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EX-32 - EX-32 - ADTRAN INCadtn-ex32_7.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

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: 000-24612

 

ADTRAN, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

63-0918200

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

901 Explorer Boulevard

Huntsville, Alabama

35806-2807

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (256) 963-8000

 

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 12 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 Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of April 20, 2017, the registrant had 48,323,754 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 

 


 

ADTRAN, Inc.

Quarterly Report on Form 10-Q

For the three months ended March 31, 2017

Table of Contents

 

Item

Number

 

 

 

Page

Number

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

1

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 – (Unaudited)

 

3

 

 

Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 – (Unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 – (Unaudited)

 

5

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 – (Unaudited)

 

6

 

 

Notes to Consolidated Financial Statements – (Unaudited)

 

7

2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

3

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

4

 

Controls and Procedures

 

31

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

1A

 

Risk Factors

 

32

2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

6

 

Exhibits

 

33

 

 

 

 

 

 

 

SIGNATURE

 

34

 

 

 

 

 

 

 

EXHIBIT INDEX

 

35

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, 2016 filed on February 24, 2017 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.

 


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADTRAN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

72,558

 

 

$

79,895

 

Short-term investments

 

 

52,458

 

 

 

43,188

 

Accounts receivable, less allowance for doubtful accounts of $— at March 31, 2017

   and December 31, 2016

 

 

85,396

 

 

 

92,346

 

Other receivables

 

 

13,398

 

 

 

15,137

 

Income tax receivable, net

 

 

 

 

 

760

 

Inventory, net

 

 

112,774

 

 

 

105,117

 

Prepaid expenses and other current assets

 

 

17,816

 

 

 

16,459

 

Total Current Assets

 

 

354,400

 

 

 

352,902

 

Property, plant and equipment, net

 

 

83,514

 

 

 

84,469

 

Deferred tax assets, net

 

 

39,085

 

 

 

38,036

 

Goodwill

 

 

3,492

 

 

 

3,492

 

Other assets

 

 

12,274

 

 

 

12,234

 

Long-term investments

 

 

174,413

 

 

 

176,102

 

Total Assets

 

$

667,178

 

 

$

667,235

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

74,300

 

 

$

77,342

 

Unearned revenue

 

 

16,969

 

 

 

16,326

 

Accrued expenses

 

 

15,035

 

 

 

12,434

 

Accrued wages and benefits

 

 

12,199

 

 

 

20,433

 

Income tax payable, net

 

 

3,126

 

 

 

 

Total Current Liabilities

 

 

121,629

 

 

 

126,535

 

Non-current unearned revenue

 

 

5,675

 

 

 

6,333

 

Other non-current liabilities

 

 

30,861

 

 

 

28,050

 

Bonds payable

 

 

26,800

 

 

 

26,800

 

Total Liabilities

 

 

184,965

 

 

 

187,718

 

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 48,321 shares outstanding at March 31, 2017 and

  79,652 shares issued and 48,472 shares outstanding at December 31, 2016

 

 

797

 

 

 

797

 

Additional paid-in capital

 

 

254,965

 

 

 

252,957

 

Accumulated other comprehensive loss

 

 

(9,477

)

 

 

(12,188

)

Retained earnings

 

 

923,116

 

 

 

921,942

 

Less treasury stock at cost: 31,331 and 31,180 shares at March 31, 2017 and

   December 31, 2016, respectively

 

 

(687,188

)

 

 

(683,991

)

Total Stockholders’ Equity

 

 

482,213

 

 

 

479,517

 

Total Liabilities and Stockholders’ Equity

 

$

667,178

 

 

$

667,235

 

 

See notes to consolidated financial statements

3


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Sales

 

 

 

 

 

 

 

 

Products

 

$

143,597

 

 

$

123,883

 

Services

 

 

26,682

 

 

 

18,321

 

Total Sales

 

 

170,279

 

 

 

142,204

 

Cost of sales

 

 

 

 

 

 

 

 

Products

 

 

76,659

 

 

 

64,073

 

Services

 

 

19,905

 

 

 

12,337

 

Total Cost of Sales

 

 

96,564

 

 

