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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2016

OR

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from             to            

Commission File Number 0-24612

 

ADTRAN, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

63-0918200

(State of Incorporation)

(I.R.S. Employer

 

Identification No.)

901 Explorer Boulevard, Huntsville, Alabama 35806-2807

(Address of principal executive offices, including zip code)

(256) 963-8000

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the Registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

x

 

Accelerated Filer

o

Non accelerated Filer

o

 

Smaller Reporting Company

o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date:

 

Class

 

Outstanding at July22, 2016

Common Stock, $.01 Par Value

 

48,398,992 Shares

 

 

 

 

 


 

ADTRAN, Inc.

Quarterly Report on Form 10-Q

For the Three and Six Months Ended June 30, 2016

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 – (Unaudited)

 

3

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 – (Unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 – (Unaudited)

 

5

 

 

Consolidated Statements of Cash Flows for the six months ended June 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

 

26

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

4

 

Controls and Procedures

 

35

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

1A

 

Risk Factors

 

36

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

6

 

Exhibits

 

37

 

 

 

 

 

 

 

SIGNATURE

 

38

 

 

 

 

 

 

 

EXHIBIT INDEX

 

39

 

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. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADTRAN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,914

 

 

$

84,550

 

Short-term investments

 

 

50,867

 

 

 

34,396

 

Accounts receivable, less allowance for doubtful accounts of $19 at June 30, 2016 and

   December 31, 2015

 

 

89,386

 

 

 

71,917

 

Other receivables

 

 

11,676

 

 

 

19,321

 

Income tax receivable, net

 

 

2,405

 

 

 

-

 

Inventory, net

 

 

86,936

 

 

 

91,533

 

Prepaid expenses and other current assets

 

 

13,563

 

 

 

10,145

 

Deferred tax assets, net

 

 

18,488

 

 

 

18,924

 

Total Current Assets

 

 

344,235

 

 

 

330,786

 

Property, plant and equipment, net

 

 

74,115

 

 

 

73,233

 

Deferred tax assets, net

 

 

19,127

 

 

 

18,091

 

Goodwill

 

 

3,492

 

 

 

3,492

 

Other assets

 

 

9,340

 

 

 

9,276

 

Long-term investments

 

 

186,249

 

 

 

198,026

 

Total Assets

 

$

636,558

 

 

$

632,904

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

59,211

 

 

$

48,668

 

Unearned revenue

 

 

15,982

 

 

 

16,615

 

Accrued expenses

 

 

12,126

 

 

 

12,108

 

Accrued wages and benefits

 

 

15,702

 

 

 

12,857

 

Income tax payable, net

 

 

-

 

 

 

2,395

 

Total Current Liabilities

 

 

103,021

 

 

 

92,643

 

Non-current unearned revenue

 

 

6,437

 

 

 

7,965

 

Other non-current liabilities

 

 

25,476

 

 

 

24,236

 

Bonds payable

 

 

27,900

 

 

 

27,900

 

Total Liabilities

 

 

162,834

 

 

 

152,744

 

Commitments and contingencies (see Note 13)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share; 200,000 shares authorized; 79,652 shares

    issued and 48,712 shares outstanding at June 30, 2016 and 79,652 shares issued

    and 49,558 shares outstanding at December 31, 2015

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

249,851

 

 

 

246,879

 

Accumulated other comprehensive loss

 

 

(8,695

)

 

 

(8,969

)

Retained earnings

 

 

912,536

 

 

 

906,772

 

Less treasury stock at cost: 30,940 and 30,094 shares at June 30, 2016 and

   December 31, 2015, respectively

 

 

(680,765

)

 

 

(665,319

)

Total Stockholders’ Equity

 

 

473,724

 

 

 

480,160

 

Total Liabilities and Stockholders’ Equity

 

$

636,558

 

 

$

632,904

 

 

See notes to consolidated financial statements

3


 

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

138,549

 

 

$

144,098

 

 

$

262,432

 

 

$

273,603

 

Services

 

 

24,152

 

 

 

16,040

 

 

 

42,473

 

 

 

29,370

 

