 	 	(22,917	)	 	 	(65,808	)	
Dividend payments	 	 	(13,230	)	 	 	(13,989	)	
Excess tax benefits from stock-based compensation arrangements	 	 	-	 	 	 	3	 	
Net cash used in financing activities	 	 	(35,071	)	 	 	(78,887	)	
Net increase (decrease) in cash and cash equivalents	 	 	(18,944	)	 	 	13,162	 	
Effect of exchange rate changes	 	 	686	 	 	 	(2,914	)	
Cash and cash equivalents, beginning of period	 	 	84,550	 	 	 	73,439	 	
Cash and cash equivalents, end of period	 	$	66,292	 	 	$	83,687	 	
Supplemental disclosure of non-cash investing activities:	 	 	 	 	 	 	 	 	
Purchases of property, plant and equipment included in accounts payable	 	$	1,174	 	 	$	1,303	 	
 
See notes to consolidated financial statements

6

ADTRAN, 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, 2015 Consolidated Balance Sheet is derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
In the opinion of management, all adjustments necessary to fairly state these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim statements should be read in conjunction with the financial statements and notes thereto included in ADTRAN’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 24, 2016 with the SEC.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Our more significant estimates include the obsolete and excess inventory reserves, warranty reserves, customer rebates, determination of the deferred revenue components of multiple element sales agreements, estimated costs to complete obligations associated with deferred revenues, estimated income tax provision and income tax contingencies, the fair value of stock-based compensation, impairment of goodwill, valuation and estimated lives of intangible assets, estimated pension liability, fair value of investments, and the evaluation of other-than-temporary declines in the value of investments. Actual amounts could differ significantly from these estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition , including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , which contains certain provisions and practical expedients in response to identified implementation issues. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We plan to adopt ASU 2014-09 and the related ASUs on January 1, 2018, and we are currently evaluating the transition method that will be elected and the impact that the adoption of ASU 2014-09 will have on our financial position, results of operations and cash flows.
7

In July 2015, the FASB issued Accounting Standards Update No.  2015-11, Inventory (Topic 330): Simplifyin g the Measurement of Inventory (ASU 2015-11). Currently, Topic 330, Inventory , requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately nor mal profit margin. ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FI FO) or average cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of c ompletion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments should be applied prospectively with earlier applicatio n permitted as of the beginning of an interim or annual reporting period. We do not believe the adoption of ASU 2015-05 will have a material impact on our financial position, results of operations and cash flows.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 amends the existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively to all periods presented. We have not selected a transition method or determined whether to early adopt ASU 2015-17 in 2016. Other than the revised balance sheet presentation of current deferred tax assets and liabilities, we do not believe the adoption of ASU 2015-17 will have a material impact on our financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. A modified retrospective approach is required. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial position, results of operations and cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of accounting for share-based compensation arrangements, including income tax effects, the classification of tax-related cash flows on the statement of cash flows, and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-09 will have on our financial position, results of operations and cash flows.
During the first quarter of 2016, we adopted the following accounting standards, which had no material effect on our financial position, results of operations or cash flows:
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The amendments may be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We adopted ASU 2015-05 during the first quarter of 2016 and will apply the new standard prospectively. The adoption of ASU 2015-05 did not have a material impact on our financial position, results of operations and cash flows.

2.  BUSINESS COMBINATIONS
 
On September 13, 2016, we acquired key fiber access products, technologies and service relationships from subsidiaries of CommScope, Inc. for $0.9 million in cash. This acquisition will enhance our solutions for the cable MSO industry and will provide cable operators with the scalable solutions, services and support they require to compete in the multi-gigabit service delivery market. This transaction was accounted for as a business combination. We have included the financial results of this acquisition in our consolidated financial statements since the date of acquisition. These revenues are included in the Network Solutions reportable segment, and in the Access & Aggregation and Customer Devices categories.
 
8

We recorded a bargain purchase gain of $3.6 million, net of income taxes, subject to customary working capital adjustments between the parties. The bargain purchase gain of $3.6 million represents the excess fair value of the net asse ts acquired over the consideration exchanged . We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical and pro forma data for future periods and have concluded that our valuation procedures and res ulting measures were appropriate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2016 Consolidated Statements of Income.
 
The preliminary allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date, subject to working capital adjustments, is as follows:
 
(In Thousands)	 	 	 	
Assets	 	 	 	
  Inventory	 	3,272	 	
  Property, plant and equipment	 	352	 	
  Intangible assets	 	4,700	 	
Total assets acquired	 	8,324	 	
 	 	 	 	
Liabilities	 	 	 	
  Accounts payable	 	(1,378	)	
  Warranty payable	 	(61	)	
  Accrued wages and benefits	 	(122	)	
  Deferred income taxes	 	(2,270	)	
Total liabilities assumed	 	(3,831	)	
 	 	 	 	
Total net assets	 	4,493	 	
  Gain on bargain purchase of a business, net of tax	 	(3,550	)	
Total purchase price	$	943	 	
 
The details of the acquired intangible assets are as follows:
 
In thousands	Value	 	 	Life (years)	
Supply agreement	$	1,400	 	 	0.8	
Customer relationships	 	1,200	 	 	6	
Developed technology	 	800	 	 	10	
License	 	500	 	 	1.3	
Patent	 	500	 	 	7.3	
Non-compete	 	200	 	 	2.3	
Trade name	 	100	 	 	2	
Total	$	4,700	 	 	 	
 
The actual revenue and pre-tax loss included in our Consolidated Statements of Income for the period September 13, 2016 to September 30, 2016 are as follows:
 
 	September 13 to	 	
(In thousands)	September 30, 2016	 	
Revenue	$	1,291	 	
Pre-tax loss	$	(70	)	

9

The following supplemental pro forma information presents the financial results as if the acquisition had occurred on January 1, 201 5 .  This supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on January 1, 201 5 , nor is it indicative of any future results. Aside from revising the 2015 pre-tax income for the effect of the bargain purchase gain, t here were no material, non-recurring adjustments to this pro forma information.
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Pro forma revenue	 	$	170,498	 	 	$	159,375	 	 	$	478,184	 	 	$	463,916	 	
Pro forma pre-tax income	 	$	11,778	 	 	$	10,294	 	 	$	35,771	 	 	$	21,826	 	
 
For the three months ended September 30, 2016, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.2 million related to this acquisition.

3. INCOME TAXES
Our effective tax rate decreased from 36.9% in the nine months ended September 30, 2015 to 34.0%, excluding the tax impact of the bargain purchase gain, in the nine months ended September 30, 2016. The decrease in the effective tax rate between the two periods is primarily attributable to the research and development tax credit being made permanent.

4. PENSION BENEFIT PLAN
We maintain a defined benefit pension plan covering employees in certain foreign countries.
The following table summarizes the components of net periodic pension cost for the three and nine months ended September 30, 2016 and 2015:
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Service cost	 	$	305	 	 	$	328	 	 	$	912	 	 	$	992	 	
Interest cost	 	 	182	 	 	 	153	 	 	 	542	 	 	 	464	 	
Expected return on plan assets	 	 	(266	)	 	 	(252	)	 	 	(796	)	 	 	(763	)	
Amortization of actuarial losses	 	 	44	 	 	 	102	 	 	 	132	 	 	 	307	 	
Net periodic pension cost	 	$	265	 	 	$	331	 	 	$	790	 	 	$	1,000	 	

5. STOCK-BASED COMPENSATION
The following table summarizes the stock-based compensation expense related to stock options, restricted stock units (RSUs) and restricted stock for the three and nine months ended September 30, 2016 and 2015, which was recognized as follows:
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Stock-based compensation expense included in cost of
   sales	 	$	88	 	 	$	59	 	 	$	282	 	 	$	202	 	
Selling, general and administrative expense	 	 	765	 	 	 	812	 	 	 	2,322	 	 	 	2,226	 	
Research and development expense	 	 	639	 	 	 	803	 	 	 	1,997	 	 	 	2,360	 	
Stock-based compensation expense included in operating
   expenses	 	 	1,404	 	 	 	1,615	 	 	 	4,319	 	 	 	4,586	 	
Total stock-based compensation expense	 	 	1,492	 	 	 	1,674	 	 	 	4,601	 	 	 	4,788	 	
Tax benefit for expense associated with non-qualified
   options	 	 	(218	)	 	 	(218	)	 	 	(643	)	 	 	(620	)	
Total stock-based compensation expense, net of tax	 	$	1,274	 	 	$	1,456	 	 	$	3,958	 	 	$	4,168	 	
 
10

The fair value of our stock options is estimated using the Black-Scholes model. The determination of the fair value of stock options on the date of grant using th e 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 during the three and nine months ended September 30, 2016 and 2015 are as follows:
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
 	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Expected volatility	 	 	34.55	%	 	 	34.80	%	 	 	34.66	%	 	 	36.24	%	
Risk-free interest rate	 	 	1.20	%	 	 	1.84	%	 	 	1.28	%	 	 	1.70	%	
Expected dividend yield	 	 	1.83	%	 	 	2.13	%	 	 	1.88	%	 	 	1.94	%	
Expected life (in years)	 	 	6.21	 	 	 	6.24	 	 	 	6.24	 	 	 	6.32	 	
Weighted-average estimated value	 	$	5.64	 	 	$	4.89	 	 	$	5.50	 	 	$	5.89	 	
 