 

76,410

 

Gross Profit

 

 

73,715

 

 

 

65,794

 

Selling, general and administrative expenses

 

 

34,767

 

 

 

30,785

 

Research and development expenses

 

 

31,916

 

 

 

29,488

 

Operating Income

 

 

7,032

 

 

 

5,521

 

Interest and dividend income

 

 

933

 

 

 

855

 

Interest expense

 

 

(141

)

 

 

(145

)

Net realized investment gain

 

 

470

 

 

 

1,728

 

Other income, net

 

 

51

 

 

 

119

 

Income before provision for income taxes

 

 

8,345

 

 

 

8,078

 

Provision for income taxes

 

 

(1,694

)

 

 

(3,064

)

Net Income

 

$

6,651

 

 

$

5,014

 

Weighted average shares outstanding – basic

 

 

48,430

 

 

 

49,220

 

Weighted average shares outstanding – diluted

 

 

48,939

 

 

 

49,389

 

Earnings per common share – basic

 

$

0.14

 

 

$

0.10

 

Earnings per common share – diluted

 

$

0.14

 

 

$

0.10

 

Dividend per share

 

$

0.09

 

 

$

0.09

 

 

See notes to consolidated financial statements

 

 

4


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net Income

 

$

6,651

 

 

$

5,014

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale securities

 

 

1,335

 

 

 

(255

)

Net unrealized gains on cash flow hedges

 

 

79

 

 

 

 

Defined benefit plan adjustments

 

 

55

 

 

 

45

 

Foreign currency translation

 

 

1,242

 

 

 

1,228

 

Other Comprehensive Income, net of tax

 

 

2,711

 

 

 

1,018

 

Comprehensive Income, net of tax

 

$

9,362

 

 

$

6,032

 

 

See notes to consolidated financial statements

 

 

5


ADTRAN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

6,651

 

 

$

5,014

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,323

 

 

 

3,347

 

Amortization of net premium on available-for-sale investments

 

 

124

 

 

 

220

 

Net realized gain on long-term investments

 

 

(470

)

 

 

(1,728

)

Net (gain) loss on disposal of property, plant and equipment

 

 

(16

)

 

 

3

 

Stock-based compensation expense

 

 

1,883

 

 

 

1,558

 

Deferred income taxes

 

 

(1,947

)

 

 

435

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

7,247

 

 

 

4,752

 

Other receivables

 

 

1,884

 

 

 

10,200

 

Inventory

 

 

(7,399

)

 

 

163

 

Prepaid expenses and other assets

 

 

(2,413

)

 

 

(3,083

)

Accounts payable

 

 

(1,713

)

 

 

(6,520

)

Accrued expenses and other liabilities

 

 

(3,166

)

 

 

902

 

Income tax payable/receivable, net

 

 

4,049

 

 

 

413

 

Net cash provided by operating activities

 

 

9,037

 

 

 

15,676

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(3,872

)

 

 

(3,166

)

Proceeds from disposals of property, plant and equipment

 

 

16

 

 

 

 

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

 

 

24,471

 

 

 

60,586

 

Purchases of available-for-sale investments

 

 

(29,517

)

 

 

(52,053

)

Net cash provided by (used in) investing activities

 

 

(8,902

)

 

 

5,367

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

1,377

 

 

 

247

 

Purchases of treasury stock

 

 

(5,559

)

 

 

(11,003

)

Dividend payments

 

 

(4,369

)

 

 

(4,453

)

Net cash used in financing activities

 

 

(8,551

)

 

 

(15,209

)

Net increase (decrease) in cash and cash equivalents

 

 

(8,416

)

 

 

5,834

 

Effect of exchange rate changes

 

 

1,079

 

 

 

1,225

 

Cash and cash equivalents, beginning of period

 

 

79,895

 

 

 

84,550

 

Cash and cash equivalents, end of period

 

$

72,558

 

 

$

91,609

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

509

 

 

$

485

 

 

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, 2016 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, 2016, filed on February 24, 2017 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; 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; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which is intended to clarify the Codification or to correct unintended application of guidance. 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. We are continuing to evaluate the potential impact of these ASUs, and we believe the most significant potential impact relates to our accounting for software license and installation services revenues. We do not believe there will be a significant impact to product or maintenance revenues.

