12liability of warranty
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period from
to
Commission file number 000-41446
ADTRAN Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
87-2164282
(State of Incorporation)
(I.R.S. Employer Identification Number)
901 Explorer Boulevard
Huntsville, Alabama 35806-2807
(256) 963-8000
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $0.01
ADTN
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such
files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the registrant's outstanding common stock held by non-affiliates of the registrant on June 30, 2022 was $852,431,295 based
on a closing market price of $17.53 as reported on the NASDAQ Global Select. There were 78,630,365 shares of common stock outstanding as of February
27, 2023.
PricewaterhouseCoopers LLP; PCAOB Firm ID: 238; Birmingham, Alabama
1
EXPLANATORY NOTE
ADTRAN Holdings, Inc. (“ADTRAN,” the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 on Form 10-K/A (this
“Amendment No. 1”) to amend and restate certain portions of the Company’s Annual Report on Form 10-K for the year ended December
31, 2022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 1, 2023 (the “Original Filing”)
As previously disclosed in the Company’s Current Report on Form 8-K filed on August 10, 2023, subsequent to the Company’s second
fiscal quarter earnings call on August 8, 2023 and during the preparation of its unaudited condensed consolidated financial statements
to be included in the Company’s Form 10-Q for the second fiscal quarter ended June 30, 2023, the Company determined that the principal
amount of indebtedness outstanding under the Company’s revolving credit facility with a syndicate of banks, including Wells Fargo
Bank, National Association (“Wells Fargo”), should be classified as noncurrent liabilities on the Company’s consolidated balance sheet.
Therefore, the outstanding Wells Fargo revolving credit facility balances for the following prior periods were misclassified and have
been adjusted from current to noncurrent liabilities on the balance sheets as follows: $60.0 million as of September 30, 2022, $60.0
million as of December 31, 2022, and $180.0 million as of March 31, 2023. Furthermore, the Company is also correcting certain errors
related to the presentation of deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) in the Original Filing’s consolidated
balance sheets that were previously assessed as immaterial errors.
On August 10, 2023, the Audit Committee of the Board of Directors (the “Audit Committee”) of the Company concluded, after
considering the recommendations of management and discussing with the Company’s independent registered public accounting firm,
PricewaterhouseCoopers LLP (“PwC”), that (i) the Company’s unaudited condensed consolidated financial statements as of and for the
quarter and year-to-date period ended September 30, 2022 included in the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2022, (ii) the Company’s audited consolidated financial statements as of and for the year ended December
31, 2022 included in the Original Filing, and (iii) the Company’s unaudited condensed consolidated financial statements as of and for
the quarter ended March 31, 2023 included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2023, respectively (collectively, the “Non-Reliance Periods”), should not be relied upon. Additionally, the Audit Committee concluded
that management’s report on internal control over financial reporting as of December 31, 2022, the opinion of PwC on the Company’s
consolidated financial statements as of and for the fiscal year ended December 31, 2022 and the opinion of PwC on the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2022, should also no longer be relied upon.
As a result of the above described misclassification and the identification of the material weakness (described further in Item 9A), the
Company is filing this Amendment No. 1 to (i) restate the disclosure on the effectiveness of the Company’s disclosure controls and
procedures and restate management’s report on internal control over financial reporting in Part II, Item 9A of the Original Filing, to
reflect management’s conclusion that the Company’s internal control over financial reporting and disclosure controls and procedures
were not effective as of
December 31, 2022, (ii) restate the Company’s consolidated financial statements to reflect the adjustment as of
December 31, 2022 of $60.0 million of short-term indebtedness to long-term indebtedness, as well as to correct the presentation of
DTAs and DTLs as of December 31, 2022, (iii) add two additional risk factors related to the material weakness and restatement,
(iv)restate the cash requirements table within Part II, Item 7, MD&A, of the Original Filing to reflect the adjustment as of December 31,
2022 of $60.0 million of short-term indebtedness to long-term indebtedness, (v) reissue the Report of the Independent Registered Public
Accounting Firm, which appears in Part II, Item 8 of the Original Filing, and (vi) amend Part IV – Item 15 Exhibits and Financial
Statement Schedules of the Original Filing to include currently dated certifications from the Company’s Chief Executive Officer and
Chief Financial Officer as required by Section 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as to fix certain immaterial
errors.
Pursuant to Rule 12b-15 promulgated by the SEC under the Securities Exchange Act of 1934, as amended, the Company has included
the entire text of Part I, Item 1A, as well as Part II, Items 7, 8 and 9A, of the Original Filing in this Amendment No. 1.
There have been
no changes to the text of Part I, Item 1A or Part II, Items 7, 8 and 9A other than the changes stated in the immediately preceding
paragraph.
Other than as described above and through the inclusion with this Amendment No. 1 of new certifications by management,
a new consent of PwC, and amendments to the list of exhibits contained in Part IV, Item 15 of the Original Filing, this Amendment No.
1 speaks only as of the date of the Original Filing and does not amend, supplement, or update any information contained in the Original
Filing to give effect to any subsequent events (including with respect to the cover page of the Original Filing, which has been updated
only to present this filing as Amendment No. 1 and to delete the reference to documents incorporated by reference into the Original
Filing). Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and the Company's reports (including
any amendments thereto) filed with the SEC subsequent to the Original Filing.
2
ADTRAN Holdings, Inc.
Annual Report on Form 10-K/A
For the Fiscal Year Ended December 31, 2022
Table of Contents
Page
Number
Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary
3
PART I
Item 1A.
Risk Factors
6
PART II
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.......................
26
Item 8.
Financial Statements and Supplementary Data
............................................................................................
45
Item 9A.
Controls and Procedures
...............................................................................................................................
97
PART IV
Item 15.
Exhibits and Financial Statement Schedules
...............................................................................................
100
SIGNATURES
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on our behalf.
We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in
this report, our other filings with the Securities and Exchange Commission (the “SEC”) and other communications with our stockholders.
Any statement that does not directly relate to a historical or current fact is a forward-looking statement. Generally, the words “believe”,
“expect”, “intend”, “estimate”, “anticipate”, “would”, “will”, “may”, “might”, “could”, “should”, “can”, “future”, “assume”, “plan”,
“seek”, “predict”, “potential”, “objective”, “expect”, “target”, “project”, “outlook”, “forecast” and similar expressions identify forward-
looking statements. We caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and
other factors that could affect the accuracy of such statements. Forward-looking statements are based on management’s current
expectations, as well as certain assumptions and estimates made by, and information available to, management at the time the statements
are made. Those statements are based on general assumptions and are subject to various risks, and because they also relate to the future,
they are likewise subject to inherent uncertainties and other factors that may cause actual results to differ materially from the views,
beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, the risks
identified in Item 1A. “Risk Factors” of this Amendment No. 1 and those described below:
Risks related to the Business Combination and DPLTA
We may fail to realize the anticipated strategic and financial benefits sought from the Business Combination.
We have experienced operational challenges as a result of the Business Combination and may also experience negative
synergies and loss of customers.
The terms of the DPLTA may have a material adverse effect on our financial results and condition.
We are exposed to additional litigation risk and uncertainty with respect to the remaining minority shareholders of ADVA,
which litigation may require us to pay a higher purchase price for additional ADVA shares than the amount provided for
under the DPLTA.
We have incurred and expect to continue to incur significant transaction fees and costs in connection with the Business
Combination and post-closing integration efforts.
We incurred a substantial amount of indebtedness in connection with the Business Combination and DPLTA. Our failure
to meet our debt service obligations could have a material adverse effect on our business, financial condition and results of
operations.
We may be unable to successfully retain and motivate our personnel, including personnel at ADVA.
The terms of our and ADVA's credit agreements restrict our current and future operations, particularly our ability to respond
to changes or to take certain actions.
Negative publicity related to post-closing integration measures may adversely affect us.
Risks related to our financial results and Company success
Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.
The lengthy sales and approval process required by service providers for new products could result in fluctuations in our
revenue.
We depend heavily on sales to certain customers; the loss of any of these customers or a significant project would
significantly reduce our revenue and net income.
Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and
could adversely affect our operating results, financial condition and cash flows.
We expect gross margins to continue to vary over time, and our levels of product and services gross margins may not be
sustainable.
Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international
regions may result in us not meeting our cost, quality or performance standards.
Our dependence on a limited number of suppliers for certain raw materials, key components and ODM products, combined
with supply shortages, have prevented and may continue to prevent us from delivering our products on a timely basis, which
4
has had and may continue to have a material adverse effect on operating results and could have a material adverse effect on
customer relations.
We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and
market share.
Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment
volumes, field service repair obligations and other rework costs incurred in correcting product failures. If our estimates
change, our liability for warranty obligations may increase or decrease, impacting future cost of revenue.
Managing our inventory is complex and may include write-downs of excess or obsolete inventory.
The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely
affect our operating results, financial condition and cash flows.
Our success depends on attracting and retaining key personnel.
If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and
financial statements could be materially impacted.
The terms of the credit agreement governing our senior credit facility restrict our current and future operations, particularly
our ability to respond to changes or to take certain actions.
We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which
could harm our financial results and cash flows.
We will require a significant amount of cash to service our indebtedness, our potential payment obligations to ADVA
shareholders under the DPLTA, and other obligations.
We could be required to recognize impairment charges related to goodwill and other intangible assets.
We may be unable to successfully and effectively manage and integrate acquisitions, divestitures and other significant
transactions, which could harm our operating results, business and prospects.
Risks related to COVID-19
The ongoing COVID-19 pandemic has impacted and may continue to impact our business, results of operations, financial
condition and cash flows, particularly our supply chain.
Risks related to our control environment
Breaches of our information systems and cyber-attacks could compromise our intellectual property and cause significant
damage to our business and reputation.
We have had to restate our previously issued consolidated financial statements and, as part of that process, have identified
a material weakness in our internal control over financial reporting commencing September 30, 2022 and continuing as of
the date hereof. If we are unable to develop and maintain effective internal control over financial reporting, we may not be
able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and
may adversely affect our business, financial condition and results of operations.
We may face litigation and other risks as a result of the restatement as described in the “Explanatory Note” within this
Amendment No. 1 and material weakness in our internal control over financial reporting.
Risks related to the telecommunications industry
We must continue to update and improve our products and develop new products to compete and to keep pace with
improvements in communications technology.
Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely
impact our results of operations.
If our products do not interoperate with our customers’ networks, installations may be delayed or canceled, which could
harm our business.
5
We engage in research and development activities to develop new, innovative solutions and to improve the application of
developed technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with
substantially greater research and development efforts and which may focus on more leading-edge development.
Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international
regions may result in us not meeting our cost, quality or performance standards.
Our failure to maintain rights to intellectual property used in our business could adversely affect the development,
functionality and commercial value of our products.
Software under license from third parties for use in certain of our products may not continue to be available to us on
commercially reasonable terms.
Our use of open source software could impose limitations on our ability to commercialize our products.
We may incur liabilities or become subject to litigation that would have a material effect on our business.
If we are unable to successfully develop and maintain relationships with SIs, service providers and enterprise VARs, our
revenue may be negatively affected.
Risks related to the Company's stock price
Our operating results may fluctuate in future periods, which may adversely affect our stock price.
The price of our common stock has been volatile and may continue to fluctuate significantly.
Risks related to the regulatory environments in which we do business
We are subject to complex and evolving U.S. and foreign laws, regulations and standards governing the conduct of our
business. Violations of these laws and regulations may harm our business, subject us to penalties and to other adverse
consequences.
Changes in trade policy in the U.S. and other countries, including the imposition of additional tariffs and the resulting
consequences, may adversely impact our gross profits, gross margins, results of operations and financial condition.
New or revised tax regulations, changes in our effective tax rate, recognition of a valuation allowance or assessments arising
from tax audits may have an adverse impact on our results.
Central Banks' monetary policy actions could increase our costs of borrowing money and negatively impact our financial
condition and future operations.
Rising inflation could negatively impact our revenues and profitability if increases in the prices of our products and services
or a decrease in customer spending result in lower sales.
Expectations relating to environmental, social and governance considerations expose the Company to potential liabilities,
increased costs, reputational harm, and other adverse effects on the Company’s business.
We caution investors that other factors may prove to be important in the future in affecting our operating results. New factors emerge
from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor, or a combination
of factors, may have on our business. You are further cautioned not to place undue reliance on these forward-looking statements because
they speak only of our views as of the date that the statements were made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
6
PART I
ITEM 1A. RISK FACTORS
Our business involves substantial risks. Any of the risk factors described below or elsewhere in this report could significantly and
adversely affect our business prospects, financial condition and results of operations. The risks described below are not the only ones
facing us. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial may also adversely
affect us.
Risks related to the Business Combination and DPLTA
We may fail to realize the anticipated strategic and financial benefits sought from the Business Combination.
We may not realize all of the anticipated benefits of the Business Combination. The success of the Business Combination will depend
on, among other things, our ability to combine our business with ADVA’s business in a manner that facilitates growth as a provider of
fiber networking solutions and realizes anticipated cost savings. We believe that the Business Combination provides an opportunity for
revenue growth in optical transport solutions, fiber access solutions and subscriber solutions.
Additionally, our ability to realize anticipated benefits of the Business Combination could be affected by a number of other factors,
including: the need for greater than expected cash or other financial resources or management time in order to integrate ADVA; increases
in other expenses related to the Business Combination, including restructuring and other exit costs; the timing and impact of purchase
accounting adjustments; accounting for IFRS to U.S. GAAP adjustments; difficulties in employee or management integration; the impact
of appraisal proceedings in connection with the DPLTA; and unanticipated liabilities associated with the Business Combination. Any
potential cost-saving opportunities may take several years following the Business Combination to implement, and any results of these
actions may not be realized for several years thereafter, if at all.
However, we must successfully combine the business in a manner that permits these anticipated benefits to be realized. In addition, we
must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth.
Further, providing integrated fiber networking solutions can be highly complex and can involve the design, development,
implementation and operation of new solutions and the transitioning of clients from traditional platforms to new platforms. If we are not
able to effectively provide different solutions and successfully achieve the growth and cost savings objectives, the anticipated benefits
of the Business Combination may not be realized fully, or at all, or may take longer to realize than expected.
We have experienced operational challenges and may also experience negative synergies and loss of customers.
Integrating the operations and personnel of the ADTRAN and ADVA businesses involves complex operational, technological and
personnel-related challenges. This process has been and will continue to be time-consuming and expensive, and it has and may continue
to disrupt our business. Difficulties in the integration of the business, which may result in significant costs and delays, include:
managing a significantly larger company;
integrating and unifying the offerings and services available to customers and coordinating distribution and marketing
efforts;
coordinating corporate and administrative infrastructures and harmonizing insurance coverage;
unanticipated issues in coordinating accounting, information technology, communications, administration and other
systems;
difficulty addressing possible differences in corporate cultures and management philosophies;
challenges associated with converting ADVA's financial reporting from international financial reporting standards (IFRS)
to accounting principles generally accepted in the U.S. (U.S GAAP) and compliance with the Sarbanes-Oxley Act of
2002, as amended, and the rules promulgated thereunder by the SEC;
legal and regulatory compliance;
dual market filing and publications obligations;
creating and implementing uniform standards, controls, procedures and policies;
litigation relating to the transactions contemplated by a reorganization, including shareholder litigation;
diversion of management’s attention from other operations;
maintaining existing agreements and relationships with customers, distributors, providers and vendors and avoiding delays
in entering into new agreements with prospective customers, distributors, providers and vendors;
7
realizing the benefits from our restructuring programs;
unforeseen and unexpected liabilities related to the Business Combination, including the risk that certain executive
officers may be subject to additional fiduciary duties and liability;
identifying and eliminating redundant and underperforming functions and assets;
effecting actions that may be required in connection with obtaining regulatory approvals; and
a deterioration of credit ratings.
We have and may continue to lose customers or our share of customers’ business as entities that were customers of both ADTRAN
and AVDA seek to diversify their suppliers of services and products.
The terms of the DPLTA may have a material adverse effect on our financial results and condition.
On January 16, 2023, the DPLTA with ADVA became effective. The DPLTA allows us to issue binding instructions to the management
board of ADVA, which could be disadvantageous to ADVA and result in a decline in the business and earnings power of ADVA. This
could have a material adverse effect on the assets, financial position and income of ADVA, which in turn could have a material adverse
effect on our financial condition.
Additionally, pursuant to the terms of the DPLTA, each ADVA shareholder (other than the Company) has received an offer to elect
either (1) to remain an ADVA shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit
Compensation. Assuming all of the minority holders of currently outstanding ADVA shares were to elect the second option, we would
be obligated to make aggregate Exit Compensation payments of approximately EUR 310.6 million or approximately $333.2 million.
based on an exchange rate as of December 31, 2022. Shareholders electing the first option of Annual Recurring Compensation may later
elect the second option. The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation
expires on March 16, 2023 (subject to appraisal proceedings). Our obligation to pay Annual Recurring Compensation under the DPLTA
would lead to a continuing payment obligation, which would amount to approximately EUR $10.6 million, or $11.4 million based on
the current exchange rate, per year assuming none of the minority ADVA shareholders were to elect Exit Compensation. The foregoing
amounts do not reflect any potential increase in payment obligations that we may have depending on the outcome of ongoing appraisal
proceedings in Germany.
The amount of this Annual Recurring Compensation payment obligation pursuant to the DPLTA could exceed the amount of dividends
that otherwise might be distributed by ADVA to minority shareholders and would even have to be paid if ADVA incurs losses, which
could have a material adverse impact on our financial results and financial condition.
We are exposed to additional litigation risk and uncertainty with respect to the remaining minority shareholders of ADVA, which
litigation may require us to pay a higher purchase price for additional ADVA shares than the amount provided for under the DPLTA.
As a result of the Business Combination, we continue to be exposed to litigation risk and uncertainty associated with the remaining
minority shareholders of ADVA. The terms of the DPLTA, including the adequacy of compensation payments to minority ADVA
shareholders under the terms of the DPLTA, have been challenged by minority shareholders of ADVA by initiating court-led appraisal
proceedings under German law. We cannot rule out that the competent court in these appraisal proceedings may adjudicate higher Exit
Compensation or Annual Recurring Compensation payment obligations (in each case, including interest thereon) than agreed upon in
the DPLTA, the financial impact and timing of which is uncertain.
We have incurred and expect to continue to incur significant transaction fees and costs in connection with the Business Combination
and post-closing integration efforts.
We have incurred and expect to continue to incur a number of significant non-recurring implementation and restructuring costs
associated with combining the operations of ADTRAN and ADVA. In addition, we have incurred significant banking, legal, accounting
and other transaction fees and costs related to the Business Combination. As of December 31, 2022, we have incurred $26.1 million of
transaction costs related to the Business Combination.
We expect to incur additional integration costs, as well costs associated with the implementation of the DPLTA and such costs are
expected to be material.
Any cost savings or other efficiencies related to the integration of the businesses that could offset these transaction- and combination-
related costs over time may not be achieved in the near term, or at all. In addition, the timeline in which cost savings are expected to be
realized is lengthy and may not be achieved. Failure to realize these synergies and cost reductions and other efficiencies in a timely
manner or at all could have a material adverse effect on our business and cash flows, financial condition and results of operations.
8
We incurred a substantial amount of indebtedness in connection with the Business Combination and the DPLTA. Our failure to
meet our debt service obligations could have a material adverse effect on our business, financial condition and results of operations.
Subsequent to the closing of the Business Combination, we entered into a new credit facility providing for borrowings of up to $400
million and under which we have incurred $60.0 million of indebtedness as of December 31, 2022. Subsequent to the closing of the
Business Combination, ADVA entered into a new revolving line of credit with Norddeutsche Landesbank - Girozentrale which it
subsequently repaid and terminated, and a revolving line of credit with DZ Bank. As of December 31, 2022, ADVA had borrowings of
$16.1 million and $9.1 million of borrowings under the two revolving lines of credit, respectively. Additionally, subsequent to December
31, 2022, the Company borrowed an additional $127.5 million under the new credit facility, a portion of which was used to pay down
and retire ADVA's notes payable and credit facility agreements except for ADVA's new revolving line of credit with DZ Bank, which
remains outstanding. S
ee “Cash Requirements” in Part I, Item 7 of this report for additional information.
Our increased indebtedness could adversely affect our operations and liquidity. Our level of indebtedness could, among other things:
make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry
conditions because we may not have sufficient cash flows to make its scheduled debt payments;
cause us to use a larger portion of our cash flow to fund interest and principal payments, reducing the availability of cash to
fund working capital, capital expenditures, research and development and other business activities;
make it more difficult for us to continue to pay the current dividend or cause us to reduce the dividend paid to the Company's
stockholders;
limit our ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to
changes in market or industry conditions;
cause us to be more vulnerable to general adverse economic and industry conditions;
cause us to be disadvantaged compared to competitors with less leverage; and
limit our ability to borrow additional money in the future to fund working capital, capital expenditures, research and
development and other general corporate purposes.
Our ability to satisfy our debt obligations and renew the credit facility is dependent upon our future performance and other risk factors
discussed in this section. However, there can be no assurance that we will be able to manage any of these risks successfully. In addition,
the credit agreement governing our indebtedness contains restrictive covenants that limit our ability to engage in activities that may be
in our long-term best interest. Our failure to comply with those covenants could result in an event of default that, if not cured or waived,
could result in the acceleration of all its debt.
We may also incur additional long-term debt and working capital lines of credit to meet future financing needs, which would increase
our total indebtedness. Although the terms of its existing and future credit agreements and of the indentures governing its debt contain
restrictions on the incurrence of additional debt, including secured debt, these restrictions are subject to a number of important exceptions
and debt incurred in compliance with these restrictions could be substantial. If we or our restricted subsidiaries incur significant
additional debt, the related risks that we face could intensify.
We may be unable to successfully retain and motivate our personnel, including personnel at ADVA.
The success of the Business Combination and our post-closing integration efforts depends, in part, on our ability to retain the talents and
dedication of key employees, including key decision-makers, currently employed by ADTRAN, Inc. and ADVA. Some of our employees
have decided and others may decide not to remain with us as a result of the Business Combination. If key employees terminate their
employment, or if an insufficient number of employees are retained to maintain effective operations, our business activities may be
adversely affected and management’s attention may be diverted from successfully integrating ADTRAN and ADVA to hiring suitable
replacements, all of which may cause our business to deteriorate. We may not be able to locate suitable replacements for any key
employees who leave or offer employment to potential replacements on reasonable terms. In addition, we may not be able to motivate
certain key employees due to organizational changes, reassignments of responsibilities, the perceived lack of appropriate opportunities
for advancement or other reasons. If we fail to successfully retain and motivate our employees, relevant capabilities and expertise may
be lost which may have an adverse effect on our cash flows, financial condition, results of operations and the business operations in
general.
9
The terms of our and ADVA's credit agreements restrict our current and future operations, particularly our ability to respond to
changes or to take certain actions.
Our Credit Agreement and ADVA's revolving line of credit with DZ Bank contain a number of restrictive covenants that impose
significant operating and financial restrictions on us and/or our subsidiaries and may limit our ability to engage in acts that may be in
our long-term best interest, including restrictions on our and/or our subsidiaries' ability to:
incur additional indebtedness and guarantee indebtedness;
pay dividends or make other distributions or repurchase or redeem capital stock;
prepay, redeem or repurchase certain debt;
issue certain preferred stock or similar equity securities;
make loans and investments;
sell assets;
incur liens;
enter into transactions with affiliates;
alter the businesses we conduct; and
consolidate, merge or sell all or substantially all of our assets.
In addition, the restrictive covenants in such credit facilities require us and/or our subsidiaries to maintain specified financial ratios and
satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control,
and we may be unable to meet them.
A breach of the covenants or restrictions under such credit facilities could result in an event of default. Such a default may allow the
creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default
provision applies. In addition, an event of default under such credit facilities would permit the lenders to terminate all commitments to
extend further credit under the applicable facility. Furthermore, if we were unable to repay the amounts due and payable under such
credit facilities, those lenders could proceed against the collateral granted them to secure that indebtedness. In the event our lenders or
noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that
indebtedness. As a result of these restrictions, we may be:
limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; and
unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial
indebtedness and our credit ratings could adversely affect the availability and terms of our financing.
We could be required to recognize impairment charges related to goodwill and other intangible assets.
The Business Combination added a significant amount of goodwill and other intangible assets to our consolidated balance sheets. In
accordance with U.S. GAAP, management periodically assesses these assets to determine if they are impaired. Significant negative
industry or economic trends, disruptions to our business, the inability to effectively integrate acquired businesses, the underperformance
of our business as compared to management’s initial expectations, unexpected significant changes or planned changes in use of the
assets, divestitures, and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such
impairments could materially adversely affect our business, financial condition and results of operations in the periods recognized.
10
Negative publicity related to integration measures may adversely affect us.
Political and public sentiment in connection with post-closing integration measures following the Business Combination may
result in
a significant amount of adverse press coverage and other adverse public statements. Adverse press coverage and public statements,
whether or not driven by political or popular sentiment, may also result in legal claims or in investigations by regulators, legislators and
law enforcement officials. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceedings, can
divert the time and effort of senior management from operating the business. Addressing any adverse publicity, governmental scrutiny
or enforcement or other legal proceedings could be time-consuming and expensive and, regardless of the factual basis for the assertions
being made, could have a negative impact on our reputation, on the morale and performance of our employees and on our relationships
with regulators, suppliers and customers. It may also have a negative impact on our ability to take timely advantage of various business
and market opportunities. The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may
have a material adverse effect on our business, cash flows, financial condition and results of operations.
Risks related to our financial results and Company success
Our revenue for a particular period can be difficult to predict, and a shortfall in revenue may harm our operating results.
As a result of the many factors discussed in this report, our revenue for a particular quarter is difficult to predict and will fluctuate from
quarter to quarter. Typically, our customers request product delivery within a short period following our receipt of an order.
Consequently, we do not typically carry a significant order backlog and are dependent upon obtaining orders and completing delivery
in accordance with shipping terms that are predominantly within each quarter to achieve our targeted revenue. Supply of semiconductor
chips and other components of our products has become constrained resulting in extended lead times and increased costs. Transportation
constraints, including shortages for both air and surface freight, as well as labor shortages in the transportation industry, have also
affected the timing and the cost of obtaining raw materials and production supplies. As a result, our gross margin percentage declined
in the second half of 2021 and throughout 2022. If supply chain constraints and transportation constraints continue, it could cause our
net revenue and gross profit to decline or to grow at a slower rate than in previous quarters. Our deployment/installation cycle can also
vary depending on the customer’s schedule, site readiness, network size and complexity and other factors, which can cause our revenue
to fluctuate from period to period. Our ability to meet financial expectations could also be affected if the variable revenue patterns seen
in prior quarters recur in future quarters. We have experienced periods of time during which manufacturing issues have delayed
shipments, leading to variable shipping patterns. In addition, to the extent that manufacturing issues and any related component shortages
continue to result in delayed shipments in the future, and particularly in quarters in which we and our subcontractors are operating at
higher levels of capacity, it is possible that revenue for a quarter could be adversely affected, and we may not be able to remediate the
conditions within the same quarter. Currently, our revenue growth and profitability in the near-term are being impacted by supply chain
constraint issues. While we are working closely with our suppliers and customers to address the near-term supply chain challenges
facing the industry and believe these challenges will continue to lessen and will begin to normalize during 2023, there can be no
assurance this will be the case.
In the past, under certain market conditions, long manufacturing lead times have caused our customers to place the same order multiple
times. When multiple ordering occurs, along with other factors, it may cause difficulty in predicting our revenue and, as a result, could
impair our ability to manage inventory effectively.
We plan our operating expense levels based primarily on forecasted revenue levels. These expenses and the impact of long-term
commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating results being below expectations
because we may not be able to quickly reduce these fixed expenses in response to short-term business changes.
The lengthy sales and approval process required by service providers for new products could result in fluctuations in our revenue.
In the industry in which we compete, sales and approval cycles are often lengthy. Selling efforts often involve a significant commitment
of time and resources by us and our customers that may include extensive product testing, laboratory or network certification, or region-
specific product certification and homologation requirements for deployment in networks. Additionally, a supplier must first obtain
product approval from a major or other service provider to sell its products to these service providers. This process can last from six to
eighteen months, or longer, depending on the technology, the service provider and the demand for the product from the service provider’s
subscribers. Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well
as products that deploy new technology or respond to new technology demands from a major or other service provider. We have been
successful in the past in obtaining these approvals; however, we cannot be certain that we will obtain these approvals in the future or
that sales of these products will continue to occur. Any attempt by a major or other service provider to seek out additional or alternative
suppliers, or to undertake, as permitted under applicable regulations, the production of these products internally, could have a material
adverse effect on our operating results. Furthermore, the delay in sales until the completion of the approval process, the length of which
is difficult to predict, could result in fluctuations of revenue and uneven operating results from quarter to quarter or year to year. Further,
once customer approval or certifications are met, our supply chain customers typically do not guarantee us a minimum, or any, volume
of sales. We are dependent on individual purchase orders as discussed elsewhere in this report.
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We depend heavily on sales to certain customers; the loss of any of these customers or a significant project would significantly reduce
our revenue and net income.
Historically, a large percentage of our revenue has been made to major service providers and larger independent communications
companies. As long as the major and larger independent communications companies represent such a substantial percentage of our total
revenue, our future success will significantly depend upon certain factors which are not within our control, including:
the timing and size of future purchase orders, if any, from these customers;
changes in strategic plans and capital budgets of these customers;
the product requirements of these customers;
the subscriber take rate, including subscriber loss or churn, of our customers;
the financial and operational success of these customers;
the impact of legislative and regulatory changes on these customers;
consolidation, acquisition of, or corporate reorganization among these customers;
the success of these customers' services deployed using our products; and
the impact of work stoppages at these customers.
In the past, revenue to our large customers have fluctuated, and may fluctuate in the future, significantly from quarter to quarter and
year to year. The loss of, or a significant reduction or delay in, revenue to any such customer or the occurrence of revenue fluctuations
could have a material adverse effect on our business and results of operations. Further, any attempt by a major or other service provider
to seek out additional or alternative suppliers or to undertake, as permitted under applicable regulations, the production of these products
internally, could have a material adverse effect on our operating results.
There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies
attempt to strengthen or hold their market positions or are unable to continue operations. This could lead to variability in our operating
results and could have a material adverse effect on our business, operating results, financial condition and cash flow. In addition,
particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that a loss of a major
customer could have a material impact on our results that we would not have anticipated in a marketplace composed of more numerous
participants.
Our exposure to the credit risks of our customers and distributors may make it difficult to collect accounts receivable and could
adversely affect our operating results, financial condition and cash flows.
Most of our revenue is made on an open credit basis, generally with payment terms of 30 to 45 days in the U.S. and typically 45 to 60
days in many geographic markets outside the U.S. As our international revenue grows, our total accounts receivable balance has
increased and will likely continue to increase. Our DSO could also increase as a result of a greater mix of international revenue.
Additionally, international laws may not provide the same degree of protection against defaults on accounts receivable as provided under
U.S. laws governing domestic transactions; therefore, as our international business grows, we may be subject to higher bad debt expense
compared to historical trends. Overall, we monitor individual customer and distributor payment capability in granting such open credit
arrangements, seek to limit such open credit to amounts that we believe customers and distributors can pay and maintain reserves we
believe are adequate to cover exposure for credit losses and other macroeconomic indicators. In the course of our sales to customers and
distributors, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible
accounts receivable due to various reasons, including potential declining operating cash flows or bankruptcy filings. While we attempt
to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, there are no
assurances we can avoid write-downs and/or write-offs of accounts receivable as a result of declining financial conditions for our
customers, including bankruptcy. Such write-downs or write-offs could negatively affect our operating results for the period in which
they occur and could potentially have a material adverse effect on our results of operations, financial condition and cash flows.
We expect gross margins to continue to vary over time, and our levels of product and services gross margins may not be sustainable.
Our level of gross margins may not be sustainable and has been and may continue to be adversely affected by numerous factors,
including:
changes in customer, geographic or product or services mix, including software and the mix of configurations and
professional services revenue within each product segment;
mix of domestic versus international revenue;
introduction of new products by competitors, including products with price-performance advantages;
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our ability to reduce product cost;
increases in labor or material cost, including increases in material costs resulting from inflation or tariffs;
foreign currency exchange rate movements;
expediting costs incurred to meet customer delivery requirements;
excess inventory and inventory holding charges;
excess and obsolescence charges;
changes in shipment volume;
our ability to absorb fixed manufacturing costs during short-term fluctuations in customer demand;
loss of cost savings due to changes in component pricing or charges incurred due to inventory holding periods if parts
ordering does not correctly anticipate product demand;
lower than expected benefits from value engineering;
increased price competition, including competitors from Asia, specifically China;
changes in distribution channels;
increased warranty cost or quality issues;
liquidated damages costs relating to customer contractual terms;
our ability to manage the impact of foreign currency exchange rate fluctuations relating to our revenue or cost of revenue;
slowdowns, recessions, economic instability, political unrest, armed conflicts (such as the ongoing military conflict in
Ukraine), or outbreaks of disease, such as the COVID-19 pandemic, around the world; and
Business Combination purchase price allocations.
For example, since the third quarter of 2021 and continuing throughout 2022, we have incurred and may continue to incur supply chain
constraint expenses, including price inflation for certain electronic components, semiconductor chips and transportation related costs,
which have lowered our gross margins and decreased our profitability.
Our dependence on a limited number of suppliers for certain raw materials, key components and ODM products, combined with
supply shortages, have prevented and may continue to prevent us from delivering our products on a timely basis, which has had and
may continue to have a material adverse effect on operating results and could have a material adverse effect on customer relations.
The fact that we are reliant on our extended supply chain could have an adverse impact on the supply of our products and on our business
and operating results. The financial problems of our suppliers and industry consolidation occurring within one or more component
supplier markets, such as the semiconductor market, in each case, could either limit supply or increase costs.
A reduction or interruption in supply, including disruptions on our global supply chain, caused in part by public health emergencies
(including the COVID-19 pandemic), geopolitical tensions (including as a result of the ongoing conflict in Ukraine and China-Taiwan
relations) or a significant natural disaster (including as a result of climate change); a significant increase in the price of one or more
components (including as a result of inflation); a failure to adequately authorize procurement of inventory by our contract manufacturers;
a failure to appropriately cancel, reschedule, or adjust our requirements based on our business needs; or a decrease in demand for our
products could materially adversely affect our business, operating results, and financial condition and could materially damage customer
relationships. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase raw
materials or components at prices that are higher than those available in the current market. In the event that we become committed to
purchasing raw materials or components at prices in excess of the current market price when the raw materials or components are
actually used, our gross margins could decrease.
In addition, certain raw materials and key components used in our products are currently available from only one source, and others are
available from only a limited number of sources. The availability of these raw materials and supplies may be subject to market forces
beyond our control, such as inflation, merger and acquisition activity of our suppliers and consolidation in some segments of our supplier
base. We have experienced and expect to continue to experience increased inflationary pressures on input costs, such as, raw materials,
supplies, labor and distribution costs to increase. Our attempts to offset these cost pressures, through increases in the selling prices of
some of our products, may not be successful and could negatively affect our operating results. In addition, from time to time, there may
not be sufficient quantities of raw materials and supplies in the marketplace to meet customer demand. For example, wafer foundries
that support chipmakers have not invested enough in recent years to increase capacities to the levels need to support demand from all of
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their customers and wafers have a long lead time for production, in some cases in excess of 30 weeks, which has led to a recent shortage
in chip supplies. Many companies utilize the same raw materials and supplies that we do in the production of their products. Suppliers
may be under pressure to allocate product to certain customers for business, regulatory or political reasons, and/or demand changes in
agreed pricing as a condition of supply. As a result, companies with more resources than our own may have a competitive advantage in
obtaining raw materials and supplies. These factors have resulted in reduced supply, higher prices of raw materials and delays in the
receipt of certain of our key components, which in turn has generated increased costs, lower margins and delays in product delivery,
with a corresponding adverse effect on revenue. Delays in product deliveries and corresponding product price increases may likewise
have an adverse effect on customer relationships. We attempt to manage these risks through developing alternative sources, by staging
inventories at strategic locations, through engineering efforts designed to obviate the necessity of certain components and by building
long-term relationships and close contact with each of our key suppliers; however, we cannot assure that delays in or failures of deliveries
of key components, either to us or to our contract manufacturers, and consequent delays in product deliveries, will not continue to occur
in the future.
In addition, our supply chain challenges are forcing us to devote a substantial portion of our research and development
expenses to redesign existing products, reducing our capacity to develop new products. For a discussion of the impact of the COVID-
19 pandemic on our supply chain,
see
“- The ongoing COVID-19 pandemic has impacted and may continue to impact our business,
results of operations and financial condition, particularly our supply chain and workforce.”
We believe that we may be faced with the following challenges in the future: new markets in which we participate may grow quickly,
which may make it difficult to quickly obtain significant raw materials and/or components; as we acquire companies and new
technologies, we may be dependent on unfamiliar supply chains or relatively small supply partners; and we face competition for certain
raw materials or components that are supply-constrained from existing competitors and companies in other markets.
We compete in markets that have become increasingly competitive, which may result in reduced gross profit margins and market
share.
The markets for our products are intensely competitive. New manufacturers have entered the markets in recent years to offer products
in competition with us. Additionally, certain companies have, in recent years, developed the ability to deliver competing products using
coaxial cable and cellular transmission, especially in high-density metropolitan areas. Competition will further increase if new
companies enter the market or existing competitors expand their product lines. Some of these potential competitors may have greater
financial, technological, manufacturing, sales and marketing, and personnel resources. As a result, these competitors may be able to
respond more rapidly or effectively to new or emerging technologies and changes in customer requirements, withstand significant price
decreases, or devote greater resources to the development, promotion and sale of their products.
In addition, our present and future competitors may be able to enter our existing or future markets with products or technologies
comparable or superior to those that we offer. An increase in competition could cause us to reduce prices, decrease our market share,
require increased spending by us on product development and sales and marketing, or cause delays or cancellations in customer orders,
any one of which could reduce our gross profit margins and adversely affect our business and results of operations.
Our estimates regarding future warranty obligations may change due to product failure rates, installation and shipment volumes,
field service repair obligations and other rework costs incurred in correcting product failures. If our estimates change, our liability
for warranty obligations may increase or decrease, impacting future cost of revenue.
Our products are highly complex, and we cannot ensure that our extensive product development, manufacturing and integration testing
will be adequate to detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under
warranty could adversely impact our reputation and negatively affect our operating results, financial position and cash flows. The
development and production of new products with high complexity often involves problems with software, components and
manufacturing methods. If significant warranty obligations arise due to reliability or quality issues arising from defects in software,
faulty components or manufacturing methods, our operating results, financial position and cash flows could be negatively impacted by:
costs associated with fixing software or hardware defects;
costs associated with internal or third-party installation errors;
high service and warranty expenses;
costs associated with recalling and replacing products with software or hardware defects, including costs from writing-off
defective products recalled;
high inventory obsolescence expense;
delays in collecting accounts receivable;
payment of liquidated damages for performance failures;
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extended performance bond expenses; and
a decline in revenue to existing customers.
Managing our inventory is complex and may include write-downs of excess or obsolete inventory.
Managing our inventory of components and finished products is complicated by a number of factors, including the need to maintain a
significant inventory of certain components that are in short supply, that have been discontinued by the component manufacturer, that
must be purchased in bulk to obtain favorable pricing or that require long lead times. These issues may result in our purchasing and
maintaining significant amounts of inventory, which if not used or expected to be used based on anticipated production requirements,
may become excess or obsolete. Any excess or obsolete inventory could also result in sales price reductions and/or inventory write-
downs, which could adversely affect our business and results of operations.