The fair value of our RSUs is calculated using a Monte Carlo Simulation valuation method. No RSUs were granted or vested during the three and nine months ended September 30, 2016 and 2015. Twelve thousand RSUs were forfeited during the nine months ended September 30, 2015.
The fair value of restricted stock is equal to the closing price of our stock on the date of grant. Two thousand shares and four thousand shares of restricted stock were granted during the three and nine months ended September 30, 2016, respectively. Two thousand shares of restricted stock vested during the three and nine months ended September 30, 2015.
Stock-based compensation expense recognized in our Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 is based on options, RSUs and restricted stock ultimately expected to vest, and has been reduced for estimated forfeitures. Estimated forfeitures for stock options are based upon historical experience and approximate 3.7% annually. We estimated a 0% forfeiture rate for our RSUs and restricted stock due to the limited number of recipients and historical experience for these awards.
As of September 30, 2016, total compensation expense related to non-vested stock options, RSUs and restricted stock not yet recognized was approximately $9.9 million, which is expected to be recognized over an average remaining recognition period of 2.2 years.
The following table is a summary of our stock options outstanding as of December 31, 2015 and September 30, 2016 and the changes that occurred during the nine months ended September 30, 2016:
 
(In thousands, except per share amounts)	 	Number of
Options	 	 	Weighted Avg.
Exercise Price	 	 	Weighted Avg.
Remaining
Contractual
Life In Years	 	 	Aggregate
Intrinsic Value	 	
Options outstanding, December 31, 2015	 	 	7,108	 	 	$	21.97	 	 	 	6.42	 	 	$	3,284	 	
Options granted	 	 	2	 	 	$	19.19	 	 	 	 	 	 	 	 	 	
Options exercised	 	 	(65	)	 	$	16.49	 	 	 	 	 	 	 	 	 	
Options forfeited	 	 	(78	)	 	$	17.93	 	 	 	 	 	 	 	 	 	
Options expired	 	 	(142	)	 	$	25.49	 	 	 	 	 	 	 	 	 	
Options outstanding, September 30, 2016	 	 	6,825	 	 	$	22.01	 	 	 	5.69	 	 	$	7,675	 	
Options vested and expected to vest, September 30, 2016	 	 	6,729	 	 	$	22.09	 	 	 	5.65	 	 	$	7,414	 	
Options exercisable, September 30, 2016	 	 	4,322	 	 	$	24.40	 	 	 	4.19	 	 	$	2,719	 	
 
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the closing price of our stock on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2016. The aggregate intrinsic value will change based on the fair market value of our stock.
The total pre-tax intrinsic value of options exercised during the three and nine months ended September 30, 2016 was $0.1 million and $0.2 million, respectively.
 
11

6 . INVESTMENTS
At September 30, 2016, we held the following securities and investments, recorded at either fair value or cost.
 
 	 	Amortized	 	 	Gross Unrealized	 	 	Carrying	 	
(In thousands)	 	Cost	 	 	Gains	 	 	Losses	 	 	Value	 	
Deferred compensation plan assets	 	$	11,656	 	 	$	2,172	 	 	$	(20	)	 	$	13,808	 	
Corporate bonds	 	 	59,900	 	 	 	136	 	 	 	(50	)	 	 	59,986	 	
Municipal fixed-rate bonds	 	 	17,589	 	 	 	54	 	 	 	(4	)	 	 	17,639	 	
Asset-backed bonds	 	 	22,564	 	 	 	72	 	 	 	(23	)	 	 	22,613	 	
Mortgage/Agency-backed bonds	 	 	15,055	 	 	 	24	 	 	 	(43	)	 	 	15,036	 	
U.S. government bonds	 	 	28,437	 	 	 	168	 	 	 	-	 	 	 	28,605	 	
Foreign government bonds	 	 	6,428	 	 	 	3	 	 	 	(1	)	 	 	6,430	 	
Variable rate demand notes	 	 	12,315	 	 	 	-	 	 	 	-	 	 	 	12,315	 	
Marketable equity securities	 	 	26,975	 	 	 	1,468	 	 	 	(1,076	)	 	 	27,367	 	
Available-for-sale securities held at fair value	 	$	200,919	 	 	$	4,097	 	 	$	(1,217	)	 	$	203,799	 	
Restricted investment held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	28,900	 	
Other investments held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,196	 	
Total carrying value of available-for-sale investments	 	 	 	 	 	 	 	 	 	 	 	 	 	$	233,895	 	
 
At December 31, 2015, we held the following securities and investments, recorded at either fair value or cost.
 
 	 	Amortized	 	 	Gross Unrealized	 	 	Carrying	 	
(In thousands)	 	Cost	 	 	Gains	 	 	Losses	 	 	Value	 	
Deferred compensation plan assets	 	$	11,325	 	 	$	1,575	 	 	$	(66	)	 	$	12,834	 	
Corporate bonds	 	 	58,328	 	 	 	20	 	 	 	(734	)	 	 	57,614	 	
Municipal fixed-rate bonds	 	 	26,414	 	 	 	28	 	 	 	(18	)	 	 	26,424	 	
Asset-backed bonds	 	 	19,281	 	 	 	2	 	 	 	(44	)	 	 	19,239	 	
Mortgage/Agency-backed bonds	 	 	15,463	 	 	 	1	 	 	 	(91	)	 	 	15,373	 	
U.S. Government bonds	 	 	35,646	 	 	 	-	 	 	 	(248	)	 	 	35,398	 	
Marketable equity securities	 	 	31,643	 	 	 	4,301	 	 	 	(1,693	)	 	 	34,251	 	
Available-for-sale securities held at fair value	 	$	198,100	 	 	$	5,927	 	 	$	(2,894	)	 	$	201,133	 	
Restricted investment held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	30,000	 	
Other investments held at cost	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,289	 	
Total carrying value of available-for-sale investments	 	 	 	 	 	 	 	 	 	 	 	 	 	$	232,422	 	
 
As of September 30, 2016, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, and foreign government bonds had the following contractual maturities:
 
(In thousands)	 	Corporate
bonds	 	 	Municipal
fixed-rate
bonds	 	 	Asset-
backed
bonds	 	 	Mortgage /
Agency-
backed bonds	 	 	U.S. government
bonds	 	 	Foreign government bonds	 	
Less than one year	 	$	22,993	 	 	$	12,156	 	 	$	-	 	 	$	-	 	 	$	2,952	 	 	$	5,100	 	
One to two years	 	 	24,504	 	 	 	3,186	 	 	 	1,094	 	 	 	1,385	 	 	 	9,096	 	 	 	1,330	 	
Two to three years	 	 	9,296	 	 	 	858	 	 	 	8,989	 	 	 	2,004	 	 	 	4,573	 	 	 	-	 	
Three to five years	 	 	3,193	 	 	 	1,439	 	 	 	9,739	 	 	 	-	 	 	 	11,984	 	 	 	-	 	
Five to ten years	 	 	-	 	 	 	-	 	 	 	2,614	 	 	 	1,448	 	 	 	-	 	 	 	-	 	
More than ten years	 	 	-	 	 	 	-	 	 	 	177	 	 	 	10,199	 	 	 	-	 	 	 	-	 	
Total	 	$	59,986	 	 	$	17,639	 	 	$	22,613	 	 	$	15,036	 	 	$	28,605	 	 	$	6,430	 	
 
Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.
12

At September 30, 2016 , we held a $ 28.9 million rest ricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond ) , which totaled $28.9 million at September 30, 2016 and December 31, 2015 . At September 30, 2016, the estimated fair value of the Bond using a level 2 valuation technique was approximately $ 29 . 3 million, based on a debt security with a comparable interest rate and maturity and a Standard and Poor’s credit rating of AAA. We have the right to set-off the balance of the Bond with the collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January 1, 2020, and bears interest at the rate of 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positi ons that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due.
We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the three and nine months ended September 30, 2016, other-than-temporary impairment charges were not significant.
Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents gross realized gains and losses related to our investments.
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Gross realized gains	 	$	1,346	 	 	$	2,251	 	 	$	5,226	 	 	$	8,856	 	
Gross realized losses	 	$	(30	)	 	$	(191	)	 	$	(1,072	)	 	$	(426	)	
 
As of September 30, 2016 and 2015, gross unrealized losses related to individual securities in a continuous loss position for 12 months or longer were not significant.