7


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. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the measurement of goodwill by eliminating step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after January 1, 2017. The amendments should be applied prospectively. We are currently evaluating whether to early adopt ASU 2017-04, but we do not expect it will have a material impact on our financial position, results of operations or cash flows.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statements of earnings to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in non-operating expenses. ASU 2017-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We do not expect ASU 2017-07 will have a material impact on our financial position, results of operations or cash flows.

During the first quarter of 2017, we adopted the following accounting standards, which had no material effect on our financial position, results of operations or cash flows:

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 adopted ASU 2015-05 in the first quarter of 2017, and there was no material impact on our financial position, results of operations or cash flows.

In January 2017, we adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result, beginning in the first quarter of 2017, we began recognizing all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. The treatment of forfeitures has changed as we have elected to discontinue our past practice of estimating forfeitures and now account for forfeitures as they occur. As a result, we recorded an increase in additional paid in capital of $0.1 million, a charge to beginning retained earnings of $0.1 million, and an increase in the deferred tax assets related to non-qualified stock options and RSUs of $10 thousand. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows within operating activities. We elected to retrospectively apply the changes in presentation to the statements of cash flows and no longer classify excess tax benefits as a financing activity, which had no effect on our cash flows for the three months ended March 31, 2016. There was no material impact on our financial position, results of operations or cash flows as a result of these changes.


8


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.

 

We recorded a bargain purchase gain of $3.5 million during the third quarter of 2016, net of income taxes, subject to customary working capital adjustments between the parties. The bargain purchase gain of $3.5 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 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

$

3,131

 

  Property, plant and equipment

 

352

 

  Intangible assets

 

4,700

 

Total assets acquired

 

8,183

 

 

 

 

 

Liabilities

 

 

 

  Accounts payable

 

(1,250

)

  Warranty payable

 

(61

)

  Accrued wages and benefits

 

(122

)

  Deferred income taxes

 

(2,265

)

Total liabilities assumed

 

(3,698

)

 

 

 

 

Total net assets

 

4,485

 

  Gain on bargain purchase of a business, net of tax

 

(3,542

)

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

 

 

 

6.0

 

Developed technology

 

800

 

 

 

10.0

 

License

 

500

 

 

 

1.3

 

Patent

 

500

 

 

 

7.3

 

Non-compete

 

200

 

 

 

2.3

 

Trade name

 

100

 

 

 

2.0

 

Total

$

4,700

 

 

 

 

 

 


9


The following unaudited supplemental pro forma information presents the financial results as if the acquisition had occurred on January 1, 2015. This unaudited 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 net income for the effect of the bargain purchase gain, there were no material, non-recurring adjustments to this unaudited pro forma information.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2016

 

 

2015

 

Pro forma revenue

 

$

143,354

 

 

$

143,980

 

Pro forma net income

 

$

4,884

 

 

$

6,418

 

 

For the three months ended March 31, 2017, we incurred acquisition and integration related expenses and amortization of acquired intangibles of $0.7 million related to this acquisition.

 

3. INCOME TAXES

Our effective tax rate decreased from 37.9% in the three months ended March 31, 2016 to 20.3% in the three months ended March 31, 2017. The decrease in the effective tax rate between the two periods is primarily attributable to an 11% effective rate reduction for a provision-to-return adjustment related to the assignment of research and development expenditures to specific company engineering locations, and the effective income tax rates among the respective jurisdictions.

