ADTRAN (ADTN) - 2020 Q4 - Annual Report

PART I Business ADTRAN provides global networking and communications platforms across two segments, serving diverse customers with a focus on innovation and R&D - ADTRAN operates under two reportable segments: Network Solutions (hardware and software) and Services & Support Its revenue is further divided into three categories: Access & Aggregation, Subscriber Solutions & Experience, and Traditional & Other Products[19] - In 2020, three customers—CenturyLink, Inc., Deutsche Telekom AG, and KGP Logistics—each accounted for more than 10% of the company's revenue Revenue from Germany also exceeded 10% of total revenue[35] Research and Development Expenditures (2018-2020) | Year | R&D Expenditures (in millions USD) | | :--- | :--- | | 2020 | $113.3 | | 2019 | $126.2 | | 2018 | $124.5 | - As of December 31, 2020, the company had 1,405 full-time employees, with 1,080 in the U.S. and 325 internationally It also utilized 250 contractors and temporary employees[68] Risk Factors The company faces significant financial, operational, and market risks, including revenue predictability, customer dependence, supply chain, and intense competition - Revenue is difficult to predict due to short order-to-delivery cycles, lack of significant order backlog, and fluctuating customer deployment schedules A shortfall in revenue could significantly harm operating results as expenses are relatively fixed in the short term[88][90] - The company depends heavily on sales to major service providers, which comprised over half of revenue in 2020 The loss of, or significant reduction in sales to, any of these customers could materially harm business results[92][93] - The ongoing COVID-19 pandemic presents risks of supply chain disruptions, increased raw material and freight costs, and potential slowdowns in customer demand, which could adversely affect financial results[114][116] - The implementation of a new Enterprise Resource Planning (ERP) software solution is a significant project that carries risks of operational disruption, delays, higher-than-anticipated costs, and potential data loss or corruption[119] - The markets for ADTRAN's products are intensely competitive and characterized by rapidly changing technology Failure to innovate and keep pace with new standards could render products obsolete and harm the company's market position[99][124][125] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[149] Properties ADTRAN's main facilities are in Huntsville, Alabama, with additional leased offices globally supporting its operations - The company's main facilities are located on an 82-acre campus in Cummings Research Park in Huntsville, Alabama[150] - ADTRAN leases office and engineering facilities in the U.S., Europe, North America, LATAM, EMEA, and APAC to support both its Network Solutions and Services & Support segments[150][151] Legal Proceedings ADTRAN faces a securities class action and a shareholder derivative lawsuit alleging false statements, which the company denies and intends to vigorously defend - A securities class action lawsuit was filed against the Company and certain executives in October 2019, alleging violations of federal securities laws related to disclosures about internal controls, inventory reserves, and financial results between February and October 2019[152] - A shareholder derivative suit was filed in March 2020, making similar allegations as the class action lawsuit and accusing directors and officers of breaches of fiduciary duty This litigation has been stayed pending the resolution of the motion to dismiss in the securities class action[153] Mine Safety Disclosures This section is not applicable to the company - Not applicable[155] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ADTRAN's common stock trades on NASDAQ, with no repurchases in Q4 2020, and authorization for an additional 2.5 million shares - ADTRAN's common stock is traded on the NASDAQ Global Select Market under the symbol ADTN[157] Stock Repurchase Activity (Q4 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share (USD) | | :--- | :--- | :--- | | Oct 2020 | — | $ — | | Nov 2020 | — | $ — | | Dec 2020 | — | $ — | - The company has authorization to repurchase an additional 2.5 million shares of its common stock under the current program[159] Selected Financial Data The company omitted selected financial data in accordance with the Regulation S-K Item 301 amendment - The company has applied the amendment to Regulation S-K Item 301, effective February 10, 2021, and has omitted the selected financial data[161] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, ADTRAN saw a 4.4% revenue decline to $506.5 million, improved gross margin to 43.0%, and achieved $2.4 million net income due to tax benefits Overview ADTRAN's 2020 revenue declined 4.4% due to international slowdowns, offset by 17.0% domestic growth, while facing COVID-19 supply chain impacts - 2020 revenue declined 4.4% year-over-year, mainly due to decreased shipments to an international Tier-1 operator[166] - Domestic revenue grew by 17.0% year-over-year, driven by growth in Tier-2 and Tier-3 carrier categories and additional fiber access deployments[166] - The COVID-19 pandemic has impacted the supply chain, causing slower deliveries, extended lead times on components, and increased raw material and freight costs[168] Results of Operations Total revenue decreased 4.4% to $506.5 million in 2020, with gross margin improving to 43.0%, resulting in $2.4 million net income due to tax benefits Consolidated Statements of Income (Loss) as a Percentage of Revenue | | 2020 | 2019 | | :--- | :--- | :--- | | Total Sales | 100.0% | 100.0% | | Gross Profit | 43.0% | 41.3% | | Selling, general and administrative expenses | 22.5% | 24.6% | | Research and development expenses | 22.4% | 23.8% | | Operating Loss | (1.9)% | (7.5)% | | Net Income (Loss) | 0.5% | (10.0)% | Revenue Comparison (2019 vs 2020) | Metric | 2019 (in millions USD) | 2020 (in millions USD) | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $530.1 | $506.5 | -4.4% | | Network Solutions Revenue | $455.2 | $438.0 | -3.8% | | Services & Support Revenue | $74.8 | $68.5 | -8.5% | | Domestic Revenue | $300.9 | $352.1 | +17.0% | | International Revenue | $229.2 | $154.4 | -32.6% | - Cost of sales as a percentage of revenue decreased from 58.7% in 2019 to 57.0% in 2020, primarily due to regional revenue shifts, changes in customer and product mix, and decreased personnel costs from restructuring[186] - The company's effective tax rate changed from an expense of 113.8% in 2019 to a benefit