ADTRAN, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. Financial statements are unaudited; amounts below are in millions of dollars except per-share data and ratios. The filing is by ADTRAN, Inc.
Business context and financial performance
ADTRAN designs and sells communications-network equipment and services through Carrier Networks and Enterprise Networks. The company emphasizes Broadband Access, Optical and Internetworking as core products, while anticipating continued declines in legacy products.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $162.1 | $192.2 | $480.9 | $541.9 |
| Gross profit / margin | $80.0 / 49.3% | $109.5 / 57.0% | $249.3 / 51.8% | $315.1 / 58.1% |
| Operating income / margin | $10.3 / 6.3% | $51.1 / 26.6% | $53.3 / 11.1% | $148.0 / 27.3% |
| Net income | $9.3 | $36.2 | $43.3 | $107.4 |
| Diluted EPS | $0.15 | $0.56 | $0.68 | $1.63 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $64.8 | $108.8 |
For the nine months, capital expenditures were $10.8 million; investing cash outflow was $24.8 million and financing cash outflow was $39.4 million. Cash and cash equivalents ended the period at $43.5 million.
Liquidity, debt and balance sheet
- Cash plus short-term investments totaled $233.9 million, versus $202.3 million at year-end 2011. Total investments, including long-term holdings, were $517.4 million.
- Current assets were $469.1 million and current liabilities $115.3 million. Working capital was $353.7 million. The current ratio was 4.07, down from 6.32; the quick ratio was 2.92, down from 4.50.
- Outstanding revenue-bond debt was $47.0 million, including $46.5 million shown as bonds payable and $0.5 million classified as current. The bond bears 5% interest and matures January 1, 2020. A $48.3 million certificate of deposit is pledged as collateral.
- Accounts receivable rose to $102.7 million; quarterly DSO increased to 58 days from 40 at year-end. Inventory rose to $107.2 million from $87.8 million.
Material changes and management commentary
- Sales fell 15.6% in Q3 and 11.3% year to date. Declines in HDSL and other legacy products, Optical products and some Internetworking sales were partly offset by Broadband Access growth. The nine-month core-product subtotal increased to $400.7 million from $389.4 million, while legacy sales fell to $80.1 million from $152.5 million.
- Carrier Networks sales declined 13.5% in Q3 and 12.4% year to date; Enterprise Networks sales declined 24.0% and 6.6%, respectively. International sales increased substantially, primarily reflecting the acquired NSN business and organic growth in Latin America.
- Management attributed weaker results to legacy-product declines, Optical-market transition toward Ethernet, delayed carrier projects and orders, and customer caution amid macroeconomic uncertainty. Lower production volumes, price movements and lower-margin NSN business contributed to reduced gross margins.
- SG&A and R&D increased year over year, partly due to higher staffing and acquisition-related costs. R&D was $35.6 million in Q3 and $92.8 million year to date.
- Operating cash flow decreased to $64.8 million from $108.8 million. Management cited adequate liquidity for foreseeable operating and capital needs, while noting that operating results can vary with customer ordering, product mix, market conditions and inventory requirements.
Acquisition, outlook, risks and contingencies
- ADTRAN acquired Nokia Siemens Networks’ Broadband Access business on May 4, 2012. It contributed $49.0 million of revenue and a $2.9 million pretax loss from acquisition through September 30; Q3 contribution was $26.3 million of revenue and a $2.5 million pretax loss. The transaction generated a $1.8 million bargain-purchase gain. Final working-capital adjustments remained under discussion.
- Acquisition-related expenses, amortization and purchase-accounting adjustments totaled $7.9 million pretax for the nine months. Management provided no specific revenue or earnings guidance in the filing.
- Principal risks include uncertain customer orders and revenue, acquisition integration and benefit realization, competition and margin pressure, customer and distributor credit exposure, inventory obsolescence, product transitions, supplier and manufacturing dependencies, warranty costs, and market and interest-rate exposure. The company reported no material changes to previously disclosed risk factors.
- The warranty liability was $7.3 million, up from $4.1 million at year-end. Management stated that known legal proceedings and claims were not expected to materially affect the business, operations, financial condition or cash flows. The filing also reports up to $7.9 million in commitments to two private-equity funds and $7.7 million applied to those commitments.
- ADTRAN paid $17.2 million in dividends and repurchased 1.2 million shares at an average $24.24 during the nine months. A further quarterly dividend of $0.09 per share was declared for payment in November 2012. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether carrier project delays and legacy-product declines persist, and whether Broadband Access growth can offset them.
- Whether NSN integration improves margins and operating performance, and how the final working-capital settlement affects the acquisition accounting.
- Whether gross margins recover as production volumes, product mix and pricing evolve; also monitor elevated R&D and operating costs.
- Whether receivables, DSO and inventory normalize, and whether inventory reserves and warranty estimates remain adequate.
- Investment portfolio valuation, interest-rate sensitivity, pledged bond collateral, and ongoing capacity for dividends and share repurchases.