13

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 quo ted prices for identical assets or liabilities in an active market; Level 2 - Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3 - Values based on prices or valuation tech niques 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, 2016 Using	 	
(In thousands)	 	Fair Value	 	 	Quoted Prices
in Active
Market for
Identical
Assets
(Level 1)	 	 	Significant
Other
Observable
Inputs
(Level 2)	 	 	Significant Unobservable Inputs
(Level 3)	 	
Cash equivalents	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market funds	 	$	2,032	 	 	$	2,032	 	 	$	-	 	 	$	-	 	
Commercial Paper	 	 	3,585	 	 	 	-	 	 	 	3,585	 	 	 	-	 	
Cash equivalents	 	 	5,617	 	 	 	2,032	 	 	 	3,585	 	 	 	-	 	
Available-for-sale securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred compensation plan assets	 	 	13,808	 	 	 	13,808	 	 	 	-	 	 	 	-	 	
Available-for-sale debt securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Corporate bonds	 	 	59,986	 	 	 	-	 	 	 	59,986	 	 	 	-	 	
Municipal fixed-rate bonds	 	 	17,639	 	 	 	-	 	 	 	17,639	 	 	 	-	 	
Asset-backed bonds	 	 	22,613	 	 	 	-	 	 	 	22,613	 	 	 	-	 	
Mortgage/Agency-backed bonds	 	 	15,036	 	 	 	-	 	 	 	15,036	 	 	 	-	 	
U.S. government bonds	 	 	28,605	 	 	 	28,605	 	 	 	-	 	 	 	-	 	
Foreign government bonds	 	 	6,430	 	 	 	-	 	 	 	6,430	 	 	 	-	 	
Variable rate demand notes	 	 	12,315	 	 	 	-	 	 	 	12,315	 	 	 	-	 	
Available-for-sale marketable equity securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Marketable equity securities – technology industry	 	 	3,693	 	 	 	3,693	 	 	 	-	 	 	 	-	 	
Marketable equity securities – other	 	 	23,674	 	 	 	23,674	 	 	 	-	 	 	 	-	 	
Available-for-sale securities	 	 	203,799	 	 	 	69,780	 	 	 	134,019	 	 	 	-	 	
Total	 	$	209,416	 	 	$	71,812	 	 	$	137,604	 	 	$	-	 	
 
 	 	Fair Value Measurements at December 31, 2015 Using	 	
(In thousands)	 	Fair Value	 	 	Quoted Prices
in Active
Market for
Identical
Assets
(Level 1)	 	 	Significant
Other
Observable
Inputs
(Level 2)	 	 	Significant Unobservable Inputs
(Level 3)	 	
Cash equivalents	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market funds	 	$	1,271	 	 	$	1,271	 	 	$	-	 	 	$	-	 	
Commercial Paper	 	 	11,696	 	 	 	-	 	 	 	11,696	 	 	 	-	 	
Cash equivalents	 	 	12,967	 	 	 	1,271	 	 	 	11,696	 	 	 	-	 	
Available-for-sale securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred compensation plan assets	 	 	12,834	 	 	 	12,834	 	 	 	-	 	 	 	-	 	
Available-for-sale debt securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Corporate bonds	 	 	57,614	 	 	 	-	 	 	 	57,614	 	 	 	-	 	
Municipal fixed-rate bonds	 	 	26,424	 	 	 	-	 	 	 	26,424	 	 	 	-	 	
Asset-backed bonds	 	 	19,239	 	 	 	-	 	 	 	19,239	 	 	 	-	 	
Mortgage/Agency-backed bonds	 	 	15,373	 	 	 	-	 	 	 	15,373	 	 	 	-	 	
U.S. government bonds	 	 	35,398	 	 	 	35,398	 	 	 	-	 	 	 	-	 	
Available-for-sale marketable equity securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Marketable equity securities – technology industry	 	 	5,384	 	 	 	5,384	 	 	 	-	 	 	 	-	 	
Marketable equity securities – other	 	 	28,867	 	 	 	28,867	 	 	 	-	 	 	 	-	 	
Available-for-sale securities	 	 	201,133	 	 	 	82,483	 	 	 	118,650	 	 	 	-	 	
Total	 	$	214,100	 	 	$	83,754	 	 	$	130,346	 	 	$	-	 	
14

The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are obtained from a variety of indust ry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple market prices are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each securi ty.
 
Our variable rate demand notes have a structure that implies a standard expected market price. The frequent interest rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates may adversely affect our results of operations and financial condition, as these are remeasured to the functional currency through profit and loss. When appropriate, we enter into various derivative transactions to enhance our ability to manage the volatility relating to these typical business exposures. We do not hold or issue derivative instruments for trading or other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our derivative instruments do not qualify for hedge accounting, and accordingly, all changes in the fair value of the instruments are recognized as other income (expense) in the Consolidated Statements of Income. Our derivative instruments are not subject to master netting arrangements and are not offset in the Consolidated Balance Sheets.
As of September 30, 2016 and December 31, 2015, we had no forward contracts outstanding.
 
The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the three and nine months ended September 30, 2016 and 2015 were as follows:
 
 	 	 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	Income Statement	 	September 30,	 	 	September 30,	 	
(In thousands)	 	Location	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Derivatives Not Designated as Hedging Instruments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign exchange contracts	 	Other income (expense)	 	$	(37	)	 	$	30	 	 	$	153	 	 	$	208	 	

8. INVENTORY
At September 30, 2016 and December 31, 2015, inventory consisted of the following:

 	 	September 30,	 	 	December 31,	 	
(In thousands)	 	2016	 	 	2015	 	
Raw materials	 	$	37,879	 	 	$	34,223	 	
Work in process	 	 	3,044	 	 	 	2,893	 	
Finished goods	 	 	55,111	 	 	 	54,417	 	
Total	 	$	96,034	 	 	$	91,533	 	
 
We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions. At September 30, 2016 and December 31, 2015, raw materials reserves totaled $18.3 million and $17.5 million, respectively, and finished goods inventory reserves totaled $10.1 million and $9.2 million, respectively.

9. GOODWILL AND INTANGIBLE ASSETS
Goodwill, all of which relates to our acquisition of Bluesocket, Inc., was $3.5 million at September 30, 2016 and December 31, 2015, and was previously recorded in our Enterprise Networks reportable segment. As a result of our new reporting structure, which is discussed further in Note 12, we reallocated goodwill from our Enterprise Networks reportable segment to our two, new reportable segments – Network Solutions and Services & Support. As a result, goodwill of $3.1 million and $0.4 million was reallocated to our Network Solutions and Services & Support reportable segments, respectively.
 
15

We evaluate the carrying value of goodwi ll during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. We have elected to first assess the qual itative factors to determine whether it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairme nt test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in 2015 , we concluded that it was not nec essary to perform the two-step impairment test. There have been no impairment losses recognized since the acquisition in 2011.
Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets and include intangibles acquired in conjunction with our acquisitions of Objectworld Communications Corporation on September 15, 2009, Bluesocket, Inc. on August 4, 2011, the NSN BBA business on May 4, 2012, and CommScope’s active fiber access business on September 13, 2016.
The following table presents our intangible assets as of September 30, 2016 and December 31, 2015:
 
(In thousands)	 	September 30, 2016	 	 	December 31, 2015	 	
 	 	Gross
Value	 	 	Accumulated Amortization	 	 	Net Value	 	 	Gross
Value	 	 	Accumulated Amortization	 	 	Net Value	 	
Customer relationships	 	$	7,178	 	 	$	(3,147	)	 	 	4,031	 	 	$	5,828	 	 	$	(2,627	)	 	$	3,201	 	
Developed technology	 	 	6,609	 	 	 	(4,995	)	 	 	1,614	 	 	 	5,720	 	 	 	(4,329	)	 	 	1,391	 	
Intellectual property	 	 	2,340	 	 	 	(2,096	)	 	 	244	 	 	 	2,340	 	 	 	(1,854	)	 	 	486	 	
Supply agreement	 	 	1,400	 	 	 	(78	)	 	 	1,322	 	 	 	-	 	 	 	-	 	 	 	-	 	
License	 	 	500	 	 	 	(16	)	 	 	484	 	 	 	-	 	 	 	-	 	 	 	-	 	
Patent	 	 	500	 	 	 	(3	)	 	 	497	 	 	 	-	 	 	 	-	 	 	 	-	 	
Trade names	 	 	370	 	 	 	(272	)	 	 	98	 	 	 	270	 	 	 	(265	)	 	 	5	 	
Non-compete	 	 	200	 	 	 	(4	)	 	 	196	 	 	 	11	 	 	 	(11	)	 	 	-	 	
Total	 	$	19,097	 	 	$	(10,611	)	 	$	8,486	 	 	$	14,169	 	 	$	(9,086	)	 	$	5,083	 	
 
Amortization expense, all of which relates to business acquisitions, was $0.5 million for the three months ended September 30, 2016 and 2015, and $1.4 million and $1.5 million for the nine months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016, the estimated future amortization expense of our intangible assets is as follows:
 
(In thousands)	 	Amount	 	
Remainder of 2016	 	$	1,058	 	
2017	 	 	2,901	 	
2018	 	 	1,189	 	
2019	 	 	675	 	
2020	 	 	640	 	
Thereafter	 	 	2,023	 	
Total	 	$	8,486	 	

16

10 . STOCKHOLDERS’ EQUITY
A summary of the changes in stockholders’ equity for the nine months ended September 30, 2016 is as follows:
 
(In thousands)	 	Stockholders’ Equity	 	
Balance, December 31, 2015	 	$	480,160	 	
Net income	 	 	27,657	 	
Dividend payments	 	 	(13,230	)	
Dividends accrued for unvested restricted stock units	 	 	(30	)	
Net unrealized losses on available-for-sale securities (net of tax)	 	 	(162	)	
Defined benefit plan adjustments	 	 	103	 	
Foreign currency translation adjustment	 	 	1,202	 	
Proceeds from stock option exercises	 	 	1,076	 	
Purchase of treasury stock	 	 	(22,917	)	
Income tax effect of stock compensation arrangements	 	 	(263	)	
Stock-based compensation expense	 	 	4,601	 	
Balance, September 30, 2016	 	$	478,197	 	
 
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 50.0 million shares of our common stock, which will be implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended September 30, 2016, we repurchased 1.2 million shares of our common stock at an average price of $18.34 per share. As of September 30, 2016, we have the authority to purchase an additional 4.6 million shares of our common stock under the current plans approved by the Board of Directors.
Stock Option Exercises
We issued 0.1 million shares of treasury stock during the nine months ended September 30, 2016 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $18.97. We received proceeds totaling $1.1 million from the exercise of these stock options during the nine months ended September 30, 2016.
Dividend Payments
During the nine months ended September 30, 2016, we paid cash dividends as follows (in thousands except per share amounts):
 