The continuing growth of our international operations could expose us to additional risks, increase our costs and adversely affect
our operating results, financial condition and cash flows.
We are expanding our presence in international markets, which represented 49.5%, 33.5% and 30.5% of our net revenue for the years
ended December 31, 2022, 2021 and 2020, respectively, and as a result, we anticipate increased revenue and operating costs in these
markets. This international expansion has increased and may continue to increase our operational risks and impact our results of
operations, including:
exposure to unfavorable commercial terms in certain countries;
the time and cost to staff and manage foreign operations, including the time and cost to maintain good relationships with
employee associations and work councils;
the time and cost to ensure adequate business interruption controls, processes and facilities;
the time and cost to manage and evolve financial reporting systems, maintain effective financial disclosure controls and
procedures, and comply with corporate governance requirements in multiple jurisdictions;
the cost to collect accounts receivable and extension of collection periods;
the cost and potential disruption of facilities transitions required in some business acquisitions;
risks as a result of less regulation of patents or other safeguards of intellectual property in certain countries;
the potential impact of adverse tax, customs regulations and transfer-pricing issues;
exposure to increased price competition from additional competitors in some countries;
exposure to global social, political and economic instability, changes in economic conditions and foreign currency exchange
rate movements;
potential exposure to liability or damage of reputation resulting from a higher incidence of corruption or unethical business
practices in some countries;
potential regulations on data protection, regarding the collection, use, disclosure and security of data;
potential trade protection measures, export compliance issues, domestic preference procurement requirements, qualification
to transact business and additional regulatory requirements;
potential exposure to natural disasters, epidemics and pandemics (and government regulations in response thereto) and acts
of war or terrorism; and
potential exposure to ongoing military conflict in Ukraine. The U.S. and certain other countries imposed sanctions on Russia
and could impose further sanctions against it, which could damage or disrupt international commerce and the global
economy. Other potential consequences include, but are not limited to, a heightened risk of cyber-warfare, biological warfare
or nuclear warfare, growth in the number of popular uprisings in the region, increased political discontent, especially in the
regions most affected by the conflict or economic sanctions, continued displacement of persons to regions close to the areas
of conflict and an increase in the number of refugees, among other unforeseen social and humanitarian effects which could
impact our business, customers, and suppliers.
In February 2022, armed conflict escalated between Russia and Ukraine. The U.S. and certain other countries have imposed sanctions
on Russia and could impose further sanctions, which could damage or disrupt international commerce and the global economy. We are
complying with a broad range of U.S. and international sanctions and export control requirements imposed on Russia.
15
If we are unable to successfully address the potential risks associated with our overall international expansion, our operating results,
financial condition and cash flows may be negatively impacted.
Our success depends on attracting and retaining key personnel.
Our business has grown significantly since its inception. Our success is dependent in large part on the continued employment of our
executive officers, including Thomas R. Stanton, our Chief Executive Officer, and other key management personnel. The unplanned
departure of one or more of these individuals could adversely affect our business. In addition, for ADTRAN to continue as a successful
entity we must also be able to attract and retain key engineers and software developers and architects whose expertise helps us maintain
competitive advantages. We believe that our future success will depend, in large part, upon our ability to continue to attract, retain, train
and motivate highly-skilled employees who are in great demand. Stock awards are designed to reward employees for their long-term
contributions and to provide incentives for them to remain with us. Changes to our overall compensation program, including our stock
incentive program, may adversely affect our ability to retain key employees. Properly managing our continued growth, avoiding the
problems often resulting from such growth and expansion and continuing to operate in the manner which has proven successful to us to
date will be critical to the future success of our business.
If we fail to manage our exposure to worldwide financial and securities markets successfully, our operating results and financial
statements could be materially impacted.
We are exposed to financial market risks, including changes in interest rates and prices of marketable equity and fixed-income securities.
The global macroeconomic environment has been challenging and inconsistent due to uncertainty in the global central bank monetary
policy and uncertainty in global credit markets and the geopolitical environment in many areas of the world. The primary objective of
the majority of our investment activities is to preserve principal while at the same time achieving appropriate yields without significantly
increasing risk. To achieve this objective, a majority of our marketable securities are investment grade corporate and municipal fixed-
rate bonds, U.S. government bonds and municipal money market instruments denominated in U.S. dollars. While we do invest a portion
of our investment portfolio in equities, which are subject to market risks, including the loss of principal, our equity investments are
generally invested in professionally-managed portfolios with the objective of exceeding the performance of their underlying
benchmarks.
We have significant investments in corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds,
U.S. government bonds and foreign government bonds. Through December 31, 2022, we have not been required to impair any of these
investments; however, we have and may continue to experience a reduction in value or loss of liquidity in these investments, which may
have an adverse effect on our results of operations, liquidity and financial condition. Fixed-rate interest securities may have their fair
value adversely impacted due to a rise in interest rates, while variable-rate securities may produce less income than expected if interest
rates fall. Our investments are subject to general credit, liquidity, market and interest rate risks, which may increase because of conditions
in the financial markets and related credit liquidity issues. Consequently, our future investment income may fall short of expectations
due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in fair value due to
changes in interest rates.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in
Part II, Item 7 of this report, “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this report and Note
6 of Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for more information about our investments.
We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could
harm our financial results and cash flows.
We are exposed to changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-
exchanges rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial
reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period’s
currency exchange rates and that of the comparable prior period. Our primary exposures to foreign currency exchange rate movements
are the Euro and the British pound sterling. As a result of our global operations, our revenue, gross margins, operating expense and
operating income in some international markets have been and may continue to be affected by foreign currency fluctuations.
We will require a significant amount of cash to service our indebtedness, our potential payment obligations to ADVA shareholders
under the DPLTA, and other obligations.
Our ability to generate cash depends on many factors beyond our control and any failure to service our outstanding indebtedness could
harm our business, financial condition and results of operations. Furthermore, we have entered into a DPLTA with ADVA. Additionally,
pursuant to the terms of the DPLTA, each ADVA shareholder (other than the Company) has received an offer to elect either (1) to
remain an ADVA shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation.
Any failure to satisfy our payment obligations under the DPLTA could harm our business, financial condition and results of operations.
16
S
ee “Risk Factors - The terms of the DPLTA may have a material adverse effect on our financial results and condition" in Part I, Item
1A of this report for additional information.
Our ability to make payments on and to refinance our indebtedness, to cover our payment obligations under the DPLTA, and to fund
working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent,
is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. If
our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient
to enable us and our subsidiaries to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion
of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital,
any of which could have a material adverse effect on us.
In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to
restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time.
Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could
further restrict our business operations. The terms of existing or future debt instruments or preferred stock may limit or prevent us from
taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness
or dividend payments on our outstanding shares of preferred stock would likely result in a reduction of our credit rating, which could
harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable terms or at all. Our inability to
generate sufficient cash flow to satisfy our debt service, payment obligations to ADVA shareholders under the DPLTA, and other
obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect,
which could be material, on our business, financial condition and results of operations.
Furthermore, if we raise additional funds through the issuance of equity or securities convertible into equity, or undertake certain
transactions intended to address our existing indebtedness, our existing stockholders could suffer dilution in their percentage ownership
of the Company, or our leverage and outstanding indebtedness could increase. Current capital market conditions, including the impact
of inflation, have increased borrowing rates and can be expected to significantly increase our cost of capital as compared to prior periods
should we seek additional funding.
We may be unable to successfully and effectively manage and integrate acquisitions, divestitures and other significant transactions,
which could harm our operating results, business and prospects.
As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions,
strategic alliances, joint ventures, divestitures and outsourcing arrangements, and we enter into agreements relating to such transactions
in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates, successfully
complete transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired
companies or employees and the divestiture of combined businesses, operations and employees. Integration, divestiture and other risks
of these transactions can be more pronounced in larger and more complicated transactions, or if multiple transactions are pursued
simultaneously. If we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to
expend resources to develop products and technology internally. This may put us at a competitive disadvantage and we may be adversely
affected by negative market perceptions, any of which may have a material adverse effect on our revenue, gross margin and profitability.
Integration and divestiture issues are complex, time-consuming and expensive and, without proper planning and implementation, could
significantly disrupt our business. The challenges involved in integrating and divesting include:
combining service and product offerings and entering into new markets in which we are not experienced;
convincing customers and distributors that any such transaction will not diminish client service standards or business focus,
preventing customers and distributors from deferring purchasing decisions or switching to other suppliers or service
providers (which could result in additional obligations to address customer uncertainty), and coordinating service, sales,
marketing and distribution efforts;
consolidating and rationalizing corporate information technology infrastructure, which may include multiple legacy systems
from various acquisitions and integrating software code;
minimizing the diversion of management attention from ongoing business concerns;
persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees,
integrating employees into our company, correctly estimating employee benefit costs and implementing restructuring
programs;
coordinating and combining administrative, service, manufacturing, research and development and other operations,
subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while
maintaining adequate standards, controls and procedures;
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our responsibility for the liabilities of the businesses we acquire, some of which we may not anticipate, including costs of
third-party advisors to resolve disputes;
achieving savings from supply chain and administration integration; and
efficiently divesting combined business operations which may cause increased costs as divested businesses are de-integrated
from embedded systems and operations.
We evaluate and enter into these types of transactions on an ongoing basis. We may not fully realize all of the anticipated benefits of
any transaction and the time frame for achieving benefits of a transaction may depend partially upon the actions of employees, suppliers
or other third parties. In addition, the pricing and other terms of our contracts for these transactions require us to make estimates and
assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors
necessary to estimate costs accurately. Any increased or unexpected costs, unanticipated delays or failure to achieve contractual
obligations could make these agreements less profitable or unprofitable.
Managing these types of transactions requires varying levels of management resources, which may divert our attention from other
business operations. These transactions could result in significant costs and expenses and charges to earnings, including those related to
severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative
facilities and contracts, in-process research and development charges, inventory adjustments, assumed litigation, regulatory compliance
and other liabilities, legal, accounting and financial advisory fees and required payments to executive officers and key employees under
retention plans. Moreover, we could incur additional depreciation and amortization expense over the useful lives of certain assets
acquired in connection with these transactions, and, to the extent that the value of goodwill or intangible assets with indefinite lives
acquired in connection with a transaction becomes impaired, we may be required to incur additional material charges relating to the
impairment of those assets. In order to complete an acquisition, we may issue common shares, potentially creating dilution for existing
shareholders, or borrow funds, which could affect our financial condition, results of operations and potentially our credit ratings. Any
prior or future downgrades in our credit rating associated with a transaction could adversely affect our ability to borrow and our
borrowing cost, and result in more restrictive borrowing terms. In addition, our effective tax rate on an ongoing basis is uncertain, and
such transactions could impact our effective tax rate. We also may experience risks relating to the challenges and costs of closing a
transaction and the risk that an announced transaction may not close. As a result, any completed, pending or future transactions may
contribute to financial results that differ materially from the investment community’s expectations.
Risks related to COVID-19
The ongoing COVID-19 pandemic has impacted and may continue to impact our business, results of operations and financial
condition, particularly our supply chain.
The global spread of COVID-19 created significant volatility, uncertainty and economic disruption. Due to the pandemic and a global
semiconductor chip shortage, we experienced disruption and delays in our supply chain and significant price increases with certain of
our manufacturing partners, and those disruptions, delays and price increases may continue. For example, in the second half of 2021
and throughout 2022, our results of operations were negatively impacted by increased expenses resulting from supply chain disruptions.
Current global supply chain and transportation constraints, including delays in supply chain deliveries and the related global semi-
conductor chip shortage, may continue to have a material adverse effect on our operating results and could have a material adverse effect
on customer relations and our financial condition. We believe these supply chain challenges and their adverse impact on our industry
will continue to ease during 2023. However, there can be no assurance that the ongoing disruptions due to COVID-19, the related global
semiconductor chip shortage or other supply chain constraints or price increases will be resolved in the near term, which could continue
to adversely affect our business, financial condition, and results of operations. We will continue to evaluate the nature and extent of the
impact of COVID-19 and supply chain constraints on our business.
Risks related to our control environment
Breaches of our information systems and cyber-attacks could compromise our intellectual property and cause significant damage to
our business and reputation.
We maintain sensitive data on our information systems and the networks of third-party providers, including intellectual property,
financial data and proprietary or confidential business information relating to our business, customers, suppliers, and business partners.
We also produce networking equipment solutions and software used by network operators to ensure security and reliability in their
management and transmission of data. Our customers, particularly those in regulated industries, are increasingly focused on the security
features of our technology solutions. Maintaining the security of information sensitive to us and our business partners is critical to our
business and reputation. We rely upon several internal business processes and information systems to support key operations and
financial functions, and the efficient operation of these processes and systems is critical. Companies are increasingly subjected to cyber-
attacks and other attempts to gain unauthorized access. We have a comprehensive approach to cybersecurity, which includes prevention,
detection, containment, and response. Our layered defense approach encompasses proactive security monitoring of our global
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infrastructure by both internal solutions and multiple third-party Security Operation Centers. Additionally, we routinely perform patch
management, vulnerability scans, penetration tests and continuous monitoring across our entire enterprise. Our security policy
framework includes meaningful and enforceable Information Security policies and procedures. The cybersecurity program is aligned
with our mission and business objectives, reviewed periodically for improvements, and is supported by experienced and certified security
professionals. This is supplemented by an information security awareness program that spans our global workforce. Despite this, our
network and storage applications and those systems and applications maintained by our third-party providers may be targeted by cyber-
attacks or potentially breached due to operator error, fraudulent activity, or other system disruptions. For example, a vulnerability named
“Log4Shell” was reported for the widely used Java logging library, Apache Log4j 2 (“Log4j”), in December of 2021. Although we did
not identify indicators of compromise in response to the Log4j vulnerability, we cannot assure that future vulnerabilities or malware
attacks will not be successful in breaching our system and in turn, have a material impact our business. Unauthorized access or disclosure
of our information could compromise our intellectual property and expose sensitive business information. Our information systems are
designed to appropriate industry standards and resiliently engineered to reduce downtime in the event of power outages, weather or
climate events and cybersecurity issues. These risks, as well as the number and frequency of cybersecurity events globally, may also be
heightened during times of geopolitical tension or instability between countries, including, for example, the ongoing military conflict in
Ukraine with Russia, from which a number of recent cybersecurity events have been alleged to have originated. We carry cybersecurity
insurance policies meant to limit our risk and exposure should one of these cybersecurity issues occur. However, a significant failure of
our systems due to these issues could result in significant remediation costs, disrupt business operations, and divert management
attention, which could result in harm to our business reputation, operating results, financial condition, and cash flows.
As part of our due diligence and integration planning process, the Company’s cybersecurity team has conducted a review of ADVA’s
cybersecurity program. Additionally, prior to integration of facilities, networks, or systems, the Company also engage CrowdStrike, a
global cybersecurity leader to conduct an enterprise-wide compromise assessment to determine if there were any targeted compromises
by nation-state actors of the ADVA information technology landscape. The results from the CrowdStrike Compromise assessment
indicated that there was no indication of compromise of the ADVA information technology environment. As part of the integration plan,
the Company intends to expand its current cybersecurity program to cover all ADVA’s global infrastructure and adopt any mature
cybersecurity practices already in place. A significant failure of our review and integration of ADVA's cybersecurity program could
expose us to penalties for failing to comply with the EU's GDPR requirements as well as result in significant remediation costs and a
disruption to our operations.
We have had to restate our previously issued consolidated financial statements and, as part of that process, have identified a material
weakness in our internal control over financial reporting commencing September 30, 2022 and continuing as of the date hereof. If
we are unable to develop and maintain effective internal control over financial reporting, we may not be able to accurately report
our financial results in a timely manner, which may adversely affect investor confidence in us and may adversely affect our business,
financial condition and results of operations.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reporting and prevent
fraud. We continue to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and
costly, and there is no assurance that these initiatives will ultimately have the intended effects. Any failure to maintain effective internal
control over financial reporting could adversely impact our ability to report our financial position and results from operations on a timely
and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations.
Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock
exchange on which our common stock is listed, the SEC or other regulatory authorities. In either case, there could be an adverse effect
on our business, financial condition and results of operations. Ineffective internal control over financial reporting could also cause
investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
We can provide no assurance that the measures we are taking and plan to take in the future will remediate the material weakness
identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to
implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we
are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent
or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.
We may face litigation and other risks as a result of the restatement as described in the “Explanatory Note” within this Amendment
No. 1 and material weakness in our internal control over financial reporting.
As part of the restatement as described in the “Explanatory Note” within this Amendment No. 1, we identified a material weakness in
our internal control over financial reporting. As a result of such material weakness, the restatement and other matters raised or that may
in the future be raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking
the federal and state securities laws, contractual claims or other claims arising from the restatement and the material weakness in our
internal control over financial reporting and the preparation of our financial statements. As of the date of this report, we have no
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knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the
future. Any such litigation or dispute, whether successful or not, could adversely affect our business, financial condition and results of
operations.
Risks related to the telecommunications industry
We must continue to update and improve our products and develop new products to compete and to keep pace with improvements in
communications technology.
The markets for our products are characterized by rapidly changing technology, evolving industry standards and continuing
improvements in the communications service offerings of service providers. If technologies or standards applicable to our products, or
service provider offerings based on our products, become obsolete or fail to gain widespread commercial acceptance, our existing
products or products under development may become obsolete or unmarketable. Moreover, the introduction of products embodying new
technologies, the emergence of new industry standards, or changes in service provider offerings could adversely affect our ability to sell
our products. For instance, we offer a large number of products that apply primarily to the delivery of high-speed digital communications
over the local loop utilizing copper wire. We compete favorably with our competitors by developing a high-performance line of these
products. We market products that apply to fiber optic transport in the local loop. We expect, however, that use of coaxial cable and
fixed and mobile wireless access in place of local loop access will increase. Also, MSOs are increasing their presence in the local loop.
To meet the requirements of these new delivery systems and to maintain our market position, we expect to continue to develop new
products and/or modify existing products. We expect that the addition of fiber-based products focused on the cable MSO operators,
using EPON and fixed wireless access solutions will better position us to benefit from spending in these adjacent markets.
Our revenue and profitability in the past have, to a significant extent, resulted from our ability to anticipate changes in technology,
industry standards and service provider offerings, and to develop and introduce new and enhanced products. Our continued ability to
adapt will be a significant factor in maintaining or improving our competitive position and our prospects for growth. We cannot assure
that we will be able to respond effectively to changes in technology, industry standards, service provider offerings or new product
announcements by our competitors. We also cannot assure that we will be able to successfully develop and market new products or
product enhancements, or that these products or enhancements will achieve market acceptance. Any failure by us to continue to anticipate
or respond in a cost-effective and timely manner to changes in technology, industry standards, service provider offerings or new product
announcements by our competitors, or any significant delays in product development or introduction, could have a material adverse
effect on our ability to competitively market our products and on our revenue, results of operations, financial condition and cash flows.
Our failure or the failure of our contract manufacturers to comply with applicable environmental regulations could adversely impact
our results of operations.
The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to environmental,
health and safety regulations. Our failure or the failure of our contract manufacturers to comply with any of these applicable requirements
could result in regulatory penalties, legal claims or disruption of production. In addition, our failure or the failure of our contract
manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials
could subject us to increased costs or liabilities. Existing and future environmental regulations may restrict our use of certain materials
to manufacture, assemble and test products. Any of these consequences could adversely impact our results of operations by increasing
our expenses and/or requiring us to alter our manufacturing processes.
If our products do not interoperate with our customers’ networks, installations may be delayed or canceled, which could harm our
business.
Our products must interface with existing networks, each of which may have different specifications, utilize multiple protocol standards
and incorporate products from other vendors. Many of our customers’ networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. Our products may be required to interoperate with many or all of the
products within these networks, as well as future products to meet our customers’ requirements. If we find errors in the existing software
or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these
errors so that our products will interoperate with the existing software and hardware. Implementation of product corrections involving
interoperability issues could increase our costs and adversely affect our results of operations. Such issues may affect our ability to obtain
product acceptance from other customers.
We engage in research and development activities to develop new, innovative solutions and to improve the application of developed
technologies, and as a consequence may miss certain market opportunities enjoyed by larger companies with substantially greater
research and development efforts and which may focus on more leading edge development.
A portion of our research and development activities are focused on the continued innovation of currently accepted access and edge
transmission technologies in order to deliver faster internet speeds, more capacity, better quality of service and operational efficiency.
These research and development efforts result in improved applications of technologies for which demand already exists or is latent.
We also focus our research and development efforts on developing software, solutions and platforms that enable service providers to
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increase revenue-generating service velocity, reducing operational costs, increasing scale and providing service agility. We rarely engage
in research projects that represent a vast departure from the current business practices of our key customers. While we believe our
strategy provides a higher likelihood of producing nearer term or more sustainable revenue streams, this strategy could result in lost
revenue opportunities and higher operating expenses should a new technology achieve rapid and widespread market acceptance. When
we do engage in research and development activities for new, leading-edge technologies and market approaches, there is no guarantee
that those technologies or market approaches will be successful or that they will be adopted and purchased by our customers.
Our strategy of outsourcing a portion of our manufacturing requirements to subcontractors located in various international regions
may result in us not meeting our cost, quality or performance standards.
We are heavily dependent on subcontractors for the assembly and testing of certain printed circuit board assemblies, subassemblies,
chassis, enclosures and equipment shelves, and the purchase of some raw materials used in such assemblies. This reliance involves
several risks, including the unavailability of, or interruptions in, access to certain process technologies and reduced control over product
quality, delivery schedules, transportation, manufacturing yields and costs. We may not be able to provide product order volumes to our
subcontractors that are high enough to achieve sufficient cost savings. If shipments fall below forecasted levels, we may incur increased
costs or be required to take ownership of excess inventory. Changes in international tariff structures could adversely impact our product
costs. We also have experienced and expect to continue to experience increased inflationary pressures on input costs, such as, raw
materials, labor and distribution costs. Our attempts to offset these cost pressures, such as through increases in the selling prices of some
of our products and services, may not be successful and could negatively affect our operating results. In addition, a significant component
of maintaining cost competitiveness is the ability of our subcontractors to adjust their costs to compensate for possible adverse exchange
rate movements. To the extent that the subcontractors are unable to do so, and we are unable to procure alternative product supplies,
then our competitiveness and results of operations could be adversely impaired. These risks may be exacerbated by economic, regulatory
or political changes or uncertainties, terrorist actions, acts of war, the effects of climate change, natural disasters or pandemics in the
foreign countries in which our subcontractors are located.
To date, we believe that we have successfully managed the risks of our dependence on these subcontractors through a variety of efforts,
which include seeking and developing alternative subcontractors while maintaining existing relationships; however, we cannot be
assured that delays in product deliveries will not occur in the future because of shortages resulting from this limited number of
subcontractors or from the financial or other difficulties of these parties. Our inability to develop alternative subcontractors if and as
required in the future, or the need to undertake required retraining and other activities related to establishing and developing a new
subcontractor relationship, could result in delays or reductions in product shipments which, in turn, could have a negative effect on our
customer relationships and operating results.
Our failure to maintain rights to intellectual property used in our business could adversely affect the development, functionality and
commercial value of our products.
Our future success depends in part upon our proprietary technology. Although we attempt to protect our proprietary technology by
contract, trademark, copyright and patent registration and internal security, including trade secret protection, these protections may not
be adequate. Furthermore, our competitors can develop similar technology independently without violating our proprietary rights. From
time to time, we receive and may continue to receive notices of claims alleging that we are infringing upon patents or other intellectual
property. Any of these claims, whether with or without merit, could result in significant legal fees, divert our management’s time,
attention and resources, delay our product shipments or require us to enter into royalty or licensing agreements. We cannot predict
whether we will prevail in any claims or litigation over alleged infringements, or whether we will be able to license any valid and
infringed patents, or other intellectual property, on commercially reasonable terms. If a claim of intellectual property infringement
against us is successful and we fail to obtain a license or develop or license non-infringing technology, our business, operating results,
financial condition and cash flows could be affected adversely.
Software under license from third parties for use in certain of our products may not continue to be available to us on commercially
reasonable terms.
We integrate third-party software into certain of our products. Licenses for this technology may not be available or continue to be
available to us on commercially reasonable terms. Difficulties with third-party technology licensors could result in the termination of
such licenses, which may result in increased costs or require us to purchase or develop a substitute technology. Difficulty obtaining and
maintaining third-party technology licenses may disrupt the development of our products and increase our costs, which could harm our
business.
Our use of open source software could impose limitations on our ability to commercialize our products.
Several of our solutions utilize elements of open source or publicly available software. Although we closely monitor our use of open
source software, the terms of many open source software licenses have not been interpreted by the courts, and there is a risk that such
licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In
such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost,
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to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of
our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our
revenue and operating expenses.
We may incur liabilities or become subject to litigation that would have a material effect on our business.
In the ordinary course of business, we accept purchase orders, and enter into sales and other related contracts, for the marketing, sale,
manufacture, distribution or use of our products and services. We may incur liabilities relating to our performance under such
agreements, or which result from damage claims arising from certain events as outlined within the particular contract. While we attempt
to include reasonable limitations of liability and other protective measures to all agreements, such agreements may not always contain,
or be subject to, maximum loss clauses and liabilities arising from them may result in significant adverse changes to our results of
operations, financial condition and cash flows.
In the ordinary course of business, we are subject to various legal proceedings and claims, including employment disputes, patent claims,
disputes over contract agreements and other commercial disputes. In some cases, claimants seek monetary recovery, or other relief,
including damages such as royalty payments related to patents, lost profits or injunctive relief, which, if granted, could require significant
expenditures. Any such disputes may be resolved before trial, or if tried, may be resolved in our favor; however, the cost of claims
sustained in litigation, and costs associated with the litigation process, may not be covered by our insurance. Such costs, and the demands
on management time during such an event, could harm our business, reputation and have a material adverse effect on our liquidity,
results of operations, financial condition and cash flows.
If we are unable to successfully develop and maintain relationships with SIs, service providers and enterprise VARs, our revenue
may be negatively affected.
As part of our sales strategy, we are targeting SIs, service providers and enterprise VARs. In addition to specialized technical expertise,
SIs, service providers and VARs typically offer sophisticated service capabilities that are frequently desired by enterprise customers. To
expand our distribution channel to include resellers with such capabilities, we must be able to provide effective support to these resellers.
If our sales, marketing or service capabilities are not sufficient to provide effective support to such SIs, service providers and VARs,
our revenue may be negatively affected, and current SI, service provider and VAR partners may terminate their relationships with us,
which would adversely impact our revenue and overall results of operations.
Risks related to the Company’s stock price
Our operating results may fluctuate in future periods, which may adversely affect our stock price
.
Our operating results have been, and will continue to be, subject to quarterly and annual fluctuations as a result of numerous factors.
These factors include, but are not limited to:
fluctuations in demand for our products and services, especially with respect to significant network expansion projects
undertaken by service providers;
continued growth of communications network traffic and the adoption of communication services and applications by
enterprise and consumer end users;
changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and
associated revenue, especially should a slowdown in communications industry spending occur due to economic downturns,
tight capital markets, or declining liquidity trends;
reductions in demand for our traditional products as new technologies gain acceptance;
our ability, and that of our distributors, to maintain appropriate inventory levels and related purchase commitments;
price and product competition in the communications and networking industries, which can change rapidly due to
technological innovation;
the overall movement toward industry consolidation among both our competitors and our customers;
our dependence on sales of our products by channel partners, the timing of their replenishment orders, the potential for
conflicts and competition involving our channel partners and large end-user customers and the potential for consolidation
among our channel partners;
variations in sales channels, product cost or mix of products and services sold;
delays in receiving acceptance, as defined under contract, from certain customers for shipments or services performed near
the end of a reporting period;
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our ability to maintain high levels of product support and professional services;
manufacturing and customer order lead times, and potential restrictions in the supply of key components;
fluctuations in our gross margin and the factors that contribute to this (as described above);
our ability to achieve cost reductions;
the ability of our customers, channel partners and suppliers to obtain financing or to fund capital expenditures;
our ability to execute on our strategy and operating plans;
benefits anticipated from our investments in engineering, sales and marketing activities;
the effects of climate change and other natural events;
the effect of political or economic conditions, including the effect of tariffs or so-called “trade wars” on us and our supply
chain, acts of war, terrorist attacks or other unrest in certain international markets;
the effect of escalating tensions along the Russia-Ukraine border. The U.S. and certain other countries imposed sanctions
on Russia and could impose further sanctions against it, which could damage or disrupt international commerce and the
global economy; and
changes in tax laws and regulations or accounting pronouncements.
As a result, operating results for a particular future period are difficult to predict, and prior results are not necessarily indicative of results
to be expected in future periods. Any of the above-mentioned factors, or other factors discussed elsewhere in this report, could have a
material adverse effect on our business, results of operations, financial condition and cash flows that could adversely affect our stock
price.
The price of our common stock has been volatile and may continue to fluctuate significantly.
Our common stock is traded on the NASDAQ Global Select Market under the symbol ADTN. Since our initial public offering in August
1994, there has been, and may continue to be, significant volatility in the market for our common stock, based on a variety of factors,
including factors listed in this section, some of which are beyond our control.
Risks related to the regulatory environments in which we do business
We are subject to complex and evolving U.S. and foreign laws, regulations and standards governing the conduct of our business.
Violations of these laws and regulations may harm our business, subject us to penalties and to other adverse consequences.
We are subject to laws and regulations that govern conduct by our Company, our employees and agents and the manufacture, sale and
use of our products. Our inability to comply with current and evolving laws and regulations governing our business domestically and
internationally may adversely affect our revenue, results of operations, financial conditions and cash flows. New and changing laws,
regulations and industry practices could require us to modify our business, products or services offered, potentially in a material manner,
and may limit our ability to develop new products, services and features. If we violate these laws and regulations, governmental
authorities in the U.S. and in foreign jurisdictions could seek to impose civil and/or criminal fines and penalties which could have an
adverse effect on our reputation, as well as our results of operations, financial condition and cash flows.
These laws and regulations include, but are not limited to:
various regulations and regional standards established by communications authorities and import/export control authorities
that govern the manufacture, sale and use of our products. Changes in domestic or international communications regulations,
tariffs, potential changes in trade policies by the U.S. and other nations, application requirements, import/export controls or
expansion of regulation to new areas, including access, communications or commerce over the internet, may affect customer
demand for our products or slow the adoption of new technologies which may affect our revenue. Further, the cost of
complying with the evolving standards and regulations, including the cost of product re-design if necessary, or the failure
to obtain timely domestic or foreign regulatory approvals or certification such that we may not be able to sell our products
where these standards or regulations apply, may adversely affect our revenue, results of operations, financial condition and
cash flows.
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compliance with a wide variety of provincial, state, national and international laws and regulations applicable to the
collection, use, retention, protection, disclosure, transfer and other processing of data, including personal data. Foreign data
protection, privacy and other laws and regulations, including GDPR, are often more restrictive than those in the U.S. These
data protection and privacy-related laws and regulations are varied, evolving, can be subject to significant change, may be
augmented or replaced by new or additional laws and regulations and may result in ever-increasing regulatory and public
scrutiny and escalating levels of enforcement and sanctions. For example, numerous states have adopted within the past
three years or are in the process of adopting various privacy-related laws and regulations. In addition, on July 16, 2020, the
Court of Justice of the European Union issued a decision that invalidated the EU-U.S. Privacy Shield framework as a basis
for transfers of personal data from the EU to the U.S., resulting in uncertainty and potential additional compliance
obligations to ensure that a valid basis under the GDPR exists for these data transfers. The European Commission published
revised standard contractual clauses for data transfers from the European Economic Area in 2021, which were required to
go into effect by December 2022. Finally, the U.K. has enacted a version of the GDPR the implementation of which occurred
by way of the Data Protection Act 2018, collectively referred to as the U.K. GDPR. Uncertainty remains, however, regarding
how aspects of data protection in the U.K. will be handled in the medium to long term. There is also a risk that we, directly
or as the result of a third-party service provider we use, could be found to have failed to comply with the laws and regulations
applicable in a jurisdiction regarding the collection, consent, handling, transfer or disposal of personal data.
the FCPA, which prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for
the purpose of directing, obtaining or keeping business, and requires companies to maintain reasonable books and records
and a system of internal accounting controls. The FCPA applies to companies, individual directors, officers, employees and
agents. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local
partners or other representatives. Because a significant portion of our total revenue is generated from revenue outside of the
U.S., we have proactively implemented internally and externally focused measures and controls to address this risk. We
help ensure that our employees understand the key requirements of FCPA compliance and the consequences of non-
compliance through training courses and detective controls. ADTRAN senior management and employees whose
responsibilities include international activities are required to complete an online training program and pass an exam every
two years. We have put processes in place to help detect non-compliance through providing our employees access to a
worldwide reporting “hotline,” available by phone and online, that is maintained by a third-party provider. Finally, we
perform annual reviews of our employees’ expense reports and corporate credit card activity to identify possible corruption
concerns. We have also implemented controls to help ensure our third-party partners and customers observe FCPA
requirements. Prior to selling to new international distributors, resellers or agents, we review third-party data and check
them against over 200 denied party lists from government institutions worldwide for potential FCPA concerns. We also
require international distributors, resellers and agents to complete an Anti-Corruption Due Diligence Questionnaire, which
is reviewed and assessed by a cross-functional compliance committee and our export-compliance function.
environmental, health and safety regulation governing the manufacture, assembly and testing of our products, including
without limitation regulations governing the use of hazardous materials. Our failure or the failure of our contract
manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous
materials could subject us to increased costs or liabilities. Existing and future environmental regulations may restrict our
use of certain materials to manufacture, assemble and test products.
requirements by the SEC governing the disclosure regarding the use of conflict minerals mined from the Democratic
Republic of the Congo and adjoining countries (the “DRC”) and disclosure with respect to procedures regarding a
manufacturer’s efforts to prevent the sourcing of such minerals from the DRC. Certain of these minerals are present in our
products. SEC rules implementing these requirements may have the effect of reducing the pool of suppliers that can supply
“conflict free” components and parts, and we may not be able to obtain conflict free products or supplies in sufficient
quantities for our operations. Because our supply chain is complex, we may face reputational challenges with our customers,
stockholders and other stakeholders if we are unable to verify sufficiently the origins for the conflict minerals used in our
products and cannot assert that our products are “conflict free.” Environmental or similar social initiatives may also make
it difficult to obtain supply of compliant components or may require us to write off non-compliant inventory, which could
have an adverse effect on our business and operating results.
the insider trading prohibitions and the respective directors' dealing rules under the German Securities Trading Act
(
Wertpapierhandelsgesetz
) and Regulation (EU) No. 596/2014 of the European Parliament and of the Council of April 16,
2014, and other applicable regulations.
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Changes in trade policy in the U.S. and other countries, specifically the U.K. and China, including the imposition of additional tariffs
and the resulting consequences, may adversely impact our gross profits, gross margins, results of operations and financial condition.
In recent years, international market conditions and the international regulatory environment have been increasingly affected by
competition among countries and geopolitical frictions. In particular, there have been a number of significant geopolitical events,
including trade tensions and regulatory actions, involving the governments of the U.S. and China. The U.S. government has raised
tariffs, and imposed new tariffs, on a wide range of imports of Chinese products, including component elements of our solutions and
certain finished goods products that we sell. U.S. tariff policy involving imports from China are slated for a broad review in 2023. The
U.S. government has also introduced broad new restrictions on imports from China allegedly manufactured with forced labor, and the
EU has debated similar restrictions. China has retaliated by raising tariffs, and imposing new tariffs, on certain exports of U.S. goods to
China, as well as introducing blocking measures to restrict the ability of domestic companies to comply with U.S. trade restrictions. For
instance, over the course of 2020, the U.S. introduced significant further restrictions limiting access to controlled U.S. technology to
additional Chinese government and commercial entities. More recently, in October 2022, the U.S. Department of Commerce imposed
additional export control restrictions targeting the provision of, inter alia, certain semiconductors and related technology to China that
could further disrupt supply chains that could adversely impact our business. In addition, the U.S. Federal Communications Commission
(the “FCC”) in November 2022 prohibited communications equipment deemed to pose an unacceptable risk to national security from
obtaining the equipment authorization that allows the products to be imported, marketed, or sold in the U.S. This prohibition currently
includes telecommunications equipment produced by Huawei and its affiliates and subsidiaries and four other Chinese companies, and
additional entities may be subsequently added to this list. The situation involving U.S.-China trade relations remains volatile and
uncertain and there can be no assurance that further actions by either country will not have an adverse impact on our business, operations
and access to technology, or components thereof, sourced from China.
The past few years have been challenging for the credit markets due to a shift from a time of quantitative easing to a time of quantitative
tightening by central banks around the world. If global economic and market conditions, or economic conditions in key markets, remain
uncertain or further deteriorate, we may experience material impacts on our business and operating results. We may also be adversely
affected in ways that we do not currently anticipate.
New or revised tax regulations, changes in our effective tax rate, recognition of a valuation allowance or assessments arising from
tax audits may have an adverse impact on our results.
We are subject to taxation in various jurisdictions, both domestically and internationally, in which we conduct business. Significant
judgment is required in the determination of our provision for income taxes, and this determination requires the interpretation and
application of complex and sometimes uncertain tax laws and regulations. Our effective tax rate may be adversely impacted by changes
in the mix of earnings between jurisdictions with different statutory tax rates, in the valuation of our deferred tax assets, and by changes
in tax rules and regulations. We continually monitor our deferred tax assets and when it becomes more likely than not that a tax benefit
will not be recognized, a valuation allowance is recorded against those assets. In addition, we are subject to examination of our income
tax returns by the Internal Revenue Service and various other tax authorities in the jurisdictions in which we conduct business. We
regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for
income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our
results of operations, financial condition and cash flow. Additionally, we continually review the adequacy of the valuation allowance
and recognize the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax
assets will be recognized. As such, we may release a portion of the valuation allowance or establish a new valuation allowance based
on operations in the jurisdictions in which these assets arose. Management continues to evaluate all evidence including historical
operating results, the existence of losses in the most recent year, forecasted earnings, future taxable income and tax planning strategies.
Should management determine that a valuation allowance is needed in the future due to not being able to absorb deferred tax assets, it
would have a material impact on our consolidated financial statements.
25
In August 2022, the Inflation Reduction Act was signed into law, which made a number of changes to the Internal Revenue Code,
including adding a 1% excise tax on stock buybacks by publicly traded corporations and a 15% corporate minimum tax on adjusted
financial statement income of certain large companies. The impact of these provisions on our effective tax rate will also depend on
additional guidance to be issued by the Secretary of the U.S. Department of the Treasury. We are currently evaluating the impact of
these provisions on our effective tax rate. Further, the Tax Act amended the Internal Revenue Code to require that specific research and
experimental (“R&E”) expenditures be capitalized and amortized over five years (U.S. R&E) or fifteen years (non-U.S. R&E) beginning
in the Company’s fiscal 2023. Although the U.S. Congress has considered legislation that would defer, modify, or repeal the
capitalization and amortization requirement, there is no assurance that the provision will be deferred, repealed, or otherwise modified.
