ADTRAN (ADTN) - 2022 Q4 - Annual Report

PART I Business ADTRAN Holdings, Inc. provides open networking and communications platforms, significantly expanding its portfolio in 2022 through the ADVA business combination - In 2022, the company completed a business combination with ADVA Optical Networking SE, significantly expanding its technology portfolio, especially in optical networking[35] - The company operates under two reportable segments: Network Solutions (hardware and software products) and Services & Support (network design, implementation, and SaaS applications)[39][40] - Following the ADVA combination, revenue is reported across three new categories: Subscriber Solutions, Access & Aggregation Solutions, and Optical Networking Solutions[43][44][47] Research and Development Expenditures (2020-2022) | Year | R&D Expense (in millions) | | :--- | :--- | | 2022 | $173.8 | | 2021 | $108.7 | | 2020 | $113.3 | - As of December 31, 2022, the company had 3,307 full-time employees, with 1,948 from ADVA and its subsidiaries[76] - One service provider customer accounted for more than 10% of total revenue in 2022, with the U.S., U.K., and Germany each contributing over 10% of total revenue[55] Risk Factors The company faces multiple risks including ADVA integration, financial predictability, supply chain, competition, and complex regulatory environments - Business Combination & DPLTA Risks: - Failure to realize anticipated strategic and financial benefits from the ADVA combination[92] - Complex operational and personnel integration challenges may disrupt business[93] - The DPLTA creates significant financial obligations, including potential Exit Compensation payments to minority ADVA shareholders of approximately €310.6 million and an Annual Recurring Compensation payment obligation[96] - Financial & Operational Risks: - Revenue is difficult to predict quarterly due to short order-to-delivery cycles and supply chain constraints[106] - Heavy dependence on sales to a few major customers, the loss of which would significantly reduce revenue[107] - Gross margins may be adversely affected by supply chain costs, inflation, and product mix[108] - Reliance on a limited number of suppliers for key components has led to delivery delays and increased costs[108] - Industry & Technology Risks: - The telecommunications market requires continuous product updates and innovation due to rapidly changing technology and evolving standards[110] - Intense competition from companies with greater financial and R&D resources could reduce market share and gross margins[129] - Products must interoperate with diverse and complex customer networks, and failure to do so can lead to delayed or canceled installations[129] - Regulatory & Macroeconomic Risks: - Subject to complex and evolving U.S. and foreign laws, including trade policies, tariffs (especially concerning China), and environmental regulations[140] - Changes in tax regulations or assessments from tax audits could adversely impact results[142] - Rising inflation and central bank monetary policy actions could increase borrowing costs and negatively impact profitability[144] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the SEC - None[148] Properties ADTRAN's global headquarters are in Huntsville, Alabama, with a European headquarters in Munich, Germany, and various other leased facilities - The company's primary facilities include its global headquarters in Huntsville, Alabama, and a leased European headquarters in Munich, Germany[148] Legal Proceedings The company is involved in various legal matters incidental to its business, but the outcome and potential loss cannot be estimated - The company is subject to various legal proceedings arising from the normal course of business, but the outcome and potential financial impact cannot be estimated at this time[149] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[150] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ADTRAN's common stock trades on NASDAQ and Frankfurt, paid quarterly dividends of $0.09 per share in 2022, and had no share repurchases - The company's common stock is traded on the NASDAQ (ADTN) and the Frankfurt Stock Exchange (QH9)[152] - A quarterly dividend of $0.09 per share was declared in each quarter of 2022[158] - The company did not repurchase any of its common stock during the fourth quarter of 2022 and has no current repurchase plan authorized[157] (Reserved) This item is intentionally left blank - This item is reserved[160] Management's Discussion and Analysis of Financial Condition and Results of Operations 2022 revenue significantly increased due to the ADVA acquisition, gross margin declined, operating expenses rose, and net loss improved, supported by strong liquidity Financial Performance Comparison (2022 vs. 2021) | Metric | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,025.5 | $563.0 | 82.2% | | Gross Profit | $327.3 | $218.4 | 49.9% | | Gross Margin | 31.9% | 38.8% | (6.9 p.p.) | | Operating Loss | ($72.8) | ($14.7) | 395.2% | | Net Loss Attributable to ADTRAN | ($2.0) | ($8.6) | (76.7%) | - The 82.2% revenue increase in 2022 was primarily driven by a $365.9 million contribution from the ADVA business combination and a $96.6 million increase from legacy ADTRAN operations[173] - Gross margin declined to 31.9% from 38.8% in 2021, attributed to acquisition-related expenses and ongoing supply chain constraint costs[175][177] - Operating expenses increased substantially due to the ADVA acquisition, with SG&A expenses rising 67.9% to $208.9 million and R&D expenses increasing 59.9% to $173.8 million[178][180] - The company recorded an income tax benefit of $62.1 million in 2022, compared to a $2.3 million