Record Date	 	Payment Date	 	Per Share Amount	 	 	Total Dividend Paid	 	
February 4, 2016	 	February 18, 2016	 	$	0.09	 	 	$	4,453	 	
April 28, 2016	 	May 12, 2016	 	$	0.09	 	 	$	4,407	 	
July 28, 2016	 	August 11, 2016	 	$	0.09	 	 	$	4,370	 	
17

Other Comprehensive Income
Other comprehensive income consists of unrealized gains (losses) on available-for-sale securities, reclassification adjustments for amounts included in net income related to impairments of available-for-sale securities, realized gains (losses) on available-for-sale securities, and amortization of actuarial gains (losses) related to our defined benefit plan, defined benefit plan adjustments, and foreign currency translation adjustments.
The following tables present changes in accumulated other comprehensive income, net of tax, by component for the three months ended September 30, 2016 and 2015:
 
 	 	Three Months Ended September 30, 2016	 	
(In thousands)	 	Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities	 	 	Defined
Benefit Plan
Adjustments	 	 	Foreign
Currency
Adjustments	 	 	Total	 	
Beginning balance	 	$	1,512	 	 	$	(3,828	)	 	$	(6,379	)	 	$	(8,695	)	
Other comprehensive income (loss) before
   reclassifications	 	 	1,028	 	 	 	-	 	 	 	575	 	 	 	1,603	 	
Amounts reclassified from accumulated other
   comprehensive income	 	 	(770	)	 	 	36	 	 	 	-	 	 	 	(734	)	
Net current period other comprehensive income (loss)	 	 	258	 	 	 	36	 	 	 	575	 	 	 	869	 	
Ending balance	 	$	1,770	 	 	$	(3,792	)	 	$	(5,804	)	 	$	(7,826	)	
 
 	 	Three Months Ended September 30, 2015	 	
(In thousands)	 	Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities	 	 	Defined
Benefit Plan
Adjustments	 	 	Foreign
Currency
Adjustments	 	 	Total	 	
Beginning balance	 	$	6,678	 	 	$	(5,617	)	 	$	(5,728	)	 	$	(4,667	)	
Other comprehensive income (loss) before
   reclassifications	 	 	(3,034	)	 	 	-	 	 	 	(1,351	)	 	 	(4,385	)	
Amounts reclassified from accumulated other
   comprehensive income	 	 	(1,257	)	 	 	71	 	 	 	-	 	 	 	(1,186	)	
Net current period other comprehensive income (loss)	 	 	(4,291	)	 	 	71	 	 	 	(1,351	)	 	 	(5,571	)	
Ending balance	 	$	2,387	 	 	$	(5,546	)	 	$	(7,079	)	 	$	(10,238	)	
 
18

The following tables present changes in accumulated other comprehensive income, net of tax, by component for the nine months ended September 30, 2016 and 2015 :
 
 	 	Nine Months Ended September 30, 2016	 	
(In thousands)	 	Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities	 	 	Defined
Benefit Plan
Adjustments	 	 	Foreign
Currency
Adjustments	 	 	Total	 	
Beginning balance	 	$	1,932	 	 	$	(3,895	)	 	$	(7,006	)	 	$	(8,969	)	
Other comprehensive income (loss) before
   reclassifications	 	 	2,267	 	 	 	-	 	 	 	1,202	 	 	 	3,469	 	
Amounts reclassified from accumulated other
   comprehensive income	 	 	(2,429	)	 	 	103	 	 	 	-	 	 	 	(2,326	)	
Net current period other comprehensive income (loss)	 	 	(162	)	 	 	103	 	 	 	1,202	 	 	 	1,143	 	
Ending balance	 	$	1,770	 	 	$	(3,792	)	 	$	(5,804	)	 	$	(7,826	)	
 
 	 	Nine Months Ended September 30, 2015	 	
(In thousands)	 	Unrealized
Gains
(Losses)
on
Available-
for-Sale
Securities	 	 	Defined
Benefit Plan
Adjustments	 	 	Foreign
Currency
Adjustments	 	 	Total	 	
Beginning balance	 	$	8,964	 	 	$	(5,757	)	 	$	(3,282	)	 	$	(75	)	
Other comprehensive income (loss) before
   reclassifications	 	 	(1,497	)	 	 	-	 	 	 	(3,797	)	 	 	(5,294	)	
Amounts reclassified from accumulated other
   comprehensive income	 	 	(5,080	)	 	 	211	 	 	 	-	 	 	 	(4,869	)	
Net current period other comprehensive income (loss)	 	 	(6,577	)	 	 	211	 	 	 	(3,797	)	 	 	(10,163	)	
Ending balance	 	$	2,387	 	 	$	(5,546	)	 	$	(7,079	)	 	$	(10,238	)	

19

The following tables present the details of reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2016 and 201 5 :
 
(In thousands)	 	Three Months Ended September 30, 2016	
Details about Accumulated Other Comprehensive Income Components	 	Amount
Reclassified
from
Accumulated
Other
Comprehensive
Income	 	 	Affected Line Item in the
Statement Where Net
Income Is Presented	
Unrealized gains (losses) on available-for-
   sale securities:	 	 	 	 	 	 	
Net realized gain on sales of securities	 	$	1,268	 	 	Net realized investment gain	
Impairment expense	 	 	(6	)	 	Net realized investment gain	
Defined benefit plan adjustments – actuarial
   losses	 	 	(51	)	 	(1)	
Total reclassifications for the period, before
   tax	 	 	1,211	 	 	 	
Tax (expense) benefit	 	 	(477	)	 	 	
Total reclassifications for the period, net
   of tax	 	$	734	 	 	 	
 
(1)	Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.	
 
(In thousands)	 	Three Months Ended September 30, 2015	
Details about Accumulated Other Comprehensive Income Components	 	Amount
Reclassified
from
Accumulated
Other
Comprehensive
Income	 	 	Affected Line Item in the
Statement Where Net
Income Is Presented	
Unrealized gains (losses) on available-for-
   sale securities:	 	 	 	 	 	 	
Net realized gain on sales of securities	 	$	2,098	 	 	Net realized investment gain	
Impairment expense	 	 	(37	)	 	Net realized investment gain	
Defined benefit plan adjustments – actuarial
   losses	 	 	(103	)	 	(1)	
Total reclassifications for the period, before
   tax	 	 	1,958	 	 	 	
Tax (expense) benefit	 	 	(772	)	 	 	
Total reclassifications for the period, net
   of tax	 	$	1,186	 	 	 	
 
(1)	Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.	

20

The following tables present the details of reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2016 and 2015 :
 
(In thousands)	 	Nine Months Ended September 30, 2016	
Details about Accumulated Other Comprehensive Income Components	 	Amount
Reclassified
from
Accumulated
Other
Comprehensive
Income	 	 	Affected Line Item in the
Statement Where Net
Income Is Presented	
Unrealized gains (losses) on available-for-
   sale securities:	 	 	 	 	 	 	
Net realized gain on sales of securities	 	$	4,383	 	 	Net realized investment gain	
Impairment expense	 	 	(401	)	 	Net realized investment gain	
Defined benefit plan adjustments – actuarial
   losses	 	 	(149	)	 	(1)	
Total reclassifications for the period, before
   tax	 	 	3,833	 	 	 	
Tax (expense) benefit	 	 	(1,507	)	 	 	
Total reclassifications for the period, net
   of tax	 	$	2,326	 	 	 	
 
(1)	Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.	
 
(In thousands)	 	Nine Months Ended September 30, 2015	
Details about Accumulated Other Comprehensive Income Components	 	Amount
Reclassified
from
Accumulated
Other
Comprehensive
Income	 	 	Affected Line Item in the
Statement Where Net
Income Is Presented	
Unrealized gains (losses) on available-for-
   sale securities:	 	 	 	 	 	 	
Net realized gain on sales of securities	 	$	8,438	 	 	Net realized investment gain	
Impairment expense	 	 	(110	)	 	Net realized investment gain	
Defined benefit plan adjustments – actuarial
   losses	 	 	(306	)	 	(1)	
Total reclassifications for the period, before
   tax	 	 	8,022	 	 	 	
Tax (expense) benefit	 	 	(3,153	)	 	 	
Total reclassifications for the period, net
   of tax	 	$	4,869	 	 	 	
 
(1)	Included in the computation of net periodic pension cost. See Note 4 of Notes to Consolidated Financial Statements.	
21

T he following table presents the tax effects related to the change in each component of other comprehensive income for the three months ended September 30, 2016 and 2015 :
 
 	 	Three Months Ended	 	 	Three Months Ended	 	
 	 	September 30, 2016	 	 	September 30, 2015	 	
(In thousands)	 	Before-Tax
Amount	 	 	Tax
(Expense)
Benefit	 	 	Net-of-Tax
Amount	 	 	Before-Tax
Amount	 	 	Tax
(Expense)
Benefit	 	 	Net-of-Tax
Amount	 	
Unrealized gains (losses) on available-for-sale
   securities	 	$	1,685	 	 	$	(657	)	 	$	1,028	 	 	$	(4,974	)	 	$	1,940	 	 	$	(3,034	)	
Reclassification adjustment for amounts related to
   available-for-sale investments included in net
   income	 	 	(1,262	)	 	 	492	 	 	 	(770	)	 	 	(2,061	)	 	 	804	 	 	 	(1,257	)	
Reclassification adjustment for amounts related to
   defined benefit plan adjustments included in net
   income	 	 	51	 	 	 	(15	)	 	 	36	 	 	 	103	 	 	 	(32	)	 	 	71	 	
Foreign currency translation adjustment	 	 	575	 	 	 	-	 	 	 	575	 	 	 	(1,351	)	 	 	-	 	 	 	(1,351	)	
Total Other Comprehensive Income (Loss)	 	$	1,049	 	 	$	(180	)	 	$	869	 	 	$	(8,283	)	 	$	2,712	 	 	$	(5,571	)	
 
