ADTRAN, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; filed November 8, 2016. Financial statements are unaudited. The filing is by ADTRAN, Inc.; the request metadata identifies ADTRAN Holdings, Inc.
Business context and financial performance
ADTRAN provides networking and communications equipment and related services to service providers, enterprises and other customers. The company reports two segments, Network Solutions and Services & Support, and sales across Access & Aggregation, Customer Devices, and Traditional & Other Products. Amounts below are in millions except per-share data.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $168.9 | $158.1 | $473.8 | $461.1 |
| Gross profit / margin | $75.8 / 44.9% | $70.6 / 44.7% | $220.6 / 46.6% | $204.5 / 44.3% |
| Operating income / margin | $10.1 / 6.0% | $8.1 / 5.1% | $30.5 / 6.4% | $10.7 / 2.3% |
| Net income | $12.4 | $7.1 | $27.7 | $12.9 |
| Diluted EPS | $0.26 | $0.14 | $0.56 | $0.25 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $27.8 | $23.3 |
Q3 sales increased 6.8%; nine-month sales increased 2.8%. Nine-month gross margin improvement reflected regional revenue and customer/product mix, partly offset by service mix, restructuring costs and higher warranty expense. Nine-month operating income benefited from lower R&D expense, among other factors. Net income included a $3.6 million bargain-purchase gain in 2016.
Changes, cash, debt and liquidity
- Services & Support sales rose 63.4% in Q3 and 52.2% for the nine months, mainly due to network installation services. Network Solutions sales fell 1.3% in Q3 and 3.2% year to date.
- Access & Aggregation sales increased $17.2 million in Q3; Traditional & Other Products continued to decline. Nine-month international sales fell 37.4%, to $96.2 million, while Q3 international sales rose 6.7%, to $41.2 million.
- Operating cash flow was $27.8 million for the nine months. Investing activities used $11.7 million, including $12.7 million of capital expenditures; financing activities used $35.1 million, including $22.9 million for share repurchases and $13.2 million for dividends.
- At September 30, cash and cash equivalents were $66.3 million, short-term investments $55.5 million, and total investments $233.9 million. Management reported $121.8 million of available short-term liquidity and believed cash, investments and operating cash flow were sufficient for at least 12 months. Working capital was $249.2 million; current and quick ratios were 3.16 and 1.93.
- Accounts receivable increased 41.6% to $101.8 million; DSO rose to 55 days from 48 at year-end 2015. Management attributed the movement to customer mix and sales/collection timing. Inventory was $96.0 million, up 4.9% from year-end.
- Debt consisted principally of a $28.9 million Alabama revenue bond, bearing 2% interest and maturing January 1, 2020. A $28.9 million restricted certificate of deposit collateralizes the bond; the company has a right of set-off. No material changes in contractual obligations were reported.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expects Traditional & Other revenue to decline over time, and said a major European customer’s upgrade work outside ADTRAN’s footprint was expected to continue through the rest of 2016, with upgrades in ADTRAN’s footprint expected to resume in the second half of 2017.
- On September 13, ADTRAN acquired fiber access products, technologies and service relationships from CommScope subsidiaries for $0.9 million cash. The acquisition added $1.3 million revenue and incurred a $0.07 million pretax loss through September 30; the reported bargain-purchase gain was $3.55 million.
- A third-party supplier part defect led to a product recall and increased Q3 warranty expense. Warranty charges were $4.0 million in Q3 versus $0.8 million a year earlier; the quarter-end warranty liability was $8.8 million.
- Management cautioned that results can fluctuate with customer orders and project timing, product/service mix, competition, foreign exchange, pricing and cost-reduction timing, warranty claims, and inventory obsolescence. The company also disclosed investment, interest-rate and currency risks; it had no forward contracts outstanding at quarter-end.
- Legal claims may arise in the ordinary course; management did not expect currently known contingencies to materially affect the business, operations, financial condition or cash flows. The filing reported no material changes to the risk factors in the 2015 Form 10-K.
Key facts for investors to verify
- How much of the earnings improvement came from recurring operations versus the $3.55 million bargain-purchase gain and investment gains?
- Whether the higher receivables and 55-day DSO convert to cash, and how international sales and the expected European customer project timing evolve.
- The financial and operational consequences of the supplier-related recall, including future warranty claims and costs.
- Whether the Services & Support growth can produce stronger margins; segment cost of sales as a share of sales rose to 67.7% in Q3 from 57.4% a year earlier.
- Clarify the private-equity-fund disclosure: the filing says commitments total up to $7.9 million, contributions were $8.4 million, and $7.7 million had been applied to commitments.
- Assess capital allocation and liquidity, including repurchases, dividends, and the restricted deposit backing the revenue bond. The board declared a further $0.09 quarterly dividend after quarter-end.