Total Sales

 

 

162,701

 

 

 

160,138

 

 

 

304,905

 

 

 

302,973

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

67,844

 

 

 

84,210

 

 

 

131,917

 

 

 

155,770

 

Services

 

 

15,902

 

 

 

7,682

 

 

 

28,239

 

 

 

13,394

 

Total Cost of Sales

 

 

83,746

 

 

 

91,892

 

 

 

160,156

 

 

 

169,164

 

Gross Profit

 

 

78,955

 

 

 

68,246

 

 

 

144,749

 

 

 

133,809

 

Selling, general and administrative expenses

 

 

32,866

 

 

 

32,123

 

 

 

63,651

 

 

 

63,187

 

Research and development expenses

 

 

31,277

 

 

 

35,479

 

 

 

60,765

 

 

 

68,015

 

Operating Income

 

 

14,812

 

 

 

644

 

 

 

20,333

 

 

 

2,607

 

Interest and dividend income

 

 

927

 

 

 

908

 

 

 

1,782

 

 

 

1,841

 

Interest expense

 

 

(142

)

 

 

(149

)

 

 

(287

)

 

 

(297

)

Net realized investment gain

 

 

1,110

 

 

 

3,255

 

 

 

2,838

 

 

 

6,370

 

Other expense, net

 

 

(251

)

 

 

(547

)

 

 

(132

)

 

 

(900

)

Income before provision for income taxes

 

 

16,456

 

 

 

4,111

 

 

 

24,534

 

 

 

9,621

 

Provision for income taxes

 

 

(6,228

)

 

 

(1,567

)

 

 

(9,292

)

 

 

(3,760

)

Net Income

 

$

10,228

 

 

$

2,544

 

 

$

15,242

 

 

$

5,861

 

Weighted average shares outstanding – basic

 

 

48,831

 

 

 

51,822

 

 

 

49,026

 

 

 

52,607

 

Weighted average shares outstanding – diluted

 

 

49,048

 

 

 

51,917

 

 

 

49,218

 

 

 

52,742

 

Earnings per common share – basic

 

$

0.21

 

 

$

0.05

 

 

$

0.31

 

 

$

0.11

 

Earnings per common share – diluted

 

$

0.21

 

 

$

0.05

 

 

$

0.31

 

 

$

0.11

 

Dividend per share

 

$

0.09

 

 

$

0.09

 

 

$

0.18

 

 

$

0.18

 

 

See notes to consolidated financial statements

 

 

4


 

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Income

 

$

10,228

 

 

$

2,544

 

 

$

15,242

 

 

$

5,861

 

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized losses on available-for-sale securities

 

 

(165

)

 

 

(1,783

)

 

 

(420

)

 

 

(2,286

)

Defined benefit plan adjustments

 

 

22

 

 

 

72

 

 

 

67

 

 

 

140

 

Foreign currency translation

 

 

(601

)

 

 

872

 

 

 

627

 

 

 

(2,446

)

Other Comprehensive Income (Loss), net of tax

 

 

(744

)

 

 

(839

)

 

 

274

 

 

 

(4,592

)

Comprehensive Income, net of tax

 

$

9,484

 

 

$

1,705

 

 

$

15,516

 

 

$

1,269

 

 

See notes to consolidated financial statements

 

 

5


 

ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

15,242

 

 

$

5,861

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,689

 

 

 

7,256

 

Amortization of net premium on available-for-sale investments

 

 

376

 

 

 

1,578

 

Net realized investment gain

 

 

(2,838

)

 

 

(6,370

)

Net loss on disposal of property, plant and equipment

 

 

5

 

 

 

160

 

Stock-based compensation expense

 

 

3,109

 

 

 

3,114

 

Deferred income taxes

 

 

(354

)

 

 

(1,743

)

Tax benefit from stock option exercises

 

 

-

 

 

 

(23

)

Excess tax benefits from stock-based compensation arrangements

 

 

-

 

 

 

38

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(17,192

)

 

 

(2,003

)

Other receivables

 

 

7,876

 

 

 

(119

)

Inventory

 

 