If the requirement is not repealed or otherwise modified, it may increase our effective tax rate. Additionally, the Organization for
Economic Co-operation and Development (the “OECD”), an international association comprised of 38 countries, including the U.S.,
has issued proposals that change long-standing tax principles including on a global minimum tax initiative. On December 12, 2022 the
EU member states agreed to implement the OECD’s Pillar 2 global corporate minimum tax rate of 15% on companies with revenues of
at least EUR 750 million, which would go into effect in 2024. Other countries including the U.K., Switzerland, Canada, Australia and
South Korea are also actively considering changes to their tax laws to adopt certain parts of the OECD’s proposals.
Central Banks' monetary policy actions could increase our costs of borrowing money and negatively impact our financial condition
and future operations.
Market interest rates are rising and are expected to continue to rise across the yield curve. Depending on future inflation levels, the rise
of nominal interest rates may produce a rise in real interest rates. Higher interest rates resulting from tightening monetary policy are
expected to increase credit costs and decrease credit availability. Increases in interest rates could increase our costs of borrowing money
under certain of our debt facilities with variable interest rates, which would negatively impact our financial condition and future
operations.
Rising
inflation could negatively impact our revenues and profitability if increases in the prices of our products and services or a
decrease in customer spending result in lower sales.
Recent significant increases in inflation may result in decreased demand for our products and services, increased manufacturing and
operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt and
equity capital. In an inflationary environment, because certain of our customer contracts provide for fixed pricing and/or due to our
competitor’s pricing strategies, we may be unable to raise the sales prices of our products and services at or above the rate at which our
costs increase, which would reduce our profit and operating margins and could have a material adverse effect on our financial results.
We also may experience lower than expected sales and potential adverse impacts on our competitive position if there is a decrease in
customer spending or a negative reaction to any price increases we are able to implement. A reduction in our revenue would be
detrimental to our profitability and financial condition and could also have an adverse impact on our future growth.
Expectations relating to environmental, social and governance considerations expose the Company to potential liabilities, increased
costs, reputational harm, and other adverse effects on the Company’s business.
Many governments, regulators, investors, employees, customers and other stakeholders are increasingly focused on environmental,
social and governance considerations relating to businesses, including climate change and greenhouse gas emissions, human and civil
rights, and diversity, equity and inclusion. In addition, we may make statements about our environmental, social and governance goals
and initiatives through our website, press statements and other communications. Responding to these environmental, social and
governance considerations and implementation of these goals and initiatives involves risks and uncertainties, requires investments, and
depends in part on third-party performance or data that is outside of our control. Any failure, or perceived failure, by us to achieve our
targets, further our initiatives, adhere to our public statements, comply with federal, state or international environmental, social and
governance laws and regulations, or meet evolving and varied stakeholder expectations and standards could result in legal and regulatory
proceedings against us and materially adversely affect our business, reputation, results of operations, financial condition and stock price.
26
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes included
in Part II, Item 8 of this report. We have omitted discussion of the earliest of the three years of financial condition and results of
operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and
Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February
25, 2022, which is available free of charge on the SEC's website at
http://www.sec.gov
and on our website at www.adtran.com.
This discussion is designed to provide the reader with information that will assist in understanding our consolidated financial
statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted
for those changes, as well as how certain accounting principles affect our consolidated financial statements. See “Cautionary Note
Regarding Forward-Looking Statements” on page 4 of this Amendment No. 1 for a description of important factors that could cause
actual results to differ from expected results. See also Part I, Item 1A, Risk Factors, of Amendment No. 1.
Unless the context otherwise indicates or requires, references in this Amendment No. 1 to “ADTRAN,” the “Company,” “we,” “us”
and “our” refer to ADTRAN, Inc. and its consolidated subsidiaries prior to the merger of Acorn MergeCo, Inc., a subsidiary of ADTRAN
Holdings, Inc., with and into ADTRAN, Inc., on July 8, 2022, after which ADTRAN, Inc. became a wholly-owned direct subsidiary of
ADTRAN Holdings, Inc. (the “Merger”), and to ADTRAN Holdings, Inc. and its consolidated subsidiaries following the Merger.
The
prior period results do not include the results of ADVA Optical Networking SE (“ADVA”) prior to the closing of the business
combination with us on July 15, 2022 (the "Business Combination").
Overview
The Company is a leading global provider of networking and communications platforms, software, systems and services focused on the
broadband access market, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and
-3 service providers, alternative service providers, such as utilities, municipalities and fiber overbuilders, cable/MSOs, SMBs and
distributed enterprises. Our innovative solutions and services enable voice, data, video and internet-communications across a variety of
network infrastructures and are currently in use by millions worldwide. We support our customers through our direct global sales
organization and our distribution networks. Our success depends upon our ability to increase unit volume and market share through the
introduction of new products and succeeding generations of products having optimal selling prices and increased functionality as
compared to both the prior generation of a product and to the products of competitors in order to gain market share. To service our
customers and grow revenue, we are continually conducting research and developing new products addressing customer needs and
testing those products for the specific requirements of the particular customers. We offer a broad portfolio of flexible software and
hardware network solutions and services that enable service providers to meet today’s service demands, while enabling them to transition
to the fully converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. In addition to
our global headquarters in Huntsville, Alabama, and our European headquarters in Munich, Germany, we have sales, administrative and
research and development facilities in strategic global locations.
ADTRAN Holdings, Inc. solely owns ADTRAN, Inc. and is the majority shareholder of ADVA Optical Networking SE ("ADVA").
ADTRAN is a leading global provider of open, disaggregated networking and communications solutions. ADVA is a global provider
of network solutions for data, storage, voice and video services. The combined technology portfolio can best address current and future
requirements, especially regarding the convergence of solutions at the network edge.
In addition to the Company's reportable segments, revenue is also reported for the following three categories – Subscriber Solutions,
Access & Aggregation Solutions, and Optical Networking Solutions.
Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories: (1)
Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products. Following the Business
Combination with ADVA, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined
with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions
& Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions and the revenue
from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.
Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.
Our Subscriber Solutions portfolio is used by service providers to terminate their access services infrastructure at the customer premises
while providing an immersive and interactive experience for residential, business and wholesale subscribers. This revenue category
includes hardware- and software-based products and services. These solutions include fiber termination solutions for residential,
business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network
edge virtualization solutions for business subscribers and cloud software solutions covering a mix of subscriber types.
27
Our Access & Aggregation Solutions are solutions that are used by communications service providers to connect residential subscribers,
business subscribers and mobile radio networks to the service providers’ metro network, primarily through fiber-based connectivity.
This revenue category includes hardware- and software-based products and services. Our solutions within this category are a mix of
fiber access and aggregation platforms, precision network synchronization and timing solutions and access orchestration solutions that
ensure highly reliable and efficient network performance.
Our Optical Networking Solutions are used by communications service providers, internet content providers and large-scale enterprises
to securely interconnect metro and regional networks over fiber. This revenue category includes hardware- and software-based products
and services. Our solutions within this category include open optical terminals, open line systems, optical subsystems and modules,
network infrastructure assurance systems and automation platforms that are used to build high-scale, secure and assured optical
networks.
ADVA Domination and Profit and Loss Transfer Agreement
The DPLTA between the Company, as the controlling company, and ADVA Optical Networking SE, as the controlled company, which
was executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register
(
Handelsregister
) of the local court (
Amtsgericht
) at the registered seat of ADVA (Jena).
Under the DPLTA, subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, (i) the Company is
entitled to issue binding instructions to the management board of ADVA, (ii) ADVA will transfer its annual profit to the Company,
subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net
loss incurred by ADVA. The obligation of ADVA to transfer its annual profit to the Company applies for the first time to the profit, if
any, generated in the ADVA fiscal year 2023. The obligation of the Company to absorb ADVA’s annual net loss applies for the first
time to the loss, if any, generated in the ADVA fiscal year 2023.
Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides
that ADVA shareholders (other than us) be offered, at their election, (i) to put their ADVA shares to the Company in exchange for a
compensation in cash of EUR 17.21 per share (the “Exit Compensation”), or (ii) to remain ADVA shareholders and receive a recurring
compensation in cash of EUR 0.59 (EUR 0.52 net under the current tax regime) per share for each full fiscal year of ADVA (the “Annual
Recurring Compensation”). The Annual Recurring Compensation is due on the third banking day following the ordinary general
shareholders’ meeting of ADVA for the respective preceding fiscal year (but in any event within eight months following expiration of
the fiscal year) and is first granted for the 2023 fiscal year, payable for the first time after the ordinary general shareholders’ meeting of
ADVA in 2024. The adequacy of both forms of compensation have been challenged by minority shareholders of ADVA via court-led
appraisal proceedings under German law,
and it is possible that the courts in such appraisal proceedings may adjudicate a higher Exit
Compensation or Annual Recurring Compensation (in each case, including interest thereon) than agreed upon in the DPLTA.
The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation had been scheduled to
expire on March 16, 2023. However, due to the appraisal proceedings that have been initiated in accordance with applicable German
law, this time period for tendering shares has been extended pursuant to the German Stock Corporation Act (
Aktiengesetz
) and will end
two months after the date on which a final decision in such appraisal proceedings has been published in the Federal Gazette
(
Bundesanzeiger
).
We currently hold 33,961,170 no-par value bearer shares of ADVA, representing 65.30% of ADVA’s outstanding shares as of February
14, 2023.
The foregoing description of the DPLTA does not purport to be complete and is qualified in its entirety by reference to the DPLTA, a
non-binding English translation of which is incorporated by reference to Exhibit 10.5 of this Amendment No. 1.
During the year ended December 31, 2022, we recognized $14.2 million of transaction costs relating to the Business Combination. We
expect to incur integration costs and costs associated with the implementation of the DPLTA during 2023 and such costs are expected
to be material.
Multi-Year Integration Program
During the fourth quarter of 2022, the Company initiated a multi-year integration program designed to optimize the assets, business
processes, and information technology systems of the Company.
The program has identified several potential cost synergies, including:
realizing operational scale;
combined sales channels;
streamlining corporate and general and administrative functions; and
combined sourcing and production costs.
28
We have and will continue to invest significant dollars to restructure the workforce, optimize legacy systems, streamline legal entities
and consolidate real estate holdings. By executing these integration activities, we expect to deliver greater innovation for customers,
career enrichment opportunities for employees, and enhanced value for shareholders.
See Note 23 of the Notes to Consolidated Financial
Statements, included in Part II, Item 8 of this Amendment No. 1 for additional information.
Financial Performance and Trends
We ended 2022 with a year-over-year revenue increase of 82.2% as compared to the year ended December 31, 2021, driven by increased
volume of sales activity due to the Business Combination with ADVA and to service provider customers. During 2022, we had one 10%
revenue customer which was a domestic service provider customer and our five largest customers comprised 38.3% of our revenue. Our
year-over-year domestic revenue increased by 38.1%, driven by increased sales volume due to the Business Combination with ADVA
and an increased sales volume of residential gateways and optical network terminals in our Network Solutions segment. Internationally,
our revenue increased by 169.7% compared to the prior year period, primarily driven by increased volume of sales activity due to the
Business Combination with ADVA and increased shipments to a Tier-1 network operator in Europe. We experienced strong demand
for our solutions during 2022 and achieved significant year-over-year bookings growth. Bookings are defined as orders received for a
product or service during a fiscal period that will be delivered or performed sometime in the future and is a forward looking metric that
we utilize to help us understand future revenue growth for the Company. Bookings are generally subject to modification and or
cancellation per the terms of the order. Our increase in demand comes from service providers planning to deploy our fiber access
platforms, in-home service delivery platforms and SaaS applications. We expect this growth to accelerate. During 2021 and 2022, we
secured several Tier-1 next-generation fiber customers, and previously announced Tier-1 fiber customers significantly increased their
bookings for our fiber access platforms. Although we expect our revenue growth and profitability in the near-term to continue to be
negatively impacted by supply chain issues, our outlook continues to strengthen given the increased demand for our products and our
expectation of an improving supply chain over the longer term.
A substantial portion of our shipments of inventory in any fiscal period relate to orders received and shipped within that fiscal period
for customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require
delivery within a few days. However, with the current global supply chain and transportation constraints, and limited availability of
semiconductor chips and other components of our products, we have experienced and may continue to experience extended lead times,
increased logistics intervals and costs, and lower volume of products deliveries, which have had and may continue to have a material
adverse effect on our operating results and could have a material adverse effect on our customer relations and our financial condition.
The
extent of the impact of the novel coronavirus (“COVID-19”) pandemic on our business remains uncertain and difficult to predict
because of the dynamic and evolving nature of the situation. Despite the widespread availability of COVID-19 vaccines and related
treatments, the global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect
the effects of public health restrictions in various ways. The economic recovery following the impact of the COVID-19 pandemic is
only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with
uncertainty regarding its ultimate length and trajectory. The COVID-19 pandemic and related countermeasures have previously impacted
our operations. During 2022, notwithstanding improvement in many markets in which we operate due to a return to more normalized
business operations, certain markets continued to be adversely impacted by COVID-19 or as a result of policies relating to COVID-19.
Additionally, due to the pandemic and a global semiconductor chip shortage, we experienced disruption and delays in our supply chain
and significant price increases with certain of our manufacturing partners, and those disruptions, delays and price increases may continue.
For example, in the second half of 2021 and throughout 2022, our results of operations were negatively impacted by increased expenses
resulting from supply chain disruptions. With the current global supply chain and transportation constraints, including delays in supply
chain deliveries and the related global semi-conductor chip shortage may continue to have a material adverse effect on our operating
results and could have a material adverse effect on customer relations and our financial condition. We believe these supply chain
challenges and their adverse impact on our industry will continue to ease during 2023. However, there can be no assurance that the
ongoing disruptions due to COVID-19, the related global semiconductor chip shortage or other supply chain constraints or price
increases will be resolved in the near term, which could continue to adversely affect our business, financial condition, and results of
operations. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business.
29
Our operating results have fluctuated, and may continue to fluctuate, on a quarterly basis due to several factors, including customer
order activity, supply chain constraints, component availability, the Company's consolidation, purchase accounting, and integration with
ADVA. A substantial portion of our shipments in any fiscal period relates to orders received and shipped within that fiscal period for
customers under agreements containing non-binding purchase commitments. Further, a significant percentage of orders require delivery
within a few days requiring us to maintain higher inventory levels. These factors may result in limited order flow visibility. However,
with the current global supply chain and transportation constraints, and limited availability of semiconductor chips and other components
of our products, we have experienced and may continue to experience extended lead times, increased logistics intervals and costs, and
lower volume of products deliveries, which have had and may continue to have a material adverse effect on our operating results and
could have a material adverse effect on customer relations and our financial condition. We believe these supply chain challenges and
their adverse impact on our industry will continue at least through fiscal 2023 and expect that the extended lead times and elevated
supply chain costs experienced by our industry will persist for the reasonably foreseeable future. It is unclear when the supply
environment will become less volatile and what impacts the supply environment will have on the industry in future periods. Operating
expenses are relatively fixed in the short term; therefore, a shortfall in quarterly revenues could significantly impact our financial results
in a given quarter.
Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market
conditions, specifically the decline that initially resulted from the COVID-19 pandemic and that may recur and foreign currency
exchange rate movements, inflation, regional conflicts, increased competition, customer order patterns, changes in product and services
mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs, tariffs and
announcements of new products by us or our competitors. Specifically, we expect inflationary pressures on input costs, such as raw
materials and labor, and distribution costs to increase. We continue to support our customer demand for our products by working with
our suppliers, contract manufacturers, distributors, and customers to address and to limit the disruption to our operations and order
fulfillment. Our attempts to offset these cost pressures, such as through increases in the selling prices of some of our products and
services, may not be successful and could negatively affect our operating results. Additionally, maintaining sufficient inventory levels
to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the
obsolescence of this inventory may have an adverse effect on our business and operating results. Also, not maintaining sufficient
inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements,
which may negatively impact our operating results.
We are exposed to changes in foreign currencies relative to the U.S. dollar, which are references to the differences between the foreign-
exchanges rates we use to convert the financial results of our international operations from local currencies into U.S. dollars for financial
reporting purposes. This impact of foreign-exchange rate changes is calculated based on the difference between the current period’s
currency exchange rates and that of the comparable prior period. Our primary exposures to foreign currency exchange rate movements
are with the Euro and the British pound sterling. As a result of our global operations, our revenue, gross margins, operating expense and
operating income in some international markets have been and may continue to be affected by foreign currency fluctuations.
Our historical financial performance is not necessarily a meaningful indicator of future results, and, in general, management expects
that our financial results may vary from period to period.
For a discussion of risks associated with our operating results, see Part I, Item
1A, Risk Factors of this Amendment No. 1.
30
Results of Operations
The following table presents selected financial information derived from our Consolidated Statements of (Loss) Income expressed as a
percentage of revenue for the years indicated. Amounts may not foot due to rounding.
Year Ended December 31,
2022
2021
2020
Revenue
Network Solutions
89.4
%
88.6
%
86.5
%
Services & Support
10.6
11.4
13.5
Total Revenue
100.0
100.0
100.0
Cost of Revenue
Network Solutions
63.1
54.7
48.2
Services & Support
5.0
6.5
8.8
Total Cost of Revenue
68.1
61.2
57.0
Gross Profit
31.9
38.8
43.0
Selling, general and administrative expenses
20.4
22.1
22.5
Research and development expenses
16.9
19.3
22.4
Asset impairments
1.7
Operating Loss
(7.1
)
(2.6
)
(1.9
)
Interest and dividend income
0.2
0.5
0.4
Interest expense
(0.3
)
Net investment (loss) gain
(1.1
)
0.3
1.0
Other income (expense), net
1.4
0.7
(0.6
)
Loss Before Income Taxes
(6.9
)
(1.1
)
(1.2
)
Income tax benefit (expense)
6.1
(0.4
)
1.7
Net (Loss) Income
(0.9
)%
(1.5
)%
0.5
%
Less: Net Loss attributable to non-controlling interest
(0.7
)
Net (Loss) Income attributable to ADTRAN Holdings, Inc.
(0.2
)%
(1.5
)%
0.5
%
The following discussion and financial information are presented to aid in an understanding of our current consolidated financial
position, changes in financial position, results of operations and cash flows and should be read in conjunction with the audited
consolidated financial statements and notes thereto included herein. The emphasis of the discussion is a comparison of the years ended
December 31, 2022 and December 31, 2021. For a discussion of a comparison of the years ended December 31, 2021 and December
31, 2020, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.
Comparison of Years Ended December 31, 2022 and December 31, 2021
Revenue
Our revenue increased 82.2% from $563.0 million for the year ended December 31, 2021 to $1,026 million for the year ended December
31, 2022. The increase in revenue for the year ended December 31, 2022 is primarily attributable to a $365.9 million increase in volume
of sales activity due to the Business Combination with ADVA and a $96.6 million increase in volume of sales activity related to our
ADTRAN, Inc. operations. The increase in revenue by category for the year ended December 31, 2022 was primarily attributable to a
$261.1 million increase in Optical Networking Solutions products due to the Business Combination with ADVA and a $184.2 million
increase in Subscriber Solutions products. Although our revenue increased, supply of semiconductor chips and other components of our
products has become constrained resulting in extended lead times and increased costs. Transportation constraints, including shortages
for both air and surface freight, as well as labor shortages in the transportation industry, have also affected the timing and the cost of
obtaining raw materials and production supplies. Although our revenue growth and profitability in the near-term may be impacted by
these global supply chain issues, our longer term outlook continues to strengthen given our progress with new customer opportunities
and the increased customer demand.
Network Solutions segment revenue increased 83.8% from $498.8 million in 2021 to $916.8 million in 2022, due primarily to the
increase of $320.3 million in volume of sales activity due to the Business Combination with ADVA and the increase in revenue for
Subscriber Solutions products of $107.0 million, partially offset by a decrease in Access & Aggregation Solutions products of $9.3
million revenue in our ADTRAN, Inc. operations.
31
Services & Support revenue increased by 69.5% from $64.2 million in 2021 to $108.7 million in 2022. The increase in revenue for 2022
was primarily attributable to the increase of $45.6 million in volume of sales activity from the Business Combination with ADVA
partially offset by a $3.1 million decrease in revenue for Access & Aggregation Solutions products in our ADTRAN, Inc. operations.
Domestic revenue increased by 38.1% from $374.6 million in 2021 to $517.4 million in 2022, driven by increased volume of network
termination and fiber CPE in our Network Solutions segment. In addition, such growth was a result of increased revenue to Tier-2 and
Tier-3 customers with diversified business among our fiber access and CPE, service provider CPE and services.
International revenue, which is defined as revenue generated from the Network Solutions and Services & Support segments provided to
a customer outside of the U.S., increased by 169.7% from $188.4 million for the year ended December 31, 2021 to $508.1 million for
the year ended December 31, 2022. International revenue, as a percentage of total revenue, increased from 33.5% for the year ended
December 31, 2021 to 49.5% for the year ended December 31, 2022. The increase in international revenue for 2022 was primarily
attributable to the increase in volume of $263.8 million in sales activity from the Business Combination with ADVA and increased
shipments to a Tier-1 network operator and multiple alternative network operators in Europe. While international revenue has increased
to approximately 49.5% of total revenues for the year ended December 31, 2022, the mix of our Network Solutions and Services &
Support segments as a percentage of total international revenue remains relatively linear. For the year ended December 31, 2022 as
compared to the year ended December 31, 2021, changes in foreign currencies relative to the U.S dollar decreased our net sales by
approximately $41.5 million.
Our ADTRAN, Inc. international revenue is largely focused on broadband infrastructure and is consequently affected by the decisions
of our customers as to timing for installation of new technologies, expansion of their networks and/or network upgrades. Our
international customers must make these decisions in the regulatory and political environment in which they operate – both nationally
and in some instances, regionally – whether of a multi-country region or a more local region within a country. Consequently, while we
expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market
opportunities for us, the factors described above may result in pressure on revenue and operating income. Our ADVA international
revenue is largely focused on the manufacture and selling of networking solutions that are based on three core areas of expertise: fiber-
optic transmission technology (cloud interconnect), cloud access technology for rapid creation of innovative services around the network
edge and solutions for precise timing and synchronization of networks. In addition, ADVA's international operations offers a
comprehensive portfolio of network design, implementation and maintenance services to assist operators in the deployment of market-
leading networks while reducing their cost to maintain these networks.
Cost of Revenue
As a percentage of revenue, cost of revenue increased from 61.2% for the year ended December 31, 2021 to 68.1% for the year ended
December 31, 2022. The increase was primarily attributable to acquisition related expenses, adjustments consisting of intangible
amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a
result of the Business Combination with ADVA, as well as supply chain constraint related expenses and to a lesser extent changes in
customer and product mix and a regional revenue shift in our ADTRAN, Inc. operations. As our current inventory that was acquired in
the Business Combination with ADVA is sold, we expect that our cost of revenue as a percentage of revenue will return to more
normalized levels. For the year ended December 31, 2022, changes in foreign currencies relative to the U.S. dollar decreased our cost
of revenue by approximately $9.6 million.
Network Solutions cost of revenue, as a percentage of that segment’s revenue, increased from 61.7% of revenue in 2021 to 70.6% of
revenue in 2022. The increase in cost of revenue as a percentage of revenue was primarily attributable to acquisition related expenses,
amortizations and adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to
inventory costs that flow through to cost of revenue as a result of the Business Combination with ADVA, as well as supply chain
constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN,
Inc. operations.
Services & Support cost of revenue, as a percentage of that segment’s revenue, decreased from 57.3% of revenue in 2021 to 47.1% of
revenue in 2022. The decrease in cost of revenue as a percentage of revenue was primarily attributable to customer mix and changes in
Services & Support mix as a result of the Business Combination with ADVA.
Services & Support revenue is comprised of network planning and implementation, maintenance, support and cloud-based management
services, with network planning and implementation being the largest and fastest growing component in the long-term. Compared to
our other services, such as maintenance, support and cloud-based management services, our network planning and implementation
services typically utilize a higher percentage of internal and subcontracted engineers, professionals and contractors to perform the work
for customers. The additional costs incurred to perform these infrastructure and labor-intensive services inherently result in lower
average gross margins as compared to maintenance and support services. Within the Services & Support segment, we do expect
variability in gross margins from quarter-to-quarter based on the mix of the services recognized.
32
Gross Profit
As a percentage of revenue, gross profit decreased from 38.8% for the year ended December 31, 2021 to 31.9% for the year ended
December 31, 2022. The decrease was primarily attributable to increases in cost of revenue related to acquisition related expenses,
adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that
flow through to cost of revenue as a result of the Business Combination with ADVA, as well as supply chain constraint related expenses
and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc. operations partially offset
by an increase in volume of sales activity due to the Business Combination with ADVA and an increase in volume of sales activity
related to our ADTRAN, Inc. operations.
As a percentage of that segment's revenue, Network Solutions gross profit decreased from 38.3% for the year ended December 31, 2021
to 29.4% for the year ended December 31, 2022. The decrease was primarily attributable to increases in cost of revenue related to
acquisition related expenses, adjustments consisting of intangible amortization of backlog, developed technology and fair value
adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with ADVA, as well as
supply chain constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our
ADTRAN, Inc. operations partially offset by an increase in volume of sales activity due to the Business Combination with ADVA and
an increase in volume of sales activity related to our ADTRAN, Inc. operations.
As a percentage of that segment's revenue, Services & Support gross profit increased from 42.7% for the year ended December 31, 2021
to 52.9% for the year ended December 31, 2022. The increase was primarily attributable to an increase in volume of sales activity due
to the Business Combination with ADVA, an increase in volume of sales activity related to our ADTRAN, Inc. and a decrease in cost
of revenue attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with ADVA.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenue decreased from 22.1% for the year ended December 31, 2021
to 20.4% for the year ended December 31, 2022. Selling, general and administrative expenses as a percentage of revenue will generally
fluctuate whenever there is a significant fluctuation in revenue for the periods being compared as these costs are relatively fixed in the
short term.
Selling, general and administrative expenses increased by 67.9% from $124.4 million for the year ended December 31, 2021 to $208.9
million for the year ended December 31, 2022. Selling, general and administrative expenses include personnel costs for management,
accounting, information technology, human resources, sales and marketing, as well as independent auditor, tax and other professional
fees, contract services and legal and litigation related costs. The increase in selling, general and administrative expenses was primarily
attributable to increased expenses related to the Business Combination with ADVA such as employee-related costs due to an increase
in the number of employees, amortization of intangible assets, depreciation of property, plant and equipment and transactions costs. For
the year ended December 31, 2022 as compared to the year ended December 31, 2021, changes in foreign currencies relative to the U.S
dollar decreased our selling, general and administrative expenses by approximately $4.4 million.
Research and Development Expenses
Research and development expenses as a percentage of revenue decreased from 19.3% for the year ended December 31, 2021 to 16.9%
for the year ended December 31, 2022. Research and development expenses as a percentage of revenue will fluctuate whenever there
are incremental product development activities or significant fluctuations in revenue for the periods being compared as these costs are
relatively fixed in the short term.
Research and development expenses increased by 59.9% from $108.7 million for the year ended December 31, 2021 to $173.8 million
for the year ended December 31, 2022. The increase in research and development expenses was primarily attributable to increased
expenses related to the Business Combination with ADVA such as employee-related costs due to an increase in the number of employees
and expenses related to our multi-year integration program, amortization of intangible assets and depreciation of property, plant and
equipment. For the year ended December 31, 2022 as compared to the year ended December 31, 2021, changes in foreign currencies
relative to the U.S. dollar decreased our research and development expenses by approximately $5.2 million.
ADVA has arrangements with governmental entities for the purposes of obtaining funding for research and development activities. The
Company classifies government grants received under these arrangements as a reduction to research and development expense incurred.
For the year ended December 31, 2022, the Company recognized $1.1 million as a reduction of research and development expense.
We expect to continue to incur research and development expenses in connection with our new and existing products. We continually
evaluate new product opportunities and engage in significant research and product development efforts, which provides for new product
development, enhancement of existing products and product cost reductions. We may incur significant research and development
expenses prior to the receipt of revenue from a major new product group.
33
Asset Impairments
In connection with the planned integration of information technology following the Business Combination, we determined that certain
projects no longer fit our needs. As a result, the Company recognized impairment charges of $17.4 million during the year ended
December 31, 2022, primarily attributable to capitalized implementation costs for a cloud computing arrangement. There were no asset
impairments recognized during the year ended December 31, 2021.
See Note 11 of the Notes to the Consolidated Financial Statements
included in Part II, Item 8 of this Amendment No. 1 for additional information.
Interest and Dividend Income
Interest and dividend income decreased by 25.4% from $2.8 million for the year ended December 31, 2021 to $2.1 million for the year
ended December 31, 2022. The decrease in interest and dividend income was primarily attributable to a decrease in the investment
balance for the twelve months ended December 31, 2022. Our investments decreased from $71.0 million as of December 31, 2021 to
$33.0 million as of December 31, 2022 and was primarily attributable to the sale of certain equity and fixed income investments for
working capital and other purposes.
Interest Expense
Interest expense increased from less than $0.1 million for the year ended December 31, 2021 to $3.4 million for the year ended December
31, 2022. The increase in interest expense was primarily related to an increase in assumed debt associated with the Business Combination
with ADVA and the new Wells Fargo Credit Agreement.
See Note 13 and Note 14 of the Notes to Consolidated Financial Statements,
included in Part II, Item 8 of this Amendment No. 1 and “Financing Activities” in “Liquidity and Capital Resources” below.
Net Investment (Loss) Gain
We recognized a net investment gain of $1.8 million and a loss of $11.3 million for the years ended December 31, 2021 and 2022,
respectively. The fluctuations in our net investments were primarily attributable to changes in the fair value of our securities recognized
during the period. We expect that any future market volatility could result in continued fluctuations in our investment portfolio.
See
“Investing Activities” in “Liquidity and Capital Resources” of this report and Note 1 and Note 6 of Notes to Consolidated Financial
Statements included in Part II, Item 8 of this report for additional information.
Other Income (Expense), net
Other income (expense), net, increased from income of $3.8 million for the year ended December 31, 2021 to income of $14.5 million
for the year ended December 31, 2022. For the years ended December 31, 2022 and 2021, other income (expense), net, is comprised
primarily of unrealized gains on foreign exchange contracts, gains and losses on foreign currency transactions and income from excess
material sales.
See Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No. 1 for
additional information on foreign exchange contracts.
Income Tax Benefit (Expense)
Our effective tax rate changed from an expense of 37.0%, for the year ended December 31, 2021 to a benefit of 87.5% for the year ended
December 31, 2022. The change in the effective tax rate for the year ended December 31, 2022, was driven primarily by the release of
the majority of our valuation allowance against our domestic deferred tax assets during the fourth quarter of 2022, that was partially
offset by increased international tax expense primarily as a result of our closing of the Business Combination with ADVA during the
third quarter of 2022.
See Note 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No.
1 for additional information.
Net (Loss) Income Attributable to ADTRAN Holdings, Inc.
As a result of the above factors, our net loss attributable to ADTRAN Holdings, Inc. decreased from $8.6 million for the year ended
December 31, 2021 to a net loss of $2.0 million for the year ended December 31, 2022. As a percentage of revenue, net loss was 1.5%
for the year ended December 31, 2021 and net loss was 0.2% for the year ended December 31, 2022.
Liquidity and Capital Resources
Liquidity
We have historically financed, our ongoing business with existing cash, investments and cash flow from operations. In the current supply
environment we also expect to utilize our credit arrangements to manage our working capital needs. We have used, and expect to
continue to use, existing cash, investments, credit arrangements and cash generated from operations for working capital, business
acquisitions, shareholder dividends and other general corporate purposes, including product development activities to enhance our
existing products and develop new products, expand our sales and marketing activities and fund capital expenditures. As of December
31, 2022, the Company has incurred a total of $26.1 million of transaction costs related to the Business Combination. We will also be
obligated to compensate any annual net loss of ADVA under the DPLTA. Additionally, pursuant to the terms of the DPLTA, each
34
ADVA shareholder (other than the Company) has received an offer to elect either (1) to remain an ADVA shareholder and receive from
us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation. Assuming all of the minority holders of currently
outstanding ADVA shares were to elect the second option, we would be obligated to make aggregate Exit Compensation payments of
approximately EUR 310.6 million or approximately $333.2 million, based on an exchange rate as of December 31, 2022. Shareholders
electing the first option of Annual Recurring Compensation may later elect the second option. The opportunity for outside ADVA
shareholders to tender ADVA shares in exchange for Exit Compensation expires on March 16, 2023 (subject to appraisal proceedings).
Our obligation to pay Annual Recurring Compensation under the DPLTA would lead to a continuing payment obligation, which would
amount to approximately EUR 10.6 million or $11.4 million (based on the current exchange rate), per year assuming none of the minority
ADVA shareholders were to elect Exit Compensation. The foregoing amounts do not reflect any potential increase in payment
obligations that we may have depending on the outcome of ongoing appraisal proceedings in Germany.
We believe that our cash and cash equivalents, investments, cash generated from operations and access to funds under the new Wells
Fargo credit facility (described below) will be adequate to meet our operating and capital needs and our obligations under the Business
Combination and the DPLTA for at least the next 12 months.
As of December 31, 2022, cash on hand was $108.6 million and short-term investments were $0.3 million, which resulted in available
short-term liquidity of $108.9 million, of which $86.3 million was held by our foreign subsidiaries. As of December 31, 2021, cash on
hand was $56.6 million and short-term investments were $0.4 million, which resulted in available short-term liquidity of $57.0 million,
of which $47.7 million was held by our foreign subsidiaries. Generally, we intend to permanently reinvest funds held outside the U.S.,
except to the extent that any of these funds can be repatriated without withholding tax. The decrease in short-term liquidity from
December 31, 2021 to December 31, 2022 was primarily attributable to the sale of certain equity and fixed income investments for
working capital and other purposes.
In addition to our cash and cash equivalents and the credit facility, we may fund a portion or all of the Exit Compensation through the
sale of securities. There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms
or at all.
Operating Activities
Net cash used in operating activities of $44.2 million during the year ended December 31, 2022 decreased by $47.2 million compared
to $3.0 million of net cash provided during the year ended December 31, 2021. This decrease was primarily due to net cash outflows
from working capital, specifically, an inventory build related to component availability, an increase in accounts receivables and
transaction costs related to the Business Combination partially offset by an increase in the average number of days payable to our trade
suppliers. Additional details related to our working capital and its drivers are discussed below.
Net accounts receivable increased 76.0% from $158.7 million as of December 31, 2021 to $279.4 million as of December 31, 2022.
There was an allowance for credit losses of less than $0.1 million as of December 31, 2022 and no allowance for credit losses as of
December 31, 2021. The increase in net accounts receivable was due primarily to the increase in sales volume related to the Business
Combination with ADVA and an increase in sales volume in our ADTRAN, Inc. operations. Quarterly accounts receivable DSO
decreased from 95 days as of December 31, 2021 to 72 days as of December 31, 2022. The decrease in DSO was due to customer and
geographical mix associated with the Business Combination with ADVA and timing of sales within the quarter.
Other receivables increased 192.4% from $11.2 million as of December 31, 2021 to $32.8 million as of December 31, 2022. The increase
in other receivables was primarily attributable to an increase in prepaid taxes associated with Business Combination with ADVA and
contract assets partially offset by a decrease in our receivables for sales of raw materials and reclaimed duty drawbacks.
Annual inventory turnover decreased from 2.60 turns as of December 31, 2021 to 2.46 turns as of December 31, 2022. Inventory
increased 205.6% from $139.9 million as of December 31, 2021 to $427.5 million as of December 31, 2022. The increase in inventory
was due to Business Combination with ADVA and strategic inventory buffer purchases given extended component lead times and
availability constraints as well as new product ramp ups to ensure supply continuity. We expect inventory levels to fluctuate as we
attempt to maintain sufficient inventory in response to supply chain uncertainties.
Accounts payable increased 131.9% from $102.5 million as of December 31, 2021 to $237.7 million as of December 31, 2022. The
increase in accounts payable was primarily due to the increase in volume of operating costs associated with the Business Combination
with ADVA, additional purchases of raw material inventory and extended payment terms. Accounts payable will fluctuate due to
variations in the timing of the receipt of inventory, supplies and services and our subsequent payments for these purchases.
Investing Activities
Capital expenditures totaled approximately $17.1 million and $5.7 million for the years ended December 31, 2022 and 2021,
respectively. These expenditures were primarily used to purchase manufacturing and test equipment, software, computer hardware and
building improvements.
35
Our combined short-term and long-term investments decreased $38.0 million from $71.0 million as of December 31, 2021 to $33.0
million as of December 31, 2022. This decrease reflects the impact of the sale of portions of our equity and fixed income investments
and the net unrealized and realized gains and losses on our investments.
We typically invest all available cash not required for immediate use in operations, primarily in securities that we believe bear minimal
risk of loss.
See Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No. 1 for additional
information.
As of December 31, 2022, our corporate bonds, municipal bonds, asset-backed bonds, mortgage/agency bonds, U.S. government bonds
and other government bonds were classified as available-for-sale and had a combined duration of 1.74 years with an average Standard
& Poor’s credit rating of AA-. Because our investment portfolio has a high-quality rating and contractual maturities of short duration,
we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market,
on a daily basis.
Our long-term investments decreased 53.7% from $70.6 million as of December 31, 2021 to $32.7 million as of December 31, 2022.
Our investments include various marketable equity securities classified as long-term investments with a fair market value of $0.8 million
and $12.6 million, as of December 31, 2022 and 2021, respectively. Long-term investments as of December 31, 2022 and 2021 also
included $22.9 million and $26.9 million, respectively, related to our deferred compensation plan.
Financing Activities
Dividends
During 2022 and 2021, we paid shareholder dividends totaling $22.9 million and $17.5 million, respectively. The continued payment of
dividends is at the discretion of the Company's Board of Directors and is subject to general business conditions and ongoing financial
results of the Company. The following table shows dividends per common share paid to our shareholders in each quarter of 2022 and
2021:
Dividends per Common Share
2022
2021
First Quarter
$
0.09
$
0.09
Second Quarter
$
0.09
$
0.09
Third Quarter
$
0.09
$
0.09
Fourth Quarter
$
0.09
$
0.09
On February 20, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.09 per common
share to be paid to the Company’s stockholders of record at the close of business on March 7, 2023. The dividends will be paid on March
21, 2023 in the aggregate amount of approximately $7.0 million.
Stock Repurchase Program
There were no stock repurchases during the years ended December 31, 2022 and 2021, and there currently is no authorized stock
repurchase plan.
Stock Option Exercises
To accommodate employee stock option exercises, the Company issued 0.5 million and 0.4 million shares of common stock and treasury
stock which resulted in proceeds of $6.9 million and $6.4 million during the years ended December 31, 2022 and 2021, respectively.
Additionally, to accommodate ADVA Optical Networking SE stock option exercises, ADVA Optical Networking SE issued 0.1 million
of ADVA Optical Networking SE common stock which resulted in proceeds of $0.8 million, during the period July 15, 2022 to
December 31, 2022. ADVA Optical Networking SE stock options outstanding as of December 31, 2022 totaled 81 thousand
(representing less than 0.2% of ADVA's outstanding shares), of which 27 thousand were exercisable.
Employee Pension Plan
We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based
on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate
increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes
in assumptions could affect future expenses and obligations.
36
In connection with the Business Combination, we acquired $29.6 million of additional obligations and $22.3 million of assets related to
postemployment benefit plans for certain groups of employees at our new operations outside of the U.S. Plans vary depending on the
legal, economic, and tax environments of the respective country. For defined benefit plans, accruals for pensions and similar
commitments have been included in the results for this year. The new defined benefit plans are for employees in Switzerland, Italy,
Israel and India:
In Switzerland, there are two defined benefit pension plans. Both plans provide benefits in the event of retirement, death or
disability. The plan's benefits are based on age, years of service, salary and on a participants old age account. The plans are
financed by contributions paid by the participants and by the Company.
