ADTRAN, Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and nine months ended September 30, 2019. ADTRAN provides networking and communications equipment and related services to service providers, cable operators and enterprises. Its reportable segments are Network Solutions and Services & Support. The filing is by ADTRAN, Inc.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $114.1 million | $140.3 million | $414.3 million | $389.2 million |
| Gross profit / margin | $46.3 million / 40.6% | $58.4 million / 41.6% | $172.0 million / 41.5% | $148.2 million / 38.1% |
| Operating income (loss) | $(20.3) million | $(2.2) million | $(25.9) million | $(41.6) million |
| Net income (loss) | $(46.1) million | $7.6 million | $(41.4) million | $(10.9) million |
| Diluted EPS | $(0.96) | $0.16 | $(0.87) | $(0.23) |
- Q3 sales declined 18.7% year over year, while nine-month sales rose 6.4%. Nine-month Services & Support revenue increased 15.5%; Network Solutions revenue rose 5.2%.
- Q3 gross margin fell 1.0 percentage point, primarily due to lower volume and customer, product and service mix. Nine-month gross margin improved 3.4 points.
- Operating cash flow was $10.1 million for the first nine months, down from $48.7 million in 2018. Capital expenditures were $6.0 million; cash dividends paid were $12.9 million. Cash and cash equivalents ended at $96.4 million.
- Cash plus short-term investments totaled $125.2 million; the filing says $62.5 million was held by foreign subsidiaries. Current assets were $350.0 million and current liabilities $128.2 million; working capital was $221.9 million and the current ratio 2.73.
- Total debt was $25.6 million, comprising an Alabama revenue bond due January 1, 2020, at 2%. A restricted $25.6 million certificate of deposit collateralized the bond and could be applied to repay it. Interest expense was $0.4 million for the nine months.
Material changes and unusual items
- Q3 sales were pressured by a pause in shipments to a Tier 1 Latin American customer and reduced spending by another international Tier 1 customer. Access & Aggregation sales fell $26.8 million year over year for the quarter; Subscriber Solutions & Experience increased $3.9 million.
- Q3 included $3.9 million of impairment charges for abandoned IT projects. Nine-month results included a $1.2 million gain from reversal of SmartRG acquisition contingent liabilities and $8.2 million of net investment gains, primarily reflecting changes in equity-security values.
- A $37.1 million valuation allowance against domestic deferred tax assets was recorded in Q3. This contributed to a $27.7 million income tax expense despite a pretax loss of $18.4 million; the nine-month tax expense was $27.4 million. Net deferred tax assets were $6.5 million at quarter-end.
- The company revised its excess and obsolete inventory reserve methodology and disclosed immaterial prior-period misstatements, including a $0.8 million Q2 adjustment that increased inventory reserves and cost of sales. Inventory reserves were $32.0 million at September 30.
- Restructuring expenses were $4.7 million for the first nine months, and the related liability was $3.6 million. The company expected the 2019 restructuring to be completed in Q4.
- Adoption of the lease standard added $10.3 million in right-of-use assets and lease liabilities at January 1, 2019; reported operating lease liabilities were $18.7 million at September 30.
Outlook, risks and contingencies
Management expected Q4 sales to remain affected by the two Tier 1 customers. It expected sales to the Latin American customer to rebound but said timing visibility was limited; it expected normal spending by the other international customer to resume in 2020. Management stated that cash, investments and expected operating cash flow were adequate for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Disclosure controls were deemed ineffective because of two continuing material weaknesses in inventory controls: cycle-count completeness and accuracy, and controls over excess and obsolete inventory estimates. Remediation was ongoing, not complete.
- A securities class-action suit filed October 17, 2019 alleges disclosure violations relating to internal controls, inventory reserves, financial results and shipments to a Latin American customer. The company disputed the allegations; outcome and potential loss could not be estimated.
- Other key exposures cited include customer concentration and credit risk, competition and pricing pressure, inventory obsolescence, foreign exchange and trade tariffs, and dependence on product development and customer network approvals.
- The company had committed up to $7.9 million to two private equity funds, with $7.7 million applied by quarter-end. A $0.09-per-share dividend was declared after quarter-end, payable December 2, 2019.
Important facts for investors to verify
- Whether inventory-control material weaknesses are remediated and whether future filings report any related adjustments.
- Recovery timing and order trends for the two Tier 1 customers, particularly the Latin American customer, and resulting revenue and margin effects.
- Whether domestic deferred tax assets become realizable and whether the valuation allowance changes.
- Settlement and repayment of the fully collateralized $25.6 million bond due January 2020.
- Developments in the securities lawsuit, restructuring completion and any resulting costs or cash requirements.