Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2010
OR
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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)
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Delaware
(State of Incorporation)
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63-0918200
(I.R.S. Employer
Identification No.) |
901 Explorer Boulevard, Huntsville, Alabama 35806-2807
(Address of principal executive offices, including zip code)
(256) 963-8000
(Registrants 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 þ 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 o 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.
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-accelerated Filer o
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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 þ
Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of
the latest practicable date:
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Class |
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Outstanding at April 23, 2010 |
Common Stock, $.01 Par Value
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62,153,966 shares |
ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Three Months Ended March 31, 2010
Table of Contents
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 Managements 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, 2009 filed on February 26, 2010 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
(In thousands, except per share amounts)
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March 31, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
26,939 |
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$ |
24,135 |
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Short-term investments |
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137,284 |
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172,469 |
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Accounts receivable, less allowance for doubtful accounts of $202 at
March 31, 2010 and $138 at December 31, 2009 |
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74,140 |
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68,044 |
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Other receivables |
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10,052 |
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4,097 |
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Inventory |
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47,799 |
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45,674 |
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Prepaid expenses |
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3,118 |
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2,795 |
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Deferred tax assets, net |
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8,787 |
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8,603 |
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Total current assets |
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308,119 |
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325,817 |
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Property, plant and equipment, net |
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74,132 |
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74,309 |
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Other assets |
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2,133 |
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2,168 |
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Long-term investments |
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214,616 |
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162,169 |
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Total assets |
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$ |
599,000 |
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$ |
564,463 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
34,771 |
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$ |
25,782 |
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Unearned revenue |
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8,282 |
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7,138 |
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Accrued expenses |
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4,808 |
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4,202 |
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Accrued wages and benefits |
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10,077 |
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7,634 |
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Income tax payable, net |
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11,705 |
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3,017 |
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Total current liabilities |
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69,643 |
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47,773 |
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Deferred tax liabilities, net |
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6,192 |
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5,035 |
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Other non-current liabilities |
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11,413 |
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11,390 |
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Bonds payable |
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47,750 |
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47,750 |
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Total liabilities |
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134,998 |
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111,948 |
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Commitments and contingencies (see Note 11) |
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Stockholders Equity |
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Common stock, par value $0.01 per share; 200,000 shares authorized;
79,652 shares issued at March 31, 2010 and December 31, 2009 |
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797 |
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797 |
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Additional paid-in capital |
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183,366 |
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181,240 |
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Accumulated other comprehensive income |
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22,591 |
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17,853 |
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Retained earnings |
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660,598 |
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649,256 |
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Less treasury stock at cost: 17,711 shares at March 31, 2010 and 17,392
shares at December 31, 2009 |
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(403,350 |
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(396,631 |
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Total stockholders equity |
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464,002 |
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452,515 |
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Total liabilities and stockholders equity |
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$ |
599,000 |
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$ |
564,463 |
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See notes to consolidated financial statements
3
ADTRAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Sales |
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$ |
127,027 |
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$ |
110,364 |
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Cost of sales |
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51,699 |
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42,904 |
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Gross profit |
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75,328 |
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67,460 |
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Selling, general and administrative expenses |
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27,204 |
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23,697 |
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Research and development expenses |
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22,779 |
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20,862 |
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Operating income |
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25,345 |
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22,901 |
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Interest and dividend income |
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1,527 |
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1,638 |
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Interest expense |
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(603 |
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(603 |
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Net realized investment gain (loss) |
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2,192 |
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(3,198 |
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Other expense, net |
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(187 |
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(135 |
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Income before provision for income taxes |
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28,274 |
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20,603 |
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Provision for income taxes |
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(10,080 |
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(5,419 |
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Net income |
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$ |
18,194 |
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$ |
15,184 |
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Weighted average shares outstanding basic |
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61,999 |
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62,123 |
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Weighted average shares outstanding diluted |
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63,060 |
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62,586 |
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Earnings per common share basic |
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$ |
0.29 |
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$ |
0.24 |
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Earnings per common share diluted |
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$ |
0.29 |
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$ |
0.24 |
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Dividend per share |
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$ |
0.09 |
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$ |
0.09 |
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See notes to consolidated financial statements
4
ADTRAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
18,194 |
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$ |
15,184 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation and amortization |
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2,593 |
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2,507 |
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Amortization of net premium on available-for-sale investments |
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1,102 |
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803 |
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Net realized (gain) loss on long-term investments |
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(2,192 |
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3,198 |
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Net (gain) loss on disposal of property, plant and equipment |
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(3 |
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1 |
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Stock-based compensation expense |
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1,689 |
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1,819 |
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Deferred income taxes |
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(1,768 |
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(1,765 |
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Tax benefit from stock option exercises |
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437 |
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(41 |
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Excess tax benefits from stock-based compensation arrangements |
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(373 |
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37 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(6,096 |
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(4,086 |
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Other receivables |
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(5,955 |
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(355 |
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Inventory |
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(2,125 |
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(2,285 |
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Prepaid expenses and other assets |
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(371 |
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313 |
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Accounts payable |
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8,989 |
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2,923 |
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Accrued expenses and other liabilities |
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4,211 |
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(33 |
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Income tax payable, net |
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8,688 |
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6,248 |
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Net cash provided by operating activities |
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27,020 |
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24,468 |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(2,329 |
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(2,356 |
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Proceeds from sales and maturities of available-for-sale investments |
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56,095 |
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63,741 |
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Purchases of available-for-sale investments |
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(64,956 |
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(66,772 |
) |
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Net cash used in investing activities |
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(11,190 |
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(5,387 |
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Cash flows from financing activities: |
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Proceeds from stock option exercises |
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2,340 |
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49 |
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Purchases of treasury stock |
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(10,330 |
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(1,430 |
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Dividend payments |
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(5,577 |
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(5,568 |
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Excess tax benefits from stock-based compensation arrangements |
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373 |
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(37 |
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Net cash used in financing activities |
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(13,194 |
) |
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(6,986 |
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Net increase in cash and cash equivalents |
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2,636 |
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12,095 |
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Effect of exchange rate changes |
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168 |
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9 |
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Cash and cash equivalents, beginning of period |
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24,135 |
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41,909 |
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Cash and cash equivalents, end of period |
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$ |
26,939 |
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$ |
54,013 |
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See notes to consolidated financial statements
5
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, 2009 Consolidated Balance Sheet is derived from audited financial statements, but does
not include all disclosures required by accounting principles generally accepted in the United
States.
In the opinion of management, all adjustments necessary for a fair presentation of these interim
statements have been included and are of a normal and recurring nature. The results of operations
for an interim period are not necessarily indicative of the results for the full year. The interim
statements should be read in conjunction with the financial statements and notes thereto included
in ADTRANs Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 26,
2010 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 allowance for doubtful accounts,
obsolete and excess inventory reserves, warranty reserves, customer rebates, allowance for sales
returns, determination of the deferred revenue components of multiple element sales agreements,
estimated income tax contingencies, the fair value of stock-based compensation, 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 October 2009, the Financial Accounting Standards Board (FASB) issued Update No. 2009-13, which
amends the Revenue Recognition topic of the FASB Accounting Standards Codification (Codification).
This update provides amendments to the criteria in Subtopic 605-25 of the Codification for
separating consideration in multiple-deliverable arrangements. As a result of those amendments,
multiple-deliverable arrangements will be separated in more circumstances than under existing U.S.
GAAP. The amendments establish a selling price hierarchy for determining the selling price of a
deliverable and will replace the term fair value in the revenue allocation guidance with selling
price to clarify that the allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. The amendments will also eliminate the residual method
of allocation and require that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and will require that a
vendor determine its best estimate of selling price in a manner that is consistent with that used
to determine the price to sell the deliverable on a standalone basis. These amendments will be
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with early adoption permitted. We do not expect the
adoption of this amendment will have a material impact on our consolidated results of operations or
financial condition.
In October 2009, the FASB issued Update No. 2009-14, which amends the Software topic of the
Codification. The amendments in this update change the accounting model for revenue arrangements
that include both tangible products and software elements. Tangible products containing software
components and non-software components that function together to deliver the tangible products
essential functionality is no longer within the scope of the software revenue guidance in Subtopic
985-605 of the Codification. In addition, the amendments in this update require that hardware
components of a tangible product containing software components always be excluded from the
software revenue guidance. In that regard, the amendments provide additional guidance on how to
determine which software, if any, relating to the tangible product also would be excluded from the
scope of the software revenue guidance. The
amendments also provide guidance on how a vendor should allocate arrangement consideration to
deliverables in an arrangement that includes both tangible products and software. The amendments
also provide further guidance on how to allocate arrangement consideration when an arrangement
includes deliverables both included and excluded from the scope of the software revenue guidance.