In Italy, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the
Company on a pay-as-you-go basis. Employees receive their pension payments as a function of salary, inflation and a
notional account.
In Israel, there is a defined benefit plan that provides benefits in the event of a participant being dismissed involuntarily,
retirement or death. The plan's benefits are based on the higher of the severance benefit required by law or the cash surrender
value of the severance benefit component of any qualifying insurance policy or long-term employee benefit fund that is
registered in the participant's name. The plan is financed by contributions paid by the Company.
In India, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the
Company on a pay-as-you-go basis.
Our defined benefit plan assets consist of a balanced portfolio of equity funds, bond funds, emerging market funds, real estate funds and
balanced funds. Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner
necessary to meet expected future benefits earned by participants and consider a broad range of economic conditions. The objectives of
our investment policy are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset
returns that meet or exceed the plans’ actuarial assumptions and achieve asset returns that are competitive with like institutions
employing similar investment strategies. The investment policy is periodically reviewed by us and a designated third-party fiduciary for
investment matters. At December 31, 2022, the estimated fair market value of our defined benefit pension plans' assets increased to
$48.7 million from $32.7 million at December 31, 2021.
The defined benefit pension plan is accounted for on an actuarial basis, which requires the use of various assumptions, including an
expected rate of return on plan assets and a discount rate. The expected return on our German plan assets that is utilized in determining
the benefit obligation and net periodic benefit cost is derived from periodic studies, which include a review of asset allocation strategies,
anticipated future long-term performance of individual asset classes, risks using standard deviations and correlations of returns among
the asset classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and
historical returns, the assumptions are primarily long-term, prospective rates of return. The discount rate has been derived from the
returns of high-quality, corporate bonds denominated in Euro currency with durations close to the duration of our pension obligations.
The projected benefit obligation for our defined benefit pension plans was $59.3 million and $44.2 million as of December 31, 2022
and 2021, respectively.
The components of net periodic pension cost, other than the service cost component, are included in other income (expense), net in the
Consolidated Statements of (Loss) Income. The components of net periodic pension cost and amounts recognized in other
comprehensive (loss) income for the years ended December 31, 2022 and 2021 were ($5.8) million and ($5.0) million, respectively.
Actuarial gains and losses are recorded in accumulated other comprehensive (loss) income. To the extent unamortized gains and losses
exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component
of net periodic pension cost over the remaining service period of active participants. We estimate that less than $0.1 million will be
amortized from accumulated other comprehensive (loss) income into net periodic pension cost in 2023 for the net actuarial loss. The net
actuarial loss recognized in accumulated other comprehensive loss as of December 31, 2022 and 2021 was $1.1 million and $7.7 million,
respectively.
See Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Amendment No. 1 for
additional information.
37
Off-Balance Sheet Arrangements
We do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with
unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for
capital resources.
Cash Requirements
The following table (as restated) summarizes the Company’s material short- and long-term cash requirements from known obligations
pursuant to certain contracts and commitments as of December 31, 2022, as well as an estimate of the timing in which such obligations
and payments are expected to be satisfied (but excluding payments that may be made pursuant to the DPLTA and currency hedging
arrangements, which are discussed below). Other than operating lease obligations, the cash requirements table excludes interest
payments.
(In thousands)
Total
2023
2024
2025
2026
2027
After 2027
Wells Fargo credit agreement
(1)
$
60,000
$
$
$
$
$
60,000
$
Nord/LB revolving line of credit
(2)
16,091
16,091
Syndicated credit agreement
working capital line of credit
(3)
10,727
10,727
DZ Bank revolving line of credit
(4)
9,118
9,118
Syndicated credit agreement note
payable
(5)
24,598
24,598
Purchase obligations
(6)
552,440
527,562
24,141
309
167
261
Operating lease obligations
(7)
34,976
8,992
8,076
6,740
3,825
2,865
4,478
Totals
$
707,950
$
597,088
$
32,217
$
7,049
$
3,992
$
63,126
$
4,478
(1) See description below.
(2) See description below.
(3) See description below.
(4) See description below.
(5) See description below.
(6) We have purchase obligations related to open purchase orders to our contract manufacturers, ODMs, component suppliers, service partners and other vendors. The settlement of our purchase obligations
will occur at various dates beginning in 2023 and going through 2027. See Note 20 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Amendment No. 1 for more information.
(7) We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations. Our operating leases had remaining lease terms ranging from one month
to 119 months as of December 31, 2022.
New Wells Fargo Credit Agreement
On July 18, 2022, ADTRAN Holdings, Inc. and ADTRAN, Inc., as the borrower, entered into a credit agreement with a syndicate of
banks, including Wells Fargo Bank, National Association, as administrative agent (“Administrative Agent”), and the other lenders
named therein (the “Credit Agreement”). The Credit Agreement allows for borrowings of up to $100 million in aggregate principal
amount, subject to being increased to up to $400 million in aggregate principal amount upon the Company or Borrower’s execution of
a DPLTA with ADVA or a parent of ADVA, among other conditions (the “Senior Credit Facilities Increase”). The DPLTA as executed
on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register (
Handelsregister
)
of the local court (
Amtsgericht
) at the registered seat of ADVA (Jena).
See Note 24 of the Notes to Consolidated Financial Statements
for further information.
38
As of December 31, 2022, ADTRAN, Inc.’s borrowings under the revolving line of credit were $60.0 million. The Credit Agreement
matures in July 2027 but provides the Company with an option to request extensions subject to customary conditions. In addition, we
may issue up to $25 million in letters of credit against the first $100 million in our total facility. As of December 31, 2022, we had a
total of $21.3 million in letters of credit with ADTRAN, Inc. outstanding against our eligible borrowings, leaving a net amount of $18.7
million available for future borrowings. Upon the DPLTA becoming effective on January 16, 2023, the available total borrowings under
the Wells Fargo Credit Agreement increased from $100 million to $400 million. On January 31, 2023, the Company increased its
borrowings under the Credit Agreement from $60.0 million to $187.5 million. In February 2023, the borrowings under the Credit
Agreement were paid down by $7.5 million, leaving $180.0 million of borrowings as of February 28, 2023. After considering our
outstanding letters of credit, this leaves the Company approximately $198.7 million available for future borrowings as of February 28,
2023. The Company used approximately $51.4 million of the proceeds from the borrowings under the Credit Agreement to retire the
outstanding borrowings under ADVA's syndicated credit agreement note payable, syndicated credit agreement working capital line of
credit and the Nord/LB revolving line of credit. ADVA's $9.1 million of borrowings under its revolving line of credit with DZ Bank
remain outstanding. Any future credit extensions under the Credit Agreement are subject to customary conditions precedent. The
proceeds of any loans are expected to be used for general corporate purposes and to pay a portion of the Exchange Offer consideration.
All U.S. borrowings under the Credit Agreement (other than swingline loans, which will bear interest at the Base Rate (as defined
below)) will bear interest, at the Company’s option, at a rate per annum equal to (A)(i) the highest of (a) the federal funds rate (i.e., for
any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the
Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day) plus ½
of 1%, (b) the prime commercial lending rate of the Administrative Agent, as established from time to time at its principal U.S. office
(which such rate is an index or base rate and will not necessarily be its lowest or best rate charged to its customers or other banks), and
(c) the daily Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor plus 1%, plus (ii) the applicable rate,
ranging from 0.5% to 1.25% (the “Base Rate”), or (B) the sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus
the applicable rate, ranging from 1.4% to 2.15%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate,
“SOFR Loans”). All EU borrowings under the Credit Agreement (other than swingline loans) will bear interest at a rate per annum equal
to the sum of the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor
administrator approved by the Administrative Agent) plus the applicable rate, ranging from 1.5% to 2.25%, provided that such sum is
subject to a 0.0% floor (such loans utilizing this interest rate, “EURIBOR Loans”). The applicable rate is based on the consolidated net
leverage ratio of the Company and its subsidiaries as determined pursuant to the terms of the Credit Agreement. Default interest is 2.00%
per annum in excess of the rate otherwise applicable in the case of any overdue principal or any other overdue amount.
In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a commitment fee
to the lenders under the Credit Agreement in respect of unutilized revolving loan commitments and an additional commitment ticking
fee at a rate of 0.25% on the commitment amounts of each lender until the earliest of (i) the date of the Senior Credit Facilities Increase,
(ii) the Company’s voluntary termination of the credit facility commitment, and (iii) December 31, 2023. The Company is also required
to pay a participation fee to the Administrative Agent for the account of each lender with respect to the Company’s participations in
letters of credit at the then applicable rate for SOFR Loans.
The Credit Agreement permits the Company to prepay any or all of the outstanding loans or to reduce the commitments under the Credit
Agreement without incurring premiums or penalties (except breakage costs with respect to SOFR Loans and EURIBOR Loans). The
Credit Agreement contains customary affirmative and negative covenants, including incurrence covenants and certain other limitations
on the ability of the Company and the Company’s subsidiaries to incur additional debt, guarantee other obligations, grant liens on assets,
make investments, dispose of assets, pay dividends or other payments on capital stock, make restricted payments, engage in mergers or
consolidations, engage in transactions with affiliates, modify its organizational documents, and enter into certain restrictive agreements.
It also contains customary events of default (subject to customary cure periods and materiality thresholds). Furthermore, the Credit
Agreement requires that the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) of the Company and its
subsidiaries tested on the last day of each fiscal quarter not exceed 3.25 to 1.0 through September 30, 2024 and 2.75 to 1.00 from
December 31, 2024 and thereafter, subject to certain exceptions. The Credit Agreement also requires that the Consolidated Interest
Coverage Ratio (as defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter
not fall below 3.00 to 1.00.
Finally, pursuant to a Collateral Agreement, dated as of July 18, 2022, among the Company, ADTRAN, Inc. and the Administrative
Agent, ADTRAN, Inc.’s obligations under the Credit Agreement are secured by substantially all of the assets of ADTRAN, Inc. and the
Company. In addition, the Company has guaranteed ADTRAN, Inc.’s obligations under the Credit Agreement pursuant to a Guaranty
Agreement, dated as of July 18, 2022, by ADTRAN, Inc. and the Company in favor of the Administrative Agent.
39
Nord/LB Revolving Line of Credit
On August 8, 2022, ADVA entered into a $16.1 million revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB)
that bears interest of Euro Short Term Rate plus 1.4% and which matures in August 2023. During the term of the loan, ADVA is
obligated to maintain an adjusted net debt to cover ratio that is equal to or less than 2.75. As of December 31, 2022, ADVA’s borrowings
under the revolving line of credit were $16.1 million. On January 31, 2023, the Company increased its borrowings under the Wells
Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings under the
Nord/LB revolving line of credit.
Syndicated Credit Agreement Working Capital Line of Credit
In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch
German Business to borrow up to $10.7 million as part of a working capital line of credit. The interest rate for the working capital line
of credit is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35% as of December 31, 2022. The
working capital line of credit matures in September 2023. As of December 31, 2022, borrowings under the working capital line of credit
totaled $10.7 million. On January 31, 2023, the Company increased its borrowings under the Wells Fargo Credit Agreement. A portion
of the proceeds from the borrowings were used to retire the outstanding borrowings under the syndicated credit agreement working
capital line of credit.
DZ Bank Money Market Facility
As of December 31, 2022, ADVA’s borrowings under its revolving line of credit with DZ Bank totaled $9.1 million, with no amounts
available for future borrowings. The interest rate is currently a fixed rate of 2.85%, which resets monthly based on renewal of the loan.
Syndicated Credit Agreement Note Payable
In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch
German Business to borrow $63.7 million. As of December 31, 2022, the amount outstanding under the note payable is $24.6 million.
The interest rate for the note payable is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35%
as of December 31, 2022. The note payable matures in September 2023. On January 31, 2023, the Company increased its borrowings
under the Wells Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings
under the syndicated credit agreement note payable.
Currency Hedging Arrangements
On November 3, 2022, the Company entered into a Euro/U.S. dollar cross-currency swap arrangement (the “Swap”) with Wells Fargo
Bank, N.A. (the “Hedge Counterparty”). The Swap, which is governed by the provisions of an ISDA Master Agreement (including
schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge
Counterparty, enable the Company to convert a portion of its Euro denominated payment obligations under the DPLTA into U.S. Dollars.
Under the Swap, the Company will exchange an aggregate notional amount of $160.0 million U.S. dollars for Euros at a daily fixed
forward rate ranging from $0.98286 to $1.03290. The aggregate amount of $160.0 million will be divided into eight quarterly tranches
of $20.0 million. The Company, at its sole discretion, may exchange all or part of each tranche on any given day within the applicable
quarter; provided, however, that it must exchange the full tranche by the end of such quarter. The Swap may be accelerated or terminated
early for a number of reasons, including but not limited to (i) non-payment by the Company or the Hedge Counterparty, (ii) breach of
representation or warranty or covenant by either party or (iii) insolvency or bankruptcy of either party.
ADVA Domination and Profit and Loss Transfer Agreement
On December 1, 2022, we, as the controlling company, entered into the DPLTA with ADVA, as the controlled company (the “DPLTA”).
The DPLTA, which was executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the
commercial register (
Handelsregister
) of the local court (
Amtsgericht
) at the registered seat of ADVA (Jena).
Under the DPLTA, subject to certain limitations pursuant to applicable law, (i) we are entitled to issue binding instructions to the
management board of ADVA, (ii) ADVA will transfer all of its annual profits to us, subject to, among other things, the creation or
dissolution of certain reserves, and (iii) we will generally absorb all annual losses incurred by ADVA. The obligation of ADVA to
transfer its annual profit to us, as well as our obligation to absorb ADVA’s annual net loss, applies for the first time to the profits or
losses generated in the ADVA fiscal year 2023.
40
Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides
that ADVA shareholders (other than us) be offered, at their election, (i) to put their ADVA shares to the Company in exchange for a
compensation in cash of EUR 17.21 per share (the “Exit Compensation”), or (ii) to remain ADVA shareholders and receive a recurring
compensation in cash of EUR 0.59 (EUR 0.52 net under the current tax regime) per share for each full fiscal year of ADVA (the “Annual
Recurring Compensation”). The Annual Recurring Compensation is due on the third banking day following the ordinary general
shareholders’ meeting of ADVA for the respective preceding fiscal year (but in any event within eight months following expiration of
the fiscal year) and is first granted for the 2023 fiscal year, payable for the first time after the ordinary general shareholders’ meeting of
ADVA in 2024. The adequacy of both forms of compensation have been challenged by minority shareholders of ADVA via court-led
appraisal proceedings under German law,
and it is possible that the courts in such appraisal proceedings may adjudicate a higher Exit
Compensation or Annual Recurring Compensation (in each case, including interest thereon) than agreed upon in the DPLTA. Our
aggregate potential payment obligations under the DPLTA are discussed above under "
Liquidity
".
The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation had been scheduled to
expire on March 16, 2023. However, due to the appraisal proceedings that have been initiated in accordance with applicable German
law, this time period for tendering shares has been extended pursuant to the German Stock Corporation Act (
Aktiengesetz
) and will end
two months after the date on which a final decision in such appraisal proceedings has been published in the Federal Gazette
(
Bundesanzeiger
).
We currently hold 33,961,170 no-par value bearer shares of ADVA, representing 65.30% of ADVA’s outstanding shares as of February
14, 2023.
The foregoing description of the DPLTA does not purport to be complete and is qualified in its entirety by reference to the DPLTA, a
non-binding English translation of which incorporated by reference to Exhibit 10.5 of this Amendment No. 1.
During the year ended December 31, 2022, we recognized $14.2 million of transaction costs relating to the Business Combination. We
expect to incur integration costs and costs associated with the implementation of the DPLTA during 2023 and such costs are expected
to be material.
Performance Bonds
Certain contracts, customers and jurisdictions in which we do business require us to provide various guarantees of performance such as
bid bonds, performance bonds and customs bonds. As of December 31, 2022 and 2021, we had commitments related to these bonds
totaling $21.1 million and $22.9 million, respectively, which expire at various dates through April 2031. In general, we would only be
liable for the amount of these guarantees in the event of default under each contract; the probability of which we believe is remote.
Critical Accounting Policies and Estimates
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used or if changes in the
accounting estimate that are reasonably likely to occur could materially impact the results of financial operations. Several accounting
policies, as described in Note 1 of Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report, require
material subjective or complex judgment and have a significant impact on our financial condition and results of operations, as applicable.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our
Consolidated Financial Statements:
Revenue
Revenue is measured based on the consideration expected to be received in exchange for transferring goods or providing services to a
customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control
of a product to the customer. Review of contracts with customers, for both direct customers and distributors, are performed and assessed
for principal versus agent considerations to determine primary responsibility for delivery of performance obligation, presumed inventory
risk, and discretion in establishing pricing, when applicable. For transactions where there are multiple performance obligations,
individual products and services are accounted for separately if they are distinct (if a product or service is separately identifiable from
other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The
consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices.
Stand-alone selling prices are determined based on the prices at which the separate products and services are sold and are allocated
based on each item’s relative value to the total value of the products and services in the arrangement. For items that are not sold
separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment terms are
generally 30 days in the U.S. and typically longer in many geographic markets outside the U.S. Shipping fees are recorded as revenue
and the related cost which we have elected to account for as a cost of fulfilling the related contract is included in cost of revenue.
Revenue, value-added and other taxes collected concurrently with revenue-producing activities are excluded from revenue. Costs of
obtaining a contract, if material, are capitalized and amortized over the period that the related revenue is recognized if greater than one
year. We have also elected to apply the practical expedient related to the incremental costs of obtaining contracts and recognize those
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costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included in selling, general
and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.
Revenue is generated by two reportable segments: Network Solutions and Services & Support.
Network Solutions Segment -
Includes hardware products and software defined next-generation virtualized solutions used in service
provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware
revenue.
Hardware and Software Revenue
Revenue from hardware sales is recognized when control is transferred to the customer, which is generally when the products are
shipped. Shipping terms are generally FOB shipping point. Revenue from software license sales is recognized at delivery and transfer
of control to the customer. Revenue is recorded net of estimated discounts and rebates using historical trends. Customers are typically
invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days
to five years for product defects, which are accrued at the time products are delivered.
Services & Support Segment -
Includes a complete portfolio of maintenance, network implementation and solutions integration and
managed services, which include hosted cloud services and subscription services to complement our Network Solutions segment.
Maintenance Revenue
Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services
at the beginning of the maintenance period. We recognize revenue for maintenance services on a straight-line basis over the maintenance
period as our customers benefit evenly throughout the contract term and deferred revenue, when applicable, is recorded in unearned
revenue and non-current unearned revenue. The total balance of our unearned revenue was $60.4 million and $27.0 million as of
December 31, 2022 and 2021, respectively.
Network Implementation Revenue
We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement services at a
point in time when each performance obligation is complete. If we have recognized revenue but have not billed the customer, the right
to consideration is recognized as a contract asset that is included in other receivables on the Consolidated Balance Sheets. The contract
asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.
Accounts Receivable Factoring
The Company has entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-
recourse basis. These transactions are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 860,
Transfers and Servicing,
and result in a reduction in accounts receivable because the agreements transfer effective control over and risk
related to the receivables to the buyers. Trade accounts receivables balances sold are removed from the Consolidated Balance Sheets
and cash received is reflected as cash provided by (used in) operating activities in the Consolidated Statements of Cash Flow. Factoring
related interest expense is recorded to interest expense on the Consolidated Statements of (Loss) Income. On each sale date, the financial
institution retains from the sale price a default reserve, up to a required balance, which is held by the financial institution in a reserve
account and pledged to the Company. The financial institution is entitled to withdraw from the reserve account the sale price of a
defaulted receivable. The balance in the reserve account is included in other assets on the Consolidated Balance Sheets.
Inventory
We carry our inventory at the lower of cost and net realizable value, with cost being determined using the first-in, first-out method.
Standard costs for material, labor, and manufacturing overhead are used to value inventory and are updated at least quarterly. Most
variances are expensed in the current period; therefore, our inventory costs approximate actual costs at the end of each reporting period.
We establish reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the
estimated net realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known trends,
inventory age and market conditions. If actual trends and market conditions are less favorable than those projected by management, we
may be required to make additional inventory write-downs. Our reserve for excess and obsolete inventory was $51.8 million and $44.6
million at December 31, 2022 and 2021, respectively. Inventory disposals charged against the reserve were $2.9 million and $1.0 million
for the years ended December 31, 2022 and December 31, 2021, respectively.
Stock-Based Compensation
For purposes of determining the estimated fair value of market-based PSU awards on the date of grant, the Monte Carlo Simulation
valuation method is used. These PSUs are subject to a market condition based on the relative total shareholder return of ADTRAN
against all of the companies in the NASDAQ Telecommunications Index and vest at the end of a three-year performance period. The
fair value of performance-based PSUs, RSUs and restricted stock is equal to the closing price of our stock on the business day
42
immediately preceding the grant date. Compensation expense related to unvested performance-based PSUs is recognized over the
requisite service period of two to three years as the achievement of the performance obligation becomes probable. For purposes of
determining the estimated fair value of our stock option awards on the date of grant, we use the Black-Scholes Model. This model
requires the input of certain assumptions that require subjective judgment. These assumptions include, but are not limited to, expected
stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Because our stock
option awards have characteristics significantly different from those of traded options, and because changes in the input assumptions
can materially affect the fair value estimate, the existing model may not provide a reliable, single measure of the fair value of our stock
option awards. Management will continue to assess the assumptions and methodologies used to calculate the estimated fair value of
stock-based compensation. Circumstances may change and additional data may become available over time, which could result in
changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change in future
periods, the compensation expense that we record may differ significantly from what we have recorded in the current period. As of
December 31, 2022, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and
restricted stock was approximately $15.8 million.
Pursuant to the Business Combination, which closed on July 15, 2022, ADVA stock option holders were entitled to have their ADVA
stock options assumed by ADTRAN Holdings (applying the exchange ratio in the Business Combination Agreement), thereafter
representing options to acquire stock of ADTRAN Holdings. The maximum number of shares of ADTRAN Holdings stock potentially
issuable upon such assumption was 2.3 million shares. The period in which such options could be assumed ended July 22, 2022. A total
of 2.1 million shares of ADTRAN Holdings stock are subject to assumed ADVA options. The determination of the fair value of stock
options assumed by ADTRAN Holdings was estimated using the Monte Carlo method and is affected by its stock price, as well as
assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate. The
stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are
not limited to, the volatility of the Company's stock price and employee exercise behaviors. As of December 31, 2022, total unrecognized
compensation expense related to the non-vested portion of stock options was approximately $8.3 million.
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired. The carrying value of goodwill is tested for
impairment in the fourth quarter of each year or more frequently if events or circumstances indicate it may be impaired. The quantitative
goodwill impairment test is performed at the level of the reporting unit. The identification of our reporting units begins at the operating
segment level and considers whether components one level below the operating segment levels should be identified as reporting units
for the purpose of testing goodwill for impairment. For goodwill impairment testing purposes, we determined the Company's reporting
units are generally the same as its operating segments, which are identified in Note 18 to the Consolidated Financial Statements.
Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances
that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In connection with the Business
Combination with ADVA the Company recognized $350.5 million of goodwill upon the closing of the exchange offer on July 15, 2022.
Therefore, we decided to proceed directly to the quantitative test of goodwill and forego the qualitative assessment. We estimate the fair
value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present
value of estimated future cash flows. A discounted cash flow analysis requires us to make various judgmental assumptions about future
sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections,
anticipated future cash flows and market participants. We also estimate the fair value of our reporting units based on a peer group
analysis, whereby companies in the telecommunications industry or with a comparable product and market structure are used to calculate
a fair enterprise value using revenue, EBITDA and debt multiples of trading value. Based on our analysis, management concluded that
there was no impairment of goodwill as of December 31, 2022. No goodwill impairment charges were recognized during the years
ended December 31, 2021 and 2020. The balance of our goodwill was $381.7 million and $7.0 million as of December 31, 2022 and
2021, respectively.
Intangible Assets
Purchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is recorded over the
estimated useful lives of the respective assets.
As part of the purchase price allocation related to the Business Combination with ADVA, the Company recognized $403.8 million of
intangible assets on July 15, 2022. Intangible assets are reviewed for impairment whenever events and circumstances indicate
impairment may have occurred. The Company assessed impairment triggers related to intangible assets during the fourth quarter of
2022, 2021 and 2020. As a result, no quantitative impairment test of long-lived assets was performed as of December 31, 2022, 2021
and 2020, and no impairment losses of intangible assets were recorded during the years ended December 31, 2022, 2021 and 2020. The
balance of our intangible assets was $401.2 million and $19.3 million as of December 31, 2022 and 2021, respectively.
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Income Taxes
We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related
to examinations by taxing authorities. We also make judgments regarding the realization of deferred tax assets and establish valuation
allowances where we believe it is more likely than not that future taxable income in certain jurisdictions will be insufficient to realize
these deferred tax assets. Our estimates regarding future taxable income and income tax provision or benefit may vary due to changes
in market conditions, changes in tax laws, or other factors. If our assumptions, and consequently our estimates, change in the future, the
valuation allowances we have established may be increased or decreased, impacting future income tax expense. We continually review
the adequacy of our valuation allowance and recognize the benefits of deferred tax assets only as the reassessment indicates that it is
more likely than not that the deferred tax assets will be realized in accordance with ASC 740, Income Taxes. During the fourth quarter
of 2022, after considering all quantitative and qualitative evidence, including our cumulative income position, historical operating
performance and future income projections, we have determined that the positive evidence overcame the negative evidence and have
concluded that it is more likely than not that a substantial portion of our U.S. federal and certain other state deferred tax assets were
realizable. As a result we have released the majority of our valuation allowance against those assets. However, the amount of deferred
tax assets considered realizable could be adjusted in future periods in the event that sufficient evidence is no longer present to support a
conclusion that it is more likely than not that all or a portion of our domestic deferred tax assets will be realized.
We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions
become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and circumstances
change.
Liability for Warranty
Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time of
product shipment based on our historical return rate and an estimate of the cost to repair or replace the defective products. We engage
in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component
suppliers. Our products continue to become more complex in both size and functionality as many of our product offerings migrate from
line card applications to total systems. The increasing complexity of our products will cause warranty incidences, when they arise, to be
more costly. Our estimates regarding future warranty obligations may change due to product failure rates, material usage, and other
rework costs incurred in correcting a product failure. In addition, from time to time, specific warranty accruals may be recorded if
unforeseen problems arise. Should our actual experience relative to these factors be worse than our estimates, we will be required to
record additional warranty expense. The liability for warranty obligations totaled $7.2 million and $5.4 million at December 31, 2022
and 2021, respectively. These liabilities are included in accrued expenses and other liabilities in the accompanying Consolidated Balance
Sheets.
Pension Benefit Plan Obligations
Pension benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions
include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results
that differ from the assumptions and changes in assumptions could affect future expenses and obligations. Our net pension liability
totaled $10.6 million and $11.4 million at December 31, 2022 and December 31, 2021, respectively. This liability is included in pension
liability in the accompanying Consolidated Balance Sheets.
Lease Obligations
We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations.
Other contracts, such as manufacturing agreements and service agreements, are reviewed to determine if they contain potential embedded
leases. These other contracts are specifically reviewed to determine whether we have the right to substantially all of the economic benefit
from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of
a lease. Some of our leases include options to renew. For those leases that are reasonably assured to be renewed, we have included the
option to extend as part of our right of use asset and lease liability. The exercise of lease renewal options is at our sole discretion. The
depreciable life of leased assets and leasehold improvements are limited by the expected lease term. Leases with an initial term of 12
months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the
lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected to not separate lease and non-
lease components. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Business Combinations
The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets recognized
as part of business combinations based on their fair values on the date of acquisition subject to purchase accounting adjustments. The
excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities assumed or acquired is
recorded as goodwill. If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the
purchase price, a bargain purchase gain is recorded. The Company’s estimates of fair value are based on historical experience, industry
44
knowledge, certain information obtained from the management of the acquired company and, in some cases, valuations performed by
independent third-party firms. The results of operations of acquired companies are included in the accompanying Consolidated
Statements of (Loss) Income since their dates of acquisition. Costs incurred to complete the Business Combination, such as legal,
accounting or other professional fees, are charged to selling, general and administrative expenses as incurred.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements,
see Note 1 of Notes to Consolidated Financial Statements included in
Part II, Item 8 of this Amendment No. 1 for additional information.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are contained in this report.
Page
Report of Independent Registered Public Accounting Firm
............................................................................................................
46
Financial Statements
.........................................................................................................................................................................
49
Consolidated Balance Sheets,
As of December 31, 2022 and 2021
......................................................................................................................................
49
Consolidated Statements of (Loss) Income,
Years Ended December 31, 2022, 2021 and 2020
.................................................................................................................
50
Consolidated Statements of Comprehensive (Loss) Income,
Years Ended December 31, 2022, 2021 and 2020
.................................................................................................................
51
Consolidated Statements of Changes in Equity,
Years Ended December 31, 2022, 2021 and 2020
.................................................................................................................
52
Consolidated Statements of Cash Flows,
Years Ended December 31, 2022, 2021 and 2020
.................................................................................................................
53
Schedule II - Valuation and Qualifying Accounts, Years Ended December 31, 2022, 2021 and 2020
105
46
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ADTRAN Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ADTRAN Holdings, Inc. and its subsidiaries (the “Company”) as of
December 31, 2022 and 2021, and the related consolidated statements of (loss) income, of comprehensive income (loss), of changes in
equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial
statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have
audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in
Internal Control
- Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December
31, 2022, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the COSO because a material
weakness in internal control over financial reporting existed as of that date related to the Company not designing and maintaining
effective controls over the presentation and disclosure of debt agreements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a
timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting
appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in
our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control
over financial reporting does not affect our opinion on those consolidated financial statements.
Restatement of Previously Issued Financial Statements and Management’s Conclusion Regarding Internal Control over Financial
Reporting
As discussed in Note 1 to the consolidated financial statements, the Company has restated its 2022 consolidated financial statements to
correct misstatements.
Management and we previously concluded that the Company maintained effective internal control over financial reporting as of
December 31, 2022. However, management has subsequently determined that a material weakness in internal control over financial
reporting related to the Company not designing and maintaining effective controls over the presentation and disclosure of debt
agreements existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over
financial reporting, as presented herein, is different from that expressed in our previous report.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management’s
report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
47
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded ADVA Optical
Networking SE (ADVA) from its assessment of internal control over financial reporting as of December 31, 2022, because it was
acquired by the Company in a purchase business combination during 2022. We have also excluded ADVA from our audit of internal
control over financial reporting. ADVA is a subsidiary whose total assets and total revenues excluded from management’s assessment
and our audit of internal control over financial reporting represent 46.9% and 35.7%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2022.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are
material to the
consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Acquisition of ADVA Optical Networking SE – Valuation of Developed Technology, Customer Relationships, and Backlog Intangible
Assets
As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of ADVA Optical Networking
SE for total purchase consideration of $578.3 million on July 15, 2022.
Assets acquired and liabilities assumed were recognized at their
respective fair values as of July 15, 2022, which resulted in the recognition of $403.8 million of identifiable intangible assets. The fair
value of the identifiable intangible assets acquired as of the acquisition date primarily consisted of developed technology of $291.9
million, customer relationships of $32.7 million, and backlog of $52.2 million. In determining the fair value, management utilized
various methods of the income approach depending on the asset. The estimation of fair value required significant judgment by
management related to net cash flows reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and
other factors. Inputs were generally determined by taking into account historical data, current and anticipated market conditions, and
growth rates. Developed technology and customer relationships were valued using the multi-period excess earnings method. Backlog
was valued using the distributor method. Significant assumptions used in the discounted cash flow analysis for (i) developed technology
were the revenue growth rates, long-term revenue growth rate, discount rate, earnings before interest, taxes, depreciation, and
amortization (EBITDA) margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation; (ii) customer
relationships were earnings before interest and taxes (EBIT) margins, contributory asset charges, and customer attrition rate; and (iii)
backlog were EBIT margins, adjusted EBIT margins, and contributory asset charges.
The principal considerations for our determination that performing procedures relating to the valuation of the developed technology,
customer relationships, and backlog intangible assets acquired in the acquisition of ADVA Optical Networking SE is a critical audit
matter are (i) the significant judgment by management when developing the fair value estimates of the identifiable intangible assets
acquired; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s
significant assumptions related to the revenue growth rates, long-term revenue growth rate, discount rate, EBITDA margins,
obsolescence factors, income tax rate, tax depreciation, and economic depreciation used in the valuation of the developed technology;
EBIT margins, contributory asset charges, and customer attrition rate used in the valuation of the customer relationships; and EBIT
margins, adjusted EBIT margins, and contributory asset charges used in the valuation of the backlog; and (iii)
the audit effort involved
the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition
accounting, including controls over the valuation of the identifiable intangible assets acquired. These procedures also included, among
others (i) reading the purchase agreement; (ii) testing management’s process for developing the fair value estimates of the developed
48
technology, customer relationships, and backlog intangible assets; (iii) evaluating the appropriateness of the multi-period excess earnings
and distributor methods; (iv) testing the completeness and accuracy of underlying data used by management in the valuation methods;
and (v) evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, long-term
revenue growth rate, discount rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation
used in the valuation of the developed technology; EBIT margins, contributory asset charges, and customer attrition rate used in the
valuation of the customer relationships; and EBIT margins, adjusted EBIT margins, and contributory asset charges used in the valuation
of the backlog. Evaluating the reasonableness of management’s significant assumptions related to the revenue growth rates, long-term
revenue growth rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation related to
the developed technology; the EBIT margins, contributory asset charges, and customer attrition rate related to the customer relationships;
and EBIT margins, adjusted EBIT margins, and contributory asset charges related to backlog involved considering (i) the past
performance of the acquired business; (ii) the consistency with external market and industry data; and (iii) whether these assumptions
were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist
in evaluating (i) the appropriateness of the valuation methods used and (ii) the reasonableness of the discount rate significant assumption.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
March 1, 2023, except for the effects of the restatement discussed in Note 1 to the consolidated financial statements and the matter
discussed in the fifth paragraph of Management’s Report on Internal Control over Financial Reporting, as to which the date is August
14, 2023
We have served as the Company’s auditor since 1986.
49
Financial Statements
ADTRAN Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except per share amount)
December 31, 2022 and 2021
ASSETS
(As Restated)
2022
2021
Current Assets
Cash and cash equivalents
$
108,644
$
56,603
Restricted cash
215
Short-term investments (includes $340 and $350 of available-for-sale securities as of December
31, 2022 and 2021, respectively, reported at fair value)
340
350
Accounts receivable, less allowance for credit losses of $49 and $0 as of December 31, 2022 and
2021, respectively
279,435
158,742
Other receivables
32,831
11,228
Inventory, net
427,531
139,891
Prepaid expenses and other current assets
33,577
9,296
Total Current Assets
882,358
376,325
Property, plant and equipment, net
110,699
55,766
Deferred tax assets
67,839
9,079
Goodwill
381,724
6,968
Intangibles, net
401,211
19,293
Other non-current assets
66,998
30,971
Long-term investments (includes $8,913 and $29,717 of available-for-sale securities as of
December 31, 2022 and 2021, respectively, reported at fair value)
32,665
70,615
Total Assets
$
1,943,494
$
569,017
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable
$
237,699
$
102,489
Revolving credit agreements outstanding
35,936
Notes payable
24,598
Unearned revenue
41,193
17,737
Accrued expenses and other liabilities
35,235
13,673
Accrued wages and benefits
44,882
14,900
Income tax payable, net
9,032
6,560
Total Current Liabilities
428,575
155,359
Non-current revolving credit agreement outstanding
60,000
Deferred tax liabilities
61,629
Non-current unearned revenue
19,239
9,271
Pension liability
10,624
11,402
Deferred compensation liability
26,668
31,383
Non-current lease obligations
22,807
3,269
Other non-current liabilities
10,339
1,231
Total Liabilities
639,881
211,915
Commitments and contingencies (see Note 20)
Equity
Common stock, par value $0.01 per share; 200,000 shares authorized;
78,088 shares issued and 77,889 outstanding as of December 31, 2022 and
79,652 shares issued and 49,063 shares outstanding as of December 31, 2021
781
797
Additional paid-in capital
895,834
288,946
Accumulated other comprehensive income (loss)
46,713
(11,914
)
Retained earnings
55,338
740,820
Less treasury stock at cost: 198 and 30,590 shares as of December 31, 2022 and 2021,
respectively
(4,125
)
(661,547
)
Non-controlling interest
309,072
Total Equity
1,303,613
357,102
Total Liabilities and Equity
$
1,943,494
$
569,017
See accompanying notes to consolidated financial statements.
50
ADTRAN Holdings, Inc.
Consolidated Statements of (Loss) Income
(In thousands, except per share amounts)
Years ended December 31, 2022, 2021 and 2020
2022
2021
2020
Revenue
Network Solutions
$
916,793
$
498,834
$
438,015
Services & Support
108,743
64,170
68,495
Total Revenue
1,025,536
563,004
506,510
Cost of Revenue
Network Solutions
647,105
307,841
244,226
Services & Support
51,179
36,786
44,733
Total Cost of Revenue
698,284
344,627
288,959
Gross Profit
327,252
218,377
217,551
Selling, general and administrative expenses
208,889
124,414
113,972
Research and development expenses
173,757
108,663
113,287
Asset impairment
17,433
65
Operating Loss
(72,827
)
(14,700
)
(9,773
)
Interest and dividend income
2,123
2,844
1,936
Interest expense
(3,437
)
(34
)
(5
)
Net investment (loss) gain
(11,339
)
1,761
4,850
Other income (expense), net
14,517
3,824
(3,254
)
Loss Before Income Taxes
(70,963
)
(6,305
)
(6,246
)
Income tax benefit (expense)
62,075
(2,330
)
8,624
Net (Loss) Income
$
(8,888
)
$
(8,635
)
$
2,378
Less: Net Loss attributable to non-controlling interest
(6,851
)
Net (Loss) Income attributable to ADTRAN Holdings, Inc.
$
(2,037
)
$
(8,635
)
$
2,378
Weighted average shares outstanding – basic
62,346
48,582
47,996
Weighted average shares outstanding – diluted
62,346
48,582
48,288
(Loss) earnings per common share attributable to ADTRAN Holdings, Inc. – basic
$
(0.03
)
$
(0.18
)
$
0.05
(Loss) earnings per common share attributable to ADTRAN Holdings, Inc. – diluted
$
(0.03
)
$
(0.18
)
$
0.05
See accompanying notes to consolidated financial statements.
51
ADTRAN Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Years ended December 31, 2022, 2021 and 2020
2022
2021
2020
Net (Loss) Income
$
(8,888
)
$
(8,635
)
$
2,378
Other Comprehensive Income (Loss), net of tax
Net unrealized (loss) gain on available-for-sale securities
(284
)
(584
)
316
Defined benefit plan adjustments
4,597
4,008
(395
)
Foreign currency translation gain (loss)
53,396
(3,699
)
4,857
Other Comprehensive Income (Loss), net of tax
57,709
(275
)
4,778
Less: Comprehensive Loss attributable to non-controlling interest, net of tax
(918
)
Comprehensive Income (Loss) attributable to ADTRAN Holdings, Inc., net of tax
$
49,739
$
(8,910
)
$
7,156
See accompanying notes to consolidated financial statements.
