of Opportunities
A MOSAIC OF
OPPORTUNITIES
2016 ANNUAL REPORT
ADTRAN is an ISO 9001, ISO 14001, and a TL 9000 certified supplier. ADTRAN, Inc.
is an Equal Opportunity Employer committed to utilizing Minority Business Enterprises
(MBE), Woman-Owned Business Enterprises (WBE) and Disabled Veteran Business
Enterprises (DVBE) whenever possible and practical for procurements supporting
ADTRAN and our customers.
ADTRAN, NetVanta, Bluesocket, vWLAN and Total Access are registered trademarks of
ADTRAN, Inc. ATLAS is a trademark of ADTRAN, Inc. All other trademarks and registered
trademarks mentioned in this publication are the property of their respective owners.
An Export License is required if these ADTRAN products are sold to a Government
Entity outside of the EU+8 (Austria, Australia, Belgium, Bulgaria, Cyprus, Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan,
Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the United
Kingdom). This is per DOC/BIS ruling G030477 issued June 6, 2003.
Copyright © 2017 ADTRAN, Inc. All rights reserved. Printed in USA. AD10404A
ADTRAN 2016 Annual Report
Information is a powerful tool.
It can be used in so many ways to
better the lives of those who seek
it. Today, some 3.5 billion people
have Internet access and these
connections are positively affect-
ing how they live, work and play.
However, 3.9 billion people remain
without connectivity, driving the
need for broadband on a global basis.
We depend on Internet access.
It can be used to store and access
information or as a means of
communication between people
and organizations. It is also a vast
source of entertainment from
games and books to movies and
hobbies. Even more importantly,
the Internet has redefined business.
It is used as a primary means
to pay bills, purchase commodi-
ties, make bank transactions and
purchase goods and services.
ADTRAN is at the forefront of
pushing the boundaries of Internet
speed and access.
New industries have emerged
to support the promotion of
businesses on the Internet. It is
revolutionizing industries like
education and healthcare, enabling
distance learning, telehealth and
much, much more.
Because the Internet touches
our everyday lives so much in
today’s world, and with this influ-
ence continuing to grow, having
a connection is simply not enough.
We want faster connections that
will enable more interactivity and
more collaboration. According to
Broadbandtrends, in 2016 only six
percent of subscribers had speeds
of 100Mbps or greater. This is a
long way from what people and
businesses need. With an increasing
number of over-the-top and stream-
ing services, combined with mobile
providers offering unlimited data,
the need for high-speed ultra-broad-
band services has no end in sight. In
fact, Broadbandtrends projects that
the number of subscribers receiving
speeds of 100Mbps or greater will
increase to 34 percent by 2020, with
the strongest growth coming in the
500Mbps – 1Gbps segment.
3
Letter to Shareholders ADTRAN is at the forefront of
pushing the boundaries of Inter-
net speed and access. Everything
we do is centered on enabling
communities and connecting lives
as we define the future network.
We are enabling operators of all
types around the globe to deploy
services faster and more efficiently
than ever before. We offer one of
the most comprehensive broad-
band product portfolios on the
market with solutions leveraging
fiber, copper, coax and wireless
access networks. These solutions
are enabling our customers to take
advantage of the mosaic of oppor-
tunities resulting from increasing
network speed and agility.
4
Our focus remains on providing
comprehensive access solutions
with clear industry leadership in
Gigabit fiber access and ultra-high
speed broadband.
ADTRAN 2016 Annual Report Our focus remains on providing
comprehensive access solutions
with clear industry leadership in
Gigabit fiber access and ultra-high
speed broadband. This, combined
with the world’s leading portfolio
of virtualized access products,
positions us to capitalize on the evo-
lution in access as carriers around
the world upgrade their infrastruc-
ture to meet customer demand.
During 2016, the telecom market
experienced strong competition
from Multi-Service Operators
(MSOs) with the initial roll out
of DOCSIS 3.1 promising ultra-
broadband services to millions
of customers. As a result, telecom
carriers must quickly respond with
faster technologies to remain
competitive. Next-generation
technologies like Super-Vectoring
and G.fast have been proven
to be cost-effective alternatives
for the delivery of multi-hundred
Mbps or Gigabit services for
customer connections, requiring
only a fraction of the cost and
time needed for full fiber builds.
Going forward, 10G capabilities
will emerge in access networks
as we realize multi-10G NG-PON2
and eventually 25G/40G/100G.
Furthermore, the promise of
wireless ubiquity, the introduction
of 5G, and millimeter wave
technologies will help drive the
need for ever-present, low-latency,
high-speed broadband services
in the future.
5
Letter to Shareholders STRENGTHEN
SOFTWARE CAPABILITIES
KEY FOCUS
1
2
3
BROADBAND ACCESS
INNOVATION
GROWTH IN
SERVICES & SUPPORT
6
ADTRAN 2016 Annual Report The Year in Review
As we look back on 2016, the
growing competition among U.S.-
based service providers helped
drive our domestic business up
20 percent year-over-year. This
enabled us to finish the year strong
at $637 million, up six percent
over the previous year. We were
also able to beat consensus revenue
and earnings estimates all four
quarters, further strengthening
shareholder value. The second half
of the year saw a resurgence in
our international business, which
contributed 21 percent of overall
revenue for the year.
As previously reported, we func-
tionally realigned our business in
mid-2015 with three goals in mind:
■ To strengthen our software
capabilities and increase our
position to address virtual-
ized technologies spurred by
Software Defined Networking
(SDN) and Network Function
Virtualization (NFV),
■ To position the company
to address the resurgence in
broadband spending with
innovative solutions in areas
like NG-PON and G.fast, and
■ To accelerate the growth
in our services business by
moving it into a separate
segment with the ability to
scale to meet the growing
demand of our customers.
These changes have enabled us
to increase productivity and effi-
ciency, preparing us for the mosaic
of opportunities that lie ahead.
7
Letter to Shareholders Strengthening our software
capabilities and increasing our po-
sition to address virtualized tech-
nologies will be vitally important
as we look to the future. As service
providers continue to seek ways to
deliver more bandwidth to their
customers, the advantages of open,
programmable and scalable net-
works afforded through SDN and
NFV are particularly attractive to
larger Tier 1 customers. In fact, we
have seen major barriers to market
entry begin to erode as we move
more features and functionality
to software. We continue to place
growing emphasis on our software
development efforts moving for-
ward as this enables us to provide
an agile response to customer needs.
Software &
Virtualization
8
ADTRAN 2016 Annual Report Our commitment to software
development and virtualization
was highlighted in 2016 through
our introduction of Mosaic, the
industry’s first truly open Soft-
ware Defined Access (SD-Access)
services architecture, the Mosaic
Cloud Platform, Mosaic OS and
our first Programmable Network
Functions (PNFs). We believe we
are the only access vendor with
SDN controls, software modularity
and application virtualization.
Our solution is also media and
platform agnostic, making it even
more appealing to customers be-
ginning the transition to virtual-
ized multi-vendor networks.
In less than one quarter after
announcing these solutions,
we had completed lab certification
with a domestic Tier 1 provider
and had begun work with other
Tier 1 and 2 Communications
Services Providers (CSPs) in
the U.S., Europe, and the Middle
East. By year end, this solution
was selected for implementation
by multiple Tier 1 carriers on a
global basis and with additional
lab trials underway.
Our focus on software development
highlights the importance of our
Research and Development (R&D)
efforts. R&D is the cornerstone
of future opportunities for our
customers and ADTRAN. We are
committed to innovation, invest-
ing approximately 20 percent of
revenue in R&D on an annual basis.
As a result of these efforts, we now
proudly hold more than 500 active
patents representing inventions in
both the U.S. and abroad.
ADTRAN Mosaic is the
industry’s first truly open
software defined (SD-Access)
Services Architecture.
9
Letter to Shareholders The Resurgence
of Broadband
A supportive regulatory environ-
ment has created a number of
opportunities for us as we look to
the year ahead. The resurgence in
broadband spending spurred by
the CAF and CAF II programs,
along with increased demand
for faster-speed services by both
residential and business customers,
has created a wealth of opportu-
nities. Tier 1 and Tier 2 service
providers have accepted $9 billion
in price cap carrier CAF II funding
beginning in 2016 that will run
through 2020. ADTRAN’s network
solutions are ideally suited for
CAF build-outs. We believe that
the enactment of CAF II rate of
return carrier regulations, which
provide over $5 billion in A-CAM
support over a 10-year period
to Tier 3 carriers, will also prove
to be positive for us.
G.fast and Vectoring/Super-Vec-
toring technologies utilize existing
copper plant to deliver speeds
beyond 1Gbps. We bolstered our
resources for G.fast development
by almost 35 percent, resulting
in increased customer momen-
tum. As of year-end 2016, we had
participated in more than 108
trials globally across six continents
and, most importantly, celebrated
customer awards in both the U.S.
and Europe. Our G.fast product
began shipping in late 2016 and
we anticipate it will bring added
momentum into the year ahead.
10
We have now shipped our
10 millionth vectoring-capable
port, making vectoring the
fastest-growing product in our
company’s history.
R
E
V
O
100
G.FAST
TRIALS
ACROSS SIX CONTINENTS
10
GIGABIT
PER SECOND
WORLD’S MOST ADVANCED
FIBER-ACCESS SOLUTIONS
ADTRAN 2016 Annual Report The demand for our vectoring
products remains strong. We
extended our vectoring capabilities
in 2016 with the first lab shipments
of the world’s highest density
Super-Vectoring product. We have
now shipped our 10 millionth
vectoring-capable port, making
vectoring the fastest-growing
product in our company’s history.
We are a leader in the world’s
largest vectoring project currently
underway in Europe, and we have
the dominant position in the larg-
est vectoring project in the U.S.,
which began in 2016. We anticipate
continued success with this product
in the year ahead.
As the demand for bandwidth
continues to grow, so too does
the fiber opportunity. PON
continues to perform very well
for us and represented the fast-
est-growing product segment for
us in 2016. This year marked
the initial deployment of our
XGS-PON platform, a technology
ADTRAN pioneered that com-
pleted standardization in June. It
substantially changes the econom-
ics of 10G PON deployment for
wireless backhaul and business
services. Our NG-PON2 initiatives
continue to move forward as we
bring to market the world’s most
advanced fiber access solution
using multi-wavelength TWDM-
PON, Optical Network Terminals
(ONTs) with tunable optics and
SDN control. Our solution is
unique in that it comprehensively
addresses network growth by
providing the easiest and most
cost-effective way to support a
common, converged fiber network
delivering business, residential
and wireless backhaul services.
Like traditional Telcos, MSOs are
fighting to win broadband cus-
tomers, presenting an attractive
opportunity for ADTRAN. We
began increasing our focus on
this space approximately two
years ago and have experienced
some traction in these accounts
with our customer devices
portfolio. In light of the sizable
opportunity this market presents,
we acquired CommScope’s active
fiber access product lines in mid-
2016. This acquisition quickly
opened up the addressable market
and also provides us with a base
of incumbency to leverage moving
forward. We now offer multiple
solutions for the MSO market
ranging from business voice and
customer premises equipment
to Radio Frequency over Glass
(RFoG) and Ethernet Passive
Optical Networking (EPON)
solutions for broadband services
delivery. We also anticipate that
Mosaic and our virtualized solu-
tions will be beneficial as market
penetration continues.
11
Letter to Shareholders Now, in addition to acquiring
our products, operators can
purchase turnkey services enabling
them to turn up services faster
and more efficiently, speeding their
time to market.
12
ADTRAN 2016 Annual Report Services
& Support
SERVICES & SUPPORT
RECORD REVENUE PERFORMANCE
GROWTH
53%
17%
SERVICES
& SUPPORT
COMPANY
REVENUE
Services & Support (S&S) holds
great potential for the future. As
part of our business realignment,
we moved S&S into a separate
segment, enabling us to scale to
meet the needs of our customers
and accelerate growth.
The growing demand for ultra-
broadband services has left
many service providers turning
to outside help for planning,
engineering, implementation, and
maintenance and support services.
In turn, this has created a great
opportunity for ADTRAN.
Now, in addition to acquiring
our products, operators can pur-
chase turnkey services enabling
them to turn up services faster
and more efficiently, speeding
their time to market.
S&S set new revenue records
in 2016, growing 53 percent
and comprising 17 percent of
company revenue. Demand
is growing for our services at a
healthy pace in both domestic
markets and abroad, and we
anticipate this trend to continue
into the foreseeable future.
13
Letter to Shareholders Financial Highlights
Company Financial Summary
(Dollars In Millions, Except Per Share Amounts)
$637M
Annual Revenue
Annual Earnings
Per Share (Diluted)
Gross Margin
Operating Income
14
ADTRAN 2016 Annual Report
Consolidated Statements of Income Data
(In thousands, except per share amounts)
2016
2015
Total sales
$636,781
$600,064
Income before provision
for income taxes
$46,895
$25,708
Net income
$35,229
$18,646
Earnings per common
share (Diluted)
$0.72
$0.36
Consolidated Balance Sheet Data
(In thousands)
UNRESTRICTED
CASH AND
MARKETABLE
SECURITIES
TOTAL
ASSETS
STOCKHOLDERS’
EQUITY
2014 - $353,2071
2015 - $272,8482
2016 - $256,0213
2014 - $738,694
2015 - $632,904
2016 - $667,235
2014 - $549,013
2015 - $480,160
2016 - $479,517
1 Net of $81 million in stock repurchases and
$20 million in dividend payments during 2014
2 Net of $66 million in stock repurchases and
$18 million in dividend payments during 2015
3 Net of $26 million in stock repurchases and
$18 million in dividend payments during 2016
Letter to Shareholders
15
Looking ahead, we are entering
2017 with renewed optimism
about the opportunities before
us. The appetite for infrastruc-
ture development continues to
grow. We believe the regulatory
opportunities afforded by CAF II
will continue to develop this year.
Likewise, we look for our success
in the technology and services
areas mentioned above to continue
to grow. We have a wealth of op-
portunities before us, and we must
now capitalize on them, growing
revenue and shareholder equity.
During the year ahead, we will
work to capitalize on the many
opportunities that lie before us
and focus on our strategic goals,
which include increasing market
share in fixed-broadband access
among our existing market seg-
ments, positioning the company
to realize growth in software and
services revenue contribution as
the industry shifts to software and
outsourcing services functions,
and leveraging adjacent market
opportunities, enabling us to
broaden our addressable markets.
However, none of this will be
attainable without our employees.
I am continually amazed by the
selfless devotion our employees
display for our company. There is
no challenge too large, and they
continually strive for what is best
for ADTRAN. We were proud to
celebrate 30 years of success in
2016 – the result of the hard work
and dedication of these individu-
als. We now look forward to the
next 30 years and the great things
the future holds. Thank you for
a job well done!
Tom Stanton, Chairman & CEO
ADTRAN, Inc.
2017
AND BEYOND
16
ADTRAN 2016 Annual Report
Financial Results
18 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
19 Stock Performance Graph
20 Selected Financial Data
21 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Critical Accounting Policies and Estimates
Results of Operations
2016 Compared to 2015
2015 Compared to 2014
Liquidity and Capital Resources
Recently Issued Accounting Pronouncements
Subsequent Events
35 Quantitative and Qualitative Disclosures About Market Risk
36 Report of Independent Registered Public Accounting Firm
37 Financial Statements
42 Notes to Consolidated Financial Statements
Note 1
– Nature of Business and Summary of Significant Accounting Policies
Note 2
– Business Combinations
Note 3
– Stock-Based Compensation
Note 4
– Investments
Note 5
– Derivative Instruments and Hedging Activities
Note 6
– Inventory
Note 7
– Property, Plant and Equipment
Note 8
– Goodwill and Intangible Assets
Note 9
– Alabama State Industrial Development Authority Financing and Economic Incentives
Note 10 – Income Taxes
Note 11 – Employee Benefit Plans
Note 12 – Segment Information and Major Customers
Note 13 – Commitments and Contingencies
Note 14 – Earnings Per Share
Note 15 – Summarized Quarterly Financial Data (Unaudited)
Note 16 – Related Party Transactions
Note 17 – Subsequent Events
This annual report contains forward-looking statements which reflect management’s best judgment based on factors currently known.
However, these statements involve risks and uncertainties, including the successful development and market acceptance of new
products, the degree of competition in the market for such products, the product and channel mix, component costs, manufacturing
efficiencies, and other risks detailed in our annual report on Form 10-K for the year ended December 31, 2016. These risks and
uncertainties could cause actual results to differ materially from those in the forward-looking statements included in this annual report.
17
Financial Results Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities
ADTRAN’s common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. As of February 2, 2017,
ADTRAN had 187 stockholders of record and approximately 7,434 beneficial owners of shares held in street name.
The following table shows the high and low closing prices per share for our common stock as reported by NASDAQ for the
periods indicated.
Common Stock Prices
2016
High
Low
2015
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$20.47
$16.60
$20.43
$17.14
$19.74
$17.81
$23.15
$17.90
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$23.38
$18.32
$19.27
$15.98
$17.28
$14.38
$17.52
$14.46
The following table shows the shareholder dividends paid in each quarter of 2016 and 2015. The Board of Directors presently
anticipates that it will declare a regular quarterly dividend so long as the present tax treatment of dividends exists and adequate
levels of liquidity are maintained.
Dividends per Common Share
2016
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
Stock Repurchases
The following table sets forth repurchases of our common stock for the months indicated.
Total
Number of
Shares
Purchased
Average
Price Paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
Maximum Number of
Shares That May Yet Be
Purchased Under the
Plans or Programs
Period
October 1, 2016 – October 31, 2016
November 1, 2016 – November 30, 2016
December 1, 2016 – December 31, 2016
37,082
124,414
—
17.81
18.00
—
Total
161,496
37,082
124,414
—
161,496
4,539,322
4,414,908
4,414,908
(1) Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market repurchase
transactions of up to 50.0 million shares of our common stock, which will be implemented through open market or private purchases
from time to time as conditions warrant.
18
ADTRAN 2016 Annual Report Stock Performance Graph
Our common stock began trading on the NASDAQ National Market on August 9, 1994. The price information reflected
for our common stock in the following performance graph and accompanying table represents the closing sales prices of
the common stock for the period from December 31, 2011 through December 31, 2016, on an annual basis. The graph
and the accompanying table compare the cumulative total stockholders’ return on our common stock with the NASDAQ
Telecommunications Index and the NASDAQ Composite Index. The calculations in the following graph and table assume
that $100 was invested on December 31, 2011 in each of our common stock, the NASDAQ Telecommunications Index
and the NASDAQ Composite Index and also assume dividend reinvestment.
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
ADTRAN, Inc.
NASDAQ Composite
NASDAQ Telecommunications
ADTRAN, Inc.
