What changed in this filing

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Item 1. Financial Statements

2024-03-15 compared with 2024-03-15 · 355 added, 427 removed, 939 unchanged (45% of the section changed)

3 unchanged sentences

(In thousands, except per share amounts)

September 30,

(As Restated)

1 unchanged sentence

Cash and cash equivalents

Short-term investments (includes $ 0 and $ 340 of available-for-sale securities as of September 30, 2023 and December 31, 2022, respectively, reported at fair value)

Accounts receivable, less allowance for credit losses of $ 15 and $ 49 as of September 30, 2023

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)

Accounts receivable, less allowance for credit losses of $ 26 and $ 49 as of June 30, 2023

and December 31, 2022, respectively

8 unchanged sentences

Long-term investments (includes $ 4,985 and $ 8,913 of available-for-sale securities as of

September 30, 2023 and December 31, 2022, respectively, reported at fair value)

June 30, 2023 and December 31, 2022, respectively, reported at fair value)

LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY

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200,000 shares authorized;

78,688 shares issued and 78,391 outstanding as of September 30, 2023 and

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

3 unchanged sentences

Treasury stock at cost:

297 and 198 shares as of September 30, 2023

297 and 198 shares as of June 30, 2023

and December 31, 2022, respectively

3 unchanged sentences

ADTRAN Holdings, Inc.

CONDENSED CONSOLIDATED STA TEMENTS OF LOSS

CONDENSED CONSOLIDATED STA TEMENTS OF (LOSS) INCOME

(In thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(As Restated)

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Network Solutions

Network Solutions - Inventory Write Down

Services & Support

2 unchanged sentences

Research and development expenses

Asset impairment

Goodwill impairment

Operating Loss

Operating (Loss) Income

Interest and dividend income

Interest expense

Net investment (loss) gain

Net investment gain (loss)

Other income, net

Loss Before Income Taxes

Income tax benefit

Net Income (Loss) attributable to non-controlling interest (1)

Net Loss attributable to ADTRAN Holdings, Inc.

(Loss) Income Before Income Taxes

Income tax benefit (expense)

Net (Loss) Income

Net Income attributable to non-controlling interest (1)

Net (Loss) Income attributable to ADTRAN Holdings, Inc.

Weighted average shares outstanding – basic

Weighted average shares outstanding – diluted

Loss per common share attributable to ADTRAN Holdings, Inc.

(1) For the three and nine months ended September 30, 2023, we have recognized $ 2.9 million and $ 8.6 million, respectively, representing the recurring cash compensation earned by non-controlling interest shareholders post-DPLTA, partially offset by a $ 3.2 million net loss attributable to non-controlling interests pre-DPLTA for the nine months ended September 30, 2023.

(Loss) earnings per common share attributable to ADTRAN Holdings, Inc.

(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, partially offset by a $ 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.

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(As Restated)

Other Comprehensive Loss, net of tax

Net unrealized gain (loss) on available-for-sale securities

Net (Loss) Income

Other Comprehensive Income (Loss), net of tax

Net unrealized (loss) gain on available-for-sale securities

Defined benefit plan adjustments

Foreign currency translation loss

Other Comprehensive Loss, net of tax

Comprehensive Loss, net of tax

Comprehensive Income (Loss) attributable to non-controlling interest

Foreign currency translation gain (loss)

Other Comprehensive Income (Loss), net of tax

Comprehensive (Loss) Income, net of tax

Comprehensive Income attributable to non-controlling interest

Comprehensive Loss attributable to ADTRAN Holdings, Inc., net of tax

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Balance as of June 30, 2023

Annual recurring compensation earned

Other comprehensive loss, net of tax

Dividend payments ($ 0.09 per share)

Dividends accrued for RSUs

Deferred compensation adjustments, net of tax

ADTRAN RSUs and restricted stock vested

ADTRAN stock options exercised

Adtran Networks stock options exercised

ADTRAN stock-based compensation expense

Redemption of redeemable non-controlling interest

Foreign currency remeasurement of redeemable non-controlling interest

Adtran Networks stock-based compensation expense

Balance as of September 30, 2023

See accompanying notes to condensed consolidated financial statements.

21 unchanged sentences

Balance as of June 30, 2022

Acquisition of Adtran Networks

Retirement of treasury stock

Other comprehensive loss, net of tax

Dividend payments ($ 0.09 per share)

Deferred compensation adjustments, net of tax

ADTRAN RSUs and restricted stock vested

ADTRAN stock options exercised

ADTRAN stock-based compensation expense

Reclassification of Adtran Networks stock options

Adtran Networks stock options exercised

Adtran Networks stock-based compensation expense

Balance as of September 30, 2022

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands)

Nine Months Ended

September 30,

Six Months Ended

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Net (loss) income

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Depreciation and amortization

Asset impairment

Goodwill impairment

Amortization of debt issuance cost

2 unchanged sentences

Deferred income taxes

Inventory write down

Inventory reserves

12 unchanged sentences

Proceeds from beneficial interests in securitized accounts receivable

Proceeds from disposals of property, plant and equipment

Acquisition of business, net of cash acquired

Net cash (used in) provided by investing activities

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Non-controlling interest put option buyback

Payment of debt issuance cost

Repayment of notes payable

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Effect of exchange rate changes

7 unchanged sentences

Purchases of property, plant and equipment included in accounts payable

Adtran Networks common shares exchanged in acquisition

Adtran Networks options assumed in acquisition

Non-controlling interest related to Adtran Networks

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

ADTRAN Holdings, Inc.

