ADTRAN, Inc. Form 10-Q — quarter ended September 30, 2020
The filing is for ADTRAN, Inc. (NASDAQ: ADTN), a provider of network access hardware, software and related services. It covers the three and nine months ended September 30, 2020; financial amounts below are in millions unless otherwise stated. The results are unaudited.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $133.1 | $114.1 | $376.4 | $414.3 |
| Gross profit / margin | $59.0 / 44.3% | $46.3 / 40.6% | $164.0 / 43.6% | $172.0 / 41.5% |
| Operating income (loss) | $4.5 | ($20.3) | ($6.4) | ($25.9) |
| Net income (loss) | $5.5 | ($46.1) | ($3.7) | ($41.4) |
| Diluted earnings (loss) per share | $0.11 | ($0.96) | ($0.08) | ($0.87) |
- Q3 revenue rose 16.7% year over year, while nine-month revenue fell 9.1%. Q3 growth reflected stronger Network Solutions sales; Services & Support revenue declined 10.8% in the quarter.
- Q3 gross margin improved 3.7 percentage points year over year, primarily from customer and product mix and lower fixed personnel costs after restructuring. Services & Support margins remained lower and its cost of sales as a share of segment revenue increased.
- For the first nine months, operating cash flow was negative $5.3, versus positive $10.1 in 2019. Capital expenditures were $5.1. Cash, cash equivalents and restricted cash ended at $71.4, versus $96.4 at the prior-year period end.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $71.1 and short-term investments were $6.2, for reported short-term liquidity of $77.3. The company said $55.7 was held by foreign subsidiaries.
- Current assets were $329.3 and current liabilities $107.0; the current ratio was 3.08, compared with 2.84 at December 31, 2019. The quick ratio was 1.66, down from 1.75.
- Inventory increased 22.3% from year-end 2019 to $120.3, reflecting product ramp preparations and buffer stock intended to protect supply continuity during COVID-19. Accounts receivable rose to $100.2; DSO improved from 72 to 69 days.
- The $24.6 Alabama revenue bond was repaid in January 2020; ADTRAN reported no outstanding debt at September 30. On November 4, it entered into a new $10.0 secured revolving credit facility, undrawn as of the filing. It matures November 4, 2021.
- Dividends paid in the first nine months totaled $13.0. The board subsequently declared a $0.09 per-share dividend payable December 1, 2020.
Changes, outlook and material risks
- Q3 U.S. revenue increased 11.7% and international revenue increased 30.2% year over year. Management cited regional U.S. service providers, European alternative operators and initial sales to a European Tier-1 operator. For the nine-month period, international revenue declined 34.5%, mainly because of reduced shipments to two international Tier-1 customers.
- Management described fiber access deployments, including PON and Gfast, and next-generation SD-Access as areas of opportunity. It expects service-provider funding under programs including FCC RDOF to begin in 2021 and sees a potential longer-term fiber investment cycle. The filing gives no numeric revenue or earnings guidance.
- COVID-19 caused supply-chain delivery slowdowns, longer lead times, raw-material and freight cost increases, and higher inventory. Management also warned that demand, operations and collections could be affected as the pandemic and economic downturn continue.
- Management expects restructuring measures to reduce operating expenses and cost of sales, but cautioned that results may fluctuate with customer orders, product mix, competition, foreign exchange, inventory and supply conditions. Q3 included a $2.8 net investment gain; market volatility may continue to affect investment results.
- The nine-month tax benefit included $7.8 attributed to CARES Act net operating loss carrybacks. A $51.2 valuation allowance was maintained against domestic and certain other deferred tax assets; changes in realizability assessments could affect future results.
- Inventory reserve estimates and valuation of investments warrant attention. The company recorded a $1.6 impairment on a private-company equity investment during the first nine months. It also disclosed a non-material out-of-period correction in Q1 related to deferred-compensation investments.
- A securities class action alleging, among other things, misstatements concerning controls, inventory reserves, financial results and customer demand remained pending; a related derivative case was stayed. ADTRAN denied the allegations and said it could not estimate any potential loss. Performance-bond commitments totaled $12.0; collateral requirements for a customer letter of credit increased after quarter-end.
Most important facts for investors to verify
- Whether Q3 sales growth is sustained, especially given the first-nine-month decline and reliance on particular large customers and projects.
- Whether inventory growth, supply costs and freight expenses normalize without additional obsolescence or margin pressure.
- Cash generation and accessible liquidity, including the amount held overseas, the collateral pledged for the customer letter of credit, and terms and availability of the new secured revolver.
- How investment gains, tax benefits and deferred-tax-asset valuation allowances affect reported earnings compared with underlying operating performance.
- Developments in the securities and derivative litigation, the customer contract collateral milestones, and COVID-19-related supply, demand and collection risks.