NASDAQ Composite
NASDAQ Telecommunications
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
$100.00
$100.00
$100.00
$65.79
$116.41
$102.78
$92.38
$165.47
$143.40
$75.77
$188.69
$149.42
$61.14
$200.32
$144.02
$80.92
$216.54
$153.88
19
Financial Results Selected Financial Data
Income Statement Data
(In thousands, except per share amounts)
Year Ended December 31,
2016
2015
2014
2013
2012
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Operating income
Interest and dividend income
Interest expense
Net realized investment gain
Other income (expense), net
Gain on bargain purchase of a business
Income before provision for income taxes
Provision for income taxes
Net income
$636,781
$600,064
$630,007
$641,744
$620,614
345,437
291,344
131,805
124,804
34,735
3,918
(572)
5,923
(651)
3,542
46,895
(11,666)
$35,229
333,167
266,897
123,542
129,876
13,479
3,953
(596)
10,337
(1,465)
—
318,680
311,327
131,958
132,258
47,111
5,019
(677)
7,278
1,175
—
332,858
308,886
129,366
131,055
48,465
7,012
(2,325)
8,614
(911)
—
303,971
316,643
134,523
125,951
56,169
7,657
(2,347)
9,550
183
1,753
25,708
59,906
60,855
72,965
(7,062)
(15,286)
(15,061)
(25,702)
$18,646
$44,620
$45,794
$47,263
Weighted average shares outstanding – basic
48,724
51,145
55,120
59,001
63,259
Weighted average shares outstanding –
assuming dilution (1)
Earnings per common share – basic
Earnings per common share – assuming dilution (1)
Dividends declared and paid per common share
48,949
51,267
55,482
59,424
63,774
$0.72
$0.72
$0.36
$0.36
$0.36
$0.36
$0.81
$0.80
$0.36
$0.78
$0.77
$0.36
$0.75
$0.74
$0.36
Balance Sheet Data
(In thousands)
At December 31,
Working capital (2)
Total assets
Total debt
Stockholders’ equity
2016
$226,367
$667,235
$27,800
2015
$219,219
$632,904
$28,900
2014
$214,985
$738,694
$30,000
2013
$260,252
$789,898
$46,500
2012
$324,924
$883,656
$46,500
$479,517
$480,160
$549,013
$604,606
$692,406
(1) Assumes exercise of dilutive stock options calculated under the treasury method. See Notes 1 and 14 of Notes to Consolidated
Financial Statements.
(2) Working capital consists of current assets less current liabilities. Prior year amounts have been recast to conform to the current period’s
presentation as a result of our early adoption of Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred
Taxes. See Note 1 of Notes to Consolidated Financial Statements.
20
ADTRAN 2016 Annual Report Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Overview
ADTRAN, Inc. (ADTRAN) is a leading global provider of networking and communications equipment. Our solutions enable
voice, data, video and Internet communications across a variety of network infrastructures. These solutions are deployed by
many of the United States’ and the world’s largest CSPs, distributed enterprises and small and medium-sized businesses, public
and private enterprises, and millions of individual users worldwide.
Our success depends upon our ability to increase unit volume and market share through the introduction of new products
and succeeding generations of products having lower selling prices and increased functionality as compared to both the prior
generation of a product and to the products of competitors. An important part of our strategy is to reduce the cost of each suc-
ceeding product generation and then lower the product’s selling price based on the cost savings achieved in order to gain market
share and/or improve gross margins. As a part of this strategy, we seek in most instances to be a high-quality, low-cost provider
of products in our markets. Our success to date is attributable in large measure to our ability to design our products initially with
a view to their subsequent redesign, allowing both increased functionality and reduced manufacturing costs in each succeeding
product generation. This strategy enables us to sell succeeding generations of products to existing customers, while increasing
our market share by selling these enhanced products to new customers.
In addition to reporting our Network Solutions and Services & Support segments, we report revenue across three categories—
Access & Aggregation, Customer Devices, and Traditional & Other Products.
Access & Aggregation solutions are used by CSPs to connect their network infrastructure to their subscribers. This category
includes software and hardware-based products and services that aggregate and/or originate access technologies. The portfolio
of ADTRAN solutions within this category includes a wide array of modular or fixed physical form factors designed to deliver
the best technology and economic fit based on the target subscriber density and environmental conditions.
The Access & Aggregation category includes product and service families such as:
n Total Access 5000 Series Fiber to the Premises (FTTP) and Fiber to the Node (FTTN) Multi-Service Access Nodes
(MSAN)
n hiX 5600 Series fiber aggregation and FTTN MSAN
n Fiber to the Distribution Point (FTTdp) Optical Network Units (ONU)
n GPON, EPON and 10G PON Optical Line Terminals (OLT)
n Optical Networking Edge (ONE) aggregation
n IP Digital Subscriber Line Access Multiplexers (DSLAMs)
n Cabinet and Outside-Plant (OSP) enclosures and services
n Network Management and Cloud-based software platforms and applications
n Pluggable optical transceivers (i.e., SFP, SFP+, XFP, QSFP), cables and other miscellaneous materials
n Planning, engineering, program management, maintenance, installation and commissioning services to implement
customer network solutions
n Other products and services that are generally applicable to Access & Aggregation
Customer Devices includes our products and services that provide end users access to CSP networks. Our Customer Devices
portfolio includes a comprehensive array of service provider and enterprise hardware and software products and services.
The Customer Devices category includes products and services such as:
n Broadband customer premise solutions, including Passive Optical Network (PON) and point-to-point Ethernet Optical
Network Terminals (ONTs)
n Radio Frequency over Glass (RFoG) MicroNodes
n Residential and business gateways
n Wi-Fi access points and associated powering and switching infrastructure
21
Financial Results n Enterprise Session Border Controllers (eSBC)
n Branch office and access routers
n Carrier Ethernet services termination devices
n VoIP media gateways
n ProServices pre-sale and post-sale technical support
n Planning, engineering, program management, maintenance, installation and commissioning services to implement the
customer devices solutions into consumer, small business and enterprise locations
n Other products and services that are generally applicable to customer devices
Traditional & Other Products generally includes a mix of prior generation technologies’ products and services, as well as other
products and services that do not fit within the Access & Aggregation or Customer Devices categories.
The Traditional & Other Products category includes products and services such as:
n Time Division Multiplexed (TDM) and Asynchronous Transfer Mode (ATM) based aggregation systems and customer
devices
n HDSL, ADSL and other mature technologies used to deliver business and residential services over the CSP access and
customer networks
n Other products and services that do not fit within the Access & Aggregation and Customer Devices categories
Sales were $636.8 million in 2016, compared to $600.1 million in 2015 and $630.0 million in 2014. Our gross profit margin
was 45.8% in 2016, compared to 44.5% in 2015 and 49.4% in 2014. Net income was $35.2 million in 2016, compared to
$18.6 million in 2015 and $44.6 million in 2014. Earnings per share, assuming dilution, were $0.72 in 2016, compared to $0.36 in
2015 and $0.80 in 2014. Earnings per share in 2016, 2015 and 2014 include the effect of the repurchase of 1.4 million, 4.0 million
and 3.7 million shares of our stock in those years, respectively.
Our operating results have fluctuated on a quarterly basis in the past, and may vary significantly in future periods due to a
number of factors, including customer order activity and backlog. Backlog levels vary because of seasonal trends, the timing of
customer projects and other factors that affect customer order lead times. Many of our customers require prompt delivery of
products. This requires us to maintain sufficient inventory levels to satisfy anticipated customer demand. If near-term demand
for our products declines, or if potential sales in any quarter do not occur as anticipated, our financial results could be adversely
affected. Operating expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly
impact our financial results in a given quarter.
Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and
market conditions, foreign currency exchange rate movements, increased competition, customer order patterns, changes in
product and services mix, timing differences between price decreases and product cost reductions, product warranty returns,
expediting costs and announcements of new products by us or our competitors. Additionally, 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 maintain-
ing 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. See Note 15 of Notes to Consolidated Financial
Statements for additional information. For a discussion of risks associated with our operating results, see Item 1A of our Form
10-K for the year ended December 31, 2016.
Critical Accounting Policies and Estimates
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if
changes in the accounting estimate that are reasonably likely to occur could materially impact the results of financial operations.
22
ADTRAN 2016 Annual Report We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation
of our consolidated financial statements. These policies have been consistently applied across our two reportable segments: (1)
Network Solutions and (2) Services & Support.
n Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the product
price is fixed or determinable, collection of the resulting receivable is reasonably assured, and product returns are reason-
ably estimable. For product sales, revenue is generally recognized upon shipment of the product to our customer in
accordance with the title transfer terms of the sales agreement, generally Ex Works, per International Commercial Terms.
In the case of consigned inventory, revenue is recognized when the end customer assumes ownership of the product.
Contracts that contain multiple deliverables are evaluated to determine the units of accounting, and the consideration
from the arrangement is allocated to each unit of accounting based on the relative selling price and corresponding terms
of the contract. We use vendor-specific objective evidence of selling price. When this evidence is not available, we are
generally not able to determine third-party evidence of selling price because of the extent of customization among
competing products or services from other companies. In these instances, we use best estimates to allocate consideration
to each respective unit of accounting. These estimates include analysis of respective bills of material and review and
analysis of similar product and service offerings. We record revenue associated with installation services when respec-
tive contractual obligations are complete. In instances where customer acceptance is required, revenue is deferred until
respective acceptance criteria have been met. Contracts that include both installation services and product sales are
evaluated for revenue recognition in accordance with contract terms. As a result, installation services may be considered
a separate deliverable or may be considered a combined single unit of accounting with the delivered product. Generally,
either the purchaser, ADTRAN, or a third party can perform the installation of our products. Sales taxes invoiced to
customers are included in revenue, and represent less than one percent of total revenues. The corresponding sales taxes
paid are included in cost of goods sold. Value added taxes collected from customers in international jurisdictions are
recorded in accrued expenses as a liability. Revenue is recorded net of discounts. Sales returns are recorded as a reduction
of revenue and accrued based on historical sales return experience, which we believe provides a reasonable estimate of
future returns.
A significant portion of our products are sold in the United States through a non-exclusive distribution network of major
technology distributors. These organizations then distribute or provide fulfillment services to an extensive network of
VARs and SIs. VARs and SIs may be affiliated with us as a channel partner, or they may purchase from the distributor on
an unaffiliated basis. Additionally, with certain limitations, our distributors may return unused and unopened product for
stock-balancing purposes when these returns are accompanied by offsetting orders for products of equal or greater value.
n We carry our inventory at the lower of cost or market, with cost being determined using the first-in, first-out method.
We use standard costs for material, labor, and manufacturing overhead to value our inventory. Our standard costs are
updated on at least a quarterly basis and any variances are expensed in the current period; therefore, our inventory costs
approximate actual costs at the end of each reporting period. We write down our inventory for estimated obsolescence or
unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated fair value
based upon assumptions about future demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, we may be required to make additional inventory write-downs. Our
reserve for excess and obsolete inventory was $25.2 million and $26.7 million at December 31, 2016 and 2015, respec-
tively. Inventory disposals charged against the reserve were $4.7 million, $0.2 million and $2.1 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
n For purposes of determining the estimated fair value of our stock option awards on the date of grant, we use the
Black-Scholes Model. This model requires the input of certain assumptions that require subjective judgment. These
assumptions include, but are not limited to, expected stock price volatility over the term of the awards and actual and
projected employee stock option exercise behaviors. Because our stock option awards have characteristics significantly
different from those of traded options, and because changes in the input assumptions can materially affect the fair value
estimate, the existing model may not provide a reliable, single measure of the fair value of our stock option awards. For
purposes of determining the estimated fair value of our performance-based performance stock unit (PSU) awards on
the date of grant, we use a Monte Carlo Simulation valuation method. The PSUs are subject to a market condition based
on the relative total shareholder return of ADTRAN against all of the companies in the NASDAQ Telecommunications
23
Financial Results Index and vest at the end of a three-year performance period. The fair value of restricted stock and restricted stock units
(RSUs) is equal to the closing price of our stock on the business day immediately preceding the grant date. Management
will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based
compensation. Circumstances may change and additional data may become available over time, which could result in
changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors
change in future periods, the compensation expense that we record may differ significantly from what we have recorded
in the current period.
n We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating
exposures related to examinations by taxing authorities. We also make judgments regarding the realization of deferred tax
assets, and establish valuation allowances where we believe it is more likely than not that future taxable income in certain
jurisdictions will be insufficient to realize these deferred tax assets. Our estimates regarding future taxable income and
income tax provision or benefit may vary due to changes in market conditions, changes in tax laws, or other factors. If our
assumptions, and consequently our estimates, change in the future, the valuation allowances we have established may be
increased or decreased, impacting future income tax expense. At December 31, 2016 and 2015 respectively, the valuation
allowance was $6.1 million and $7.3 million. As of December 31, 2016, we have state research tax credit carry-forwards
of $3.9 million, which will expire between 2017 and 2030. These carry-forwards were caused by tax credits in excess of
our annual tax liabilities to an individual state where we no longer generate sufficient state income. In addition, as of
December 31, 2016, we have a deferred tax asset of $7.3 million relating to net operating loss carry-forwards which will
expire between 2017 and 2030. These carry-forwards are the result of acquisitions in 2009 and in 2011. The acquired net
operating losses are in excess of the amount of estimated earnings. We believe it is more likely than not that we will not
realize the full benefits of our deferred tax asset arising from these credits and net operating losses, and accordingly, have
provided a valuation allowance against that piece.
We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the
positions become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts
and circumstances change.
n Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at
the time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage
in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our
component suppliers. Our products continue to become more complex in both size and functionality as many of our
product offerings migrate from line card applications to total systems. The increasing complexity of our products will
cause warranty incidences, when they arise, to be more costly. Our estimates regarding future warranty obligations may
change due to product failure rates, material usage, and other rework costs incurred in correcting a product failure.
In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our
actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty
expense. Alternatively, if we provide for more reserves than we require, we will reverse a portion of such provisions in
future periods. The liability for warranty obligations totaled $8.5 million and $8.7 million at December 31, 2016 and 2015,
respectively. These liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.
n Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts.
These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates,
and mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future
expenses and obligations. Our net pension liability totaled $10.0 million and $7.6 million at December 31, 2016 and 2015,
respectively. This liability is included in other non-current liabilities in the accompanying Consolidated Balance Sheets.
n We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if
events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below
its carrying value. We have elected to first assess the qualitative factors to determine whether it is more likely than not
that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step impairment test. If we determine that it is more likely than
not that its fair value is less than its carrying amount, then the two-step impairment test will be performed. Based on the
results of our qualitative assessment in 2016, we concluded that it was not necessary to perform the two-step impairment
test. There have been no impairment losses recognized since the acquisition in 2011.
24
ADTRAN 2016 Annual Report Results of Operations
The following table presents selected financial information derived from our consolidated statements of income expressed as a
percentage of sales for the years indicated..
Year Ended December 31,
2016
2015
2014
Sales
Products
Services
Total sales
Cost of sales
Products
Services
Gross profit
Selling, general and administrative expenses
Research and development expenses
Operating income
Interest and dividend income
Interest expense
Net realized investment gain
Other income (expense), net
Gain on bargain purchase of a business
Income before provision for income taxes
Provision for income taxes
Net income
82.5%
17.5
100.0
42.5
11.7
45.8
20.7
19.6
5.5
0.6
(0.1)
0.9
(0.1)
0.6
7.4
(1.8)
5.5%
87.9%
12.1
100.0
49.0
6.6
44.5
20.6
21.6
2.2
0.7
(0.1)
1.7
(0.2)
—
4.3
(1.2)
3.1%
88.8%
11.2
100.0
45.7
4.9
49.4
20.9
21.0
7.5
0.8
(0.1)
1.2
0.2
—
9.5
(2.4)
7.1%
25
Financial Results
2016 Compared to 2015
Sales
Our sales increased 6.1% from $600.1 million in 2015 to $636.8 million in 2016. The increase in sales is primarily attributable
to a $38.6 million increase in Services & Support sales, partially offset by a $1.9 million decrease in Network Solutions sales.
Network Solutions sales decreased 0.4% from $527.4 million in 2015 to $525.5 million in 2016. The decrease in sales in 2016 is
primarily attributable to a decrease in sales of our Access & Aggregation products and Traditional & Other products, partially
offset by an increase in sales of our Customer Devices products. The decrease in sales of our Access & Aggregation products
is primarily attributable to a decrease in international hiX product sales, partially offset by an increase in OSP DSLAM sales.
The increase in sales of our Customer Devices products is primarily attributable to increased sales of our FTTP ONT products.
While we expect that revenues from Traditional & Other products will continue to decline over time, these revenues may fluctu-
ate and continue for years because of the time required for our customers to transition to newer technologies.
Services & Support sales increased 53.2% from $72.6 million in 2015 to $111.3 million in 2016. The increase in sales in 2016 is
primarily attributable to an increase in network installation services for Access & Aggregation products.
International sales, which are included in the Network Solutions and Services & Support amounts discussed above, decreased
25.0% from $180.7 million in 2015 to $135.4 million in 2016. International sales, as a percentage of total sales, decreased from
30.1% in 2015 to 21.3% in 2016. Our international revenues are affected to a great extent by the timing of network upgrade proj-
ects at our larger European and Latin American customers and by changes in foreign exchange rates in territories in which we
sell our products and services. Throughout 2016, our largest European customer focused on completing network upgrade activi-
ties in regions outside of our footprint with them. However, we expect that once current projects are completed, future network
upgrades will resume in the second half of 2017 within our geographic footprint with this customer. Additionally, after reaching
a cyclical high in the second quarter of 2014, the value of the Euro currency relative to the U.S. dollar declined significantly
throughout the second half of 2014 and in 2015. Though the Euro-USD exchange rate appears to have stabilized since reaching
a low in the fourth quarter of 2015, it remains approximately 20% below the highs of 2014. This decline in the value of the Euro
throughout 2015 and into 2016 significantly reduced the U.S. dollar value of revenue from our European sales.
Cost of Sales
As a percentage of sales, cost of sales decreased from 55.5% in 2015 to 54.2% in 2016. The decrease is primarily attributable to a
regional revenue shift and customer and product mix, partially offset by a change in services mix, restructuring expenses and an
increase in warranty expense related to a product recall caused by a defect in a part provided by a third party supplier.
Network Solutions cost of sales, as a percent of that segment’s sales, decreased from 55.7% of sales in 2015 to 51.5% of sales in
2016. The decrease in Network Solutions cost of sales as a percentage of that segment’s sales is primarily attributable to a regional
revenue shift and customer and product mix, partially offset by restructuring expenses and an increase in warranty expense
related to a product recall caused by a defect in a part provided by a third party supplier.
Services & Support cost of sales, as a percent of that segment’s sales, increased from 54.1% of sales in 2015 to 67.2% of sales
in 2016. The increase in Services & Support cost of sales as a percentage of that segment’s sales is primarily attributable to an
increase in network installation services, which have higher costs than maintenance and support services, and in restructuring
expenses.