(“ADTRAN” or the “Company”) is a leading global provider of networking and communications platforms, software, systems and services focused on the broadband access market, serving a diverse domestic and international customer base in multiple countries that includes large, medium and small Service Providers, alternative Service Providers, such as utilities, municipalities and fiber overbuilders, cable/MSOs, SMBs and distributed enterprises.

(“ADTRAN” or the “Company”) is a leading global provider of networking and communications platforms, software, systems and services focused on the broadband access market, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and -3 Service Providers, alternative Service Providers, such as utilities, municipalities and fiber overbuilders, cable/MSOs, SMBs and distributed enterprises.

Our innovative solutions and services enable voice, data, video and internet-communications across a variety of network infrastructures and are currently in use by millions worldwide.

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In addition to our global headquarters in Huntsville, Alabama, and our European headquarters in Munich, Germany, we have sales and research and development facilities in strategic global locations.

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 (formerly ADVA Optical Networking SE).

and is the majority shareholder of Adtran Networks.

ADTRAN is a leading global provider of open, disaggregated networking and communications solutions.

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The combined technology portfolio can best address current and future requirements, especially regarding the convergence of solutions at the network edge.

Domination and Profit and Loss Transfer Agreement

Effectiveness of the Domination and Profit and Loss Transfer Agreement

The DPLTA between the Company, as the controlling company, and Adtran Networks SE, as the controlled company, as executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register ( Handelsregister ) of the local court ( Amtsgericht ) at the registered seat of Adtran Networks (Jena).

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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 5.0 % plus a variable component (according to the German Civil Code) that was 3.12 % as of September 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 € 325.3 million or approximately $ 344.2 million, based on an exchange rate as of September 30, 2023 and reflecting interest accrued through September 30, 2023 during the pendency of the appraisal proceedings discussed below.

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.

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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 nine months ended September 30, 2023, we accrued $ 2.9 million and $ 8.6 million in Annual Recurring Compensation, which was reflected as a reduction to retained (deficit) earnings, respectively.

On October 18, 2022, the Company's Board of Directors authorized the Company to purchase additional shares of Adtran Networks through open market purchases not to exceed 15,346,544 shares.

For the three and nine months ended September 30, 2023, less than 1 thousand shares and 64 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately € 8 thousand and € 1.1 million, respectively, or approximately $ 9 thousand and $ 1.2 million, respectively, based on an exchange rate as of September 30, 2023, were paid to Adtran Networks shareholders.

As of September 30, 2023, and as of the date of issuance of these financial statements, 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.

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, and as of the date of issuance of these financial statements, 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 additional funding provided for under the First Amendment to the Wells Fargo credit facility that was signed on August 9, 2023, (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, from the issuance of these financial statements, although we have suspended dividend payments and are implementing a business efficiency program, which includes, but is not limited to, planned reductions in our operating expenses and a site consolidation plan.

In connection with the site consolidation plan, we are also exploring a potential sale of our headquarters in Huntsville.

We may also need to further reduce capital expenditures and/or take other steps to preserve working capital in order to ensure that we can meet such needs and obligations.

See Note 22, Subsequent Events, for additional information regarding the suspension of the quarterly dividend.

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 additional funding provided for under the First Amendment to the Wells Fargo credit facility that was signed on August 9, 2023, (described below and as recently expanded) 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, from the issuance of these financial statements, 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.

On July 18, 2022, ADTRAN Holdings, Inc.

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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.

On August 9, 2023, the Company, its wholly-owned direct subsidiary, ADTRAN, Inc., the lenders party thereto and the Administrative Agent entered into a First Amendment to the Credit Agreement (the “First Amendment” and, together with the Credit Agreement, the “Credit Facility”).

The Credit Facility matures in July 2027;

however, the Company has an option to request extensions subject to customary conditions.

See Note 12, Revolving Credit Agreements, for additional information regarding the terms of the Credit Facility.

The Credit Agreement matures in July 2027, but provides the Company with an option to request extensions subject to customary conditions.

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 Credit Agreement (the “First Amendment”), which amended the Credit Agreement.

See Note 22, Subsequent Events, for additional information.

Board Approval Purchase of Adtran Networks Common Stock

On October 18, 2022, the Company's Board of Directors authorized the Company to purchase additional shares of Adtran Networks through open market purchases not to exceed 15,346,544 shares.