These amendments will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We do not expect the adoption of this amendment will have a material impact on our
consolidated results of operations or financial condition.
6
During the first quarter of 2010, we adopted the following accounting standards, which had no
material effect on our consolidated results of operations or financial condition:
In January 2010, the FASB issued Update No. 2010-06, which amends the Fair Value Measurements and
Disclosures topic of the Codification. The amendments in this update require new disclosures about
transfers in and out of Level 1 and Level 2 fair value measurements and the activity in Level 3
fair value measurements and, in addition, clarify existing disclosures required for levels of
disaggregation and inputs and valuation techniques. These amendments will be effective for interim
and annual reporting periods beginning after December 15, 2009, except for the disclosures about
activity in Level 3 fair value measurements, which is effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. We adopted this amendment
for the period ended March 31, 2010, and we have provided the disclosures required for the period
ended March 31, 2010.
In February 2010, the FASB issued Update No. 2010-09, which amends the Subsequent Events topic of
the Codification. The amendments in this update require entities that are SEC filers to evaluate
subsequent events through the date that the financial statements are issued. Additionally, SEC
filers are no longer required to disclose the date through which subsequent events were evaluated.
The amendments in this update were effective upon issuance. We adopted this amendment for the
period ended March 31, 2010, and we have provided the disclosures required for the period ended
March 31, 2010.
2. INCOME TAXES
Our effective tax rate increased from 26.3% in the three months ended March 31, 2009 to 35.7% in
the three months ended March 31, 2010. The increase is primarily due to a one-time tax benefit of
$1.7 million recorded in the first quarter of 2009, which decreased our effective tax rate by 8.3
percentage points. The $1.7 million benefit resulted from a review of our deduction for
manufacturers domestic production activities for the years 2005, 2006 and 2007 under Internal
Revenue Code Section 199, which was completed during the first quarter of 2009. Amended income tax
returns were filed during the first quarter of 2009 in association with this benefit. In addition,
the manufacturers domestic production activities deduction increased from six percent in 2009 to
nine percent in 2010, resulting in approximately a 1.0 percentage point decrease in our rate for
the first quarter of 2010. The tax provision for the first quarter of 2009 also included the
benefit from the research and development tax credit. The tax provision rate for the first quarter
of 2010 did not include a benefit from the research and development tax credit, which expired on
December 31, 2009. The exclusion of the benefit from the research and development tax credits
resulted in approximately a 2.0 percentage point increase in our effective tax rate in the first
quarter of 2010.
7
3. STOCK-BASED COMPENSATION
The following table summarizes the stock-based compensation expense related to stock options and
restricted stock units (RSUs) under the Stock Compensation Topic of the FASB Codification for the
three months ended March 31, 2010 and 2009, which was recognized as follows:
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Three Months Ended |
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March 31, |
|
(In thousands) |
|
2010 |
|
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2009 |
|
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|
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Stock-based compensation expense included in
cost of sales |
|
$ |
68 |
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$ |
71 |
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Selling, general and administrative expense |
|
|
750 |
|
|
|
828 |
|
Research and development expense |
|
|
871 |
|
|
|
920 |
|
|
|
|
|
|
|
|
Stock-based compensation expense included in
operating expenses |
|
|
1,621 |
|
|
|
1,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
|
1,689 |
|
|
|
1,819 |
|
Tax benefit for expense associated with
non-qualified options |
|
|
(177 |
) |
|
|
(185 |
) |
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
1,512 |
|
|
$ |
1,634 |
|
|
|
|
|
|
|
|
The fair value of our stock options was estimated using the Black-Scholes model. The determination
of the fair value of stock options on the date of grant using the Black-Scholes model is affected
by our stock price as well as assumptions regarding a number of complex and subjective variables
that may have a significant impact on the fair value estimate.
The weighted-average assumptions and value of options granted for the three months ended March 31,
2010 and 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Expected volatility |
|
|
41.29 |
% |
|
|
42.79 |
% |
Risk-free interest rate |
|
|
2.52 |
% |
|
|
1.45 |
% |
Expected dividend yield |
|
|
1.59 |
% |
|
|
2.35 |
% |
Expected life (in years) |
|
|
5.22 |
|
|
|
4.88 |
|
Weighted-average estimated value |
|
$ |
7.86 |
|
|
$ |
4.77 |
|
ADTRAN uses the Monte Carlo Simulation valuation technique to value its RSUs. No RSUs were granted
to employees during the three months ended March 31, 2010 or 2009.
Stock-based compensation expense recognized in our Consolidated Statements of Income for the three
months ended March 31, 2010 and 2009 is based on options and RSUs ultimately expected to vest, and
has been reduced for estimated forfeitures. Estimated forfeitures for stock options were based
upon historical experience and approximate 4% annually. We estimated a 0% forfeiture rate for our
RSUs due to the limited number of recipients and lack of historical experience for these awards.
As of March 31, 2010, total compensation cost related to non-vested stock options and RSUs not yet
recognized was approximately $14.8 million, which is expected to be recognized over an average
remaining recognition period of 2.7 years.
8
The following schedule summarizes the activity in our stock option plans for the three months ended
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Weighted Avg. |
|
|
Contractual |
|
|
Intrinsic |
|
(In thousands, except per share amounts) |
|
Options |
|
|
Exercise Price |
|
|
Life In years |
|
|
Value |
|
Options outstanding, December 31, 2009 |
|
|
6,916 |
|
|
$ |
20.42 |
|
|
|
6.05 |
|
|
$ |
25,719 |
|
Options granted |
|
|
11 |
|
|
$ |
22.58 |
|
|
|
|
|
|
|
|
|
Options cancelled/forfeited |
|
|
(8 |
) |
|
$ |
23.63 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(159 |
) |
|
$ |
14.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Options outstanding, March 31, 2010 |
|
|
6,760 |
|
|
$ |
20.54 |
|
|
|
5.86 |
|
|
$ |
45,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, March 31, 2010 |
|
|
4,441 |
|
|
$ |
20.35 |
|
|
|
4.39 |
|
|
$ |
32,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the
difference between ADTRANs closing stock price on the last trading day of the quarter and the
exercise price, multiplied by the number of in-the-money options) that would have been received by
the option holders had all option holders exercised their options on March 31, 2010. The aggregate
intrinsic value will change based on the fair market value of ADTRANs stock. The total pre-tax
intrinsic value of options exercised during the three month period ended March 31, 2010 was $1.7
million.
4. INVESTMENTS
At March 31, 2010, we held the following securities and investments, recorded at either fair value
or cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value / |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Carrying |
|
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
|
$ |
3,003 |
|
|
$ |
627 |
|
|
$ |
(3 |
) |
|
$ |
3,627 |
|
Corporate bonds (FDIC guaranteed) |
|
|
40,394 |
|
|
|
558 |
|
|
|
|
|
|
|
40,952 |
|
Municipal fixed rate bonds |
|
|
144,621 |
|
|
|
579 |
|
|
|
(97 |
) |
|
|
145,103 |
|
Municipal variable rate demand notes |
|
|
69,195 |
|
|
|
|
|
|
|
|
|
|
|
69,195 |
|
Fixed income bond fund |
|
|
867 |
|
|
|
330 |
|
|
|
|
|
|
|
1,197 |
|
Marketable equity securities |
|
|
10,237 |
|
|
|
31,308 |
|
|
|
(177 |
) |
|
|
41,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities held at fair value |
|
$ |
268,317 |
|
|
$ |
33,402 |
|
|
$ |
(277 |
) |
|
$ |
301,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investment held at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,250 |
|
Other investments held at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value of available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
351,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, we held $3.6 million of deferred compensation plan assets, carried at fair
value.
At March 31, 2010, we held $41.0 million of corporate bonds issued by various banks that are
guaranteed by the Federal Deposit Insurance Corporation (FDIC). These bonds are classified as
available-for-sale and had an average duration of 2.15 years at March 31, 2010. All of these bonds
had a credit rating of AAA at March 31, 2010.
At March 31, 2010, we held $145.1 million of municipal fixed-rate bonds. At March 31, 2010,
approximately 42% of our municipal fixed-rate bond portfolio had a credit rating of AAA, 51% had a
credit rating of AA, and 7% had a credit rating of A. These bonds are classified as
available-for-sale investments and had an average duration of 1.18 years at March 31, 2010.
Because our bond portfolio has a high quality rating and contractual maturities of a short
duration, we are able to obtain prices for these bonds derived from observable market inputs, or
for similar securities traded in an active market, on a daily basis.