An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the
product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differ-
ences between the recognition of cost reductions and the lowering of product selling prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6.7% from $123.5 million in 2015 to $131.8 million in 2016. Selling, gen-
eral and administrative expenses include personnel costs for administration, finance, information systems, human resources,
sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, bad debt expense, adver-
tising, promotional material, trade show expenses, and related travel costs. The increase in selling, general and administrative
expenses is primarily attributable to an increase in variable incentive compensation expense and use tax expense, partially offset
by a decrease in professional services.
Selling, general and administrative expenses as a percentage of sales increased from 20.6% for the year ended December 31, 2015
to 20.7% for the year ended December 31, 2016. Selling, general and administrative expenses as a percentage of sales will gener-
ally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.
26
ADTRAN 2016 Annual Report Research and Development Expenses
Research and development expenses decreased 3.9% from $129.9 million in 2015 to $124.8 million in 2016. The decrease in
research and development expenses is primarily attributable to a decrease in compensation expense, lease expense and testing
expense, partially offset by an increase in contract services. The decrease in compensation expense and lease expense in 2016 was
primarily attributable to the consolidation of engineering resources that occurred during the second quarter of 2015.
Research and development expenses as a percentage of sales decreased from 21.6% for the year ended December 31, 2015 to
19.6% for the year ended December 31, 2016. Research and development expenses as a percentage of sales will fluctuate whenev-
er there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.
We expect to continue to incur research and development expenses in connection with our new and existing products and our
expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and
product development efforts which provide for new product development, enhancement of existing products and product cost
reductions. We may incur significant research and development expenses prior to the receipt of revenues from a major new
product group.
Interest and Dividend Income
Interest and dividend income remained constant at $3.95 million in 2015 and $3.92 million in 2016.
Interest Expense
Interest expense, which is primarily related to our taxable revenue bond, remained consistent at $0.6 million in 2015 and 2016, as
we had no substantial change in our fixed-rate borrowing. See “Financing Activities” in “Liquidity and Capital Resources” below
for additional information on our taxable revenue bond.
Net Realized Investment Gain
Net realized investment gain decreased from $10.3 million in 2015 to $5.9 million in 2016. The decrease in realized investment
gains is primarily attributable to fewer gains from the sale of equity securities in 2016. See “Investing Activities” in “Liquidity and
Capital Resources” below for additional information.
Other Income (Expense), net
Other income (expense), net, comprised primarily of miscellaneous income, gains and losses resulting from foreign currency
exchange rate movements, and investment account management fees, decreased from $1.5 million of expense in 2015 to
$0.7 million of expense in 2016. The change is primarily attributable to gains on forward currency contracts during the fourth
quarter of 2016.
Gain on Bargain Purchase of a Business
Gain on bargain purchase of a business is related to our acquisition of key fiber access products, technologies and service re-
lationships from a third party on September 13, 2016. See note 2 of Notes to Consolidated Financial Statements for additional
information.
Income Taxes
Our effective tax rate decreased from 27.5% in 2015 to 24.9% in 2016. The decrease in the effective tax rate between the two
periods is primarily attributable to the benefit associated with the bargain purchase gain.
Net Income
As a result of the above factors, net income increased from $18.6 million in 2015 to $35.2 million in 2016. As a percentage of
sales, net income increased from 3.1% in 2015 to 5.5% in 2016.
2015 Compared to 2014
Sales
Our sales decreased 4.8% from $630.0 million in 2014 to $600.1 million in 2015. The decrease in sales is primarily attributable
to a $32.1 million decrease in Network Solutions sales, partially offset by a $2.2 million increase in Services & Support sales.
Network Solutions sales decreased 5.7% from $559.5 million in 2014 to $527.4 million in 2015. The decrease in sales in 2015 is
primarily attributable to a decrease in sales of our Customer Devices products and Traditional & Other products. The decrease
in sales of our Customer Devices products is primarily attributable to weakness in sales of IP gateway products to the CLEC and
MSO markets. While we expect that revenues from Traditional & Other products will continue to decline over time, these rev-
27
Financial Results enues may fluctuate and continue for years because of the time required for our customers to transition to newer technologies.
Network Solutions sales were also negatively impacted by the impact of the strengthening U.S. dollar against the Euro.
Services & Support sales increased 3.1% from $70.5 million in 2014 to $72.6 million in 2015. The increase in sales in 2015 is
primarily attributable to an increase in network installation services for Access & Aggregation products.
International sales, which are included in the Network Solutions and Services & Support amounts discussed above, decreased
27.3% from $248.6 million in 2014 to $180.7 million in 2015. International sales, as a percentage of total sales, decreased from
39.5% in 2014 to 30.1% in 2015. Our international revenues are affected to a great extent by the timing of network upgrade proj-
ects at our larger European and Latin American customers and by changes in foreign exchange rates in territories in which we
sell or products and services. After reaching a cyclical high in the second quarter of 2014, the value of the Euro currency relative
to the U.S. dollar declined significantly throughout the second half of 2014 and in 2015. This decline in the value of the Euro
throughout 2015 significantly reduced the U.S. dollar value of revenue from our European sales.
Cost of Sales
As a percentage of sales, cost of sales increased from 50.6% in 2014 to 55.5% in 2015. The increase is primarily attributable to the
strengthening of the U.S. dollar against the Euro, growth in our service-related material sales in the U.S. market, and customer
and product mix.
Network Solutions cost of sales, as a percent of that segment’s sales, increased from 51.5% of sales in 2014 to 55.7% of sales
in 2015. The increase in Network Solutions cost of sales as a percentage of that segment’s sales is primarily attributable to the
strengthening of the U.S. dollar against the Euro, and customer and product mix.
Services & Support cost of sales, as a percent of that segment’s sales, increased from 43.5% of sales in 2014 to 54.1% of sales
in 2015. The increase in Services & Support cost of sales as a percentage of that segment’s sales is primarily attributable to an
increase in network installation services, which have higher costs, versus a greater mix of maintenance and support services in
the prior period.
An important part of our strategy is to reduce the product cost of each succeeding product generation and then to lower the
product’s price based on the cost savings achieved. This may cause variations in our gross profit percentage due to timing differ-
ences between the recognition of cost reductions and the lowering of product selling prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 6.4% from $132.0 million in 2014 to $123.5 million in 2015. Selling, gen-
eral and administrative expenses include personnel costs for administration, finance, information systems, human resources,
sales and marketing, and general management, as well as rent, utilities, legal and accounting expenses, bad debt expense, adver-
tising, promotional material, trade show expenses, and related travel costs. The decrease in selling, general and administrative
expenses is primarily attributable to decreases in compensation expense, travel expense, and independent contractor expense,
partially offset by an increase in professional services and restructuring charges.
Selling, general and administrative expenses as a percentage of sales decreased from 20.9% for the year ended December 31,
2014 to 20.6% for the year ended December 31, 2015. Selling, general and administrative expenses as a percentage of sales will
generally fluctuate whenever there is a significant fluctuation in revenues for the periods being compared.
Research and Development Expenses
Research and development expenses decreased 1.8% from $132.3 million in 2014 to $129.9 million in 2015. The decrease in re-
search and development expenses is primarily attributable to decreases in compensation expense and independent contractors,
partially offset by an increase in engineering and testing expense and restructuring charges.
Research and development expenses as a percentage of sales increased from 21.0% for the year ended December 31, 2014 to
21.6% for the year ended December 31, 2015. Research and development expenses as a percentage of sales will fluctuate whenev-
er there are incremental product development activities or a significant fluctuation in revenues for the periods being compared.
We expect to continue to incur research and development expenses in connection with our new and existing products and our
expansion into international markets. We continually evaluate new product opportunities and engage in intensive research and
product development efforts which provide 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.
28
ADTRAN 2016 Annual Report Interest and Dividend Income
Interest and dividend income decreased from $5.0 million in 2014 to $4.0 million in 2015. The decrease in interest and dividend
income is primarily attributable to a reduction in the average rate of return on our investments, as well as a decrease in our aver-
age investment balances.
Interest Expense
Interest expense, which is primarily related to our taxable revenue bond, decreased from $0.7 million in 2014 to $0.6 million in
2015. The decrease is primarily attributable to a reduction in the principal and the impact of an interest rate reduction, which
occurred during the first quarter of 2014. See “Financing Activities” in “Liquidity and Capital Resources” below for additional
information on our taxable revenue bond.
Net Realized Investment Gain
Net realized investment gain increased from $7.3 million in 2014 to $10.3 million in 2015. The increase in realized investment
gains is primarily attributable to larger gains from the sale of equity securities in 2015. See “Investing Activities” in “Liquidity and
Capital Resources” below for additional information.
Other Income (Expense), net
Other income (expense), net, comprised primarily of miscellaneous income, gains and losses resulting from foreign
currency exchange rate movements, and investment account management fees, changed from $1.2 million of income in 2014
to $1.5 million of expense in 2015. The change is primarily attributable to a $2.4 million gain recorded in the fourth quarter of
2014 related to the settlement of working capital items from an acquisition transaction that closed in 2012.
Income Taxes
Our effective tax rate increased from 25.5% in 2014 to 27.5% in 2015. The increase in the effective tax rate between the two
periods is primarily attributable to a foreign tax benefit from the elimination of a valuation allowance in 2014, partially offset by
a benefit from the closure of an audit and a higher R&D credit in 2015.
Net Income
As a result of the above factors, net income decreased from $44.6 million in 2014 to $18.6 million in 2015. As a percentage of
sales, net income decreased from 7.1% in 2014 to 3.1% in 2015.
Liquidity and Capital Resources
Liquidity
We intend to finance our operations with cash flow from operations. We have used, and expect to continue to use, the cash
generated from operations for working capital, purchases of treasury stock, shareholder dividends, and other general corporate
purposes, including (i) product development activities to enhance our existing products and develop new products and (ii)
expansion of sales and marketing activities. We believe our cash and cash equivalents, investments and cash generated from
operations to be adequate to meet our operating and capital needs for at least the next 12 months.
At December 31, 2016, cash on hand was $79.9 million and short-term investments were $43.2 million, which resulted in avail-
able short-term liquidity of $123.1 million, of which $42.1 million was held by our foreign subsidiaries. At December 31, 2015,
cash on hand was $84.6 million and short-term investments were $34.4 million, which resulted in available short-term liquidity
of $118.9 million, of which $38.9 million was held by our foreign subsidiaries. The increase in short-term liquidity from Decem-
ber 31, 2015 to December 31, 2016 is primarily attributable to shifts among available investment option tenures to provide funds
for our short-term cash needs.
Operating Activities
Our working capital, which consists of current assets less current liabilities, increased 3.3% from $219.2 million as of December
31, 2015 to $226.4 million as of December 31, 2016. The increase in our working capital is primarily attributable to an increase in
accounts receivable and inventory, partially offset by an increase in accounts payable and accrued wages and benefits. The quick
ratio, defined as cash and cash equivalents, short-term investments, and net accounts receivable, divided by current liabilities,
decreased from 2.06 as of December 31, 2015 to 1.70 as of December 31, 2016. The decrease in the quick ratio is primarily at-
tributable to an increase in accounts payable and accrued wages and benefits, partially offset by an increase in accounts receiv-
able. The current ratio, defined as current assets divided by current liabilities, decreased from 3.37 as of December 31, 2015 to
29
Financial Results 2.79 as of December 31, 2016. The decrease in the current ratio is primarily attributable to an increase in accounts payable and
accrued wages and benefits, partially offset by an increase in accounts receivable and inventory. The increase in accrued wages
and benefits was primarily attributable to an increase in accrued variable incentive compensation.
Net accounts receivable increased 28.4% from $71.9 million at December 31, 2015 to $92.3 million at December 31, 2016. Our
allowance for doubtful accounts was $19 thousand at December 31, 2015 and nil at December 31, 2016. Quarterly accounts
receivable DSO increased from 48 days as of December 31, 2015 to 52 days as of December 31, 2016. The change in net accounts
receivable and DSO is due to changes in customer mix and the timing of sales and collections during the quarter. Certain inter-
national customers can have longer payment terms than U.S. customers.
Annual inventory turnover decreased from 3.75 turns as of December 31, 2015 to 3.51 turns as of December 31, 2016. Inventory
increased 14.8% from $91.5 million at December 31, 2015 to $105.1 million at December 31, 2016. We expect inventory levels
to fluctuate as we attempt to maintain sufficient inventory in response to seasonal cycles of our business ensuring competitive
lead times while managing the risk of inventory obsolescence that may occur due to rapidly changing technology and customer
demand.
Accounts payable increased 58.9% from $48.7 million at December 31, 2015 to $77.3 million at December 31, 2016. Accounts
payable will fluctuate due to variations in the timing of the receipt of supplies, inventory and services and our subsequent pay-
ments for these purchases.
Investing Activities
Capital expenditures totaled approximately $21.4 million, $11.8 million and $11.3 million for the years ended December 31,
2016, 2015 and 2014, respectively. These expenditures were primarily used to purchase computer hardware, software, manufac-
turing and test equipment, and building improvements.
Our combined short-term and long-term investments decreased $13.1 million from $232.4 million at December 31, 2015 to
$219.3 million at December 31, 2016. This decrease reflects the impact of our cash needs for share repurchases, shareholder divi-
dends, equipment acquisitions, as well as net realized and unrealized losses, and amortization of net premiums on our combined
investments, partially offset by additional funds available for investment provided by our operating activities and stock option
exercises by our employees.
We invest all available cash not required for immediate use in operations primarily in securities that we believe bear minimal
risk of loss. At December 31, 2016, these investments included corporate bonds of $66.4 million, municipal fixed-rate bonds of
$11.8 million, asset-backed bonds of $10.2 million, mortgage/agency-backed bonds of $13.0 million, U.S. government bonds
of $29.8 million, foreign government bonds of $3.7 million, and variable rate demand notes of $11.9 million. At December
31, 2015, these investments included corporate bonds of $57.6 million, municipal fixed-rate bonds of $26.4 million, asset-
backed bonds of $19.2 million, mortgage/agency-backed bonds of $15.4 million and government bonds of $35.4 million. As of
December 31, 2016, our corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds,
U.S. government bonds, foreign government bonds, and municipal variable rate demand notes were classified as available-for-
sale and had a combined duration of 1.15 years with an average credit rating of A+. Because our bond portfolio has a high qual-
ity rating and contractual maturities of a short duration, we are able to obtain prices for these bonds derived from observable
market inputs, or for similar securities traded in an active market, on a daily basis.
Our long-term investments decreased 11.1% from $198.0 million at December 31, 2015 to $176.1 million at December 31,
2016. Long-term investments at December 31, 2016 and December 31, 2015 included an investment in a certificate of deposit of
$27.8 million and $30.0 million, respectively, which serves as collateral for our revenue bond, as discussed below. We have invest-
ments in various marketable equity securities classified as long-term investments at a cost of $30.6 million and $31.6 million, and
with a fair value of $29.4 million and $34.3 million, at December 31, 2016 and December 31, 2015, respectively.
Long-term investments at December 31, 2016 and 2015 also included $14.6 million and $12.8 million, respectively, related to
our deferred compensation plan, and $0.8 million and $1.3 million, respectively, of other investments, consisting of interests in
two private equity funds and an investment in a privately held telecommunications equipment manufacturer.
We review our investment portfolio for potential “other-than-temporary” declines in value on an individual investment basis.
We assess, on a quarterly basis, significant declines in value which may be considered other-than-temporary and, if necessary,
recognize and record the appropriate charge to write-down the carrying value of such investments. In making this assessment,
we take into consideration qualitative and quantitative information, including but not limited to the following: the magnitude
30
ADTRAN 2016 Annual Report and duration of historical declines in market prices, credit rating activity, assessments of liquidity, public filings, and statements
made by the issuer. We generally begin our identification of potential other-than-temporary impairments by reviewing any
security with a fair value that has declined from its original or adjusted cost basis by 25% or more for six or more consecutive
months. We then evaluate the individual security based on the previously identified factors to determine the amount of the
write-down, if any. For the years ended December 31, 2016, 2015, and 2014, we recorded charges of $0.8 million, $0.2 million
and $0.1 million, respectively, related to the other-than-temporary impairment of certain publicly traded equity securities, our
deferred compensation plan assets, and our investments in two private equity funds.
Financing Activities
In conjunction with an expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive pro-
gram offered by the State of Alabama Industrial Development Authority (the “Authority”). Pursuant to the program, on January
13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of the bonds to
ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the “Bank”). Wachovia
Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of Tennessee) (the “Bondholder”), which was acquired
by Wells Fargo & Company on December 31, 2008, purchased the original bonds from the Bank and made further advances
to the Authority, bringing the total amount outstanding to $50.0 million. An Amended and Restated Taxable Revenue Bond
(“Amended and Restated Bond”) was issued and the original financing agreement was amended. The Amended and Restated
Bond bears interest, payable monthly. The interest rate is 2% per annum. The Amended and Restated Bond matures on January
1, 2020, and is currently outstanding in the aggregate principal amount of $27.8 million. The estimated fair value of the bond
using a level 2 valuation technique at December 31, 2016 was approximately $28.1 million, based on a debt security with a
comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. We are required to make payments to the
Authority in amounts necessary to pay the interest on the Amended and Restated Bond. Included in long-term investments at
December 31, 2016 is $27.8 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit
against the principal of this bond, and 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.
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 that we are required to remit to the state for those employment positions that qualify under
the program. We realized economic incentives related to payroll withholdings totaling $1.3 million for each of the years ended
December 31, 2016, 2015 and 2014.
We made principal payments of $1.1 million for the years ended December 31, 2016 and 2015, respectively, and we anticipate
making a principal payment in 2017. At December 31, 2016, $1.0 million of the bond debt was classified as a current liability in
accounts payable in the Consolidated Balance Sheets.
Dividends
During 2016, 2015 and 2014, we paid shareholder dividends totaling $17.6 million, $18.4 million and $19.9 million, respectively.
The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present tax treatment
of dividends exists and adequate levels of liquidity are maintained. The following table shows dividends paid to our shareholders
in each quarter of 2016, 2015 and 2014.
Dividends per Common Share
2016
2015
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
31
Financial Results Stock Repurchase Program
Since 1997, our Board of Directors has approved multiple share repurchase programs that have authorized open market re-
purchase transactions of up to 50.0 million shares of our common stock, which will be implemented through open market or
private purchases from time to time as conditions warrant. For the years 2016, 2015 and 2014, we repurchased 1.4 million shares,
4.0 million shares and 3.7 million shares, respectively, for a cost of $25.8 million, $66.2 million and $80.6 million, respectively, at
an average price of $18.29, $16.68 and $21.96 per share, respectively. We currently have the authority to purchase an additional
4.4 million shares of our common stock under the current plans approved by the Board of Directors.