The following table presents the tax effects related to the change in each component of other comprehensive income for the nine months ended September 30, 2016 and 2015:
 
 	 	Nine Months Ended	 	 	Nine Months Ended	 	
 	 	September 30, 2016	 	 	September 30, 2015	 	
(In thousands)	 	Before-Tax
Amount	 	 	Tax
(Expense)
Benefit	 	 	Net-of-Tax
Amount	 	 	Before-Tax
Amount	 	 	Tax
(Expense)
Benefit	 	 	Net-of-Tax
Amount	 	
Unrealized gains (losses) on available-for-sale
   securities	 	$	3,716	 	 	$	(1,449	)	 	$	2,267	 	 	$	(2,454	)	 	$	957	 	 	$	(1,497	)	
Reclassification adjustment for amounts related to
   available-for-sale investments included in net
   income	 	 	(3,982	)	 	 	1,553	 	 	 	(2,429	)	 	 	(8,328	)	 	 	3,248	 	 	 	(5,080	)	
Reclassification adjustment for amounts related to
   defined benefit plan adjustments included in net
   income	 	 	149	 	 	 	(46	)	 	 	103	 	 	 	306	 	 	 	(95	)	 	 	211	 	
Foreign currency translation adjustment	 	 	1,202	 	 	 	-	 	 	 	1,202	 	 	 	(3,797	)	 	 	-	 	 	 	(3,797	)	
Total Other Comprehensive Income (Loss)	 	$	1,085	 	 	$	58	 	 	$	1,143	 	 	$	(14,273	)	 	$	4,110	 	 	$	(10,163	)	

 
22

11 . EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015 is as follows:
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands, except per share amounts)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Numerator	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	12,415	 	 	$	7,067	 	 	$	27,657	 	 	$	12,928	 	
Denominator	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average number of shares – basic	 	 	48,470	 	 	 	49,862	 	 	 	48,839	 	 	 	51,682	 	
Effect of dilutive securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock options	 	 	137	 	 	 	29	 	 	 	137	 	 	 	94	 	
Restricted stock and restricted stock units	 	 	71	 	 	 	36	 	 	 	60	 	 	 	16	 	
Weighted average number of shares – diluted	 	 	48,678	 	 	 	49,927	 	 	 	49,036	 	 	 	51,792	 	
Net income per share – basic	 	$	0.26	 	 	$	0.14	 	 	$	0.57	 	 	$	0.25	 	
Net income per share – diluted	 	$	0.26	 	 	$	0.14	 	 	$	0.56	 	 	$	0.25	 	
 
Anti-dilutive options to purchase common stock outstanding were excluded from the above calculations. Anti-dilutive options totaled 5.6 million and 6.0 million for the three months ended September 30, 2016 and 2015, respectively, and 5.7 million and 6.1 million for the nine months ended September 30, 2016 and 2015, respectively.

12. SEGMENT INFORMATION
In 2015, we began a realignment of our organizational structure to better match our market opportunities, technological development initiatives, and improve efficiencies. During the first quarter of 2016, our chief operating decision maker requested changes in the information that he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning with the quarter ended March 31, 2016, we began reporting our financial performance based on two, new reportable segments – Network Solutions and Services & Support. Network Solutions includes hardware products and next-generation virtualized solutions used in service provider or business networks, as well as prior-generation products. Services & Support includes our suite of ProCloud ® managed services, network installation, engineering and maintenance services, and fee-based technical support and equipment repair/replacement plans.
We evaluate the performance of our new segments based on gross profit; therefore, selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other income/expense and provision for taxes are reported on a company-wide, functional basis only. Historical financial information by reportable segment and category, as discussed below, has been recast to conform to our new reporting structure. There are no inter-segment revenues.
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, 2016 and 2015. We do not produce asset information by reportable segment; therefore, it is not reported.
 
 	 	Three Months Ended	 	
 	 	September 30, 2016	 	 	September 30, 2015	 	
(In thousands)	 	Sales	 	 	Gross Profit	 	 	Sales	 	 	Gross Profit	 	
Network Solutions	 	$	136,277	 	 	$	65,289	 	 	$	138,120	 	 	$	62,151	 	
Services & Support	 	 	32,613	 	 	 	10,519	 	 	 	19,958	 	 	 	8,498	 	
Total	 	$	168,890	 	 	$	75,808	 	 	$	158,078	 	 	$	70,649	 	
 
 	 	Nine Months Ended	 	
 	 	September 30, 2016	 	 	September 30, 2015	 	
(In thousands)	 	Sales	 	 	Gross Profit	 	 	Sales	 	 	Gross Profit	 	
Network Solutions	 	$	398,709	 	 	$	195,804	 	 	$	411,723	 	 	$	179,984	 	
Services & Support	 	 	75,086	 	 	 	24,753	 	 	 	49,328	 	 	 	24,474	 	
Total	 	$	473,795	 	 	$	220,557	 	 	$	461,051	 	 	$	204,458	 	
 
23

Sales by Category
In addition to our new reporting segments, we will also report revenue for the following three categories – Access & Aggregation, Customer Devices, and Traditional & Other Products.
Access & Aggregation generally includes software and hardware based products and services that communication service providers (CSPs) use to aggregate and/or originate network access technologies. The portfolio of ADTRAN solutions within this category includes a wide array of modular or fixed physical form factors designed to deliver the best technology and economic fit for our customers based on the target subscriber density and environmental conditions.
The Access & Aggregation category includes product and service families such as:
 	•	Total Access ® 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)	
 	•	hiX 5600 Series fiber aggregation and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)	
 	•	A9000 Series of EPON DOCSIS-provisioned Optical Line Terminals (OLT)	
 	•	Fiber to the Distribution Point (FTTdp) Optical Network Units (ONU)	
 	•	Optical Line Terminals (OLT)	
 	•	Optical Networking Edge (ONE) aggregation	
 	•	Distribution Point Units (DPUs)	
 	•	IP Digital Subscriber Line Access Multiplexers (DSLAMs)	
 	•	Cabinet and Outside-Plant (OSP) enclosures and services	
 	•	Network Management and Cloud based software platforms and applications	
 	•	Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials	
 	•	Other products and services that are generally applicable to Access & Aggregation	
Customer Devices generally includes the products and services that provide end users access to the CSP network.  The Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.
The Customer Devices category includes products and services such as:
 	•	Broadband customer premise solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical Network Terminals (ONTs)	
 	•	Radio Frequency over Glass (RFoG) MicroNodes	
 	•	Residential and business gateways	
 	•	Wi-Fi access points and associated powering and switching infrastructure	
 	•	enterprise Session Border Controllers (eSBC)	
 	•	Branch office and access routers	
 	•	Carrier Ethernet services termination devices	
 	•	VoIP media gateways	
 	•	ProServices ®	
 	•	Planning, engineering, program management, maintenance, installation and commissioning services to implement the customer devices solutions into consumer, small business and enterprise locations	
 	•	Other products and services that are generally applicable to customer devices	
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Traditional & Other Products generally includes a mix of prior generation technologies’ products and services, as well as other products and services that do not fit within the Access & Aggregation or Customer Devices categories.
The Traditional & Other Products category includes products and services such as:
 	•	Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM) based aggregation systems and customer devices	
 	•	HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and customer networks	
 	•	Other products and services that do not fit within the Access & Aggregation and Customer Devices categories	
The table below presents sales information by category for the three and nine months ended September 30, 2016 and 2015:
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Access & Aggregation	 	$	120,618	 	 	$	103,431	 	 	$	316,705	 	 	$	309,014	 	
Customer Devices	 	 	32,984	 	 	 	35,545	 	 	 	106,213	 	 	 	97,291	 	
Traditional & Other Products	 	 	15,288	 	 	 	19,102	 	 	 	50,877	 	 	 	54,746	 	
Total	 	$	168,890	 	 	$	158,078	 	 	$	473,795	 	 	$	461,051	 	

13. LIABILITY FOR WARRANTY RETURNS
Our products generally include warranties of 90 days to ten years for product defects. We accrue for warranty returns at the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in future periods. The liability for warranty obligations totaled $8.8 million and $8 . 7 million at September 30, 2016 and December 31, 2015, respectively. During the three months ended September 30, 2016, we incurred an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.
A summary of warranty expense and write-off activity for the three and nine months ended September 30, 2016 and 2015 is as follows:
 
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	September 30,	 	 	September 30,	 	
(In thousands)	 	2016	 	 	2015	 	 	2016	 	 	2015	 	
Balance at beginning of period	 	$	8,935	 	 	$	8,933	 	 	$	8,739	 	 	$	8,415	 	
Plus: Amounts charged to cost and expenses	 	 	4,012	 	 	 	777	 	 	 	6,341	 	 	 	1,905	 	
Less: Deductions	 	 	(4,195	)	 	 	(994	)	 	 	(6,328	)	 	 	(1,604	)	
Balance at end of period	 	$	8,752	 	 	$	8,716	 	 	$	8,752	 	 	$	8,716	 	

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1 4 . COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment disputes, patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek damages or other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Although the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are currently aware will not materially affect our business, operations, financial condition or cash flows.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million as of September 30, 2016, of which $7.7 million has been applied to these commitments.