52
ADTRAN Holdings, Inc.
Consolidated Statements of Changes in Equity
(In thousands, except per share amounts)
Years ended December 31, 2022, 2021 and 2020
Common
Shares
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Non-
controlling
interest
Total
Equity
Balance as of December 31, 2019
79,652
$
797
$
274,632
$
806,702
$
(685,288
)
$
(16,417
)
$
$
380,426
Net income
2,378
2,378
Other comprehensive income, net of tax
4,778
4,778
Dividend payments ($0.09 per share)
(17,334
)
(17,334
)
Dividends accrued on unvested restricted
stock units
(180
)
(180
)
Deferred compensation adjustments,
net of tax
(2,806
)
(2,806
)
PSUs, RSUs and restricted stock vested
(9,753
)
8,601
(1,152
)
Stock-based compensation expense
6,834
6,834
Balance as of December 31, 2020
79,652
797
281,466
781,813
(679,493
)
(11,639
)
372,944
Net loss
(8,635
)
(8,635
)
Other comprehensive loss, net of tax
(275
)
(275
)
Dividend payments ($0.09 per share)
(17,529
)
(17,529
)
Non-cash dividend payments ($0.09 per
share)
(5
)
5
Dividends accrued on unvested restricted
stock units
(320
)
(320
)
Deferred compensation adjustments,
net of tax
(1,248
)
(1,248
)
Stock options exercised
(1,842
)
8,274
6,432
PSUs, RSUs and restricted stock vested
(12,662
)
10,915
(1,747
)
Stock-based compensation expense
7,480
7,480
Balance as of December 31, 2021
79,652
797
288,946
740,820
(661,547
)
(11,914
)
357,102
Net loss
(2,037
)
(6,851
)
(8,888
)
Acquisition of ADVA
27,995
280
577,980
316,415
894,675
Retirement of treasury stock
(30,330
)
(303
)
(655,761
)
656,064
Other comprehensive loss, net of tax
58,627
(918
)
57,709
Dividend payments ($0.09 per share)
(22,885
)
(22,885
)
Dividends accrued on unvested restricted
stock units
353
353
Deferred compensation adjustments, net of
tax
(71
)
(71
)
ADTRAN RSUs and restricted stock vested
372
4
(10,482
)
631
(9,847
)
ADTRAN stock options exercised
399
3
5,330
798
6,131
ADTRAN stock-based compensation
expense
26,141
26,141
Reclassification of ADVA stock options
187
99
286
ADVA stock options exercised
472
254
726
ADVA stock-based compensation expense
2,108
73
2,181
Balance as of December 31, 2022
78,088
$
781
$
895,834
$
55,338
$
(4,125
)
$
46,713
$
309,072
$
1,303,613
See accompanying notes to consolidated financial statements.
53
ADTRAN Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 2022, 2021 and 2020
2022
2021
2020
Cash flows from operating activities:
Net (Loss) Income
$
(8,888
)
$
(8,635
)
$
2,378
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating
activities:
Depreciation and amortization
67,553
16,084
16,627
Asset impairments
17,433
65
Amortization of debt issuance cost
288
Amortization of net discount on available-for-sale investments
19
108
Loss (gain) on investments
9,826
(5,127
)
(5,802
)
Net loss on disposal of property, plant and equipment
152
4
Stock-based compensation expense
28,322
7,480
6,834
Deferred income taxes
(62,388
)
(1,784
)
(1,356
)
Inventory reserves
(2,363
)
(5,029
)
(5,398
)
Other, net
216
Change in operating assets and liabilities:
Accounts receivable, net
788
(60,864
)
(7,269
)
Other receivables
(20,088
)
9,752
(4,732
)
Inventory
(73,237
)
(10,638
)
(20,184
)
Prepaid expenses other current assets and other assets
(7,116
)
(7,146
)
(5,239
)
Accounts payable
28,105
53,270
4,543
Accrued expenses and other liabilities
(20,483
)
10,063
5,093
Income taxes payable
(2,151
)
5,470
(2,294
)
Net cash (used in) provided by operating activities
(44,228
)
3,008
(16,518
)
Cash flows from investing activities:
Purchases of property, plant and equipment
(17,072
)
(5,669
)
(6,413
)
Proceeds from sales and maturities of available-for-sale investments
51,661
50,466
105,100
Purchases of available-for-sale investments
(23,899
)
(35,031
)
(56,767
)
Proceeds from beneficial interests in securitized accounts receivable
1,126
Proceeds from disposals of property, plant and equipment
12
2
Insurance proceeds received
500
Acquisition of note receivable
(523
)
Acquisition of business, net of cash acquired
44,003
Net cash provided by investing activities
55,831
10,266
41,399
Cash flows from financing activities:
Tax withholdings related to stock-based compensation settlements
(4,253
)
(1,860
)
(1,043
)
Proceeds from stock option exercises
6,904
6,431
Dividend payments
(22,885
)
(17,529
)
(17,334
)
Proceeds from draw on revolving credit agreements
141,887
10,000
Repayment of revolving credit agreements
(48,000
)
(10,000
)
Payment of debt issuance cost
(3,015
)
Repayment of bonds payable
(24,600
)
Repayment of notes payable
(17,702
)
Net cash provided by (used in) financing activities
52,936
(12,958
)
(42,977
)
Net increase (decrease) in cash and cash equivalents
64,539
316
(18,096
)
Effect of exchange rate changes
(12,713
)
(3,677
)
4,502
Cash, cash equivalents and restricted cash, beginning of year
56,818
60,179
73,773
Cash, cash equivalents and restricted cash, end of year
$
108,644
$
56,818
$
60,179
Supplemental disclosure of cash financing activities
Cash paid for interest
$
1,728
$
13
$
24
Cash paid for income taxes
$
3,832
$
1,780
$
7,609
Cash used in operating activities related to operating leases
$
5,229
$
1,892
$
2,632
Supplemental disclosure of non-cash investing activities
Right-of-use assets obtained in exchange for lease obligations
$
3,410
$
1,875
$
324
Purchases of property, plant and equipment included in accounts payable
$
1,165
$
638
$
108
ADVA common shares exchanged in acquisition
$
565,491
$
$
ADVA options assumed in acquisition
$
12,769
$
$
Non-controlling interest related to ADVA
$
316,415
$
$
See accompanying notes to consolidated financial statements.
54
Notes to Consolidated Financial Statements
Note 1 – Nature of Business
ADTRAN Holdings, Inc. (“ADTRAN” or the “Company”) is a leading global provider of networking and communications platforms,
software, systems and services focused on the broadband access market, serving a diverse domestic and international customer base in
multiple countries that includes Tier-1, -2 and -3 service providers, alternative service providers, such as utilities, municipalities and
fiber overbuilders, cable/MSOs, SMBs and distributed enterprises. Our innovative solutions and services enable voice, data, video and
internet-communications across a variety of network infrastructures and are currently in use by millions worldwide. We support our
customers through our direct global sales organization and our distribution networks. Our success depends upon our ability to increase
unit volume and market share through the introduction of new products and succeeding generations of products having optimal selling
prices and increased functionality as compared to both the prior generation of a product and to the products of competitors in order to
gain market share. To service our customers and grow revenue, we are continually conducting research and developing new products
addressing customer needs and testing those products for the specific requirements of the particular customers. We offer a broad portfolio
of flexible software and hardware network solutions and services that enable service providers to meet today’s service demands, while
enabling them to transition to the fully converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network
of the future. In addition to our global headquarters in Huntsville, Alabama, and our European headquarters in Munich, Germany, we
have sales and research and development facilities in strategic global locations.
In 2022, following the business combination (the “Business Combination”) with ADVA Optical Networking SE (“ADVA”), which
included the Merger, we became the sole owner of and successor to ADTRAN, Inc. and the majority shareholder of ADVA. ADTRAN,
Inc. is a leading global provider of open, disaggregated networking and communications solutions that enable voice, data, video, and
internet communications across any network infrastructure. Its award-winning end-to-end fiber broadband solutions portfolio spans
from OLTs to in-home services and intelligent SaaS solutions. ADVA is a global provider of open networking solutions with over 25
years of experience in optical networking, carrier Ethernet access and network synchronization. ADVA has led the industry for over
two decades with open and secure networking solutions that carefully balance space, power and cost. Together, we serve customers in
a broad range of industries in over 100 countries.
Principles of Consolidation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted
in the U.S. (“U.S. GAAP”) and include the financial position, results of operations, comprehensive (loss) income, changes in equity and
cash flows of ADTRAN and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include allowance for
credit losses on accounts receivable and contract assets, excess and obsolete inventory reserves, warranty reserves, customer rebates,
determination and accrual of the deferred revenue related to performance obligations under contracts with customers, estimated costs to
complete obligations associated with deferred and accrued revenues and network installations, estimated income tax provision and
income tax contingencies, fair value of stock-based compensation, assessment of goodwill and other intangibles for impairment,
estimated lives of intangible assets, estimates of intangible assets upon measurement, estimated pension liability and fair value of
investments. Actual amounts could differ significantly from these estimates.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the
information reasonably available to us and the unknown future impacts of the SARS-CoV-2 coronavirus/COVID-19 global pandemic
(or variants of the SARS-CoV-2 coronavirus), supply chain constraints, inflationary pressures, the energy crisis, currency fluctuations
and political tensions as of December 31, 2022 and through the date of this report. The accounting matters assessed included, but were
not limited to, the allowance for credit losses, stock-based compensation, carrying value of goodwill, intangibles and other long-lived
assets, financial assets, valuation allowances for tax assets, revenue recognition and costs of revenue. Future conditions related to the
magnitude and duration of the COVID-19 pandemic, as well as other factors, including supply chain constraints and inflationary
pressures could result in further impacts to the Company's consolidated financial statements in future reporting periods.
Restatement of Previously Issued Financial Statements
During the second quarter of 2023, the Company determined that it overstated total current liabilities and understated non-current
liabilities as of December 31, 2022, due to a revolving credit agreement being classified as a current liability instead of a non-current
liability. The total amount of liabilities remains unchanged. The Company restated the December 31. 2022
Consolidated Balance Sheet
presented in this report by decreasing the current portion of revolving credit agreements outstanding by $60.0 million and increasing
non-current revolving credit agreement outstanding by $60.0 million.
55
The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported
consolidated financial statements as of December 31, 2022:
(In thousands)
As Reported
Adjustment
As Restated
Revolving credit agreements outstanding
$
95,936
$
(60,000
)
$
35,936
Total current liabilities
$
488,575
$
(60,000
)
$
428,575
Non-current revolving credit agreement outstanding
$
$
60,000
$
60,000
During the first quarter of 2023, the
Company determined that it understated total assets and total liabilities as of December 31, 2022,
due to improper netting of deferred tax assets and deferred tax liabilities. While the net amount of deferred tax assets and liabilities
remains unchanged, the Company reported the deferred tax assets and liabilities balances without properly applying jurisdictional net
reporting disclosure rules. The jurisdictional netting error was a result of the consolidation of financial statements with ADVA following
the business combination, which closed on July 15, 2022. Management has determined that this misstatement was not material to any
of its previously issued financial statements. However, the Company restated the December 31, 2022 Consolidated Balance Sheet
presented in this Amendment No. 1 by increasing deferred tax assets and total assets by $61.6 million and increasing deferred tax
liability, total liabilities, and total liabilities, redeemable non-controlling interest and equity by $61.6 million.
The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported
consolidated financial statements as of December 31, 2022:
(In thousands)
As Reported
Adjustment
As Restated
Deferred tax assets
$
6,210
$
61,629
$
67,839
Total assets
$
1,881,865
$
61,629
$
1,943,494
Deferred tax liabilities
$
$
61,629
$
61,629
Total liabilities
$
578,252
$
61,629
$
639,881
The accompanying applicable Notes have been updated to reflect the effects of the restatement as of December 31, 2022.
Correction of Immaterial Misstatements
During the first quarter of 2020, it was determined that certain investments held in the Company’s stock for a deferred compensation
plan accounted for as a Rabbi trust were incorrectly classified as long-term investments with the fair value of such investments
incorrectly marked to market at each period end rather than classified as treasury stock held at historical cost. This plan has been in
existence since 2011. The Company corrected this misstatement as an out-of-period adjustment in the three months ended March 31,
2020 and the twelve months ended December 31, 2020, by remeasuring the investment assets to their historical cost basis through the
recording of a net investment gain of $1.5 million in the Consolidated Statement of (Loss) Income and then correcting the classification
by decreasing the long-term investment balance at its remeasured cost basis of $2.8 million to treasury stock in the Consolidated 2020
Balance Sheet. Management has determined that this misstatement was not material to any of its previously issued financial statements
and that correction of the misstatement was not material to the 2020 annual financial results on either a quantitative or qualitative basis.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents represent demand deposits, money market funds and short-term investments classified as available-for-sale
with original maturities of three months or less. We maintain depository investments with certain financial institutions. As of
December 31, 2022, $100.1 million of our cash and cash equivalents, primarily certain domestic money market funds and foreign
depository accounts, were in excess of government provided insured depository limits. Although these depository investments may
exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions and
determined the risk of material financial loss due to the exposure of such credit risk to be minimal.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived
from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied. Assets and
liabilities recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the
inputs used to measure their fair values.
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the immediate or short-term maturity of these financial instruments.
56
The fair value measurements of our derivative instruments are determined using models that maximize the use of the observable market
inputs including interest rate curves and both forward and spot prices for currencies, and are classified as Level II under the fair value
hierarchy. The fair values of our derivatives are included in Note 12.
The estimated fair value of our notes payable, approximates the carrying value and is classified as Level II under the fair value hierarchy.
The carrying value of our notes payable is included in Note 14.
Investments with contractual maturities beyond one year may be classified as short-term based on their highly liquid nature and because
such marketable securities represent the investment of cash that is available for current operations. Despite the long-term nature of their
stated contractual maturities, we routinely buy and sell these securities and we believe we have the ability to quickly sell them to the
remarketing agent, tender agent or issuer at par value plus accrued interest in the event we decide to liquidate our investment in a
particular variable rate demand note. All income generated from these investments is recorded as interest income. We have not recorded
any losses relating to variable rate demand notes.
Long-term investments is comprised of deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed
bonds, mortgage/agency-backed bonds, U.S. and foreign government bonds, marketable equity securities and other equity investments.
Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance
sheet date, although the securities may not be readily marketable due to the size of the available market. Any changes in fair value are
recognized in net investment (loss) gain. Realized gains and losses on sales of debt securities are computed under the specific
identification method and are included in other income (expense). See Note 6 for additional information.
For financing receivables, the Company does not measure the allowance for credit losses for accrued interest receivables, as the
uncollectable accrued interest receivable is written off by reversing any previously recorded interest income in a timely manner (as soon
as these amounts are determined to be uncollectable).
Accounts Receivable
We record accounts receivable at amortized cost. Prior to establishing payment terms for a new customer, we evaluate the credit risk of
the customer. Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection
experience and other financial factors. As of December 31, 2022, single customers comprising more than 10% of our total accounts
receivable balance included three customers, which accounted for 33.1% of our total accounts receivable. As of December 31, 2022,
these three customers individually accounted for 11.4%, 11.1% and 10.6%, respectively, of our total accounts receivable. As of
December 31, 2021, single customers comprising more than 10% of our total accounts receivable balance included three customers,
which accounted for 59.9% of our total accounts receivable. As of December 31, 2021, these three customers individually accounted
for 35.8%, 12.1% and 12.0%, respectively, of our total accounts receivable.
We regularly review the need for an allowance for credit losses related to our outstanding accounts receivable balances using the
historical loss-rate method as well as assessing asset-specific risks. The assessment of asset-specific risks included the evaluation of
relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to
pay, such as the customer’s current financial condition or credit rating by geographic location, as provided by a third party and/or by
customer, if needed, and overall macro-economic conditions in which the customer operates. Based on this assessment, an allowance
for credit losses would be recorded if the Company determined that, based on our historical write-offs, which have been immaterial, and
such asset specific risks, there was risk in collectability of the full amount of any accounts receivable.
Accounts Receivable Factoring
The Company has entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-
recourse basis. These transactions are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 860,
Transfers and Servicing,
and result in a reduction in accounts receivable because the agreements transfer effective control over and risk
related to the receivables to the buyers. Trade accounts receivables balances sold are removed from the Consolidated Balance Sheets
and cash received is reflected as cash provided by (used in) operating activities in the Consolidated Statements of Cash Flow. Factoring
related interest expense is recorded to interest expense on the Consolidated Statements of Loss. On each sale date, the financial institution
retains from the sale price a default reserve, up to a required balance, which are held by the financial institution in a reserve account and
pledged to the Company. The financial institution is entitled to withdraw from the reserve account the sale price of a defaulted receivable.
The balance in the reserve account is included in other assets on the Consolidated Balance Sheets.
Inventory
Inventory is carried at the lower of cost and estimated net realizable value, with cost being determined using the first-in, first-out method.
Standard costs for material, labor and manufacturing overhead are used to value inventory and are updated at least quarterly. We establish
reserves for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net
realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known trends, inventory age
and market conditions. When we dispose of excess and obsolete inventories, the related disposals are charged against the inventory
reserve. See Note 7 for additional information.
57
Property, Plant and Equipment
Property, plant and equipment, which is stated at cost, is depreciated using the straight-line method over the estimated useful lives of
the assets. We depreciate building and land improvements from five to 39 years, office machinery and equipment from three to seven
years, engineering machinery and equipment from three to seven years, and computer software from three to five years. Expenditures
for repairs and maintenance are charged to expense as incurred. Major improvements that materially prolong the lives of the assets are
capitalized. Gains and losses on the disposal of property, plant and equipment are recorded in operating loss. See Note 8 for additional
information.
Intangible Assets
Purchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is recorded over the
estimated useful lives of the respective assets. See Note 11 for additional information.
Impairment of Long-Lived Assets and Intangibles
Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the
asset’s carrying value. In connection with the planned integration of information technology following the Business Combination, we
determined that certain projects no longer fit our needs. As a result the Company recognized impairment charges of $17.4 million during
the year ended December 31, 2022 related to capitalized implementation costs for a cloud computing arrangement. The impairment
charges were determined based on actual costs incurred. There were no impairment losses for long-lived assets during the years ended
December 31, 2021 and 2020, or for intangible assets recognized during the years ended December 31, 2022, 2021 or 2020.
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired. The carrying value of goodwill is tested for
impairment in the fourth quarter of each year or more frequently if events or circumstances indicate it may be impaired. The quantitative
goodwill impairment test is performed at the level of the reporting unit. The identification of our reporting units begins at the operating
segment level and considers whether components one level below the operating segment levels should be identified as reporting units
for purpose of testing goodwill for impairment. For goodwill impairment testing purposes, the Company determined the Company's
reporting units are generally the same as its operating segments, which are identified in Note 18 to the Consolidated Financial Statements.
Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances
that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Related to the Business Combination
with ADVA the Company recognized $350.5 million of goodwill upon the merger on July 15, 2022. Therefore, we decided to proceed
directly to the quantitative test of goodwill and forego the qualitative assessment. We estimate the fair value of our reporting units based
on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.
A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates
and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market
participants. We also estimate the fair value of our reporting units based on a peer group analysis, whereby companies in the
telecommunications industry or with a comparable product and market structure are used to calculate a fair enterprise value using
revenue, EBITDA and debt multiples of trading value. Based on our analysis, management concluded that there was no impairment of
goodwill as of December 31, 2022. No impairment charges on goodwill were recognized during the years ended December 31, 2021
and 2020.
Other Non-Current Assets
Implementation costs incurred for hosting arrangements that are related to service contracts are capitalized and amortized over the term
of the arrangement. Capitalized implementation costs totaled $6.2 million and $21.0 million as of December 31, 2022 and 2021,
respectively and are included in other non-current assets on the Consolidated Balance Sheets. In connection with the planned integration
of information technology following the Business Combination, we determined that certain projects no longer fit our needs. As a result
the Company recognized impairment charges of $16.9 million during the year ended December 31, 2022 related to capitalized
implementation costs for a cloud computing arrangement. The impairment charges were determined based on actual costs incurred.
During the year ended December 31, 2021 and 2020, no impairment charges were recognized. We depreciate capitalized implementation
costs on a straight-line basis over ten years. Amortization expense was $3.9 million and $1.0 million for the years ended December 31,
2022 and 2021, respectively, which is recorded almost entirely in selling, general and administrative expenses in the Consolidated
Statements of (Loss) Income. No amortization expense was recognized for the year ended December 31, 2020.
58
Liability for Warranty
Our products generally include warranties of 90 days to five years for product defects. We accrue for warranty returns at the time of
product shipment based on our historical return rate and estimate of the cost to repair or replace the defective products. We engage in
extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers.
The increasing complexity of our products will cause warranty incidences, when they arise, to be more costly. Our estimates regarding
future warranty obligations may change due to product failure rates, material usage and other rework costs incurred in correcting a
product failure. In addition, from time to time, specific warranty accruals may be recorded if unforeseen problems arise. Should our
actual experience relative to these factors be worse than our estimates, we will be required to record additional warranty expense. Our
liability for warranty returns totaled $7.2 million and $5.4 million as of December 31, 2022 and 2021, respectively.
Pension Benefit Plan Obligations
We maintain a defined benefit pension plan covering employees in certain foreign countries. Pension benefit plan obligations are based
on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate
increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes
in assumptions could affect future expenses and obligations. Our net pension liability totaled $10.6 million and $11.4 million as of
December 31, 2022 and 2021, respectively.
Lease Obligations
We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations.
Other contracts, such as manufacturing agreements and service agreements, are reviewed to determine if they contain potential embedded
leases. These other contracts are specifically reviewed to determine whether we have the right to substantially all of the economic benefit
from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of
a lease. Some of our leases include options to renew, with renewal terms of up to five years. For those leases that are reasonably assured
to be renewed, we have included the option to extend as part of our right of use asset and lease liability. The exercise of lease renewal
options is at our sole discretion. The depreciable life of leased assets and leasehold improvements are limited by the expected lease term.
Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized
on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we elected
to not separate lease and non-lease components. Our lease agreements do not contain any material residual value guarantees or material
restrictive covenants.
Stock-Based Compensation
We have two stock incentive plans from which stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and
restricted stock are available for grant to employees and directors. Costs related to these awards are recognized over their vesting periods.
Stock-based compensation expense recognized for the years ended December 31, 2022, 2021 and 2020 was approximately $28.3 million,
$7.5 million, and $6.8 million, respectively. See Note 5 for additional information.
Research and Development Costs
Research and development costs include compensation for engineers and support personnel, contracted services, depreciation and
material costs associated with new product development, enhancement of current products and product cost reductions. We continually
evaluate new product opportunities and engage in intensive research for product and software development efforts. Research and
development costs totaled $173.8 million, $108.7 million and $113.3 million for the years ended December 31, 2022, 2021 and 2020,
respectively.
ADVA has arrangements with governmental entities for the purposes of obtaining funding for research and development activities. The
Company classifies government grants received under these arrangements as a reduction to research and development expense incurred.
For the year ended December 31, 2022, the Company recognized $1.1 million as a reduction of research and development expense.
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this
approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are
recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred
taxes during the year. Deferred taxes result from the difference between financial and tax basis of our assets and liabilities and are
adjusted for changes in tax rates and tax laws when such changes are enacted. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions
become uncertain. We adjust these reserves, including any impact on the related interest and penalties, as facts and circumstances
change.
59
Foreign Currency
Transactions with customers that are denominated in foreign currencies are recorded using the appropriate exchange rates from
throughout the year. Assets and liabilities denominated in foreign currencies are remeasured at the balance sheet dates using the closing
rates of exchange between those foreign currencies and the functional currency with any transaction gains or losses reported in other
income (expense). Our primary exposures to foreign currency exchange rate movements are with our German subsidiary, whose
functional currency is the Euro and our Australian subsidiary, whose functional currency is the Australian dollar. Adjustments resulting
from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive
(loss) income.
Revenue
Revenue is measured based on the consideration expected to be received in exchange for transferring goods or providing services to a
customer and as performance obligations under the terms of the contract are satisfied. Generally, this occurs with the transfer of control
of a product to the customer. Review of contracts with customers, for both direct customers and distributors, are performed and
assessment made regarding principal versus agent considerations to determine primary responsibility for delivery of performance
obligation, presumed inventory risk, and discretion in establishing pricing, when applicable. For transactions where there are multiple
performance obligations, individual products and services are accounted for separately if they are distinct (if a product or service is
separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available
to the customer). The consideration, including any discounts, is allocated between separate products and services based on their stand-
alone selling prices. Stand-alone selling prices are determined based on the prices at which the separate products and services are sold
and are allocated based on each item’s relative value to the total value of the products and services in the arrangement. For items that
are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach. Payment
terms are generally 30 days in the U.S. and typically longer in many geographic markets outside the U.S. Shipping fees are recorded as
revenue and the related cost is included in cost of revenue. Revenue, value-added and other taxes collected concurrently with revenue-
producing activities are excluded from revenue. Costs of obtaining a contract, if material, are capitalized and amortized over the period
that the related revenue is recognized if greater than one year. We have elected to account for shipping fees as a cost of fulfilling the
related contract. We have also elected to apply the practical expedient related to the incremental costs of obtaining contracts and
recognize those costs as an expense when incurred if the amortization period of the assets is one year or less. These costs are included
in selling, general and administrative expenses. Capitalized costs with an amortization period greater than one year were immaterial.
Revenue is generated by two reportable segments: Network Solutions and Services & Support.
Network Solutions Segment -
Includes hardware products and software defined next-generation virtualized solutions used in service
provider or business networks, as well as prior generation products. The majority of the revenue from this segment is from hardware
revenue.
Hardware and Software Revenue
Revenue from hardware sales is recognized when control is transferred to the customer, which is generally when the products are
shipped. Shipping terms are generally FOB shipping point. Revenue from software license sales is recognized at delivery and transfer
of control to the customer. Revenue is recorded net of estimated discounts and rebates using historical trends. Customers are typically
invoiced when control is transferred and revenue is recognized. Our products generally include assurance-based warranties of 90 days
to five years for product defects, which are accrued at the time products are delivered.
Services & Support Segment -
Includes a complete portfolio of maintenance, network implementation and solutions integration and
managed services, which include hosted cloud services and subscription services to complement our Network Solutions segment.
Maintenance Revenue
Our maintenance service periods range from one month to five years. Customers are typically invoiced and pay for maintenance services
at the beginning of the maintenance period. We recognize revenue for maintenance services on a straight-line basis over the maintenance
period as our customers benefit evenly throughout the contract term and deferred revenue, when applicable, are recorded in current and
non-current unearned revenue.
Network Implementation Revenue
We recognize revenue for network implementation, which primarily consists of engineering, execution and enablement services at a
point in time when each performance obligation is complete. If we have recognized revenue but have not billed the customer, the right
to consideration is recognized as a contract asset that is included in other receivables on the Consolidated Balance Sheet. The contract
asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.
See Notes 4 and 18 for additional information on reportable segments.
60
Unearned Revenue
Unearned revenue primarily represents customer billings on maintenance service programs and unearned revenue related to multiple
element contracts where we still have contractual obligations to our customers. We currently offer maintenance contracts ranging from
one month to five years. Revenue attributable to maintenance contracts is recognized on a straight-line basis over the related contract
term. In addition, we provide software maintenance and a variety of hardware maintenance services to customers under contracts with
terms up to ten years. When we defer revenue related to multiple performance obligations where we still have contractual obligations,
we also defer the related costs. Current deferred costs are included in prepaid expenses and other current assets on the accompanying
Consolidated Balance Sheets and totaled $1.5 million and $0.7 million as of December 31, 2022 and 2021, respectively. Non-current
deferred costs are included in other non-current assets on the accompanying Consolidated Balance Sheets and less than $0.1 million as
of December 31, 2022 and $0.1 million as of December 31, 2021.
(Loss) Earnings per Share
(Loss) earnings per common share and (loss) earnings per common share assuming dilution are based on the weighted average number
of common shares and, when dilutive, common equivalent shares outstanding during the year. See Note 22 for additional information.
Business Combinations
The Company records assets acquired, liabilities assumed, contractual contingencies, when applicable, and intangible assets recognized
as part of business combinations based on their fair values on the date of acquisition subject to purchase accounting adjustments. The
excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities assumed or acquired is
recorded as goodwill. If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the
purchase price, a bargain purchase gain is recorded. The Company’s estimates of fair value are based on historical experience, industry
knowledge, certain information obtained from the management of the acquired company and, in some cases, valuations performed by
independent third-party firms. The results of operations of acquired companies are included in the accompanying Consolidated
Statements of (Loss) Income since their dates of acquisition. Costs incurred to complete the Business Combination, such as legal,
accounting or other professional fees are charged to selling, general and administrative expenses as incurred.
Non-Controlling Interest
Non-controlling interest represents the equity interest in ADVA held by holders other than the Company. On July 15, 2022, upon the
close of the Business Combination, the ADVA stockholders’ equity ownership percentage in ADVA was approximately 36%. The
Company has consolidated the financial position and results of operations of ADVA and reflected the proportionate interest held by the
ADVA stockholders as non-controlling interest in the accompanying condensed consolidated balance sheet. As of December 31, 2022,
the ADVA stockholders’ equity ownership percentage in ADVA was approximately 34.7%.
Recent Accounting Pronouncements Not Yet Adopted
There are currently no recently issued accounting pronouncements not yet adopted which would have a material effect on the Condensed
Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2021-08, Business
Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which would require
an acquirer to recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree
recognized and measured them in its pre-acquisition financial statements in accordance with Topic 606, Revenue Recognition. The
Company early adopted ASU 2021-08 on July 1, 2022 and the standard was applied retrospectively beginning with January 1, 2022.
Note 2 – Business Combination Agreement
ADVA Optical Networking SE
On August 30, 2021, ADTRAN and ADVA, entered into a Business Combination Agreement, pursuant to which both companies agreed
to combine their respective businesses and each become subsidiaries of a new holding company, ADTRAN Holdings, Inc. (formerly
known as Acorn HoldCo, Inc.) which was formed as a wholly-owned subsidiary of ADTRAN in order to consummate the transactions
under the Business Combination Agreement. Under the terms of the Business Combination Agreement, on July 8, 2022, Acorn
MergeCo, Inc, a Delaware corporation and wholly-owned direct subsidiary of the Company, merged with and into ADTRAN, Inc.
leaving ADTRAN, Inc. surviving the merger as a wholly-owned direct subsidiary of the Company.
Additionally, pursuant to the Business Combination Agreement, on July 15, 2022, the Company made a public offer to exchange each
issued and outstanding no-par value bearer share of ADVA for 0.8244 shares of Company Common Stock, par value $0.01 per share of
the Company. The Exchange Offer was settled on Exchange Offer Settlement Date, on which date the Company acquired 33,957,538
61
bearer shares of ADVA, or 65.43% of ADVA’s outstanding bearer shares as of the Exchange Offer Settlement Date, in exchange for
the issuance of an aggregate of 27,994,595 shares of Company Common Stock. Additionally, pursuant to the Business Combination
Agreement, ADVA stock option holders were entitled to have their ADVA stock options assumed by ADTRAN Holdings, Inc. (applying
the exchange ratio in the Business Combination Agreement), thereafter representing options to acquire stock of ADTRAN, Inc. The fair
value of the ADVA stock options assumed by ADTRAN, Inc. was $12.8 million, estimated using the Monte Carlo method.
ADTRAN, Inc. and ADVA became subsidiaries of ADTRAN Holdings, Inc. as a result of the Business Combination. ADTRAN was
determined to be the accounting acquirer of ADVA based on ADTRAN shareholders’ majority equity stake in the combined company,
the composition of the board of directors and senior management of the combined company, among other factors. The Business
Combination of ADVA has been accounted for using the acquisition method of accounting as per the provisions of Accounting Standards
Codification 805, “Business Combinations” (“ASC 805”). The Business Combination Agreement used a fixed exchange ratio of
Company Common Stock for ADVA shares of common stock, which resulted in a 36% equity stake for ADVA stockholders and 64%
equity stake for ADTRAN stockholders in the post-closing combined company (calculated on a fully diluted basis and utilizing the
tender of 65.43% of ADVA’s current issued and outstanding share capital). Therefore, ADTRAN shareholders continue to hold a
majority interest in the combined company after the Business Combination was completed. Additionally, the Board of Directors is
comprised of six members from ADTRAN and three members from ADVA; the current ADTRAN chief executive officer acts as the
chairman of the Board of Directors and the former ADVA chief executive officer as the vice chairman of the Board of Directors.
Additionally, the current ADTRAN chief executive officer and ADTRAN chief financial officer hold these positions within the
combined company. Based upon these and other considerations as outlined in ASC 805, ADTRAN represents the accounting acquirer.
The following table summarizes the purchase price for the ADVA business combination:
(In thousands, except shares, share price and exchange ratio)
Purchase Price
ADVA shares exchanged
33,957,538
Exchange ratio
0.8244
ADTRAN Holdings, Inc. shares issued
27,994,595
ADTRAN Holdings, Inc. share price on July 15, 2022
$
20.20
Purchase price paid for ADVA shares
$
565,491
Equity compensation
(1)
$
12,769
Total purchase price
$
578,260
(1)
Represents the portion of replacement share-based payment awards that relates to pre-combination vesting.
Assets acquired and liabilities assumed were recognized at their respective fair values as of July 15, 2022. In determining the fair value,
the Company utilized various methods of the income, cost and market approaches depending on the asset or liability being fair valued.
The estimation of fair value required significant judgment related to future net cash flows reflecting the risk inherent in each cash flow
stream, competitive trends, market comparables and other factors. Inputs were generally determined by taking into account historical
data, current and anticipated market conditions, and growth rates.
Developed technology and customer relationships were valued using the multi-period excess earnings method. Backlog was valued
using the distributor method. Significant assumptions used in the discounted cash flow analysis for (i) developed technology were the
revenue growth rates, long-term revenue growth rate, discount rate, and earnings before interest, taxes, depreciation and amortization
(“EBITDA”) margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation; (ii) customer relationships
were earnings before interest and taxes (“EBIT”) margins, contributory asset charges, and customer attrition rate; and (iii) backlog were
EBIT margins, adjusted EBIT margins, and contributory asset charges.
The allocation of the purchase price to the assets acquired and liabilities assumed was subject to adjustment within the measurement
period (up to one year from the acquisition date). The measurement period adjustments since initial preliminary estimates resulted from
changes to the fair value estimates of the acquired assets and assumed liabilities based on finalizing the valuations of inventory, prepaid
expenses and other current assets, property plant and equipment, intangible assets, other non-current assets and deferred tax assets and
liabilities. The cumulative effect of all measurement period adjustments resulted in a decrease to recognized goodwill of $8.7 million.
62
The following table summarizes the preliminary purchase price allocation for each major class of assets acquired and liabilities assumed
in the acquisition of ADVA (in thousands):
(In thousands)
Total purchase price
$
578,260
Non-controlling interest
$
316,415
Net Assets:
Cash and cash equivalents
$
44,003
Accounts receivable
114,659
Other receivables
1,457
Inventory
200,331
Prepaid expenses and other current assets
28,208
Property plant and equipment
55,480
Deferred tax assets
1,759
Identifiable intangible assets
403,780
Other non-current assets
31,074
Accounts payable
(98,587
)
Current unearned revenue
(26,047
)
Accrued expenses and other liabilities
(59,600
)
Income tax payable, net
(4,898
)
Current portion of notes payable
(25,254
)
Tax liabilities
(1,400
)
Non-current unearned revenue
(11,498
)
Pension liability
(6,820
)
Other non-current liabilities
(6,094
)
Non-current portion of revolving credit agreements and notes payable
(15,250
)
Non-current lease obligations
(20,046
)
Deferred tax liabilities
(61,040
)
Total net assets acquired
$
544,217
Goodwill
$
350,458
The allocation of the purchase price and fair value assessment of goodwill, deferred tax assets, and deferred tax liabilities continues to
be preliminary. The acquisition accounting is subject to revision once the Company receives final information. It is possible that the
final assessment of fair value may differ materially from the preliminary assessment. If the final assessment differs from this preliminary
assessment, the measurement period adjustments will be recorded in the period in which they are determined as if they had been
completed at the acquisition date.
The preliminary fair value of the assets acquired include accounts receivable of $114.7 million and other receivables of $1.5 million.
The unpaid principal balance under these receivables is $118.5 million and $1.5 million, respectively. The difference between the fair
value and the unpaid principal balance primarily represents amounts expected to be uncollectible.
The fair value of the identifiable intangible assets acquired as of the acquisition date:
(In thousands)
Estimated-average useful
life (in years)
(1)
Fair value
Income Statement Amortization Classification
Developed technology
8.5
$
291,925
Cost of revenue - Network Solutions
Backlog
1.4
52,165
Cost of revenue - Network Solutions and Services & Support
Customer relationships
10.5
32,704
Selling, general and administrative expenses
Trade name
2.8
26,986
Selling, general and administrative expenses
Total
$
403,780
(1)
Determination of the weighted average period of the individual categories of intangible assets was based on the nature of the applicable
intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with definite
lives is recognized over the period of time the assets are expected to contribute to future cash flows.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Based on
preliminary estimates, the ADVA acquisition resulted in the recognition of goodwill of $350.5 million, which the Company believes is
attributable to the value driven by the Company’s expected growth of the business, synergies, and expanded market and product
opportunities.
Goodwill created as a result of the ADVA acquisition that is not deductible for tax purposes.
After the Business Combination, the chief operating decision maker assessed and will continue to assess the Company’s performance
and allocate resources to its two segments (1) Network Solutions and (2) Services & Support. Based on preliminary estimates, the
63
goodwill resulting from the Business Combination of $272.8 million was allocated to the Network Solutions segment, and $77.7 million
was allocated to the Services & Support segment. See Note 18 of the Notes to Consolidated Financial Statements, included in this
Amendment No. 1 for more information about the Company’s segments.
As of the acquisition date, the fair value of the non-controlling interest was approximately $316.4 million and determined using a market
approach. As a portion of ADVA shares will remain trading after the Business Combination, the non-controlling interest was calculated
using 17,941,496 ADVA shares held by non-controlling interest multiplied by the ADVA closing share price of €17.58 ($17.64 using
the July 15, 2022 EUR to USD conversion rate of $1.00318) on July 15, 2022.
The Company included the financial results of ADVA in its consolidated financial statements since July 15, 2022, the acquisition date.
The net revenue and net loss from the ADVA business since July 15, 2022, were $365.9 million and $12.9 million, respectively, which
are included in the Company’s Consolidated Statement of Loss. The net loss attributable to non-controlling interest from the ADVA
business for the year ended December 31, 2022 was $6.9 million.
As of December 31, 2022, the Company has incurred $26.1 million of transaction costs related to the Business Combination, of which
$14.2 million and $11.9 million were incurred during the years ended December 31, 2022 and 2021, respectively. These transaction
costs are recorded in selling, general and administrative expense in the Consolidated Statements of Loss.
Supplemental Pro Forma Information (Unaudited)
The unaudited pro forma financial information in the table below summarizes the combined results of operations for ADTRAN and
ADVA as though the Business Combination had occurred on January 1, 2021. The pro forma amounts have been adjusted for differences
in basis of accounting which are determined before taking into effect the impacts of purchase accounting and Business Combination
accounting impacts.
The following unaudited pro forma information is presented for illustrative purposes only. It is not necessarily indicative of the results
of operations of future periods, the results of operations that actually would have been realized had the entities been a single company
as of January 1, 2021, or the future operating results of the combined entities. The unaudited pro forma information does not give effect
to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost
savings that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs
that the Company may incur related to the acquisition as part of combining the operations of the companies.