Stock Option Exercises
To accommodate employee stock option exercises, we issued 0.3 million shares of treasury stock for $4.7 million during the year
ended December 31, 2016, 0.1 million shares of treasury stock for $1.0 million during the year ended December 31, 2015, and
0.1 million shares of treasury stock for $2.8 million during the year ended December 31, 2014.
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 arrange-
ments with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of
or requirements for capital resources.
We have various contractual obligations and commercial commitments. The following table sets forth, in millions, the annual
payments we are required to make under contractual cash obligations and other commercial commitments at December 31,
2016.
Contractual Obligations
(In millions)
Long-term debt
Interest on long-term debt
Purchase obligations
Operating lease obligations
Total
$27.8
1.5
184.5
10.5
2017
$1.0
0.5
183.4
3.8
Totals
$224.3
$188.7
2018
$—
0.5
0.8
2.0
$3.3
2019
$—
0.5
0.3
0.8
$1.6
2020
$26.8
—
—
0.7
$27.5
After 2020
$—
—
—
3.2
$3.2
We are required to make payments necessary to pay the interest on the Amended and Restated Bond, currently outstanding in
the aggregate principal amount of $27.8 million. The bond matures on January 1, 2020, and bears interest at the rate of 2% per
annum. Included in long-term investments are $27.8 million of restricted funds, which is a collateral deposit against the prin-
cipal amount of this bond. We made principal payments of $1.1 million for the years ended December 31, 2016 and 2015. We
anticipate making a principal payment in 2017. At December 31, 2016 and 2015, $1.0 million of the bond debt was classified as
a current liability in accounts payable in the Consolidated Balance Sheets. See Note 9 of Notes to Consolidated Financial State-
ments for additional information.
Purchase obligations primarily relate to open purchase orders to our contract manufacturers, component suppliers, service
partners, and other vendors.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million
as of December 31, 2016, of which $7.7 million has been applied to these commitments. The additional $0.2 million commit-
ment has been excluded from the table above due to uncertainty of when it will be applied.
We also have obligations related to uncertain income tax positions that have been excluded from the table above due to the
uncertainty of when the related expense will be recognized. See Note 10 of Notes to Consolidated Financial Statements for ad-
ditional information.
32
ADTRAN 2016 Annual Report Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic
605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of
the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August
2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December
31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after
December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09,
including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Report-
ing Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guid-
ance on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obliga-
tions and the licensing implementation guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-
Scope Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identi-
fied implementation issues; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers, which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09
allows for either full retrospective or modified retrospective adoption. We plan to adopt ASU 2014-09 and the related ASUs on
January 1, 2018, and we are currently evaluating the transition method that will be elected. We are continuing to evaluate the po-
tential impact of these ASUs, and we believe the most significant potential impact relates to our accounting for software license
and installation services revenues. We do not believe there will be a significant impact to product or maintenance revenues.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement
of Inventory (ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or mar-
ket. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin.
ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The
amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average
cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. The amendments should be applied prospectively with earlier application permitted as of
the beginning of an interim or annual reporting period. We adopted ASU 2015-05 in the first quarter of 2017, and there was no
material impact on our financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02
requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the
entity’s leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have
a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of
operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of ac-
counting for share-based compensation arrangements, including income tax effects, the classification of tax-related cash flows
on the statement of cash flows, and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December
15, 2016, including interim periods within those years. We adopted ASU 2016-09 in the first quarter of 2017, and there was no
material impact on our financial position, results of operations and cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the measurement of goodwill by elimi-
nating step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a report-
ing unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning
after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after
January 1, 2017. The amendments should be applied prospectively. We do not expect the adoption of ASU 2017-04 will have a
material impact on our financial position, results of operations or cash flows.
33
Financial Results During 2016, we adopted the following accounting standards, which had no material effect on our financial position, results of
operations or cash flows:
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles – Goodwill and Other – Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which
provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing ar-
rangement includes a software license, then the customer should account for the software license element of the arrangement
consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license,
the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for annual reporting periods
beginning after December 15, 2015, including interim periods within that reporting period. The amendments may be applied
either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We adopted
ASU 2015-05 during the first quarter of 2016 and will apply the new standard prospectively. The adoption of ASU 2015-05 did
not have a material impact on our financial position, results of operations and cash flows.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes
(ASU 2015-17). ASU 2015-17 amends the existing guidance on income taxes to require the classification of all deferred tax assets
and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016,
including interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively, for
all deferred tax assets and liabilities, or retrospectively to all periods presented. We elected to early adopt ASU 2015-17 during
the fourth quarter of 2016, and we applied the guidance retrospectively to all periods presented. As a result, $17.3 million and
$18.9 million were reclassified from current deferred tax assets to non-current deferred tax assets at December 31, 2016 and
2015, respectively.
Subsequent Events
On January 17, 2017, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of
record at the close of business on February 2, 2017. The quarterly dividend payment was $4.4 million and was paid on February
16, 2017. 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 first quarter and as of February 24, 2017, we have repurchased 0.2 million shares of our common stock through open
market purchases at an average cost of $21.46 per share. We currently have the authority to purchase an additional 4.2 million
shares of our common stock under the current plan approved by the Board of Directors.
34
ADTRAN 2016 Annual Report Quantitative and Qualitative Disclosures
About Market Risk
We are exposed to financial market risks, including changes in interest rates, foreign currency rates and prices of marketable eq-
uity 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, fixed-rate bonds, and municipal money market instruments denominated
in U.S. dollars. Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the
concentration in any one issuer to 5% of the market value of our total investment portfolio.
We maintain depository investments with certain financial institutions. Although these depository investments may exceed
government insured depository limits, we have evaluated the credit worthiness of these financial institutions, and determined
the risk of material financial loss due to exposure of such credit risk to be minimal. As of December 31, 2016, $77.9 million of
our cash and cash equivalents, primarily certain domestic money market funds and foreign depository accounts, were in excess
of government provided insured depository limits.
As of December 31, 2016, approximately $166.7 million of our cash and investments may be directly affected by changes in
interest rates. We have performed a hypothetical sensitivity analysis assuming market interest rates increase or decrease by 50
basis points (bps) for an entire year, while all other variables remain constant. At December 31, 2016, we held $67.8 million of
cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 bps
decline in interest rates as of December 31, 2016 would reduce annualized interest income on our cash and investments by ap-
proximately $0.3 million. In addition, we held $98.9 million of fixed-rate bonds whose fair values may be directly affected by a
change in interest rates. A hypothetical 50 bps increase in interest rates as of December 31, 2016 would reduce the fair value of
our fixed-rate bonds by approximately $0.6 million.
As of December 31, 2015, interest income on approximately $169.6 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 in-
crease or decrease by 50 bps for an entire year, while all other variables remain constant. A hypothetical 50 bps decline in interest
rates as of December 31, 2015 would have reduced annualized interest income on our cash, money market instruments, float-
ing rate corporate bonds and municipal variable rate demand notes by approximately $0.3 million. In addition, a hypothetical
50 bps increase in interest rates as of December 31, 2015 would have reduced the fair value of our municipal and corporate bonds
by approximately $0.8 million.
We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross mar-
gin on revenue derived from some international customers, expenses, and assets and liabilities held in non-functional currencies
related to our foreign subsidiaries. Our primary exposures to foreign currency exchange rate movements are with our German
subsidiary, whose functional currency is the Euro, our Australian subsidiary, whose functional currency is the Australian dol-
lar, and our Mexican subsidiary, whose functional currency is the U.S. dollar. We are exposed to changes in foreign currency
exchange rates to the extent of our German subsidiary’s use of contract manufacturers and raw material suppliers whom we
predominately pay in U.S. dollars. As a result, changes in currency exchange rates could cause variations in gross margin in the
products that we sell in the EMEA region.
We have certain international customers who are invoiced or pay in a non-functional currency. Changes in the monetary ex-
change rates used to invoice such customers versus the functional currency of the entity billing such customers may adversely
affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures,
we may enter into various derivative transactions, when appropriate. We do not hold or issue derivative instruments for trad-
ing or other speculative purposes. All non-functional currencies billed would result in a combined hypothetical gain or loss of
$0.3 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. Any gain or loss would be partially
mitigated by these derivative instruments.
As of December 31, 2016, we had no material contracts subject to currency revaluation, other than accounts receivable, accounts
payable, and loans to a subsidiary, denominated in foreign currencies. As of December 31, 2016, we had forward contracts out-
standing with notional amounts totaling €5.5 million ($5.8 million), which mature in the first quarter of 2017. The fair value of
these forward contracts was a net asset of approximately $0.2 million as of December 31, 2016.
For further information about the fair value of our available-for-sale investments and our derivative and hedging activities as of
December 31, 2016, see Notes 4 and 5 of Notes to Consolidated Financial Statements.
35
Financial Results Report of Independent Registered Public
Accounting Firm
To Board of Directors and Stockholders of ADTRAN, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the
financial position of ADTRAN, Inc. and its subsidiaries at December 31, 2016 and December 31, 2015 and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with account-
ing principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial state-
ments are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by manage-
ment, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also in-
cluded performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for
deferred income taxes in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reli-
ability of financial reporting and the preparation of financial statements for external purposes in accordance with generally ac-
cepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, pro-
jections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Birmingham, Alabama
February 24, 2017
36
ADTRAN 2016 Annual Report Financial Statements
ADTRAN, INC.
Consolidated Balance Sheets
December 31, 2016 and 2015
(In thousands, except per share amounts)
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts of $— and $19 at
December 31, 2016 and 2015, respectively
Other receivables
Income tax receivable, net
Inventory, net
Prepaid expenses and other current assets
Total Current Assets
Property, plant and equipment, net
Deferred tax assets, net
Goodwill
Other assets
Long-term investments
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
Unearned revenue
Accrued expenses
Accrued wages and benefits
Income tax payable, net
Total Current Liabilities
Non-current unearned revenue
Other non-current liabilities
Bonds payable
Total Liabilities
Commitments and contingencies (see Note 13)
Stockholders' Equity
Common stock, par value $0.01 per share; 200,000 shares authorized;
79,652 shares issued and 48,472 shares outstanding at December 31, 2016 and
79,652 shares issued and 49,558 shares outstanding at December 31, 2015
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Less treasury stock at cost: 31,180 and 30,094 shares at December 31, 2016 and
2015, respectively
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
2016
2015
$79,895
43,188
92,346
15,137
760
105,117
16,459
352,902
84,469
38,036
3,492
12,234
176,102
$667,235
$77,342
16,326
12,434
20,433
—
126,535
6,333
28,050
26,800
187,718
797
252,957
(12,188)
921,942
(683,991)
479,517
$667,235
$84,550
34,396
71,917
19,321
—
91,533
10,145
311,862
73,233
37,015
3,492
9,276
198,026
$632,904
$48,668
16,615
12,108
12,857
2,395
92,643
7,965
24,236
27,900
152,744
797
246,879
(8,969)
906,772
(665,319)
480,160
$632,904
37
Financial Results
ADTRAN, INC.
Consolidated Statements of Income
Years ended December 31, 2016, 2015 and 2014
(In thousands, except per share amounts)
2016
2015
2014
Sales
Products
Services
Total Sales
Cost of Sales
Products
Services
Total Cost of Sales
Gross Profit
Selling, general and administrative expenses
Research and development expenses
Operating Income
Interest and dividend income
Interest expense
Net realized investment gain
Other income (expense), net
Gain on bargain purchase of a business
Income before provision for income taxes
Provision for income taxes
Net Income
Weighted average shares outstanding—basic
Weighted average shares outstanding—diluted
Earnings per common share—basic
Earnings per common share—diluted
See notes to consolidated financial statements.
$525,502
111,279
636,781
$527,422
72,642
600,064
$559,532
70,475
630,007
270,695
74,742
345,437
291,344
131,805
124,804
34,735
3,918
(572)
5,923
(651)
3,542
46,895
(11,666)
$35,229
48,724
48,949
$0.72
$0.72
293,843
39,324
333,167
266,897
123,542
129,876
13,479
3,953
(596)
10,337
(1,465)
—
25,708
(7,062)
$18,646
51,145
51,267
$0.36
$0.36
288,015
30,665
318,680
311,327
131,958
132,258
47,111
5,019
(677)
7,278
1,175
—
59,906
(15,286)
$44,620
55,120
55,482
$0.81
$0.80
38
ADTRAN 2016 Annual Report
ADTRAN, INC.
Consolidated Statements of Comprehensive Income
Years ended December 31, 2016, 2015 and 2014
(In thousands)
Net Income
Other Comprehensive Loss, net of tax:
Net unrealized losses on available-for-sale securities
Defined benefit plan adjustments
Foreign currency translation
Other Comprehensive Loss, net of tax
Comprehensive Income, net of tax
See notes to consolidated financial statements.
2016
$35,229
(1,528)
(1,122)
(569)
(3,219)
$32,010
2015
$18,646
(7,032)
1,862
(3,724)
(8,894)
$9,752
2014
$44,620
(1,773)
(4,866)
(4,189)
(10,828)
$33,792
39
Financial Results ADTRAN, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2016, 2015 and 2014
Common
Shares
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
79,652
$797
$233,511
$884,451
$(524,906)
$10,753
$604,606
(In thousands)
Balance, December 31, 2013
Net income
Other comprehensive loss, net of tax
Dividend payments
Dividends accrued for unvested
restricted stock units
Stock options exercised: 147 shares
PSUs and restricted stock vested:
35 shares
Purchase of treasury stock:
3,669 shares
Income tax effect of stock
compensation arrangements
Stock-based compensation expense
(10,828)
44,620
(19,947)
(19)
(558)
(796)
3,397
796
(80,576)
(326)
81
8,563
Balance, December 31, 2014
79,652
797
241,829
907,751
(601,289)
(75)
Net income
Other comprehensive loss, net of tax
Dividend payments
Dividends accrued for unvested
restricted stock units
Stock options exercised: 60 shares
PSUs and restricted stock vested:
34 shares
Purchase of treasury stock:
3,967 shares
Income tax effect of stock
compensation arrangements
Stock-based compensation expense
(8,894)
18,646
(18,449)
(7)
(402)
(767)
1,363
767
(66,160)
(69)
(1,593)
6,712
Balance, December 31, 2015
79,652
797
246,879
906,772
(665,319)
(8,969)
Net income
Other comprehensive loss, net of tax
Dividend payments
Dividends accrued for unvested
restricted stock units
Stock options exercised: 283 shares
PSUs and restricted stock vested:
42 shares
Purchase of treasury stock:
1,411 shares
Income tax effect of stock
compensation arrangements
Stock-based compensation expense
(3,219)
35,229
(17,583)
(48)
(1,499)
6,216
(142)
(929)
929
(25,817)
(475)
6,695
44,620
(10,828)
(19,947)
(19)
2,839
(326)
(80,576)
81
8,563
549,013
18,646
(8,894)
(18,449)
(7)
961
(69)
(66,160)
(1,593)
6,712
480,160
35,229
(3,219)
(17,583)
(48)
4,717
(142)
(25,817)
(475)
6,695
Balance, December 31, 2016
79,652
$797
$252,957
$921,942
$(683,991)
$(12,188)
$479,517
See notes to consolidated financial statements.
40
ADTRAN 2016 Annual Report ADTRAN, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2016, 2015 and 2014
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of net premium on available-for-sale investments
Net realized gain on long-term investments
Net loss on disposal of property, plant and equipment
Gain on bargain purchase of a business
Stock-based compensation expense
Deferred income taxes
Tax impact of stock option exercises
Excess tax benefits from stock-based compensation arrangements
Change in operating assets and liabilities:
Accounts receivable, net
Other receivables
Inventory
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Income taxes payable, net
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposals of property, plant and equipment
2016
2015
2014
$35,229
$18,646
$44,620
14,407
643
(5,923)
22
(3,542)
6,695
(2,685)
—
(2)
(21,302)
4,101
(10,887)
(7,108)
26,722
8,792
(3,162)
42,000
14,245
2,402
(10,337)
644
—
6,712
(692)
(40)
(3)
14,918
11,704
(6,877)
(5,070)
(5,826)
(10,289)
(11,590)
18,547
14,845
4,360
(7,278)
142
—
8,563
(5,526)
81
(63)
(3,910)
(19,298)
2,144
(3,818)
9,973
(166)
11,168
55,837
(21,441)
(11,753)
(11,256)
—
183
1
Proceeds from sales and maturities of available-for-sale investments
225,075
280,435
230,019
Purchases of available-for-sale investments
(209,172)
(188,921)
(142,695)
Acquisition of business
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from stock option exercises
Purchases of treasury stock
Dividend payments
Payments on long-term debt
Excess tax benefits from stock-based compensation arrangements
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Effect of exchange rate changes
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information
Cash paid during the year for interest
Cash paid during the year for income taxes
Supplemental disclosure of non-cash investing activities
(943)
(6,481)
4,717
(25,817)
(17,583)
(1,100)
2
(39,781)
(4,262)
(393)
84,550
$79,895
$575
$18,689
—
79,944
961
(66,160)
(18,449)
(1,100)
3
—
76,069
2,839
(80,576)
(19,947)
(16,500)
63
(84,745)
(114,121)
13,746
(2,635)
73,439
17,785
(2,644)
58,298
$84,550
$73,439
$598
$20,139
$758
$9,856
Purchases of property, plant and equipment included in accounts payable
$2,103
$598
$467
See notes to consolidated financial statements.
41
Financial Results Notes to Consolidated Financial Statements
1 Nature of Business and Summary of Significant Accounting Policies
ADTRAN, Inc. is a leading global provider of networking and communications equipment. Our solutions enable voice, data,
video and Internet communications across a variety of network infrastructures. These solutions are deployed by many of the
United States’ and the world’s largest CSPs, distributed enterprises and small and medium-sized businesses, public and private
enterprises, and millions of individual users worldwide.
Principles of Consolidation
Our consolidated financial statements include ADTRAN and its wholly owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation.
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 ex-
pense during the reporting period. Our more significant estimates include the obsolete and excess inventory reserves, warranty
reserves, customer rebates, determination of the deferred revenue components of multiple element sales agreements, estimated
costs to complete obligations associated with deferred revenues and network installations, estimated income tax provision and
income tax contingencies, the fair value of stock- based compensation, impairment of goodwill, valuation and estimated lives of
intangible assets, estimated pension liability, fair value of investments, and the evaluation of other-than-temporary declines in
the value of investments. Actual amounts could differ significantly from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits, money market funds, and short-term investments classified as available-
for-sale with original maturities of three months or less. We maintain depository investments with certain financial institutions.
Although these depository investments may exceed government insured depository limits, we have evaluated the credit worthi-
ness of these applicable financial institutions, and determined the risk of material financial loss due to the exposure of such credit
risk to be minimal. As of December 31, 2016, $77.9 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.
Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and ac-
counts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying
amount reported for bonds payable was $27.8 million, compared to an estimated fair value of $28.1 million, based on a debt
security with a comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA.
Investments with contractual maturities beyond one year, such as our variable rate demand notes, may be classified as short-
term based on their highly liquid nature and because such marketable securities represent the investment of cash that is avail-
able for current operations. Despite the long-term nature of their stated contractual maturities, we routinely buy and sell these
securities and we believe we have the ability to quickly sell them 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. All income
generated from these investments was recorded as interest income. We have not been required to record any losses relating to
variable rate demand notes.
42
ADTRAN 2016 Annual Report Long-term investments represent a restricted certificate of deposit held at cost, deferred compensation plan assets, corporate
bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency backed bonds, U.S. and foreign government bonds,
variable rate demand notes, marketable equity securities, and other equity investments. Marketable equity securities are report-
ed at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities
may not be readily marketable due to the size of the available market. Unrealized gains and losses, net of tax, are reported as a
separate component of stockholders’ equity. Realized gains and losses on sales of securities are computed under the specific iden-
tification method and are included in current income. We review our investment portfolio quarterly for investments considered
to have sustained an other-than-temporary decline in value. Impairment charges for other-than-temporary declines in value are
recorded as realized losses in the accompanying consolidated statements of income. All of our investments at December 31, 2016
and 2015 are classified as available-for-sale securities. See Note 4 of Notes to Consolidated Financial Statements for additional
information.
Accounts Receivable
We record accounts receivable at net realizable value. Prior to establishing payment terms for a new customer, we evaluate the
credit risk of the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based
on customer collection experience and other financial factors. At December 31, 2016, three customers accounted for 63.3%
of our total accounts receivable. At December 31, 2015, three customers accounted for 37.3% of our total accounts receivable.
We maintain an allowance for doubtful accounts for losses resulting from the inability of our customers to make required pay-
ments. We regularly review the allowance for doubtful accounts and consider factors such as the age of accounts receivable bal-
ances, the current economic conditions that may affect a customer’s ability to pay, significant one-time events and our historical
experience. If the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments,
we may be required to record an allowance for doubtful accounts. If circumstances change with regard to individual receivable
balances that have previously been determined to be uncollectible (and for which a specific reserve has been established), a re-
duction in our allowance for doubtful accounts may be required. Our allowance for doubtful accounts was nil and $19 thousand
at December 31, 2016 and December 31, 2015, respectively.
Other Receivables
Other receivables are comprised primarily of amounts due from subcontract manufacturers for product component transfers,
accrued interest on investments and on a restricted certificate of deposit, amounts due from various jurisdictions for value-
added tax, and amounts due from employee stock option exercises.
Inventory
Inventory is carried at the lower of cost or market, with cost being determined using the first-in, first-out method. Standard costs
for material, labor and manufacturing overhead are used to value inventory. Standard costs are updated at least quarterly; there-
fore, inventory costs approximate actual costs at the end of each reporting period. We establish reserves for estimated excess,
obsolete or unmarketable inventory equal to the difference between the cost of the inventory and the estimated fair value of the
inventory based upon assumptions about future demand, market conditions and age. When we dispose of excess and obsolete
inventories, the related disposals are charged against the inventory reserve. See Note 6 of Notes to Consolidated Financial State-
ments for additional information.
Property, Plant and Equipment
Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful
lives of the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from
three to seven years, engineering machinery and equipment from three to seven years, and computer software from three to five
years. Expenditures for repairs and maintenance are charged to expense as incurred. Betterments that materially prolong the
lives of the assets are capitalized. Gains and losses on the disposal of property, plant and equipment are recorded in operating
income. See Note 7 of Notes to Consolidated Financial Statements for additional information.
43
Financial Results Liability for Warranty
Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the
time revenue is recognized based on our estimate of the cost to repair or replace the defective products. We engage in extensive
product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers.
Our products continue to become more complex in both size and functionality as many of our product offerings migrate from
line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they
arise, to be more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material
usage, and other rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals
may be recorded if unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates,
we will be required to record additional warranty expense. Alternatively, if we provide for more reserves than we require, we
will reverse a portion of such provisions in future periods. During 2016, we incurred an increase in warranty expense related
to a product recall caused by a defect in a part provided by a third party supplier. The liability for warranty obligations totaled
$8.5 million and $8.7 million at December 31, 2016 and 2015, respectively. These liabilities are included in accrued expenses in
the accompanying consolidated balance sheets.
A summary of warranty expense and write-off activity for the years ended December 31, 2016, 2015 and 2014 is as follows:
(In thousands)
Year Ended December 31,
Balance at beginning of period
Plus: Amounts charged to cost and expenses
Less: Deductions
Balance at end of period
2016
$8,739
8,561
(8,752)
$8,548
2015
$8,415
2,998
(2,674)
$8,739
2014
$8,977
3,103
(3,665)
$8,415
Pension Benefit Plan Obligations
We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations
are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates,
compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from
the assumptions and changes in assumptions could affect future expenses and obligations.
Stock-Based Compensation
We have two Board and stockholder approved stock incentive plans from which stock options and other awards are available for
grant to employees and directors. All employee and director stock options granted under our stock option plans have an exercise
price equal to the fair market value of the award, as defined in the plan, of the underlying common stock on the grant date. There
are currently no vesting provisions tied to performance or market conditions for any stock awards. Vesting for all outstanding
award grants is based only on continued service as an employee or director of ADTRAN. All of our outstanding stock option
awards are classified as equity awards.
Under the provisions of our approved plans, we made grants of performance stock units to certain of our executive officers in
2016, 2015, and 2014. The performance stock units are subject to a market condition based on the relative total shareholder
return of ADTRAN against all the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year
performance period. The performance stock units are converted into shares of common stock upon vesting. Depending on the
relative total shareholder return over the performance period, the executive officers may earn from 0% to 150% of the number
of restricted stock units granted. The fair value of the award is based on the market price of our common stock on the date of
grant, adjusted for the expected outcome of the impact of market conditions using a Monte Carlo Simulation valuation method.
The recipients of the performance stock units also earn dividend credits during the performance period, which are paid in cash
upon the issuance of common stock for the restricted stock units.
Stock-based compensation expense recognized in 2016, 2015 and 2014 was approximately $6.7 million, $6.7 million and
$8.6 million, respectively. As of December 31, 2016, total compensation cost related to non-vested stock options, restricted stock
units, performance stock units and restricted stock not yet recognized was approximately $16.4 million, which is expected to be
recognized over an average remaining recognition period of 2.9 years. See Note 3 of Notes to Consolidated Financial Statements
for additional information.
44
ADTRAN 2016 Annual Report Impairment of Long-Lived Assets
We review long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are
less than the asset’s carrying value. An impairment loss would be recognized in the amount by which the recorded value of the
asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best infor-
mation available in the circumstances. There were no impairment losses recognized during 2016, 2015 or 2014.
Goodwill and Purchased Intangible Assets
We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur
or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the
reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is necessary
to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than its carrying
amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in 2016, we
concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses recognized
since the acquisition in 2011. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization.
Amortization is recorded over the estimated useful lives of the respective assets, which is 9 months to 14 years.
Research and Development Costs
Research and development costs include compensation for engineers and support personnel, outside contracted services, de-
preciation and material costs associated with new product development, the enhancement of current products, and product
cost reductions. We continually evaluate new product opportunities and engage in intensive research and product development
efforts. Research and development costs totaled $124.8 million, $129.9 million and $132.3 million for the years ended December
31, 2016, 2015 and 2014, respectively.
Other Comprehensive Income
Other comprehensive income consists of unrealized gains (losses) on available-for-sale securities, reclassification adjustments
for amounts included in net income related to impairments of available-for-sale securities and realized gains (losses) on avail-
able-for-sale securities, defined benefit plan adjustments and foreign currency translation adjustments.
The following table presents changes in accumulated other comprehensive income, net of tax, by component for the years ended
December 31, 2014, 2015 and 2016:
(In thousands)
Balance at December 31, 2013
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Balance at December 31, 2014
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Balance at December 31, 2015
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated other
comprehensive income
Balance at December 31, 2016
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
Defined
Benefit Plan
Adjustments
Foreign
Currency
Adjustments
$(891)
(4,866)
—
(5,757)
1,589
273
(3,895)
(1,229)
$907
Total
$10,753
(4,189)
(6,692)
—
(4,136)
(3,282)
(3,724)
—
(7,006)
(569)
(75)
(2,979)
(5,915)
(8,969)
(283)
$10,737
2,363
(4,136)
8,964
(844)
(6,188)
1,932
1,515
(3,043)
$404
107
—
(2,936)
$(5,017)
$(7,575)
$(12,188)
45
Financial Results The following tables present the details of reclassifications out of accumulated other comprehensive income for the years ended
December 31, 2016, 2015 and 2014:
(In thousands)
2016
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities
Impairment expense
Defined benefit plan adjustments – actuarial losses
Total reclassifications for the period, before tax
Tax (expense) benefit
Total reclassifications for the period, net of tax
Amount Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income
Is Presented
$5,408 Net realized investment gain
(419) Net realized investment gain
(156)
(1)
4,833
(1,897)
$2,936
(1) Included in the computation of net periodic pension cost. See Note 11 of Notes to Consolidated Financial Statements.
(In thousands)
2015
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities
Impairment expense
Defined benefit plan adjustments – actuarial losses
Total reclassifications for the period, before tax
Tax (expense) benefit
Total reclassifications for the period, net of tax
Amount Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income
Is Presented
$10,348 Net realized investment gain
(203) Net realized investment gain
(396)
(1)
9,749
(3,834)
$5,915
(1) Included in the computation of net periodic pension cost. See Note 11 of Notes to Consolidated Financial Statements.
(In thousands)
2014
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available-for-sale securities:
Net realized gain on sales of securities
Impairment expense
Total reclassifications for the period, before tax
Tax (expense) benefit
Total reclassifications for the period, net of tax
Amount Reclassified from
Accumulated Other
Comprehensive Income
Affected Line Item in the
Statement Where Net Income
Is Presented
$6,895 Net realized investment gain
(115) Net realized investment gain
6,780
(2,644)
$4,136
46
ADTRAN 2016 Annual Report The following tables present the tax effects related to the change in each component of other comprehensive income for the years
ended December 31, 2016, 2015 and 2014:
(In thousands)
Unrealized gains (losses) on
available-for-sale securities
Reclassification adjustment for amounts
related to available-for-sale investments
Defined benefit plan adjustments
Reclassification adjustment for amounts
related to defined benefit plan adjustments
included in net income
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
(In thousands)
Unrealized gains (losses) on
available-for-sale securities
Reclassification adjustment for amounts
related to available-for-sale investments
Defined benefit plan adjustments
Reclassification adjustment for amounts
related to defined benefit plan adjustments
included in net income
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
Before-Tax Amount
2016
Tax (Expense) Benefit
Net-of-Tax Amount
$2,484
(4,989)
(1,782)
156
(569)
$(4,700)
$(969)
1,946
553
(49)
—
$1,481
$1,515
(3,043)
(1,229)
107
(569)
$(3,219)
Before-Tax Amount
2015
Tax (Expense) Benefit
Net-of-Tax Amount
$(1,384)
(10,145)
2,303
396
(3,724)
$(12,554)
$540
3,957
(714)
(123)
—
$3,660
$(844)
(6,188)
1,589
273
(3,724)
$(8,894)
(In thousands)
Unrealized gains (losses) on
available-for-sale securities
Reclassification adjustment for amounts
related to available-for-sale investments
Defined benefit plan adjustments
Foreign currency translation adjustment
Total Other Comprehensive Income (Loss)
Before-Tax Amount
2014
Tax (Expense) Benefit
Net-of-Tax Amount
$3,874
(6,780)
(7,052)
(4,189)
$(14,147)
$(1,511)
2,644
2,186
—
$3,319
$2,363
(4,136)
(4,866)
(4,189)
$(10,828)
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Un-
der this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred taxes result from the difference between financial and tax bases of our
assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances
are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the
positions become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and
circumstances change.
47
Financial Results Foreign Currency
We record transactions denominated in foreign currencies on a monthly basis using exchange rates from throughout the year.
Assets and liabilities denominated in foreign currencies are translated at the balance sheet dates using the closing rates of ex-
change between those foreign currencies and the functional currency with any transaction gains or losses reported in other
income (expense). Our primary exposures to foreign currency exchange rate movements are with our German subsidiary,
whose functional currency is the Euro, our Australian subsidiary, whose functional currency is the Australian dollar, and our
Mexican subsidiary, whose functional currency is the U.S. dollar. Adjustments resulting from translating financial statements of
international subsidiaries are recorded as a component of accumulated other comprehensive income (loss).
Revenue Recognition
Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the product price
is fixed or determinable, collection of the resulting receivable is reasonably assured, and product returns are reasonably esti-
mable. For product sales, revenue is generally recognized upon shipment of the product to our customer in accordance with the
title transfer terms of the sales agreement, generally Ex Works, per International Commercial Terms. In the case of consigned
inventory, revenue is recognized when the end customer assumes ownership of the product. Contracts that contain multiple
deliverables are evaluated to determine the units of accounting, and the consideration from the arrangement is allocated to each
unit of accounting based on the relative selling price and corresponding terms of the contract. We use vendor-specific objec-
tive evidence of selling price. When this evidence is not available, we are generally not able to determine third-party evidence
of selling price because of the extent of customization among competing products or services from other companies. In these
instances, we use best estimates to allocate consideration to each respective unit of accounting. These estimates include analysis
of respective bills of material and review and analysis of similar product and service offerings. We record revenue associated with
installation services when respective contractual obligations are complete. In instances where customer acceptance is required,
revenue is deferred until respective acceptance criteria have been met. Contracts that include both installation services and
product sales are evaluated for revenue recognition in accordance with contract terms. As a result, installation services may be
considered a separate deliverable or may be considered a combined single unit of accounting with the delivered product. Gener-
ally, either the purchaser, ADTRAN, or a third party can perform the installation of our products. Shipping fees are recorded as
revenue and the related cost is included in cost of sales. Sales taxes invoiced to customers are included in revenues, and represent
less than one percent of total revenues. The corresponding sales taxes paid are included in cost of goods sold. Value added taxes
collected from customers in international jurisdictions are recorded in accrued expenses as a liability. Revenue is recorded net
of discounts. Sales returns are recorded as a reduction of revenue and accrued based on historical sales return experience, which
we believe provides a reasonable estimate of future returns.
A portion of our products are sold to a non-exclusive distribution network of major technology distributors in the United States.
These large organizations then distribute or provide fulfillment services to an extensive network of VARs and SIs. VARs and SIs
may be affiliated with us as a channel partner, or they may purchase from the distributor in an unaffiliated fashion. Additionally,
with certain limitations our distributors may return unused and unopened product for stock-balancing purposes when such
returns are accompanied by offsetting orders for products of equal or greater value.
We participate in cooperative advertising and market development programs with certain customers. We use these programs to
reimburse customers for certain forms of advertising, and in general, to allow our customers credits up to a specified percent-
age of their net purchases. Our costs associated with these programs are estimated and included in marketing expenses in our
consolidated statements of income. We also participate in rebate programs to provide sales incentives for certain products. Our
costs associated with these programs are estimated and accrued at the time of sale, and are recorded as a reduction of sales in
our consolidated statements of income.
48
ADTRAN 2016 Annual Report Unearned Revenue
Unearned revenue primarily represents customer billings on our maintenance service programs and unearned revenues relat-
ing to multiple element contracts where we still have contractual obligations to our customers. We currently offer maintenance
contracts ranging from one to five years. Revenue attributable to maintenance contracts is recognized on a straight-line basis
over the related contract term. In addition, we provide software maintenance and a variety of hardware maintenance services to
customers under contracts with terms up to ten years. When we defer revenue related to multiple-element contracts where we
still have contractual obligations, we also defer the related costs. Deferred costs are included in prepaid expenses and other assets
and totaled $10.7 million and $5.2 million at December 31, 2016 and 2015, respectively.
Other Income (Expense), Net
Other income (expense), net, is comprised primarily of miscellaneous income and expense, gains and losses on foreign currency
transactions, and investment account management fees. For the year ended December 31, 2014, other income (expense), net in-
cluded a $2.4 million gain related to the settlement of working capital items from an acquisition transaction that closed in 2012.
Earnings per Share
Earnings per common share, and earnings per common share assuming dilution, are based on the weighted average number of
common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 14 of Notes to Consoli-
dated Financial Statements for additional information.
Dividends
During 2016, 2015 and 2014, we paid shareholder dividends totaling $17.6 million, $18.4 million and $19.9 million, respectively.
The Board of Directors presently anticipates that it will declare a regular quarterly dividend so long as the present tax treatment
of dividends exists and adequate levels of liquidity are maintained. The following table shows dividends paid to our shareholders
in each quarter of 2016, 2015 and 2014.
Dividends per Common Share
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
2014
$0.09
$0.09
$0.09
$0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$0.09
$0.09
$0.09
$0.09
On January 17, 2017, the Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to share-
holders of record at the close of business on February 2, 2017. The ex-dividend date was January 31, 2017 and the payment date
was February 16, 2017. The quarterly dividend payment was $4.4 million.
Business Combinations
We use the acquisition method to account for business combinations. Under the acquisition method of accounting, we recog-
nize the assets acquired and liabilities assumed at their fair value on the acquisition date. Goodwill is measured as the excess of
the consideration transferred over the net assets acquired. Costs incurred to complete the business combination, such as legal,
accounting or other professional fees, are charged to general and administrative expenses as they are incurred.
49
Financial Results Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic
605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of
the Codification. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August
2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December
31, 2017, and interim periods within those fiscal years, with early adoption permitted for reporting periods beginning after
December 15, 2016. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU 2014-09,
including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance
on principal versus agent considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Per-
formance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations
and the licensing implementation guidance; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients, which contains certain provisions and practical expedients in response to identified
implementation issues; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers, which is intended to clarify the Codification or to correct unintended application of guidance. ASU 2014-09 allows
for either full retrospective or modified retrospective adoption. We plan to adopt ASU 2014-09 and the related ASUs on January
1, 2018, and we are currently evaluating the transition method that will be elected. We are continuing to evaluate the potential
impact of these ASUs, and we believe the most significant potential impact relates to our accounting for software license and
installation services revenues. We do not believe there will be a significant impact to product or maintenance revenues.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory (ASU 2015-11). Currently, Topic 330, Inventory, requires an entity to measure inventory at the lower of cost or mar-
ket. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin.