15. SUBSEQUENT EVENTS
On October 18, 2016, we announced that our Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to stockholders of record at the close of business on November 03, 2016. The payment date will be November 17, 2016. The quarterly dividend payment will be approximately $4.3 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common stock considering the tax treatment of dividends and adequate levels of Company liquidity.
During the fourth quarter and as of November 8, 2016, we have repurchased 0.2 million shares of our common stock through open market purchases at an average cost of $17.96 per share. We currently have the authority to purchase an additional 4.4 million shares of our common stock under the current plan approved by the Board of Directors.

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 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. is a leading global provider of networking and communications equipment. Our solutions enable voice, data, video and Internet communications across a variety of network infrastructures. These solutions are deployed by many of the United States’ and the world’s largest service providers, distributed enterprises and small and medium-sized businesses, public and private enterprises, and millions of individual users 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.
We report revenue for the following three categories – Access & Aggregation, Customer Devices, and Traditional & Other Products.
Access & Aggregation generally includes software and hardware based products and services that communication service providers (CSPs) use to aggregate and/or originate network access technologies. The portfolio of ADTRAN solutions within this category includes a wide array of modular or fixed physical form factors designed to deliver the best technology and economic fit for our customers based on the target subscriber density and environmental conditions.
The Access & Aggregation category includes product and service families such as:
 	•	Total Access ® 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)	
 	•	hiX 5600 Series fiber aggregation and Fiber to the Node (FTTN) Multi-Service Access Nodes (MSAN)	
 	•	A9000 Series of EPON DOCSIS-provisioned Optical Line Terminals (OLT)	
 	•	Fiber to the Distribution Point (FTTdp) Optical Network Units (ONU)	
 	•	Optical Line Terminals (OLT)	
 	•	Optical Networking Edge (ONE) aggregation	
 	•	Distribution Point Units (DPUs)	
 	•	IP Digital Subscriber Line Access Multiplexers (DSLAMs)	
 	•	Cabinet and Outside-Plant (OSP) enclosures and services	
 	•	Network Management and Cloud based software platforms and applications	
 	•	Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials	
 	•	Other products and services that are generally applicable to Access & Aggregation	

 
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Custo mer Devices generally includes the products and services that provide end users access to the CSP network.  The Customer Devices portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.
The Customer Devices category includes products and services such as:
 	•	Broadband customer premise solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical Network Terminals (ONTs)	
 	•	Radio Frequency over Glass (RFoG) MicroNodes	
 	•	Residential and business gateways	
 	•	Wi-Fi access points and associated powering and switching infrastructure	
 	•	enterprise Session Border Controllers (eSBC)	
 	•	Branch office and access routers	
 	•	Carrier Ethernet services termination devices	
 	•	VoIP media gateways	
 	•	ProServices	
 	•	Planning, engineering, program management, maintenance, installation and commissioning services to implement the customer devices solutions into consumer, small business and enterprise locations	
 	•	Other products and services that are generally applicable to customer devices	
Traditional & Other Products generally includes a mix of prior generation technologies’ products and services, as well as other products and services that do not fit within the Access & Aggregation or Customer Devices categories.
The Traditional & Other Products category includes products and services such as:
 	•	Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM) based aggregation systems and customer devices	
 	•	HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and customer networks	
 	•	Other products and services that do not fit within the Access & Aggregation and Customer Devices categories	
See Note 12 of Notes to Consolidated Financial Statements in this report for further information regarding these product categories.
Sales were $168.9 million and $473.8 million for the three and nine months ended September 30, 2016 compared to $158.1 million and $461.1 million for the three and nine months ended September 30, 2015. Our gross margin increased to 44.9% and 46.6% for the three and nine months ended September 30, 2016 from 44.7% and 44.3% for the three and nine months ended September 30, 2015. Our operating income margin increased to 6.0% and 6.4% for the three and nine months ended September 30, 2016 from 5.1% and 2.3% for the three and nine months ended September 30, 2015. Net income was $12.4 million and $27.7 million for the three and nine months ended September 30, 2016, compared to $7.1 million and $12.9 million for the three and nine months ended September 30, 2015. Our effective tax rate, excluding the tax impact of the bargain purchase gain, decreased to 25.9% and 34.0% for the three and nine months ended September 30, 2016 from 35.0% and 36.9% for the three and nine months ended September 30, 2015.  Earnings per share, assuming dilution, were $0.26 and $0.56 for the three and nine months ended September 30, 2016, compared to $0.14 and $0.25 for the three and nine months ended September 30, 2015.
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, including customer order activity and backlog. Backlog levels vary because of seasonal trends, the timing of customer projects and other factors that affect customer order lead times. Many of our customers require prompt delivery of products. This 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.
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Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, foreign currency exchange rate movements, increased competition, cust omer order patterns, changes in product and services mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs and announcements of new products by us or our competitors. Additionally, maintaini ng 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 this inventory may have an adverse effect on our business and operating resu lts. 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 negatively 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, 2015, filed on February 24, 2016 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, 2015, filed on February 24, 2016 with the SEC.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to 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 operations and financial condition, which is incorporated herein by reference.

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015
SALES
Our sales increased 6.8% from $158.1 million in the three months ended September 30, 2015 to $168.9 million in the three months ended September 30, 2016, and increased 2.8% from $461.1 million in the nine months ended September 30, 2015 to $473.8 million in the nine months ended September 30, 2016. The increase in sales for the three months ended September 30, 2016 is primarily attributable to a $17.2 million increase in our Access and Aggregation products, partially offset by a $3.8 million decrease in sales of our Traditional & Other products and a $2.6 million decrease in sales of our Customer Devices products. The increase in sales for the nine months ended September 30, 2016 is primarily attributable to a $8.9 million increase in sales of our Customer Devices products and a $7.7 million increase in sales of our Access & Aggregation products, partially offset by a $3.9 million decrease in sales of our Traditional & Other products.
Network Solutions sales decreased 1.3% from $138.1 million in the three months ended September 30, 2015 to $136.3 million in the three months ended September 30, 2016, and decreased 3.2% from $411.7 million in the nine months ended September 30, 2015 to $398.7 million in the nine months ended September 30, 2016. The decrease in sales for the three months ended September 30, 2016 is primarily attributable to a decrease in sales of Customer Devices products and Traditional & Other products, partially offset by an increase in Access & Aggregation products. The decrease in sales of our Customer Devices products is primarily attributable to decreased sales of our Ethernet products. The increase in sales of our Access and Aggregation products for the three months ended September 30, 2016 is primarily attributable to an increase in international hiX product sales. The decrease in sales for the nine months ended September 30, 2016 is primarily attributable to a decrease in sales of Access & Aggregation products and Traditional & Other products, partially offset by an increase in Customer Devices products. The decrease in sales of our Access and Aggregation products is primarily attributable to a decrease in international hiX product sales, partially offset by an increase in U.S. Total Access 5000 product sales. The increase in sales of our Customer Devices products is primarily attributable to increased sales of our FTTP ONT products and Ethernet products. While we expect that revenues from Traditional & Other products will continue to decline over time, these revenues may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.
 
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Services & Support sales increased 63.4 % from $ 20.0 million in the three months ended September 30, 2015 to $ 32.6 million in the three mo nths ended September   30, 2016, and increased 52.2 % from $ 49.3 million in the nine months ended September 30, 2015 to $ 75.1 milli on in the nine months ended September   30, 2016. The increase in sales for the three and nine months ended September 30, 2016 is primarily attributable to an increase in net work installation services for Access and A ggregation products.
International sales, which are included in the Network Solutions and Services & Support amounts discussed above, increased 6.7% from $38.6 million in the three months ended September 30, 2015 to $41.2 million in the three months ended September 30, 2016, and decreased 37.4% from $153.7 million in the nine months ended September 30, 2015 to $96.2 million in the nine months ended September 30, 2016. International sales, as a percentage of total sales, stayed consistent at 24.4% for the three months ended September 30, 2016 and 2015, and decreased from 33.3% for the nine months ended September 30, 2015 to 20.3% for the nine months ended September 30, 2016. Our international revenues are affected to a great extent by the timing of network upgrade projects at our larger European and Latin American customers and by changes in foreign exchange rates in territories in which we sell or products and services. Throughout 2016, our largest European customer has focused on completing network upgrade activities in regions outside of our footprint with them, and we currently expect this pattern to continue throughout the remainder of 2016. However, we expect that once current projects are completed, future network upgrades will resume in the second half of 2017 within our geographic footprint with this customer. Additionally, after reaching a cyclical high in the second quarter of 2014, the value of the Euro currency relative to the U.S. dollar declined significantly throughout the second half of 2014 and in 2015. Though the Euro-USD exchange rate appears to have stabilized since reaching a low in the fourth quarter of 2015, it remains approximately 20% below the highs of 2014. This decline in the value of the Euro throughout 2015 and into 2016 significantly reduced the U.S. dollar value of revenue from our European sales.
 
COST OF SALES
 
As a percentage of sales, cost of sales decreased from 55.3% in the three months ended September 30, 2015 to 55.1% in the three months ended September 30, 2016, and decreased from 55.7% in the nine months ended September 30, 2015 to 53.4% in the nine months ended September 30, 2016. The decrease in cost of sales as a percentage of sales for the three and nine months ended September 30, 2016 is primarily attributable to a regional revenue shift and customer and product mix, partially offset by a change in services mix, restructuring expenses and an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.
 