4,938

 

 

 

(14,254

)

Prepaid expenses and other assets

 

 

(4,263

)

 

 

(1,433

)

Accounts payable

 

 

10,354

 

 

 

30,938

 

Accrued expenses and other liabilities

 

 

1,474

 

 

 

2,175

 

Income tax payable/receivable, net

 

 

(4,799

)

 

 

(3,961

)

Net cash provided by operating activities

 

 

20,617

 

 

 

21,214

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(6,679

)

 

 

(5,392

)

Proceeds from disposals of property, plant and equipment

 

 

-

 

 

 

8

 

Proceeds from sales and maturities of available-for-sale investments

 

 

109,993

 

 

 

120,422

 

Purchases of available-for-sale investments

 

 

(112,903

)

 

 

(62,626

)

Net cash provided by (used in) investing activities

 

 

(9,589

)

 

 

52,412

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

541

 

 

 

833

 

Purchases of treasury stock

 

 

(16,579

)

 

 

(49,307

)

Dividend payments

 

 

(8,860

)

 

 

(9,509

)

Excess tax benefits from stock-based compensation arrangements

 

 

-

 

 

 

(38

)

Net cash used in financing activities

 

 

(24,898

)

 

 

(58,021

)

Net increase (decrease) in cash and cash equivalents

 

 

(13,870

)

 

 

15,605

 

Effect of exchange rate changes

 

 

234

 

 

 

(1,829

)

Cash and cash equivalents, beginning of period

 

 

84,550

 

 

 

73,439

 

Cash and cash equivalents, end of period

 

$

70,914

 

 

$

87,215

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

554

 

 

$

270

 

 

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): Simplifying the Measurement of Inventory (ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We do not believe the adoption of ASU 2015-05 will have a material impact on our financial position, results of operations and cash flows.

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

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

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

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

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

 

 

2. INCOME TAXES

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

 

 

 

 

8


 

3. PENSION BENEFIT PLAN

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

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Service cost

 

$

310

 

 

$

324

 

 

$

607

 

 

$

664

 

Interest cost

 

 

184

 

 

 

152

 

 

 

360

 

 

 

311

 

Expected return on plan assets

 

 

(271

)

 

 

(250

)

 

 

(530

)

 

 

(511

)

Amortization of actuarial losses

 

 

45

 

 

 

100

 

 

 

88

 

 

 

205

 

Net periodic pension cost

 

$

268

 

 

$

326

 

 

$

525

 

 

$

669

 

 

 

4. STOCK-BASED COMPENSATION

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Stock-based compensation expense included in cost of

   sales

 

$

95

 

 

$

53

 

 

$

194

 

 

$

143

 

Selling, general and administrative expense

 

 

788

 

 

 

723

 

 

 

1,557

 

 

 

1,414

 

Research and development expense

 

 

668

 

 

 

699

 

 

 

1,358

 

 

 

1,557

 

Stock-based compensation expense included in operating

   expenses

 

 

1,456

 

 

 

1,422

 

 

 

2,915

 

 

 

2,971

 

Total stock-based compensation expense

 

 

1,551

 

 

 

1,475

 

 

 

3,109

 

 

 

3,114

 

Tax benefit for expense associated with non-qualified

   options

 

 

(213

)

 

 

(222

)

 

 

(425

)

 

 

(402

)

Total stock-based compensation expense, net of tax

 

$

1,338

 

 

$

1,253

 

 

$

2,684

 

 

$

2,712

 

 

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

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

 

 

 

Three and Six Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Expected volatility

 

 

34.74

%

 

 

38.75

%

Risk-free interest rate

 

 

1.33

%

 

 

1.46

%

Expected dividend yield

 

 

1.91

%

 

 

1.60

%

Expected life (in years)

 

 

6.26

 

 

 

6.47

 

Weighted-average estimated value

 

$

5.42

 

 

$

7.63

 

 

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

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

9


 

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

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

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

 

(In thousands, except per share amounts)

 

Number of

Options

 

 

Weighted Avg.

Exercise Price

 

 

Weighted Avg.

