ADTRAN, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing names ADTRAN, Inc. as the registrant. Dollar amounts below are in millions unless otherwise stated.
Business context and financial performance
ADTRAN supplies networking and communications equipment and related services. Its reportable segments are Network Solutions and Services & Support. Results were sharply affected by reduced spending from a domestic Tier 1 customer following a merger-related review.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $140.3 | $185.1 | $389.2 | $540.1 |
| Gross profit / margin | $58.4 / 41.6% | $86.5 / 46.7% | $148.2 / 38.1% | $244.8 / 45.3% |
| Operating income (loss) / margin | $(2.2) / (1.6)% | $18.2 / 9.8% | $(41.6) / (10.7)% | $41.5 / 7.7% |
| Net income (loss) | $7.6 | $15.9 | $(10.9) | $35.0 |
| Diluted EPS | $0.16 | $0.33 | $(0.23) | $0.72 |
Cash flow, liquidity and debt
- Nine-month operating cash flow was $48.7, versus $22.0 in 2017; investing cash flow was $(12.0), and financing cash flow was $(25.8). Capital expenditures were $5.7. Operating cash flow less capital expenditures was approximately $43.0.
- Cash and cash equivalents were $94.2 at September 30, 2018, with short-term investments of $5.9. Management reported available short-term liquidity of $100.1, including $70.1 held by foreign subsidiaries that it intends to keep invested abroad.
- Current assets were $348.5 and current liabilities $123.5; working capital was $225.0, the current ratio 2.82, and the quick ratio 1.63. The company reported total assets of $648.8 and stockholders’ equity of $463.6.
- The balance sheet reports $25.6 of bonds payable. Notes describe $26.7 of outstanding Alabama revenue-bond loans, including $1.1 classified as current in accounts payable, and a $26.7 restricted certificate of deposit as collateral with a right of set-off. The bond matures January 1, 2020 and bears 2% interest.
- ADTRAN paid $13.0 in dividends and repurchased $14.2 of stock during the first nine months. The quarterly dividend remained $0.09 per share; a further $0.09 dividend was declared for payment November 14, 2018.
Changes versus prior comparable periods
- Q3 sales fell 24.2% and nine-month sales fell 27.9%. Access & Aggregation sales declined $44.1 in Q3 and $136.4 year to date, principally because of the domestic Tier 1 customer’s merger-related review and spending slowdown. Services & Support sales fell 51.3% in Q3 and 49.9% year to date, mainly reflecting fewer related network installation services.
- International sales increased 52.0% in Q3 to $56.6 and 38.8% year to date to $175.2, rising to 40.3% and 45.0% of total sales, respectively. Growth was attributed principally to EMEA and APAC projects.
- Gross margin declined in both periods, reflecting regional, customer, product and service mix; year-to-date results also reflected restructuring and warranty-related factors. Lower operating expenses did not offset the revenue and gross-profit declines.
- Net investment gains rose to $4.5 in Q3 and $5.4 year to date, largely reflecting fair-value changes in equity securities recognized in earnings under a newly adopted accounting standard. Nine-month results also included an $11.3 bargain-purchase gain from the Sumitomo Electric Lightwave North American EPON business acquisition.
- Cash from operations improved year over year, supported in part by working-capital movements, including collections of receivables and lower inventory. Receivables declined to $101.9 from $144.2 at year-end 2017; inventory declined to $106.1 from $122.5.
Outlook, commentary, risks and unusual items
- Management said the project suspended after the major customer’s merger had not resumed and that it was uncertain when, if ever, it would resume. It also cited slower-than-expected orders of an ultra-broadband product from a large domestic customer.
- Management described opportunities from next-generation PON projects, an APAC deployment, a European network upgrade and EPON opportunities with North American cable operators. These were characterized as opportunities, not quantified guidance. The filing provides no specific revenue or earnings guidance.
- Management expected cash, investments and operating cash generation to meet operating and capital needs for at least the next 12 months. It noted risks from customer timing and concentration, variable demand and backlog, mix and price-cost timing, inventory obsolescence, competition, foreign exchange, regulatory uncertainty, and execution of new projects. The filing added increased tariffs and possible retaliatory trade actions as a risk.
- The nine-month net loss included significant tax effects: the company reported an $11.9 tax benefit and attributed its effective tax-rate change to domestic losses, tax projects and the U.S. Tax Cuts and Jobs Act. The Q3 income statement also reports a $4.4 tax benefit despite pretax income of $3.2.
- The EPON acquisition closed March 19, 2018, for $7.8 cash consideration and generated a $11.3 bargain-purchase gain. Q3 acquired-business revenue was $1.0; acquisition-related expenses and acquired-intangible amortization were $0.7 for Q3 and $1.6 for the nine months.
- The company adopted the new revenue standard in 2018. It reported a $1.8 increase in nine-month net income compared with results without adoption. It expects adoption of the new lease standard to materially increase reported balance-sheet assets and liabilities, but not materially affect operating results.
- Routine legal claims and proceedings were disclosed; management said known contingencies were not expected to materially affect the business, operations, financial condition or cash flows. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether and when the domestic Tier 1 customer resumes the delayed project, and the resulting effect on Access & Aggregation and service revenue.
- Whether announced international projects and EPON opportunities convert into sustained revenue and acceptable margins.
- How much reported earnings depend on investment fair-value gains, the bargain-purchase gain and tax benefits, versus recurring operating performance.
- Inventory reserve adequacy, warranty costs and the effect of customer, regional and service mix on gross margin.
- The composition and accessibility of liquidity, particularly funds held by foreign subsidiaries, and the bond’s reported carrying amount versus the stated outstanding loan balance.