ADTRAN (US:ADTN)2022-11-08 16:00PART I. FINANCIAL INFORMATION Financial Statements The financial statements reflect the significant impact of the ADVA business combination, substantially increasing assets, liabilities, revenue, and expenses Condensed Consolidated Balance Sheets Balance Sheet Summary (in thousands) | Balance Sheet Items | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $111,099 | $56,603 | | Inventory, net | $416,163 | $139,891 | | Goodwill | $357,869 | $6,968 | | Intangibles, net | $393,575 | $19,293 | | Total Assets | $1,838,054 | $569,017 | | Liabilities & Equity | | | | Accounts payable | $276,026 | $102,489 | | Revolving credit agreements | $84,503 | $0 | | Total Liabilities | $653,227 | $211,915 | | Total Equity | $1,184,827 | $357,102 | - The significant increase in assets and liabilities is primarily due to the business combination with ADVA, which added substantial goodwill, intangible assets, inventory, and debt to the balance sheet3366 Condensed Consolidated Statements of Loss Statement of Loss Summary (in thousands, except per share amounts) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $340,709 | $138,081 | $667,265 | $408,846 | | Gross Profit | $103,027 | $47,673 | $219,849 | $163,942 | | Operating Loss | $(48,018) | $(10,058) | $(39,953) | $(7,462) | | Net Loss | $(44,859) | $(10,427) | $(43,843) | $(4,445) | | Net Loss attributable to ADTRAN | $(41,934) | $(10,427) | $(40,918) | $(4,445) | | Loss per share - diluted | $(0.57) | $(0.21) | $(0.72) | $(0.09) | - Revenue for Q3 2022 more than doubled year-over-year, driven by the ADVA acquisition, however, operating and net losses widened significantly due to increased operating expenses, acquisition-related costs, and a $17.0 million asset impairment charge36 Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(42,733) | $28,891 | | Net cash provided by (used in) investing activities | $43,381 | $(3,620) | | Net cash provided by (used in) financing activities | $61,129 | $(7,126) | | Net increase in cash | $61,777 | $18,145 | - Operating cash flow was negative for the first nine months of 2022, a significant decrease from the prior year, driven by higher net loss and increased working capital needs, particularly for inventory, while investing activities included $44.0 million in cash acquired from the ADVA business combination, and financing activities were positive due to proceeds from new revolving credit agreements48 Notes to Condensed Consolidated Financial Statements - The company completed its business combination with ADVA on July 15, 2022, acquiring 65.43% of ADVA's outstanding shares and consolidating its financial results, with ADTRAN determined to be the accounting acquirer516162 Preliminary Purchase Price Allocation for ADVA (in thousands) | Item | Amount | | :--- | :--- | | Total purchase price | $578,260 | | Non-controlling interest | $316,415 | | Total net assets acquired | $535,518 | | Goodwill | $359,157 | - Following the business combination, the company recast its revenue categories into Subscriber Solutions, Access & Aggregation Solutions, and a new category, Optical Networking Solutions, which represents a significant portion of ADVA's portfolio81197 - On October 18, 2022, the company and ADVA agreed on a draft Domination and Profit and Loss Transfer Agreement (DPLTA), which is subject to ADVA shareholder approval and, if approved, would require ADTRAN to offer compensation to remaining ADVA shareholders52212213 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the significant Q3 2022 revenue increase primarily to the ADVA business combination, despite gross margin declines and increased operating expenses leading to wider losses Results of Operations Revenue Performance (Q3 2022 vs Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $340.7M | $138.1M | +146.7% | | Network Solutions Revenue | $304.9M | $120.8M | +152.5% | | Services & Support Revenue | $35.8M | $17.3M | +106.6% | | International Revenue | $171.0M | $46.2M | +270.1% | - The increase in revenue for Q3 2022 was primarily driven by a $163.8 million contribution from the ADVA business combination251 - Gross margin decreased to 30.2% in Q3 2022 from 34.5% in Q3 2021, attributed to $25.5 million in acquisition-related expenses (amortization, inventory fair value adjustments), supply chain constraint costs, and changes in product/customer mix250258 - Operating expenses increased significantly due to the inclusion of ADVA's operations, with Selling, general and administrative (SG&A) expenses rising to $74.9 million from $31.0 million, and Research and development (R&D) expenses increasing to $59.2 million from $26.8 million264266 - The company recognized an asset impairment charge of $17.0 million in Q3 2022 related to capitalized costs for a cloud computing arrangement that no longer fits the