ADTRAN Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars. ADTRAN completed its acquisition of a controlling 65.43% stake in ADVA in July 2022; reported 2022 results include ADVA only from July 15 onward, so year-over-year growth is not a like-for-like measure.
Business context and key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $340.7m | $138.1m | $667.3m | $408.8m |
| Gross profit / margin | $103.0m / 30.2% | $47.7m / 34.5% | $219.8m / 32.9% | $163.9m / 40.1% |
| Operating loss | $48.0m | $10.1m | $40.0m | $7.5m |
| Net loss attributable to ADTRAN Holdings | $41.9m | $10.4m | $40.9m | $4.4m |
| Loss per diluted share | $0.57 | $0.21 | $0.72 | $0.09 |
| Operating cash flow | Not separately presented | Not separately presented | $(42.7)m | $28.9m |
Q3 revenue comprised Network Solutions of $304.9m and Services & Support of $35.8m. Reported revenue increased 146.7% in Q3 and 63.2% year to date, driven by the acquisition and higher ADTRAN sales. ADVA contributed $163.8m of revenue and $8.4m of net loss from its acquisition date through September 30.
Gross margin contracted year over year. Management attributed the pressure principally to supply-chain costs and acquisition-related amortization and inventory fair-value adjustments; it reported $25.5m of acquisition-related expenses, amortization and adjustments affecting cost of revenue. The period also included $17.0m of impairment charges on capitalized cloud-computing implementation costs following a change in planned IT integration.
At September 30, cash and cash equivalents were $111.1m and short-term investments were $0.8m. Current assets were $875.6m and current liabilities $525.3m. Inventory was $416.2m, up from $139.9m at year-end 2021; accounts receivable was $302.4m, up from $158.7m. Management said the inventory increase reflected the ADVA acquisition and buffer purchases amid extended component lead times.
Reported revolving borrowings were $84.5m and notes payable were $29.8m, for total borrowings of about $114.3m. The company reported $60.0m outstanding under the Wells Fargo facility, with $24.0m net available for future borrowing after letters of credit, and said it was compliant with material covenants at quarter-end. The Wells Fargo facility matures in 2027; certain ADVA facilities and notes mature in 2023. The filing reports a 4.05% weighted-average rate on revolving credit agreements.
Investing cash flow was $43.4m provided and financing cash flow was $61.1m provided for the nine months. The company paid $15.9m in dividends during that period. Its $454.1m of purchase commitments are a significant future cash requirement.
Material changes versus comparable periods
- Q3 revenue rose sharply, but comparisons are substantially affected by ADVA being consolidated only from July 15, 2022. Management reported Q3 revenue growth in domestic and international markets and identified two customers each contributing at least 10% of quarterly revenue.
- Gross margin fell 4.3 percentage points in Q3 and 7.2 points for the first nine months. Operating and net losses widened versus 2021.
- Operating cash flow moved from $28.9m provided to $42.7m used, largely due to inventory investment, higher receivables and transaction costs, partly offset by higher payables.
- Goodwill increased to $357.9m and intangible assets to $393.6m, primarily from the ADVA acquisition. The purchase-price allocation remained preliminary.
- Foreign-currency translation contributed a $26.9m loss to other comprehensive income for the nine-month period; management also reported that currency movements reduced reported revenue by about $34.4m year to date.
Outlook, risks, contingencies and unusual items
- Management described demand and bookings as strong, citing fiber access, in-home service delivery and SaaS demand, and said the longer-term outlook strengthened with new customer opportunities. It expected near-term revenue growth and profitability to remain pressured by supply-chain issues, while anticipating improvement over the longer term. The filing provides no quantified revenue or earnings guidance.
- Risks include semiconductor and component shortages, freight delays and costs, inflation, inventory obsolescence, customer concentration, foreign-exchange exposure, and integration challenges. Management cautioned that orders and bookings can be modified or canceled and provide limited visibility.
- ADTRAN and ADVA had agreed on a final draft of a proposed domination and profit and loss transfer agreement (DPLTA), but ADVA shareholder approval and registration were still pending. If effective, ADTRAN would have to cover ADVA annual net losses and offer minority shareholders either EUR 17.21 per share in exit compensation or recurring annual compensation initially stated at EUR 0.59 per share, subject to adjustment. If all eligible minority holders elected exit compensation, the estimated aggregate payment was EUR 309.8m (about $303.6m); if none elected it, annual recurring payments were estimated at about $10.4m. The filing warned that appraisal litigation could increase these amounts.
- The proposed DPLTA was scheduled for an ADVA shareholder vote on November 30, 2022, with effectiveness no earlier than January 1, 2023. A November 3 cross-currency swap covered up to $160m of potential euro-denominated DPLTA payments.
- The company had incurred $25.2m in business-combination transaction costs through September 30 and estimated another $1.1m, in addition to expected integration costs. It also reported $21.1m in performance-bond commitments; management considered payment unlikely absent contract default.
- Management concluded disclosure controls were effective, but excluded ADVA from the evaluation during the first year after acquisition. ADVA represented about 66% of consolidated assets at quarter-end.
Important facts for investors to verify
- How much reported growth reflects ADVA consolidation versus underlying organic growth, and how the combined company performs on a comparable basis.
- Whether the DPLTA was approved and registered, the final minority-shareholder compensation terms, and any resulting cash, borrowing or litigation exposure.
- Whether supply constraints ease, inventory converts into sales, and gross margins recover after acquisition-related purchase-accounting effects.
- Progress on integration, transaction and restructuring costs, and inclusion of ADVA in internal-control evaluations.
- Availability and terms of credit, covenant compliance, and the company’s capacity to meet debt maturities, purchase commitments and any DPLTA obligations while funding operations.