UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐ 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: 001-41446

 

ADTRAN Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware	87-2164282
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
901 Explorer Boulevard Huntsville, Alabama	35806-2807
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (256) 963-8000

 

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 per share		ADTN		The NASDAQ Global Select Market

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 Regulation 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 7, 2023, the registrant had 78,681,829 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

1

---

ADTRAN Holdings, Inc.

Quarterly Report on Form 10-Q

For the Three and Six Months Ended June 30, 2023

Table of Contents

 

Item Number				Page Number
		Glossary of Selected Terms		3
		General		4
		Cautionary Note Regarding Forward-Looking Statements		4
		PART I. FINANCIAL INFORMATION
1		Financial Statements:
		Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 – (Unaudited)		7
		Condensed Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2023 and 2022 – (Unaudited)		8
		Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2023 and 2022 – (Unaudited)		9
		Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2023 and 2022 (Unaudited)		10
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 – (Unaudited)		12
		Notes to Condensed Consolidated Financial Statements – (Unaudited)		13
2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		45
3		Quantitative and Qualitative Disclosures About Market Risk		63
4		Controls and Procedures		65
		PART II. OTHER INFORMATION
1		Legal Proceedings		66
1A		Risk Factors		66
2		Unregistered Sales of Equity Securities and Use of Proceeds		73
5		Other Information		73
6		Exhibits		73
		SIGNATURE		77

 

 

2

---

GLOSSARY OF SELECTED TERMS

 

Below are certain acronyms, concepts and defined terms commonly used in our industry and in this Quarterly Report on Form 10-Q, along with their meanings:

 

Acronym/Concept/
Defined Term	Meaning
BEAD	Broadband Equity, Access and Deployment Program
CPE	Customer-Premises Equipment
DPLTA	Domination and Profit and Loss Transfer Agreement
DSO	Days Sales Outstanding
E.U.	European Union
EURIBOR	Euro Interbank Offered Rate
IPCEI ME/CT	Important Project of Common European Interest - Microelectronics and Communication Technologies
MSO	Multiple System Operator
ODM	Original Design Manufacturing
OLT	Optical Line Terminal
RNCI	Redeemable Non-Controlling Interest
SaaS	Software as a Service
SEC	Securities and Exchange Commission
Service Provider	Entity that provides voice, data or video services to consumers and businesses
SI	Person or company that specializes in bringing together component subsystems into a whole and ensuring that those subsystems function together
SLA	Service Level Agreement
SMB	Small and Mid-Sized Business
SOFR	Secured Overnight Financing Rate
U.S.	United States of America
VAR	Value-Added Reseller

 

 

3

---

GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q 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.

On May 24, 2023, at the annual general meeting of the shareholders of ADVA Optical Networking SE, a subsidiary of the Company ("ADVA"), the shareholders of ADVA approved the proposed change of its name to Adtran Networks SE ("Adtran Networks"), which was registered in the commercial register of the local court of Jena, Germany on June 8, 2023. Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “Adtran Networks” refer to Adtran Networks SE (formerly ADVA Optical Networking SE).

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of ADTRAN. ADTRAN and its 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. The following are some of the risks that could affect our financial performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements:

Risks related to the Business Combination and DPLTA

Risks related to our financial results and Company success

4

---

Risks related to our control environment

 

Risks related to the telecommunications industry

5

---

Risks related to the Company's stock price

Risks related to the regulatory environments in which we do business

The foregoing list of risks is not exclusive. For a more detailed description of the risk factors associated with our business, see Part I, Item 1A of Amendment No. 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC August 14, 2023, as well as the risk factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

		June 30,				December 31,
		2023				2022
ASSETS
Current Assets
Cash and cash equivalents		$	124,294			$	108,644
Short-term investments (includes $3,089 and $340 of available-for-sale securities as of    June 30, 2023 and December 31, 2022, respectively, reported at fair value)			3,089				340
Accounts receivable, less allowance for credit losses of $26 and $49 as of June 30, 2023    and December 31, 2022, respectively			239,565				279,435
Other receivables			32,394				32,831
Inventory, net			416,802				427,531
Prepaid expenses and other current assets			33,880				33,577
Total Current Assets			850,024				882,358
Property, plant and equipment, net			115,719				110,699
Deferred tax assets			82,076				67,839
Goodwill			388,163				381,724
Intangibles, net			355,084				401,211
Other non-current assets			60,634				66,998
Long-term investments (includes $4,985 and $8,913 of available-for-sale securities as of    June 30, 2023 and December 31, 2022, respectively, reported at fair value)			31,238				32,665
Total Assets		$	1,882,938			$	1,943,494
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY
Current Liabilities
Accounts payable		$	171,735			$	237,699
Revolving credit agreements outstanding			10,912				35,936
Notes payable			—				24,598
Unearned revenue			48,030				41,193
Accrued expenses and other liabilities			26,807				35,235
Accrued wages and benefits			36,843				44,882
Income tax payable, net			15,314				9,032
Total Current Liabilities			309,641				428,575
Non-current revolving credit agreement outstanding			200,000				60,000
Deferred tax liabilities			44,614				61,629
Non-current unearned revenue			24,111				19,239
Pension liability			10,883				10,624
Deferred compensation liability			28,522				26,668
Non-current lease obligations			20,834				22,807
Other non-current liabilities			16,401				10,339
Total Liabilities			655,006				639,881
Commitments and contingencies (see Note 20)
Redeemable Non-Controlling Interest			445,462				—
Equity
Common stock, par value $0.01 per share; 200,000 shares authorized;    78,661 shares issued and 78,364 outstanding as of June 30, 2023 and    78,088 shares issued and 77,889 shares outstanding as of December 31, 2022			787				781
Additional paid-in capital			766,428				895,834
Accumulated other comprehensive income			62,208				46,713
Retained (deficit) earnings			(41,010	)			55,338
Treasury stock at cost: 297 and 198 shares as of June 30, 2023    and December 31, 2022, respectively			(5,943	)			(4,125	)
Non-controlling interest			—				309,072
Total Equity			782,470				1,303,613
Total Liabilities, Redeemable Non-Controlling Interest and Equity		$	1,882,938			$	1,943,494

 

See accompanying notes to condensed consolidated financial statements.

7

---

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited)

(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2023				2022				2023				2022
Revenue
Network Solutions		$	283,002			$	155,992			$	565,420			$	294,366
Services & Support			44,376				16,046				85,870				32,190
Total Revenue			327,378				172,038				651,290				326,556
Cost of Revenue
Network Solutions			216,960				99,921				436,090				190,575
Services & Support			17,865				9,611				34,839				19,159
Total Cost of Revenue			234,825				109,532				470,929				209,734
Gross Profit			92,553				62,506				180,361				116,822
Selling, general and administrative expenses			66,583				27,873				133,980				55,766
Research and development expenses			70,598				26,500				140,741				52,991
Operating (Loss) Income			(44,628	)			8,133				(94,360	)			8,065
Interest and dividend income			358				217				662				421
Interest expense			(4,064	)			(94	)			(7,351	)			(124	)
Net investment gain (loss)			1,262				(4,646	)			2,514				(8,061	)
Other income, net			2,494				681				2,191				455
(Loss) Income Before Income Taxes			(44,578	)			4,291				(96,344	)			756
Income tax benefit (expense)			8,363				(2,148	)			19,676				260
Net (Loss) Income		$	(36,215	)		$	2,143			$	(76,668	)		$	1,016
Less: Net Loss attributable to non-controlling interest(1)			(2,881	)			—				(8,870	)			—
Net (Loss) Income attributable to ADTRAN Holdings, Inc.		$	(33,334	)		$	2,143			$	(67,798	)		$	1,016
Weighted average shares outstanding – basic			78,366				49,123				78,364				49,110
Weighted average shares outstanding – diluted			78,366				49,809				78,364				49,813
(Loss) earnings per common share attributable to ADTRAN Holdings, Inc. – basic		$	(0.43	)		$	0.04			$	(0.87	)		$	0.02
(Loss) earnings per common share attributable to ADTRAN Holdings, Inc. – diluted		$	(0.43	)		$	0.04			$	(0.87	)		$	0.02

(1)For the three and six months ended June 30, 2023, we have recognized $2.9 million and $5.7 million, respectively, representing the recurring cash compensation earned by non-controlling interest shareholders post-DPLTA and an incremental $3.2 million net loss attributable to non-controlling interests pre-DPLTA for the six months ended June 30, 2023.

See accompanying notes to condensed consolidated financial statements.

8

---

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2023				2022				2023				2022
Net (Loss) Income		$	(36,215	)		$	2,143			$	(76,668	)		$	1,016
Other Comprehensive Income (Loss), net of tax
Net unrealized (loss) gain on available-for-sale securities			(6	)			(200	)			64				(924	)
Defined benefit plan adjustments			23				(87	)			57				(100	)
Foreign currency translation gain (loss)			6,940				(2,853	)			15,618				(3,758	)
Other Comprehensive Income (Loss), net of tax			6,957				(3,140	)			15,739				(4,782	)
Less: Comprehensive Income attributable to non-controlling interest, net of tax			—				—				244				—
Comprehensive Loss attributable to ADTRAN Holdings, Inc., net of tax		$	(29,258	)		$	(997	)		$	(61,173	)		$	(3,766	)

 

See accompanying notes to condensed consolidated financial statements.

