ADTRAN, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing is by ADTRAN, Inc. (the historical registrant name shown in the filing). Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $142.8 | $147.0 |
| Gross profit / margin | $65.6 / 45.9% | $77.8 / 52.9% |
| Operating income / margin | $2.0 / 1.4% | $11.3 / 7.7% |
| Net income / margin | $3.3 / 2.3% | $9.6 / 6.5% |
| Diluted EPS | $0.06 | $0.17 |
| Operating cash flow | $13.0 | $9.9 |
| Capital expenditures | $2.4 | $2.0 |
| Quarterly dividend per share | $0.09 | $0.09 |
- Sales declined 2.8%, while gross profit fell 15.7% and net income fell about 65%. Gross margin contracted 7.0 percentage points.
- Sales by reportable segment: Carrier Networks $116.0 million, down 1.8%; Enterprise Networks $26.8 million, down 7.0%. Core product revenue was essentially flat at $131.5 million versus $131.3 million; legacy product revenue declined to $11.4 million from $15.7 million.
- Net realized investment gains were $3.1 million, compared with $2.2 million. The filing attributes the increase mainly to gains on equity-security sales and portfolio rebalancing.
Balance sheet, liquidity and capital
- At March 31, cash and cash equivalents were $87.0 million and short-term investments were $78.8 million, totaling $165.8 million of short-term liquidity, versus $120.4 million at year-end 2014. Total current assets were $401.1 million and current liabilities $132.0 million; management reported a 3.04 current ratio and 1.94 quick ratio.
- Operating cash flow was $13.0 million. Inventory rose 7.4% from year-end to $93.1 million; accounts payable rose to $73.7 million from $56.4 million. Cash increased to $87.0 million from $73.4 million.
- The Alabama State Industrial Development Authority revenue bond had $30.0 million outstanding, bears 2% interest, and matures January 1, 2020. The balance sheet reports $28.8 million as bonds payable; the company says $1.2 million of principal is classified in accounts payable as current. A $30.0 million restricted certificate of deposit collateralizes the bond, and ADTRAN may set it off against the debt.
- Combined short- and long-term investments were $315.4 million, down from $327.6 million at year-end. The company reported its bond portfolio duration at 1.0 years and average credit rating at A+.
- ADTRAN repurchased 141,000 shares for $3.0 million at an average $21.52 per share during the quarter and paid $4.8 million in dividends. It had authorization to repurchase a further 4.7 million shares at March 31.
Drivers, outlook and risks
- Management linked weaker margins principally to the stronger U.S. dollar against the euro, a larger share of lower-margin international sales, customer and product mix, higher services mix, and pricing actions to maintain market share. Lower SG&A partly offset these pressures; R&D expense was broadly unchanged.
- Broadband Access revenue increased $3.3 million, but lower Internetworking and legacy sales weighed on results. Management expects HDSL and other legacy revenue to continue declining as customers migrate to newer technologies. International sales rose 9.4% to $59.4 million, or 41.6% of total sales.
- The filing provides no quantified revenue or earnings guidance. Management said cash, investments, and operating cash generation should be adequate for operating and capital needs for at least the next 12 months.
- Key disclosed risks include quarterly demand and backlog variability, competition and gross-margin pressure, customer concentration and credit risk, inventory obsolescence, dependence on suppliers and contract manufacturers, product development and warranty costs, and foreign-exchange exposure. The company had €63.0 million ($67.7 million) of forward contracts maturing during 2015; derivatives are not designated for hedge accounting.
- Unusual item: ADTRAN recorded corrections of immaterial prior-period misstatements, including a $1.3 million increase in Q1 other expense. The aggregate correction reduced Q1 pretax income by $0.8 million; management said it was not expected to be material to full-year results.
- Management stated that known legal proceedings and claims were not expected to materially affect the company. It disclosed commitments of up to $7.9 million to two private-equity funds and reported $8.4 million contributed, of which $7.7 million had been applied to those commitments.
- Comprehensive loss was $0.4 million, including a $3.3 million foreign-currency translation loss. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether weaker gross margin persists, particularly given currency, mix, and pricing pressures.
- Whether growth in Broadband Access and other core products can offset ongoing legacy declines and softer Internetworking demand.
- The quality and liquidity of the investment portfolio, including the restricted $30.0 million bond collateral and sensitivity to interest-rate or market changes.
- The reported out-of-period correction and the relationship between private-equity commitments and contributions.
- Subsequent capital returns: the filing reports that by May 6 the company had repurchased 1.2 million shares in Q2 at an average $16.33 per share, and declared a $0.09 dividend payable May 21, 2015.