For the Years Ended
December 31,
(In thousands)
2022
2021
Revenue
$
1,410,296
$
1,210,201
Net loss attributable to ADTRAN Holdings, Inc.
$
(46,204
)
$
(91,423
)
Note 3 – Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance
Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:
(In thousands)
December 31, 2022
December 31, 2021
Cash and cash equivalents
$
108,644
$
56,603
Restricted cash
215
Cash, cash equivalents and restricted cash
$
108,644
$
56,818
64
Note 4 - Revenue
The following is a description of the principal activities from which revenue is generated by reportable segment:
Network Solutions Segment -
Includes hardware and software products that enable a digital future which support the Company's
Subscriber, Access and Aggregation, and Optical Networking Solutions.
Services & Support Segment -
Includes network design, implementation, maintenance and cloud-hosted services supporting the
Company's Subscriber, Access and Aggregation, and Optical Networking Solutions.
Revenue by Category
In addition to the Company's reportable segments, revenue is also reported for the following three categories – Subscriber Solutions,
Access & Aggregation Solutions and Optical Networking Solutions.
Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories: (1)
Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products. Following the Business
Combination with ADVA, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined
with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions
& Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions, and the revenue
from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.
Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.
Our Subscriber Solutions portfolio is used by service providers to terminate their access services infrastructure at the customer premises
while providing an immersive and interactive experience for residential, business and wholesale subscribers. This revenue category
includes hardware- and software-based products and services. These solutions include fiber termination solutions for residential,
business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network
edge virtualization solutions for business subscribers, and cloud software solutions covering a mix of subscriber types.
Our Access & Aggregation Solutions are solutions that are used by communications service providers to connect residential subscribers,
business subscribers and mobile radio networks to the service providers’ metro network, primarily through fiber-based connectivity.
This revenue category includes hardware- and software-based products and services. Our solutions within this category are a mix of
fiber access and aggregation platforms, precision network synchronization and timing solutions, and access orchestration solutions that
ensure highly reliable and efficient network performance.
Our Optical Networking Solutions are used by communications service providers, internet content providers and large-scale enterprises
to securely interconnect metro and regional networks over fiber. This revenue category includes hardware- and software-based products
and services. Our solutions within this category include open optical terminals, open line systems, optical subsystems and modules,
network infrastructure assurance systems, and automation platforms that are used to build high-scale, secure and assured optical
networks.
The following table disaggregates revenue by reportable segment and revenue category for the year ended December 31, 2022:
(In thousands)
Network Solutions
Services & Support
Total
Subscriber Solutions
$
364,238
$
26,216
$
390,454
Access & Aggregation Solutions
326,934
47,068
374,002
Optical Networking Solutions
225,621
35,459
261,080
Total
$
916,793
$
108,743
$
1,025,536
The following table disaggregates revenue by reportable segment and revenue category for the year ended December 31, 2021:
(In thousands)
Network Solutions
Services & Support
Total
Subscriber Solutions
$
189,825
$
16,385
$
206,210
Access & Aggregation Solutions
309,009
47,785
356,794
Optical Networking Solutions
Total
$
498,834
$
64,170
$
563,004
65
The following table disaggregates revenue by reportable segment and revenue category for the year ended December 31, 2020:
(In thousands)
Network Solutions
Services & Support
Total
Subscriber Solutions
$
163,349
$
15,315
$
178,664
Access & Aggregation Solutions
274,666
53,180
327,846
Optical Networking Solutions
Total
$
438,015
$
68,495
$
506,510
The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of December
31, 2022 and December 31, 2021 related to contractual maintenance agreements, contractual SaaS and subscription services, and
hardware contracts that exceed one year in duration amounted to $277.2 million and $101.1 million, respectively. As of December 31,
2022, approximately 66% is expected to be recognized over the next 12 months, and the remainder recognized thereafter. The majority
of the Company's remaining performance obligations at December 31, 2022 are related to contracts or orders that have an original
expected duration of one year or less, for which the Company is electing to utilize the practical expedient available within the guidance,
and are excluded from the transaction price related to these future obligations. The Company will generally satisfy the remaining
performance obligations as we transfer control of the products ordered or services to our customers, excluding maintenance services,
which are satisfied over time.
The following table provides information about accounts receivable, contract assets and unearned revenue from contracts with
customers:
(In thousands)
December 31, 2022
December 31, 2021
Accounts receivable
$
279,435
$
158,742
Contract assets
(1)
$
1,852
$
464
Unearned revenue
$
41,193
$
17,737
Non-current unearned revenue
$
19,239
$
9,271
(1)
Included in other receivables on the Consolidated Balance Sheets.
The Company is party to a receivables purchase agreement with a third party financial institution (the “Factor”). As of December 31,
2022, accounts receivable totaling $14.9 million were sold, of which $1.2 million was retained by the Factor in the reserve account. The
balance in the reserve account is included in other assets on the Consolidated Balance Sheets. As of December 31, 2022, the Company
has an allowance for doubtful accounts related to factored accounts receivable totaling less than $0.1 million. The cost of receivables
purchase agreement is included in interest expense in the Consolidated Statements of Loss and totaled $0.3 million for the year ended
December 31, 2022.
Of the outstanding unearned revenue balances as of December 31, 2021, $14.0 million was recognized as revenue during the year ended
December 31, 2022, respectively. Of the outstanding unearned revenue balances as of December 31, 2020, $11.2 million was recognized
as revenue during the year ended December 31, 2021.
66
Note 5 – Stock-Based Compensation
The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the
years ended December 31, 2022, 2021 and 2020:
(In thousands)
2022
2021
2020
Stock-based compensation expense included in cost of revenue
$
2,876
$
543
$
426
Selling, general and administrative expenses
20,844
4,571
4,036
Research and development expenses
4,602
2,366
2,372
Stock-based compensation expense included in operating expenses
25,446
6,937
6,408
Total stock-based compensation expense
28,322
7,480
6,834
Tax benefit for expense associated with non-qualified stock options, PSUs,
RSUs and restricted stock
(5,152
)
(1,849
)
(1,629
)
Total stock-based compensation expense, net of tax
$
23,170
$
5,631
$
5,205
Stock Incentive Program Descriptions
2020 Stock Incentive Plans
At the annual meeting of stockholders held on May 13, 2020, the Company’s stockholders approved, upon recommendation of the Board
of Directors, the adoption of the ADTRAN, Inc. 2020 Employee Stock Incentive Plan (the “2020 Employee Plan”) as well as the
ADTRAN, Inc. 2020 Directors Stock Plan (the “2020 Directors Plan”), which were assumed by the Company upon consummation of
the Merger. No additional awards will be granted under the Company’s previous stock incentive plans, the ADTRAN, Inc. 2015
Employee Stock Incentive Plan (the “2015 Employee Plan”) or the 2010 Directors Stock Plan (the “2010 Directors Plan”) subsequent
to the stockholders’ approval of these new stock plans. Outstanding awards granted under the 2015 Employee Plan and the 2010
Directors Plan will remain subject to the terms of such plans, and shares underlying awards granted under such plans that are cancelled
or forfeited will be available for issuance under the 2020 Employee Plan or the 2020 Directors Plan, as applicable.
Under the 2020 Employee Plan, the Company is authorized to issue 2.8 million shares of common stock to certain employees, key
service providers and advisors through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs and
restricted stock, any of which may be subject to performance-based conditions. RSUs and restricted stock granted under the 2020
Employee Plan will typically vest pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date. Stock
options granted under the 2020 Employee Plan will typically become exercisable beginning after one year of continued employment,
normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date and have a ten-year contractual
term. Stock options, RSUs and restricted stock granted under the 2020 Employee Plan reduce the shares authorized for issuance under
the 2020 Employee Plan by one share of common stock for each share underlying the award. Forfeitures, cancellations or expirations of
awards granted under the 2015 Employee Plan increase the shares authorized for issuance under the 2020 Employee Plan, with
forfeitures, cancellations or expirations of RSUs and restricted stock increasing the shares authorized for issuance by 2.5 shares of
common stock for each share underlying the award. Forfeitures, cancellations or expirations of stock options from the 2015 Employee
Plan increase the shares authorized for issuance under the 2020 Employee Plan by one share of common stock for each share underlying
the award.
Under the 2020 Directors Plan, the Company is authorized to issue 0.4 million shares of common stock through stock options, restricted
stock and RSUs to non-employee directors. Stock awards issued under the 2020 Directors Plan typically will become vested in full on
the first anniversary of the grant date. Stock options issued under the 2020 Directors Plan will have a ten-year contractual term. Stock
options, restricted stock and RSUs granted under the 2020 Directors Plan reduce the shares authorized for issuance under the 2020
Directors Plan by one share of common stock for each share underlying the award. Forfeitures, cancellations and expirations of awards
granted under the 2010 Directors Stock Plan increase the shares authorized for issuance under the 2020 Directors Plan by one share of
common stock for each share underlying the award.
Previous Stock Incentive Plans
In January 2015, the Board of Directors adopted the 2015 Employee Plan, which authorized 7.7 million shares of common stock for
issuance to certain employees and officers through incentive stock options and non-qualified stock options, stock appreciation rights,
PSUs, RSUs and restricted stock. The 2015 Employee Plan was adopted by stockholder approval at our annual meeting of stockholders
held in May 2015. PSUs, RSUs and restricted stock granted under the 2015 Plan reduce the shares authorized for issuance under the
2015 Employee Plan by 2.5 shares of common stock for each share underlying the award. Options granted under the 2015 Employee
Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule
beginning on the first anniversary of the grant date and have a ten-year contractual term. Expiration dates of options outstanding as of
December 31, 2022 under the 2015 Employee Plan range from 2025 to 2026.
67
In January 2006, the Board of Directors adopted the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (the “2006 Plan”), which
authorized 13.0 million shares of common stock for issuance to officers and certain employees through incentive stock options and non-
qualified stock options, stock appreciation rights, RSUs and restricted stock. Options granted under the 2006 Plan typically become
exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first
anniversary of the grant date and had a ten-year contractual term. The 2006 Plan was replaced in May 2015 by the 2015 Employee Plan.
Expiration dates of options outstanding as of December 31, 2022 under the 2006 Plan range from 2022 to 2024.
In May 2010, the Company’s stockholders approved the 2010 Directors Plan, under which 0.5 million shares of common stock have
been reserved for issuance. This plan replaced the 2005 Directors Stock Option Plan. Under the 2010 Directors Plan, the Company may
issue stock options, restricted stock and RSUs to our non-employee directors. Stock awards issued under the 2010 Directors Plan become
vested in full on the first anniversary of the grant date. Options issued under the 2010 Directors Plan had a ten-year contractual term.
All remaining options under the 2010 Directors Plan expired in 2019.
PSUs, RSUs and restricted stock - ADTRAN Holdings, Inc.
The following table is a summary of our PSUs, RSUs and restricted stock outstanding as of December 31, 2021 and 2022 and the
changes that occurred during 2022:
Number of
shares (In
thousands)
Weighted
Average Grant
Date Fair Value
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2021
1,930
$
14.11
PSUs, RSUs and restricted stock granted
645
$
20.56
PSUs, RSUs and restricted stock vested
(1,440
)
$
12.81
PSUs, RSUs and restricted stock forfeited
(49
)
$
14.22
Unvested PSUs, RSUs and restricted stock outstanding, December 31, 2022
1,086
$
17.54
The following table details the significant assumptions that impact the fair value estimate of the market-based PSUs:
2022
2021
2020
Estimated fair value per share
$
24.01
$
26.07
$
14.43
Expected volatility
45.77
%
53.27
%
51.88
%
Risk-free interest rate
4.28
%
0.85
%
0.24
%
Expected dividend yield
1.76
%
1.63
%
2.85
%
For market-based PSUs, the number of shares of common stock earned by a recipient is subject to a market condition based on
ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-
year performance period. Depending on the relative total shareholder return over the performance period, the recipient may earn from
0% to 150% of the shares underlying the PSUs, with the shares earned distributed upon the vesting. The fair value of the award is based
on the market price of our common stock on the date of grant, adjusted for the expected outcome of the impact of market conditions
using a Monte Carlo Simulation valuation method. A portion of the granted PSUs vests and the underlying shares become deliverable
upon the death or disability of the recipient or upon a change of control of ADTRAN, as defined by the 2020 Employee Plan. The
recipients of the PSUs receive dividend credits based on the shares of common stock underlying the PSUs. The dividend credits vest
and are earned in the same manner as the PSUs and are paid in cash upon the issuance of common stock for the PSUs.
During each of the years ended December, 2022, 2021 and 2020, the Company granted 0.3 million performance-based PSUs to its
executive officers and certain employees. The grant-date fair value of these performance-based awards was based on the closing price
of the Company’s stock on the date of grant. These awards vest over one-year, two-year and three-year periods, respectively, subject to
the grantee’s continued employment, with the ability to earn shares in a range of 0% to 142.8% of the awarded number of PSUs based
on the achievement of defined performance targets. Equity-based compensation expense with respect to these awards may be adjusted
over the vesting period to reflect the probability of achievement of performance targets defined in the award agreements. Pursuant to
the Business Combination, the unearned performance-based PSUs converted to time-based RSUs which were treated as an award
modification during the third quarter of 2022. This resulted in incremental compensation expense totaling $17.8 million being recognized
during the twelve months ended December 31, 2022. These awards were fully vested as of December 31, 2022.
Pursuant to the Business Combination, 0.3 million shares of market-based PSU awards converted to time-based RSU's awards which
were treated as an award modification during the third quarter of 2022. Given that the fair value of these awards after the modification
was less than the fair value of the awards immediately before the modification, no incremental compensation expense was recognized.
The Company continued to recognize compensation expense based on the award's original grant date fair value. As of December 31,
2022, there was $1.4 million of unrecognized compensation expense related to these awards which will be recognized over the weighted
average remaining service period of 1.57 years.
68
The fair value of RSUs and restricted stock is equal to the closing price of our stock on the grant date. RSUs and restricted stock vest
ratably over four-year and one-year periods, respectively.
We will continue to assess the assumptions and methodologies used to calculate the estimated fair value of stock-based compensation.
If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which
may materially impact our fair value determination.
As of December 31, 2022, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and
restricted stock was approximately $15.8 million, which is expected to be recognized over an average remaining recognition period of
2.25 years and will be adjusted for actual forfeitures as they occur.
As of December 31, 2022, 3.3 million shares were available for issuance under shareholder-approved equity plans in connection with
the grant and exercise of stock options, PSU’s, RSU’s or restricted stock.
Stock Options - ADTRAN Holdings, Inc.
The following table is a summary of stock options outstanding as of December 31, 2022 and 2021 and the changes that occurred during
2022:
Number of
Options
(In
thousands)
Weighted
Average
Exercise
Price
(Per share)
Weighted Avg.
Remaining
Contractual Life
in Years
Aggregate
Intrinsic
Value
(In thousands)
Stock options outstanding, December 31, 2021
1,721
$
19.37
2.39
$
6,669
ADVA stock options replaced by ADTRAN Holdings stock options
(1)
2,094
$
11.12
Stock options exercised
(519
)
$
15.70
Stock options forfeited
(10
)
$
10.28
Stock options expired
(138
)
$
22.73
Stock options outstanding, December 31, 2022
3,148
$
14.37
3.42
$
16,251
Stock options exercisable, December 31, 2022
1,711
$
15.95
1.95
$
7,104
(1)
Each ADVA stock option surrendered was exchanged for 0.8244 ADTRAN Holdings stock options.
As of December 31, 2022, there was $8.3 million of unrecognized compensation expense related to stock options which will be
recognized over the remaining weighted-average period of 2.4 years.
Pursuant to the Business Combination, which closed on July 15, 2022, ADVA stock option holders were entitled to have their ADVA
stock options assumed by ADTRAN Holdings (applying the exchange ratio in the Business Combination Agreement), thereafter
representing options to acquire stock of ADTRAN Holdings. The maximum number of shares of ADTRAN Holdings stock potentially
issuable upon such assumption was 2.3 million shares. The period in which such options could be assumed ended July 22, 2022. A total
of 2.1 million shares of ADTRAN Holdings stock are subject to assumed ADVA options. The determination of the fair value of stock
options assumed by ADTRAN Holdings was estimated using the Monte Carlo method and is affected by its stock price, as well as
assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate. The
stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are
not limited to, the volatility of the Company's stock price and employee exercise behaviors.
All of the options were previously issued at exercise prices that approximated fair market value at the date of grant.
The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADTRAN’s closing
stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had all option holders exercised their options on December 31, 2022. The amount of aggregate
intrinsic value was $16.3 million as of December 31, 2022 and will change based on the fair market value of ADTRAN’s stock. The
total pre-tax intrinsic value of options exercised during the year ended December 31, 2022 was $4.0 million.
69
The following table further describes our stock options outstanding as of December 31, 2022:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Options
Outstanding at
December 31, 2022
(In thousands)
Weighted Avg.
Remaining
Contractual Life
in Years
Weighted
Average
Exercise
Price
Options
Exercisable at
December 31, 2022
(In thousands)
Weighted
Average
Exercise
Price
$6.06 – $8.67
755
3.21
$
7.37
320
$
6.47
$8.68 – $13.74
833
4.65
$
11.45
207
$
9.63
$13.75 – $17.15
427
3.27
$
15.33
368
$
15.33
$17.16 – $21.36
679
3.92
$
19.02
369
$
18.97
$21.37 – $23.64
454
0.83
$
23.64
447
$
23.64
3,148
1,711
The Black-Scholes option pricing model (the “Black-Scholes Model”) is used to determine the estimated fair value of stock option
awards on the date of grant. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Because our
stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can
materially affect the fair value estimate, existing models may not provide reliable measures of fair value of our stock options. The stock
option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but are not
limited to, the volatility of our stock price and employee exercise behaviors.
The stock option pricing model requires the use of several assumptions that impact the fair value estimate. These variables include, but
are not limited to, the volatility of our stock price and employee exercise behaviors.
The weighted-average estimated fair value of stock options granted to employees during the year ended December 31, 2022 was $5.81
per share with the following weighted-average assumptions:
2022
Expected volatility
45.00
%
Risk-free interest rate
3.00
%
Expected dividend yield
1.77
%
Expected life (in years)
2.4
There were no stock options granted in during the years ended December 31, 2021 and 2020.
Stock Options - ADVA Optical Networking SE
The following table summarizes ADVA Optical Networking SE stock options outstanding as of July 15, 2022 (the Business Combination
closing date) and December 31, 2022 and the changes that occurred between July 15, 2022 and December 31, 2022:
Number of
Options
(In thousands)
Weighted
Average
Exercise Price
(Per share)
Weighted Avg.
Remaining
Contractual Life
in Years
Aggregate
Intrinsic
Value
(In thousands)
Stock options outstanding, July 15, 2022
2,745
$
9.09
4.60
$
27,205
Stock options exercised
(102
)
$
8.02
ADVA stock options replaced by ADTRAN Holdings stock
options
(1)
(2,550
)
$
9.80
Stock options forfeited
(12
)
$
9.57
Stock options outstanding, December 31, 2022
81
$
8.58
4.00
$
1,222
Stock options exercisable, December 31, 2022
27
$
7.37
2.39
$
432
(1)
Each ADVA stock option surrendered was exchanged for 0.8244 ADTRAN Holdings stock options.
As of December 31, 2022, there was $0.1 million of unrecognized compensation expense related to stock options which will be
recognized over the remaining weighted-average period of 1.17 years.
All of the options were previously issued at exercise prices that approximated fair market value at the date of grant.
70
The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADVA's closing stock
price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have
been received by the option holders had all option holders exercised their options on December 31, 2022. The amount of aggregate
intrinsic value was $1.2 million as of December 31, 2022 and will change based on the fair market value of ADVA's stock. The total
pre-tax intrinsic value of options exercised during the period July 15, 2022 through December 31, 2022 was $1.6 million.
The following table further describes ADVA's stock options outstanding as of December 31, 2022:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Options
Outstanding at
December 31, 2022
(In thousands)
Weighted Avg.
Remaining
Contractual Life
in Years
Weighted
Average
Exercise
Price
Options
Exercisable at
December 31, 2022
(In thousands)
Weighted
Average
Exercise
Price
€4.98 - €7.05
35
3.52
$
6.97
9
$
5.34
€7.06 - €8.70
18
2.60
$
8.41
18
$
8.41
€8.71 - €15.68
28
5.48
$
10.73
$
81
27
Note 6 – Investments
Debt Securities and Other Investments
As of December 31, 2022, the following debt securities and other investments were included in short-term investments and long-term
investments on the Consolidated Balance Sheet and recorded at fair value:
Amortized
Gross Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Corporate bonds
$
2,538
$
5
$
(81
)
$
2,462
Municipal fixed-rate bonds
185
(5
)
180
Asset-backed bonds
818
1
(24
)
795
Mortgage/Agency-backed bonds
1,853
(105
)
1,748
U.S. government bonds
3,870
3
(188
)
3,685
Foreign government bonds
407
(24
)
383
Available-for-sale debt securities held at fair value
$
9,671
$
9
$
(427
)
$
9,253
As of December 31, 2021, the following debt securities and other investments were included in short-term investments and long-term
investments on the Consolidated Balance Sheet and recorded at fair value:
Amortized
Gross Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Corporate bonds
$
10,776
$
6
$
(35
)
$
10,747
Municipal fixed-rate bonds
1,553
2
(4
)
1,551
Asset-backed bonds
322
3
(3
)
322
Mortgage/Agency-backed bonds
4,754
15
(33
)
4,736
U.S. government bonds
12,251
12
(92
)
12,171
Foreign government bonds
543
(4
)
539
Available-for-sale debt securities held at fair value
$
30,199
$
38
$
(171
)
$
30,066
71
As of December 31, 2022, our debt securities had the following contractual maturities:
(In thousands)
Corporate
bonds
Municipal
fixed-rate
bonds
Asset-backed
bonds
Mortgage /
Agency-backed
bonds
U.S.
government
bonds
Foreign
government
bonds
Less than one year
$
$
180
$
$
$
160
$
One to two years
1,450
96
162
2,787
276
Two to three years
1,012
186
598
617
107
Three to five years
335
253
121
Five to ten years
317
More than ten years
178
418
Total
$
2,462
$
180
$
795
$
1,748
$
3,685
$
383
Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
Realized gains and losses on sales of securities are computed under the specific identification method. The following table presents
gross realized gains and losses related to our debt securities for the years ended December 31, 2022, 2021 and 2020:
For the year ended December 31,
(In thousands)
2022
2021
2020
Gross realized gains on debt securities
$
17
$
241
$
459
Gross realized losses on debt securities
(1,211
)
(159
)
(58
)
Total (loss) gain recognized, net
$
(1,194
)
$
82
$
401
The Company’s investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration
in any one issuer to 5% of the market value of the total investment portfolio. The Company did not purchase any available-for-sale debt
with credit deterioration during the years ended December 31, 2022, 2021 and 2020.
The following table presents the breakdown of debt securities and other investments with unrealized losses as of December 31, 2022:
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Total
(In thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Corporate bonds
$
1,367
$
(39
)
$
583
$
(42
)
$
1,950
$
(81
)
Municipal fixed-rate bonds
178
(5
)
180
(5
)
Asset-backed bonds
524
(14
)
117
(10
)
641
(24
)
Mortgage/Agency-backed bonds
825
(23
)
844
(82
)
1,668
(105
)
U.S. government bonds
2,215
(106
)
1,063
(82
)
3,278
(188
)
Foreign government bonds
383
(24
)
383
(24
)
Total
$
4,931
$
(182
)
$
3,168
$
(245
)
$
8,100
$
(427
)
The following table presents the breakdown of debt securities and other investments with unrealized losses as of December 31, 2021:
Continuous Unrealized
Loss Position for Less
than 12 Months
Continuous Unrealized
Loss Position for 12
Months or Greater
Total
(In thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Corporate bonds
$
6,795
$
(35
)
$
$
$
6,795
$
(35
)
Municipal fixed-rate bonds
1,129
(4
)
1,129
(4
)
Asset-backed bonds
198
(3
)
198
(3
)
Mortgage/Agency-backed bonds
3,006
(33
)
3,006
(33
)
U.S. government bonds
10,552
(92
)
10,552
(92
)
Foreign government bonds
294
(4
)
294
(4
)
Total
$
21,974
$
(171
)
$
$
$
21,974
$
(171
)
72
The increase in unrealized losses during 2022 resulted from changes in market positions associated with our fixed income portfolio.
Marketable Equity Securities
Marketable equity securities consist of publicly traded stock, funds and certain other investments measured at fair value or cost, where
appropriate.
Realized and unrealized gains and losses for our marketable equity securities for the year ended December 31, 2022, 2021 and 2020
were as follows:
For the year ended December 31,
(In thousands)
2022
2021
2019
Realized losses on equity securities sold
$
(1,675
)
$
(992
)
$
(2,382
)
Unrealized (losses) gains on equity securities held
(8,470
)
2,671
6,831
Total (loss) gain recognized, net
$
(10,145
)
$
1,679
$
4,449
As of December 31, 2022 and 2021, gross unrealized losses related to individual investments in a continuous loss position for twelve
months or longer were not material.
U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of
financial instruments:
Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs
that are observable either directly or indirectly;
Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement; inputs could include information supplied by investees.
The Company’s cash equivalents and investments held at fair value are categorized into this hierarchy as follows:
Fair Value Measurements as of December 31, 2022 Using
(In thousands)
Fair Value
Quoted Prices
in Active
Market for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
Money market funds
$
228
$
228
$
Available-for-sale debt securities
Corporate bonds
2,462
2,462
Municipal fixed-rate bonds
180
180
Asset-backed bonds
795
795
Mortgage/Agency-backed bonds
1,748
1,748
U.S. government bonds
3,685
3,685
Foreign government bonds
383
383
Marketable equity securities
Marketable equity securities - various industries
804
804
Deferred compensation plan assets
22,942
22,942
Total
$
33,227
$
27,659
$
5,568
$
73
Fair Value Measurements as of December 31, 2021 Using
(In thousands)
Fair Value
Quoted Prices
in Active
Market for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents
Money market funds
$
652
$
652
$
$
Available-for-sale debt securities
Corporate bonds
10,747
10,747
Municipal fixed-rate bonds
1,551
1,551
Asset-backed bonds
322
322
Mortgage/Agency-backed bonds
4,736
4,736
U.S. government bonds
12,171
12,171
Foreign government bonds
539
539
Marketable equity securities
Marketable equity securities - various industries
12,606
12,606
Deferred compensation plan assets
26,935
26,935
Total
$
70,259
$
52,364
$
17,895
$
The fair value of our Level 2 securities is calculated using a weighted average market price for each security. Market prices are obtained
from a variety of industry standard data providers, large financial institutions and other third-party sources. These multiple market prices
are used as inputs into a distribution-curve-based algorithm to determine the daily market value of each security.
The fair value of Level 3 securities is calculated based on unobservable inputs. Quantitative information with respect to unobservable
inputs consisted of third-party valuations performed in accordance with ASC 820 –
Fair Value Measurement.
Inputs used in preparing
the third-party valuation included the following assumptions, among others: estimated discount rates and fair market yields.
Our variable rate demand notes have a structure that implies a standard expected market price. The frequent interest rate resets make it
reasonable to expect the price to stay at par. These securities are priced at the expected market price.
74
Note 7 – Inventory
As of December 31, 2022 and 2021, inventory, net was comprised of the following:
(In thousands)
2022
2021
Raw materials
$
186,346
$
74,709
Work in process
12,087
2,143
Finished goods
229,098
63,039
Total Inventory, net
$
427,531
$
139,891
Inventory reserves are established for estimated excess and obsolete inventory equal to the difference between the cost of the inventory
and the estimated net realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known
trends, inventory age and market conditions. As of December 31, 2022 and 2021, our inventory reserve was $57.0 million and $44.6
million, respectively.
Note 8 – Property, Plant and Equipment
As of December 31, 2022 and 2021, property, plant and equipment, net was comprised of the following:
(In thousands)
2022
2021
Engineering and other equipment
$
170,785
$
134,771
Building
82,932
68,157
Computer hardware and software
80,455
72,274
Building and land improvements
47,861
35,578
Furniture and fixtures
22,403
19,917
Land
5,364
4,575
Total Property, Plant and Equipment
409,800
335,272
Less: accumulated depreciation
(299,101
)
(279,506
)
Total Property, Plant and Equipment, net
$
110,699
$
55,766
Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the
asset’s carrying value. In connection with the planned integration of information technology following the Business Combination, we
determined that certain projects no longer fit our needs. As a result, the Company recognized impairment charges of $0.5 million during
the year ended December 31, 2022 related to software and web site development. The impairment charges were determined based on
actual costs incurred. During the year ended December 31, 2021, no impairment charges were recognized. During the year ended
December 31, 2020, the Company recognized impairment charges of $0.1 million.
Depreciation expense was $20.9 million, $12.0 million and $12.2 million for the years ended December 31, 2022, 2021 and 2020,
respectively, which is recorded in cost of revenue, selling, general and administrative expenses and research and development expenses
in the Consolidated Statements of (Loss) Income.
Note 9 – Leases
We have operating leases for office space, automobiles and various other equipment in the U.S. and in certain international locations.
As of December 31, 2022, our operating leases had remaining lease terms of one month to 119 months, some of which included options
to extend the leases for up to five years, and some of which included options to terminate the leases within three months. Supplemental
balance sheet information related to operating leases is as follows:
December 31,
December 31,
(In thousands)
Classification
2022
2021
Assets
Operating lease assets
Other non-current assets
$
30,340
$
4,922
Total lease asset
$
30,340
$
4,922
Liabilities
Current operating lease liability
Accrued expenses and other liabilities
$
7,596
$
1,730
Non-current operating lease liability
Other non-current liabilities
22,807
3,269
Total lease liability
$
30,403
$
4,999
75
Lease expense related to short-term leases was less than $0.1 million for the twelve months ended December 31, 2022, 2021 and 2020,
and is included in cost of revenue, selling, general and administrative expenses and research and development expenses in the
Consolidated Statements of (Loss) Income. Lease expense related to variable lease payments that do not depend on an index or rate,
such as real estate taxes and insurance reimbursements, was $0.6 million, $0.5 million and $0.7 million for the twelve months ended
December 31, 2022, 2021 and 2020, respectively.
The components of lease expense included in the Consolidated Statements of (Loss) Income were as follows:
For the Year Ended December 31,
(In thousands)
2022
2021
2020
Cost of revenue
$
110
$
51
$
113
Research and development expenses
942
1,071
1,121
Selling, general and administrative expenses
3,961
883
1,311
Total operating lease expense
$
5,013
$
2,005
$
2,545
As of December 31, 2022, operating lease liabilities included on the Consolidated Balance Sheet by future maturity were as follows:
(In thousands)
Amount
2023
8,992
2024
8,076
2025
6,740
2026
3,825
2027
2,865
Thereafter
4,478
Total lease payments
34,976
Less: Interest
(4,573
)
Present value of lease liabilities
$
30,403
Future operating lease payments include $4.4 million related to options to extend lease terms that are reasonably certain of being
exercised. There are no legally binding leases that have not yet commenced.
An incremental borrowing rate is used based on information available at the commencement date in determining the present value of
lease payments. The incremental borrowing rate is determined on a portfolio basis by grouping leases with similar terms, as well as
grouping leases based on a U.S. dollar or Euro functional currency. The following table provides information about our weighted average
lease terms and weighted average discount rates:
As of
December 31,
Weighted average remaining lease term (years)
2022
2021
Operating leases with USD functional currency
7.9
1.8
Operating leases with Euro functional currency
4.2
3.5
Weighted average discount rate
Operating leases with USD functional currency
3.77
%
3.49
%
Operating leases with Euro functional currency
3.70
%
1.22
%
Note 10 – Goodwill
The changes in the carrying amount of goodwill for the year ended December 31, 2022 are as follows:
(In thousands)
Network Solutions
Services & Support
Total
As of December 31, 2021
$
6,570
$
398
$
6,968
Goodwill from Business Combination with ADVA
272,797
77,661
350,458
Foreign currency translation adjustments
18,913
5,385
24,298
As of December 31, 2022
$
298,280
$
83,444
$
381,724
76
Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances
that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Related to the Business Combination
with ADVA the Company recognized $350.5 million of goodwill upon the merger on July 15, 2022. Therefore, we decided to proceed
directly to the quantitative test of goodwill and forego the qualitative assessment. We estimate the fair value of our reporting units based
on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.
A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates
and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market
participants. We also estimate the fair value of our reporting units based on a peer group analysis, whereby companies in the
telecommunications industry or with a comparable product and market structure are used to calculate a fair enterprise value using
revenue, EBITDA and debt multiples of trading value. Based on our analysis, management concluded that there was no impairment of
goodwill as of December 31, 2022. No impairment charges on goodwill were recognized during the years ended December 31, 2021
and 2020.
Note 11 – Intangible Assets
Intangible assets as of December 31, 2022 and 2021, consisted of the following:
2022
2021
(In thousands)
Weighted
Average Useful
Life
(in years)
Gross Value
Accumulated
Amortization
Net Value
Gross Value
Accumulated
Amortization
Net Value
Customer relationships
10.9
$
55,517
$
(12,772
)
$
42,745
$
20,796
$
(9,906
)
$
10,890
Backlog
1.6
55,782
(22,725
)
33,057
Developed technology
8.5
320,364
(21,856
)
298,508
8,200
(3,683
)
4,517
Licensed technology
9.0
5,900
(3,141
)
2,759
5,900
(2,486
)
3,414
Licensing agreements
8.5
560
(298
)
262
560
(225
)
335
Patents
7.3
500
(431
)
69
500
(363
)
137
Trade names
3.0
29,066
(5,255
)
23,811
210
(210
)
Total
$
467,689
$
(66,478
)
$
401,211
$
36,166
$
(16,873
)
$
19,293
As part of the purchase price allocation related to the Business Combination with ADVA, the Company recognized $403.8 million of
intangible assets on July 15, 2022. Intangible assets are reviewed for impairment whenever events and circumstances indicate
impairment may have occurred. The Company assessed impairment triggers related to intangible assets during each financial period in
2022, 2021 and 2020. As a result, no quantitative impairment test of long-lived assets was performed as of December 31, 2022, 2021
and 2020, and no impairment losses of intangible assets were recorded during the years ended December 31, 2022, 2021 and 2020.
Amortization expense was $47.3 million, $4.1 million and $4.4 million for the years ended December 31, 2022, 2021 and 2020,
respectively, and was included in cost of revenue, selling, general and administrative expenses and research and development expenses
in the Consolidated Statements of (Loss) Income.
As of December 31, 2022, estimated future amortization expense of intangible assets was as follows:
(In thousands)
Amount
2023
$
82,080
2024
57,545
2025
46,095
2026
42,851
2027
41,491
Thereafter
131,149
Total
$
401,211
77
Note 12 - Hedging
The Company has certain forward rate agreements to hedge foreign currency exposure of expected future cash flows in foreign currency.
The Company does not hold or issue derivative instruments for trading or other speculative purposes. Derivatives are initially recognized
at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each
reporting period. All changes in the fair value of derivative instruments are recognized as other income (expense) in the Consolidated
Statements of Income. The derivative instruments are not subject to master netting agreements and are not offset in the Consolidated
Balance Sheets. We are exposed to risk from credit-related losses resulting from nonperformance by counterparties to our financial
instruments. We perform credit evaluations of our counterparties under forward exchange contracts and expect all counterparties to meet
their obligations. We have not experienced credit losses from our counterparties.
As of December 31, 2022, the Company had 47 forward rate contracts outstanding.
Foreign Currency Hedging Agreement
On November 3, 2022, the Company entered into a Euro/U.S. dollar cross-currency swap arrangement (the “Swap”) with Wells Fargo
Bank, N.A. (the “Hedge Counterparty”). The Swap, which is governed by the provisions of an ISDA Master Agreement (including
schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge
Counterparty, enable the Company to convert a portion of its Euro denominated payment obligations under the proposed DPLTA into
U.S. Dollars. Under the Swap, the Company will exchange an aggregate notional amount of $160.0 million U.S. dollars for Euros at a
daily fixed forward rate ranging from $0.98286 to $1.03290. The aggregate amount of $160.0 million will be divided into eight quarterly
tranches of $20.0 million. The Company, at its sole discretion, may exchange all or part of each tranche on any given day within the
applicable quarter; provided, however, that it must exchange the full tranche by the end of such quarter. The Swap may be accelerated
or terminated early for a number of reasons, including but not limited to (i) non-payment by the Company or the Hedge Counterparty,
(ii) breach of representation or warranty or covenant by either party or (iii) insolvency or bankruptcy of either party.
The fair values of the Company's derivative instruments recorded in the Condensed Consolidated Balance Sheet as of December 31,
2022 were as follows:
(In thousands)
Balance Sheet
Location
December 31, 2022
December 31, 2021
Derivatives Not Designated as Hedging Instruments (Level 2):
Foreign exchange contracts – derivative assets
Other receivables
$
11,992
$
Foreign exchange contracts – derivative liabilities
Accounts payable
$
(633
)
$
Total derivatives
$
11,359
$
The change in the fair values of the Company's derivative instruments recorded in the Condensed Consolidated Statements of Income
during the years ended December 31, 2022, 2021 and 2020 were as follows:
(In thousands)
Income Statement
Location
2022
2021
2020
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts
Other income (expense), net
$
10,793
$
$
78
Note 13 – Revolving Credit Agreements
The carrying amounts of the Company's current and non-current revolving credit agreements in its Consolidated Balance Sheets were
as follows:
As of
December 31,
2022
2021
(In thousands)
(As Restated)
Nord/LB revolving line of credit
$
16,091
$
Syndicated credit agreement working capital line of credit
10,727
DZ bank revolving line of credit
9,118
Wells Fargo revolving credit agreement
Cadence revolving credit agreement
Total current revolving credit agreements
$
35,936
$
As of
December 31,
2022
2021
(In thousands)
(As Restated)
Wells Fargo credit agreement
$
60,000
$
Total non-current revolving credit agreement
$
60,000
$
As of December 31, 2022, the weighted average interest rate on our revolving credit agreements was 4.12%.
Wells Fargo Credit Agreement
On July 18, 2022, ADTRAN Holdings, Inc. and ADTRAN, Inc., as the borrower, entered into a credit agreement with a syndicate of
banks, including Wells Fargo Bank, National Association, as administrative agent (“Administrative Agent”), and the other lenders
named therein (the “Credit Agreement”). The Credit Agreement allows for borrowings of up to $100.0 million in aggregate principal
amount, subject to being increased to up to $400.0 million in aggregate principal amount upon the Company or Borrower’s execution
of a DPLTA with ADVA or a parent of ADVA, among other conditions (the “Senior Credit Facilities Increase”). The DPLTA as
executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register
(
Handelsregister
) of the local court (
Amtsgericht
) at the registered seat of ADVA (Jena). See Note 24 of the Notes to Consolidated
Financial Statements for further information.
The Credit Agreement replaced the Cadence Revolving Credit Agreement and the Wells Fargo Revolving Credit Agreement. In
connection with the entry into the Credit Agreement, all outstanding borrowings under such credit agreements have been repaid and the
agreements terminated.