9

---

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(In thousands, except per share amounts)

 

		Common Shares				Common Stock				Additional Paid-In Capital				Retained (Deficit) Earnings				Treasury Stock				Accumulated Other Comprehensive Income				Non-controlling interest				Total Equity
Balance as of December 31, 2022			78,088			$	781			$	895,834			$	55,338			$	(4,125	)		$	46,713			$	309,072			$	1,303,613
Net loss			—				—				—				(37,274	)			—				—				(3,179	)			(40,453	)
Reclassification and remeasurement from equity to mezzanine equity for non-controlling interests in Adtran Networks			—				—				(137,620	)			—				—				—				(306,137	)			(443,757	)
Other comprehensive income, net of tax			—				—				—				—				—				8,538				244				8,782
Dividend payments to ADTRAN Holdings, Inc. shareholders ($0.09 per share)			—				—				—				(7,076	)			—				—				—				(7,076	)
Deferred compensation adjustments, net of tax			—				—				—				—				(1,792	)			—				—				(1,792	)
ADTRAN RSUs and restricted stock vested			561				6				—				(144	)			—				—				—				(138	)
ADTRAN stock options exercised			6				—				—				58				—				—				—				58
ADTRAN stock-based compensation expense			—				—				3,812				—				—				—				—				3,812
Redemption of redeemable non-controlling interest			—				—				—				343				—				—				—				343
Foreign currency remeasurement of redeemable non-controlling interest			—				—				—				(430	)			—				—				—				(430	)
Annual recurring compensation earned			—				—				—				(2,809	)			—				—				—				(2,809	)
Adtran Networks stock-based compensation expense			—				—				9				—				—				—				—				9
Balance as of March 31, 2023			78,655			$	787			$	762,035			$	8,006			$	(5,917	)		$	55,251			$	—			$	820,162
Net loss			—				—				—				(36,215	)			—				—				—				(36,215	)
Other comprehensive income, net of tax			—				—				—				—				—				6,957				—				6,957
Dividend payments to ADTRAN Holdings, Inc. shareholders ($0.09 per share)			—				—				—				(7,076	)			—				—				—				(7,076	)
Dividends accrued for RSUs			—				—				—				9				—				—				—				9
Deferred compensation adjustments, net of tax			—				—				—				—				(26	)			—				—				(26	)
ADTRAN RSUs and restricted stock vested			6				—				—				(44	)			—				—				—				(44	)
Adtran Networks stock options exercised			—				—				92				—				—				—				—				92
ADTRAN stock-based compensation expense			—				—				4,291				—				—				—				—				4,291
Redemption of redeemable non-controlling interest			—				—				—				6				—				—				—				6
Foreign currency remeasurement of redeemable non-controlling interest			—				—				—				(2,814	)			—				—				—				(2,814	)
Annual recurring compensation earned			—				—				—				(2,882	)			—				—				—				(2,882	)
Adtran Networks stock-based compensation expense			—				—				10				—				—				—				—				10
Balance as of June 30, 2023			78,661			$	787			$	766,428			$	(41,010	)		$	(5,943	)		$	62,208			$	—			$	782,470

 

See accompanying notes to condensed consolidated financial statements.

 

10

---

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(In thousands, except per share amounts)

 

		Common Shares				Common Stock				Additional Paid-In Capital				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss				Non-controlling interest				Total Equity
Balance as of December 31, 2021			79,652			$	797			$	288,946			$	740,820			$	(661,547	)		$	(11,914	)		$	-			$	357,102
Net loss			—				—				—				(1,127	)			—				—				—				(1,127	)
Other comprehensive loss, net of tax			—				—				—				—				—				(1,642	)			—				(1,642	)
Dividend payments ($0.09 per share)			—				—				—				(4,438	)			—				—				—				(4,438	)
Dividends accrued on unvested RSUs			—				—				—				32				—				—				—				32
Deferred compensation adjustments, net of tax			—				—				—				—				(18	)			—				—				(18	)
PSUs, RSUs and restricted stock vested			—				—				—				(895	)			841				—				—				(54	)
Stock options exercised			—				—				—				(143	)			711				—				—				568
Stock-based compensation expense			—				—				1,893				—				—				—				—				1,893
Balance as of March 31, 2022			79,652			$	797			$	290,839			$	734,249			$	(660,013	)		$	(13,556	)		$	—			$	352,316
Net income			—				—				—				2,143				—				—				—				2,143
Other comprehensive loss, net of tax			—				—				—				—				—				(3,140	)			—				(3,140	)
Dividend payments ($0.09 per share)			—				—				—				(4,439	)			—				—				—				(4,439	)
Dividends accrued on unvested RSUs			—				—				—				(23	)			—				—				—				(23	)
Deferred compensation adjustments, net of tax			—				—				—				—				24				—				—				24
PSUs, RSUs and restricted stock vested			—				—				—				(90	)			(210	)			—				—				(300	)
Stock options exercised			—				—				—				(19	)			87				—				—				68
Stock-based compensation expense			—				—				1,888				—				—				—				—				1,888
Balance as of June 30, 2022			79,652			$	797			$	292,727			$	731,821			$	(660,112	)		$	(16,696	)		$	—			$	348,537

 

See accompanying notes to condensed consolidated financial statements.

11

---

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		Six Months Ended
		June 30,
		2023				2022
Cash flows from operating activities:
Net (loss) income		$	(76,668	)		$	1,016
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization			67,467				7,235
Amortization of debt issuance cost			291				—
(Gain) loss on investments, net			(4,530	)			7,882
Stock-based compensation expense			8,103				3,781
Deferred income taxes			(31,962	)			(93	)
Other, net			130				27
Inventory reserves			20,885				(4,296	)
Changes in operating assets and liabilities:
Accounts receivable, net			40,975				(14,315	)
Other receivables			561				2,606
Inventory			(6,920	)			(53,982	)
Prepaid expenses, other current assets and other assets			7,105				671
Accounts payable			(67,923	)			42,968
Accrued expenses and other liabilities			110				2,179
Income taxes payable, net			6,216				(1,597	)
Net cash used in operating activities			(36,160	)			(5,918	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(20,118	)			(3,285	)
Proceeds from sales and maturities of available-for-sale investments			2,074				25,071
Purchases of available-for-sale investments			(580	)			(17,002	)
Proceeds from beneficial interests in securitized accounts receivable			1,156				—
Net cash (used in) provided by investing activities			(17,468	)			4,784
Cash flows from financing activities:
Tax withholdings related to stock-based compensation settlements			(6,315	)			(333	)
Proceeds from stock option exercises			163				636
Dividend payments			(14,156	)			(8,877	)
Proceeds from draw on revolving credit agreements			163,729				28,000
Repayment of revolving credit agreements			(49,155	)			(28,000	)
Non-controlling interest put option buyback			(1,202	)			—
Repayment of notes payable			(24,885	)			—
Net cash provided by (used in) financing activities			68,179				(8,574	)
Net increase (decrease) in cash and cash equivalents			14,551				(9,708	)
Effect of exchange rate changes			1,099				(3,742	)
Cash and cash equivalents, beginning of period			108,644				56,818
Cash and cash equivalents, end of period		$	124,294			$	43,368
Supplemental disclosure of cash financing activities:
Cash paid for interest		$	4,719			$	124
Cash used in operating activities related to operating leases		$	5,082			$	915
Supplemental disclosure of non-cash investing activities:
Right-of-use assets obtained in exchange for lease obligations		$	515			$	552
Purchases of property, plant and equipment included in accounts payable		$	2,662			$	818

See accompanying notes to condensed consolidated financial statements.

12

---

ADTRAN Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

19

---

22

---

 

 

 

23

---

28

---

 

29

---

 

 

 

 

 

 

37

---

38

---

 

40

---

42

---

 

44

---

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes that appear in Part I, Item 1 of this document. In addition, the following discussion should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part I, Item 1A, Risk Factors, included in Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on August 14, 2023 (the “2022 Form 10-K/A”), as well as Part I, Item 1, Business, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2023,.

This discussion is designed to provide the reader with information that will assist in understanding our Condensed 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 Condensed Consolidated Financial Statements. See “Cautionary Note Regarding Forward-Looking Statements” on page 4 of this report for a description of important factors that could cause actual results to differ from expected results. See also Part 1, Item 1A, Risk Factors, of the 2022 Form 10‑K/A and Part II, Item 1A, Risk Factors of this Form 10-Q.

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to "ADTRAN", the “Company,” “we,” “us” and “our” refer to ADTRAN Holdings, Inc. and its consolidated subsidiaries for periods subsequent to the Merger and to ADTRAN, Inc. and its consolidated subsidiaries for periods prior to the Merger. The prior period results do not include the results of Adtran Networks prior to 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 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.

On May 24, 2023, at the annual general meeting of the shareholders of ADVA Optical Networking SE, a subsidiary of the Company ("ADVA"), the shareholders of ADVA approved the proposed change of its name to Adtran Networks SE ("Adtran Networks"), which was registered in the commercial register of the local court of Jena, Germany on June 8, 2023. Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “Adtran Networks” refer to Adtran Networks SE (formerly ADVA Optical Networking SE).

ADTRAN Holdings, Inc. solely owns ADTRAN, Inc. and is the majority shareholder of Adtran Networks. ADTRAN is a leading global provider of open, disaggregated networking and communications solutions. Adtran Networks 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.

The chief operating decision maker regularly reviews the Company’s financial performance based on two reportable segments: (1) Network Solutions and (2) Services & Support. 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 Adtran Networks 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 Adtran Networks, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined with a portion of the applicable Adtran Networks solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions & Experience revenue is combined with a portion of the applicable Adtran Networks 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 Adtran Networks portfolio.

45

---

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.