9
At March 31, 2010, we held $69.2 million of municipal variable rate demand notes, all of which are
classified as available-for-sale short-term investments. At March 31, 2010, 98% of our municipal
variable rate demand notes had a credit rating of VMIG-1 or A-1+ with the remaining 2% rated A-1,
and all contained put options of seven days. Despite the long-term nature of their stated
contractual maturities, we believe that we have the ability to quickly liquidate these securities.
Our investments in these securities are recorded at fair value, and the interest rates reset every
seven days. We have the ability to sell our variable rate demand notes to the remarketing agent,
tender agent or issuer at par value plus accrued interest in the event we decide to liquidate our
investment in a particular variable rate demand note. Approximately 32% of our variable rate
demand notes are supported by letters of credit from banks that we believe to be in good financial
condition. The remaining 68% of our variable rate demand notes are supported by standby purchase
agreements. As a result of these factors, we had no cumulative gross unrealized holding gains
(losses) or gross realized gains (losses) from these investments. All income generated from these
investments was recorded as interest income. We have not been required to record any losses
relating to municipal variable rate demand notes.
At March 31, 2010, we held $1.2 million of a fixed income bond fund.
At March 31, 2010, we held $41.4 million of marketable equity securities, including a single
security, of which we held 1.9 million shares, carried at a fair value of $29.4 million. We sold
138 thousand shares of this security during the three months ended March 31, 2010. The sale
resulted in proceeds of $2.1 million and a realized gain of $2.0 million. This single security
traded approximately 1.3 million shares per day in the first quarter of 2010 in an active market on
a European stock exchange. This single security comprises $28.7 million of the gross unrealized
gains included in the fair value of our marketable equity securities at March 31, 2010. The
remaining $2.6 million of gross unrealized gains and $0.2 million of gross unrealized losses at
March 31, 2010 were spread among 387 equity securities.
At March 31, 2010, we held a $48.3 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). At March 31, 2010, the estimated fair value of the Bond was approximately $45.0
million, based on a debt security with a comparable interest rate and maturity and a Standard and
Poors credit rating of A+. 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. For more information on the
Bond, see Debt under Liquidity and Capital Resources in the Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in Item 2 of Part I of this
report.
At March 31, 2010, we held $2.2 million of other investments carried at cost, consisting of
interests in two private equity funds and an investment in a privately held telecommunications
equipment manufacturer. The fair value of these investments was estimated to be approximately
$10.3 million at March 31, 2010, based on unobservable inputs including information supplied by the
company and the fund managers. We have committed to invest up to an aggregate of $7.9 million in
the two private equity funds, and we have contributed $7.9 million as of March 31, 2010, of which
$7.4 million has been applied toward these commitments. As of March 31, 2010, we have received
distributions related to these two private equity funds of $6.3 million, of which $0.6 million was
recorded as a realized investment gain. These investments are carried at cost, net of
distributions, with distributions in excess of our investment recorded as a realized investment
gain. The duration of each of these commitments is ten years with $0.2 million expiring in 2010
and $0.3 million expiring in 2012. We have not been required to record any impairment losses
related to these investments during the three months ended March 31, 2010.
10
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. As a result of
our review, we recorded an
other-than-temporary impairment charge of $2 thousand during the first quarter of 2010 related to
one marketable equity security. For the three months ended March 31, 2009, we recorded an
other-than-temporary impairment charge of $1.9 million related to 99 marketable equity securities.
In addition to the impairment charge we recorded on our marketable equity securities, we recorded
an impairment of $0.4 million related to our investment in a fixed income bond fund and $0.5
million related to our deferred compensation plan during the first quarter of 2009 as a result of
similar reviews.
In accordance with the Fair Value Measurements and Disclosures Topic of the FASB Codification, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2010 Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Market for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
(In thousands) |
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
12,198 |
|
|
$ |
12,198 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
|
|
3,627 |
|
|
|
3,627 |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds (FDIC guaranteed) |
|
|
40,952 |
|
|
|
|
|
|
|
40,952 |
|
|
|
|
|
Municipal fixed-rate bonds |
|
|
145,103 |
|
|
|
|
|
|
|
145,103 |
|
|
|
|
|
Municipal variable rate demand notes |
|
|
69,195 |
|
|
|
|
|
|
|
69,195 |
|
|
|
|
|
Fixed income bond fund |
|
|
1,197 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
Available-for-sale equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities technology industry |
|
|
30,592 |
|
|
|
30,592 |
|
|
|
|
|
|
|
|
|
Equity securities other |
|
|
10,776 |
|
|
|
10,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
301,442 |
|
|
|
46,192 |
|
|
|
255,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
313,640 |
|
|
$ |
58,390 |
|
|
$ |
255,250 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2009 Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Market for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
(In thousands) |
|
Fair Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
18,370 |
|
|
$ |
18,370 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
|
|
3,424 |
|
|
|
3,424 |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds (FDIC guaranteed) |
|
|
20,414 |
|
|
|
|
|
|
|
20,414 |
|
|
|
|
|
Municipal fixed-rate bonds |
|
|
141,285 |
|
|
|
|
|
|
|
141,285 |
|
|
|
|
|
Municipal variable rate demand notes |
|
|
84,359 |
|
|
|
|
|
|
|
84,359 |
|
|
|
|
|
Fixed income bond fund |
|
|
1,163 |
|
|
|
1,163 |
|
|
|
|
|
|
|
|
|
Available-for-sale equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities technology industry |
|
|
23,491 |
|
|
|
23,491 |
|
|
|
|
|
|
|
|
|
Equity securities other |
|
|
10,044 |
|
|
|
10,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
284,180 |
|
|
|
38,122 |
|
|
|
246,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
302,550 |
|
|
$ |
56,492 |
|
|
$ |
246,058 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 and December 31, 2009, the fair value of the investments in available-for-sale
Level 2 corporate bonds and municipal fixed-rate bonds was $186.1 million and $161.7 million,
respectively. The fair value of these securities is calculated using a weighted average market
price for each security. Market prices are obtained from a variety of industry standard data
providers, security master files from large financial institutions, and other third-party sources.
These multiple market prices are used as inputs into a distribution-curve-based algorithm to
determine the daily market value of each security.
As of March 31, 2010 and December 31, 2009, the fair value of the investments in available-for-sale
Level 2 municipal variable rate demand notes was $69.2 million and $84.4 million, respectively.
These securities have a structure that implies a standard expected market price. The frequent
interest rate resets make it reasonable to expect the price to stay at par. These securities are
priced at the expected market price.
5. INVENTORY
At March 31, 2010 and December 31, 2009, inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Raw materials |
|
$ |
35,028 |
|
|
$ |
33,930 |
|
Work in progress |
|
|
3,548 |
|
|
|
2,662 |
|
Finished goods |
|
|
17,351 |
|
|
|
16,832 |
|
Inventory reserves |
|
|
(8,128 |
) |
|
|
(7,750 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
47,799 |
|
|
$ |
45,674 |
|
|
|
|
|
|
|
|
12
6. STOCKHOLDERS EQUITY
A summary of the changes in stockholders equity for the three months ended March 31, 2010 is as
follows:
|
|
|
|
|
|
|
Stockholders |
|
(In thousands) |
|
Equity |
|
Balance, December 31, 2009 |
|
$ |
452,515 |
|
Net income |
|
|
18,194 |
|
Dividend payments |
|
|
(5,577 |
) |
Dividends accrued for unvested restricted stock units |
|
|
(4 |
) |
Net change in unrealized gains and losses on marketable securities (net of deferred taxes) |
|
|
4,570 |
|
Foreign currency translation adjustment |
|
|
168 |
|
Proceeds from stock option exercises |
|
|
2,340 |
|
Tax benefits from stock option exercises |
|
|
437 |
|
Stock-based compensation expense |
|
|
1,689 |
|
Purchases of treasury stock |
|
|
(10,330 |
) |
|
|
|
|
Balance, March 31, 2010 |
|
$ |
464,002 |
|
|
|
|
|
Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have
authorized open market repurchase transactions of up to 30 million shares of our common stock.
During the three months ended March 31, 2010, we repurchased 0.5 million shares of our common stock
at an average price of $21.62 per share. We have the authority to purchase an additional 2.2
million shares of our common stock under the plan approved by the Board of Directors on April 14,
2008.
Stock Option Exercises
We issued 0.2 million shares of treasury stock during the three months ended March 31, 2010 to
accommodate employee stock option exercises. The stock options had exercise prices ranging from
$8.70 to $23.02. We received proceeds totaling $2.3 million from the exercise of these stock
options during the first three months of 2010.