As of December 31, 2022, ADTRAN, Inc.’s borrowings under the revolving line of credit were $60.0 million. The Credit Agreement
matures in July 2027 but provides the Company with an option to request extensions subject to customary conditions. In addition, we
may issue up to $25.0 million in letters of credit against our $100.0 million total facility. As of December 31, 2022, we had a total of
$21.3 million in letters of credit with ADTRAN, Inc. outstanding against our eligible borrowings, leaving a net amount of $18.7 million
available for future borrowings. In February 2023, the borrowings under the Credit Agreement were paid down by $7.5 million, leaving,
$180.0 million of borrowings as of February 28, 2023. After considering our outstanding letters of credit, this leaves the Company
approximately $198.7 million available for future borrowings as of February 28, 2023. Any future credit extensions under the Credit
Agreement are subject to customary conditions precedent. The proceeds of any loans are expected to be used for general corporate
purposes and to pay a portion of the Exchange Offer consideration.
79
All U.S. borrowings under the Credit Agreement (other than swingline loans, which will bear interest at the Base Rate (as defined
below)) will bear interest, at the Company’s option, at a rate per annum equal to (A)(i) the highest of (a) the federal funds rate (i.e., for
any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the
Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day) plus ½
of 1%, (b) the prime commercial lending rate of the Administrative Agent, as established from time to time at its principal U.S. office
(which such rate is an index or base rate and will not necessarily be its lowest or best rate charged to its customers or other banks), and
(c) the daily Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor plus 1%, plus (ii) the applicable rate,
ranging from 0.5% to 1.25% (the “Base Rate”), or (B) the sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus
the applicable rate, ranging from 1.4% to 2.15%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate,
“SOFR Loans”). All EU borrowings under the Credit Agreement (other than swingline loans) will bear interest at a rate per annum equal
to the sum of the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor
administrator approved by the Administrative Agent) plus the applicable rate, ranging from 1.5% to 2.25%, provided that such sum is
subject to a 0.0% floor (such loans utilizing this interest rate, “EURIBOR Loans”). The applicable rate is based on the consolidated net
leverage ratio of the Company and its subsidiaries as determined pursuant to the terms of the Credit Agreement. Default interest is 2.00%
per annum in excess of the rate otherwise applicable in the case of any overdue principal or any other overdue amount.
In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a commitment fee
to the lenders under the Credit Agreement in respect of unutilized revolving loan commitments and an additional commitment ticking
fee at a rate of 0.25% on the commitment amounts of each lender until the earliest of (i) the date of the Senior Credit Facilities Increase,
(ii) the Company’s voluntary termination of the credit facility commitment, and (iii) December 31, 2023. The Company is also required
to pay a participation fee to the Administrative Agent for the account of each lender with respect to the Company’s participations in
letters of credit at the then applicable rate for SOFR Loans.
The Credit Agreement permits the Company to prepay any or all of the outstanding loans or to reduce the commitments under the Credit
Agreement without incurring premiums or penalties (except breakage costs with respect to SOFR Loans and EURIBOR Loans). The
Credit Agreement contains customary affirmative and negative covenants, including incurrence covenants and certain other limitations
on the ability of the Company and the Company’s subsidiaries to incur additional debt, guarantee other obligations, grant liens on assets,
make investments, dispose of assets, pay dividends or other payments on capital stock, make restricted payments, engage in mergers or
consolidations, engage in transactions with affiliates, modify its organizational documents, and enter into certain restrictive agreements.
It also contains customary events of default (subject to customary cure periods and materiality thresholds). Furthermore, the Credit
Agreement requires that the consolidated total net leverage ratio (as defined in the Credit Agreement) of the Company and its subsidiaries
tested on the last day of each fiscal quarter not exceed 3.25 to 1.0 through September 30, 2024 and 2.75 to 1.00 from December 31,
2024 and thereafter, subject to certain exceptions. The Credit Agreement also requires that the consolidated interest coverage ratio (as
defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter not fall below 3.00 to
1.00. As of December 31, 2022, the Company was in compliance with all material covenants.
Finally, pursuant to a Collateral Agreement, dated as of July 18, 2022, among the Company, ADTRAN, Inc. and the Administrative
Agent, ADTRAN, Inc.’s obligations under the Credit Agreement are secured by substantially all of the assets of ADTRAN, Inc. and the
Company. In addition, the Company has guaranteed ADTRAN, Inc.’s obligations under the Credit Agreement pursuant to a Guaranty
Agreement, dated as of July 18, 2022, by ADTRAN, Inc. and the Company in favor of the Administrative Agent.
Nord/LB Revolving Line of Credit
On August 8, 2022, ADVA entered into a $16.1 million revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB)
that bears interest of Euro Short Term Rate plus 1.4% and which matures in August 2023. During the term of the loan, ADVA is
obligated to maintain an adjusted net debt to cover ratio that is equal to or less than 2.75. As of December 31, 2022, The Company was
in compliance with the adjusted net debt to cover ratio. As of December 31, 2022, ADVA’s borrowings under the revolving line of
credit were $16.1 million, with no amounts available for future borrowings. On January 31, 2023, the Company increased its borrowings
under the Wells Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings
under the Nord/LB revolving line of credit.
Syndicated Credit Agreement Working Capital Line of Credit
In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch
German Business to borrow up to $10.7 million as part of a working capital line of credit. The interest rate for the working capital line
of credit is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35% as of December 31, 2022. The
working capital line of credit matures in September 2023. As of December 31, 2022, borrowings under the working capital line of credit
totaled $10.7 million, with no amounts available for future borrowings. On January 31, 2023, the Company increased its borrowings
under the Wells Fargo Credit Agreement. A portion of the proceeds from the borrowings were used to retire the outstanding borrowings
under the syndicated credit agreement working capital line of credit.
80
DZ Bank Money Market Facility
As of December 31, 2022, ADVA’s borrowings under the revolving line of credit totaled $9.1 million, with no amounts available for
future borrowings. The interest rate is currently a rate of 2.8%, which resets monthly based on renewal of the loan.
Prior Wells Fargo Revolving Credit Agreement
On April 1, 2022, ADTRAN, Inc. entered into a Credit Agreement and related Revolving Line of Credit Note (together, the “Prior Wells
Revolving Credit Agreement”) in favor of Wells Fargo Bank, National Association, as lender (the “Wells Lender”). The Wells Revolving
Credit Agreement provided the Company with a $25.0 million secured revolving credit facility. During the year ended December 31,
2022, the Company made draws totaling $10.0 million under the Prior Wells Revolving Credit Agreement all of which had been repaid
as of December 31, 2022. The Wells Fargo Credit Agreement replaced the Prior Wells Fargo Revolving Credit Agreement and all
outstanding borrowings have been repaid and the prior agreement was terminated.
Prior Cadence Revolving Credit Agreement
On May 19, 2022, ADTRAN, Inc., as borrower, modified its Revolving Credit and Security Agreement and related Promissory Note
(together, the “Cadence Revolving Credit Agreement”) with Cadence Bank, N.A., as lender (the “Cadence Lender”). The modified Prior
Cadence Revolving Credit Agreement provided the Company with a $25.0 million secured revolving credit facility. During the year
ended December 31, 2022, the Company made draws totaling $18.0 million under the Prior Cadence Revolving Credit Agreement all
of which had been repaid as of December 31, 2022. The Wells Fargo Credit Agreement replaced the Prior Cadence Revolving Credit
Agreement and all outstanding borrowings have been repaid and the prior agreement was terminated.
Note 14 – Notes Payable
The carrying amounts of the Company's notes payable in its Condensed Consolidated Balance Sheets were as follows:
Fair Value as of
Carrying Value as of
Carrying Value as of
(In thousands)
December 31, 2022
December 31, 2022
December 31, 2021
Syndicated credit agreement note payable
$
24,598
$
24,598
$
Deutsche Bank term loan
Total Notes Payable
$
24,598
$
24,598
$
Syndicated Credit Agreement Note Payable
In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch
German Business to borrow $63.7 million. As of December 31, 2022, the amount outstanding under the note payable is $24.6 million.
The interest rate for the note payable is adjusted periodically based on a defined leverage ratio and is currently 2.49% as of December
31, 2022. The note payable matures in September 2023.
Deutsche Bank Term Loan
In October 2019, ADVA entered into a $9.8 million term loan with Deutsche Bank that bears interest of EURIBOR plus 1.1%. The term
loan matured in September 2022 and was repaid as of December 31, 2022.
Note 15 – Income Taxes
The components of income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 are as follows:
(In thousands)
2022
2021
2020
Current
Federal
$
4,572
$
11
$
(10,574
)
State
88
(63
)
(329
)
International
(4,347
)
4,166
3,635
Total Current
313
4,114
(7,268
)
Deferred
Federal
(47,429
)
State
(6,776
)
International
(8,183
)
(1,784
)
(1,356
)
Total Deferred
(62,388
)
(1,784
)
(1,356
)
Total Income Tax (Benefit) Expense
$
(62,075
)
$
2,330
$
(8,624
)
81
The effective income tax rate differs from the federal statutory rate due to the following:
2022
2021
2020
Tax provision computed at the federal statutory rate
21.00
%
21.00
%
21.00
%
State income tax provision, net of federal benefit
2.60
13.33
11.10
Federal research credits
6.74
53.77
57.63
Foreign taxes
6.29
(4.69
)
(17.83
)
Tax-exempt income
0.21
3.75
1.93
Change in valuation allowance
63.92
(75.26
)
44.79
Non-deductible transaction costs
(2.74
)
(39.48
)
Foreign tax credits
(0.40
)
0.14
17.90
Stock-based compensation
(2.09
)
10.74
(23.36
)
Withholding taxes
0.03
0.14
(20.83
)
Alabama law change
(25.39
)
Impact of CARES Act
45.65
Return to accrual
0.24
9.48
Global intangible low-taxed income ("GILTI")
(8.08
)
(4.29
)
(0.49
)
Other, net
(0.24
)
(0.19
)
0.56
Effective Tax Rate
87.48
%
(36.95
)%
138.05
%
(Loss) income before expense (benefit) for income taxes for the years ended December 31, 2022, 2021 and 2020 is as follows:
(In thousands)
2022
2021
2020
U.S. entities
$
(33,720
)
$
(14,982
)
$
(12,833
)
International entities
(37,243
)
8,677
6,587
Total
$
(70,963
)
$
(6,305
)
$
(6,246
)
(Loss) income before expense (benefit) for income taxes for international entities reflects (loss) income based on statutory transfer
pricing agreements. This amount does not correlate to consolidated international revenue, which occurs from our U.S. entity.
82
Deferred income taxes on the Consolidated Balance Sheets result from temporary differences between the amount of assets and liabilities
recognized for financial reporting and tax purposes. The significant components of current and non-current deferred taxes as of
December 31, 2022 and 2021 consist of the following:
(In thousands)
2022
2021
Deferred tax assets:
Inventory
$
5,818
$
9,538
Accrued expenses
7,865
3,851
Deferred compensation
5,792
7,027
Stock-based compensation
1,373
1,469
Uncertain tax positions related to state taxes and related interest
102
124
Pensions
5,952
6,061
Foreign losses
4,744
2,862
State losses and credit carry-forwards
3,516
5,914
Federal loss and research carry-forwards
64,995
21,606
Lease liabilities
4,093
1,471
Capitalized research and development expenditures
31,248
9,349
Investments
160
Valuation allowance
(5,201
)
(50,564
)
Total Deferred Tax Assets
130,457
18,708
Deferred tax liabilities:
Property, plant and equipment
(8,982
)
(3,590
)
Intellectual property
(108,671
)
(3,230
)
Right of use lease assets
(6,594
)
(1,459
)
Investments
(1,350
)
Total Deferred Tax Liabilities
(124,247
)
(9,629
)
Net Deferred Tax Assets
$
6,210
$
9,079
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Subsequently,
the Internal Revenue Service (“IRS”) released its final GILTI regulations on July 9,
2020. The passage of the CARES Act and subsequent
issuance of the GILTI final regulations together resulted in the Company’s recognition of a tax benefit in the amount of $10.8 million
during 2020, $7.9 million of which related to the utilization of deferred tax assets which had previously been offset with a valuation
allowance and $2.9 million primarily related to the tax rate differential on carrying back losses from 2018 and 2019 tax years to prior
years in which the U.S. Corporate tax rate was 35% versus the current 21% federal tax rate.
On February 12, 2021, the Alabama Business Tax Competitiveness Act (the "Act") was signed into law. As a result of the Act, we
recognized an expense of $1.6 million in the three months ended March 31, 2021 related to the revaluation of our deferred tax assets,
which was offset by changes in our valuation allowance previously recorded against our domestic deferred tax assets.
During the three months ended September 30, 2021, Management decided to pursue a claim for refund related to the revocation of our
IRC Section 59(e) election that was made on our originally filed 2018 U.S. federal tax return. The Company filed a related carryback
claim of net operating losses generated in 2018 to prior years as allowed under the CARES Act that was passed in 2020. An IRS Section
59(e) election is generally non-revocable except in cases for which IRS Commissioner’s approval is given. Approval is granted only in
rare and unusual circumstances. We filed a private letter ruling (“PLR”) request to revoke our election. During the three months ended
December 31, 2021, a response to our PLR was published denying our request to revoke the previously made 59(e). As a result of these
filings, and Management’s position to pursue them through appeals, we have established a receivable in the amount of $15.2 million
and a deferred tax asset related to additional research and development credit carryforward in the amount of $1.8 million that would be
available if our revocation request is successful, offset with an uncertain tax liability of $17.0 million.
As of December 31, 2022 and 2021, non-current deferred taxes reflected deferred taxes on net unrealized gains and losses on available-
for-sale investments and deferred taxes on unrealized losses in our pension plan. The net change in non-current deferred taxes associated
with these items, which resulted in a deferred tax expense of $2.0 million and $1.6 million in 2022 and 2021, respectively, was recorded
as an adjustment to other comprehensive (loss) income, presented in the Consolidated Statements of Comprehensive (Loss) Income.
83
The Company continually reviews the adequacy of its valuation allowance and recognizes the benefits of deferred tax assets only as the
reassessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance with ASC 740,
Income
Taxes.
Our assessment of the realizability of our deferred tax assets includes the evaluation of evidence, some of which requires
significant judgment, including historical operating results, the evaluation of a three-year cumulative income position, future taxable
income projections and tax planning strategies. Should management’s conclusion change in the future and additional valuation
allowance or a partial or full release of the valuation allowance become necessary, it could have a material effect on our consolidated
financial statements. During the fourth quarter of 2022, after considering all quantitative and qualitative evidence, including our
cumulative income position, historical operating performance and future income projections, we have determined that the positive
evidence overcame the negative evidence and have concluded that it is more likely than not that a substantial portion of our U.S. federal
and certain other state deferred tax assets were realizable. As a result we have released the majority of our valuation allowance against
those assets.
As of December 31, 2022 and 2021, the Company had gross deferred tax assets totaling $11.4 million offset by a valuation allowance
totaling $5.2 million and gross deferred tax assets totaling $59.6 million offset by a valuation allowance of $50.6 million, respectively.
Of the current valuation allowance, $3.2 million was established against our domestic deferred tax assets and the remaining $2.0 million
is related to foreign net operating loss and research and development credit carryforwards where we lacked sufficient activity to realize
those deferred tax assets. The change in our valuation allowance for the year ending December 31, 2022 was a decrease of $45.4 million.
The change in the valuation allowance was primarily related to the previously mentioned release of the valuation allowance in the fourth
quarter of 2022. The large increase during the year in our international deferred tax liabilities was primarily related to purchase price
accounting, partially offset with acquired deferred tax assets as a result of the ADVA acquisition that was completed in the third quarter
of 2022.
Supplemental balance sheet information related to deferred tax assets (liabilities) as of December 31, 2022 and 2021 were as follows:
December 31, 2022
(In thousands)
Deferred Tax Assets (Liabilities)
Valuation Allowance
Deferred Tax Assets
(Liabilities), net
Domestic
$
61,726
$
(3,177
)
$
58,549
International
(50,315
)
(2,024
)
(52,339
)
Total
$
11,411
$
(5,201
)
$
6,210
December 31, 2021
(In thousands)
Deferred Tax Assets
Valuation Allowance
Deferred Tax Assets, net
Domestic
$
48,265
$
(48,265
)
$
International
11,378
(2,299
)
9,079
Total
$
59,643
$
(50,564
)
$
9,079
As of December 31, 2022 and 2021, the deferred tax assets for foreign and domestic loss carry-forwards, research and development tax
credits, unamortized research and development costs and state credit carry-forwards totaled $104.5 million and $39.7 million,
respectively. As of December 31, 2022, $21.8 million of these deferred tax assets will expire at various times between 2023 and 2038.
The remaining deferred tax assets will either amortize through 2038 or carryforward indefinitely.
As of December 31, 2022 and 2021, respectively, our cash and cash equivalents were $108.6 million and $56.6 million and short-term
investments were $0.3 million and $0.4 million, which provided available short-term liquidity of $108.9 million and 57.0 million. Of
these amounts, our foreign subsidiaries held cash of $86.3 million and $47.7 million, respectively, representing approximately 79% and
84% of available short-term liquidity, which is used to fund ongoing liquidity needs of these subsidiaries. As part of our restructuring
plan, the Company’s assertion on being indefinitely reinvested changed in a particular jurisdiction in a previous year. The Company has
a withholding tax liability of $0.4 million and $0.7 million as of December 31, 2022 and 2021, respectively. The Company maintains
its assertion in all other jurisdictions that it is indefinitely reinvesting its funds held in foreign jurisdictions outside of the U.S., except
to the extent any of these funds can be repatriated without withholding tax. However, if all of these funds were repatriated to the U.S.,
or used for U.S. operations, certain amounts could be subject to tax. Due to the timing and circumstances of repatriation of such earnings,
if any, it is not practicable to determine the amount of funds subject to unrecognized deferred tax liability.
During 2022, 2021 and 2020, no income tax benefit or expense was recorded for stock options exercised as an adjustment to equity.
84
The change in the unrecognized income tax benefits for the years ended December 31, 2022, 2021 and 2020 were as follows:
(In thousands)
2022
2021
2020
Balance at beginning of period
$
17,836
$
1,078
$
1,487
Increases for tax position related to:
Prior years
17,025
4
Current year
123
136
165
Decreases for tax positions related to:
Prior years
(13
)
(27
)
Expiration of applicable statute of limitations
(61
)
(376
)
(578
)
Balance at end of period
$
17,885
$
17,836
$
1,078
As of December 31, 2022, 2021 and 2020, our total liability for unrecognized tax benefits was $17.9 million, $17.8 million and $1.1
million, respectively, of which $17.9 million, $17.8 million and $1.0 million, respectively, would reduce our effective tax rate if we
were successful in upholding all of the uncertain positions and recognized the amounts recorded. We classify interest and penalties
recognized on the liability for unrecognized tax benefits as income tax expense. As of December 31, 2022, 2021 and 2020, the balances
of accrued interest and penalties were $0.1 million, $0.2 million and $0.3 million, respectively.
We do not anticipate a single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits
within 12 months of this reporting date, unless a resolution is reached regarding the appeal of our PLR denial noted above. We file
income tax returns in the U.S. for federal and various state jurisdictions and several foreign jurisdictions. We are not currently under
audit by the Internal Revenue Service. Generally, we are not subject to changes in income taxes by any taxing jurisdiction for the years
prior to 2018.
Note 16 – Employee Benefit Plans
Pension Benefit Plan
We maintain a defined benefit pension plan covering employees in certain foreign countries.
In connection with the Business Combination, we acquired $29.6 million of additional obligations and $22.3 million of assets related to
postemployment benefit plans for certain groups of employees at our new operations outside of the U.S. Plans vary depending on the
legal, economic, and tax environments of the respective country. For defined benefit plans, accruals for pensions and similar
commitments have been included in the results for this year. The new defined benefit plans are for employees in Switzerland, Italy,
Israel and India:
In Switzerland, there are two defined benefit pension plans. Both plans provide benefits in the event of retirement, death or
disability. The plan's benefits are based on age, years of service, salary and on a participants old age account. The plans are
financed by contributions paid by the participants and by the Company.
In Italy, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the
Company on a pay as you go basis. Employees receive their pension payments as a function of salary, inflation and a
notional account.
In Israel, there is a defined benefit pension plan that provides benefits in the event of a participant being dismissed
involuntarily, retirement or death. The plan's benefits are based on the higher of the severance benefit required by law or
the cash surrender value of the severance benefit component of any qualifying insurance policy or long-term employee
benefit fund that is registered in the participant's name. The plan is financed by contributions paid by the Company.
In India, the post-employment benefit plan is required due to statutory provisions. The plan is financed directly by the
Company on a pay as you go basis.
85
The pension benefit plan obligations and funded status as of December 31, 2022 and 2021, were as follows:
(In thousands)
2022
2021
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
$
73,779
(1)
$
50,927
Service cost
1,426
1,229
Interest cost
1,168
339
Actuarial gain - experience
(2,039
)
(750
)
Actuarial gain - assumptions
(11,128
)
(3,327
)
Benefit payments
(1,400
)
(756
)
Effects of foreign currency exchange rate changes
(2,462
)
(3,498
)
Projected benefit obligation at end of period
59,344
44,164
Change in plan assets:
Fair value of plan assets at beginning of period
55,084
(1)
32,263
Actual (loss) gain on plan assets
(4,372
)
2,943
Contributions
382
Effects of foreign currency exchange rate changes
(2,374
)
(2,444
)
Fair value of plan assets at end of period
48,720
32,762
Unfunded status at end of period
$
(10,624
)
$
(11,402
)
(1)
In connection with the Business Combination, we acquired $29.6 million of additional projected benefit obligations and $22.3
million of plan assets whose beginning of period measurement date is July 15, 2022.
The accumulated benefit obligation was $56.8 million and $44.2 million as of December 31, 2022 and 2021, respectively. The decrease
in the accumulated benefit obligation, projected benefit obligation and the actuarial loss was primarily attributable to an increase in the
discount rate during 2022.
The net amounts recognized in the Consolidated Balance Sheets for the unfunded pension liability as of December 31, 2022 and 2021
were as follows:
(In thousands)
2022
2021
Current liability
$
$
Pension liability
10,624
11,402
Total
$
10,624
$
11,402
The components of net periodic pension cost, other than the service cost component, are included in other income (expense), net in the
Consolidated Statements of (Loss) Income. The components of net periodic pension cost and amounts recognized in other
comprehensive (loss) income for the years ended December 31, 2022, 2021 and 2020 were as follows:
(In thousands)
2022
2021
2020
Net periodic benefit cost:
Service cost
$
1,426
$
1,229
$
1,270
Interest cost
1,168
339
444
Expected return on plan assets
(2,129
)
(1,842
)
(1,679
)
Amortization of actuarial losses
355
1,088
970
Net periodic benefit cost
820
814
1,005
Other changes in plan assets and benefit obligations
recognized in other comprehensive (loss) income:
Net actuarial (gain) loss
(6,549
)
(4,984
)
1,784
Amortization of actuarial losses
(113
)
(825
)
(1,212
)
Amount recognized in other comprehensive (loss) income
(6,662
)
(5,809
)
572
Total recognized in net periodic benefit cost and other
comprehensive (loss) income
$
(5,842
)
$
(4,995
)
$
1,577
The amounts recognized in accumulated other comprehensive (loss) income as of December 31, 2022 and 2021 were as follows:
(In thousands)
2022
2021
Net actuarial loss
$
(1,073
)
$
(7,736
)
86
The defined benefit pension plan is accounted for on an actuarial basis, which requires the use of various assumptions, including an
expected rate of return on plan assets and a discount rate. The expected return on our plans assets is utilized in determining the benefit
obligation and net periodic benefit cost is derived from periodic studies, which include a review of asset allocation strategies, anticipated
future long-term performance of individual asset classes, risks using standard deviations and correlations of returns among the asset
classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and historical
returns, the assumptions are primarily long-term, prospective rates of return. The discount rate has been derived from the returns of
high-quality, corporate bonds denominated in Euro currency with durations close to the duration of our pension obligations.
The weighted-average assumptions that were used to determine the net periodic benefit cost for the years ended December 31, 2022,
2021 and 2020 were as follows:
2022
2021
2020
Discount rate
3.24
%
1.16
%
1.00
%
Rate of compensation increase
2.17
%
2.00
%
2.00
%
Expected long-term rates of return
4.65
%
5.90
%
5.90
%
The weighted-average assumptions that were used to determine the benefit obligation as of December 31, 2022 and 2021:
2022
2021
2020
Discount rate
3.10
%
1.16
%
0.69
%
Rate of compensation increase
2.17
%
2.00
%
2.00
%
Actuarial gains and losses are recorded in accumulated other comprehensive (loss) income. To the extent unamortized gains and losses
exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component
of net periodic pension cost over the remaining service period of active participants.
The Company anticipates making approximately $1.8 million in contributions to the pension plans in 2023
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid to participants:
(In thousands)
2023
$
2,377
2024
2,303
2025
3,331
2026
3,092
2027
3,710
2028 - 2032
18,287
Total
$
33,100
87
U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of
financial instruments:
Level 1 – Observable outputs; values based on unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 – Significant inputs that are observable; values based on quoted prices in markets that are not active or model inputs
that are observable either directly or indirectly;
Level 3 – Significant unobservable inputs; values based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. These inputs could include information supplied by
investees.
We have categorized our cash equivalents and our investments held at fair value into this hierarchy as follows:
Fair Value Measurements at December 31, 2022 Using
(In thousands)
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
1,423
$
1,423
$
$
Available-for-sale securities
Bond funds:
Corporate bonds
13,256
13,256
Government bonds
5,490
5,490
Equity funds:
Global equity
15,452
15,452
Balanced fund
5,190
5,190
Emerging markets
1,707
1,707
Large cap value
194
194
Global real estate fund
6,008
6,008
Available-for-sale securities
47,297
47,297
Total
$
48,720
$
48,720
$
$
Fair Value Measurements at December 31, 2021 Using
(In thousands)
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
801
$
801
$
$
Available-for-sale securities
Bond funds:
Corporate bonds
7,528
7,528
Government bonds
5,721
5,721
Equity funds:
Global equity
12,170
12,170
Balanced fund
2,919
2,919
Emerging markets
2,259
2,259
Large cap value
235
235
Global real estate fund
1,129
1,129
Available-for-sale securities
31,961
31,961
Total
$
32,762
$
32,762
$
$
Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet
expected future benefits earned by participants and consider a broad range of economic conditions. The objectives of the target
allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns
that meet or exceed the plans’ actuarial assumptions and achieve asset returns that are competitive with like institutions employing
similar investment strategies.
The investment policy is periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The
policy is established and administered in a manner that is compliant at all times with applicable government regulations.
88
401(k) Savings Plan
We maintain the ADTRAN, Inc. 401(k) Retirement Plan (the “Savings Plan”) for the benefit of eligible employees. The Savings Plan
is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”), and is intended
to be a “safe harbor” 401(k) plan under Code Section 401(k)(12). The Savings Plan allows employees to save for retirement by
contributing part of their compensation to the plan on a tax-deferred basis. The Savings Plan also requires us to contribute a “safe harbor”
amount each year. We match up to 4% of employee contributions (100% of an employee’s first 3% of contributions and 50% of their
next 2% of contributions), beginning on the employee’s one-year anniversary date. In calculating our matching contribution,
compensation up to the statutory maximum under the Code is used ($305,000 for 2022). All matching contributions under the Savings
Plan vest immediately. Employer contribution expense and plan administration costs for the Savings Plan amounted to approximately
$4.1 million, $3.9 million and $4.0 million in 2022, 2021 and 2020, respectively.
Deferred Compensation Plans
We maintain four deferred compensation programs for certain executive management employees and our Board of Directors.
The ADTRAN, Inc. Deferred Compensation Program for Employees is offered as a supplement to our tax-qualified 401(k) plan and is
available to certain executive management employees who have been designated by our Board of Directors. This deferred compensation
plan allows participants to defer all or a portion of certain specified bonuses and up to 25% of remaining cash compensation and permits
us to make matching contributions on a discretionary basis without the limitations that apply to the 401(k) plan. To date, we have not
made any matching contributions under this plan. We also maintain the ADTRAN, Inc. Equity Deferral Program for Employees. Under
this plan, participants may elect to defer all or a portion of their vested PSUs and RSUs to the plan. Such deferrals shall continue to be
held and deemed to be invested in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to
another deemed investment pursuant to an election made by the participant.
For our Board of Directors, we maintain the ADTRAN, Inc. Deferred Compensation Program for Directors. This program allows our
Board of Directors to defer all or a portion of monetary remuneration paid to the Director, including, but not limited to, meeting fees
and annual retainers. We also maintain the ADTRAN, Inc. Equity Deferral Program for Directors. Under this plan, participants may
elect to defer all or a portion of their vested restricted stock awards. Such deferrals shall continue to be held and deemed to be invested
in shares of ADTRAN stock unless and until the amounts are distributed or such deferrals are moved to another deemed investment
pursuant to an election made by the director.
We have set aside the plan assets for all plans in a rabbi trust (the “Trust”) and all contributions are credited to bookkeeping accounts
for the participants. The Trust assets are subject to the claims of our creditors in the event of bankruptcy or insolvency. The assets of the
Trust are deemed to be invested in pre-approved mutual funds as directed by each participant and the participant’s bookkeeping account
is credited with the earnings and losses attributable to those investments. Benefits are scheduled to be distributed six months after
termination of employment in a single lump sum payment or annual installments paid over a three or ten-year term based on the
participant’s election. Distributions will be made on a pro-rata basis from each of the hypothetical investments of the participant’s
account in cash. Any whole shares of ADTRAN, Inc. common stock that are distributed will be distributed in-kind.
Assets of the Trust are deemed invested in mutual funds that cover an investment spectrum ranging from equities to money market
instruments. These mutual funds are publicly quoted and reported at fair value. The fair value of the assets held by the Trust and the
amounts payable to the plan participants as of December 31, 2022 and 2021 were as follows:
(In thousands)
2022
2021
Fair Value of Plan Assets
Long-term investments
$
22,943
$
26,935
Total Fair Value of Plan Assets
$
22,943
$
26,935
Amounts Payable to Plan Participants
Deferred compensation liability
$
26,668
$
31,383
Total Amounts Payable to Plan Participants
$
26,668
$
31,383
The Trust held $3.7 million and $4.1 million of common stock in the Company as of December 31, 2022 and 2021, respectively. Shares
of the Company held by the Trust are recorded at cost and classified as treasury stock on the Consolidated Balance Sheet.
Interest and dividend income of the Trust are included in interest and dividend income in the accompanying 2022, 2021 and 2020
Consolidated Statements of (Loss) Income. Changes in the fair value of the plan assets held by the Trust have been included in other
income (expense) in the accompanying 2022, 2021 and 2020 Consolidated Statements of (Loss) Income. Changes in the fair value of
the deferred compensation liability are included as selling, general and administrative expense in the accompanying 2022, 2021 and
2020 Consolidated Statements of (Loss) Income. Based on the changes in the total fair value of the Trust’s assets, the Company recorded
deferred compensation income in 2022, 2021 and 2020 of $6.3 million, $0.9 million and $4.3 million, respectively.
89
Retiree Medical Coverage
Medical, dental and prescription drug coverage is provided to certain spouses and former spouses of current and former officers on the
same terms as provided to our active officers for up to 30 years. As of December 31, 2022 and 2021, this liability totaled $0.2 million
and $0.3 million, respectively.
Note 17 – Equity
The following table presents changes in accumulated other comprehensive (loss) income, net of tax, by components of accumulated
other comprehensive (loss) income for the years ended December 31, 2022, 2021 and 2020:
(In thousands)
Unrealized
Gains (Losses)
on Available-
for-Sale
Securities
Defined
Benefit Plan
Adjustments
Foreign
Currency
Adjustments
ASU 2018-02
Adoption
(1)
Total
Balance as of December 31, 2019
$
(284
)
$
(9,226
)
$
(7,292
)
$
385
$
(16,417
)
Other comprehensive (loss) income before
reclassifications
749
(1,231
)
4,857
4,375
Amounts reclassified from accumulated other
comprehensive (loss) income
(433
)
836
403
Balance as of December 31, 2020
32
(9,621
)
(2,435
)
385
(11,639
)
Other comprehensive (loss) income before
reclassifications
(705
)
3,439
(3,699
)
(965
)
Amounts reclassified from accumulated other
comprehensive (loss) income
121
569
690
Balance as of December 31, 2021
(552
)
(5,613
)
(6,134
)
385
(11,914
)
Other comprehensive (loss) income before
reclassifications
(41
)
4,519
53,396
57,874
Amounts reclassified from accumulated other
comprehensive (loss) income
(243
)
78
(165
)
Net current period other comprehensive (loss) income
(284
)
4,597
53,396
57,709
Less: Comprehensive Loss attributable to non-
controlling interest, net of tax
(918
)
(918
)
Balance as of December 31, 2022
$
(836
)
$
(1,016
)
$
48,180
$
385
$
46,713
(1)
With the adoption of ASU 2018-02 on January 1, 2019, stranded tax effects related to the Tax Cuts and Jobs Act of 2017 were
reclassified to retained earnings.
90
The following tables present the details of reclassifications out of accumulated other comprehensive (loss) income for the years ended
December 31, 2022, 2021 and 2020:
(In thousands)
For the year ended December 31,
Details about Accumulated Other Comprehensive (Loss)
Income Components
2022
2021
2020
Affected Line Item in the
Statement Where Net
(Loss) Income Is Presented
Unrealized (loss) gains on available-for-sale
securities:
Net realized gain (loss) on sales of securities
$
328
$
(164
)
$
585
Net investment gain
Defined benefit plan adjustments – actuarial losses
(113
)
(825
)
(1,212
)
(1)
Total reclassifications for the period, before tax
215
(989
)
(627
)
Tax (benefit) expense
(50
)
299
224
Total reclassifications for the period, net of tax
$
165
$
(690
)
$
(403
)
(1)
Included in the computation of net periodic pension cost. See Note 16 for additional information.
The following tables present the tax effects related to the change in each component of other comprehensive (loss) income for the years
ended December 31, 2022, 2021 and 2020:
2022
(In thousands)
Before-Tax
Amount
Tax
(Expense)
Benefit
Net-of-Tax
Amount
Unrealized gains (losses) on available-for-sale securities
$
(55
)
$
14
$
(41
)
Reclassification adjustment for amounts related to available-for-sale
investments included in net income (loss)
(328
)
85
(243
)
Defined benefit plan adjustments
6,549
(2,030
)
4,519
Reclassification adjustment for amounts related to defined benefit plan
adjustments included in net income (loss)
113
(35
)
78
Foreign currency translation adjustment
53,396
53,396
Total Other Comprehensive (Loss) Income
$
59,675
$
(1,966
)
$
57,709
2021
(In thousands)
Before-Tax
Amount
Tax
(Expense)
Benefit
Net-of-Tax
Amount
Unrealized gains (losses) on available-for-sale securities
$
(953
)
$
248
$
(705
)
Reclassification adjustment for amounts related to available-for-sale
investments included in net income (loss)
164
(43
)
121
Defined benefit plan adjustments
4,984
(1,545
)
3,439
Reclassification adjustment for amounts related to defined benefit plan
adjustments included in net income (loss)
825
(256
)
569
Foreign currency translation adjustment
(3,699
)
(3,699
)
Total Other Comprehensive (Loss) Income
$
1,321
$
(1,596
)
$
(275
)
2020
(In thousands)
Before-Tax
Amount
Tax
(Expense)
Benefit
Net-of-Tax
Amount
Unrealized gains (losses) on available-for-sale securities
$
1,012
$
(263
)
$
749
Reclassification adjustment for amounts related to available-for-sale
investments included in net (loss) income
(585
)
152
(433
)
Defined benefit plan adjustments
(1,784
)
553
(1,231
)
Reclassification adjustment for amounts related to defined benefit plan
adjustments included in net (loss) income
1,212
(376
)
836
Foreign currency translation adjustment
4,857
4,857
Total Other Comprehensive (Loss) Income
$
4,712
$
66
$
4,778
91
Note 18 – Segment Information and Major Customers
The chief operating decision maker regularly reviews the Company’s financial performance based on two reportable segments: (1)
Network Solutions and (2) Services & Support.
The Network Solutions segment includes hardware and software products that enable a digital future which support the Company's
Subscriber, Access and Aggregation, and Optical Networking Solutions. The Company's cloud-managed Wi-Fi gateways, virtualization
software, and switches provide a mix of wired and wireless connectivity at the customer premises. In addition, its Carrier Ethernet
products support a variety of applications at the network edge ranging from mobile backhaul to connecting enterprise customers
(“Subscriber Solutions"). The Company's portfolio includes products for multi-gigabit service delivery over fiber or alternative media
to homes and businesses.
The Services & Support segment offers a comprehensive portfolio of network design, implementation, maintenance and cloud-hosted
services supporting its Subscriber, Access and Aggregation, and Optical Networking Solutions. These services assist operators in the
deployment of multi-vendor networks while reducing their cost to maintain these networks. The cloud-hosted services include a suite
of SaaS applications under the Company's Mosaic One platform that manages end-to-end network and service optimization for both
fiber access infrastructure and mesh Wi-Fi connectivity. The Company backs these services with a global support organization that
offers on-site and off-site support services with varying SLAs.
The performance of these segments is evaluated based on revenue, gross profit and gross margin; therefore, selling, general and
administrative expenses, research and development expenses, interest and dividend income, interest expense, net investment (loss) gain,
other income, net and income tax benefit (expense) are reported on a Company-wide basis only. There is no inter-segment revenue.
Asset information by reportable segment is not produced and, therefore, is not reported.
The following table presents information about revenue and gross profit of our reportable segments for each of the years ended
December 31, 2022, 2021 and 2020:
2022
2021
2020
(In thousands)
Revenue
Gross Profit
Revenue
Gross Profit
Revenue
Gross Profit
Network Solutions
$
916,793
$
269,688
$
498,834
$
190,993
$
438,015
$
193,789
Services & Support
108,743
57,564
64,170
27,384
68,495
23,762
Total
$
1,025,536
$
327,252
$
563,004
$
218,377
$
506,510
$
217,551
92
For the years ended December 31, 2022, 2021 and 2020, $3.2 million, $1.2 million and $1.4 million, respectively, of depreciation
expense was included in gross profit for our Network Solutions segment. For the years ended December 31, 2022, 2021 and 2020, $10
thousand, $14 thousand and $32 thousand, respectively, of depreciation expense was included in gross profit for our Services & Support
segment.
Revenue by Category
In addition to its reportable segments, revenue is also reported for the following three categories – Subscriber Solutions, Access &
Aggregation Solutions, and Optical Networking Solutions.
Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories: (1)
Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products. Following the Business
Combination with ADVA, the Company has recast these revenues such that ADTRAN’s former Access & Aggregation revenue is
combined with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber
Solutions & Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions, and the
revenue from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions
category. Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.
Our Subscriber Solutions portfolio is used by service providers to terminate their access services infrastructure at the customer premises
while providing an immersive and interactive experience for residential, business and wholesale subscribers. This revenue category
includes hardware- and software-based products and services. These solutions include fiber termination solutions for residential,
business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network
edge virtualization solutions for business subscribers, and cloud software solutions covering a mix of subscriber types.
Our Access & Aggregation Solutions are solutions that are used by communications service providers to connect residential subscribers,
business subscribers and mobile radio networks to the service providers’ metro network, primarily through fiber-based connectivity.
This revenue category includes hardware- and software-based products and services. Our solutions within this category are a mix of
fiber access and aggregation platforms, precision network synchronization and timing solutions, and access orchestration solutions that
ensure highly reliable and efficient network performance.