46

---

ADTRAN NETWORKS DOMINATION AND PROFIT AND LOSS TRANSFER AGREEMENT

The DPLTA between the Company, as the controlling company, and Adtran Networks, 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 Adtran Networks (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 Adtran Networks, (ii) Adtran Networks 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 Adtran Networks. The obligation of Adtran Networks to transfer its annual profit to the Company applies for the first time to the profit, if any, generated in the Adtran Networks fiscal year 2023. The obligation of the Company to absorb Adtran Networks annual net loss applies for the first time to the loss, if any, generated in the Adtran Networks fiscal year 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that Adtran Networks shareholders (other than us) be offered, at their election, (i) to put their Adtran Networks shares to the Company in exchange for compensation in cash of €17.21 per share plus guaranteed interest (the "Exit Compensation"), or (ii) to remain Adtran Networks shareholders and receive a recurring compensation in cash of €0.59 (€0.52 net under the current tax regime) per share for each full fiscal year of Adtran Networks (the “Annual Recurring Compensation”). The guaranteed interest component under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid. The guaranteed interest rate is 5% plus a variable component that was 1.62% as of June 30, 2023. The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’ meeting of Adtran Networks 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 Adtran Networks in 2024. The adequacy of both forms of compensation has been challenged by minority shareholders of Adtran Networks 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 Adtran Networks shareholders to tender Adtran Networks 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). For the three and six months ended June 30, 2023, a total of approximately 46 thousand shares and 63 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately €0.8 million and €1.1 million, respectively, or approximately $0.9 million and $1.2 million, respectively, based on an exchange rate as of June 30, 2023, were paid to Adtran Networks' shareholders.

We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.36% of Adtran Networks outstanding shares as of June 30, 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 the 2022 Form 10-K/A.

As of June 30, 2023, the Company has incurred $26.2 million of transaction costs related to the Business Combination. During the three and six months ended June 30, 2023, $0.1 million of transaction costs were incurred. During the three and six months ended June 30, 2022, $1.2 million and $2.7 million of transaction costs were incurred, respectively. These transaction costs are recorded in selling, general and administrative expenses in the Consolidated Statements of (Loss) Income.

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:

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. During the three and six months ended June 30, 2023, we recognized $0.6 million and $1.4 million of integration costs related to the Business Combination, respectively, that are

47

---

included in selling, general and administrative expenses in the Condensed Consolidated Statement of (Loss) Income. We expect to incur additional integration costs and costs associated with the implementation of the DPLTA during the remainder of 2023 and such costs are expected to be material.

During the three and six months ended June 30, 2023, we recognized $5.9 million and $8.3 million of restructuring costs relating to the Business Combination that are included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statement of (Loss) Income, respectively. See Note 21 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for additional information.

FINANCIAL PERFORMANCE AND TRENDS

We ended the second quarter of 2023 with a year-over-year revenue increase of 90.3% as compared to the three months ended June 30, 2022, driven by increased volume of sales activity due to the Business Combination with Adtran Networks and to Service Provider customers. During the second quarter of 2023, we had one 10% revenue customer, which was an international Service Provider customer and our five largest customers comprised 39.1% of our revenue. Our year-over-year domestic revenue increased by 25.1%, driven by increased sales volume due to the Business Combination with Adtran Networks and partially offset by decreases due to the macro-economic environment and customers optimizing their inventory, which impacted our Subscriber Solutions product line. Internationally, our year-over-year revenue increased by 194.3%, primarily driven by increased volume of sales activity due to the Business Combination with Adtran Networks and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe.

Growing customer concerns over inventory stocking levels affected our second quarter Subscriber Solutions category. We believe that this over-supply of CPE products will continue into the third quarter of 2023. Revenue for our Access and Optical Networking products grew sequentially. Supply constraints, however, limited our flexibility to clear past-due backlog across all product categories. We believe that the inventory impact is transitory, and we expect to see some improvement to both the over-supply of CPE products and the backlog of products across all categories in the coming quarters. Despite these challenges, we have maintained our emphasis on product development to enable us to respond to rapidly changing technology and evolving industry standards. For example, public funding through projects such as IPCEI ME/CT will further our research and development for new communication technologies. Additionally, public funding through BEAD is expected to commence in late 2024 to early 2025, which provides a positive outlook for the future.

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 Adtran Networks. 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. For example, during the recent 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. Although, expedite fees and lead times for semiconductor chips and other key components began to ease during the first half of 2023, we continued to be negatively impacted by price increases, which could continue to have a material adverse effect on customer relations and our financial condition. Our 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.

The coronavirus ("COVID-19") pandemic and related countermeasures previously impacted our operations. Notwithstanding improvement in many markets in which we operate due to a return to more normalized business operations, certain markets continue to be adversely impacted by COVID-19 or as a result of policies relating to COVID-19.

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, 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 ensure 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 (loss) in some international markets have been and may continue to be affected by foreign currency fluctuations.

48

---

Subsequent to June 30, 2023, the Company has experienced volatility in its stock price which reduced the market value of the Company’s common stock as of this filing. The Company will continue to monitor its stock price, operating results and other macroeconomic factors to determine if there has been any indication of a sustained decline in fair value requiring an event driven assessment of the recoverability of its goodwill within the third quarter of 2023.

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. Factors that could materially affect our business, financial condition or operating results are included in Part I, Item 1A of the 2022 Form 10-K/A and Part II, Item 1A of this Form 10-Q.

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

 

49

---

RESULTS OF OPERATIONS – THREE AND SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2022

The following table presents selected financial information derived from our Condensed Consolidated Statements of (Loss) Income expressed as a percentage of revenue for the periods indicated. Amounts may not foot due to rounding.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2023				2022				2023				2022
Revenue
Network Solutions			86.4		%		90.7		%		86.8		%		90.1		%
Services & Support			13.6				9.3				13.2				9.9
Total Revenue			100.0				100.0				100.0				100.0
Cost of Revenue
Network Solutions			66.3				58.1				67.0				58.4
Services & Support			5.5				5.6				5.3				5.9
Total Cost of Revenue			71.7				63.7				72.3				64.2
Gross Profit			28.3				36.3				27.7				35.8
Selling, general and administrative expenses			20.3				16.2				20.6				17.1
Research and development expenses			21.6				15.4				21.6				16.2
Operating (Loss) Income			(13.6	)			4.7				(14.5	)			2.5
Interest and dividend income			0.1				0.1				0.1				0.1
Interest expense			(1.2	)			(0.1	)			(1.1	)			—
Net investment gain (loss)			0.4				(2.7	)			0.4				(2.5	)
Other income, net			0.8				0.4				0.3				0.1
(Loss) Income Before Income Taxes			(13.6	)			2.5				(14.8	)			0.2
Income tax benefit (expense)			2.6				(1.2	)			3.0				0.1
Net (Loss) Income			(11.1	)	%		1.2		%		(11.8	)	%		0.3		%
Less: Net Loss attributable to non-controlling interest			(0.9	)			—				(1.4	)			—
Net (Loss) Income attributable to ADTRAN Holdings, Inc.			(10.2	)	%		1.2		%		(10.4	)	%		0.3		%

 

REVENUE

Our revenue increased 90.3% from $172.0 million for the three months ended June 30, 2022 to $327.4 million for the three months ended June 30, 2023 and increased 99.4% from $326.6 million for the six months ended June 30, 2022 to $651.3 million for the six months ended June 30, 2023. The increase in revenue for the three months ended June 30, 2023 is primarily attributable to a $186.7 million increase in volume of sales activity due to the Business Combination with Adtran Networks and partially offset by a $31.4 million decrease in volume of sales activity related to our ADTRAN, Inc. operations. The increase in revenue for the six months ended June 30, 2023 is primarily attributable to a $379.0 million increase in volume of sales activity due to the Business Combination with Adtran Networks partially offset by a $54.3 million decrease in volume of sales activity related to our ADTRAN, Inc. operations. The increase in revenue by category for the three months ended June 30, 2023 was primarily attributable to a $143.0 million increase in Optical Networking Solutions products due to the Business Combination with Adtran Networks, a $10.4 million increase in Access & Aggregation revenue and a $1.9 million increase in Subscriber Solutions products. The increase in revenue by category for the six months ended June 30, 2023 was primarily attributable to a $290.8 million increase in Optical Networking Solutions products due to the Business Combination with Adtran Networks, a $24.5 million increase in Subscriber Solutions products, and a $9.5 million increase in Access & Aggregation Solutions revenue. Growing customer concerns over inventory stocking levels affected our first and second quarter Subscriber Solutions category. We believe that this over-supply of CPE products will continue into the third quarter of 2023. Revenue for our Access and Optical Networking products grew sequentially. Supply constraints, however, limited our flexibility to clear past-due backlog across all product categories. We believe that the inventory impact is transitory, and we expect to see some improvement to both the over-supply of CPE products and the backlog of products across all categories in the coming quarters. We do not see any material changes to our near-term opportunities and our long-term growth catalysts as carriers around the world upgrade their networks to fiber.

Network Solutions segment revenue increased 81.4% from $156.0 million for the three months ended June 30, 2022 to $283.0 million for the three months ended June 30, 2023 and increased 92.1% from $294.4 million for the six months ended June 30, 2022 to $565.4 million for the six months ended June 30, 2023. The increase in Network Solutions revenue for the three months ended June 30, 2023 was due to the increase of $159.9 million in volume of sales activity due to the Business Combination with Adtran Networks, partially offset by a decrease of $31.3 million in Subscriber Solutions products and a decrease of $1.5 million in Access & Aggregation revenue in our ADTRAN, Inc. operations. The increase in revenue for the six months ended June 30, 2023 was due to an increase of $326.9 million in volume of sales activity due to the Business Combination with Adtran Networks, partially offset by a decrease of $42.4 million

50

---

in Subscriber Solutions products and a decrease of $13.4 million in Access & Aggregation Solutions in our ADTRAN, Inc. operations. More specifically, the decrease in revenue for the three and six months ended June 30, 2023 of our ADTRAN, Inc. operations was primarily due to lower volume of sales of our residential solutions products.