of 138.1% in 2020 This was primarily driven by the establishment of a valuation allowance in 2019 and tax benefits from loss carrybacks under the CARES Act in 2020[203] Liquidity and Capital Resources ADTRAN's 2020 short-term liquidity was $63.3 million, inventory increased 27.6% to $125.5 million, and the company became debt-free after repaying $24.6 million in bonds - As of December 31, 2020, available short-term liquidity was $63.3 million, of which $49.7 million was held by foreign subsidiaries[206] - In November 2020, the company entered into a new $10.0 million secured revolving credit facility, which had not been drawn upon as of year-end[207] - Inventory increased by 27.6% to $125.5 million at year-end 2020, primarily due to strategic buffer purchases to ensure supply continuity during the COVID-19 pandemic[211] - The company's $24.6 million outstanding balance on its taxable revenue bonds was repaid in full upon maturity in January 2020, leaving the company with no outstanding debt as of December 31, 2020[217] Dividends Paid Per Common Share (USD) | Quarter | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | First | $0.09 | $0.09 | $0.09 | | Second | $0.09 | $0.09 | $0.09 | | Third | $0.09 | $0.09 | $0.09 | | Fourth | $0.09 | $0.09 | $0.09 | Critical Accounting Policies and Estimates ADTRAN's critical accounting policies involve significant judgment in revenue recognition, inventory valuation, stock-based compensation, goodwill impairment, and income tax estimates - Revenue is recognized when control of goods or services is transferred to the customer For contracts with multiple performance obligations, consideration is allocated based on relative standalone selling prices[236] - Reserves for excess and obsolete inventory are established based on historical usage, known trends, inventory age, and market conditions The reserve was $39.6 million at the end of 2020, up from $34.1 million in 2019[243] - The fair value of market-based performance stock units (PSUs) is determined using a Monte Carlo Simulation valuation method, while the fair value of other stock awards is based on the stock's closing price on the grant date[244] - The company established a valuation allowance against its domestic deferred tax assets in 2019 due to uncertainty about their future realization, a critical estimate impacting the income tax provision[247] Quantitative and Qualitative Disclosures about Market Risk ADTRAN faces interest rate risk, with a 50 basis point increase potentially reducing fixed-rate bond fair value by $0.4 million, and foreign currency risk, with a 10% USD change potentially causing a $2.3 million gain or loss - The company is exposed to interest rate risk As of December 31, 2020, a hypothetical 50 basis point increase in interest rates would reduce the fair value of its $41.6 million in fixed-rate bonds by approximately $0.4 million[258] - Primary foreign currency exposures are to the Euro and the Australian dollar A hypothetical 10% strengthening or weakening of the U.S. dollar against billing currencies could result in a gain or loss of $2.3 million[259][260] Financial Statements and Supplementary Data This section presents ADTRAN's audited consolidated financial statements for 2020, with PricewaterhouseCoopers LLP issuing an unqualified opinion and identifying inventory reserve as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[268] - The auditor identified the 'Excess and Obsolete Inventory Reserve' as a critical audit matter due to the significant judgment required by management in its estimation and the high degree of auditor subjectivity and effort needed to evaluate the assumptions[276] Key Financial Statement Balances (in thousands USD) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $525,679 | $545,118 | | Total Liabilities | $152,735 | $164,692 | | Total Stockholders' Equity | $372,944 | $380,426 | | For the Year Ended | 2020 | 2019 | | Total Sales | $506,510 | $530,061 | | Gross Profit | $217,551 | $219,167 | | Net Income (Loss) | $2,378 | $(52,982) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants regarding accounting or financial disclosure matters - None[477] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, despite a new ERP system implementation - Management concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period[478] - Based on an assessment using the COSO framework, management concluded that ADTRAN maintained effective internal control over financial reporting as of December 31, 2020[484] - The company began implementing a new enterprise resource planning (ERP) software solution in Q4 2020, with completion expected in 2021[480] Other Information The company reports no other information for this item - None[486] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement, including the Code of Business Conduct and Ethics - The company has adopted the ADTRAN, Inc. Code of Business Conduct and Ethics, which applies to all employees, officers, and directors[489] - Most information required by this item is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[491] Executive Compensation Executive compensation information is incorporated by reference from ADTRAN's 2021 Proxy Statement - All information required by this item is incorporated by reference from the 2021 Proxy Statement[492] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans, with 3,602,976 remaining available as of December 31, 2020 Equity Compensation Plan Information as of December 31, 2020 | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights (USD) | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 3,950,646 | $18.30 | 3,602,976 | Certain Relationships and Related Transactions and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from ADTRAN's 2021 Proxy Statement - All information required by this item is incorporated by reference from the 2021 Proxy Statement[495] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from ADTRAN's 2021 Proxy Statement - All information required by this item is incorporated by reference from the 2021 Proxy Statement[496] PART IV Exhibits and Financial Statement Schedules This section lists all consolidated financial statements, financial schedules, and exhibits filed as part of the Form 10-K report - This section lists all consolidated financial statements, the financial statement schedule for Valuation and Qualifying Accounts, and all exhibits filed with the report[499] Form 10-K Summary The company has elected not to provide a summary of the information contained in this Form 10-K report - The company has elected not to provide a Form 10-K summary[508]