ADTRAN (ADTN) - 2023 Q1 - Quarterly Report

Part I. Financial Information Financial Statements Q1 2023 financial statements reflect significant revenue growth and increased operating loss, primarily due to the ADVA business combination Condensed Consolidated Balance Sheets The balance sheet as of March 31, 2023, shows $1.94 billion in total assets, increased liabilities, and a new $442.7 million Redeemable Non-Controlling Interest Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $136,457 | $108,644 | | Inventory, net | $416,291 | $427,531 | | Goodwill | $385,755 | $381,724 | | Total Assets | $1,938,595 | $1,943,494 | | Liabilities & Equity | | | | Revolving credit agreements | $190,843 | $95,936 | | Total Liabilities | $675,765 | $639,881 | | Redeemable Non-Controlling Interest | $442,668 | $0 | | Total Equity | $820,162 | $1,303,613 | - The non-controlling interest in ADVA was reclassified to Redeemable Non-Controlling Interest (RNCI) on January 16, 2023, now classified outside stockholders' equity upon DPLTA effectiveness[50] - The December 31, 2022 balance sheet was revised to correct a $61.6 million understatement of deferred tax assets and liabilities, affecting gross balances but not the net amount[47][48] Condensed Consolidated Statements of Loss Q1 2023 total revenue surged 109.6% to $323.9 million due to the ADVA acquisition, resulting in a $49.7 million operating loss and $34.5 million net loss Q1 2023 vs. Q1 2022 Performance (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Revenue | $323,912 | $154,518 | | Gross Profit | $87,808 | $54,316 | | Operating Loss | $(49,732) | $(68) | | Net Loss Attributable to ADTRAN | $(34,464) | $(1,127) | | Loss Per Share (diluted) | $(0.44) | $(0.02) | - Significant increases in operating expenses, with SG&A at $67.4 million and R&D at $70.1 million, primarily drove the operating loss, reflecting expanded post-ADVA operations[28] Condensed Consolidated Statements of Cash Flows Q1 2023 operating activities used $19.9 million cash, while financing activities provided $55.6 million from increased borrowings, leading to a $27.8 million cash increase Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(19,926) | $4,869 | | Net cash used in investing activities | $(6,794) | $(2,700) | | Net cash provided by (used in) financing activities | $55,628 | $(3,924) | | Net increase (decrease) in cash | $28,908 | $(1,755) | - Financing activities were driven by $94.8 million net proceeds from revolving credit agreements, used to fund operations, repay $24.7 million in notes, and pay $7.1 million in dividends[40] Notes to Condensed Consolidated Financial Statements Notes detail the ADVA business combination's impact, including purchase price allocation, goodwill, intangibles, DPLTA effects, new revenue categories, debt, and segment performance Note 2. Business Combination ADTRAN acquired ADVA for $578.3 million, recognizing $350.5 million goodwill and $403.8 million intangibles, with ADVA contributing $192.3 million revenue and a $25.4 million net loss in Q1 2023 Purchase Price Allocation (in thousands) | Category | Fair Value | | :--- | :--- | | Total purchase price | $578,260 | | Non-controlling interest | $316,415 | | Net Assets Acquired | $544,217 | | Goodwill | $350,458 | - Identifiable intangible assets acquired totaled $403.8 million, primarily Developed Technology ($291.9 million), Backlog ($52.2 million), and Customer Relationships ($32.7 million)[59] - For Q1 2023, the ADVA business contributed $192.3 million in revenue and a net loss of $25.4 million to consolidated results[59] Note 3. Revenue Q1 2023 total revenue was $323.9 million, disaggregated into new categories post-ADVA, with Optical Networking Solutions contributing $147.8 million, and remaining performance obligations increasing to $389.0 million Revenue by Category (in thousands) | Revenue Category | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Subscriber Solutions | $79,336 | $56,722 | | Access & Aggregation Solutions | $96,820 | $97,796 | | Optical Networking Solutions | $147,756 | $0 | | Total | $323,912 | $154,518 | - Remaining performance obligations totaled $389.0 million as of March 31, 2023, with approximately 68% expected to be recognized within the next 12 months[64] Debt (Revolving Credit & Notes Payable) Total revolving credit agreements increased to $190.8 million as of March 31, 2023, primarily from increased Wells Fargo borrowings, while $24.6 million in notes payable were fully repaid - Borrowings under the main Wells Fargo credit facility increased from $60.0 million to $180.0 million during the quarter, with the total facility size expanding to $400 million upon DPLTA effectiveness[107][108] - The company fully repaid the $24.6 million syndicated credit agreement note payable on January 31, 2023[113][114] Segment and Geographic Information Q1 2023 revenue was $282.4 million for Network Solutions and $41.5 million for Services & Support, with international revenue growing to 59.4% of total, driven by the ADVA combination Revenue by Geographic Area (in thousands) | Geographic Area | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | United States | $131,466 | $99,048 | | Germany | $76,286 | $10,920 | | United Kingdom | $57,397 | $30,388 | | Other international | $58,763 | $14,162 | | Total | $323,912 | $154,518 | Segment Performance (in thousands) | Segment | Q1 2023 Revenue | Q1 2023 Gross Profit | | :--- | :--- | :--- | | Network Solutions | $282,418 | $63,288 | | Services & Support | $41,494 | $24,520 | | Total | $323,912 | $87,808 | Commitments and Contingencies The company faces significant DPLTA commitments, including potential $335.6 million Exit Compensation or $11.3 million annual recurring compensation, alongside $459.3 million in purchase commitments - Under the DPLTA, the company is obligated to offer either Exit Compensation of €17.21 per share (totaling approximately $335.6 million) or Annual Recurring Compensation of €0.59 per share to remaining ADVA shareholders[144] - As of March 31, 2023, the company had purchase commitments totaling $459.3 million for inventory and manufacturing services[147] Management's Discussion and Analysis (MD&A) MD&A attributes 109.6% Q1 2023 revenue growth to ADVA, noting gross margin decline due to purchase accounting, increased operating expenses, and ongoing integration for synergies, with liquidity managed via cash and credit facility Results of Operations Q1 2023 revenue increased 109.6% to $323.9 million due to ADVA, but gross margin fell to 27.1% due to purchase accounting, leading to a $49.7 million operating loss - Revenue increase was primarily attributable to a $192.3 million increase in sales from the ADVA business combination[174] - Gross margin was negatively impacted by $32.6 million of ADVA acquisition adjustments, including intangible amortization and fair value adjustments to inventory[176][177] - Customer concerns over inventory stocking levels negatively affected the Subscriber Solutions category, a trend expected to continue into Q2 2023[167][174] Liquidity and Capital Resources Q1 2023 ended with $136.5 million cash and access to a $400 million credit facility, deemed sufficient for operations and DPLTA obligations, including potential $335.6 million exit payments and $459.3 million purchase obligations - The company believes its liquidity, including $136.5 million cash and available credit, is adequate to meet obligations for at least the next 12 months[191] - Material cash requirements include operating leases ($33.5 million), purchase obligations ($459.3 million), outstanding debt ($190.8 million), and significant potential DPLTA payments[201] - The company entered into forward contracts to hedge an aggregate notional amount of $160.0 million of its Euro-denominated DPLTA payment obligations[203][205] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate and foreign currency risks, with a 50 basis point rate increase impacting annual interest expense by $1.0 million, and uses forward contracts to hedge Euro and British pound exposures, including DPLTA obligations - A hypothetical 50 basis point increase in interest rates would increase annual interest expense by $1.0 million on the $190.8 million variable-rate debt[211] - The company's primary foreign currency exposures are to the Euro and British pound sterling, with approximately 40.9% of Q1 2023 operating expenses paid in local currencies[212] - To manage DPLTA payment risk, the company entered into Euro/U.S. dollar forward contracts to hedge a notional amount of $160.0 million[212][214] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2023, excluding the ADVA acquisition as permitted by SEC guidance, with ongoing efforts to integrate ADVA's internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period[217] - As permitted by the SEC, the evaluation of internal control over financial reporting excluded the ADVA acquisition, which represented 42.4% of consolidated assets and 59.4% of consolidated revenues for the quarter[218] Part II. Other Information Legal Proceedings & Risk Factors The company faces various legal matters, including a new ADVA lawsuit against Huawei, with no material changes to previously disclosed risk factors regarding revenue predictability, gross margins, and ADVA integration - In May 2023, ADVA filed a lawsuit against Huawei Technologies Co. Ltd seeking a declaration that Huawei violated commitments to license standard essential patents on FRAND terms[156][225] - No material changes to risk factors from the 2022 Form 10-K were noted, with reiterated risks including revenue predictability, gross margin sustainability, and ADVA internal control integration challenges[221][222][224] Other Corporate Matters No common stock repurchases occurred during the quarter, Ulrich Dopfer was appointed Principal Accounting Officer, and a $0.09 per share quarterly cash dividend was declared post-quarter end - The Board of Directors declared a quarterly cash dividend of $0.09 per common share on May 8, 2023[154] - Effective May 10, 2023, Ulrich Dopfer was appointed as the company's Principal Accounting Officer[155][228] - No shares of common stock were repurchased during the three months ended March 31, 2023[227]