Services & Support segment revenue increased 176.6% from $16.0 million for the three months ended June 30, 2022 to $44.4 million for the three months ended June 30, 2023 and increased 166.8% from $32.2 million for the six months ended June 30, 2022 to $85.9 million for the six months ended June 30, 2023. The increase in revenue for the three months ended June 30, 2023 was primarily attributable to the increase of $26.9 million in volume of sales activity from the Business Combination with Adtran Networks a $0.8 million increase in revenue for Subscriber Solutions services in our ADTRAN, Inc. operations and a $0.7 million increase in revenue for Access & Aggregation Solutions services in our ADTRAN, Inc. operations. The increase in revenue for the six months ended June 30, 2023 was primarily attributable to the increase of $52.2 million in volume of sales activity from the Business Combination with Adtran Networks and a $1.5 million increase in revenue for Subscriber Solutions services in our ADTRAN, Inc. operations. More specifically, the increase in revenue for the three and six months ended June 30, 2023 of our ADTRAN, Inc. operations was primarily due to higher volume of sales of our software services and business solutions services.

Domestic revenue increased by 25.1% from $105.6 million for the three months ended June 30, 2022 to $132.3 million for the three months ended June 30, 2023 and increased by 28.8% from $204.8 million for the six months ended June 30, 2022 to $263.8 million for the six months ended June 30, 2023, 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 businesses 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 194.3% from $66.3 million for the three months ended June 30, 2022 to $195.1 million for the three months ended June 30, 2023 and increased by 218.3% from $121.8 million for the six months ended June 30, 2022 to $387.5 million for the six months ended June 30, 2023. International revenue, as a percentage of total revenue, increased from 38.5% for the three months ended June 30, 2022 to 59.6% for the three months ended June 30, 2023 and increased from 37.3% for the six months ended June 30, 2022 to 59.5% for the six months ended June 30, 2023. The change for the three months ended June 30, 2023 was primarily attributable to a $126.4 million increase in volume of sales activity from the Business Combination with Adtran Networks and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe. The change for the six months ended June 30, 2023 was primarily attributable to a $256.8 million increase in volume of sales activity from the Business Combination with Adtran Networks and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe. While international revenue has increased to approximately 59.6% and 59.5% of total revenues for the three and six months ended June 30, 2023, the mix of our Network Solutions and Services & Support segments as a percentage of total international revenue remains relatively linear. For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S. dollar increased our net revenue by approximately $2.6 million and decreased our net revenue by approximately $7.5 million, respectively.

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 Adtran Networks 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, Adtran Networks 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 costs to maintain these networks.

COST OF REVENUE

As a percentage of revenue, cost of revenue increased from 63.7% for the three months ended June 30, 2022 to 71.7% for the three months ended June 30, 2023 and increased from 64.2% for the six months ended June 30, 2022 to 72.3% for the six months ended June 30, 2023. The increase for the three and six months ended June 30, 2022 was primarily attributable to $33.4 million and $66.0 million, respectively, of 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 Adtran Networks, acquisition 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 lower freight and expedite fees. As the current inventory that was acquired in the Business Combination with Adtran Networks is sold, we expect that our cost of revenue as a percentage of revenue will return to more normalized levels. For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S. dollar increased our cost of revenue by approximately $0.3 million and decreased our cost of revenue by approximately $1.7 million, respectively. See additional information related to amortization lives and expense in Notes 2 and 10 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

51

---

Network Solutions cost of revenue, as a percentage of that segment’s revenue, increased from 64.1% for the three months ended June 30, 2022 to 76.7% for the three months ended June 30, 2023 and increased from 64.7% for the six months ended June 30, 2022 to 77.1% for the six months ended June 30, 2023. The increase in cost of revenue as a percentage of revenue for the three and six months ended June 30, 2023 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 Adtran Networks and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc. operations, partially offset by lower freight and expedite fees.

Services & Support cost of revenue, as a percentage of that segment’s revenue, decreased from 59.9% for the three months ended June 30, 2022 to 40.3% for the three months ended June 30, 2023 and decreased from 59.5% for the six months ended June 30, 2022 to 40.6% for the six months ended June 30, 2023. The decrease in cost of revenue as a percentage of revenue for the three and six months ended June 30, 2023 was primarily attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with Adtran Networks.

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.

GROSS PROFIT

As a percentage of revenue, gross profit decreased from 36.3% for the three months ended June 30, 2022 to 28.3% for the three months ended June 30, 2023 and decreased from 35.8% for the six months ended June 30, 2022 to 27.7% for the six months ended June 30, 2023. The decrease for the three and six months ended June 30, 2023 was primarily attributable to $33.4 million and $66.0 million, respectively, of 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 Adtran Networks, acquisition related expenses and a decrease 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 35.9% for the three months ended June 30, 2022 to 23.3% for the three months ended June 30, 2023 and decreased from 35.3% for the six months ended June 30, 2022 to 22.9% for the six months ended June 30, 2023. 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 Adtran Networks and a decrease in volume of sales activity related to our ADTRAN, Inc. operations partially offset by an increase in volume of sales activity due to the Business Combination with Adtran Networks.

As a percentage of that segment's revenue, Services & Support gross profit increased from 40.1% for the three months ended June 30, 2022 to 59.7% for the three months ended June 30, 2023 and increased from 40.5% for the six months ended June 30, 2022 to 59.4% for the six months ended June 30, 2023. The increase was primarily attributable to an increase in volume of sales activity due to the Business Combination with Adtran Networks, an increase in volume of sales activity related to our ADTRAN, Inc. operations 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 Adtran Networks.

52

---

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

As a percentage of revenue, selling, general and administrative expenses increased from 16.2% for the three months ended June 30, 2022 to 20.3% for the three months ended June 30, 2023 and increased from 17.1% for the six months ended June 30, 2023 to 20.6% for the six months ended June 30, 2023. While 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, in the three and six months ended June 30, 2023 we saw a more significant increase due to increased expenses related to the Business Combination with Adtran Networks and other items described below. Our restructuring and integration programs are in the process of consolidating, streamlining and integrating the workforce, systems and processes of ADTRAN and Adtran Networks, which we expect will lower selling, general and administrative expense as a percentage of revenue over time.

Selling, general and administrative expenses increased 138.9% from $27.9 million for the three months ended June 30, 2022 to $66.6 million for the three months ended June 30, 2023 and increased 140.3% from $55.8 million for the six months ended June 30, 2022 to $134.0 million for the six months ended June 30, 2023. Although 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 for the three and six months ended June 30, 2023 was primarily attributable to increased expenses related to the Business Combination with Adtran Networks such as employee-related costs due to an increase in the number of employees, costs related to our restructuring program, amortization of intangible assets, depreciation of property, plant and equipment, restructuring expenses, stock-based compensation expense and transactions costs. For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S dollar increased our selling, general and administrative expenses by approximately $0.2 million and decreased our selling, general and administrative expenses by approximately $1.2 million, respectively.

 

RESEARCH AND DEVELOPMENT EXPENSES

As a percentage of revenue, research and development expenses increased from 15.4% for the three months ended June 30, 2022 to 21.6% for the three months ended June 30, 2023 and increased from 16.2% for the six months ended June 30, 2022 to 21.6% for the six months ended June 30, 2023. Although, 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, in the first half of 2023 we saw a more significant increase due to increased expenses related to the Business Combination with Adtran Networks and other items described below. Our restructuring and integration programs are in the process of consolidating, streamlining and integrating the workforce, systems and processes of ADTRAN and Adtran Networks, which we expect will lower research and development expense as a percentage of revenue over time.

Research and development expenses increased 166.4% from $26.5 million for the three months ended June 30, 2022 to $70.6 million for the three months ended June 30, 2023 and increased 165.6% from $53.0 million for the six months ended June 30, 2022 to $140.7 million for the six months ended June 30, 2023. The increase in research and development expenses was primarily attributable to increased expenses related to the Business Combination with Adtran Networks such as employee-related costs due to an increase in the number of employees and expenses related to our multi-year integration program, restructuring expenses, amortization of intangible assets, depreciation of property, plant and equipment and stock-based compensation expense. For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S. dollar increased our research and development expenses by approximately $0.1 million and decreased our research and development expenses by approximately $2.1 million, respectively.

Adtran Networks has arrangements with governmental entities for the purpose 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 three and six months ended June 30, 2023, the Company recognized $0.9 million and $1.5 million as a reduction of research and development expense, respectively.

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.

INTEREST AND DIVIDEND INCOME

Interest and dividend income increased from $0.2 million for the three months ended June 30, 2022 to $0.4 million for the three months ended June 30, 2023 and increased from $0.4 million for the six months ended June 30, 2022 to $0.7 million for the six months ended June 30, 2023. Interest and dividend income was up due to increased income related to the Business Combination with Adtran Networks for the three and six months ended June 30, 2023.

53

---

INTEREST EXPENSE

Interest expense increased from $0.1 million for the three months ended June 30, 2022 to $4.1 million for the three months ended June 30, 2023 and increased from $0.1 million for the six months ended June 30, 2022 to $7.4 million for the six months ended June 30, 2023. The increase in interest expense during the three and six months ended June 30, 2023 was primarily related to an increase in the Wells Fargo Credit Agreement and the assumed debt associated with the Business Combination with Adtran Networks. See Note 12 and Note 13 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report.

