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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. FINANCIAL 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): 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.  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 assets 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 resulting 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, 2015.  This supplemental pro forma information does not purport to be indicative of what would have occurred had the acquisition been completed on January 1, 2015, nor is it indicative of any future results. Aside from revising the 2015 pre-tax income for the effect of the bargain purchase gain, there 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 the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.

The weighted-average assumptions and value of options granted 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.