ADTRAN, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 7, 2020. Amounts below are in U.S. dollars. The filing identifies the registrant as ADTRAN, Inc.
Business context and results
ADTRAN supplies networking and communications products and services to service providers, cable operators and enterprises. Q2 revenue fell 17.7% year over year, mainly because of reduced shipments to two Tier-1 customers, including lower spending in Latin America and Europe. U.S. revenue grew 12.2%, while international revenue declined 45.4%. Management cited growth in U.S. fiber access deployments and Asia-Pacific access network builds.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $128.7m | $156.4m | $243.2m | $300.2m |
| Gross profit | $53.5m | $65.0m | $105.1m | $125.6m |
| Gross margin | 41.5% | 41.6% | 43.2% | 41.9% |
| Operating income (loss) | $(6.0)m | $0.6m | $(11.0)m | $(5.6)m |
| Net income (loss) | $0.8m | $4.0m | $(9.2)m | $4.8m |
| Diluted EPS | $0.02 | $0.08 | $(0.19) | $0.10 |
| Cash from operating activities | Not reported separately | Not reported separately | $1.7m | $11.0m |
Financial position and liquidity
- At June 30, cash and cash equivalents were $69.1m, restricted cash $1.2m, short-term investments $9.0m, and long-term investments $84.4m. Total assets were $522.7m and stockholders’ equity $364.2m.
- ADTRAN repaid its $24.6m revenue bond at maturity in January 2020 and reported no debt at June 30. Current liabilities were $107.2m; working capital was $207.7m, current ratio 2.94 and quick ratio 1.62.
- First-half investing cash flow was $27.8m, mainly reflecting investment maturities and sales; financing cash outflow was $33.3m, including bond repayment of $24.6m and dividends of $8.7m. Capital expenditures were $3.1m.
- Management said available liquidity and expected operating cash flows were adequate for operating and capital needs for at least the next 12 months. Of $78.1m in cash and short-term investments, $50.0m was held by foreign subsidiaries.
Material changes, outlook and notable items
- First-half revenue declined 19.0%; Access & Aggregation was the principal category of weakness, with sales down $60.5m year over year. Subscriber Solutions & Experience grew for the first half, but was nearly flat in Q2.
- Q2 net income included a $9.9m net investment gain despite an operating loss. First-half results included a $1.0m net investment loss. Management attributed investment volatility to market movements, including the COVID-19-related downturn and subsequent rebound; future volatility may continue.
- The first-half tax benefit included $7.4m related to the CARES Act’s net operating loss carryback provisions. The company also increased its valuation allowance against domestic deferred tax assets by $3.6m.
- Management described progress on fiber and fiber-extension solutions, including PON and G.fast, and said it saw the beginning of a significant fiber-deployment investment cycle. It expected FCC Rural Digital Opportunity Fund payments to service providers to begin in 2021. No specific revenue or earnings guidance was provided.
- COVID-19 had caused slower supply deliveries, longer lead times for some components, raw-material cost increases and higher freight costs. Management also warned that customer demand and supply-chain disruptions could worsen; the full impact remained uncertain.
- A customer performance letter of credit was collateralized by $5.0m at quarter-end. Required collateral may rise to approximately $12.0m by February 2021 as contract milestones are reached. Performance-bond commitments totaled $11.3m.
- ADTRAN disclosed securities class-action and shareholder derivative litigation concerning alleged statements about controls, inventory reserves, results and customer demand. The company denied the allegations; it could not estimate any possible loss. The derivative case was stayed pending a motion to dismiss in the class action.
- The filing states that a previously identified material weakness in controls over excess and obsolete inventory reserves was remediated as of June 30, 2020, and management judged disclosure controls effective. The company also reported an immaterial out-of-period correction in Q1 involving deferred-compensation plan investments and a $1.5m investment gain.
Key facts for investors to verify
- Whether Tier-1 customer spending and international revenue recover, and whether recent U.S. and Asia-Pacific fiber demand offsets continued weakness elsewhere.
- How much reported earnings depend on investment gains or losses rather than operating performance, and how portfolio volatility affects results and liquidity.
- Whether COVID-19-related supply delays, freight costs, customer demand and collections materially change in subsequent quarters.
- Progress toward the customer-contract milestones that could increase pledged collateral from $5.0m to approximately $12.0m.
- Developments in the securities and derivative lawsuits, including any change in the company’s ability to estimate potential exposure.
- Whether restructuring savings, inventory reserves and the remediated financial-reporting controls remain effective.