NET INVESTMENT (LOSS) GAIN

We recognized a net investment loss of $4.6 million and a gain of $1.3 million for the three months ended June 30, 2022 and 2023, respectively and recognized a net investment loss of $8.1 million and a gain of $2.5 million for the six months ended June 30, 2022 and 2023, 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 Note 6 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, and “Investing Activities” in “Liquidity and Capital Resources” below for additional information.

 

OTHER INCOME, NET

Other expense, net, which primarily consisted of gains and losses on foreign currency transactions and income from excess material sales, increased from income of $0.7 million for the three months ended June 30, 2022 to income of $2.5 million for the three months ended June 30, 2023 and increased from income of $0.5 million for the six months ended June 30, 2022 to income of $2.2 million for the six months ended June 30, 2023.

 

INCOME TAX BENEFIT (EXPENSE)

The Company's effective tax rate changed from an expense of 50.1% of pre-tax income for the three months ended June 30, 2022, to a benefit of 18.8% of pre-tax income for the three months ended June 30, 2023 and changed from a benefit of 34.3% of pre-tax income for the six months ended June 30, 2022, to a benefit of 20.4% of pre-tax income for the six months ended June 30, 2023. In 2022, we benefited from a change in our annual estimated tax rate as a result of the requirement to begin capitalizing research and development expenses for U.S. tax purposes beginning in 2022 as previously passed as part of the Tax Cuts and Jobs Act in December 2017, and the associated impact of those changes on our previously established valuation allowance. The change in the effective tax rate for the three and six months ended June 30, 2023, was driven primarily by a change in our estimated tax rate as a result of the closing of the Business Combination with Adtran Networks during the third quarter of 2022 as well as the release of our domestic valuation allowance during the fourth quarter of 2022.

NET (LOSS) INCOME ATTRIBUTABLE TO ADTRAN HOLDINGS, INC.

As a result of the above factors, net (loss) income attributable to ADTRAN Holdings, Inc. decreased from net income of $2.1 million for the three months ended June 30, 2022 to a net loss of $33.3 million for the three months ended June 30, 2023 and decreased from net income of $1.0 million for the six months ended June 30, 2022 to a net loss of $67.8 million for the six months ended June 30, 2023. Upon the DPLTA becoming effective on January 16, 2023, the Company began absorbing all Adtran Networks losses rather than just the loss related to the Company's ownership percentage in Adtran Networks.

 

LIQUIDITY AND CAPITAL RESOURCES

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.

54

---

Pursuant to the terms of the DPLTA, each Adtran Networks shareholder (other than the Company) has received an offer to elect either (1) to remain an Adtran Networks shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation plus guaranteed interest. The guaranteed interest under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid. The guaranteed interest rate is 5% plus a variable component that was 1.62% as of June 30, 2023. Assuming all the minority holders of currently outstanding Adtran Networks shares were to elect the second option, we would be obligated to make aggregate Exit Compensation payments, including guaranteed interest, of approximately €319.0 million or approximately $348.1 million, based on an exchange rate as of June 30, 2023 and reflecting interest accrued through June 30, 2023 at a rate of 5.0% in addition to the variable base interest rate according to the German Civil Code (currently 3.12%) during the pendency of the appraisal proceedings discussed below. Shareholders electing the first option of Annual Recurring Compensation may later elect the second option. The opportunity for outside Adtran Networks shareholders to tender Adtran Networks 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 are also obligated to absorb any annual net loss of Adtran Networks under the DPLTA. Additionally, our obligation to pay Annual Recurring Compensation under the DPLTA is a continuing payment obligation, which will amount to approximately €10.6 million or $11.6 million (based on the current exchange rate) per year assuming none of the minority Adtran Networks 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. During the three and six months ended June 30, 2023, we accrued $2.9 million and $5.7 million in Annual Recurring Compensation, which was reflected as a reduction to retained (deficit) earnings, respectively. For the three and six months ended June 30, 2023, a total of approximately 46 thousand shares and 63 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately €0.8 million and €1.1 million, respectively, or approximately $0.9 million and $1.2 million, respectively, based on an exchange rate as of June 30, 2023, were paid to Adtran Networks shareholders.

As of June 30, 2023, the Company does not have sufficient liquidity to meet payment obligations under the DPLTA pertaining to Exit Compensation assuming a substantial majority of Adtran Networks shareholders elect such option in the current period. We believe the probability that a substantial majority of Adtran Networks shareholders elect to receive Exit Compensation in the next twelve months is remote based on the diverse base of shareholders that must make this election on an individual shareholder basis, the current ongoing appraisal proceedings involving a dispute on the value of the Exit Compensation which is expected to take 24-36 months to resolve, the current guaranteed Annual Recurring Compensation payment plus the interest earned on such shares during the ongoing appraisal proceedings, and the current trading value of Adtran Networks SE shares.

Therefore, we believe that our cash and cash equivalents, investments, working capital management initiatives and access to funds under the Wells Fargo credit facility, including the August 9, 2023, $50 million term loan amendment, (described below) will be adequate to meet our operating and capital needs and our obligations under the DPLTA, including potential Exit Compensation, for at least the next 12 months, although we may need to suspend payment of dividends, reduce capital expenditures and/or take other steps to preserve working capital in order to ensure that we can meet such needs and obligations.

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 allowed for borrowings of up to $100.0 million in aggregate principal amount, but the borrowings increased to up to $400.0 million in aggregate principal amount upon the DPLTA becoming effective on January 16, 2023. The Credit Agreement matures in July 2027, but provides the Company with an option to request extensions subject to customary conditions.

As of June 30, 2023, ADTRAN, Inc.’s outstanding borrowings under the revolving line of credit were $200.0 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 $400.0 million total facility. As of June 30, 2023, we had a total of $2.2 million in letters of credit outstanding against our eligible borrowings, leaving a net amount of $197.8 million available for future borrowings. Any future credit extensions under the Credit Agreement are subject to customary conditions precedent, including a net leverage ratio financial covenant and a material adverse effect condition. In consideration of the factors described above in respect of expected timing of payment of the Exit Compensation and our assessment of compliance with these covenants we believe that we will have access to sufficient funding to meet any obligations that come due under the terms of the DPLTA in the next 12 months from the date of issuance of these condensed consolidated financial statements.

Wells Fargo Credit Agreement Amendment

On August 9, 2023, the Company, its wholly-owned direct subsidiary, ADTRAN, Inc., the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent and as collateral agent, entered into a First Amendment to the Credit Agreement (the “First Amendment”).

55

---

The First Amendment, among other things, provides for:

The First Amendment further added additional financial flexibility by amending the $30 million external debt capped basket to be an unlimited amount and permitting, subject to certain requirements, the incurrence of convertible indebtedness by the Company in an aggregate principal amount of up to $172.5 million. Any such convertible indebtedness must be incurred in pro forma compliance with the financial covenants in the Credit Agreement, unsecured and otherwise rank junior to borrowings under the Credit Agreement, and have a stated maturity date of at least 91 days after the latest scheduled maturity date of loans and commitments under the Credit Agreement. Net cash proceeds from any incurrence of convertible indebtedness must be used to repurchase minority shares of Adtran Networks or repay revolver borrowings under the Credit Agreement.

Lastly, the First Amendment added market environmental, social and governance provisions and extended the required delivery date of the financial statements of the Company and its subsidiaries for the fiscal quarter ended June 30, 2023 to August 18, 2023.

As of June 30, 2023, our cash on hand was $124.3 million and short-term investments were $3.1 million, which resulted in available short-term liquidity of $127.4 million, of which $86.3 million was held by our foreign subsidiaries. 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. 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.

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 or additional alternative funding sources, if available. There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms or at all. If we cannot raise additional funds as needed, it could have a material adverse impact on our financial results and financial condition.

Operating Activities

Net cash used in operating activities of $36.2 million during the six months ended June 30, 2023 increased by $30.2 million compared to net cash used in operating activities of $5.9 million during the six months ended June 30, 2022. This increase in net cash used was primarily due to the net loss for the period, for the reasons discussed above, as adjusted primarily for depreciation and deferred taxes, and net cash outflows from working capital, specifically, a decrease 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 decreased 14.3% from $279.4 million as of December 31, 2022 to $239.6 million as of June 30, 2023. There was an allowance for credit losses of less than $0.1 million as of June 30, 2023 and an allowance for credit losses of less than $0.1 million as of December 31, 2022. The decrease in net accounts receivable was due primarily to customer and geographical mix. Quarterly accounts receivable DSO decreased from 72 days as of December 31, 2022 to 67 days as of June 30, 2023. The decrease in DSO was

56

---

due to customer and geographical mix associated with the Business Combination with Adtran Networks and timing of sales within the quarter.

Other receivables decreased 1.3% from $32.8 million as of December 31, 2022 to $32.4 million as of June 30, 2023. The decrease in other receivables was primarily attributable to a decrease for sales of raw materials.

Quarterly inventory turnover was 2.5 turns as of December 31, 2022 and 2.3 turns as of June 30, 2023. Inventory decreased 2.5% from $427.5 million as of December 31, 2022 to $416.8 million as of June 30, 2023. The decrease in inventory was due to a reduction in component purchases due to improved lead times as well as utilization of buffer stock. We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to supply chain uncertainties.

Accounts payable decreased 27.8% from $237.7 million as of December 31, 2022 to $171.7 million as of June 30, 2023. The decrease in accounts payable was primarily due to a decrease in the average number of days payable to our trade suppliers. 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 $20.1 million and $3.3 million for the six months ended June 30, 2023 and 2022, respectively. These expenditures were primarily used to purchase manufacturing and test equipment, software, computer hardware and building improvements.