Dividend Payments
During 2010, we have paid cash dividends as follows (in thousands except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date |
|
Payment Date |
|
|
Per Share Amount |
|
|
Total Dividend Paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 4, 2010 |
|
February 18, 2010 |
|
$ |
0.09 |
|
|
$ |
5,577 |
|
Comprehensive Income
Comprehensive income consists of net income, net change in unrealized gains and losses on
marketable securities and foreign currency translation adjustments.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
Net income |
|
$ |
18,194 |
|
|
$ |
15,184 |
|
Net change in unrealized gains and losses related to: |
|
|
|
|
|
|
|
|
Marketable securities, net of deferred taxes of $2,772 |
|
|
4,622 |
|
|
|
564 |
|
Impaired marketable securities, net of deferred taxes
of $31 |
|
|
(52 |
) |
|
|
1,614 |
|
Foreign currency translation adjustment |
|
|
168 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
22,932 |
|
|
$ |
17,371 |
|
|
|
|
|
|
|
|
13
7. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the three months ended
March 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
Numerator |
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,194 |
|
|
$ |
15,184 |
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Weighted average number of shares basic |
|
|
61,999 |
|
|
|
62,123 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
Stock options |
|
|
1,045 |
|
|
|
459 |
|
Restricted stock units |
|
|
16 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Weighted average number of shares diluted |
|
|
63,060 |
|
|
|
62,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.29 |
|
|
$ |
0.24 |
|
Net income per share diluted |
|
$ |
0.29 |
|
|
$ |
0.24 |
|
Anti-dilutive options to purchase common stock outstanding were excluded from the above
calculations. Anti-dilutive options totaled 3.3 million and 4.9 million for the three months ended
March 31, 2010 and 2009, respectively.
8. SEGMENT INFORMATION
ADTRAN operates in two reportable segments: (1) the Carrier Networks Division and (2) the
Enterprise Networks Division. We evaluate the performance of our segments based on gross profit;
therefore, selling, general and administrative expenses, research and development expenses,
interest and dividend income, interest expense, net realized investment gain/loss, other expense,
net and provision for income taxes are reported on an entity-wide basis only. There are no
inter-segment revenues.
The following table presents information about the reported sales and gross profit of our
reportable segments for the three months ended March 31, 2010 and 2009. Asset information by
reportable segment is not reported, since we do not produce such information internally.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
(In thousands) |
|
Sales |
|
|
Gross Profit |
|
|
Sales |
|
|
Gross Profit |
|
Carrier Networks |
|
$ |
99,524 |
|
|
$ |
59,266 |
|
|
$ |
87,084 |
|
|
$ |
54,255 |
|
Enterprise Networks |
|
|
27,503 |
|
|
|
16,062 |
|
|
|
23,280 |
|
|
|
13,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
127,027 |
|
|
$ |
75,328 |
|
|
$ |
110,364 |
|
|
$ |
67,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Product
Our three major product categories are Carrier Systems, Business Networking and Loop Access.
14
Carrier Systems products are used by communications service providers to provide last mile access
in support of data, voice and video services to consumers and enterprises. The Carrier Systems
category includes our broadband access products comprised of Total Access® 5000 multi-service
access and aggregation platform products, Total Access 1100/1200 Series Fiber-To-The-Node (FTTN)
products, and Digital Subscriber Line Access Multiplexer (DSLAM) products. Our broadband access
products are used by service providers to deliver high-speed Internet access, Voice over Internet
Protocol (VoIP), IP Television (IPTV), and/or Ethernet services from the central office or remote
terminal locations to customer premises. The Carrier Systems category also includes our optical
access products. These products
consist of optical access multiplexers including our family of OPTI products. Optical access
products are used to deliver higher bandwidth services, or to aggregate large numbers of low
bandwidth services for transportation across fiber optic infrastructure. Total Access 1500
products, 303 concentrator products, M13 multiplexer products, and mobile backhaul products are
also included in the Carrier Systems product category.
Business Networking products provide access to telecommunication services, facilitating the
delivery of converged services and Unified Communications to the SMB and Enterprise markets. The
Business Networking category includes Internetworking products and Integrated Access Devices
(IADs). Internetworking products consist of our Total Access IP Business Gateways, Optical Network
Terminals (ONTs), and NetVanta product lines. NetVanta products include multi-service routers,
managed Ethernet switches, IP Private Branch Exchange (PBX) products, IP phone products, Unified
Communications solutions, and Carrier Ethernet Network Terminating Equipment (NTE).
Loop Access products are used by carrier and enterprise customers for access to copper-based
telecommunications networks. The Loop Access category includes products such as: Digital Data
Service (DDS) and Integrated Services Digital Network (Total Reach) products, High bit-rate Digital
Subscriber Line (HDSL) products including Total Access 3000 HDSL and Time Division
Multiplexed-Symmetrical HDSL (TDM-SHDSL) products, T1/E1/T3, Channel Service Units/Data Service
Units, and TRACER fixed wireless products.
The table below presents sales information by product for the three months ended March 31, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Carrier Systems |
|
$ |
58,093 |
|
|
$ |
42,729 |
|
Business Networking |
|
|
26,457 |
|
|
|
20,012 |
|
Loop Access |
|
|
42,477 |
|
|
|
47,623 |
|
|
|
|
|
|
|
|
Total |
|
$ |
127,027 |
|
|
$ |
110,364 |
|
|
|
|
|
|
|
|
In addition, we identify sub-categories of product revenues, which we divide into growth products,
representing our primary growth areas, and traditional products. Our growth products consist of
Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking
products (included in Business Networking) and our traditional products include HDSL products
(included in Loop Access) and other products.
15
Subcategory revenues included in the above are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Growth Products |
|
|
|
|
|
|
|
|
Broadband Access (included in Carrier Systems) |
|
$ |
36,362 |
|
|
$ |
22,219 |
|
Optical Access (included in Carrier Systems) |
|
|
11,259 |
|
|
|
10,652 |
|
Internetworking (NetVanta & Multi-service Access
Gateways) (included in Business Networking) |
|
|
22,183 |
|
|
|
15,315 |
|
|
|
|
|
|
|
|
Total |
|
|
69,804 |
|
|
|
48,186 |
|
|
|
|
|
|
|
|
|
|
Traditional Products |
|
|
|
|
|
|
|
|
HDSL (does not include T1) (included in Loop Access) |
|
|
39,930 |
|
|
|
42,921 |
|
Other products (excluding HDSL) |
|
|
17,293 |
|
|
|
19,257 |
|
|
|
|
|
|
|
|
Total |
|
|
57,223 |
|
|
|
62,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
127,027 |
|
|
$ |
110,364 |
|
|
|
|
|
|
|
|
Sales by Geographic Region
The table below presents sales information by geographic area for the three months ended March 31,
2010 and 2009. International sales correlate to shipments with a non-U.S. destination.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
United States |
|
$ |
120,300 |
|
|
$ |
103,418 |
|
International |
|
|
6,727 |
|
|
|
6,946 |
|
|
|
|
|
|
|
|
Total |
|
$ |
127,027 |
|
|
$ |
110,364 |
|
|
|
|
|
|
|
|
9. LIABILITY FOR WARRANTY RETURNS
Our products generally include warranties of one to ten years for product defects. We accrue for
warranty returns at the time revenue is recognized based on our estimate of the cost to repair or
replace the defective products. We engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component suppliers. Our products
continue to become more complex in both size and functionality as many of our product offerings
migrate from line card applications to systems products. The increasing complexity of our products
will cause warranty incidences, when they arise, to be more costly. Our estimates regarding future
warranty obligations may change due to product failure rates, material usage, and other rework
costs incurred in correcting a product failure. In addition, from time to time, specific warranty
accruals may be recorded if unforeseen problems arise. Should our actual experience relative to
these factors be worse than our estimates, we will be required to record additional warranty
expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion
of such provisions in future periods. The liability for warranty obligations totaled $2.9 million
at March 31, 2010 and $2.8 million at December 31, 2009. These liabilities are included in accrued
expenses in the accompanying Consolidated Balance Sheets.