 

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 months ended March 31, 2017 and 2016:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2017

 

 

2016

 

Service cost

 

$

297

 

 

$

297

 

Interest cost

 

 

143

 

 

 

176

 

Expected return on plan assets

 

 

(299

)

 

 

(259

)

Amortization of actuarial losses

 

 

73

 

 

 

43

 

Net periodic pension cost

 

$

214

 

 

$

257

 

 

5. STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation expense related to stock options, performance stock units (PSUs), restricted stock units (RSUs) and restricted stock for the three months ended March 31, 2017 and 2016, which was recognized as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

 

2017

 

 

2016

 

Stock-based compensation expense included in cost of

   sales

 

$

91

 

 

$

99

 

Selling, general and administrative expense

 

 

1,016

 

 

 

769

 

Research and development expense

 

 

776

 

 

 

690

 

Stock-based compensation expense included in operating

   expenses

 

 

1,792

 

 

 

1,459

 

Total stock-based compensation expense

 

 

1,883

 

 

 

1,558

 

Tax benefit for expense associated with non-qualified

   options

 

 

(380

)

 

 

(212

)

Total stock-based compensation expense, net of tax

 

$

1,503

 

 

$

1,346

 

 

10


Stock Options

The following table is a summary of our stock options outstanding as of December 31, 2016 and March 31, 2017 and the changes that occurred during the three months ended March 31, 2017:

 

(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, 2016

 

 

6,338

 

 

$

22.14

 

 

 

5.63

 

 

$

16,972

 

Options granted

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(82

)

 

$

16.84

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(12

)

 

$

17.84

 

 

 

 

 

 

 

 

 

Options expired

 

 

(16

)

 

$

26.18

 

 

 

 

 

 

 

 

 

Options outstanding, March 31, 2017

 

 

6,228

 

 

$

22.21

 

 

 

5.38

 

 

$

11,692

 

Options vested and expected to vest, March 31, 2017

 

 

6,228

 

 

$

22.21

 

 

 

5.38

 

 

$

11,692

 

Options exercisable, March 31, 2017

 

 

4,660

 

 

$

23.78

 

 

 

4.47

 

 

$

6,111

 

 

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 March 31, 2017. 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 months ended March 31, 2017 was $0.4 million.

As of March 31, 2017, there was $6.3 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over an average remaining recognition period of 2.0 years.

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 March 31, 2017 or 2016.

 

PSUs, RSUs and restricted stock

 

The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2016 and the changes that occurred during the three months ended March 31, 2017:

 

(In thousands, except per share amounts)

 

Number of

Shares

 

 

Weighted Avg. Grant Date Fair Value

 

Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2016

 

 

519

 

 

$

20.51

 

PSUs, RSUs and restricted stock granted

 

 

518

 

 

$

22.25

 

PSUs, RSUs and restricted stock vested

 

 

(2

)

 

$

18.29

 

PSUs, RSUs and restricted stock forfeited

 

 

(2

)

 

$

20.00

 

Unvested PSUs, RSUs and restricted stock outstanding, March 31, 2017

 

 

1,033

 

 

$

21.39

 

The fair value of our PSUs with market conditions is calculated using a Monte Carlo Simulation valuation method. The fair value of RSUs and restricted stock is equal to the closing price of our stock on the date of grant. During the first quarter of 2017, the Compensation Committee of the Board of Directors approved a PSU grant of 0.5 million shares that contain performance conditions. The fair value of these performance-based PSU awards was equal to the closing price of our stock on the date of grant.

As of March 31, 2017, there was $8.8 million of unrecognized compensation expense related to unvested market-based PSUs, RSUs and restricted stock, which is expected to be recognized over an average remaining recognition period of 3.2 years. In addition, there was $11.5 million of unrecognized compensation expense related to unvested performance-based PSUs, which will be recognized over the requisite service period of three years as achievement of the performance objective becomes probable. For the three months ended March 31, 2017, no compensation expense was recognized related to these performance-based PSU awards.

 

 

11


6. INVESTMENTS

At March 31, 2017, 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

 

$

15,084

 

 

$

2,314

 

 

$

(26

)

 

$

17,372

 

Corporate bonds

 

 

72,324

 

 

 

99

 

 

 

(150

)

 

 

72,273

 

Municipal fixed-rate bonds

 

 

10,970

 

 

 

14

 

 

 

(25

)

 

 

10,959

 

Asset-backed bonds

 

 

11,832

 

 

 

10

 

 

 

(14

)

 

 

11,828

 

Mortgage/Agency-backed bonds

 

 

12,370

 

 

 

23

 

 

 

(80

)

 

 

12,313

 

U.S. government bonds

 