ASU 2015-11 does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The
amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average
cost. ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. The amendments should be applied prospectively with earlier application permitted as of
the beginning of an interim or annual reporting period. We adopted ASU 2015-05 in the first quarter of 2017, and there was no
material impact on our financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02
requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the
entity’s leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. A modified retrospective approach is required. We anticipate the adoption of ASU 2016-02 will have
a material impact on our financial position; however, we do not believe adoption will have a material impact on our results of
operations. We believe the most significant impact relates to our accounting for operating leases for office space and equipment.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of account-
ing for share-based compensation arrangements, including income tax effects, the classification of tax-related cash flows on
the statement of cash flows, and accounting for forfeitures. ASU 2016-09 is effective for fiscal years beginning after December
15, 2016, including interim periods within those years. We adopted ASU 2016-09 in the first quarter of 2017, and there was no
material impact on our financial position, results of operations and cash flows.
50
ADTRAN 2016 Annual Report In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Sim-
plifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the measurement of goodwill by eliminating
step 2 of the goodwill impairment test. Under ASU 2017-04, entities will be required to compare the fair value of a reporting
unit to its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value. ASU 2017-04 is effective for annual or interim impairment tests performed in fiscal years beginning
after December 15, 2019, with early adoption permitted for annual or interim impairment tests performed on testing dates after
January 1, 2017. The amendments should be applied prospectively. We do not expect the adoption of ASU 2017-04 will have a
material impact on our financial position, results of operations or cash flows.
During 2016, we adopted the following accounting standards, which had no material effect on our financial position, results of
operations or cash flows:
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Soft-
ware (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which provides
guidance on accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement in-
cludes a software license, then the customer should account for the software license element of the arrangement consistent with
the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer
should account for the arrangement as a service contract. ASU 2015-05 is effective for annual reporting periods beginning after
December 15, 2015, including interim periods within that reporting period. The amendments may be applied either prospec-
tively to all arrangements entered into or materially modified after the effective date or retrospectively. We adopted ASU 2015-
05 during the first quarter of 2016 and will apply the new standard prospectively. The adoption of ASU 2015-05 did not have a
material impact on our financial position, results of operations and cash flows.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes
(ASU 2015-17). ASU 2015-17 amends the existing guidance on income taxes to require the classification of all deferred tax assets
and liabilities as non-current on the balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016,
including interim periods within those years. Early adoption is permitted. The guidance may be applied either prospectively, for
all deferred tax assets and liabilities, or retrospectively to all periods presented. We elected to early adopt ASU 2015-17 during
the fourth quarter of 2016, and we applied the guidance retrospectively to all periods presented. As a result, $17.3 million and
$18.9 million were reclassified from current deferred tax assets to non-current deferred tax assets at December 31, 2016 and
2015, respectively.
51
Financial Results 2 Business Combinations
On September 13, 2016, we acquired key fiber access products, technologies and service relationships from subsidiaries of Com-
mScope, Inc. for $0.9 million in cash. This acquisition will enhance our solutions for the cable MSO industry and will provide
cable operators with the scalable solutions, services and support they require to compete in the multi-gigabit service delivery
market. This transaction was accounted for as a business combination. We have included the financial results of this acquisition
in our consolidated financial statements since the date of acquisition. These revenues are included in the Network Solutions
reportable segment, and in the Access & Aggregation and Customer Devices categories.
We recorded a bargain purchase gain of $3.5 million, net of income taxes, subject to customary working capital adjustments
between the parties. The bargain purchase gain represents the excess fair value of the net assets acquired over the consideration
exchanged. We have assessed the recognition and measurement of the assets acquired and liabilities assumed based on historical
and pro forma data for future periods and have concluded that our valuation procedures and resulting measures were appro-
priate. The gain is included in the line item “Gain on bargain purchase of a business” in the 2016 Consolidated Statements of
Income.
The allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition
date, subject to working capital adjustments, is as follows:
(In thousands)
Assets
Inventory
Property, plant and equipment
Intangible assets
Total assets acquired
Liabilities
Accounts payable
Warranty payable
Accrued wages and benefits
Deferred income taxes
Total liabilities assumed
Total net assets
Gain on bargain purchase of a business, net of tax
Total purchase price
The details of the acquired intangible assets are as follows:
(In thousands)
Supply agreement
Customer relationships
Developed technology
License
Patent
Non-compete
Trade name
Total
52
$3,131
352
4,700
8,183
(1,250)
(61)
(122)
(2,265)
(3,698)
4,485
(3,542)
$943
Life (years)
0.8
6.0
10.0
1.3
7.3
2.3
2.0
Value
$1,400
1,200
800
500
500
200
100
$4,700
ADTRAN 2016 Annual Report
The actual revenue and net loss included in our Consolidated Statements of Income for the period September 13, 2016 to
December 31, 2016 are as follows:
(In thousands)
Revenue
Net loss
September 13 to December 31, 2016
$2,768
$(805)
The following supplemental unaudited pro forma information presents the financial results as if the acquisition had occurred
on January 1, 2015. This supplemental unaudited pro forma information does not purport to be indicative of what would have
occurred had the acquisition been completed on January 1, 2015, nor is it indicative of any future results. Aside from revising the
2015 net income for the effect of the bargain purchase gain, there were no material, non-recurring adjustments to this unaudited
pro forma information.
(In thousands)
Pro forma revenue
Pro forma net income
2016
$641,170
$31,212
2015
$603,923
$22,945
For the year ended December 31, 2016, we incurred acquisition and integration related expenses and amortization of acquired
intangibles of $1.0 million related to this acquisition.
3 Stock-Based Compensation
Stock Incentive Program Descriptions
On January 23, 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (2006 Plan),
which authorized 13.0 million shares of common stock for issuance to certain employees and officers through incentive stock
options and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units (RSUs). The 2006
Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 9, 2006. Options granted under
the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year
vesting schedule beginning on the first anniversary of the grant date, and have a ten-year contractual term. The 2006 Plan was
replaced on May 13, 2015 by the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan). Expiration dates of options
outstanding at December 31, 2016 under the 2006 Plan range from 2017 to 2024.
Our stockholders approved the 2010 Directors Stock Plan (2010 Directors Plan) on May 5, 2010, under which 0.5 million shares
of common stock have been reserved. This plan replaces the 2005 Directors Stock Option Plan. Under the 2010 Directors Plan,
the Company may issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the
2010 Directors Plan normally become vested in full on the first anniversary of the grant date. Options issued under the 2010
Directors Plan have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2016 under the 2010
Directors Plan range from 2017 to 2019.
On January 20, 2015, the Board of Directors adopted the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (2015 Plan),
which authorizes 7.7 million shares of common stock for issuance to certain employees and officers through incentive stock op-
tions and non-qualified stock options, stock appreciation rights, performance stock units (PSUs), restricted stock and RSUs. The
2015 Plan was adopted by stockholder approval at our annual meeting of stockholders held on May 13, 2015. PSUs, restricted
stock and RSUs granted under the 2015 Plan reduce the shares authorized for issuance under the 2015 Plan by 2.5 shares of com-
mon stock for each share underlying the award. Options granted under the 2015 Plan typically become exercisable beginning
after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary
of the grant date, and have a ten-year contractual term. Expiration dates of options outstanding at December 31, 2015 under the
2015 Plan range from 2025 to 2026.
53
Financial Results
The following table summarizes stock-based compensation expense related to stock options, PSUs, restricted stock and RSUs for
the years ended December 31, 2016, 2015 and 2014, which was recognized as follows:
(In thousands)
Stock-based compensation expense included in cost of sales
Selling, general and administrative expense
Research and development expense
Stock-based compensation expense included in operating expenses
Total stock-based compensation expense
Tax benefit for expense associated with non-qualified options
Total stock-based compensation expense, net of tax
2016
$389
3,341
2,965
6,306
6,695
(963)
$5,732
2015
$280
3,261
3,171
6,432
6,712
(862)
$5,850
2014
$479
4,185
3,899
8,084
8,563
(1,157)
$7,406
Stock-based compensation expense recognized in our Consolidated Statements of Income for the years ended December 31,
2016, 2015 and 2014 is based on stock options, PSUs, restricted stock and RSUs ultimately expected to vest, and has been re-
duced for estimated forfeitures. Estimates for forfeiture rates are based upon historical experience and are evaluated quarterly.
We expect our forfeiture rate for stock options and RSUs to be approximately 3.7% annually. We estimated a 0% forfeiture rate
for our PSUs and restricted stock due to the limited number of recipients and historical experience for these awards.
Stock Options
The following table is a summary of our stock options outstanding as of December 31, 2015 and 2016 and the changes that
occurred during 2016:
(In thousands, except per share amounts)
Options outstanding, December 31, 2015
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding, December 31, 2016
Options vested and expected to vest,
December 31, 2016
Options exercisable, December 31, 2016
Number of
Options
Weighted
Average
Exercise Price
Weighted Average
Remaining Contractual
Life in Years
Aggregate
Intrinsic
Value
7,108
19
(283)
(93)
(413)
6,338
6,276
4,757
$21.97
$18.24
$16.66
$17.90
$23.96
$22.14
$22.20
$23.67
6.42
$3,284
5.63
5.60
4.73
$16,972
$16,606
$9,137
At December 31, 2016, total compensation cost related to non-vested stock options not yet recognized was approximately
$7.5 million, which is expected to be recognized over an average remaining recognition period of 2.1 years.
All of the options above were issued at exercise prices that approximated fair market value at the date of grant. At December 31,
2016, 5.6 million options were available for grant under the shareholder approved plans.
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between ADTRAN’s
closing stock price on the last trading day of 2016 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 December 31, 2016. The
amount of aggregate intrinsic value will change based on the fair market value of ADTRAN’s stock.
54
ADTRAN 2016 Annual Report
The total pre-tax intrinsic value of options exercised during 2016, 2015 and 2014 was $1.1 million, $0.1 million and $0.7 million,
respectively. The fair value of options fully vesting during 2016, 2015 and 2014 was $5.7 million, $6.6 million and $7.7 million,
respectively.
The following table further describes our stock options outstanding as of December 31, 2016:
Range of
Exercise Prices
$14.88 – 18.96
$18.97 – 23.45
$23.46 – 30.35
$30.36 – 41.92
Options Outstanding
Options
Outstanding
at 12/31/16
(in thousands)
Weighted Avg.
Remaining
Contractual Life
in Years
2,101
1,380
1,491
1,366
6,338
6.78
5.79
5.08
4.29
Weighted
Average
Exercise
Price
$15.82
$20.17
$23.89
$31.94
Options Exercisable
Options
Exercisable
at 12/31/16
(in thousands)
Weighted
Average
Exercise
Price
1,217
881
1,293
1,366
4,757
$16.14
$20.84
$23.92
$31.94
PSUs, restricted stock and RSUs
Under the 2015 Plan, awards other than stock options, including PSUs, restricted stock and RSUs, may be granted to certain
employees and officers. Under our PSU program, the number of shares of common stock earned by a recipient pursuant to
the PSUs is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the
NASDAQ Telecommunications Index at the end of a three-year performance period. Depending on the relative total share-
holder return over the performance period, the recipient may earn from 0% to 150% of the shares underlying the PSUs, with
the shares earned distributed upon the vesting of the PSUs at the end of the three-year performance period. The fair value of the
award is based on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of
market conditions using a Monte Carlo Simulation valuation method. A portion of the granted PSUs also vest and the underly-
ing shares become deliverable upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined
by the 2015 Plan. The recipients of the PSUs receive dividend credits based on the shares of common stock underlying the PSUs.
The dividend credits are vested and earned in the same manner as the PSUs and are paid in cash upon the issuance of common
stock for the PSUs. The fair value of restricted stock and RSUs is equal to the closing price of our stock on the business day im-
mediately preceding the grant date. Restricted stock and RSUs vest ratably over one year and four year periods, respectively.
The following table is a summary of our PSUs, restricted stock and RSUs outstanding as of December 31, 2015 and 2016 and the
changes that occurred during 2016:
(In thousands except per share amounts)
Unvested PSUs, restricted stock and RSUs outstanding, December 31, 2015
PSUs, restricted stock and RSUs granted
PSUs, restricted stock and RSUs vested
PSUs, restricted stock and RSUs forfeited
Unvested RSUs and restricted stock outstanding, December 31, 2016
Number
of Shares
Weighted
Average Grant
Date Fair Value
106
460
(46)
(1)
519
$21.09
$20.63
$22.50
$20.00
$20.51
At December 31, 2016, total compensation cost related to the non-vested portion of PSUs, restricted stock and RSUs not yet
recognized was approximately $8.9 million, which is expected to be recognized over an average remaining recognition period
of 3.6 years.
55
Financial Results Valuation and Expense Information
We use the Black-Scholes option pricing model (Black-Scholes Model) for the purpose of determining the estimated fair value of
stock option awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judg-
ment. Because our stock options have characteristics significantly different from those of traded options, and because changes
in the input assumptions can materially affect the fair value estimate, existing models may not provide reliable measures of fair
value of our stock options. We use a Monte Carlo Simulation valuation method to value our performance-based PSUs. The fair
value of RSUs and restricted stock issued is equal to the closing price of our stock on the date of grant. We will continue to assess
the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation. If circumstances
change, and additional data becomes available over time, we may change our assumptions and methodologies, which may ma-
terially impact our fair value determination.
The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables
include, but are not limited to, the volatility of our stock price and employee exercise behaviors. There were no changes made
during 2016 to the methodology used to determine our assumptions.
The weighted-average estimated fair value of stock options granted to employees during the years ended December 31, 2016,
2015 and 2014 was $5.22 per share, $4.28 per share and $6.31 per share, respectively, with the following weighted-average as-
sumptions:
Expected volatility
Risk-free interest rate
Expected dividend yield
Expected life (in years)
2016
34.79%
1.36%
1.98%
6.25
2015
34.57%
1.81%
2.35%
6.23
2014
39.05%
1.79%
1.90%
6.33
We based our estimate of expected volatility for the years ended December 31, 2016, 2015 and 2014 on the sequential historical
daily trading data of our common stock for a period equal to the expected life of the options granted. The selection of the his-
torical volatility method was based on available data indicating our historical volatility is as equally representative of our future
stock price trends as is our implied volatility. We have no reason to believe the future volatility of our stock price is likely to differ
from its past volatility. The risk-free interest rate assumption is based upon implied yields of U.S. Treasury zero-coupon bonds
on the date of grant having a remaining term equal to the expected life of the options granted. The dividend yield is based on our
historical and expected dividend payouts. The expected life of our stock options is based upon historical exercise and forfeiture
activity of our previous stock-based grants with a ten-year contractual term.
The PSU pricing model also requires the use of several significant assumptions that impact the fair value estimate. The estimated
fair value of the PSUs granted to employees during the years ended December 31, 2016, 2015 and 2014 was $23.50 per share,
$17.64 per share and $22.11 per share, respectively, with the following assumptions:
Expected volatility
Risk-free interest rate
Expected dividend yield
2016
29.79%
1.17%
1.80%
2015
31.34%
1.20%
2.35%
2014
36.40%
0.96%
1.89%
56
ADTRAN 2016 Annual Report Investments
4
At December 31, 2016, we held the following securities and investments, recorded at either fair value or cost:
Available-for-sale securities held at fair value
$190,146
Restricted investment held at cost
Other investments
Total carrying value of available-for-sale investments
At December 31, 2015, we held the following securities and investments, recorded at either fair value or cost:
(In thousands)
Deferred compensation plan assets
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Variable rate demand notes
Marketable equity securities
(In thousands)
Deferred compensation plan assets
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
Government bonds
Marketable equity securities
Amortized
Cost
$12,367
Gross
Unrealized
Gains
$2,271
66,522
11,799
10,201
13,080
30,022
3,729
11,855
30,571
58,328
26,414
19,281
15,463
35,646
31,643
64
12
19
15
15
2
—
311
$2,709
20
28
2
1
—
4,301
$5,927
Amortized
Cost
$11,325
Gross
Unrealized
Gains
$1,575
Gross
Unrealized
Losses
$(42)
(174)
(37)
(14)
(91)
(270)
(1)
—
(1,503)
$(2,132)
Gross
Unrealized
Losses
$(66)
(734)
(18)
(44)
(91)
(248)
(1,693)
Fair Value/
Carrying
Value
$14,596
66,412
11,774
10,206
13,004
29,767
3,730
11,855
29,379
$190,723
27,800
767
$219,290
Fair Value/
Carrying
Value
$12,834
57,614
26,424
19,239
15,373
35,398
34,251
$(2,894)
$201,133
30,000
1,289
$232,422
Available-for-sale securities held at fair value
$198,100
Restricted investment held at cost
Other investments held at cost
Total carrying value of available-for-sale investments
As of December 31, 2016, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds,
U.S. government bonds, and foreign government bonds had the following contractual maturities:
(In thousands)
Less than one year
One to two years
Two to three years
Three to five years
Five to ten years
More than ten years
Total
Corporate
bonds
Municipal
fixed-rate
bonds
Asset-
backed
bonds
Mortgage/
Agency-
backed
bonds
U.S.
government
bonds
Foreign
government
bonds
$18,912
32,497
11,486
3,517
—
—
$8,321
1,703
351
1,399
—
—
$—
635
2,415
5,402
1,600
154
$—
976
980
—
2,060
8,988
$1,701
4,903
13,072
10,091
—
—
$2,400
1,330
—
—
—
—
$66,412
$11,774
$10,206
$13,004
$29,767
$3,730
57
Financial Results Our investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in
any one issuer to 5% of the market value of our total investment portfolio.
We 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 consecu-
tive months. We then evaluate the individual security based on the previously identified factors to determine the amount of
the write-down, if any. For each of the years ended December 31, 2016, 2015 and 2014, we recorded a charge of $0.8 million,
$0.2 million and $0.1 million, respectively, related to the other-than-temporary impairment of certain marketable equity securi-
ties and our deferred compensation plan assets.
Realized gains and losses on sales of securities are computed under the specific identification method. The following table pres-
ents gross realized gains and losses related to our investments for the years ended December 31, 2016, 2015 and 2014:
(In thousands)
Year Ended December 31,
Gross realized gains
Gross realized losses
2016
$7,530
2015
$10,906
$(1,607)
$(569)
2014
$7,586
$(308)
The following table presents the breakdown of investments with unrealized losses at December 31, 2016:
(In thousands)
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Deferred compensation plan assets
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Marketable equity securities
Total
$294
32,562
8,936
2,986
7,842
26,449
924
21,607
$101,600
$(12)
(166)
(37)
(14)
(81)
(270)
(1)
(1,200)
$(1,781)
$245
2,722
—
—
1,239
—
—
1,495
$5,701
$(30)
(8)
—
—
(10)
—
—
(303)
$(351)
$539
35,284
8,936
2,986
9,081
26,449
924
23,102
$107,301
$(42)
(174)
(37)
(14)
(91)
(270)
(1)
(1,503)
$(2,132)
The following table presents the breakdown of investments with unrealized losses at December 31, 2015:
(In thousands)
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Deferred compensation plan assets
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
Government bonds
Marketable equity securities
Total
$1,243
35,952
9,160
16,857
15,216
35,397
14,364
$128,189
$(53)
(566)
(18)
(44)
(91)
(248)
(1,564)
$(2,584)
$92
3,042
—
—
—
—
374
$3,508
$(13)
(168)
—
—
—
—
(129)
$(310)
$1,335
38,994
9,160
16,857
15,216
35,397
14,738
$131,697
$(66)
(734)
(18)
(44)
(91)
(248)
(1,693)
$(2,894)
58
ADTRAN 2016 Annual Report The decrease in unrealized losses during 2016, as reflected in the table above, results from changes in market positions associated
with our fixed income and equity investment portfolio. At December 31, 2016, a total of 293 of our marketable equity securities
were in an unrealized loss position.