company's needs following the business combination268 Liquidity and Capital Resources - As of September 30, 2022, the company had available short-term liquidity of $111.9 million in cash and short-term investments, which the company believes, along with cash from operations and credit facilities, will be adequate for at least the next 12 months276277 - Net cash used in operating activities was $42.7 million for the first nine months of 2022, a sharp decline from $28.9 million provided in the same period of 2021, mainly due to an inventory build, an increase in accounts receivable, and transaction costs279 - Inventory increased by 197.5% to $416.2 million from year-end 2021, driven by the ADVA acquisition and strategic buffer purchases to mitigate supply chain constraints281 Material Cash Requirements as of Sep 30, 2022 (in thousands) | Obligation | Total | Less than 1 year | | :--- | :--- | :--- | | Debt Obligations | $114,285 | $104,284 | | Purchase Obligations | $454,143 | $444,922 | | Operating Lease Obligations | $32,027 | $10,630 | | Total | $601,599 | $560,980 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, interest rate changes, and marketable securities, with ADVA increasing Euro exposure and necessitating hedging strategies - The company's primary foreign currency exposure is to the Euro, Australian dollar, and British pound sterling, with currency fluctuations decreasing net sales by approximately $34.4 million for the first nine months of 2022256311 - A hypothetical 50 basis point increase in interest rates would reduce the fair value of the company's $28.7 million in fixed-rate bonds by approximately $0.2 million310 - To manage currency risk related to the proposed DPLTA payment obligations, the company entered into a Euro/U.S. dollar cross-currency swap arrangement in November 2022 with a notional amount of $160.0 million216381 Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2022, excluding the recently acquired ADVA business, which is currently being integrated - The evaluation of disclosure controls and procedures as of September 30, 2022, excluded the impact of the ADVA acquisition, which was completed on July 15, 2022316317 - ADVA's assets represented approximately 66.0% of consolidated assets as of the reporting date, and its revenues were 48.1% of consolidated revenues for the third quarter317 PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal matters incidental to its business, with outcomes and potential losses currently unpredictable - The company is subject to various lawsuits, claims, and investigations that arise in the normal course of business319 Risk Factors The company faces significant new and heightened risks primarily from the ADVA business combination, including integration challenges, DPLTA implications, increased debt, and supply chain pressures - The company may fail to realize anticipated strategic benefits and cost savings from the ADVA business combination due to integration challenges, greater-than-expected costs, or difficulties in unifying product offerings320321 - There are significant risks related to the proposed DPLTA with ADVA, including potential delays or failure to get shareholder approval, which could hinder synergy realization and access to increased credit facilities, and if implemented, the DPLTA would create substantial payment obligations to minority shareholders and require ADTRAN to cover any of ADVA's annual net losses326329330 - The company incurred a substantial amount of new debt in connection with the business combination, which could make it more difficult to service debt obligations, reduce cash available for operations, and limit future business opportunities336337 - Gross margins may not be sustainable and could be adversely affected by supply chain expenses, price inflation for components, increased transportation costs, and changes in product or customer mix355357 - The business combination added significant goodwill and intangible assets, which could be subject to impairment charges if the business underperforms or economic trends are negative, potentially affecting financial results372 [Unregistered Sales of Equity Securities and Use of Proceeds](index=66&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECU RITIES%20AND%20USE%20OF%20PROCEEDS) The company did not repurchase any common stock during the nine months ended September 30, 2022, and has no current repurchase authorization - No shares of common stock were repurchased during the nine months ended September 30, 2022380 Other Information On November 3, 2022, the company entered a Euro/U.S. dollar cross-currency swap for $160.0 million to hedge potential DPLTA payment obligations - The company entered into a Euro/U.S. dollar cross-currency swap on November 3, 2022, to hedge potential payment obligations from the proposed DPLTA381