ADTRAN, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. ADTRAN designs and sells communications-network equipment and services through Carrier Networks and Enterprise Networks. This unaudited filing covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. The filing is for ADTRAN, Inc., not ADTRAN Holdings, Inc.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $184.2 million | $150.4 million | $349.7 million | $277.4 million |
| Gross profit / margin | $106.8 million / 58.0% | $89.3 million / 59.4% | $205.6 million / 58.8% | $164.7 million / 59.4% |
| Operating income / margin | $51.3 million / 27.9% | $38.6 million / 25.7% | $96.9 million / 27.7% | $64.0 million / 23.1% |
| Net income / diluted EPS | $36.9 million / $0.56 | $27.8 million / $0.44 | $71.2 million / $1.08 | $45.9 million / $0.73 |
| Operating cash flow | Not separately presented for the quarter | $65.7 million | $49.0 million |
- Sales increased 22.5% in Q2 and 26.1% for the first half; net income rose 33.1% and 55.0%, respectively. First-half diluted EPS increased from $0.73 to $1.08.
- Growth was led by growth-product sales (Broadband Access, Optical Access and Internetworking): $132.1 million in Q2, up from $89.0 million, and $237.7 million for the half, up from $158.8 million.
- Q2 Carrier Networks sales increased 28.0% to $150.5 million; Enterprise Networks sales increased 2.9% to $33.7 million. Loop Access sales fell $8.8 million in Q2, largely due to lower HDSL sales.
- Gross margin declined as a higher mix of lower-margin professional-services and cabinet revenue, plus expediting costs for a specific customer project, raised cost of sales. Operating margin improved as revenue growth outpaced operating expense growth.
Financial position and liquidity
- At June 30, 2011, cash and cash equivalents were $23.8 million; short-term investments were $138.7 million; long-term investments were $372.4 million. Management reported $162.5 million in available short-term liquidity and said cash, investments and operating cash flow were adequate for foreseeable needs.
- Current assets were $359.2 million and current liabilities $64.3 million; working capital was $294.9 million. The current ratio was 5.59, down from 7.10 at year-end 2010; the quick ratio was 3.82, down from 5.21. The company attributed the change mainly to shifting investments from short- to long-term classification and higher accounts payable.
- Total assets were $808.4 million and stockholders’ equity $673.7 million. The balance sheet reported bonds payable of $46.5 million; MD&A states total revenue-bond borrowings of $48.0 million, with $1.5 million classified as current. A $48.3 million restricted certificate of deposit collateralizes the bond; it matures in 2020 and bears 5% interest.
- Inventory rose 16.7% to $86.7 million to support demand, installation activity and industry component constraints. Net receivables increased 17.5% to $83.3 million; days sales outstanding rose from 39 to 41 days.
- Investing cash flow was negative $104.7 million, chiefly reflecting net purchases of available-for-sale investments; capital expenditures were $6.3 million. Financing cash flow was positive $30.6 million, including $33.0 million from employee option exercises and $11.6 million of dividends paid. Cash declined $8.3 million to $23.8 million.
Outlook, risks and unusual items
- No quantitative revenue or earnings guidance is provided. Management expects traditional-product revenue, including HDSL, to decline over time as customers migrate to newer technologies; it expects ongoing R&D spending for new and existing products and international expansion.
- Management cautions that results may fluctuate with customer orders, backlog, project timing, economic conditions, product mix, competition, pricing and cost-reduction timing. Inventory availability and obsolescence, supplier constraints, warranty costs, customer concentration, international expansion and currency movements are among the stated risks.
- Investment-related items include $6.1 million of net realized investment gains in the first half, attributed to portfolio realignment, and a $12,000 other-than-temporary impairment charge. A single European-listed equity represented $24.3 million of the marketable-equity portfolio and a substantial portion of unrealized gains. Management described its investment portfolio as subject to interest-rate and securities-market risks.
- Legal claims and proceedings arise in the ordinary course; management said known contingencies were not expected to materially affect the business, operations, financial condition or cash flows. The filing reports no material change in risk factors and no off-balance-sheet financing arrangements.
- After quarter-end, the board declared a $0.09-per-share dividend payable August 11, 2011. By August 2, ADTRAN had repurchased 0.6 million shares at an average $34.25 per share. No shares were repurchased during the first half.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in Broadband Access and other growth products can continue, and whether lower traditional-product sales offset that growth.
- Whether gross-margin pressure from mix and project-related expediting costs persists, and how inventory growth and component availability affect future results.
- The liquidity and valuation risks in the investment portfolio, especially the concentrated equity holding, municipal variable-rate demand notes and sensitivity of fixed-rate bonds to interest rates.
- The presentation and repayment schedule of the $48.0 million revenue bond, including its collateral and annual early-redemption plans.
- The extent to which first-half earnings benefited from investment gains, stock-option-related tax benefits and the reinstated research tax credit.
- Post-quarter share repurchases, the ongoing dividend, and the potential effects of customer, supplier, competitive and international-market risks.