 

28,251

 

 

 

27

 

 

 

(231

)

 

 

28,047

 

Foreign government bonds

 

 

3,279

 

 

 

 

 

 

 

 

 

3,279

 

Variable rate demand notes

 

 

10,505

 

 

 

 

 

 

 

 

 

10,505

 

Marketable equity securities

 

 

30,934

 

 

 

1,669

 

 

 

(842

)

 

 

31,761

 

Available-for-sale securities held at fair value

 

$

195,549

 

 

$

4,156

 

 

$

(1,368

)

 

$

198,337

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,800

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

734

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

226,871

 

 

At December 31, 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

 

$

12,367

 

 

$

2,271

 

 

$

(42

)

 

$

14,596

 

Corporate bonds

 

 

66,522

 

 

 

64

 

 

 

(174

)

 

 

66,412

 

Municipal fixed-rate bonds

 

 

11,799

 

 

 

12

 

 

 

(37

)

 

 

11,774

 

Asset-backed bonds

 

 

10,201

 

 

 

19

 

 

 

(14

)

 

 

10,206

 

Mortgage/Agency-backed bonds

 

 

13,080

 

 

 

15

 

 

 

(91

)

 

 

13,004

 

U.S. government bonds

 

 

30,022

 

 

 

15

 

 

 

(270

)

 

 

29,767

 

Foreign government bonds

 

 

3,729

 

 

 

2

 

 

 

(1

)

 

 

3,730

 

Variable rate demand notes

 

 

11,855

 

 

 

 

 

 

 

 

 

11,855

 

Marketable equity securities

 

 

30,571

 

 

 

311

 

 

 

(1,503

)

 

 

29,379

 

Available-for-sale securities held at fair value

 

$

190,146

 

 

$

2,709

 

 

$

(2,132

)

 

$

190,723

 

Restricted investment held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,800

 

Other investments held at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

767

 

Total carrying value of available-for-sale investments

 

 

 

 

 

 

 

 

 

 

 

 

 

$

219,290

 

 

As of March 31, 2017, 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 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

 

 

Variable rate demand notes

 

Less than one year

 

$

31,566

 

 

$

8,237

 

 

$

 

 

$

 

 

$

750

 

 

$

1,400

 

 

$

 

One to two years

 

 

20,265

 

 

 

1,540

 

 

 

1,017

 

 

 

976

 

 

 

6,365

 

 

 

1,329

 

 

 

 

Two to three years

 

 

19,036

 

 

 

 

 

 

2,078

 

 

 

726

 

 

 

8,569

 

 

 

550

 

 

 

 

Three to five years

 

 

1,406

 

 

 

1,182

 

 

 

7,416

 

 

 

 

 

 

12,363

 

 

 

 

 

 

1,790

 

Five to ten years

 

 

 

 

 

 

 

 

1,173

 

 

 

1,896

 

 

 

 

 

 

 

 

 

2,000

 

More than ten years

 

 

 

 

 

 

 

 

144

 

 

 

8,715

 

 

 

 

 

 

 

 

 

6,715

 

Total

 

$

72,273

 

 

$

10,959

 

 

$

11,828

 

 

$

12,313

 

 

$

28,047

 

 

$

3,279

 

 

$

10,505

 

 

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 March 31, 2017, we held a $27.8 million restricted certificate of deposit, which is carried at cost. This investment serves as a collateral deposit against the principal amount outstanding under loans made to ADTRAN pursuant to an Alabama State Industrial Development Authority revenue bond (the Bond), which totaled $27.8 million at March 31, 2017 and December 31, 2016. At March 31, 2017, the estimated fair value of the Bond using a level 2 valuation technique was approximately $27.9 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 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.

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 months ended March 31, 2017 and 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

 

 

 

March 31,

 

(In thousands)

 

2017

 

 

2016

 

Gross realized gains

 

$

719

 

 

$

2,364

 

Gross realized losses

 

$

(249

)

 

$

(636

)

As of March 31, 2017 and 2016, 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 quoted prices for identical assets or liabilities in an active market; Level 2 - Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly; Level 3 - Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs include information supplied by investees.