Network Solutions cost of sales, as a percent of that segment’s sales, decreased from 55.0% in the three months ended September 30, 2015 to 52.1% in the three months ended September 30, 2016, and decreased from 56.3% in the nine months ended September 30, 2015 to 50.9% in the nine months ended September 30, 2016. The decrease in cost of sales as a percent of that segment’s sales for the three and nine months ended September 30, 2016 is primarily attributable to a regional revenue shift and customer and product mix, partially offset by restructuring expenses and an increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.
 
Services & Support cost of sales, as a percent of that segment’s sales, increased from 57.4% in the three months ended September 30, 2015 to 67.7% in the three months ended September 30, 2016, and increased from 50.4% in the nine months ended September 30, 2015 to 67.0% in the nine months ended September 30, 2016. The increase in cost of sales as a percent of that segment’s sales for the three and nine months ended September 30, 2016 is primarily attributable to an increase in network installation services, which have higher costs, versus a greater mix of maintenance and support services in the prior periods, and in restructuring expenses.
 
An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differences between the recognition of cost reductions and the lowering of product selling prices.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 12.3% from $30.0 million in the three months ended September 30, 2015 to $33.7 million in the three months ended September 30, 2016, and increased 4.5% from $93.2 million in the nine months ended September 30, 2015 to $97.4 million in the nine months ended September 30, 2016. The increase in selling, general and administrative expenses for the three months ended September 30, 2016 is primarily attributable to an increase in variable incentive compensation expense, partially offset by a decrease in marketing expenses. The increase in selling, general and administrative expenses for the nine months ended September 30, 2016 is primarily attributable to an increase in variable incentive compensation expense and contract services, partially offset by a decrease in professional services and marketing expenses.
 
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As a percentage of sales, selling, general and administrative expenses increased from 19.0 % in the three months ended September   30, 2015 to 20. 0 % in the three months ended Septembe r   30, 2016, and increased from 20.2% in the nine months ended September 30, 2015 to 20.6% in the nine months ended September 30, 2016 . Selling, general and administrative expenses as a percentage of sales may fluctuate whenever there is a significant fluct uation in revenues for the periods being compared.
 
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 1.8% from $32.6 million in the three months ended September 30, 2015 to $32.0 million in the three months ended September 30, 2016, and decreased 7.8% from $100.6 million in the nine months ended September 30, 2015 to $92.7 million in the nine months ended September 30, 2016. The decrease in research and development expenses for the three months ended September 30, 2016 is primarily attributable to a decrease in compensation expense, lease expense and testing expense. The decrease in research and development expenses for the nine months ended September 30, 2016 is primarily attributable to a decrease in compensation expense, lease expense and testing expense, partially offset by an increase in contract services. The decrease in compensation expense and lease expense for the three and nine months ended September 30, 2016 was primary attributable to the consolidation of engineering resources that occurred during the second quarter of 2015.
As a percentage of sales, research and development expenses decreased from 20.6% in the three months ended September 30, 2015 to 18.9% in the three months ended September 30, 2016, and decreased from 21.8% in the nine months ended September 30, 2015 to 19.6% in the nine months ended September 30, 2016. Research and development expenses as a percentage of sales will fluctuate whenever there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.
We expect to continue to incur research and development expenses in connection with our new and existing products and our expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and product development efforts which provides for new product development, enhancement of existing products and product cost reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new product group.
 
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased 8.5%, or $0.1 million from the three months ended September 30, 2015 to the three months ended September 30, 2016, and was consistent at $2.7 million for the nine months ended September 30, 2016 and 2015. The increase in interest and dividend income for the three months ended September 30, 2016, is primarily attributable to an increase in the rate of return on fixed income investments.
 
INTEREST EXPENSE
Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.14 million and $0.15 million in the three months ended September 30, 2015 and 2016, respectively, and $0.4 million in the nine months ended September 30, 2015 and 2016, as we had no substantial change in our fixed-rate borrowing. See “Liquidity and Capital Resources” below for additional information on our revenue bond.
 
NET REALIZED INVESTMENT GAIN
Net realized investment gains decreased 36.1% from $2.1 million in the three months ended September 30, 2015 to $1.3 million in the three months ended September 30, 2016, and decreased 50.7% from $8.4 million in the nine months ended September 30, 2015 to $4.2 million in the nine months ended September 30, 2016. The decrease in realized investment gains for the three and nine months ended September 30, 2016 is primarily attributable to decreased gains from the sale of equity securities. See “Investing Activities” in “Liquidity and Capital Resources” below for additional information.
 
OTHER INCOME (EXPENSE), NET
Other income (expense), net, comprised primarily of miscellaneous income, gains and losses on foreign currency transactions, investment account management fees, and scrap raw material sales, changed from $0.1 million of income in the three months ended September 30, 2015 to $0.2 million of expense in the three months ended September 30, 2016, and changed from $0.8 million of expense in the nine months ended September 30, 2015 to $0.4 million of expense in the nine months ended September 30, 2016. The changes for the three and nine months ended September 30, 2016 is primarily attributable to foreign currency transactions.
 
INCOME TAXES
Our effective tax rate decreased from 36.9% in the nine months ended September 30, 2015 to 34.0%, excluding the tax impact of the bargain purchase gain, in the nine months ended September 30, 2016. The decrease in the effective tax rate between the two periods is primarily attributable to the research and development tax credit being made permanent.

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NET INCOME
As a result of the above factors, net income increased $5.3 million from $7.1 million in the three months ended September 30, 2015 to $12.4 million in the three months ended September 30, 2016, and increased $14.7 million from $12.9 million in the nine months ended September 30, 2015 to $27.7 million in the nine months ended September 30, 2016.
As a percentage of sales, net income increased from 4.5% in the three months ended September 30, 2015 to 7.4% in the three months ended September 30, 2016, and increased from 2.8% in the nine months ended September 30, 2015 to 5.8% in the nine months ended September 30, 2016.

 
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
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, shareholder dividends, 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 at least the next 12 months.
At September 30, 2016, cash on hand was $66.3 million and short-term investments were $55.5 million, which resulted in available short-term liquidity of $121.8 million, of which $45.3 million was held by our foreign subsidiaries. At December 31, 2015, cash on hand was $84.6 million and short-term investments were $34.4 million, which resulted in available short-term liquidity of $118.9 million, of which $38.9 million was held by our foreign subsidiaries. The increase in short-term liquidity from December 31, 2015 to September 30, 2016 is primarily attributable to shifts among available investment option tenures to provide funds for our short-term cash needs.
 
Operating Activities
Our working capital, which consists of current assets less current liabilities, increased 4.6% from $238.1 million as of December 31, 2015 to $249.2 million as of September 30, 2016. The increase in our working capital is primarily attributable to an increase in accounts receivable, partially offset by a decrease in other receivables and an increase in accounts payable, accrued expenses, and accrued wages and benefits. The quick ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities, decreased from 2.06 as of December 31, 2015 to 1.93 as of September 30, 2016. The decrease in the quick ratio is primarily attributable to an increase in accounts receivable, partially offset by an increase in accounts payable, accrued expenses, and accrued wages and benefits. The current ratio, defined as current assets divided by current liabilities, decreased from 3.57 as of December 31, 2015 to 3.16 as of September 30, 2016. The decrease in the current ratio is primarily attributable to an increase in accounts payable, accrued expenses, accrued wages and benefits, and a decrease in other receivables, partially offset by an increase in accounts receivable.
Net accounts receivable increased 41.6% from $71.9 million at December 31, 2015 to $101.8 million at September 30, 2016. Our allowance for doubtful accounts was $19 thousand at December 31, 2015 and nil at September 30, 2016. Quarterly accounts receivable days sales outstanding (DSO) increased from 48 days as of December 31, 2015 to 55 days as of September 30, 2016. The change in net accounts receivable is due to changes in customer mix and the timing of sales and collections during the quarter. Certain international customers can have longer payment terms than U.S. customers. Other receivables decreased from $19.3 million at December 31, 2015 to $12.2 million at September 30, 2016. The decrease in other receivables is primarily attributable to the timing of filing returns and collections of VAT receivables in our international subsidiaries. Other receivables will also fluctuate due to the timing of shipments and collections for materials supplied to our contract manufacturers during the quarter.
Quarterly inventory turnover increased from 3.3 turns as of December 31, 2015 to 4.1 turns at September 30, 2016. Inventory increased 4.9% from December 31, 2015 to September 30, 2016. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to services activity and seasonal cycles of our business, ensuring competitive lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.
Accounts payable increased 38.5% from $48.7 million at December 31, 2015 to $67.4 million at September 30, 2016. Accounts payable will fluctuate 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 $12.7 million and $7.8 million for the nine months ended September 30, 2016 and 2015, respectively. These expenditures were primarily used to purchase computer hardware, software, manufacturing and test equipment, and building improvements.
On September 13, 2016, we acquired key fiber access products, technologies and service relationships from subsidiaries of CommScope, Inc. for $0.9 million in cash. This acquisition will enhance our solutions for the cable MSO industry and will provide cable operators with the scalable solutions, services and support they require to compete in the multi-gigabit service delivery market. We recorded a bargain purchase gain of $3.6 million, net of income taxes, subject to customary working capital adjustments between the parties.
33