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 appro ximately $ 0.9 million and $ 1.2 million, respectively, based on an exchange rate as of June 30, 2023 were paid to Adtran Networks' shareholders.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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Actual amounts could differ significantly from these estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of supply chain constraints, inflationary pressures, the energy crisis, currency fluctuations and political tensions as of September 30, 2023, and through the date of this report.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of supply chain constraints, inflationary pressures, the energy crisis, currency fluctuations and political tensions as of June 30, 2023, and through the date of this report.

The accounting matters assessed included, but were not limited to, the allowance for credit losses, stock-based compensation, carrying value of goodwill, intangibles and other long-lived assets, financial assets, valuation allowances for tax as sets, revenue recognition and costs of revenue.

1 unchanged sentence

Revision of Previously Issued Financial Statements

During the fourth quarter of 2023, management identified an immaterial error relating to the understatement of non-controlling interest and the overstatement of accumulated other comprehensive income in the Condensed Consolidated Balance Sheet as of December 31, 2022 and the understatement of comprehensive loss attributable to non-controlling interest and overstated the comprehensive loss attributable to ADTRAN Holdings, Inc., net of tax in the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022.

The immaterial misstatements occurred following the Business Combination between the Company and the Company’s majority-owned subsidiary, Adtran Networks SE (“Adtran Networks”) on July 15, 2022.

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However, in order to correctly state non-controlling interest and accumulated other comprehensive income in connection with the filing of this Amendment No.

1, the December 31, 2022 balance sheet items and comprehensive loss for the three and nine months ended September 30, 2022 have been corrected to reflect the impact of this immaterial error.

1, the December 31, 2022 balance sheet items have been corrected to reflect the impact of this immaterial error.

The Company will revise its consolidated financial statements as of and for the year ended December 31, 2022 when it files its Form 10-K for the period ended December 31, 2023.

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Non-Controlling Interest

The following table reflects the impact of the revision to the specific line items presented in the Company’s previously reported Condensed Consolidated Statement of Changes in Equity as of September 30, 2022:

September 30, 2022

(In thousands)

Accumulated Other Comprehensive Income

Non-Controlling Interest

The following table reflects the impact of the revision to the specific line items presented in the Company’s previously reported Condensed Consolidated Statements of Comprehensive Loss as of September 30, 2022:

For the Three Months Ended September 30, 2022

For the Nine Months Ended September 30, 2022

(In thousands)

Comprehensive Loss attributable to non-controlling interest

Comprehensive Loss attributable to ADTRAN Holdings, Inc., net of tax

The accompanying applicable Notes have been updated to reflect the effects of the revision.

Restatement of Previously Issued Financial Statements

During the fourth quarter of 2023, the Company determined that it understated income attributable to the non-controlling interest, loss attributable to the Company, loss per common share attributable to ADTRAN Holdings, Inc.

– basic and diluted, understated comprehensive income attributable to non-controlling interest and understated comprehensive loss attributable to ADTRAN Holdings, Inc., net of tax for the three and nine months ended September 30, 2023.

During the fourth quarter of 2023, the Company determined that it understated redeemable non-controlling interest and overstated accumulated other comprehensive income as June 30, 2023.

Additionally, during the fourth quarter of 2023, the Company determined that it understated income attributable to the non-controlling interest, loss attributable to the Company, loss per common share attributable to ADTRAN Holdings, Inc.

The misstatements occurred following the effectiveness of the Domination Profit and Loss Transfer Agreement (“DPLTA”) between the Company and the Company’s majority-owned subsidiary, Adtran Networks SE (“Adtran Networks”) upon the registration of the DPLTA with the commercial register on January 16, 2023.

Pursuant to the DPLTA, the minority shareholders of Adtran Networks are guaranteed recurring cash compensation commencing with respect to the 2023 fiscal year.

The Company incorrectly presented the guaranteed cash compensation attributable to the non-controlling interest as a loss rather than income attributable to the non-controlling interest during the three and nine months ended September 30, 2023.

This error resulted in an understatement of net income attributable to the non-controlling interest, an understatement of net loss attributable to the Company and loss per common share attributable to ADTRAN Holdings, Inc.

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Additionally, this error resulted in an understatement of additional paid-in capital and an overstatement of accumulated other comprehensive income.

The Company restated the Condensed Consolidated Statements of Loss for the three and nine months ended September 30, 2023 presented in this report by increasing net loss attributable to the Company by $ 5.8 million and $ 17.2 million, respectively.

The Company restated the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2023 presented in this report by increasing comprehensive loss attributable to the Company by $ 2.9 million and $ 5.6 million, respectively.

The following tables reflects the impact of the restatement to the specific line items presented in the Company’s previously reported Condensed Consolidated Statements of Loss and the previously reported Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2023:

For the Three Months Ended September 30, 2023

For the Nine Months Ended September 30, 2023

The Company restated the Condensed Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2023 presented in this report by increasing net loss attributable to the Company by $ 5.8 million and $ 11.4 million, respectively.

The Company restated the Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2023 presented in this report by increasing comprehensive loss attributable to the Company by $ 2.9 million and $ 2.6 million, respectively.