We have categorized our cash equivalents 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
could include information supplied by investees.
Fair Value Measurements at December 31, 2016 Using
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
(In thousands)
Cash equivalents
Money market funds
Commercial paper
Cash equivalents
Available-for-sale securities
Deferred compensation plan assets
Available-for-sale debt securities
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
U.S. government bonds
Foreign government bonds
Variable rate demand notes
$6,878
17,222
24,100
14,596
66,412
11,774
10,206
13,004
29,767
3,730
11,855
Available-for-sale marketable equity securities
Marketable equity securities—
technology industry
Marketable equity securities—other
Available-for-sale securities
Total
3,374
26,005
190,723
$214,823
$6,878
—
6,878
14,596
—
—
—
—
29,767
—
—
3,374
26,005
73,742
$80,620
$—
17,222
17,222
—
66,412
11,774
10,206
13,004
—
3,730
11,855
—
—
116,981
$134,203
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
59
Financial Results Fair Value Measurements at December 31, 2015 Using
(In thousands)
Cash equivalents
Money market funds
Commercial paper
Cash equivalents
Available-for-sale securities
Deferred compensation plan assets
Available-for-sale debt securities
Corporate bonds
Municipal fixed-rate bonds
Asset-backed bonds
Mortgage/Agency-backed bonds
Government bonds
$1,271
11,696
12,967
12,834
57,614
26,424
19,239
15,373
35,398
Available-for-sale marketable equity securities
Marketable equity securities—
technology industry
Marketable equity securities—other
Available-for-sale securities
Total
5,384
28,867
201,133
$214,100
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$1,271
—
1,271
12,834
—
—
—
—
35,398
5,384
28,867
82,483
$83,754
$—
11,696
11,696
—
57,614
26,424
19,239
15,373
—
—
—
118,650
$130,346
$—
—
—
—
—
—
—
—
—
—
—
—
$—
The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are
obtained from a variety of 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.
Our municipal variable rate demand notes have a structure that implies a standard expected market price. The frequent interest
rate resets make it reasonable to expect the price to stay at par. These securities are priced at the expected market price.
5 Derivative Instruments and Hedging Activities
We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary
exchange rates may adversely affect our results of operations and financial condition, as these are remeasured to the functional
currency through profit and loss. When appropriate, we enter into various derivative transactions to enhance our ability to
manage the volatility relating to these typical business exposures. We do not hold or issue derivative instruments for trading or
other speculative purposes. Our derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. Our
derivative instruments do not qualify for hedge accounting, and accordingly, all changes in the fair value of the instruments are
recognized as other income (expense) in the Consolidated Statements of Income. Our derivative instruments are not subject to
master netting arrangements and are not offset in the Consolidated Balance Sheets.
As of December 31, 2016, we had forward contracts outstanding with notional amounts totaling €5.5 million ($5.8 million),
which mature in the first quarter of in 2017.
60
ADTRAN 2016 Annual Report The fair values of our derivative instruments recorded in the Consolidated Balance Sheet as of December 31, 2016 and 2015
were as follows:
(In thousands)
Balance Sheet Location
Derivatives Not Designated as Hedging Instruments (Level 2):
Foreign exchange contracts – asset derivatives
Other receivables
2016
$159
2015
—
The change in the fair values of our derivative instruments recorded in the Consolidated Statements of Income during the years
ended December 31, 2016, 2015 and 2014 were as follows:
(In thousands)
Income Statement Location
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts
Other income (expense)
2016
$724
2015
$511
2014
$1,852
Inventory
6
At December 31, 2016 and 2015, inventory was comprised of the following:
(In thousands)
Raw materials
Work in process
Finished goods
Total Inventory, net
2016
$40,461
4,003
60,653
$105,117
2015
$34,223
2,893
54,417
$91,533
We establish reserves for estimated excess, obsolete, or unmarketable inventory equal to the difference between the cost of the
inventory and the estimated fair value of the inventory based upon assumptions about future demand and market conditions.
At December 31, 2016 and 2015, raw materials reserves totaled $14.6 million and $17.5 million, respectively, and finished goods
inventory reserves totaled $10.6 million and $9.2 million, respectively.
7 Property, Plant and Equipment
At December 31, 2016 and 2015, property, plant and equipment were comprised of the following:
(In thousands)
Land
Building and land improvements
Building
Furniture and fixtures
Computer hardware and software
Engineering and other equipment
Total Property, Plant and Equipment
Less accumulated depreciation
Total Property, Plant and Equipment, net
2016
$4,575
29,229
68,301
18,477
87,655
118,746
326,983
(242,514)
$84,469
2015
$4,575
25,667
68,301
17,347
76,389
112,132
304,411
(231,178)
$73,233
Depreciation expense was $12.0 million, $12.3 million and $12.5 million in 2016, 2015, and 2014, respectively.
61
Financial Results 8 Goodwill and Intangible Assets
Goodwill was $3.5 million at December 31, 2016 and 2015, and was previously recorded in our Enterprise Networks reportable
segment. As a result of our new reporting structure adopted in the first quarter of 2016, which is discussed further in Note 12,
we reallocated goodwill from our Enterprise Networks reportable segment to our two, new reportable segments – Network So-
lutions and Services & Support. As a result, goodwill of $3.1 million and $0.4 million was reallocated to our Network Solutions
and Services & Support reportable segments, respectively.
We evaluate the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events
occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying
amount. We have elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value
of the reporting unit to which the goodwill is assigned is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step impairment test. If we determine that it is more likely than not that its fair value is less than
its carrying amount, then the two-step impairment test will be performed. Based on the results of our qualitative assessment in
2016, we concluded that it was not necessary to perform the two-step impairment test. There have been no impairment losses
recognized since the acquisition in 2011.
Intangible assets are included in other assets in the accompanying Consolidated Balance Sheets. The following table presents our
intangible assets as of December 31, 2016 and 2015:
(In thousands)
Customer relationships
Developed technology
Intellectual property
Supply agreement
License
Patent
Trade names
Non-compete
Total
2016
Accumulated
Amortization
Gross Value
$6,899
6,444
2,340
1,400
500
500
370
200
$(3,208)
(5,061)
(2,129)
(544)
(113)
(20)
(285)
(26)
2015
Accumulated
Amortization
Gross Value
$5,828
5,720
2,340
—
—
—
270
11
$(2,627)
(4,329)
(1,854)
—
—
—
(265)
(11)
Net
Value
$3,691
1,383
211
856
387
480
85
174
Net
Value
$3,201
1,391
486
—
—
—
5
—
$18,653
$(11,386)
$7,267
$14,169
$(9,086)
$5,083
Amortization expense was $2.5 million, $1.9 million and $2.3 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
As of December 31, 2016, the estimated future amortization expense of intangible assets is as follows:
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
62
Amount
$2,867
1,168
655
621
568
1,388
$7,267
ADTRAN 2016 Annual Report 9 Alabama State Industrial Development Authority Financing and Economic Incentives
In conjunction with an expansion of our Huntsville, Alabama, facility, we were approved for participation in an incentive pro-
gram offered by the State of Alabama Industrial Development Authority (the “Authority”). Pursuant to the program, on January
13, 1995, the Authority issued $20.0 million of its taxable revenue bonds and loaned the proceeds from the sale of the bonds to
ADTRAN. The bonds were originally purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the “Bank”). Wachovia
Bank, N.A., Nashville, Tennessee (formerly First Union National Bank of Tennessee) (the “Bondholder”), which was acquired
by Wells Fargo & Company on December 31, 2008, purchased the original bonds from the Bank and made further advances
to the Authority, bringing the total amount outstanding to $50.0 million. An Amended and Restated Taxable Revenue Bond
(“Amended and Restated Bond”) was issued and the original financing agreement was amended. The Amended and Restated
Bond bears interest, payable monthly. The interest rate is 2% per annum. The Amended and Restated Bond matures on January
1, 2020, and is currently outstanding in the aggregate principal amount of $27.8 million. The estimated fair value of the bond
using a level 2 valuation technique at December 31, 2016 was approximately $28.1 million, based on a debt security with a
comparable interest rate and maturity and a Standard & Poor’s credit rating of AAA. We are required to make payments to the
Authority in amounts necessary to pay the interest on the Amended and Restated Bond. Included in long-term investments at
December 31, 2016 is $27.8 million which is invested in a restricted certificate of deposit. These funds serve as a collateral deposit
against the principal of this bond, and 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.
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 that we are required to remit to the state for those employment positions that qualify under
the program. We realized economic incentives related to payroll withholdings totaling $1.3 million for each of the years ended
December 31, 2016, 2015 and 2014.
We made principal payments of $1.1 million for the years ended December 31, 2016 and 2015, respectively, and anticipate
making a principal payment in 2017. At December 31, 2016, $1.0 million of the bond debt was classified as a current liability in
accounts payable in the Consolidated Balance Sheets.
10 Income Taxes
A summary of the components of the provision for income taxes for the years ended December 31, 2016, 2015 and 2014 is as
follows:
(In thousands)
Current
Federal
State
International
Total Current
Deferred
Federal
State
International
Total Deferred
Total Provision for Income Taxes
2016
2015
2014
$12,733
1,141
477
14,351
647
73
(3,405)
(2,685)
$11,666
$7,504
279
(29)
7,754
(585)
(66)
(41)
(692)
$7,626
599
12,587
20,812
(1,083)
(123)
(4,320)
(5,526)
$7,062
$15,286
63
Financial Results Our effective income tax rate differs from the federal statutory rate due to the following:
Tax provision computed at the federal statutory rate
State income tax provision, net of federal benefit
Federal research credits
Foreign taxes
Tax-exempt income
State tax incentives
Stock-based compensation
Domestic production activity deduction
Bargain purchase
Other, net
Effective Tax Rate
2016
35.00%
3.93
(8.15)
(0.34)
(0.53)
(2.77)
2.53
(2.23)
(2.64)
0.08
2015
35.00%
4.86
(12.55)
2.10
(1.94)
(5.04)
6.91
(3.17)
—
1.30
2014
35.00%
2.69
(4.05)
(7.26)
(1.25)
(2.21)
3.06
(1.15)
—
0.69
24.88%
27.47%
25.52%
Income before provision for income taxes for the years ended December 31, 2016, 2015 and 2014 is as follows:
(In thousands)
U.S. entities
International entities
Total
2016
$54,077
(7,182)
$46,895
2015
$27,400
(1,692)
$25,708
2014
$23,812
36,094
$59,906
Income before provision for income taxes for international entities reflects income based on statutory transfer pricing agree-
ments. This amount does not correlate to consolidated international revenues, many of which occur from our U.S. entity.
Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities rec-
ognized for financial reporting and tax purposes. The principal components of our current and non-current deferred taxes are
as follows:
(In thousands)
Deferred tax assets
Accounts receivable
Inventory
Accrued expenses
Investments
Deferred compensation
Stock-based compensation
Uncertain tax positions related to state taxes and related interest
Pensions
Foreign losses
State losses and credit carry-forwards
Federal loss and research carry-forwards
Valuation allowance
Total Deferred Tax Assets
Deferred tax liabilities
Property, plant and equipment
Accrued expenses
Intellectual property
Investments
Total Deferred Tax Liabilities
Net Deferred Tax Assets
64
2016
2015
$—
12,020
5,551
1,062
5,751
4,724
762
4,273
6,486
4,021
5,886
(6,149)
44,387
(4,433)
—
(1,918)
—
(6,351)
$38,036
$ 7
12,558
6,359
—
5,072
4,704
1,026
5,729
5,389
4,187
5,886
(7,250)
43,667
(3,315)
(2,791)
(476)
(70)
(6,652)
$37,015
ADTRAN 2016 Annual Report At December 31, 2016 and 2015, non-current deferred taxes related to our investments and our defined benefit pension plan,
reflect deferred taxes on the net unrealized gains on available-for-sale investments and deferred taxes on unrealized losses in our
pension plan. The net change in non-current deferred taxes associated with these items, a deferred tax benefit of $1.5 million
and $3.7 million in 2016 and 2015, respectively, is recorded as an adjustment to other comprehensive income, presented in the
Consolidated Statements of Comprehensive Income.
Based upon our results of operations in 2016 and expected profitability in future years in a certain international jurisdiction, we
concluded that it is more likely than not certain foreign deferred tax assets will be realized. As of December 31, 2016, the remain-
ing valuation allowance primarily relates to deferred tax assets related to state credit carry-forwards from tax credits in excess of
our annual tax liability to an individual state where we do not generate sufficient state income to offset the credit and net operat-
ing losses in foreign jurisdictions. We believe it is more likely than not that we will not realize the full benefits of the deferred
tax assets arising from these losses and credits, and accordingly, we have provided a valuation allowance against these deferred
tax assets. The deferred tax assets for foreign and domestic carry-forwards, unamortized research and development costs, and
state credit carry-forwards of $16.4 million will expire between 2017 and 2030. The loss carry-forwards were acquired through
acquisitions in 2009 and 2011. We will continue to assess the realization of our deferred tax assets and related valuations allow-
ances. We do not provide for U.S. income tax on undistributed earnings of our foreign operations, whose earnings are intended
to be permanently reinvested. These earnings are not required to service debt or fund our U.S. operations. It is impracticable
to determine the amount of any unrecognized deferred tax liability for temporary differences related to investments in foreign
subsidiaries. The net change in our valuation allowance from December 31, 2015 to December 31, 2016 was $1.1 million.
As of December 31, 2016 and 2015, respectively, our cash and cash equivalents were $79.9 million and $84.6 million and short-
term investments were $43.2 million and $34.4 million, which provided an available short-term liquidity of $123.1 million and
$118.9 million. Of these amounts, our foreign subsidiaries held cash of $42.1 million and $38.9 million, respectively, represent-
ing approximately 34.2% and 32.7% of available short-term liquidity, which is used to fund on-going liquidity needs of these
subsidiaries. We intend to permanently reinvest these funds outside the U.S. and our current business plans do not indicate
a need to repatriate to fund domestic operations. However, if these funds were repatriated to the U.S. or used for U.S. opera-
tions, certain amounts related to the earnings and profits of foreign subsidiaries could be subject to U.S. tax for the incremental
amount in excess of the foreign tax paid. Due to the timing and circumstances of repatriation of such earnings, if any, it is not
practical to determine the amount of funds subject to repatriation or the associated unrecognized deferred tax liability related
to the amount.
During 2016, 2015 and 2014, we recorded an income tax benefit (expense) of nil, $(40) thousand and $0.1 million, respectively,
as an adjustment to equity. This is calculated on the difference between the exercise price of stock option exercises and the mar-
ket price of the underlying common stock upon exercise.
The change in the unrecognized income tax benefits for the years ended December 31, 2016, 2015 and 2014 is reconciled below:
(In thousands)
Balance at beginning of period
Increases for tax position related to:
Prior years
Current year
Decreases for tax positions related to:
Prior years
Settlements with taxing authorities
Expiration of applicable statute of limitations
Balance at end of period
2016
$2,537
95
428
—
—
(834)
$2,226
2015
$3,334
—
280
(29)
(103)
(945)
$2,537
2014
$3,240
—
522
—
—
(428)
$3,334
As of December 31, 2016, 2015, and 2014, our total liability for unrecognized tax benefits was $2.2 million, $2.5 million, and
$3.3 million, respectively, of which $1.7 million, $1.8 million, and $2.6 million, respectively, would reduce our effective tax rate
if we were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and
penalties recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2016, 2015 and
2014, the balances of accrued interest and penalties were $0.8 million, $0.9 million and $1.0 million, respectively.
We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax ben-
efits within 12 months of this reporting date. We file income tax returns in the U.S. federal and various state jurisdictions and
several foreign jurisdictions. We are not currently under audit by the Internal Revenue Service. Generally, we are not subject to
changes in income taxes by any taxing jurisdiction for the years prior to 2013.
65
Financial Results 11 Employee Benefit Plans
Pension Benefit Plan
We maintain a defined benefit pension plan covering employees in certain foreign countries.
The pension benefit plan obligations and funded status at December 31, 2016 and 2015, are as follows:
(In thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
Service cost
Interest cost
Actuarial gain (loss) - experience
Actuarial gain (loss) - assumptions
Benefit payments
Effects of foreign currency exchange rate changes
Projected benefit obligation at end of period
Change in plan assets:
Fair value of plan assets at beginning of period
Actual return on plan assets
Effects of foreign currency exchange rate changes
Fair value of plan assets at end of period
Funded (unfunded) status at end of period
2016
2015
$(26,851)
(1,211)
(720)
431
(2,628)
52
916
$(30,507)
(1,314)
(615)
247
2,078
81
3,179
(30,011)
(26,851)
19,213
1,494
(662)
20,045
$(9,966)
20,338
988
(2,113)
19,213
$(7,638)
The accumulated benefit obligation was $28.7 million and $25.1 million at December 31, 2016 and 2015, respectively. The in-
crease in the accumulated benefit obligation and the change in actuarial gain (loss) is primarily attributable to a decrease in the
discount rate used in 2016 to determine the accumulated benefit obligation.
The net amounts recognized in the balance sheet for the unfunded pension liability as of December 31, 2016 and 2015 are as
follows:
(In thousands)
Current liability
Non-current liability
Total
2016
$—
(9,966)
$(9,966)
2015
$—
(7,638)
$(7,638)
The components of net periodic pension cost and amounts recognized in other comprehensive income for the years ended
December 31, 2016, 2015 and 2014 are as follows:
(In thousands)
Net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial losses
Net periodic benefit cost
Other changes in plan assets and benefit obligations
recognized in other comprehensive income:
Net actuarial (gain) loss
Amortization of actuarial losses
Amount recognized in other comprehensive income
Total recognized in net periodic benefit cost and
other comprehensive income
2016
$1,211
720
(1,057)
175
1,049
1,782
(156)
1,626
$2,675
2015
$1,314
615
(1,011)
407
1,325
(2,303)
(396)
(2,699)
$(1,374)
2014
$1,189
836
(1,086)
—
939
7,052
—
7,052
$7,991
66
ADTRAN 2016 Annual Report The amounts recognized in accumulated other comprehensive income as of December 31, 2016 and 2015 are as follows:
(In thousands)
Net actuarial loss
2016
$6,871
2015
$5,245
The defined benefit pension plan is accounted for on an actuarial basis, which requires the selection of various assumptions,
including an expected rate of return on plan assets and a discount rate. The expected return on our German plan assets that
is utilized in determining the benefit obligation and net periodic benefit cost is derived from periodic studies, which include a
review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks using standard
deviations and correlations of returns among the asset classes that comprise the plans’ asset mix. While the studies give appro-
priate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective
rates of return.