Our combined short-term and long-term investments increased $1.3 million from $33.0 million as of December 31, 2022 to $34.3 million as of June 30, 2023. This increase reflects the impact of 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 the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

As of June 30, 2023, 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 15 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 4.4% from $32.7 million as of December 31, 2022 to $31.2 million as of June 30, 2023. Our investments include various marketable equity securities classified as long-term investments with a fair market value of $0.9 million and $0.8 million as of June 30, 2023 and December 31, 2022, respectively. Our investments include various available-for-sale debt securities classified as long-term investments with a fair market value of $8.1 million and $9.3 million as of June 30, 2023 and December 31, 2022. Long-term investments as of June 30, 2023 and December 31, 2022 also included $25.4 million and $22.9 million, respectively, related to our deferred compensation plans.

 

57

---

Financing Activities

Dividends

During the six month periods ended June 30, 2023 and 2022, we paid dividends totaling $14.2 million and $8.9 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.

Stock Repurchase Program

There were no stock repurchases during the periods ended June 30, 2023 and 2022, and there currently is no authorized stock repurchase program.

Stock Option Exercises

To accommodate employee stock option exercises, the Company issued 6 thousand and 37 thousand shares of common stock and treasury stock which resulted in proceeds of $58 thousand and $0.6 million during the six months ended June 30, 2023 and 2022, respectively. Additionally, to accommodate Adtran Networks SE stock option exercises, Adtran Networks issued 13 thousand shares of Adtran Networks common stock which resulted in proceeds of $0.1 million, for the six months ended June 30, 2023. Adtran Networks SE stock options outstanding as of June 30, 2023 totaled 68 thousand (representing less than 0.2% of Adtran Networks outstanding shares), of which 13 thousand were exercisable.

Off-Balance Sheet Arrangements

We have exposure to credit losses from off-balance sheet exposures, to provide various guarantees of performance such as bid bonds, performance bonds and customs bonds, where we believe the risk of loss is immaterial to our financial statements as of June 30, 2023. Otherwise, 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. See Note 20 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for additional information.

Cash Requirements

The following table summarizes the Company’s material short- and long-term cash requirements from known obligations pursuant to certain contracts and commitments as of June 30, 2023, 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)		$	200,000			$	—			$	—			$	—			$	—			$	200,000			$	—
Nord/LB revolving line of credit(2)			10,912				10,912				—				—				—				—				—
Purchase obligations(3)			377,427				308,708				62,976				5,736				7				—				—
Operating lease obligations(4)			32,499				4,662				8,658				7,159				4,506				2,950				4,564
Totals		$	620,838			$	324,282			$	71,634			$	12,895			$	4,513			$	202,950			$	4,564

(1) See description below.

(2) See description below.

(3) 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 2026. See Note 20 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report

for more information.

(4) 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 once month to 113 months as of June 30, 2023.

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 allowed for borrowings of up to $100 million in aggregate principal amount, but the borrowings increased to up to $400.0 million in aggregate principal amount upon the DPLTA becoming effective on January 16, 2023.

58

---

As of June 30, 2023, ADTRAN, Inc.’s borrowings under the revolving line of credit were $200.0 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 $400.0 million dollar total facility. As of June 30, 2023, we had a total of $2.2 million in letters of credit under ADTRAN, Inc. outstanding against our eligible borrowings, leaving a net amount of $197.8 million available for future borrowings. Any future credit extensions under the Credit Agreement are subject to customary conditions precedent. 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 Exit Compensation consideration.

All U.S. borrowings under the Credit Agreement (other than swingline loans, which bear interest at the Base Rate (as defined below)) 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 E.U. borrowings under the Credit Agreement (other than swingline loans) 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 participation 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.

New Nord/LB Revolving Line of Credit

On March 29, 2023, Adtran Networks entered into a $16.1 million unsecured revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB) that bears interest of Euro Short Term Rate plus 1.94%. The line of credit has a perpetual term that can be terminated by the Company or Nord/LB at any time. As of June 30, 2023, Adtran Networks borrowed $10.9 million under this facility.

Currency Hedging Arrangements

On November 3, 2022, the Company entered into a Euro/U.S. forward contract arrangement (the “Initial Forward”) with Wells Fargo Bank, N.A. (the “Hedge Counterparty”). The Initial Forward, 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, enables the Company to convert a portion of its Euro denominated payment obligations under the DPLTA into U.S. Dollars. Under the Initial Forward, the Company agreed to 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 is divided into eight quarterly tranches of $20.0 million, commencing in the fourth quarter of 2022. The Company, at its sole discretion, may exchange all

59

---

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 Initial Forward 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.

On March 21, 2023, the Company entered into a Euro/U.S. dollar forward contract arrangement (the “Forward”) with Wells Fargo Bank, N.A. (the “Hedge Counterparty”). Under the Forward, 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, the Company will exchange an aggregate notional amount of $160.0 million U.S. dollars for Euros at a daily fixed forward rate of $1.085 per €1.00 in average. During the six months ended June 30, 2023, the Company settled two $20.0 million forward contract tranches and the remaining will be divided into six quarterly tranches of $20.0 million. These new forward contracts transacted on March 21, 2023 (to sell EUR/buy USD) were entered into for the purpose of unwinding the previously transacted forward contracts (to buy EUR/sell USD), transacted in November 2022. The drawdown dates of the original ratchet forwards are set to the same date as the maturity of the new offsetting forward contracts.

 

60

---

Adtran Networks Domination and Profit and Loss Transfer Agreement

On December 1, 2022, we, as the controlling company, entered into the DPLTA with Adtran Networks, as the controlled company. 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 Adtran Networks (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 Adtran Networks, (ii) Adtran Networks 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 Adtran Networks. The obligation of Adtran Networks to transfer its annual profit to us, as well as our obligation to absorb Adtran Networks annual net loss, applies for the first time to the profits or losses generated in the Adtran Networks fiscal year 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that Adtran Networks shareholders (other than us) be offered, at their election, (i) to put their Adtran Networks shares to the Company in exchange for compensation in cash of €17.21 per share plus guaranteed interest (the "Exit Compensation"), or (ii) to remain Adtran Networks shareholders and receive a recurring compensation in cash of €0.59 (€0.52 net under the current tax regime) per share for each full fiscal year of Adtran Networks (the “Annual Recurring Compensation”). The guaranteed interest component under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid. The guaranteed interest rate is 5% plus a variable component that was 1.62% as of June 30, 2023. The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’ meeting of Adtran Networks 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 Adtran Networks in 2024. The adequacy of both forms of compensation have been challenged by minority shareholders of Adtran Networks 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 Adtran Networks shareholders to tender Adtran Networks 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 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.36% of Adtran Networks outstanding shares as of June 30, 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 the 2022 Form 10-K/A.

As of June 30, 2023, the Company has incurred $26.2 million of transaction costs related to the Business Combination. During the three and six months ended June 30, 2023, $0.1 million of transaction costs were incurred. During the three and six months ended June 30, 2022, $1.2 million and $2.7 million of transaction costs were incurred, respectively.

During the three and six months ended June 30, 2023, we recognized $0.6 million and $1.4 million of integration costs related to the Business Combination, respectively, that are included in selling, general and administrative expenses in the Condensed Consolidated Statement of (Loss) Income. We expect to incur additional integration costs and costs associated with the implementation of the DPLTA during the remainder of 2023 and such costs are expected to be material.

During the three and six months ended June 30, 2023, we recognized $5.9 million and $8.3 million of restructuring costs relating to the Business Combination, respectively, that are included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statement of (Loss) Income. See Note 21 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for additional information.

 

61

---

Other Cash Requirements

During the six months ended June 30, 2023, other than the Exit Compensation payments and Annual Recurring Compensation under the DPLTA, there have been no other material changes in cash requirements from those discussed in the 2022 Form 10-K/A.

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 June 30, 2023 and December 31, 2022, we had commitments related to these bonds totaling $12.2 million and $21.1 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 I, Item 1 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 critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements. During the six months ended June 30, 2023, other than the change in accounting policy regarding non-controlling interests as outlined in Note 1 and Note 16 to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, there were no significant changes to our critical accounting policies and estimates as described in the financial statements contained in the 2022 Form 10-K/A.

62

---

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in foreign currency rates, prices of marketable equity and fixed-income securities. In addition, the ongoing global pandemic raises the possibility of an extended economic downturn and has caused volatility in financial markets. The primary objective of the large 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, fixed-rate bonds and municipal money market instruments denominated in U.S. dollars. Our investment policy provides limitations for issuer concentration, by restricting, at the time of purchase, the concentration in any one issuer to 5% of the market value of our total investment portfolio.

We maintain depository investments with certain financial institutions. As of June 30, 2023, $120.1 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 exceed government insured depository limits, we have evaluated the credit-worthiness of these financial institutions and determined the risk of material financial loss due to exposure of such credit risk to be minimal.

Interest Rate Risk

As of June 30, 2023, approximately $9.5 million of our cash and investments may be directly affected by changes in interest rates. As of June 30, 2023, we held $1.6 million of cash and variable-rate investments where a change in interest rates would impact our interest income. A hypothetical 50 basis point decline in interest rates as of June 30, 2023, assuming all other variables remain constant, would reduce annualized interest income on our cash and investments by less than $0.1 million. In addition, we held $7.8 million of fixed-rate bonds whose fair values may be directly affected by a change in interest rates. A hypothetical 50 basis point increase in interest rates as of June 30, 2023, assuming all other variables remain constant, would reduce the fair value of our fixed-rate bonds by less than $0.1 million. As of June 30, 2023, the carrying amounts of our revolving credit agreements totaled $210.9 million where a change in interest rates would impact our interest expense. A hypothetical 50 basis point increase in interest rates as of June 30, 2023, assuming all other variables remain constant, would increase our interest expense by $1.1 million. The analyses cover our debt and investments. The analyses use actual or approximate maturities for the debt and investments. The discount rates used were based on the market interest rates in effect as of June 30, 2023.