The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported Condensed Consolidated Statements of (Loss) Income and the previously reported Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2023:

For the Three Months Ended June 30, 2023

For the Six Months Ended June 30, 2023

(In thousands)

Income (Loss) attributable to non-controlling interest

Net Income attributable to non-controlling interest

Net Loss attributable to ADTRAN Holdings, Inc.

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Comprehensive Loss attributable to ADTRAN Holdings, Inc., net of tax

The accompanying applicable Notes have been updated to reflect the effects of the restatement as of September 30, 2023.

The following table reflects the impact of the restatement, in addition to the revision of the December 31, 2022 balances referenced above, to the specific line items presented in the Company’s previously reported Condensed Consolidated Balance Sheets as of September 30, 2023 and the Condensed Consolidated Statement of Changes in Equity for the period ended September 30, 2023:

September 30, 2023

The accompanying applicable Notes have been updated to reflect the effects of the restatement as of June 30, 2023.

The following table reflects the impact of the restatement, in addition to the revision of the December 31, 2022 balances referenced above, to the specific line items presented in the Company’s previously reported Condensed Consolidated Balance Sheets as of June 30, 2023 and the Condensed Consolidated Statement of Changes in Equity for the period ended June 30, 2023:

June 30, 2023

(In thousands)

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Redeemable Non-Controlling Interest

As of September 30, 2023 and December 31, 2022, the non-controlling Adtran Networks stockholders’ equity ownership percentage in Adtran Networks was approximately 34.6 % and 34.7 %, respectively.

As of June 30, 2023 and December 31, 2022, the Adtran Networks stockholders’ equity ownership percentage in Adtran Networks was approximately 34.6 % and 34.7 %, respectively.

As a result of the effectiveness of the DPLTA on January 16, 2023, the Adtran Networks shares, representing the equity interest in Adtran Networks held by holders other than the Company, can be tendered at any time and are, therefore, redeemable and must be classified outside stockholders’ equity.

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shareholders continued to hold a majority interest in the combined company following the completion of the Business Combination.

Additionally, following the transaction, the Board of Directors was comprised of six members from ADTRAN, Inc.

Additionally, the Board of Directors is comprised of six members from ADTRAN, Inc.

and three members from Adtran Networks;

the ADTRAN, Inc.

chief executive officer became and continues to act as the chairman of the Board of Directors and the former Adtran Networks chief executive officer became the vice chairman of the Board of Directors.

Additionally, the ADTRAN, Inc.

the current ADTRAN, Inc.

chief executive officer acts as the chairman of the Board of Directors and the former Adtran Networks chief executive officer as the vice chairman of the Board of Directors.

Additionally, the current ADTRAN, Inc.

chief executive officer and ADTRAN, Inc.

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Based upon these and other considerations as outlined in ASC 805, ADTRAN, Inc.

represented the accounting acquirer.

represents the accounting acquirer.

The following table summarizes the purchase price for the Adtran Networks business combination:

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The cumulative effect of all measurement period adjustments resulted in a decrease to recognized goodwill of $ 8.7 million.

The following table summarizes the final purchase price allocation for each major class of assets acquired and liabilities assumed in the Business Combination (in thousands):

The following table summarizes the purchase price allocation for each major class of assets acquired and liabilities assumed in the Business Combination (in thousands):

(In thousands)

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Total net assets acquired

The fair value of the assets acquired included accounts receivable of $ 114.7 million and other receivables of $ 1.5 million.

The unpaid principal balance under these receivables was $ 118.5 million and $ 1.5 million, respectively.

The difference between the fair value and the unpaid principal balance primarily represents amounts determined to be uncollectible.

The fair value of the assets acquired include accounts receivable of $ 114.7 million and other receivables of $ 1.5 million.

The unpaid principal balance under these receivables is $ 118.5 million and $ 1.5 million, respectively.

The difference between the fair value and the unpaid principal balance primarily represents amounts expected to be uncollectible.

The fair value of the identifiable intangible assets acquired as of the acquisition date:

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The Company has included the financial results of Adtran Networks in its consolidated financial statements since July 15, 2022, the acquisition date.

The net revenue from the Adtran Networks business for the three and nine months ended September 30, 2023, was $ 158.4 million and $ 537.5 million, respectively, and the net loss from the Adtran Networks business for the three and nine months ended September 30, 2023, was $ 38.8 million and $ 79.4 million, respectively, which are included in the Company’s Consolidated Statement of Loss.

There was no net loss attributable to non-controlling interest from the Adtran Networks business for the three months ended September 30, 2023.

The net loss attributable to non-controlling interest from the Adtran Networks business for the nine months ended September 30, 2023 was $ 3.2 million.

For the three and nine months ended September 30, 2023 , we recognized $ 2.9 million and $ 8.6 million, respectively, representing the portion of the annual recurring cash compensation to the non-controlling shareholders accrued during such periods, which will be paid after the ordinary general shareholders' meeting of Adtran Networks beginning in 2024.

See Note 1 and Note 20 for additional information on RNCI and the annual dividend .

As of September 30, 2023, the Company has incurred $ 26.2 million of transaction costs related to the Business Combination.