16
A summary of warranty expense and write-off activity for the three months ended March 31, 2010 and
2009 is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Balance at beginning of period |
|
$ |
2,833 |
|
|
$ |
2,812 |
|
Plus: Amounts charged to cost and expenses |
|
|
771 |
|
|
|
615 |
|
Less: Deductions |
|
|
(703 |
) |
|
|
(637 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,901 |
|
|
$ |
2,790 |
|
|
|
|
|
|
|
|
10. RELATED PARTY TRANSACTIONS
We employ the law firm of our director emeritus for legal services. All bills for services
rendered by this firm are reviewed and approved by our Chief Financial Officer. We believe that
the fees for such services are comparable to those charged by other firms for services rendered to
us. We paid $40 thousand during the three month period ended March 31, 2010 and $10 thousand
during the three month period ended March 31, 2009 for these legal services.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we may be subject to various legal proceedings and claims,
including employment disputes, patent claims, disputes over contract agreements and other
commercial disputes. In some cases, claimants seek damages or other relief, such as royalty
payments related to patents, which, if granted, could require significant expenditures. Although
the outcome of any claim or litigation can never be certain, it is our opinion that the outcome of
all contingencies of which we are currently aware will not materially affect our business,
operations, financial condition or cash flows.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we
have contributed $7.9 million as of March 31, 2010, of which $7.4 million has been applied to these
commitments. See Note 4 of Notes to Consolidated Financial Statements for additional information.
12. SUBSEQUENT EVENTS
On April 13, 2010, we announced that our Board of Directors declared a quarterly cash dividend of
$0.09 per common share to be paid to stockholders of record at the close of business on April 29,
2010. The payment date will be May 13, 2010. The quarterly dividend payment will be approximately
$5.6 million. In July 2003, our Board of Directors elected to begin declaring quarterly dividends
on our common stock considering the tax treatment of dividends and adequate levels of Company
liquidity.
17
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements
and the related notes that appear elsewhere in this document.
OVERVIEW
ADTRAN, Inc. designs, manufactures, markets and services network access solutions for
communications networks. Our solutions are widely deployed by providers of telecommunications
services (serviced by our Carrier Networks Division), and small and mid-sized businesses (SMBs) and
enterprises (serviced by our Enterprise Networks Division), and enable voice, data, video and
Internet communications across wireline and wireless networks. Many of these solutions are
currently in use by every major United States service provider and many global ones, as well as by
many public, private and governmental organizations worldwide.
Our success depends upon our ability to increase unit volume and market share through the
introduction of new products and succeeding generations of products having lower selling prices and
increased functionality as compared to both the prior generation of a product and to the products
of competitors. An important part of our strategy is to reduce the cost of each succeeding product
generation and then lower the products selling price based on the cost savings achieved in order
to gain market share and/or improve gross margins. As a part of this strategy, we seek in most
instances to be a high-quality, low-cost provider of products in our markets. Our success to date
is attributable in large measure to our ability to design our products initially with a view to
their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in
each succeeding product generation. This strategy enables us to sell succeeding generations of
products to existing customers, while increasing our market share by selling these enhanced
products to new customers.
Our three major product categories are Carrier Systems, Business Networking and Loop Access.
Carrier Systems products are used by communications service providers to provide last mile access
in support of data, voice and video services to consumers and enterprises. Business Networking
products provide access to telecommunication services, facilitating the delivery of converged
services and Unified Communications to the SMB and Enterprise markets. Loop Access products are
used by carrier and enterprise customers for access to copper-based telecommunications networks.
In addition, we identify sub-categories of product revenues, which we divide into growth products,
representing our primary growth areas, and traditional products. Our growth products consist of
Broadband Access and Optical Access products (included in Carrier Systems) and Internetworking
products (included in Business Networking) and our traditional products include HDSL products
(included in Loop Access) and other products. Many of our customers are migrating their networks
to deliver higher bandwidth services by utilizing newer technologies. We believe that products in
our primary growth areas position us well for this migration. We anticipate that revenues of many
of our traditional products, including HDSL, although declining, may continue for years because of
the time required for our customers to transition to newer technologies.
See Note 8 of Notes to Consolidated Financial Statements in this report for further information
regarding these product categories.
Sales were $127.0 million for the three months ended March 31, 2010 compared to $110.4 million for
the three months ended March 31, 2009. Product revenues for our three primary growth areas,
Broadband Access, Optical Access and Internetworking, were $69.8 million for the three months ended
March 31, 2010 compared to $48.2 million for the three months ended March 31, 2009. Our gross
margin decreased for the three months ended March 31, 2010 to 59.3% from 61.1% for the three months
ended March 31, 2009. Our operating income margin decreased to 20.0% for the three months ended
March 31, 2010 from 20.8% for the three months ended March 31, 2009. Net income was $18.2 million
for the three months ended March 31, 2010 compared to $15.2 million for the three months ended
March 31, 2009. Our effective tax rate increased from 26.3% for the three months ended March 31,
2009 to 35.7% for the three months ended
March 31, 2010. Earnings per share, assuming dilution, were $0.29 for the three months ended March
31, 2010 compared to $0.24 for the three months ended March 31, 2009.
18
Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly
in future periods due to a number of factors. We normally operate with very little order backlog.
A majority of our sales in each quarter result from customer orders received in that quarter under
agreements containing non-binding purchase commitments. Many of our customers require prompt
delivery of products. This results in a limited backlog of orders and requires us to maintain
sufficient inventory levels to satisfy anticipated customer demand. If near-term demand for our
products declines, or if potential sales in any quarter do not occur as anticipated, our financial
results could be adversely affected. Operating expenses are relatively fixed in the short term;
therefore, a shortfall in quarterly revenues could significantly impact our financial results in a
given quarter.
Our operating results may also fluctuate as a result of a number of other factors, including a
decline in general economic and market conditions, increased competition, customer order patterns,
changes in product mix, timing differences between price decreases and product cost reductions,
product warranty returns, expediting costs and announcements of new products by us or our
competitors. Additionally, maintaining sufficient inventory levels to assure prompt delivery of
our products increases the amount of inventory that may become obsolete and increases the risk that
the obsolescence of this inventory may have an adverse effect on our business and operating
results. Also, not maintaining sufficient inventory levels to assure prompt delivery of our
products may cause us to incur expediting costs to meet customer delivery requirements, which may
negatively impact our operating results in a given quarter.
Accordingly, our historical financial performance is not necessarily a meaningful indicator of
future results, and, in general, management expects that our financial results may vary from period
to period. A list of factors that could materially affect our business, financial condition or
operating results is included under Factors That Could Affect Our Future Results in Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 of
Part I of this report. These factors have also been discussed in more detail in Item 1A of Part I
in our most recent Annual Report on Form 10-K for the year ended December 31, 2009, filed on
February 26, 2010 with the SEC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed significantly from those detailed
in our most recent Annual Report on Form 10-K for the year ended December 31, 2009, filed on
February 26, 2010 with the SEC.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for a full
description of recent accounting pronouncements, including the expected dates of adoption and
estimated effects on results of operation and financial condition, which is incorporated herein by
reference.
RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31,
2009
SALES
ADTRANs sales increased 15.1% from $110.4 million in the three months ended March 31, 2009 to
$127.0 million in the three months ended March 31, 2010.
Carrier Networks sales increased 14.3% from $87.1 million in the three months ended March 31, 2009
to $99.5 million in the three months ended March 31, 2010. The increase is primarily attributable
to increases in Broadband Access, Internetworking NTE products and Optical Access product sales,
partially offset by a decrease in HDSL and other traditional product sales.
Enterprise Networks sales increased 18.1% from $23.3 million in the three months ended March 31,
2009 to $27.5 million in the three months ended March 31, 2010. The increase is attributable to an
increase in Internetworking sales, partially offset by declines in sales of traditional products.
Internetworking product sales were 73.6% of Enterprise Network sales in the three months ended
March 31, 2010 compared with 63.2% in the three months ended March 31, 2009. Traditional products
primarily comprise the remainder of Enterprise Networks sales. Enterprise Networks sales as a
percentage of total sales increased from 21.1% for the three months ended March 31, 2009 to 21.7%
for the three months ended March 31, 2010.
19
International sales, which are included in the Carrier Networks and Enterprise Networks amounts
discussed above, decreased 3.2% from $6.9 million in the three months ended March 31, 2009 to $6.7
million in the three months ended March 31, 2010. International sales, as a percentage of total
sales, decreased from 6.3% for the three months ended March 31, 2009 to 5.3% for the three months
ended March 31, 2010. International sales decreased in the three months ended March 31, 2010
compared to the three months ended March 31, 2009 primarily due to a decline in sales to our
Canadian customers.
Carrier System product sales increased $15.4 million in the three months ended March 31, 2010
compared to the three months ended March 31, 2009 due primarily to a $14.1 million increase in
Broadband Access product sales, a $0.6 million increase in Optical Access and a $0.7 million
increase in TDM product sales. The increase in Broadband Access and Optical Access product sales
is primarily attributable to continued growth of our TA5000, TA1100/1200 FTTN products, and OPTI
6100 products.