Foreign Currency Exchange Rate Risk

We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, expenses, and assets and liabilities held in non-functional currencies related to our foreign subsidiaries. Our primary exposures to foreign currency exchange rate movements are with the Euro and the British pound sterling. Our revenue is primarily denominated in the respective functional currency of the subsidiary and paid in that subsidiary's functional currency or certain other local currency. The majority of our global supply chain predominately makes payments in U.S. dollars and some of our operating expenses are paid in certain local currencies (approximately 42.6% of total operating expense for the six months ended June 30, 2023, respectively). Therefore, our revenue, gross margins, operating expenses and operating income (loss) are all subject to foreign currency fluctuations. As a result, changes in currency exchange rates could cause variations in our operating income (loss).

We have certain customers and suppliers who are invoiced or pay in a non-functional currency. Changes in the monetary exchange rates used to invoice such customers versus the functional currency of the entity billing such customers may adversely affect our results of operations and financial condition. To manage the volatility relating to these typical business exposures, we may enter into various derivative transactions, when appropriate. We do not hold or issue derivative instruments for trading or other speculative purposes. All non-functional currencies billed would result in a combined hypothetical gain or loss of $6.4 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. All non-functional currencies invoiced by suppliers would result in a combined hypothetical gain or loss of $11.8 million if the U.S. dollar weakened or strengthened 10% against the billing currencies. This change represents an increase in the amount of hypothetical gain or loss compared to prior periods and is mainly due to an increase in U.S. dollar denominated billings in a non-U.S. dollar denominated subsidiary.

As of June 30, 2023, we had certain material contracts subject to currency revaluation, including accounts receivable, accounts payable and lease liabilities denominated in foreign currencies. As of June 30, 2023, we had 51 forward contracts outstanding with a fair value of $8.1 million. The objective of these foreign currency forward contracts is to reduce the impact of currency exchange rate movements on our operating results by offsetting gains and losses on the forward contracts with increases or decreases in foreign currency transactions. We do not use foreign currency contracts for speculative or trading purposes. Hedging of our currency exposures may not always be effective to protect us against currency exchange rate fluctuations. See Note 11 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

On November 3, 2022, the Company entered into a Euro/U.S. forward contract arrangement (the “Initial Forward”) with Wells Fargo Bank, N.A. (the “Hedge Counterparty”). The Initial Forward, 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, enables the Company to convert a portion of its Euro denominated payment obligations under the DPLTA into

63

---

U.S. Dollars. Under the Initial Forward, the Company agreed to 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 is divided into eight quarterly tranches of $20.0 million, commencing in the fourth quarter of 2022. 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 Initial Forward 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.

On March 21, 2023, the Company entered into a Euro/U.S. dollar forward contract arrangement (the “Forward”) with the “Hedge Counterparty. Under the Forward, 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, the Company will exchange an aggregate notional amount of $160.0 million U.S. dollars for Euros at a daily fixed forward rate of $1.085 per €1.00 in average. During the six months ended June 30, 2023, the Company settled two $20.0 million forward contract tranches and the remaining will be divided into six quarterly tranches of $20.0 million. These new forward contracts transacted on March 21, 2023 (to sell EUR/buy USD) were entered into for the purpose of unwinding the previously transacted forward contracts (to buy EUR/sell USD), transacted in November 2022. The drawdown dates of the original ratchet forwards are set to the same date as the maturity of the new offsetting forward contracts.

For further information about the fair value of our investments as of June 30, 2023, see Note 6 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

 

64

---

ITEM 4. CONTROLS AND PROCEDURES

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 our 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 Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Based on 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, our disclosure controls and procedures were not effective as of June 30, 2023.

Material Weakness in Internal Control over Financial Reporting

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.

We identified that we 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 our 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 for 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.

Management’s Remediation Efforts

To remediate the material weakness in our internal control over financial reporting, our management 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 time for us to conclude through testing that the control activities are operating effectively, the material weakness described above will not be considered remediated.

Changes in Internal Control over Financial Reporting.

On July 15, 2022, the Company acquired 33,957,538 bearer shares of Adtran Networks (formerly known as ADVA Optical Networking SE), or 65.43% of Adtran Networks outstanding bearer shares as of such date, as further described in Note 2 of the Notes to the Condensed Consolidated Financial Statements. On June 30, 2023, Adtran Networks assets represented approximately 41.0% of our consolidated assets. For the three and six months ended June 30, 2023, Adtran Networks revenues represented approximately 57.0% and 58.2% of our consolidated revenues, respectively and loss before income taxes represented approximately 71.1% and 70.0% of our consolidated loss before income taxes, respectively. As permitted by SEC guidance, we currently exclude Adtran Networks 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 Adtran Networks operations. Other than the extension of our oversight and monitoring processes to include Adtran Networks operations and the ongoing remediation efforts related to the material weakness described above, there were no other changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

65

---

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are 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. See Note 20 of the Notes to Condensed Consolidated Financial Statements included in Part 1 of this report for a description of our material legal proceedings, which is incorporated herein by reference. At this time, we are unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with these Legal Matters.

ITEM 1A. RISK FACTORS

A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in the 2022 Form 10-K/A. There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 2022 Form 10-K/A other than as described in the risk factors below.

Risks related to the Business Combination and DPLTA

We have incurred and expect to continue to incur significant costs in connection with the Business Combination and post-closing integration and restructuring 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 Adtran Networks. In addition, we have incurred significant banking, legal, accounting and other transaction fees and costs related to the Business Combination. As of June 30, 2023, we have incurred $26.2 million of transaction costs related to the Business Combination.

We expect to incur additional restructuring costs and such costs are expected to be material. During the three and six months ended June 30, 2023, we recognized $5.9 million and $8.3 million of restructuring costs relating 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. During the three and six months ended June 30, 2023, we recognized $0.6 million and $1.4 million of integration costs related to the Business Combination, respectively.

In addition, we have incurred significant banking, legal, accounting and other transaction fees and costs related to the Business Combination. As of June 30, 2023, we have incurred $26.2 million of transaction costs related to the Business Combination.

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

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.

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. We further expanded our available borrowings under the credit facility to $450 million effective August 9, 2023.On March 29, 2023, Adtran Networks entered into a $16.1 million unsecured revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB) and retired the outstanding borrowings under their revolving line of credit with DZ bank. As of June 30, 2023, the Company had incurred $200.0 million of indebtedness under the Wells Fargo Credit Agreement and Adtran Networks had borrowings of $10.9 million under the Nord/LB revolving line of credit. See “Cash Requirements” in Item 2 of this report for additional information.

Our increased indebtedness could adversely affect our operations and liquidity. Our level of indebtedness could, among other things:

66

---

 

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. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If we fail to pay interest on, or repay, our borrowings under the Wells Fargo credit facility and Nord/LB revolving line of credit when required, we will be in default under the applicable loans, and may also suffer an event of default under the terms of other borrowing arrangements that we may enter into from time to time. If our cash flows and capital resources are insufficient to fund our obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled obligations or that these actions would be permitted under the terms of our future debt agreements. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or obtain sufficient proceeds from those dispositions to meet our debt service and other obligations when due. Any of these events could have a material adverse effect on our business, results of operations and financial condition. 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.

The terms of the DPLTA may have a material adverse effect on our financial results and condition.

The DPLTA between the Company, as the controlling company, and Adtran Networks, 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 Adtran Networks (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 Adtran Networks, (ii) Adtran Networks 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 Adtran Networks. The obligation of Adtran Networks to transfer its annual profit to the Company applies for the first time to the profit, if any, generated in the Adtran Networks fiscal year 2023. The obligation of the Company to absorb Adtran Networks annual net loss applies for the first time to the loss, if any, generated in the Adtran Networks fiscal year 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that Adtran Networks shareholders (other than the Company) be offered, at their election, (i) to put their Adtran Networks shares to the Company in exchange for compensation in cash of €17.21 per share, plus guaranteed interest (the “Exit Compensation”), or (ii) to remain Adtran Networks shareholders and receive a recurring compensation in cash of €0.59 (€0.52 net under the current tax regime) per share for each full fiscal year of Adtran Networks (the “Annual Recurring Compensation”). The guaranteed interest under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid. The guaranteed interest rate is 5% plus a variable component that was 1.62% as of June 30, 2023 and reflecting interest accrued through June 30, 2023 at a rate of 5.0% in addition to the variable base interest rate according to the German Civil Code (currently 3.12%) during the pendency of the appraisal proceedings discussed below. The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’ meeting of Adtran Networks 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 Adtran Networks in 2024. The adequacy of both forms of compensation has been challenged by minority shareholders of Adtran Networks 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 obligation to pay Annual Recurring Compensation under the DPLTA is a continuing payment obligation, which will amount to approximately €10.6 million or $11.6 million (based on the current exchange rate) per year assuming none of the minority Adtran Networks 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. For the three and six months ended June 30, 2023, a total of approximately 46 thousand shares and 63 thousand

67

---

shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately €0.8 million and €1.1 million, respectively, or approximately $0.9 million and $1.2 million, respectively, based on an exchange rate as of June 30, 2023, were paid to Adtran Networks shareholders. Assuming all the minority holders of currently outstanding Adtran Networks shares were to elect the first option, we would be obligated to make aggregate Exit Compensation payments, including guaranteed interest, of approximately €319.0 million or approximately $348.1 million, based on an exchange rate as of June 30, 2023. In addition to our cash and cash equivalents and the credit facility, we may fund a portion or all of the Annual Recurring Compensation and Exit Compensation through the sale of securities or additional alternative funding sources, if available. There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms or at all. If we cannot raise additional funds as needed, it could have a material adverse impact on our financial results and financial condition. Additionally, the payment of the Annual Recurring Compensation and Exit Compensation could have a material adverse impact on our financial results and financial condition. See “Liquidity and Capital Resources” in Item 2 of this report for additional information.