During the three and nine months ended September 30, 2023, $ 8 thousand and $ 0.1 million of transaction costs were incurred, respectively.

During the three and nine months ended September 30, 2022, $ 10.6 million and $ 13.3 million of transaction costs were incurred, respectively.

These transaction costs are recorded in selling, general and administrative expenses in the Consolidated Statements of Loss.

The net revenue from the Adtran Networks business for the three and six months ended June 30, 2023, was $ 186.7 million and $ 379.0 million, respectively, and the net loss from the Adtran Networks business for the three and six months ended June 30, 2023, was $ 31.7 million and $ 67.5 million, respectively, which are included in the Company’s Consolidated Statement of (Loss) Income.

There was no net loss attributable to non-controlling interest from the Adtran Networks business for the three months ended June 30, 2023.

The net loss attributable to non-controlling interest from the Adtran Networks business for the six months ended June 30, 2023 was $ 6.0 million.

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.

Supplemental Pro Forma Information (Unaudited)

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Three Months Ended

Nine Months Ended

Six Months Ended

(In thousands)

September 30, 2022

June 30, 2022

Net income (loss)

The following is a description of the principal activities from which revenue is generated by reportable segment:

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(1) Access & Aggregation, (2) Subscriber Solutions & Experience and (3) Traditional & Other Products.

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.

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.

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Three Months Ended

September 30, 2023

September 30, 2022

June 30, 2023

June 30, 2022

(In thousands)

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Subscriber Solutions

Nine Months Ended

September 30, 2023

September 30, 2022

Six Months Ended

June 30, 2023

June 30, 2022

(In thousands)

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Subscriber Solutions

The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of September 30, 2023 and December 31, 2022 related to contractual maintenance agreements, contractual SaaS and subscription services, and hardware contracts that exceed one year in duration amounted to $ 314.0 milli on and $ 277.2 million, respectively.

As of September 30, 2023, approximately 68.6 % is expected to be recognized over the next 12 months and the remainder recognized thereafter.

The majority of the Company's remaining performance obligations as of September 30, 2023 are related to contracts or orders that have an original expected duration of one year or less, for which the Company is electing to utilize the practical expedient available within the guidance, and are excluded from the transaction price related to these future obligations.

The aggregate amount of transaction price allocated to remaining performance obligations that have not been satisfied as of June 30, 2023 and December 31, 2022 related to contractual maintenance agreements, contractual SaaS and subscription services, and hardware contracts that exceed one year in duration amounted to $ 369.3 milli on and $ 277.2 million, respectively.

As of June 30, 2023, approximately 46.5 % is expected to be recognized over the next 12 months and the remainder recognized thereafter.

The majority of the Company's remaining performance obligations as of June 30, 2023 are related to contracts or orders that have an original expected duration of one year or less, for which the Company is electing to utilize the practical expedient available within the guidance, and are excluded from the transaction price related to these future obligations.

The Company will generally satisfy the remaining performance obligations as we transfer control of the products ordered or services to our customers, excluding maintenance services, which are satisfied over time.

1 unchanged sentence

(In thousands)

September 30, 2023

June 30, 2023

December 31, 2022

5 unchanged sentences

The Company is party to a receivables purchase agreement with a third-party financial institution (the “Factor”), which accelerates receivable collection and helps to better manage cash flow.

Total accounts receivables sold for the nine months ended September 30, 2023 and the twelve months ended December 31, 2022, totaled $ 17.8 million and $ 14.9 million, respectively, of which $ 1.4 million was retained by the Factor in the reserve account.

Total accounts receivables sold for the six months ended June 30, 2023 and the twelve months ended December 31, 2022, totaled $ 14.7 million and $ 14.9 million, respectively, of which $ 1.2 million was retained by the Factor in the reserve account.

The balance in the reserve account is included in other assets on the Condensed Consolidated Balance Sheets.

As of September 30, 2023 and December 31, 2022, the Company had an allowance for credit losses related to factored accounts receivable totaling less than $ 0.1 million.

The cost of the receivables purchase agreement is included in interest expense in the Condensed Consolidated Statements of Loss and totaled $ 0.3 million and $ 0.9 million for the three and nine months ended September 30, 2023, respectively.

Of the outstanding unearned revenue balances as of December 31, 2022, $ 6.1 million and $ 31.3 milli on were recognized as revenue during the three and nine months ended September 30, 2023, respectively .

Of the $ 17.7 million of outstanding unearned revenue balances as of December 31, 2021, $ 2.8 million and $ 12.3 million were recognized as revenue during the three and nine months ended September 30, 2022, respectively.

As of June 30, 2023 and December 31, 2022, the Company had an allowance for credit losses related to factored accounts receivable totalin g less t han $ 0.1 million.

The cost of the receivables purchase agreement is included in interest expense in the Condensed Consolidated Statements of (Loss) Income and totaled $ 0.3 million and $ 0.6 million for the three and six months ended June 30, 2023, respectively.

Of the outstanding unearned revenue balances as of December 31, 2022 , $ 24.8 million and $ 50.5 million was recognized as revenue during the three and six months ended June 30, 2023, respectively .

