ADTRAN, Inc. — Form 10-Q Summary
Period: Quarter ended March 31, 2018. The filing is by ADTRAN, Inc. (the historical registrant named in the supplied filing), not ADTRAN Holdings, Inc. Financial statements are unaudited and compare the quarter with Q1 2017.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior balance-sheet date |
|---|---|---|
| Revenue | $120.8 million | $170.3 million; down 29.1% |
| Gross profit and margin | $39.7 million; 32.9% | $73.7 million; 43.3% |
| Operating income (loss) and margin | $(26.6) million; (22.1)% | $6.9 million; 4.1% |
| Net income (loss) | $(10.8) million | $6.7 million |
| Diluted earnings (loss) per share | $(0.22) | $0.14 |
| Operating cash flow | $46.2 million | $9.0 million |
| Cash and cash equivalents | $82.6 million | $86.4 million at Dec. 31, 2017 |
| Short-term investments | $16.4 million | $16.1 million at Dec. 31, 2017 |
| Total debt reported | $25.6 million bonds payable; MD&A describes $26.7 million outstanding, including $1.1 million classified in accounts payable | $25.6 million bonds payable at Dec. 31, 2017 |
Short-term liquidity (cash plus short-term investments) was $99.0 million, including $63.7 million held by foreign subsidiaries and intended to remain invested abroad. Working capital was $242.2 million, the current ratio 3.36, and the quick ratio 1.75. The revenue bond bears 2% interest, matures January 1, 2020, and is collateralized by a restricted certificate of deposit. The company reported no off-balance-sheet financing arrangements.
Operating cash flow benefited substantially from a $63.9 million reduction in accounts receivable; cash flow should therefore be viewed alongside this working-capital movement. Investing cash flow was $(36.6) million, including $7.8 million for the business acquisition, and financing cash flow was $(14.2) million, including $10.2 million of treasury-stock purchases and $4.4 million of dividends. Capital expenditures were $2.0 million.
Material changes and business developments
- Revenue fell across the main categories: Access & Aggregation was $81.7 million versus $120.1 million; Customer Devices was $30.1 million versus $36.3 million; Traditional & Other Products was $9.0 million versus $13.9 million. Management attributed the largest decline to a merger-related review and spending slowdown at a domestic Tier 1 customer, particularly affecting Access & Aggregation and related installation services.
- International sales increased 15.1% to $58.7 million, or 48.6% of revenue, led by EMEA; growth was partly offset by lower APAC sales. Services & Support revenue declined 41.7% to $15.6 million.
- Gross margin declined to 32.9%. Management cited regional, customer, product and services mix; higher labor expense related to restructuring; and comparison with Q1 2017, which benefited from a supplier settlement and contract-manufacturer purchase discounts.
- On March 19, ADTRAN acquired Sumitomo Electric Lightwave’s North American EPON business and entered a technology-license and OEM-supply agreement with Sumitomo Electric Industries. The transaction produced an $11.3 million bargain-purchase gain. Acquired-business revenue was zero and net loss was $77,000 for the post-acquisition period through March 31.
- ADTRAN adopted ASC 606 using the modified retrospective method. It increased Q1 revenue by a net $667,000 and reduced net loss by $175,000 versus results without adoption. The filing also reports adoption of ASU 2016-01, including reclassification of $3.2 million of prior unrealized equity gains to opening retained earnings.
Outlook, commentary and risks
Management said it believed cash, investments and operating cash generation were adequate for operating and capital needs for at least the next 12 months. No specific numerical revenue or earnings guidance is provided. Management described prospective opportunities from a new nationwide APAC award and additional EMEA awards, and anticipated possible improvement if Latin American customers resume network upgrades. It cautioned that Mexican regulatory uncertainty had delayed a return to normal customer buying patterns.
Risks highlighted include customer order timing and concentration, revenue and service mix, competition and pricing, inventory obsolescence or shortages, product warranty costs, foreign-exchange exposure, regulatory and political uncertainty in international markets, and quarterly revenue volatility against relatively fixed short-term operating expenses. Management stated that risk factors had not materially changed from the 2017 Form 10-K. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
The filing’s explanatory note says the April 17 earnings release did not adequately reflect ASU 2016-01. The filed statements incorporate the standard’s treatment of a $3.2 million opening investment gain reclassification; compared with the original release, the change decreased investment income by $2.1 million, increased the tax benefit by $0.4 million, and increased loss per share by $0.03.
Important facts for investors to verify
- Whether the domestic Tier 1 customer’s spending slowdown is temporary, and how customer concentration and order timing affect near-term revenue.
- Whether revenue and gross margins stabilize after the sharp year-over-year decline, including the contribution and margin profile of services and the acquired EPON business.
- How much of reported operating cash flow reflects recurring operations versus the quarter’s large accounts-receivable collection.
- The final purchase accounting and realized strategic or financial contribution of the EPON acquisition; its purchase-price allocation was preliminary.
- The treatment of the $26.7 million revenue-bond obligation and matching restricted collateral, and the availability of foreign-held liquidity for U.S. operations.
- The corrected ASU 2016-01 earnings impact versus the April 17 release, and the effects of accounting estimates, inventory reserves, warranty obligations and international market risks.