The opportunity for outside Adtran Networks shareholders to tender Adtran Networks 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).

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 Adtran Networks to minority shareholders and would even have to be paid if Adtran Networks' incurs losses, which could have a material adverse impact on our financial results and financial condition.

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 Adtran Networks’ 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 Adtran Networks; 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; our ability to satisfy our payment obligations to minority Adtran Networks shareholders under 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.

The terms of our and Adtran Networks credit agreements restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

Our Credit Agreement and Adtran Networks revolving line of credit with Nord/LB 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:

68

---

 

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:

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.

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 revenue and gross margin percentage declined in the first half of 2023. 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.

Our customers in the subscriber solutions & experience technology category are increasingly focusing on working capital optimization and depletion of overstocked inventories, which have impacted and may continue to materially impact demand in that category.

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:

69

---

For example, throughout 2022, we incurred increased expenses resulting from supply chain disruptions, including delays in supply chain deliveries and the related global semi-conductor chip shortage, which lowered our gross margins and decreased our profitability. These supply chain challenges and their adverse impact on our industry began to ease during the first half of 2023. However, there can be no assurance that the ongoing disruptions due to the 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.

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 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

70

---

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. Furthermore, we, our employees and some of our third-party service providers have been, and anticipate continuing to be, the targets of various cyber threats. These include hacking attacks, social engineering schemes such as "phishing," and Business Email Compromise (BEC) attacks, wherein attackers impersonate company executives or colleagues in emails to trick employees into transferring funds or revealing sensitive information. These events have not had a significant effect on our financial condition or operational results to date; however, we cannot ensure that future cyber threats will not have a material impact on 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 Adtran Networks’ cybersecurity program. Additionally, prior to integration of facilities, networks, or systems, the Company also engaged 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 Adtran Networks information technology landscape. The results from the CrowdStrike Compromise assessment indicated that there was no indication of compromise of the Adtran Networks information technology environment. As part of the integration plan, the Company intends to expand its current cybersecurity program to cover all Adtran Networks’ global infrastructure and adopt any mature cybersecurity practices already in place. A significant failure of our review and integration of Adtran Networks’ 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 of our previously issued consolidated financial statements and material weakness in our internal control over financial reporting.

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. 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

71

---

and the preparation of our financial statements. As of the date of this report, we have no 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

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. For example, on May 8, 2023, Adtran Networks' and its subsidiary, ADVA Optical Networking North America Inc. (together, "ADVA") filed a lawsuit in the U.S District Court for the Eastern District of Texas (“EDTX”) against Huawei Technologies Co. Ltd (“Huawei”) seeking a declaration from the court that Huawei violated its commitments to negotiate in good faith and to license standard essential patents (“SEPs”), to the extent any SEPs are practiced by ADVA, on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms and conditions. The case also seeks to obtain a ruling by the court that ADVA has complied with its own commitments and requests that the Court establish FRAND terms and conditions for obtaining a FRAND license on any SEPs to the extend they are practiced by ADVA. The lawsuit also seeks to enjoin Huawei from enforcing five Huawei patents that ADVA considers invalid and/or not practiced, and that Huawei has infringed an ADVA patent. ADVA expects Huawei to respond to the action in August 2023 and expects a trial to be scheduled for the second half of 2024. On July 20, 2023, ADVA Optical Networking SE ("ADVA Germany") was served with a complaint filed by Huawei against ADVA Germany in the District Court München I, Germany, alleging that certain products infringe upon one of Huawei’s patents. ADVA Germany's response in the case is due in November 2023, and the filing of a separate nullity action to invalidate the patent is also available in Germany. 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 materially adversely affected.

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. For example, on May 8, 2023, Adtran Networks' and its subsidiary, ADVA Optical Networking North America Inc. (together, "ADVA") filed a lawsuit in the U.S District Court for the Eastern District of Texas (“EDTX”) against Huawei Technologies Co. Ltd (“Huawei”) seeking a declaration from the court that Huawei violated its commitments to negotiate in good faith and to license standard essential patents (“SEPs”), to the extent any SEPs are practiced by ADVA, on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms and conditions. The case also seeks to obtain a ruling by the court that ADVA has complied with its own commitments and requests that the Court establish FRAND terms and conditions for obtaining a FRAND license on any SEPs to the extent they are practiced by ADVA. The lawsuit also seeks to enjoin Huawei from enforcing five Huawei patents that ADVA considers invalid and/or not practiced, and that Huawei has infringed an ADVA patent. ADVA expects Huawei to respond to the action in August 2023 and expects a trial to be scheduled for the second half of 2024. On July 20, 2023, ADVA Optical Networking SE ("ADVA Germany") was served with a complaint filed by Huawei against ADVA Germany in the District Court München I, Germany, alleging that certain of its products infringe upon one of Huawei’s patents. ADVA Germany's response in the case is due in November 2023, and the filing of a separate nullity action to invalidate the patent is also available in Germany.

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.

Risks related to the regulatory environments in which we do business

72

---

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.

We see an increased risk to our liquidity due to the current instability in the financial services industry which could negatively impact our financial condition and future operations. This includes risk relating to our liquidity balances and investments, as well as risk relating to the financial stability of our customers and suppliers. We seek to only enter into transactions with creditworthy banks and financial institutions. To assess the creditworthiness of banks, we utilize current credit ratings from rating agencies, such as S&P, Moodyʼs and Fitch, as well as current default rates (credit default swaps). We are also in frequent dialogue with customers and suppliers to assess counterparty risks. Nevertheless, many of these transactions expose us to credit risk in the event of our counterparty’s default. Any such losses could be material and could materially and adversely affect our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the six months ended June 30, 2023, we did not repurchase any shares of our common stock. As of June 30, 2023, there is no current authorization to repurchase common stock.

ITEM 5. OTHER INFORMATION

Insider Trading Arrangements

During the fiscal quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

Wells Fargo Credit Agreement Amendment

On August 9, 2023, the Company, its wholly-owned direct subsidiary, ADTRAN, Inc., the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent and as collateral agent, entered into a First Amendment to the Credit Agreement (the “First Amendment”).

The First Amendment, among other things, provides for:

73

---

The First Amendment further added additional financial flexibility by amending the $30 million external debt capped basket to be an unlimited amount and permitting, subject to certain requirements, the incurrence of convertible indebtedness by the Company in an aggregate principal amount of up to $172.5 million. Any such convertible indebtedness must be incurred in pro forma compliance with the financial covenants in the Credit Agreement, unsecured and otherwise rank junior to borrowings under the Credit Agreement, and have a stated maturity date of at least 91 days after the latest scheduled maturity date of loans and commitments under the Credit Agreement. Net cash proceeds from any incurrence of convertible indebtedness must be used to repurchase minority shares of Adtran Networks or repay revolver borrowings under the Credit Agreement.

Lastly, the First Amendment added market environmental, social and governance provisions and extended the required delivery date of the financial statements of the Company and its subsidiaries for the fiscal quarter ended June 30, 2023 to August 18, 2023.

 

 

74

---

ITEM 6. EXHIBITS

Exhibits.

Effective June 8, 2023, ADVA Optical Networking SE, a subsidiary of the Company (“ADVA”), changed its name to Adtran Networks SE. By operation of law, any reference to ADVA Optical Networking SE in these exhibits should be read as Adtran Networks SE as set forth in the Exhibit List below.

 

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of ADTRAN Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company'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 the Company's Form 8-K filed July 8, 2022)
4.1	Description of Securities (incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q filed May 10, 2023)
10.1†	First Amendment to the CEO Employment Agreement dated March 29, 2023 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 3, 2023)
10.2†	Employment Agreement, dated September 29, 2006 and Amendment Nos. 1-16, by and between Adtran Networks SE and Christoph Glingener (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed April 3, 2023)
10.3†	Seventeenth Amendment, dated March 28, 2023, to Employment Agreement by and between Adtran Networks SE and Christoph Glingener (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed April 3, 2023)
10.4†	Eighth Amendment, dated May 26, 2023 including Exhibit 1 thereto, to the Employment Agreement by and between Adtran Networks SE and Ulrich Dopfer (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 1, 2023).
10.5†	Exhibit 1 to the Seventeenth Amendment, dated March 28, 2023 and executed May 31, 2023, to the Employment Agreement by and between Adtran Networks SE and Christoph Glingener (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed June 1, 2023).
10.6†	Consulting Agreement, dated June 28, 2023, by and between ADTRAN, Inc. and Michael Foliano (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed June 28, 2023).
10.7*	First Amendment to Credit Agreement, dated August 9, 2023, by and between ADTRAN Holdings, Inc. and Wells Fargo Bank, National Association.
31*	Rule 13a-14(a)/15d-14(a) Certifications
32*	Section 1350 Certifications
101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022; (ii) Condensed Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2023 and 2022; (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2023 and 2022; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022; (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022; and (vi) Notes to Condensed Consolidated Financial Statements
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

75

---

* Filed herewith.

† Represents a management compensation plan or arrangement

 

76

---

SIGNATURE

Pursuant to the requirements 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.

 

		ADTRAN Holdings, Inc. (Registrant)
Date: August 14, 2023		/s/ Ulrich Dopfer
		Ulrich Dopfer
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

 

77

---