Of the $ 17.7 million of outstanding unearned revenue balances as of December 31, 2021, $ 4.1 million and $ 9.5 million was recognized as revenue during the three and six months ended June 30, 2022, respectively.

Accounts Receivable

1 unchanged sentence

Accounts receivable balances are considered past due when payment has not been received by the date indicated on the relevant invoice or based on agreed upon terms between the customer and the Company.

As of September 30, 2023 and December 31, 2022 , the Company’s outstanding accounts receivable balance was $ 229.3 million and $ 279.4 million, respectively.

As of June 30, 2023 and December 31, 2022, the Company’s outstanding accounts receivable balance was $ 239.6 million and $ 279.4 million, respectively.

The Company assessed the need for an allowance for credit losses related to its outstanding accounts receivable using the historical loss-rate method as well as assessing asset-specific risks.

3 unchanged sentences

Additionally, the Company determined that significant changes to customer country risk rating from period-to-period and from the end of the prior year to the end of the current quarter would require further review and analysis by the Company.

The allowance for credit losses was $ 15 thousand and $ 49 thousand as of September 30, 2023 and December 31, 2022, respectively, related to accounts receivable.

The allowance for credit losses was $ 26 thousand and $ 49 thousand as of June 30, 2023 and December 31, 2022, respectively, related to accounts receivable.

Contract Assets

The Company records contract assets when it has recognized revenue but has not yet billed the customer.

As of September 30, 2023 and December 31, 2022 , the Company’s outstanding contract asset balance was $ 0.9 million and $ 1.9 million, respectively, which is included in other receivables on the Consolidated Balance Sheets.

As of June 30, 2023 and December 31, 2022, the Company’s outstanding contract asset balance was $ 1.2 million and $ 1.9 million, respectively, which is included in other receivables on the Consolidated Balance Sheets.

The Company assessed the need for an allowance for credit losses related to its outstanding contract assets using the historical loss-rate method as well as asset-specific risks.

4 unchanged sentences

Additionally, the Company determined that significant changes to customer country risk rating from period-to-period and from the end of the prior year to the end of the current quarter would be subject to further review and analysis by the Company.

No allowance for credit losses was recorded for the three months ended September 30, 2023 and 2022 related to contract assets.

The Company’s effective tax rate changed from a benefit of 8.8 % of pre-tax loss for the three months ended September 30, 2022 , to a benefit of 18.0 % of pre-tax loss for the three months ended September 30, 2023 and changed from a benefit of 9.4 % of pre-tax loss for the nine months ended September 30, 2022 , to a benefit of 19.2 % of pre-tax loss for the nine months ended September 30, 2023.

The change in the effective tax rate for the three and nine months ended September 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, with exception for certain research and development credits in a particular state in which we do not have sufficient activity to utilize them prior to expiration.

No allowance for credit losses was recorded for the three months ended June 30, 2023 and 2022 related to contract assets.

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 loss 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 loss for the six months ended June 30, 2023.

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.

During the second quarter of 2023, the Company concluded a review with the Internal Revenue Services of its amended tax returns previously filed related to refund claims arising from the Company’s request to revoke an IRC Section 59(e) election made on the Company’s originally filed 2018 U.S.

federal tax return.

The Company had previously received an unfavorable response to its Private Letter Ruling request, in which it requested the Commissioner's approval for revoking the election.

federal tax return, and received an unfavorable response, Private Letter Ruling request.

As a result of that review, and after taking into consideration other factors, including weighing the potential benefits with projected costs to litigate and the hazards of litigation, management has concluded that it will not pursue the claims any further.

As a result, the Company has removed the previously recorded receivable of $ 15.2 million and related research and development credit carryforward of $ 1.8 million, as well as the offsetting uncertain tax position reserves against them of $ 17.0 million during the second quarter of 2023.

As a result, the company has removed the previously recorded receivable of $ 15.2 million and related research and development credit carryforward of $ 1.8 million as well as the offsetting uncertain tax position reserves against them of $ 17.0 million within our financials as of June 30, 2023.

The Company continually reviews the adequacy of its valuation allowance and recognizes the benefits of deferred tax assets only as the assessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance with ASC 740, Income Taxes.

As of September 30, 2023 , the Company had net deferred tax assets totaling $ 57.3 million, and a valuation allowance totaling $ 5.0 million against those deferred tax assets.

As of June 30, 2023, the Company had net deferred tax assets totaling $ 42.5 million, and a valuation allowance totaling $ 5.0 million against those deferred tax assets.

The remaining $ 37.5 million in deferred tax assets are primarily related to capitalized R&D expenses in the U.S., partially offset by net purchase price intangibles from the Business Combination closed with Adtran Networks during the third quarter of 2022.

2 unchanged sentences

Supplemental balance sheet information related to deferred tax assets (liabilities) is as follows:

As of September 30, 2023

As of June 30, 2023

(In thousands)

10 unchanged sentences

STOCK-BASED COMPENSATION

For the three months ended September 30, 2023 and 2022 , stock-based compensation expense was $ 4.2 million and $ 12.1 million, respectively, and for the nine months ended September 30, 2023 and 2022 , stock-based compensation expense was $ 12.2 million and $ 15.9 million, respectively.