Business Networking product sales increased $6.4 million in the three months ended March 31, 2010
compared to the three months ended March 31, 2009, due to a $6.9 million increase in sales of
Internetworking products, offset by a decrease of $0.5 million in sales of traditional IAD products
as customers shifted to newer technologies. Many of these newer technologies are integral to our
Internetworking product area.
Loop Access product sales decreased $5.1 million in the three months ended March 31, 2010 compared
to the three months ended March 31, 2009 primarily due to a $3.0 million decrease in HDSL product
sales and decreases in other traditional products.
COST OF SALES
As a percentage of sales, cost of sales increased from 38.9% in the three months ended March 31,
2009 to 40.7% in the three months ended March 31, 2010. The increase in cost of sales as a
percentage of sales is primarily related to costs incurred to expedite delivery of materials.
Carrier Networks cost of sales, as a percent of division sales, increased from 37.7% in the three
months ended March 31, 2009 to 40.5% in the three months ended March 31, 2010. The increase in
cost of sales as a percentage of sales is primarily related to costs incurred to expedite delivery
of materials and an increase of allocated cost of sales elements to the division.
Enterprise Networks cost of sales, as a percent of division sales, decreased from 43.3% in the
three months ended March 31, 2009 to 41.6% in the three months ended March 31, 2010. The decrease
in cost of sales as a percentage of sales is primarily related to cost reductions generated through
improved manufacturing efficiencies and a reduction of allocated cost of sales elements to the
division, partially offset by an increase in costs incurred to expedite delivery of materials.
An important part of our strategy is to reduce the product costs of each succeeding product
generation and then to lower the products price based on the cost savings achieved. This may
cause variations in our gross profit percentage due to timing differences between the recognition
of cost reductions and the lowering of product selling prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 14.8% from $23.7 million in the three months
ended March 31, 2009 to $27.2 million in the three months ended March 31, 2010. The increase in
selling, general and administrative expenses is primarily related to increased staffing and travel
expenses.
Selling, general and administrative expenses as a percentage of sales decreased from 21.5% in the
three months ended March 31, 2009 to 21.4% in the three months ended March 31, 2010. Selling,
general and administrative expenses as a percentage of sales may fluctuate whenever there is a
significant fluctuation in revenues for the periods being compared.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 9.2% from $20.9 million in the three months ended March
31, 2009 to $22.8 million in the three months ended March 31, 2010. The increase in research and
development expenses reflects increased staffing and testing expense primarily related to customer
specific product development activities, as well as costs related to product design approvals
primarily for one or more of the top three U.S. carriers. As a percentage of sales, research and
development expenses decreased from 18.9% in the three months ended March 31, 2009 to 17.9% in the
three months ended March 31, 2010.
20
We expect to continue to incur research and development expenses in connection with our new and
existing products and our expansion into international markets. We continually evaluate new
product opportunities and engage in intensive research and product development efforts which
provides for new product development, enhancement of existing products and product cost reductions.
We may incur significant research and development expenses prior to the receipt of revenues from a
major new product group or market expansion.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased 6.8% from $1.6 million in the three months ended March 31,
2009 to $1.5 million in the three months ended March 31, 2010. This decrease is primarily driven
by a 0.4% reduction in the average rate of return on these investments as a result of lower
interest rates, partially offset by a 5.6% increase in our average investment balances.
INTEREST EXPENSE
Interest expense, which is primarily related to our taxable revenue bond, remained constant at $0.6
million in each of the three months ended March 31, 2010 and 2009. See Liquidity and Capital
Resources below for additional information on our revenue bond.
NET REALIZED INVESTMENT GAIN/LOSS
Net realized investment gain/loss changed from a $3.2 million loss in the three months ended March
31, 2009 to a $2.2 million gain in the three months ended March 31, 2010. This change is primarily
a result of the other-than-temporary impairment of certain securities in our equity portfolio in
2009 and the realized gain on the sale of one security in 2010. See Investing Activities in
Liquidity and Capital Resources below for additional information.
OTHER EXPENSE, NET
Other expense, net, comprised primarily of miscellaneous income, gains and losses on foreign
currency transactions, investment account management fees, scrap raw material sales, and gains and
losses on the disposal of property, plant and equipment occurring in the normal course of business,
increased from $0.1 million of expense in the three months ended March 31, 2009 to $0.2 million of
expense in the three months ended March 31, 2010.
INCOME TAXES
Our effective tax rate increased from 26.3% in the three months ended March 31, 2009 to 35.7% in
the three months ended March 31, 2010. The increase is primarily due to a one-time tax benefit of
$1.7 million recorded in the first quarter of 2009, which decreased our effective tax rate by 8.3
percentage points. The $1.7 million benefit resulted from a review of our deduction for
manufacturers domestic production activities for the years 2005, 2006 and 2007 under Internal
Revenue Code Section 199, which was completed during the first quarter of 2009. Amended income tax
returns were filed during the first quarter of 2009 in association with this benefit. In addition,
the manufacturers domestic production activities deduction increased from six percent in 2009 to
nine percent in 2010, resulting in approximately a 1.0 percentage point decrease in our rate for
the first quarter of 2010. The tax provision for the first quarter of 2009 also included the
benefit from the research and development tax credit. The tax provision rate for the first quarter
of 2010 did not include a benefit from the research and development tax credit, which expired on
December 31, 2009. The
exclusion of the benefit from the research and development tax credits resulted in approximately a
2.0 percentage point increase in our effective tax rate in the first quarter of 2010.
21
NET INCOME
As a result of the above factors, net income increased $3.0 million from $15.2 million in the three
months ended March 31, 2009 to $18.2 million in the three months ended March 31, 2010.
As a percentage of sales, net income increased from 13.8% in the three months ended March 31, 2009
to 14.3% in the three months ended March 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At March 31, 2010, cash on hand was $26.9 million and short-term investments were $137.3 million,
which resulted in available short-term liquidity of $164.2 million. At December 31, 2009, our cash
on hand of $24.1 million and short-term investments of $172.5 million resulted in available
short-term liquidity of $196.6 million. The decrease in liquidity from December 31, 2009 to March
31, 2010 primarily reflects a realignment of our investment portfolio from short-term to long-term,
which increased long-term investments by $52.4 million in the first quarter of 2010 compared to
December 31, 2009.
Operating Activities
Our working capital, which consists of current assets less current liabilities, decreased 14.2%
from $278.0 million as of December 31, 2009 to $238.5 million as of March 31, 2010. The quick
ratio, defined as cash, cash equivalents, short-term investments, and net accounts receivable,
divided by current liabilities, decreased from 5.54 as of December 31, 2009 to 3.42 as of March 31,
2010. The current ratio, defined as current assets divided by current liabilities, decreased from
6.82 as of December 31, 2009 to 4.42 as of March 31, 2010. Our working capital, the quick ratio,
and the current ratio decreased due to a realignment of our investment portfolio from short-term to
long-term, which increased long-term investments by $52.4 million, and an increase in current
liabilities of $21.9 million, due primarily to increases of $9.0 million in accounts payable and
$8.7 million in income taxes payable during the first quarter of 2010.
Net accounts receivable increased from $68.0 million at December 31, 2009 to $74.1 million at March
31, 2010. Our allowance for doubtful accounts was $0.1 million at December 31, 2009 and $0.2
million at March 31, 2010. Quarterly accounts receivable days sales outstanding (DSO) increased
from 50 days as of December 31, 2009 to 53 days as of March 31, 2010. Net accounts receivable and
DSO increased for the quarter ended March 31, 2010 due to the timing of sales during the quarter.
Other receivables increased from $4.1 million at December 31, 2009 to $10.1 million at March 31,
2010. Generally, the change in other receivables is due to the timing of collections for materials
supplied to our contract manufacturers.
Quarterly inventory turnover decreased from 4.5 turns as of December 31, 2009 to 4.4 turns as of
March 31, 2010. Inventory increased 4.7% from December 31, 2009 to March 31, 2010. We expect
inventory levels to fluctuate as we attempt to maintain sufficient inventory to ensure competitive
lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing
technology and customer demand.
Accounts payable increased 34.9% from $25.8 million at December 31, 2009 to $34.8 million at March
31, 2010. Generally, the change in accounts payable is due to variations in the timing of the
receipt of supplies, inventory and services and our subsequent payments for these purchases.
Investing Activities
Capital expenditures totaled approximately $2.3 million and $2.4 million for the three months ended
March 31, 2010 and 2009, respectively. These expenditures were primarily used to purchase
manufacturing and test equipment and computer software and hardware.
Our combined short-term and long-term investments increased $17.3 million from $334.6 million at
December 31, 2009 to $351.9 million at March 31, 2010.