Our Optical Networking Solutions are used by communications service providers, internet content providers and large-scale enterprises
to securely interconnect metro and regional networks over fiber. This revenue category includes hardware- and software-based products
and services. Our solutions within this category include open optical terminals, open line systems, optical subsystems and modules,
network infrastructure assurance systems, and automation platforms that are used to build high-scale, secure and assured optical
networks.
The following tables disaggregate our revenue by category for the years ended December 31, 2022, 2021 and 2020:
2022
(In thousands)
Network Solutions
Services &
Support
Total
Subscriber Solutions
$
364,238
$
26,216
$
390,454
Access & Aggregation Solutions
326,934
47,068
374,002
Optical Networking Solutions
225,621
35,459
261,080
Total
$
916,793
$
108,743
$
1,025,536
2021
(In thousands)
Network Solutions
Services &
Support
Total
Subscriber Solutions
$
189,825
$
16,385
$
206,210
Access & Aggregation Solutions
309,009
47,785
356,794
Optical Networking Solutions
Total
$
498,834
$
64,170
$
563,004
2020
(In thousands)
Network Solutions
Services &
Support
Total
Subscriber Solutions
$
163,349
$
15,315
$
178,664
Access & Aggregation Solutions
274,666
53,180
327,846
Optical Networking Solutions
Total
$
438,015
$
68,495
$
506,510
93
Additional Information
The following table presents revenue information by geographic area for the years ended December 31, 2022, 2021 and 2020:
(In thousands)
2022
2021
2020
United States
$
517,433
$
374,600
$
352,079
United Kingdom
189,685
56,355
13,799
Germany
146,797
65,229
74,882
Other international
171,621
66,820
65,750
Total
$
1,025,536
$
563,004
$
506,510
Customers comprising more than 10% of revenue can change from year to year. Single customers comprising more than 10% of revenue
in 2022 included one customer, at 10.4%, which was a service provider and was included in both our Network Solutions and Services
& Support segments. Single customers comprising more than 10% of revenue in 2021 included one customer at 18% and was included
in both our Network Solutions and Services & Support segments. Single customers comprising more than 10% of revenue in 2020
included three customers at 15%, 12% and 10% and was included in both our Network Solutions and Services & Support segments.
Other than those with more than 10% of revenue disclosed above our next five largest customers can change, and have historically
changed, from year-to-year. The next five largest customers combined represented 33%, 38% and 34% of total revenue in 2022, 2021
and 2020, respectively.
As of December 31, 2022, property, plant and equipment, net totaled $110.7 million, which included $56.2 million held in the U.S. and
$54.5 million held outside the U.S. As of December 31, 2021, property, plant and equipment, net totaled $55.8 million, which included
$53.0 million held in the U.S. and $2.8 million held outside the U.S. Property, plant and equipment, net is reported on a Company-wide,
functional basis only.
Note 19 – Liability for Warranty Returns
The liability for warranty obligations totaled $7.2 million and $5.4 million as of December 31, 2022 and 2021, respectively. These
liabilities are included in accrued expenses and other liabilities and other non-current liabilities in the accompanying Consolidated
Balance Sheets.
A summary of warranty expense and write-off activity for the years ended December 31, 2022, 2021 and 2020 is as follows:
Year Ended December 31,
(In thousands)
2022
2021
2020
Balance at beginning of period
$
5,403
$
7,146
$
8,394
Plus: ADVA acquisition
3,756
Plus: Amounts charged to cost and expenses
3,104
855
1,538
Plus: Foreign currency translation adjustments
334
Less: Deductions
(5,401
)
(2,598
)
(2,786
)
Balance at end of period
$
7,196
$
5,403
$
7,146
Note 20 – Commitments and Contingencies
Legal Matters
From time to time the Company is subject to or otherwise involved in various lawsuits, claims, investigations and legal proceedings that
arise out of or are incidental to the conduct of our business (collectively, “Legal Matters”), including those relating to employment
matters, patent rights, regulatory compliance matters, stockholder claims, and contractual and other commercial disputes. Such Legal
Matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Additionally, an
unfavorable outcome in a legal matter, including in a patent dispute, could require the Company to pay damages, entitle claimants to
other relief, such as royalties, or could prevent the Company from selling some of its products in certain jurisdictions. At this time, the
Company is unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with such legal matters.
Performance Bonds
C
ertain contracts, customers and jurisdictions in which the Company do business require us to provide various guarantees of performance
such as bid bonds, performance bonds and customs bonds. As of December 31, 2022 and December 31, 2021, the Company had
commitments related to these bonds totaling $22.0 million and $22.9 million, respectively, which expire at various dates through April
94
2031. In general the Company would only be liable for the amount of these guarantees in the event of default under each contract, the
probability of which the Company believes is remote.
Purchase Commitments
The Company purchases components from a variety of suppliers and use contract manufacturers to provide manufacturing services for
our products. Our inventory purchase commitments are for short-term product manufacturing requirements as well as for commitments
to suppliers to secure manufacturing capacity. Certain of our inventory purchase commitments with contract manufacturers and suppliers
relate to arrangements to secure supply and pricing for certain product components for multi-year periods. As of December 31, 2022,
purchase commitments totaled $552.4 million.
Note 21 – Current Expected Credit Losses
Under ASC 326
– Financial Instruments – Credit Losses
, the Company estimates credit losses for the contractual life of assets that are
measured at amortized cost and are within the scope of this guidance, which includes accounts receivable, net investment in sales-type
leases, contract assets under the revenue recognition model and outstanding notes receivable. Where appropriate, the Company pools
assets if similar risk characteristics exist. Additionally, the Company analyzes its available-for-sale debt securities for impairment and
records a credit loss allowance as needed.
Assets Measured at Amortized Cost
Accounts Receivable
The Company records accounts receivable in the normal course of business as products are shipped or services are performed and
invoiced, but payment has not yet been remitted by the customer. Accounts receivable balances are considered past due when payment
has not been received by the date indicated on the relevant invoice or based on agreed upon terms between the customer and the
Company.
As of December 31, 2022 and 2021, the Company’s net outstanding accounts receivable balance was $279.4 million and $158.7 million,
respectively. The Company assessed the need for an allowance for credit losses related to its outstanding accounts receivable using the
historical loss-rate method as well as assessing asset-specific risks. The Company’s historical losses related to accounts receivable have
been immaterial as evidenced by its historical allowance and write-offs due to collectability. The assessment of asset-specific risks
included the evaluation of relevant available information, from internal and external sources, relating to current conditions that may
affect a customer’s ability to pay, such as the customer’s current financial condition, credit rating by geographic location, as provided
by a third party and/or by customer, if needed, and the overall macro-economic conditions in which the customer operates. The Company
pooled assets by geographic location to determine if an allowance should be applied to its accounts receivable balance, assessing the
specific country risk rating and overall economics of that particular country. If elevated risk existed, or customer specific risk indicated
the accounts receivable balance was at risk, the Company further analyzed the need for an allowance related to specific accounts
receivable balances. Additionally, the Company determined that significant changes to customer country risk rating from period-to-
period and from the end of the prior year to the end of the current quarter would require further review and analysis by the Company.
Credit losses totaling less than $0.1 million were recorded for the year ended December 31, 2022, related to accounts receivable.
No credit losses were recorded for the years ended December 31, 2021 and 2020 related to accounts receivable. The Company's
allowance for credit losses related to accounts receivable was less than $0.1 as of December 31, 2022. The Company had no allowance
for credit losses related to accounts receivable as of December 31, 2021.
Contract Assets
The Company records contract assets when it has recognized revenue but has not yet billed the customer. As of December 31, 2022 and
2021, the Company’s outstanding contract asset balance was $1.9 million and $0.5 million, respectively, which is included in other
receivables on the Consolidated Balance Sheets. The Company assessed the need for an allowance for credit losses related to its
outstanding contract assets using the historical loss-rate method as well as asset-specific risks. The Company’s historical losses related
to contract assets receivable have been immaterial as evidenced by historical write-offs due to collectability. Asset-specific risk included
the evaluation of relevant available information, from internal and external sources, relating to current conditions that may affect a
customer’s ability to pay once invoiced, such as the customer’s financial condition, credit rating by geographic location as provided by
a third party and/or by customer, if needed, and the overall macro-economic conditions in which the customer operates. The Company
pooled assets by geographic location to determine if an allowance should be applied to its contract asset balance, assessing the specific
country risk rating and the overall economics of that particular country. If elevated risk existed, or customer specific risk indicated the
contract balance was at risk, the Company further analyzed the need for an allowance related to specific customer balances. Additionally,
the Company determined that significant changes to customer country risk rating from period-to-period and from the end of the prior
year to the end of the current quarter would be subject to further review and analysis by the Company.
No allowance for credit losses was recorded for the year ended December 31, 2022 and 2021 related to contract assets.
95
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of December 31, 2022, 2021 or January 1, 2021.
Available-for-Sale Debt Securities
As of December 31, 2022 and 2021 the Company’s available-for-sale debt securities totaled $9.3 million and $30.1 million, respectively.
These securities were analyzed at the individual investment level, by Committee on Uniform Securities Identification Procedures
(“CUSIP”), to limit credit losses, if applicable, to reflect only the amount by which the fair value of the security was less than its
amortized cost. The Company noted that, as of December 31, 2022 and, 2021, there was no intent to sell any of its available-for-sale
debt securities before maturity, and, therefore, the Company assessed the need for an allowance for each of its available-for-sale debt
securities in which the fair value was less than its amortized cost as of December 31, 2022 and 2021. Accrued interest receivable on
available-for-sale debt securities, which is included in other receivables on the Consolidated Balance Sheets as of December 31, 2022
and 2021, which totaled less than $0.1 million and was excluded from the estimate of credit losses for both periods based on the
Company’s accounting policy election. Income generated from available-for-sale debt securities was recorded as interest and dividend
income in the Consolidated Statements of (Loss) Income.
The Company had 99 positions in available-for-sale debt securities that were in an unrealized loss position as of December 31, 2022.
See Note 6 for additional information.
For those available-for-sale debt securities whose fair value was less than its amortized cost basis, the Company analyzed additional
criteria such as adverse conditions specifically related to the security, an industry or geographic area, failure of the issuer of the security
to make scheduled interest or principal payments, if applicable, and any changes to the rating of the security by a rating agency to
determine if a credit loss existed. The Company used information provided by its investment manager to determine if any scheduled
interest or principal payments had not been received and used a third party to determine if any changes to credit ratings had occurred.
Principal and interest payments are considered past due when payment has not been received based on scheduled terms of each debt
security. The Company ceases to accrue interest on debt securities on a case by case basis. As of December 31, 2022, the Company
noted that all principal and interest payments had been received as scheduled and that there had been no changes in credit ratings year-
over-year or period-over-period that warranted further review.
No allowance for credit losses was recorded for the years ended December 31, 2022 and 2021 related to the Company’s available-for-
sale debt securities.
Note 22 – (Loss) Earnings per Share
The calculations of basic and diluted (loss) earnings per share for the years ended December 31, 2022, 2021 and 2020 are as follows:
(In thousands, except for per share amounts)
2022
2021
2020
Numerator
Net (Loss) Income attributable to ADTRAN Holdings, Inc.
$
(2,037
)
$
(8,635
)
$
2,378
Denominator
Weighted average number of shares – basic
62,346
48,582
47,996
Effect of dilutive securities:
PSUs, RSUs and restricted stock
292
Weighted average number of shares – diluted
62,346
48,582
48,288
(Loss) earnings per share attributable to ADTRAN Holdings, Inc. – basic
$
(0.03
)
$
(0.18
)
$
0.05
(Loss) earnings per share attributable to ADTRAN Holdings, Inc. –
diluted
$
(0.03
)
$
(0.18
)
$
0.05
For each of the years ended December 31, 2022, 2021 and 2020, less than 0.1 million, 0.1 million and 0.1 million shares of unvested or
unearned, as applicable, PSUs, RSUs and restricted stock were excluded from the calculation of diluted (loss) earnings per share due to
their anti-dilutive effect.
For the year ended December 31, 2022, 2021 and 2020, 0.2 million, 0.3 million and 3.6 million stock options, respectively, were
outstanding but were not included in the computation of diluted (loss) earnings per share due to their exercise prices being greater than
the average market price of the common shares during the quarter, making them anti-dilutive under the treasury stock method.
Note 23 – Restructuring
During the fourth quarter of 2022, the Company initiated a multi-year integration program designed to optimize the assets, business
processes, and information technology systems of the Company in relation to the Business Combination with ADVA. The integration
program is expected to maximize cost synergies by realizing operation scale, combining sales channels, streamlining corporate and
general and administrative functions and combining sourcing and production costs.
96
During the second half of 2019, the Company initiated a restructuring plan to realign its expense structure with the reduction in revenue
experienced in recent years and overall Company objectives. As part of this restructuring plan, the Company announced plans to reduce
its overall operating expenses, both in the U.S. and internationally. This plan was completed and all amounts paid in 2021.
In February 2019, the Company announced the restructuring of a certain portion of its workforce predominantly in Germany, which
included the closure of the Company’s office location in Munich, Germany accompanied by relocation or severance benefits for the
affected employees. Voluntary early retirement was offered to certain other employees and was announced in March 2019 and again in
August 2020. This plan was completed in 2021 and all amounts paid in 2022.
A reconciliation of the beginning and ending restructuring liability, which is included in accrued wages and benefits in the Consolidated
Balance Sheets as of December 31, 2022 and 2021, is as follows:
(In thousands)
2022
2021
Balance at beginning of period
$
1,514
$
4,186
Plus: Amounts charged to cost and expense
1,629
411
Less: Amounts paid
(2,984
)
(3,083
)
Balance at end of period
$
159
$
1,514
Restructuring expenses included in the Consolidated Statements of (Loss) Income are for the years ended December 31, 2022, 2021 and
2020:
(In thousands)
2022
2021
2020
Network solutions - cost of revenue
$
8
$
13
$
220
Services & support - cost of revenue
3
235
Cost of revenue
$
8
$
16
$
455
Selling, general and administrative expenses
117
221
1,832
Research and development expenses
1,504
174
3,942
Total restructuring expenses
$
1,629
$
411
$
6,229
The following table represents the components of restructuring expense by geographic area for the years ended December 31, 2022,
2021 and 2020:
(In thousands)
2022
2021
2020
United States
$
2
$
289
$
2,234
International
1,627
122
3,995
Total restructuring expenses
$
1,629
$
411
$
6,229
Note 24 – Subsequent Events
Dividend approval
On February 20, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.09 per common
share to be paid to the Company’s stockholders of record at the close of business on March 7, 2023. The payment date will be March
21, 2023 in the aggregate amount of approximately $7.0 million.
Effectiveness of the Domination and Profit and Loss Transfer Agreement
The DPLTA between the Company, as the controlling company, and ADVA Optical Networking SE, as the controlled company as
executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register
(
Handelsregister
) of the local court (
Amtsgericht
) at the registered seat of ADVA (Jena).
Under the DPLTA, subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, (i) the Company is
entitled to issue binding instructions to the management board of ADVA, (ii) ADVA will transfer its annual profit to the Company,
subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net
loss incurred by ADVA. The obligation of ADVA to transfer its annual profit to the Company applies for the first time to the profit
generated in the ADVA fiscal year 2023. The obligation of the Company to absorb ADVA’s annual net loss applies for the first time to
the loss generated in the ADVA fiscal year 2023.
97
Expansion of Wells Fargo Line of Credit & Payoff of ADVA Loans.
Upon the DPLTA becoming effective on January 16, 2023, the available total borrowings under the Wells Fargo Credit Agreement
increased from $100 million to $400 million. On January 31, 2023, the Company increased its borrowings under the Credit Agreement
from $60.0 million to $187.5 million. In February 2023, the borrowings under the Credit Agreement were paid down by $7.5 million,
leaving $180.0 million of borrowings as of February 28, 2023. After considering our outstanding letters of credit, this leaves the
Company approximately $198.7 million available for future borrowings as of February 28, 2023. The Company used approximately
$51.4 million of the proceeds from the borrowings under the Credit Agreement to retire the outstanding borrowings under ADVA's
syndicated credit agreement note payable, syndicated credit agreement working capital line of credit and the Nord/LB revolving line of
credit. ADVA's $9.1 million of borrowings under their revolving line of credit with DZ bank remains outstanding.
Integration Bonus Plan
On March 1, 2023, the Compensation Committee of the Board of Directors of the Company established an “Integration Bonus Plan”
consisting of a combination of performance-based performance stock units ("PSUs") and cash bonus award amounts (together with the
PSUs, the “Integration Awards”). Under the Integration Bonus Plan, certain key employees of the Company, including the Company’s
named executive officers as disclosed in the most recent proxy statement filed by the Company with the SEC (the “Participants”), are
eligible to earn the Integration Awards over a performance period beginning upon the date of the grant and ending on December 31,
2024 based on the achievement of cost savings targets related to the Business Combination.
See Item 9B. Other Information of this the
Original Filing for addition information.
ITEM 9A. CONTROLS AND PROCEDURES
Internal Control over Financial Reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include in our
Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting,
as well as a report from our independent registered public accounting firm on the effectiveness of internal control over financial
reporting. Management’s Report on Internal Control over Financial Reporting (Restated) is included below, and the related report from
our independent registered public accounting firm is located in Part II, Item 8, “Financial Statements and Supplementary Data,” of this
report.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that the
information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms promulgated
by the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, an evaluation was carried out by management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)
and 15d-15(e)) under the Exchange Act. At the time of the Original Filing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2022. Subsequent to that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial
reporting described below in Management’s Report on Internal Control over Financial Reporting (Restated), our disclosure controls and
procedures were not effective as of December 31, 2022.
Changes in Internal Control over Financial Reporting.
On July 15, 2022, we acquired 33,957,538 bearer shares of ADVA, or 65.43%
of ADVA’s outstanding bearer shares as of such date, as further described in Note 2 of the Notes to the Consolidated Financial
Statements. At December 31, 2022, ADVA’s assets represented approximately 46.9% of our consolidated assets. For the year ended
December 31, 2022, ADVA’s revenues represented approximately 35.7% of our consolidated revenues and loss before income taxes
represented approximately 46.9% of our consolidated loss before income taxes. As permitted by SEC guidance, we currently exclude
ADVA in our evaluation of internal control over financial reporting and related disclosure controls and procedures for the first year after
the Business Combination. However, we are in the process of extending our oversight and monitoring processes that support our internal
control over financial reporting and disclosure controls and procedures to include ADVA’s operations. There were no changes in the
Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2022 that have materially
affected, or are reasonably likely to materially affect, its internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (
RESTATED
)
Management of ADTRAN is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act of 1934. ADTRAN’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
98
external purposes in accordance with generally accepted accounting principles. ADTRAN’s internal control over financial reporting
includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of ADTRAN;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of ADTRAN are being made
only in accordance with authorizations of management and directors of ADTRAN; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
ADTRAN’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of ADTRAN’s internal control over financial reporting as of December 31, 2022. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control-Integrated Framework (2013).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of ADTRAN's annual or interim financial statements will not be prevented or detected
on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2022, management
determined that there were deficiencies in ADTRAN’s internal control over financial reporting that constituted a material weakness.
Specifically, management determined that ADTRAN did not design and maintain effective internal control over financial reporting due
to the following material weakness:
ADTRAN did not design and maintain effective controls over the presentation and disclosure of debt agreements,
specifically to ensure the presentation and disclosure reflect the terms of the agreements. This material weakness resulted
in the restatement of ADTRAN’s consolidated financial statements for the year ended December 31, 2022, as well as the
condensed consolidated financial statements for the three and nine months ended September 30, 2022, and the three months
ended March 31, 2023. Additionally, this material weakness could result in misstatements of the accounts or disclosures
that would result in a material misstatement to the annual or interim consolidated financial statements that would not be
prevented or detected, including the misstatements that required the filing of this Amendment No. 1.
In Management’s Report on Internal Control over Financial Reporting included in the Original Filing, management previously
concluded that ADTRAN maintained effective internal control over financial reporting as of December 31, 2022. Subsequent to the
filing date of the Original Filing, management has concluded that the material weakness described above existed as of December 31,
2022. As a result, management has concluded that the Company did not maintain effective internal control over financial reporting as
of December 31, 2022 based on the criteria in
Internal Control-Integrated Framework (2013)
issued by COSO. Accordingly,
management has restated its Report on Internal Control over Financial Reporting.
As permitted by SEC guidance, we excluded ADVA from our evaluation of internal control over financial reporting as of December 31,
2022 because it was acquired in a business combination during 2022. ADVA is a subsidiary whose assets represented approximately
46.9% of our consolidated assets as of December 31, 2022 and ADVA’s revenues represented 35.7% of our consolidated revenues for
the year ended December 31, 2022.
The effectiveness of our internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears under Part II, Item 8, “Financial Statements and Supplementary
Data,” of this report.
MANAGEMENT'S REMEDIATION EFFORTS
To remediate the material weakness in the Company’s internal control over financial reporting, the Company plans to initiate a
remediation plan that includes: implementing a new control over the review of new or amendments to our agreements for terms and
conditions that impact the presentation or disclosure of debt. We believe that the foregoing actions will support the improvement of the
Company’s internal control over financial reporting, and, through our efforts to identify, design, and implement the necessary control
activities, will be effective in remediating the material weakness described above. We will continue to devote significant time and
attention to these remediation efforts. As we continue to evaluate and work to improve our internal control over financial reporting,
management may determine to take additional measures to address the material weakness or determine to modify the remediation plan
described above. Until the remediation steps set forth above, including the efforts to implement the necessary control activities that we
identify, are fully completed, and there has been appropriate time for us to conclude through testing that the control activities are
operating effectively, the material weakness described above will not be considered remediated.
99
100
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents Filed as Part of This Report.
1. Consolidated Financial Statements
The consolidated financial statements of ADTRAN and the report of independent registered public accounting firm thereon
are set forth under Part II, Item 8 of this report.
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of (Loss) Income for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Equity for the years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by incorporation by reference
to a previously filed registration statement or report, such registration statement or report is identified in parentheses. We will furnish
any exhibit upon request to: ADTRAN Holdings, Inc., Attn: Investor Relations, 901 Explorer Boulevard, Huntsville, Alabama 35806.
There is a charge of $0.50 per page to cover expenses for copying and mailing.
Effective as of July 8 2022, ADTRAN Holdings, Inc. became the successor to ADTRAN, Inc. Any reference to "ADTRAN, Inc." in
these exhibits should be read as "ADTRAN Holdings, Inc." as set forth in the Exhibit List below.
Exhibit
Number
Description
2.1
Business Combination Agreement, dated August 30, 2021, by and among ADTRAN, Inc., Acorn HoldCo, Inc., Acorn
MergeCo, Inc. and ADVA Optical Networking SE (incorporated by reference to Exhibit 2.1 to ADTRAN’s Form 8-K filed
August 30, 2021)
2.2
Irrevocable Undertaking, dated August 30, 2021, by and among Acorn HoldCo, Inc., EGORA Holding GmbH and Egora
Investments GmbH (incorporated by reference to Exhibit 2.2 to ADTRAN’s Form 8-K filed August 30, 2021).
3.1
Amended and Restated Certificate of Incorporation of ADTRAN, Inc. (incorporated by reference to Exhibit 3.1 to ADTRAN's
Form 8-K filed July 8, 2022)
3.2
Amended and Restated Bylaws of ADTRAN Holdings, Inc. (incorporated by reference to Exhibit 3.2 to ADTRAN's Form
8-K filed July 8, 2022).
4.1
Description of Securities (incorporated by reference to Exhibit 4.1 to ADTRAN’s Form 10-K filed May 10, 2023).
10.1
Management Contracts and Compensatory Plans:
(a)
ADTRAN, Inc. Variable Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed May 9, 2011).
(b)
Form of Notice Letter under the ADTRAN, Inc. Variable Incentive Compensation Plan (incorporated by reference to
Exhibit 10.3(b) to ADTRAN’s Form 10-K filed February 25, 2020).
(c)
ADTRAN, Inc. 2006 Employee Stock Incentive Plan (incorporated by reference to Exhibit 4.1 to ADTRAN’s
Registration Statement on Form S-8 (File No. 333-133927) filed May 9, 2006).
101
(d)
First Amendment to the ADTRAN, Inc. 2006 Employee Stock Incentive Plan (incorporated by reference to Exhibit
10.3(h) to ADTRAN’s 2007 Form 10-K filed February 28, 2008).
(e)
Form of Nonqualified Stock Option Agreement under the 2006 Employee Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K filed June 8, 2006).
(f)
Form of Incentive Stock Option Agreement under the 2006 Employee Stock Incentive Plan (incorporated by reference
to Exhibit 10.2 to the Company's Form 8-K filed June 8, 2006).
(g)
Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.3(k) to the Company's
2006 Form 10-K filed February 28, 2007).
(h)
ADTRAN, Inc. 2010 Directors Stock Plan (incorporated by reference to Exhibit 4.3 to ADTRAN’s Form S-8 filed
July 30, 2010).
(i)
Form of Stock Option Award Agreement under the ADTRAN, Inc. 2010 Directors Stock Plan (incorporated by
reference to Exhibit 10.3(k) to the Company's Form 10-K filed February 25, 2020).
(j)
Form of Restricted Stock Award Agreement under the ADTRAN, Inc. 2010 Directors Stock Plan (incorporated by
reference to Exhibit 10.3(l) to the Company's Form 10-K filed February 25, 2020).
(k)
ADTRAN, Inc. 2015 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed May 15, 2015).
(l)
Form of Performance Shares Agreement under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (incorporated
by reference to Exhibit 4.5 to the Company's Form S-8 filed December 21, 2016).
(m)
Form of Restricted Stock Unit Agreement under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed November 16, 2016).
(n)
Form of Option Award Agreement under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (incorporated by
reference to Exhibit 10.3(p) to the Company's Form 10-K filed February 25, 2020).
(o)
ADTRAN, Inc. Deferred Compensation Program for Employees, as amended and restated as of June 1, 2010
(incorporated by reference to Exhibit 10.3(n) to the Company's Form 10-K filed February 24, 2016).
(p)
ADTRAN, Inc. Deferred Compensation Program for Directors, as amended and restated as of June 1, 2010
(incorporated by reference to Exhibit 10.3(o) to the Company's Form 10-K filed February 24, 2016).
(q)
ADTRAN, Inc. Equity Deferral Program for Employees, as amended and restated as of October 1, 2011 (incorporated
by reference to Exhibit 10.3(p) to the Company's Form 10-K filed February 24, 2016).
(r)
ADTRAN, Inc. Equity Deferral Program for Directors, as amended and restated as of October 1, 2011 (incorporated
by reference to Exhibit 10.3(q) to the Company's Form 10-K filed February 24, 2016).
(s)
Form of Clawback Agreement, entered into between ADTRAN, Inc. and each executive officer of ADTRAN, Inc.
(incorporated by reference to Exhibit 10.3(x) to the Company's Form 10-K filed February 25, 2020).
102
(t)**
Amended and Restated ADTRAN Holdings, Inc. 2020 Employee Stock Incentive Plan.
(u)**
Amended and Restated ADTRAN Holdings, Inc. 2020 Directors Stock Plan
(v)
Form of Notice Letter with respect to RSU and PSU awards under the ADTRAN, Inc. 2020 Employee Stock Incentive
Plan (incorporated by reference to Exhibit 10.3 (ae) to the Company's Form 10-K filed February 26, 2021).
(w)
Form of ADTRAN Sales Incentive Compensation Program – General Terms (participants include James D. Wilson)
(incorporated by reference to Exhibit 10.3(ad) to the Company’s Form 10-K filed February 26, 2021)
(x)
Form of Notice Letter with respect to restricted stock awards under the ADTRAN, Inc. 2020 Directors Stock Incentive
Plan (incorporated by reference to Exhibit 10.3(af) to the Company's Form 10-K filed February 26, 2021).
(y)
Form of Market-Based Performance Stock Unit Agreement under the ADTRAN, Inc. 2020 Employee Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q filed May 6, 2021)
(z)
Form of Restricted Stock Unit Agreement under the ADTRAN, Inc. 2020 Employee Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q filed May 6, 2021)
(aa)
Form of Performance Shares Agreement (and Notice Letter) under the ADTRAN, Inc. 2020 Employee Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q filed May 6, 2021)
(ab)
Form of Performance Shares Agreement under the ADTRAN, Inc. 2015 Employee Stock Incentive Plan (incorporated
by reference to Exhibit 10.4 to the Company's Form 10-Q filed May 6, 2021)
(ac)
Amended and Restated Variable Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed on January 26, 2023)
(ad)
Form of VICC Award Letter for Quarterly Bonus Program (incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed on January 26, 2023)
(ae)
Employment Agreement dated July 13, 2022 by and between Thomas R. Stanton and ADTRAN Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed July 15, 2022)
(af)
Settlement Agreement, dated August 4, 2022, by and between ADVA Optical Networking SE and Brian Protiva
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed September 30, 2022)
(ag)**
Form of 2022 Integration Award Agreement for ADTRAN Holdings, Inc.
(ah)
Employment Agreement, dated September 29, 2006 and Amendment Nos. 1-16, by and between ADVA Optical
Networking SE and Christoph Glingener (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K
filed April 3, 2023)
10.2
Credit Agreement dated July 18, 2022, by and among ADTRAN Holdings, Inc. and ADTRAN, Inc. as borrowers, in favor of
Wells Fargo Bank, National Association as lender (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K
filed July 22, 2022)
10.3
Collateral Agreement dated July 18, 2022, by and among ADTRAN Holdings, Inc., ADTRAN, Inc., and Wells Fargo Bank,
National Association (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed July 22, 2022)
10.4
Guaranty Agreement dated July 18, 2022, by and between ADTRAN Holdings, Inc. and ADTRAN, Inc. in favor of Wells
Fargo Bank, National Association (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed July 22, 2022)
10.5
Domination and Profit and Loss Transfer Agreement between ADTRAN Holdings, Inc. and ADVA Optical Networking SE,
dated November 30, 2022 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed December 5, 2022)
21**
Subsidiaries of ADTRAN.
23*
Consent of PricewaterhouseCoopers LLP.
103
24**
Powers of Attorney.
31*
Rule 13a-14(a)/15d-14(a) Certifications.
32*
Section 1350 Certifications.
101
The following financial statements from the Company's Annual Report on Form 10-K/A for the year ended December 31,
2022, formatted in inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of (Loss) Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated
Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial
Statements, and (vii) Schedule II – Valuation and Qualifying Accounts.
104
Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)
*
Furnished or filed herewith, as applicable
** Filed with the Original Filing.
(P) Indicates a paper filing with the SEC.
+ Schedules and exhibits omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a copy of any omitted
schedule or exhibit to the SEC upon request.
† Confidential treatment has been requested as to certain portions of this document. Each such portion, which has been omitted therein
and replaced with an asterisk (*), has been filed separately with the Securities and Exchange Commission.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2023.
ADTRAN Holdings, Inc.
(Registrant)
By:
/s/ Ulrich Dopfer
Ulrich Dopfer
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
105
ADTRAN Holdings, Inc.
SCHE
DULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at
Beginning
of Period
Charged to
Costs &
Expenses
Deductions
Balance at
End of
Period
Year ended December 31, 2022
Allowance for Credit Losses
$
49
$
49
Deferred Tax Asset Valuation Allowance
$
50,564
45,363
$
5,201
Year ended December 31, 2021
Allowance for Credit Losses
$
38
(38
)
$
Deferred Tax Asset Valuation Allowance
$
45,818
6,347
1,601
$
50,564
Year ended December 31, 2020
Allowance for Credit Losses
$
38
$
38
Deferred Tax Asset Valuation Allowance
$
48,616
5,120
7,918
$
45,818
Exhibit 31
CERTIFICATIONS
I, Thomas R. Stanton, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A of ADTRAN Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: August 14, 2023
/s/ Thomas R. Stanton
Thomas R. Stanton
Chief Executive Officer and Chairman of the Board
I, Ulrich Dopfer, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A of ADTRAN Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: August 14, 2023
/s/ Ulrich Dopfer
Ulrich Dopfer
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of ADTRAN Holdings, Inc. (the “Company”) on Form 10-K/A for the period ended
December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas R. Stanton,
Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company for the periods described herein.
/s/ Thomas R. Stanton
Thomas R. Stanton
Chief Executive Officer and Chairman of the Board
Date: August 14, 2023
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of ADTRAN Holdings, Inc. (the “Company”) on Form 10-K/A for the period ended
December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ulrich Dopfer, Chief
Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company for the periods described herein.
/s/ Ulrich Dopfer
Ulrich Dopfer
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
Date: August 14, 2023
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ADTRAN Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ADTRAN Holdings, Inc. and its
subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of
(loss) income, of comprehensive income (loss), of changes in equity and of cash flows for each of the three
years in the period ended December 31, 2022, including the related notes and financial statement schedule
listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We
also have audited the Company's internal control over financial reporting as of December 31, 2022, based on
criteria established in
Internal Control - Integrated Framework
(2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company
did not maintain, in all material respects, effective internal control over financial reporting as of December
31, 2022, based on criteria established in
Internal Control – Integrated Framework
(2013) issued by the
COSO because a material weakness in internal control over financial reporting existed as of that date related
to the Company not designing and maintaining effective controls over the presentation and disclosure of debt
agreements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis. The material weakness referred to
above is described in Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests
applied in our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness
of the Company’s internal control over financial reporting does not affect our opinion on those consolidated
financial statements.
Restatement of Previously Issued Financial Statements and Management’s Conclusion Regarding Internal
Control over Financial Reporting
As discussed in Note 1 to the consolidated financial statements, the Company has restated its 2022
consolidated financial statements to correct misstatements.
Management and we previously concluded that the Company maintained effective internal control over
financial reporting as of December 31, 2022. However, management has subsequently determined that a
material weakness in internal control over financial reporting related to the Company not designing and
maintaining effective controls over the presentation and disclosure of debt agreements existed as of that date.
Accordingly, management’s report has been restated and our present opinion on internal control over
financial reporting, as presented herein, is different from that expressed in our previous report.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in management’s report referred to above. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
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statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded ADVA Optical Networking SE (ADVA) from its assessment of internal control over financial
reporting as of December 31, 2022, because it was acquired by the Company in a purchase business
combination during 2022. We have also excluded ADVA from our audit of internal control over financial
reporting. ADVA is a subsidiary whose total assets and total revenues excluded from management’s
assessment and our audit of internal control over financial reporting represent 46.9% and 35.7%, respectively,
of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit
committee and that (i) relates to accounts or disclosures that are material to the
consolidated financial
statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated
financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition of ADVA Optical Networking SE – Valuation of Developed Technology, Customer Relationships,
and Backlog Intangible Assets
As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of
ADVA Optical Networking SE for total purchase consideration of $578.3 million on July 15, 2022.
Assets
acquired and liabilities assumed were recognized at their respective fair values as of July 15, 2022, which
resulted in the recognition of $403.8 million of identifiable intangible assets. The fair value of the identifiable
intangible assets acquired as of the acquisition date primarily consisted of developed technology of $291.9
3
million, customer relationships of $32.7 million, and backlog of $52.2 million. In determining the fair value,
management utilized various methods of the income approach depending on the asset. The estimation of fair
value required significant judgment by management related to net cash flows reflecting the risk inherent in
each cash flow stream, competitive trends, market comparables and other factors. Inputs were generally
determined by taking into account historical data, current and anticipated market conditions, and growth
rates. Developed technology and customer relationships were valued using the multi-period excess earnings
method. Backlog was valued using the distributor method. Significant assumptions used in the discounted
cash flow analysis for (i) developed technology were the revenue growth rates, long-term revenue growth
rate, discount rate, earnings before interest, taxes, depreciation, and amortization (EBITDA) margins,
obsolescence factors, income tax rate, tax depreciation, and economic depreciation; (ii) customer
relationships were earnings before interest and taxes (EBIT) margins, contributory asset charges, and
customer attrition rate; and (iii) backlog were EBIT margins, adjusted EBIT margins, and contributory asset
charges.
The principal considerations for our determination that performing procedures relating to the valuation of the
developed technology, customer relationships, and backlog intangible assets acquired in the acquisition of
ADVA Optical Networking SE is a critical audit matter are (i) the significant judgment by management when
developing the fair value estimates of the identifiable intangible assets acquired; (ii) a high degree of auditor
judgment, subjectivity, and effort in performing procedures and evaluating management’s significant
assumptions related to the revenue growth rates, long-term revenue growth rate, discount rate, EBITDA
margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation used in the
valuation of the developed technology; EBIT margins, contributory asset charges, and customer attrition rate
used in the valuation of the customer relationships; and EBIT margins, adjusted EBIT margins, and
contributory asset charges used in the valuation of the backlog; and (iii)
the audit effort involved the use of
professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements. These procedures included testing the
effectiveness of controls relating to the acquisition accounting, including controls over the valuation of the
identifiable intangible assets acquired. These procedures also included, among others (i) reading the purchase
agreement; (ii) testing management’s process for developing the fair value estimates of the developed
technology, customer relationships, and backlog intangible assets; (iii) evaluating the appropriateness of the
multi-period excess earnings and distributor methods; (iv) testing the completeness and accuracy of
underlying data used by management in the valuation methods; and (v) evaluating the reasonableness of
significant assumptions used by management related to the revenue growth rates, long-term revenue growth
rate, discount rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic
depreciation used in the valuation of the developed technology; EBIT margins, contributory asset charges,
and customer attrition rate used in the valuation of the customer relationships; and EBIT margins, adjusted
EBIT margins, and contributory asset charges used in the valuation of the backlog. Evaluating the
reasonableness of management’s significant assumptions related to the revenue growth rates, long-term
revenue growth rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and
economic depreciation related to the developed technology; the EBIT margins, contributory asset charges,
and customer attrition rate related to the customer relationships; and EBIT margins, adjusted EBIT margins,
and contributory asset charges related to backlog involved considering (i) the past performance of the
acquired business; (ii) the consistency with external market and industry data; and (iii) whether these
assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized
skill and knowledge were used to assist in evaluating (i) the appropriateness of the valuation methods used
and (ii) the reasonableness of the discount rate significant assumption.
Report on Other Legal and Regulatory Requirements - European Single Electronic Format
In connection with the Company’s listing requirements with the FrankfurtStock Exchange, management is
responsible for presenting the consolidated financial statements in compliance with the requirements set
forth in Article 3 of the
Delegated Regulation 2019/815 on European Single Electronic Format
(ESEF
Regulation). The requirements set forth in the ESEF Regulation that are relevant to the Company relate to
the consolidated financial statements being prepared using a valid eXtensible HyperText Markup Language
(XHTML) format. As part of our assessment as to whether the consolidated financial statements are prepared,
in all material respects, with the requirements set forth in the ESEF Regulation that are relevant to the
4
Company, we have performed tests of the compliance of the presentation of the consolidated financial
statements of the Company with the requirement to prepare the consolidated financial statements using a
valid XHTML format as set forth in the ESEF Regulation. In our opinion, the presentation of the consolidated
financial statements, identified as ADTRAN Holdings –202212-31-EN, have been prepared, in all material
respects, with the requirements set forth in the ESEF Regulation that are relevant to the Company insofar as
it relates to the preparation of the consolidated financial statements in a valid XHTML format.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
March 1, 2023, except for the effects of the restatement discussed in Note 1 to the consolidated financial
statements and the matter discussed in the fifth paragraph of Management’s Report on Internal Control over
Financial Reporting, as to which the date is August 14, 2023, and except with respect to the Report on Other
Legal and Regulatory Requirements – European Single Electronic Format section of our report above, as to
which the date is August 23, 2023
We have served as the Company’s auditor since 1986.