Another key assumption in determining net pension expense is the assumed discount rate to be used to discount plan obliga-
tions. The discount rate has been derived from the returns of high-quality, corporate bonds denominated in Euro currency with
durations close to the duration of our pension obligations.
The weighted-average assumptions that were used to determine the net periodic benefit cost for the years ended December 31,
2016, 2015 and 2014 are as follows:
Discount rates
Rate of compensation increase
Expected long-term rates of return
2016
2.64%
2.00%
5.40%
2015
2.20%
2.25%
5.40%
The weighted-average assumptions that were used to determine the benefit obligation at December 31, 2016 and 2015:
Discount rates
Rate of compensation increase
2016
1.90%
2.00%
2014
3.70%
2.25%
5.40%
2015
2.64%
2.25%
Actuarial gains and losses are recorded in accumulated other comprehensive income. To the extent unamortized gains and
losses exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amor-
tized as a component of net periodic pension cost over the remaining service period of active participants. We estimate that
$0.3 million will be amortized from accumulated other comprehensive income into net periodic pension cost in 2017 for the
net actuarial loss.
We do not anticipate making a contribution to this pension plan in 2017. The following pension benefit payments, which reflect
expected future service, as appropriate, are expected to be paid to participants:
(In thousands)
2017
2018
2019
2020
2021
2022 – 2026
Total
$348
515
699
964
1,079
5,156
$8,761
67
Financial Results We have categorized our cash equivalents 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 December 31, 2016 Using
(In thousands)
Cash and cash equivalents
Available-for-sale securities
Bond funds:
Corporate bonds
Government bonds
Equity funds:
Large cap blend
Large cap value
Balanced fund
Available-for-sale securities
Total
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$6
$—
$—
Fair Value
$6
12,546
2,037
4,462
249
745
20,039
$20,045
12,546
2,037
4,462
249
745
20,039
$20,045
—
—
—
—
—
—
$—
—
—
—
—
—
—
$—
Fair Value Measurements at December 31, 2015 Using
(In thousands)
Cash and cash equivalents
Available-for-sale securities
Bond funds:
Corporate bonds
Government bonds
Equity funds:
Large cap blend
Large cap value
Balanced fund
Available-for-sale securities
Total
Quoted Prices
in Active
Markets for Identical
Assets (Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$3
$—
$—
Fair Value
$3
11,633
1,960
4,604
258
755
19,210
$19,213
11,633
1,960
4,604
258
755
19,210
$19,213
—
—
—
—
—
—
$—
—
—
—
—
—
—
$—
Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner neces-
sary to meet expected future benefits earned by participants, and consider a broad range of economic conditions. Central to the
policy are target allocation ranges by asset class, which is currently 75% for bond funds and 25% for equity funds.
The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation
parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, and achieve asset returns that are com-
petitive with like institutions employing similar investment strategies.
The investment policy is periodically reviewed by us and a designated third-party fiduciary for investment matters. The policy is
established and administered in a manner that is compliant at all times with applicable government regulations.
68
ADTRAN 2016 Annual Report
401(k) Savings Plan
We maintain the ADTRAN, Inc. 401(k) Retirement Plan (Savings Plan) for the benefit of our eligible employees. The Savings
Plan is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (Code), and
is intended to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for
retirement by contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to
contribute a “safe harbor” amount each year. We match up to 4% of employee contributions (100% of an employee’s first 3% of
contributions and 50% of their next 2% of contributions), beginning on the employee’s one year anniversary date. In calculating
our matching contribution, we only use compensation up to the statutory maximum under the Code ($265 thousand for 2016).
All contributions under the Savings Plan are 100% vested. Expenses recorded for employer contributions and plan administra-
tion costs for the Savings Plan amounted to approximately $4.1 million, $4.7 million and $4.5 million in 2016, 2015 and 2014,
respectively.
Deferred Compensation Plans
We maintain four deferred compensation programs for certain executive management employees and our Board of Directors.
For our executive management employees, the ADTRAN, Inc. Deferred Compensation Program for Employees is offered as a
supplement to our tax-qualified 401(k) plan and is available to certain executive management employees who have been desig-
nated by our Board of Directors. This deferred compensation plan allows participants to defer all or a portion of certain specified
bonuses and up to 25% of remaining cash compensation, and permits us to make matching contributions on a discretionary
basis, without the limitations that apply to the 401(k) plan. To date, we have not made any matching contributions under this
plan. We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees. Under this plan, participants may elect to
defer all or a portion of their vested PSUs to the Plan. Such deferrals shall continue to be held and deemed to be invested in shares
of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment
pursuant to an election made by the Participant.
For our Board of Directors, we maintain the ADTRAN, Inc. Deferred Compensation Program for Directors. This program al-
lows our Board of Directors to defer all or a portion of monetary remuneration paid to the Director, including, but not limited
to, meeting fees and annual retainers. We also maintain the ADTRAN, Inc. Equity Deferral Program for Directors. Under this
plan, participants may elect to defer all or a portion of their vested restricted stock awards. Such deferrals shall continue to be
held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are
moved to another deemed investment pursuant to an election made by the Director.
We have set aside the plan assets for all plans in a rabbi trust (Trust) and all contributions are credited to bookkeeping accounts
for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The as-
sets of the Trust are deemed to be invested in pre-approved mutual funds as directed by each participant, and the participant’s
bookkeeping account is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be
distributed six months after termination of employment in a single lump sum payment or annual installments paid over a three
or ten year term. Distributions will be made on a pro rata basis from each of the hypothetical investments of the Participant’s
account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.
Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money
market instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the
Trust and the amounts payable to the plan participants at December 31, 2016 and 2015 are as follows:
(In thousands)
Fair Value of Plan Assets
Long-term Investments
Total Fair Value of Plan Assets
Amounts Payable to Plan Participants
Non-current Liabilities
Total Amounts Payable to Plan Participants
2016
2015
$14,596
$14,596
$14,596
$14,596
$12,834
$12,834
$12,834
$12,834
69
Financial Results
Interest and dividend income of the Trust have been included in interest and dividend income in the accompanying 2016,
2015 and 2014 Consolidated Statements of Income. Changes in the fair value of the plan assets held by the Trust have been
included in accumulated other comprehensive income in the accompanying 2016 and 2015 Consolidated Balance Sheets.
Changes in the fair value of the deferred compensation liability are included as selling, general and administrative expense in
the accompanying 2016, 2015 and 2014 Consolidated Statements of Income. Based on the changes in the total fair value of the
Trust’s assets, we recorded deferred compensation income (expense) in 2016, 2015 and 2014 of $(1.3) million, $0.3 million and
$(0.7) million, respectively.
Retiree Medical Coverage
We provide medical, dental and prescription drug coverage to one retired former officer and his spouse, for his life, on the same
terms as provided to our active officers, and to the spouse of a former deceased officer for up to 30 years. At December 31, 2016
and 2015, this liability totaled $0.2 million.
12 Segment Information and Major Customers
In 2015, we realigned our organizational structure to better match our market opportunities, technological development initia-
tives, and improve efficiencies. During the first quarter of 2016, our chief operating decision maker requested changes in the
information that he regularly reviews for purposes of allocating resources and assessing performance. As a result, beginning with
the quarter ended March 31, 2016, we began reporting our financial performance based on two, new reportable segments—
Network Solutions and Services & Support. Network Solutions includes hardware products and next-generation virtualized
solutions used in service provider or business networks, as well as prior-generation products. Services & Support includes our
suite of ProCloud managed services, network installation, engineering and maintenance services, and fee-based technical sup-
port and equipment repair/replacement plans.
We evaluate the performance of our new segments based on gross profit; therefore, selling, general and administrative expenses,
research and development expenses, interest and dividend income, interest expense, net realized investment gain/loss, other
income/expense and provision for taxes are reported on a company-wide, functional basis only. Historical financial information
by reportable segment and category, as discussed below, has been recast to conform to our new reporting structure. There are
no inter-segment revenues.
The following table presents information about the reported sales and gross profit of our reportable segments for each of the
years ended December 31, 2016, 2015 and 2014. Asset information by reportable segment is not reported, since we do not pro-
duce such information internally.
(In thousands)
Sales and Gross Profit by
Market Segment
Network Solutions
Services & Support
Total
2016
2015
2014
Sales
Gross Profit
Sales
Gross Profit
Sales
Gross Profit
$525,502
111,279
$636,781
$254,807
$527,422
$233,579
$559,532
36,537
72,642
33,318
70,475
$291,344
$600,064
$266,897
$630,007
$271,517
39,810
$311,327
Sales by Category
In addition to our new reporting segments, we will also report revenue for the following three categories—Access & Aggrega-
tion, Customer Devices, and Traditional & Other Products.
The table below presents sales information by product category for the years ended December 31, 2016, 2015 and 2014:
(In thousands)
Access & Aggregation
Customer Devices
Traditional & Other Products
Total
2016
$436,372
137,608
62,801
$636,781
2015
$405,698
125,565
68,801
$600,064
2014
$401,769
138,051
90,187
$630,007
70
ADTRAN 2016 Annual Report The following table presents sales information by geographic area for the years ended December 31, 2016, 2015 and 2014. Inter-
national sales correlate to shipments with a non-U.S. destination.
(In thousands)
United States
Germany
Other international
Total
2016
$501,337
85,780
49,664
$636,781
2015
$419,366
111,666
69,032
$600,064
2014
$381,382
150,987
97,638
$630,007
Customers comprising more than 10% of revenue can change from year to year. Single customers comprising more than 10%
of our revenue in 2016 included three customers at 24%, 19% and 12%. Single customers comprising more than 10% of our
revenue in 2015 included three customers at 20%, 17% and 14%. Single customers comprising more than 10% of our revenue
in 2014 included two customers at 21% and 14%. No other customer accounted for 10% or more of our sales in 2016, 2015 or
2014. Our five largest customers, other than those with more than 10 percent of revenues disclosed above, can change from year
to year. These customers represented 13%, 14%, and 22% of total revenue in 2016, 2015 and 2014, respectively. Revenues in this
disclosure do not include distributor agents, who predominately provide fulfillment services to end users. In such cases where
known, that revenue is associated with the end user.
Additional Segment Information
As of December 31, 2016, long-lived assets, net totaled $84.5 million, which includes $79.9 million held in the United States and
$4.6 million held outside the United States. As of December 31, 2015, long-lived assets, net totaled $73.2 million, which includes
$68.8 million held in the United States and $4.4 million held outside the United States.
13 Commitments and Contingencies
In the ordinary course of business, we may be subject to various legal proceedings and claims, including employment disputes,
patent claims, disputes over contract agreements and other commercial disputes. In some cases, claimants seek damages or
other relief, such as royalty payments related to patents, which, if granted, could require significant expenditures. Although the
outcome of any claim or litigation can never be certain, it is our opinion that the outcome of all contingencies of which we are
currently aware will not materially affect our business, operations, financial condition or cash flows.
We have committed to invest up to an aggregate of $7.9 million in two private equity funds, and we have contributed $8.4 million
as of December 31, 2016, of which $7.7 million has been applied to these commitments.
We lease office space and equipment under operating leases which expire at various dates through 2025. As of December 31, 2016,
future minimum rental payments under non-cancelable operating leases with original maturities of greater than 12 months are
as follows:
(In thousands)
2017
2018
2019
2020
Thereafter
Total
$3,788
2,043
847
741
3,243
$10,662
Rental expense was $4.2 million, $4.9 million and $4.7 million for the years ended December 31, 2016, 2015 and 2014, respec-
tively.
71
Financial Results 14 Earnings per Share
A summary of the calculation of basic and diluted earnings per share (EPS) for the years ended December 31, 2016, 2015 and
2014 is as follows:
(In thousands, except for per share amounts)
2016
2015
2014
Numerator
Net Income
Denominator
$35,229
$18,646
$44,620
Weighted average number of shares—basic
48,724
51,145
55,120
Effect of dilutive securities:
Stock options
Restricted stock and restricted stock units
Weighted average number of shares—diluted
Net income per share—basic
Net income per share—diluted
170
55
48,949
$0.72
$0.72
81
41
51,267
$0.36
$0.36
304
58
55,482
$0.81
$0.80
For each of the years ended December 31, 2016, 2015 and 2014, 4.6 million, 6.1 million and 4.4 million stock options were out-
standing but were not included in the computation of that year’s diluted EPS because the options’ exercise prices were greater
than the average market price of the common shares, therefore making them anti-dilutive under the treasury stock method.
15 Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of our last eight fiscal quarters. This information has
been prepared on a basis consistent with our audited financial statements and includes all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of the data.
Unaudited Quarterly Operating Results
(In thousands, except for per share amounts)
Three Months Ended
March 31, 2016
Net sales
Gross profit
Operating income
Net income
Earnings per common share
Earnings per common share
assuming dilution (1)
$142,204
$65,794
$5,521
$5,014
$0.10
$0.10
June 30, 2016 September 30, 2016 December 31, 2016
$162,701
$78,955
$14,812
$10,228
$0.21
$0.21
$168,890
$75,808
$10,130
$12,415
$0.26
$0.26
$162,986
$70,787
$4,272
$7,572
$0.16
$0.16
Three Months Ended
March 31, 2015
June 30, 2015 September 30, 2015 December 31, 2015
Net sales
Gross profit
Operating income
Net income
Earnings per common share
Earnings per common share
assuming dilution (1)
$142,835
$65,563
$1,963
$3,317
$0.06
$0.06
$160,138
$68,246
$644
$2,544
$0.05
$0.05
$158,078
$70,649
$8,072
$7,067
$0.14
$0.14
$139,013
$62,439
$2,800
$5,718
$0.12
$0.12
(1) Assumes exercise of dilutive stock options calculated under the treasury stock method.
72
ADTRAN 2016 Annual Report
16 Related Party Transactions
We employed the law firm of our director emeritus for legal services. All bills for services rendered by this firm were 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. The services of our director emeritus ended with his death on September 7, 2014. For the year
ended 2014, we incurred fees of $0.1 million for these legal services.
17 Subsequent Events
On January 17, 2017, the Board declared a quarterly cash dividend of $0.09 per common share to be paid to shareholders of
record at the close of business on February 2, 2017. The quarterly dividend payment was $4.4 million and was paid on February
16, 2017. 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 first quarter and as of February 24, 2017, we have repurchased 0.2 million shares of our common stock through open
market purchases at an average cost of $21.46 per share. We currently have the authority to purchase an additional 4.2 million
shares of our common stock under the current plan approved by the Board of Directors.
73
Financial Results Directors and Executive Officers
Thomas R. Stanton
Chairman and Chief Executive Officer
H. Fenwick Huss
Director of the Company
Willem Kooyker Dean of the Zicklin School
of Business at Baruch College
William L. Marks
Director of the Company
Former Chairman of the Board and Chief Executive
Officer of Whitney Holding Corp. (the holding company
for Whitney National Bank of New Orleans)
Anthony J. Melone
Director of the Company
Former Executive Vice President and Chief Technology
Officer for Verizon Communications
Balan Nair
Director of the Company
Executive Vice President and Chief Technology Officer
of Liberty Global, Inc.
Roy J. Nichols
Director Emeritus
Founder and former President of
Nichols Research Corporation
Jacqueline H. Rice
Executive Vice President and Chief Risk and
Compliance Officer for Target Corporation
Kathryn A. Walker
Director of the Company
Managing Director for OpenAir Equity Partners
Michael K. Foliano
Senior Vice President
Global Operations
Kevin P. Heering
Senior Vice President
Quality and Administration
Roger D. Shannon
Senior Vice President of Finance,
Chief Financial Officer,
Corporate Secretary and Treasurer
Raymond R. Schansman
Senior Vice President
Global Services & Support
Eduard Scheiterer
Senior Vice President
Engineering and Development
James D. Wilson, Jr.
Senior Vice President
Technology and Strategy
Transfer Agent
American Stock Transfer and Trust Company
New York, NY
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Birmingham, Alabama
Special Counsel
Dentons US LLP
Atlanta, Georgia
Form 10-K
ADTRAN’s 2016 Annual Report on Form 10-K
(without exhibits) as filed with the Securities and
Exchange Commission is available to stockholders
without charge upon written request to:
Investor Relations
ADTRAN, Inc.
901 Explorer Blvd.
P.O. Box 140000
Huntsville, Alabama 35814-4000
256 963-8220 or 256 963-7600
investorrelations@adtran.com (email)
Annual Meeting
The 2017 Annual Meeting of Stockholders will be held
at ADTRAN corporate headquarters, 901 Explorer
Boulevard, Huntsville, Alabama, on Wednesday,
May 10, 2017, at 10:30 a.m. Central time.
74
ADTRAN 2016 Annual Report Corporate
Headquarters
ADTRAN, Inc.
901 Explorer Boulevard
Huntsville, AL 35806
USA
P.O. Box 140000
Huntsville, AL 35814-4000
1 800 9ADTRAN
1 256 963-8000
1 256 963-8004 fax
investorrelations@adtran.com
www.adtran.com
International Offices
ADTRAN Networks Pty. Ltd.
Melbourne, Australia
ADTRAN Singapore Pte. Ltd.
Singapore
ADTRAN Europe Limited
Basingstoke, Hampshire and Ipswich,
Suffolk, United Kingdom
ADTRAN Canada, Inc.
Montreal and Mississauga, Canada
ADTRAN Networks S.A. de C.V.
Mexico City, Mexico
ADTRAN Networks & Services S. de R.L. de C.V.
Mexico City, Mexico
ADTRAN Peru S.R.L.
Lima, Peru
ADTRAN GmbH
Berlin, Bruchsal, Greifswald, Leipzig,
and Munich, Germany
ADTRAN Oy
Helsinki, Finland
ADTRAN M.E.P.E.
Athens, Greece
ADTRAN Networks India Private Limited
Hyderabad, India
ADTRAN Holdings Ltd.
Tel Aviv, Israel
ADTRAN S.R.L.
Milan, Italy
ADTRAN Sp. z.o.o.
Warsaw, Poland
ADTRAN s.r.o.
Bratislava, Slovakia
ADTRAN Switzerland GmbH
Zurich, Switzerland
Saudi Arabian Branch of ADTRAN International, Inc.
Riyadh, Saudi Arabia
ADTRAN GmbH Permanent Establishment
Tunis, Tunisia