We invest all available cash not required for immediate use in operations primarily in securities
that we believe bear minimal risk of loss. At March 31, 2010 these investments included municipal
variable rate demand notes of $69.2 million, municipal fixed-rate bonds of $145.1 million and
corporate bonds issued by various banks that are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) of $41.0 million. At December 31, 2009, these investments included municipal
variable rate demand notes of $84.4 million, municipal fixed-rate bonds of $141.3 million and
corporate bonds guaranteed by the FDIC of $20.4 million.
22
Our municipal variable rate demand notes are classified as available-for-sale short-term
investments. At March 31, 2010, 98% had a credit rating of VMIG-1 or A-1+ with the remaining 2%
rated A-1, and all contained put options of seven days. Despite the long-term nature of their
stated contractual maturities, we believe that we have the ability to quickly liquidate these
securities. Our investments in these securities are recorded at fair value, and the interest rates
reset every seven days. We have the ability to sell our variable rate demand notes to the
remarketing agent, tender agent, or issuer at par value plus accrued interest in the event we
decide to liquidate our investment in a particular variable rate demand note. Approximately 32% of
our variable rate demand notes are supported by letters of credit from banks that we believe to be
in good financial condition. The remaining 68% of our variable rate demand notes are supported by
standby purchase agreements. As a result of all of these factors, we had no cumulative gross
unrealized holding gains (losses) or gross realized gains (losses) from these investments at March
31, 2010. All income generated from these investments was recorded as interest income. We have
not been required to record any losses relating to municipal variable rate demand notes or auction
rate securities.
At March 31, 2010, approximately 42% of our municipal fixed-rate bond portfolio had a credit rating
of AAA, 51% had a credit rating of AA, and the remaining 7% had a credit rating of A. These bonds
are classified as available-for-sale investments and had an average duration of 1.18 years at March
31, 2010. Because our bond portfolio has a high quality rating and contractual maturities of a
short duration, we are able to obtain prices for these bonds derived from observable market inputs,
or for similar securities traded in an active market, on a daily basis.
At March 31, 2010, we held $41.0 million of corporate bonds issued by various banks that are
guaranteed by the FDIC. These bonds are classified as available-for-sale and had an average
duration of 2.15 years at March 31, 2010. All of these bonds had a credit rating of AAA at March
31, 2010. Because of the high quality and short duration of these issues, we are able to obtain
prices for these bonds derived from observable market inputs on a daily basis.
Our long-term investments increased 32.3% from $162.2 million at December 31, 2009 to $214.6
million at March 31, 2010. The primary reason for the increase in our long-term investments during
the first quarter of 2010 was the realignment of our investment portfolio. Long-term investments
at March 31, 2010 and December 31, 2009 included an investment in a certificate of deposit of $48.3
million which serves as collateral for our revenue bonds, as discussed below. We have various
equity investments included in long-term investments at a cost of $10.2 million and $9.8 million,
and with a fair value of $41.4 million and $33.5 million, at March 31, 2010 and December 31, 2009,
respectively, including a single equity security, of which we held 1.9 million shares and 2.1
million shares, carried at $29.4 million and $22.4 million of fair value at March 31, 2010 and
December 31, 2009, respectively. The single security traded approximately 1.3 million shares per
day in the first quarter of 2010 in an active market on a European stock exchange. Of the gross
unrealized gains included in the fair value of our marketable securities at March 31, 2010, this
single security comprised $28.7 million of this unrealized gain. Long-term investments at March
31, 2010 also include $3.6 million related to our deferred compensation plan; $2.2 million of other
investments carried at cost, consisting of interests in two private equity funds and an investment
in a privately held telecommunications equipment manufacturer; and $1.2 million of a fixed income
bond fund.
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. As a result of our review, we recorded an other-than-temporary impairment charge of $2
thousand during the first quarter of 2010 related to one marketable equity security. For the three
months ended March 31, 2009, we recorded an other-than-temporary impairment charge of $1.9 million
related to 99 marketable equity securities. In addition to the impairment charge we recorded on
our marketable equity securities, we recorded an impairment of $0.4 million related to our
investment in a fixed income bond fund and $0.5 million related to our deferred compensation plan
during the first quarter of 2009 as a result of similar reviews.
23
Financing Activities
Dividends
In July 2003, our Board of Directors elected to begin declaring quarterly dividends on our common
stock considering the tax treatment of dividends and adequate levels of Company liquidity. During
the three months ended March 31, 2010, we paid dividends totaling $5.6 million.
Debt
We have amounts outstanding under loans made pursuant to an Alabama State Industrial Development
Authority revenue bond (the Bond) which totaled $48.3 million at March 31, 2010 and December 31,
2009. At March 31, 2010, the estimated fair value of the Bond was approximately $45.0 million,
based on a debt security with a comparable interest rate and maturity and a Standard & Poors
credit rating of A+. Included in long-term investments are restricted funds in the amount of $48.3
million at March 31, 2010 and December 31, 2009, which is a collateral deposit against the
principal amount of the Bond. We have the right to set-off the balance of the Bond with the
collateral deposit in order to reduce the balance of the indebtedness. The Bond matures on January
1, 2020, and bears interest at the rate of 5% per annum. In conjunction with this program, we are
eligible to receive certain economic incentives from the state of Alabama that reduce the amount of
payroll withholdings we are required to remit to the state for those employment positions that
qualify under this program.
We are required to make payments in the amounts necessary to pay the principal and interest on the
amounts currently outstanding. Based on positive cash flow from operating activities, we have
decided to continue early partial redemptions of the Bond. It is our intent to make annual
principal payments in addition to the interest amounts that are due. In connection with this
decision, $0.5 million of the Bond debt has been classified as a current liability in the
Consolidated Balance Sheet.
Stock Repurchase Program
During the three months ended March 31, 2010, we repurchased 0.5 million shares of our common stock
at an average price of $21.62 per share under the repurchase plans approved by our Board of
Directors. Since 1997, our Board of Directors has approved multiple share repurchase programs that
have authorized open market repurchase transactions. We have the authority to purchase an
additional 2.2 million shares of our common stock under the plan approved by the Board of Directors
on April 14, 2008.
To accommodate employee stock option exercises, we issued 0.2 million shares of treasury stock for
$2.3 million during the three months ended March 31, 2010. During the three months ended March 31,
2009, we issued five thousand shares of treasury stock for $49 thousand.
Off-Balance Sheet Arrangements and Contractual Obligations
We do not have off-balance sheet financing arrangements and have not engaged in any related party
transactions or arrangements with unconsolidated entities or other persons that are reasonably
likely to materially affect liquidity or the availability of or requirements for capital resources.
During the three months ended March 31, 2010, there have been no material changes in contractual
obligations and commercial commitments from those discussed in our most recent Annual Report on
Form 10-K for the year ended December 31, 2009 filed on February 26, 2010 with the SEC.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we
have contributed $7.9 million as of March 31, 2010, of which $7.4 million has been applied to these
commitments. See Note 4 of Notes to Consolidated Financial Statements for additional information.
We intend to finance our operations with cash flow from operations. We have used, and expect to
continue to use, the cash generated from operations for working capital, purchases of treasury
stock, dividend payments, and other general corporate purposes, including (i) product development
activities to enhance our existing products and develop new products and (ii) expansion of sales
and marketing activities. We believe our cash and cash equivalents, investments and cash generated
from operations to be adequate to meet our operating and capital needs for the foreseeable future.