Remaining

Contractual

Life In Years

 

 

Aggregate

Intrinsic Value

 

Options outstanding, December 31, 2015

 

 

7,108

 

 

$

21.97

 

 

 

6.42

 

 

$

3,284

 

Options granted

 

 

1

 

 

$

18.83

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(33

)

 

$

16.58

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(42

)

 

$

17.88

 

 

 

 

 

 

 

 

 

Options expired

 

 

(54

)

 

$

25.65

 

 

 

 

 

 

 

 

 

Options outstanding, June 30, 2016

 

 

6,980

 

 

$

22.00

 

 

 

5.93

 

 

$

6,522

 

Options vested and expected to vest, June 30, 2016

 

 

6,865

 

 

$

22.09

 

 

 

5.88

 

 

$

6,260

 

Options exercisable, June 30, 2016

 

 

4,420

 

 

$

24.35

 

 

 

4.44

 

 

$

2,298

 

 

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

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

 

10


 

5. INVESTMENTS

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

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,516

 

 

$

1,628

 

 

$

(49

)

 

$

13,095

 

Corporate bonds

 

 

54,044

 

 

 

149

 

 

 

(61

)

 

 

54,132

 

Municipal fixed-rate bonds

 

 

16,889

 

 

 

59

 

 

 

-

 

 

 

16,948

 

Asset-backed bonds

 

 

23,526

 

 

 

53

 

 

 

(6

)

 

 

23,573

 

Mortgage/Agency-backed bonds

 

 

19,214

 

 

 

44

 

 

 

(39

)

 

 

19,219

 

U.S. Government bonds

 

 

33,498

 

 

 

308

 

 

 

-

 

 

 

33,806

 

Variable rate demand notes

 

 

11,740

 

 

 

-

 

 

 

-

 

 

 

11,740

 

Marketable equity securities

 

 

32,948

 

 

 

1,901

 

 

 

(1,478

)

 

 

33,371

 

Available-for-sale securities held at fair value

 

$

203,375

 

 

$

4,142

 

 

$

(1,633

)

 

$

205,884

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,232

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

237,116

 

 

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

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Carrying

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Deferred compensation plan assets

 

$

11,325

 

 

$

1,575

 

 

$

(66

)

 

$

12,834

 

Corporate bonds

 

 

58,328

 

 

 

20

 

 

 

(734

)

 

 

57,614

 

Municipal fixed-rate bonds

 

 

26,414

 

 

 

28

 

 

 

(18

)

 

 

26,424

 

Asset-backed bonds

 

 

19,281

 

 

 

2

 

 

 

(44

)

 

 

19,239

 

Mortgage/Agency-backed bonds

 

 

15,463

 

 

 

1

 

 

 

(91

)

 

 

15,373

 

U.S. Government bonds

 

 

35,646

 

 

 

-

 

 

 

(248

)

 

 

35,398

 

Marketable equity securities

 

 

31,643

 

 

 

4,301

 

 

 

(1,693

)

 

 

34,251

 

Available-for-sale securities held at fair value

 

$

198,100

 

 

$

5,927

 

 

$

(2,894

)

 

$

201,133

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,289

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

232,422

 

 

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

 

(In thousands)

 

Corporate

bonds

 

 

Municipal

fixed-rate

bonds

 

 

Asset-

backed

bonds

 

 

Mortgage /

Agency-

backed bonds

 

 

U.S. Government

bonds

 

Less than one year

 

$

20,729

 

 

$

10,473

 

 

$

-

 

 

$

4,972

 

 

$

2,953

 

One to two years

 

 

24,884

 

 

 

4,488

 

 

 

822

 

 

 

2,569

 

 

 

7,481

 

Two to three years

 

 

6,099

 

 

 

1,536

 

 

 

9,077

 

 

 

2,058

 

 

 

11,344

 

Three to five years

 

 

2,420

 

 

 

451

 

 

 

10,991

 

 

 

-

 

 

 

12,028

 

Five to ten years

 

 

-

 

 

 

-

 

 

 

2,506

 

 

 

1,036

 

 

 

-

 

More than ten years

 

 

-