ADTRAN Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. ADTRAN provides broadband networking and communications products and services through Network Solutions and Services & Support. Comparisons are affected by the July 2022 acquisition of Adtran Networks; 2022 results include its operations only from the acquisition date.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $272.3 | $340.7 | $923.6 | $667.3 |
| Gross profit / margin | $74.2 / 27.3% | $103.0 / 30.2% | $254.6 / 27.6% | $219.8 / 32.9% |
| Operating loss | $(89.3) | $(48.0) | $(183.7) | $(40.0) |
| Net loss | $(75.6) | $(44.9) | $(152.3) | $(43.8) |
| Net loss attributable to ADTRAN Holdings | $(72.7) | $(41.9) | $(140.5) | $(40.9) |
| Loss per share, diluted | $(0.93) | $(0.57) | $(1.79) | $(0.72) |
- Revenue: Q3 revenue fell 20.1% year over year, primarily as customers reduced inventory, especially in Subscriber Solutions, and the stronger U.S. dollar weighed on international revenue. Nine-month revenue increased 38.4%, primarily reflecting the acquisition. Q3 Network Solutions revenue was $228.6 million; Services & Support revenue was $43.8 million.
- Margins and unusual charges: Q3 included a $21.0 million inventory write-down tied to product discontinuations and a $37.9 million non-cash goodwill impairment in Services & Support. Acquisition-related amortization and purchase-accounting adjustments also weighed on cost of revenue. The goodwill charge had no expected future cash expenditure.
- Cash flow: Nine-month operating cash use was $29.3 million, versus $42.7 million in the prior-year period. Investing cash use was $22.8 million, including $33.7 million of capital expenditures. Financing provided $60.3 million. Cash rose to $116.1 million from $108.6 million at year-end 2022.
- Liquidity and debt: Current assets were $779.6 million and current liabilities $285.3 million at September 30. Debt included $200.0 million drawn under the Wells Fargo facility and $10.6 million under Adtran Networks’ Nord/LB line; the filing reports total revolving borrowings of $210.6 million and a weighted-average rate of 7.11%. The Wells Fargo facility has a $400 million revolving commitment, with $197.8 million reported available after letters of credit. The company reported compliance with material credit covenants.
- Working capital: Inventory was $374.0 million, down from $427.5 million at year-end; accounts receivable was $229.3 million, down from $279.4 million. DSO increased to 77 days from 72 days at year-end.
Material changes versus the prior comparable period
- Q3 revenue declined as customers worked down excess CPE inventory. Management said this over-supply was expected to continue through Q4 2023 and the first half of 2024.
- Q3 gross margin declined 2.9 percentage points year over year, reflecting the inventory write-down, acquisition-related costs and amortization, weaker sales volume, and product and regional mix.
- Nine-month revenue growth largely reflects the acquired Adtran Networks business; comparisons are therefore not fully like-for-like. Acquisition-related expenses, depreciation and amortization, and higher interest expense also increased year-to-date costs.
- The company recorded a $37.9 million goodwill impairment in Services & Support after lower market capitalization and revised projections led to a quantitative review. It warned that subsequent stock-price volatility could prompt further impairment testing.
Outlook, risks, contingencies and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management expected CPE inventory oversupply to persist into the first half of 2024, while stating that Access and Optical Networking revenue had grown sequentially. Management cited carrier fiber upgrades and public broadband funding expected to begin in late 2024 through 2026 as longer-term opportunities.
- Efficiency program: Announced November 6, 2023, the program targets operating-cost reductions and capital efficiency, including site consolidation and a potential partial sale of owned real estate. The company suspended its quarterly dividend, redirecting cash toward debt reduction, interest expense and the program. It estimated program costs of $35.5 million to $45.5 million and expected substantial completion in 2024; potential leaseback expense could reach $12 million annually.
- Integration and restructuring: The company expects additional material integration and DPLTA implementation costs into 2024. Nine-month restructuring costs were $33.2 million. Product exits included copper-based DSL and fixed wireless products and the IoT gateway market; related discontinuations drove the Q3 inventory write-down.
- DPLTA obligations: Under the agreement with Adtran Networks, ADTRAN generally absorbs its annual losses and owes minority shareholders recurring compensation or cash exit compensation. If all minority holders elected exit compensation, the estimated obligation was about €325.3 million, or $344.2 million, including interest accrued through September 30. Management said the likelihood of a substantial majority electing this option within 12 months was remote, but disclosed it lacked sufficient liquidity to meet that scenario if it occurred in the current period. German appraisal proceedings could increase compensation amounts and extend the tender period.
- Controls and reporting: Disclosure controls were deemed ineffective at September 30, 2023 because of a material weakness in controls over the presentation and disclosure of debt agreements. The weakness had resulted in restatements of prior financial statements. Management implemented a new review control but had not concluded remediation was complete.
- Other risks and contingencies: The filing highlights customer and distributor concentration, revenue volatility, supply-chain and inventory risks, foreign-exchange exposure, competition, integration execution, debt service and covenant risks, and cybersecurity and litigation risks. Huawei-related U.S. and German litigation was settled in August 2023, with the parties agreeing to dismiss the cases. The company could not estimate possible losses for other legal matters.
Important facts for investors to verify
- Whether customer inventory reductions ease as expected and when revenue and gross margins recover.
- Progress, cash costs, savings and asset-sale proceeds from the efficiency and site-consolidation plans.
- ADTRAN’s liquidity capacity for debt service and possible DPLTA payments, including the outcome and timing of German appraisal proceedings.
- Whether internal-control remediation is tested and deemed effective, and whether further goodwill impairment is required.
- Actual restructuring, integration and leaseback costs compared with management’s estimates, and the financial effects of the dividend suspension.