24
FACTORS THAT COULD AFFECT OUR FUTURE RESULTS
The following are some of the risks that could affect our financial performance or could cause
actual results to differ materially from those expressed or implied in our forward-looking
statements:
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Our operating results may fluctuate in future periods, which may adversely affect our
stock price. |
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|
Our revenue for a particular period can be difficult to predict, and a shortfall in
revenue may harm our operating results. |
|
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General economic conditions may reduce our revenues and harm our operating results. |
|
|
Our exposure to the credit risks of our customers and distributors may make it difficult
to collect accounts receivable and could adversely affect our operating results and financial
condition. |
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We expect gross margin to vary over time, and our level of product gross margin may not be
sustainable. |
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We must continue to update and improve our products and develop new products in order to
compete and to keep pace with improvements in telecommunications technology. |
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Our products may not continue to comply with the regulations governing their sale, which
may harm our business. |
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Our failure or the failure of our contract manufacturers to comply with applicable
environmental regulations could adversely impact our results of operations. |
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If our products do not interoperate with our customers networks, installations may be
delayed or cancelled, which could harm our business. |
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The lengthy approval process required by ILECs and other service providers for new
products could result in fluctuations in our revenue. |
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We engage in research and development activities to improve the application of developed
technologies, and as a consequence may miss certain market opportunities enjoyed by larger
companies with substantially greater research and development efforts who may focus on more
leading edge development. |
|
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We depend heavily on sales to certain customers; the loss of any of these customers would
significantly reduce our revenues and net income. |
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Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors
located in Asia may result in us not meeting our cost, quality or performance standards. |
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Our dependence on a limited number of suppliers may prevent us from delivering our
products on a timely basis, which could have a material adverse effect on customer relations
and operating results. |
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We compete in markets that have become increasingly competitive, which may result in
reduced gross profit margins and market share. |
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Our estimates regarding future warranty obligations may change due to product failure
rates, shipment volumes, field service obligations and other rework costs incurred in
correcting product failures. If our estimates change, the liability for warranty obligations
may be increased or decreased, impacting future cost of goods sold. |
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Managing our inventory is complex and may include write-downs of excess or obsolete
inventory. |
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We may pursue acquisitions, which may expose us to a number of risks. If we are unable to
mitigate these risks, our business may be negatively impacted. |
|
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Increased sales volume in international markets could result in increased costs or loss of
revenue due to factors inherent in these markets. |
|
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We may be adversely affected by fluctuations in currency exchange rates. |
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|
Our success depends on our ability to reduce the selling prices of succeeding generations
of our products. |
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Our failure to maintain rights to intellectual property used in our business could
adversely affect the development, functionality, and commercial value of our products. |
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Software under license from third parties for use in certain of our products may not
continue to be available to us on commercially reasonable terms. |
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We may incur liabilities or become subject to litigation that would have a material effect
on our business. |
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Consolidation and deterioration in the competitive service provider market could result in
a significant decrease in our revenue. |
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We depend on distributors who maintain inventories of our products. If the distributors
reduce their inventories of these products, our sales could be adversely affected. |
25
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If we are unable to successfully develop relationships with system integrators, service
providers, and enterprise value added resellers, our sales may be negatively affected. |
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If we fail to manage our exposure to worldwide financial and securities markets
successfully, our operating results and financial statements could be materially impacted. |
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Changes in our effective tax rate or assessments arising from tax audits may have an
adverse impact on our results. |
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Our success depends on attracting and retaining key personnel. |
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Regulatory and potential physical impacts of climate change may affect our customers and
our production operations, resulting in adverse affects on our operating results. |
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While we believe our internal control over financial reporting is adequate, a failure to
maintain effective internal control over financial reporting as our business expands could
result in a loss of investor confidence in our financial reports and have an adverse effect
on our stock price. |
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|
The price of our common stock has been volatile and may continue to fluctuate
significantly. |
The foregoing list of risks is not exclusive. For a more detailed description of the risk factors
associated with our business, see Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2009, filed on February 26, 2010 with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates and prices of
marketable equity and fixed-income securities. The primary objective of the large majority of our
investment activities is to preserve principal while at the same time achieving appropriate yields
without significantly increasing risk. To achieve this objective, a majority of our marketable
securities are investment grade, municipal, fixed-rate bonds, municipal variable rate demand notes
and municipal money market instruments denominated in United States dollars. At March 31, 2010,
98% of our municipal variable rate demand notes had a credit rating of VMIG-1 or A-1+, while the
remaining 2% had a rating of A-1. Approximately 42% of our municipal fixed-rate bonds had a credit
rating of AAA, 51% had a credit rating of AA, and the remaining 7% had a credit rating of A. We
also held $41.0 million of corporate bonds that are guaranteed by the Federal Deposit Insurance
Corporation and issued by various banks. At March 31, 2010, all of our corporate bonds had a
credit rating of AAA.
We maintain depository investments with certain financial institutions. Although these depository
investments may exceed government insured depository limits, we have evaluated the credit
worthiness of these financial institutions, and determined the risk of material financial loss due
to exposure of such credit risk to be minimal. As of March 31, 2010, $23.2 million of our cash and
cash equivalents, primarily certain domestic money market funds and foreign depository accounts,
were in excess of government provided insured depository limits. The Temporary Liquidity Guarantee
Program adopted during 2008 by the Federal Deposit Insurance Corporation provided full coverage of
our domestic depository accounts through December 2009. Although this program was extended through
June 30, 2010, the banks where we maintain our depository accounts opted out of participation in
this program after December 31, 2009.
As of March 31, 2010, approximately $268.6 million of our cash and investments may be directly
affected by changes in interest rates. We have performed a hypothetical sensitivity analysis
assuming market interest rates increase or
decrease by 50 basis points (bps), 100 bps and 150 bps for the entire year, while all other
variables remain constant. At March 31, 2010, we held $89.9 million of cash and money market
instruments and municipal variable rate demand notes where a change in interest rates would impact
our interest income. Hypothetical 50 bps, 100 bps and 150 bps declines in interest rates as of
March 31, 2010 would reduce annualized interest income on our cash and money market instruments and
municipal variable rate demand notes by approximately $0.4 million, $0.9 million and $1.3 million,
respectively. In addition, we held $178.7 million of fixed-rate municipal bonds and corporate
bonds whose fair values may be directly affected by a change in interest rates. Hypothetical 50
bps, 100 bps and 150 bps increases in interest rates as of March 31, 2010 would reduce the fair
value of our municipal fixed-rate bonds and corporate bonds by approximately $1.2 million, $2.4
million and $3.5 million, respectively.
26
As of March 31, 2009, interest income on approximately $73.8 million of our cash and investments
was subject to being directly affected by changes in interest rates. We performed a hypothetical
sensitivity analysis assuming market interest rates increase or decrease by 50 basis points (bps),
100 bps and 150 bps, while all other variables remain constant. Hypothetical 50 bps, 100 bps and
150 bps declines in interest rates as of March 31, 2009 would have reduced annualized interest
income on our cash, money market instruments and municipal variable rate demand notes by
approximately $0.4 million, $0.7 million and $1.1 million, respectively. In addition, hypothetical
50 bps, 100 bps and 150 bps increases in interest rates as of March 31, 2009 would have reduced the
fair value of our municipal fixed-rate bonds and corporate bonds by approximately $0.9 million,
$1.8 million and $2.7 million, respectively.
For further information about the fair value of our available-for-sale investments as of March 31,
2010 see Note 4 of Notes to Consolidated Financial Statements.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief
Financial Officer are responsible for establishing and maintaining disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for
ADTRAN. Our Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
quarterly report, have concluded that our disclosure controls and procedures are effective.
(b) Changes in internal control over financial reporting. There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
A list of factors that could materially affect our business, financial condition or operating
results is included under Factors That Could Affect Our Future Results in Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 of
Part I of this report. There have been no material changes to the risk factors as disclosed in
Item 1A of Part I of our most recent Annual Report on Form 10-K for the year ended December 31,
2009, filed on February 26, 2010 with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth ADTRANs repurchases of its common stock for the months indicated.
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|
|
|
|
|
Total Number of |
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|
Maximum Number |
|
|
|
Total |
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Average |
|
|
Shares Purchased |
|
|
of Shares that May |
|
|
|
Number of |
|
|
Price |
|
|
as Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
Shares |
|
|
Paid per |
|
|
Announced Plans |
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|
Under the Plans or |
|
Period |
|
Purchased |
|
|
Share |
|
|
or Programs (1) |
|
|
Programs |
|
January 1, 2010 January 31, 2010 |
|
|
200,000 |
|
|
$ |
21.69 |
|
|
|
200,000 |
|
|
|
2,498,576 |
|
February 1, 2010 February 28, 2010 |
|
|
277,851 |
|
|
$ |
21.56 |
|
|
|
277,851 |
|
|
|
2,220,725 |
|
March 1, 2010 March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,220,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
|
477,851 |
|
|
|
|
|
|
|
477,851 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
(1) |
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On April 14, 2008, ADTRANs Board of Directors approved additional repurchases of up to
5,000,000 shares of its common stock. This plan will be implemented through open market
purchases from time to time as conditions warrant. |
ITEM 6. EXHIBITS
Exhibits.
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Exhibit No. |
|
Description |
|
31 |
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Rule 13a-14(a)/15d-14(a) Certifications |
|
|
|
|
|
|
32 |
|
|
Section 1350 Certifications |
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ADTRAN, INC.
(Registrant)
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Date: May 3, 2010 |
/s/ James E. Matthews
|
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James E. Matthews |
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|
Senior Vice President Finance,
Chief Financial Officer, Treasurer,
Secretary and Director
(Principal Accounting Officer) |
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28
EXHIBIT INDEX
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Exhibit No. |
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Description |
|
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|
|
31 |
|
|
Rule 13a-14(a)/15d-14(a) Certifications |
|
|
|
|
|
|
32 |
|
|
Section 1350 Certifications |
29