ADTRAN, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing is by ADTRAN, Inc.; the supplied company metadata names ADTRAN Holdings, Inc.
Business context and financial performance
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. Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $156.4 | $128.0 | $300.2 | $248.9 |
| Gross profit / margin | $65.0 / 41.6% | $50.0 / 39.0% | $125.6 / 41.9% | $89.7 / 36.1% |
| Operating income (loss) | $0.6 | $(12.8) | $(5.6) | $(39.5) |
| Net income (loss) | $4.0 | $(7.7) | $4.8 | $(18.5) |
| Diluted EPS | $0.08 | $(0.16) | $0.10 | $(0.38) |
| Cash from operations | — | $11.0 | $52.9 |
- Q2 revenue rose 22.1% year over year. Network Solutions revenue increased 20.9%; Services & Support rose 32.6%.
- Growth came mainly from Access & Aggregation and Subscriber Solutions & Experience; Traditional & Other Products declined. International sales were $81.1 million in Q2, 51.9% of revenue.
- Q2 gross margin improved with higher volume, regional and product/customer mix. Operating results also benefited from a $1.2 million gain reversing SmartRG acquisition-related contingent liabilities.
- Six-month net income included an $8.4 million net investment gain, primarily from changes in fair value of equity securities. The prior-year six-month period included an $11.3 million bargain-purchase gain from the Sumitomo EPON acquisition.
- Operating cash flow was $11.0 million, down from $52.9 million; the filing attributes the comparison in part to working-capital movements, including a $17.3 million accounts-receivable cash use in 2019 versus a $66.9 million source in 2018. Capital expenditures were $4.3 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $106.8 million, short-term investments $30.9 million, and long-term investments $87.3 million. Current assets were $383.4 million and current liabilities $145.4 million; working capital was $238.0 million and the current ratio 2.64.
- Reported short-term liquidity (cash plus short-term investments) was $137.7 million, including a restricted $25.6 million certificate of deposit pledged against the revenue bond. The filing reports $64.1 million of this short-term liquidity held by foreign subsidiaries.
- Debt consisted of a $25.6 million Alabama revenue bond, bearing 2% interest and due January 1, 2020. The bond is collateralized by the restricted certificate of deposit, which the company may offset against the debt.
- Stockholders’ equity was $446.0 million. The company paid $8.6 million in dividends in the first half and repurchased 13,000 shares for $0.2 million.
Changes, outlook and material items
- Management said a Tier-1 European carrier customer was temporarily slowing access-network capital spending for the remainder of 2019. The full impact was not yet determined; management expected normal spending to resume at the beginning of 2020. The filing provides no quantified revenue or earnings guidance.
- A workforce restructuring, predominantly in Germany and including closure of the Munich office, was expected to conclude in Q4 2019. First-half 2019 restructuring expense was $3.5 million; the ending accrued liability was $2.7 million.
- The company revised its excess and obsolete inventory reserve methodology and recorded an immaterial out-of-period adjustment: a $0.8 million increase to reserve and cost of sales in Q2, and a cumulative $0.2 million reduction to reserve and cost of sales for the first half. Management also disclosed two continuing material weaknesses in inventory controls, involving cycle counts and the inventory-reserve process. Disclosure controls were deemed ineffective as of June 30, 2019; remediation was ongoing.
- Other risks highlighted include revenue and customer concentration volatility, competitive pricing and margin pressure, international and foreign-exchange exposure, inventory obsolescence, customer credit risk, and the need to develop and update products. The company stated its cash, investments and expected operating cash flows were adequate for operating and capital needs for at least 12 months.
- Management reported that identified control weaknesses had not caused a material misstatement in the presented statements, but could allow a material misstatement in future reporting if not remediated. It also disclosed an immaterial prior cash-flow classification error related to $1.0 million of insurance proceeds; the six-month 2019 statement correctly classifies the proceeds as investing cash flow.
Important facts for investors to verify
- Progress and independent validation of remediation for the inventory-control material weaknesses.
- Whether the European carrier spending slowdown ended as expected, and its actual effect on second-half revenue and profitability.
- Cash conversion and receivables: first-half operating cash flow fell substantially year over year, while receivables and DSO increased.
- How much of reported liquidity is restricted or held overseas, and repayment/offset of the fully collateralized bond at its January 2020 maturity.
- Durability of improved gross margins and the contribution of equity-investment gains and other unusual items to reported earnings.