expense in 2021, primarily due to the release of a valuation allowance against U.S. deferred tax assets[186] - Inventory increased 205.6% to $427.5 million at year-end 2022, driven by the ADVA acquisition and strategic buffer purchases to mitigate supply chain constraints[190] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate and foreign currency risks, managed through its investment portfolio and derivative instruments - Interest Rate Risk: A hypothetical 50 basis point increase in interest rates would increase the company's annual interest expense by approximately $0.6 million, primarily affecting its revolving credit agreements and notes payable[234] - Foreign Currency Risk: Primary exposures are to the Euro and British pound sterling; a hypothetical 10% strengthening/weakening of the U.S. dollar would result in a gain/loss of $8.0 million on receivables and $10.4 million on payables denominated in non-functional currencies[235] - The company utilizes hedging instruments to manage currency risk, including 47 forward contracts and a Euro/U.S. dollar cross-currency swap with a notional amount of $160 million to hedge DPLTA payment obligations[235] Financial Statements and Supplementary Data This section presents audited financial statements with an unqualified auditor's opinion, highlighting the critical audit matter of ADVA intangible asset valuation - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[247] - A Critical Audit Matter was identified concerning the valuation of developed technology ($291.9 million), customer relationships ($32.7 million), and backlog ($52.2 million) intangible assets from the ADVA acquisition, due to significant management judgment and complex assumptions[251] Consolidated Balance Sheet Summary | (In thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,881,865 | $569,017 | | Total Current Liabilities | $488,575 | $155,359 | | Total Liabilities | $578,252 | $211,915 | | Total Equity | $1,303,613 | $357,102 | Consolidated Statement of (Loss) Income Summary | (In thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Total Revenue | $1,025,536 | $563,004 | | Gross Profit | $327,252 | $218,377 | | Operating Loss | ($72,827) | ($14,700) | | Net Loss Attributable to ADTRAN | ($2,037) | ($8,635) | Consolidated Statement of Cash Flows Summary | (In thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($44,228) | $3,008 | | Net cash provided by investing activities | $55,831 | $10,266 | | Net cash provided by (used in) financing activities | $52,936 | ($12,958) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[474] Controls and Procedures Management concluded disclosure controls and internal controls were effective, excluding the recently acquired ADVA business from the assessment - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[475] - The assessment of internal control over financial reporting excluded the ADVA acquisition, which constituted 41.4% of consolidated assets and 35.7% of consolidated revenues for the year[476][480] Other Information An "Integration Bonus Plan" was established to incentivize key employees for achieving cost-saving synergies from the ADVA business combination - An "Integration Bonus Plan" was established on March 1, 2023, to incentivize key employees to achieve cost-saving synergies from the ADVA business combination[482] Integration Bonus Plan Potential Awards for NEOs | Named Executive Officer | Base Salary (as of Mar 1, 2023) | Max Total Value of Award | | :--- | :--- | :--- | | Thomas R. Stanton | $1,000,000 | $1,320,000 | | James D. Wilson, Jr. | $405,072 | $534,696 | | Ronald D. Centis | $349,398 | $461,206 | | Raymond Harris | $313,611 | $413,966 | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the company - None[483] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2023 Proxy Statement - The company has adopted a Code of Business Conduct and Ethics applicable to all employees, officers, and directors[485] - Other required information for this item is incorporated by reference from the forthcoming 2023 Proxy Statement[485] Executive Compensation Executive compensation information is incorporated by reference from the 2023 Proxy Statement - All information required by this item is incorporated by reference from the 2023 Proxy Statement[486] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details on securities authorized for issuance under equity compensation plans are provided, with other ownership information incorporated by reference Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 4,234,225 | $9.06 | 3,311,439 | | Equity compensation plans not approved by stockholders | — | — | — | | Total | 4,234,225 | $9.06 | 3,311,439 | - Other information required by this item is incorporated by reference from the 2023 Proxy Statement[489] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - All information required by this item is incorporated by reference from the 2023 Proxy Statement[490] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - All information required by this item is incorporated by reference from the 2023 Proxy Statement[491] PART IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including financial statements, schedules, and key exhibits - This item lists the financial statements, financial statement schedules, and exhibits filed with the report[493] - Key exhibits include the Business Combination Agreement, Credit Agreement, Domination and Profit and Loss Transfer Agreement, and various employee and director compensation plans[495][501][503] Form 10-K Summary The company has elected not to provide a summary of the information contained in this Form 10-K report - ADTRAN has elected not to provide a Form 10-K summary[509]