For the three months ended June 30, 2023 and 2022, stock-based compensation expense was $ 4.3 million and $ 1.9 million, respectively, and for the six months ended June 30, 2023 and 2022, stock-based compensation expense was $ 8.0 million and $ 3.8 million, respectively.

PSUs, RSUs and Restricted Stock - ADTRAN Holdings, Inc.

The following table summarizes the RSUs and restricted stock outstanding as of December 31, 2022 and September 30, 2023 and the changes that occurred during the nine months ended September 30, 2023:

The following table summarizes the RSUs and restricted stock outstanding as of December 31, 2022 and June 30, 2023 and the changes that occurred during the six months ended June 30, 2023:

(in thousands)

5 unchanged sentences

RSUs and restricted stock forfeited

Unvested RSUs and restricted stock outstanding, September 30, 2023

During the nine months ended September 30, 2023, the Company granted 0.9 million performance-based PSUs to its executive officers and certain employees.

Unvested RSUs and restricted stock outstanding, June 30, 2023

During the six months ended June 30, 2023, the Company granted 0.9 million performance-based PSUs to its executive officers and certain employees.

The grant-date fair value of these performance-based awards was based on the closing price of the Company’s stock on the date of grant.

These awards vest over either a two or three-year period, subject to the gra ntee’s continued employment, with the ability to earn shares in a range of 0 % to either 100 % or 150 % of the awarded number of PSUs based on the achievement of defined performance targets.

Equity-based compensation expense and liabilities with respect to these awards may be adjusted over the vesting period to reflect the probability of achievement of performance targets defined in the award agreements.

Equity-based compensation expense with respect to these awards may be adjusted over the vesting period to reflect the probability of achievement of performance targets defined in the award agreements.

The fair value of RSUs and restricted stock is equal to the closing price of its stock on the date of grant.

The fair value of PSUs with market conditions is calculated using a Monte Carlo simulation valuation method.

As of September 30, 2023 , total unrecognized compensation expense related to non-vested market-based RSUs and restricted stock was approximately $ 19.1 million, which will be recognized over the remaining weighted-average period of 2.2 years.

As of June 30, 2023 , total unrecognized compensation expense related to non-vested market-based RSUs and restricted stock was approximately $ 21.8 million, which will be recognized over the remaining weighted-average period of 2.4 years.

There was $ 13.9 million of unrecognized compensation expense related to unvested 2023 performance-based PSUs, which will be recognized over the remaining requisite service period of 2.4 years if achievement of the performance obligation becomes probable.

Unrecognized compensation expense will be adjusted for actual forfeitures.

As of September 30, 2023, 2.0 million shares were available for issuance under stockholder-approved equity plans.

As of June 30, 2023, 2.0 million shares were available for issuance under stockholder-approved equity plans.

Stock Options - ADTRAN Holdings, Inc.

The following table summarizes the ADTRAN Holdings, Inc.

stock options outstanding as of December 31, 2022 and September 30, 2023 and the changes that occurred during the nine months ended September 30, 2023:

stock options outstanding as of December 31, 2022 and June 30, 2023 and the changes that occurred during the six months ended June 30, 2023:

Stock Options

10 unchanged sentences

Stock options expired

Stock options outstanding, September 30, 2023

Stock options exercisable, September 30, 2023

As of September 30, 2023 , there was $ 5.2 million of unrecognized compensation expense related to stock options which will be recognized over the remaining weighted-average period of 1.9 years.

Stock options outstanding, June 30, 2023

Stock options exercisable, June 30, 2023

As of June 30, 2023 , there was $ 6.3 million of unrecognized compensation expense related to stock options which will be recognized over the remaining weighted-average period of 2.0 years.

Pursuant to the Business Combination, which closed on July 15, 2022, Adtran Networks stock option holders were entitled to have their Adtran Networks stock options assumed by ADTRAN Holdings, Inc.

2 unchanged sentences

stock potentially issuable upon such assumption was 2.3 million shares.

The period in which such options could be assumed ended on July 22, 2022.

The period in which such options could be assumed ended July 22, 2022.

A total of 2.1 million shares of ADTRAN Holdings, Inc.

5 unchanged sentences

All of the options were previously issued at exercise prices that approximated fair market value at the date of grant.

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between the Company's closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2023 .

The amount of aggregate intrinsic value was $ 0.7 million as of September 30, 2023, which will change based on the fair market value of the Company's stock.

The total pre-tax intrinsic value of options exercised during the nine months ended September 30, 2023 was $ 50 thousand.

The amount of aggregate intrinsic value was $ 2.6 million as of June 30, 2023 and will change based on the fair market value of the Company's stock.

The total pre-tax intrinsic value of options exercised during the six months ended June 30, 2023 was $ 43 thousand.