Our combined short-term and long-term investments increased $ 1.5 million from $232.4 million at December   31, 2015 to $ 233.9   million at September   30, 2016. This increase reflects funds available for investment provided by our operating ac tivities and stock option exercises by our employees , partially offset by our cash needs for capital expenditures, purchases of treasury stock, and shareholder dividends, as well as net realized and unrealized gains and losses and amortization of net premi ums on our combined investments.
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, 2016 these investments included corporate bonds of $60.0 million, municipal fixed-rate bonds of $17.6 million, asset-backed bonds of $22.6 million, mortgage/agency-backed bonds of $15.0 million, U.S. government bonds of $28.6 million, foreign government bonds of $6.4 million, and variable rate demand notes of $12.3 million. At December 31, 2015, these investments included corporate bonds of $57.6 million, municipal fixed-rate bonds of $26.4 million, asset-backed bonds of $19.2 million, mortgage/agency-backed bonds of $15.4 million, and U.S. government bonds of $35.4 million. As of September 30, 2016, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S. government bonds, foreign government bonds, and variable rate demand notes were classified as available-for-sale and had a combined duration of 1.0 years with an average Standard & Poor’s credit rating of AA-. 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.
Our long-term investments decreased 9.9% from $198.0 million at December 31, 2015 to $178.4 million at September 30, 2016. Long-term investments at September 30, 2016 and December 31, 2015 included an investment in a certificate of deposit of $28.9 and $30.0 million, respectively, which serves as collateral for our revenue bond. See “Debt” below for additional information. We have various equity investments included in long-term investments at a cost of $27.0 million and $31.6 million, and with a fair value of $27.4 million and $34.3 million, at September 30, 2016 and December 31, 2015, respectively.
Long-term investments at September 30, 2016 and December 31, 2015 also included $13.8 million and $12.8 million, respectively, related to our deferred compensation plans, and $1.2 million and $1.3 million, respectively, of other investments carried at cost, consisting of interests in two private equity funds and an investment in a privately held telecommunications equipment manufacturer.
We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis. We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary, recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment, we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive months. We then evaluate the individual security based on the previously identified factors to determine the amount of the write-down, if any. For the three and nine months ended September 30, 2016 and 2015, other-than-temporary impairment charges were not significant.
 
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, 2016, we paid dividends totaling $13.2 million.
Debt
We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond) which totaled $28.9 million at September 30, 2016 and December 31, 2015. At September 30, 2016, the estimated fair value of the Bond was approximately $29.3 million, based on a debt security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. Included in long-term investments are restricted funds in the amount of $28.9 million at September 30, 2016 and $30.0 million at December 31, 2015, 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 2% per annum. In conjunction with this program, we are eligible to receive certain economic incentives from the state of Alabama that reduce the amount of payroll withholdings we are required to remit to the state for those employment positions that qualify under this program. We are required to make payments in the amounts necessary to pay the interest on the amounts currently outstanding. It is our intent to make annual principal payments in addition to the interest amounts that are due. In connection with this decision, $1.0 million of the Bond has been classified as a current liability in accounts payable in the Consolidated Balance Sheet at September 30, 2016.
34

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 50.0 million shares of our common stock, which will be implemented through open market or private purchases from time to time as conditions warrant. During the nine months ended September 30, 2016, we repurchased 1.2 million shares of our common stock at an average price of $18.34 per share. As of September 30, 2016, we have the authority to purchase an additional 4.6 million shares of our common stock under the current plans approved by the Board of Directors.
Stock Option Exercises
We issued 0.1 million shares of treasury stock during the nine months ended September 30, 2016 to accommodate employee stock option exercises. The stock options had exercise prices ranging from $15.29 to $18.97. We received proceeds totaling $1.1 million from the exercise of these stock options during the nine months ended September 30, 2016.
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, 2016, 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, 2015 filed on February 24, 2016 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 $8.4 million as of September 30, 2016, of which $7.7 million has been applied to these commitments.

35

 ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates, foreign currency 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, variable rate demand notes and municipal money market instruments denominated in U.S. dollars. Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.
We 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, 2016, $64.4 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.
As of September 30, 2016, approximately $178.8 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) for an entire year, while all other variables remain constant. At September 30, 2016, we held $78.1 million of cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bps decline in interest rates as of September 30, 2016 would reduce annualized interest income on our cash and investments by approximately $0.4 million. In addition, we held $100.7 million of fixed-rate bonds whose fair values may be directly affected by a change in interest rates. A hypothetical 50 bps increase in interest rates as of September 30, 2016 would reduce the fair value of our fixed-rate bonds by approximately $0.5 million.
As of September 30, 2015, approximately $182.6 million of our cash and investments was subject to being directly affected by changes in interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50 bps for the entire year, while all other variables remain constant. A hypothetical 50 bps decline in interest rates as of September 30, 2015 would have reduced annualized interest income on our cash, money market instruments and variable rate demand notes by approximately $0.4 million. In addition, a hypothetical 50 bps increase in interest rates as of September 30, 2015 would have reduced the fair value of our municipal fixed-rate bonds and corporate bonds by approximately $0.6 million.
We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, expenses, and assets and liabilities held in non-functional currencies related to our foreign subsidiaries. Our primary exposures to foreign currency exchange rates are with our Mexican subsidiary, whose functional currency is the United States dollar, our German subsidiary, whose functional currency is the Euro, and our Australian subsidiary, whose functional currency is the Australian dollar. We are exposed to changes in foreign currency exchange rates to the extent of our German subsidiary’s use of contract manufacturers and raw material suppliers whom we predominately pay in U.S. dollars. As a result, changes in currency exchange rates could cause variations in gross margin in the products that we sell in the EMEA region.
We have certain international customers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates used to invoice such customers versus the functional currency of the entity billing such customers may adversely affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures, we may enter into various derivative transactions, when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. All non-functional currencies billed would result in a combined hypothetical gain or loss of $0.1 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. Any gain or loss would be partially mitigated by these derivative instruments.
As of September 30, 2016, we had no material contracts, other than accounts receivable, accounts payable, and loans to a subsidiary, denominated in foreign currencies. As of September 30, 2016, we had no forward contracts outstanding.
For further information about the fair value of our available-for-sale investments and our derivative and hedging activities as of September 30, 2016, see Notes 6 and 7 of Notes to Consolidated Financial Statements.
36

 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.
 
37

PART I  I. OTHER INFORMATION
 ITEM 1A. RISK FACTORS
A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2015.
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth repurchases of our 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	 	 	Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs	 	
July 1, 2016 – July 31, 2016	 	 	247,764	 	 	 	18.00	 	 	 	247,764	 	 	 	4,681,188	 	
August 1, 2016 – August 31, 2016	 	 	104,784	 	 	 	17.92	 	 	 	104,784	 	 	 	4,576,404	 	
September 1, 2016 – September 30, 2016	 	 	-	 	 	 	-	 	 	 	-	 	 	 	4,576,404	 	
Total	 	 	352,548	 	 	 	 	 	 	 	352,548	 	 	 	 	 	
 
On July 14, 2015, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock (bringing the total shares authorized for repurchase to 50.0 million). This authorization will be implemented through open market or private purchases from time to time as conditions warrant.

38

 ITEM 6. EXHIBITS
Exhibits.
 
Exhibit No.	 	Description	
 	 	 	
 31	 	Rule 13a-14(a)/15d-14(a) Certifications	
 	 	 	
 32	 	Section 1350 Certifications	
 	 	 	
101.INS	 	XBRL Instance Document	
 	 	 	
101.SCH	 	XBRL Taxonomy Extension Schema Document	
 	 	 	
101.CAL	 	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	 	
101.LAB	 	XBRL Taxonomy Extension Labels Linkbase Document	
 	 	 	
101.PRE	 	XBRL Taxonomy Extension Presentation Linkbase Document	
 	 	 	
101.DEF	 	XBRL Taxonomy Extension Definition Linkbase Document	

 
39

 SIGNA TURE
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 8, 2016	 	/s/ Roger D. Shannon	
 	 	Roger D. Shannon	
 	 	Senior Vice President of Finance,	
 	 	Chief Financial Officer,	
 	 	Corporate Treasurer and Secretary	
 	 	(Principal Financial Officer)	

40

 EXHIBIT INDEX
 
Exhibit No.	 	Description	
 	 	 	
 31	 	Rule 13a-14(a)/15d-14(a) Certifications	
 	 	 	
 32	 	Section 1350 Certifications	
 	 	 	
101.INS	 	XBRL Instance Document	
 	 	 	
101.SCH	 	XBRL Taxonomy Extension Schema Document	
 	 	 	
101.CAL	 	XBRL Taxonomy Extension Calculation Linkbase Document	
 	 	 	
101.LAB	 	XBRL Taxonomy Extension Labels Linkbase Document	
 	 	 	
101.PRE	 	XBRL Taxonomy Extension Presentation Linkbase Document	
 	 	 	
101.DEF	 	XBRL Taxonomy Extension Definition Linkbase Document	

 
41

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 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 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 8, 2016

/s/ Thomas R. Stanton	
Thomas R. Stanton	
Chief Executive Officer and Chairman of the Board	

 

CERTIFICATIONS
I, Roger D. Shannon, 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 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 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 8, 2016

/s/ Roger D. Shannon	
Roger D. Shannon	
Senior Vice President of Finance,	
Chief Financial Officer,	
Corporate Treasurer and Secretary	

 
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, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas R. Stanton, Chief Executive Officer and Chairman of the Board 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 8, 2016

 

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, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger D. Shannon, Senior Vice President of Finance, Chief Financial Officer, Corporate Secretary and Treasurer 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/ Roger D. Shannon	
Roger D. Shannon	
Senior Vice President of Finance,	
Chief Financial Officer,	
Corporate Secretary and Treasurer	
November 8, 2016