Stock Options - Adtran Networks

The following table summarizes the Adtran Networks stock options outstanding as of December 31, 2022 and September 30, 2023 and the changes that occurred during the nine months ended September 30, 2023:

The following table summarizes the Adtran Networks stock options outstanding as of December 31, 2022 and June 30, 2023 and the changes that occurred during the six months ended June 30, 2023:

(In thousands)

6 unchanged sentences

Stock options exercised

Stock options forfeited

Stock options expired

Stock options outstanding, September 30, 2023

Stock options exercisable, September 30, 2023

As of September 30, 2023 , there was $ 0.1 million of unrecognized compensation expense related to Adtran Networks stock options which will be recognized over the remaining weighted-average period of 3.4 years.

Stock options outstanding, June 30, 2023

Stock options exercisable, June 30, 2023

As of June 30, 2023 , there was $ 0.1 million of unrecognized compensation expense related to Adtran Networks stock options which will be recognized over the remaining weighted-average period of 3.9 years.

All of the Adtran Networks options were previously issued at exercise prices that approximated fair market value at the date of grant.

The aggregate intrinsic value of Adtran Networks stock options represents the total pre-tax intrinsic value (the difference between Adtran Networks closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2023 .

The amount of aggregate intrinsic value was $ 0.7 million as of September 30, 2023 and will change based on the fair market value of Adtran Networks stock.

The total pre-tax intrinsic value of Adtran Networks options exercised during the nine months ended September 30, 2023 was $ 0.2 million.

The amount of aggregate intrinsic value was $ 0.9 million as of June 30, 2023 and will change based on the fair market value of Adtran Networks stock.

The total pre-tax intrinsic value of Adtran Networks options exercised during the six months ended June 30, 2023 was $ 0.2 million.

Debt Securities and Other Investments

The following debt securities and other investments were included on the Condensed Consolidated Balance Sheets and recorded at fair value as of December 31, 2022:

The following debt securities and other investments were included on the Condensed Consolidated Balance Sheets and recorded at fair value:

As of June 30, 2023

Gross Unrealized

(In thousands)

Corporate bonds

Municipal fixed-rate bonds

Asset-backed bonds

Mortgage/Agency-backed bonds

government bonds

Foreign government bonds

Available-for-sale debt securities held at fair value

As of December 31, 2022

8 unchanged sentences

Available-for-sale debt securities held at fair value

The Company did no t have any debt securities and other investments as of September 30, 2023.

The contractual maturities related to debt securities and other investments were as follows:

As of June 30, 2023

(In thousands)

Foreign government bonds

Less than one year

One to two years

Two to three years

Three to five years

Five to ten years

More than ten years

Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Re alized gains and losses on sales of debt securities are computed under the specific identification method.

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

2 unchanged sentences

Total loss recognized, net

Income generated from available-for-sale debt securities was recorded as interest and dividend income in the Condensed Consolidated Statements of Loss.

No allowance for credit losses was recorded for the nine months ended September 30, 2023 and 2022 related to available-for-sale debt securities.

Income generated from available-for-sale debt securities was recorded as interest and dividend income in the Condensed Consolidated Statements of (Loss) Income.

No allowance for credit losses was recorded for the six months ended June 30, 2023 and 2022 related to available-for-sale debt securities.

The Company’s investment policy provides limitations for issuer concentration, which limits, at the time of purchase, the concentration in any one issuer to 5 % of the market value of its total investment portfolio.

The Company did no t purchase any available-for-sale debt security with credit deterioration during the nine months ended September 30, 2023.

The Company did no t purchase any available-for-sale debt security with credit deterioration during the six months ended June 30, 2023.

Realized and unrealized gains and losses related to marketable equity securities were as follows:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

2 unchanged sentences

Total gain (loss) recognized, net

Income generated from marketable equity securities was recorded as interest and dividend income in the Condensed Consolidated Statements of Loss.

Income generated from marketable equity securities was recorded as interest and dividend income in the Condensed Consolidated Statements of (Loss) Income.

GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of financial instruments:

7 unchanged sentences

The Company’s cash equivalents and investments held at fair value are categorized into this hierarchy as follows:

Fair Value Measurements as of September 30, 2023 Using

Fair Value Measurements as of June 30, 2023 Using

(In thousands)

6 unchanged sentences

Total cash equivalents

Available-for-sale debt securities

Corporate bonds

Municipal fixed-rate bonds

Asset-backed bonds

Mortgage/Agency-backed bonds

government bonds

Foreign government securities

Marketable equity securities

1 unchanged sentence

Deferred compensation plan assets

Total long-term investments

Total short-term and long-term investments

Fair Value Measurements as of December 31, 2022 Using

21 unchanged sentences

(In thousands)

September 30, 2023

June 30, 2023

December 31, 2022

4 unchanged sentences

Inventory reserves are established for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on estimated reserve percentages, which considers historical usage, known trends, inventory age and market conditions.

As of September 30, 2023 and December 31, 2022, inventory reserves were $ 86.3 million and $ 57.0 million, respectively.

In connection with the Company’s restructuring efforts, during the quarter ended September 30, 2023, management determined that there would be a discontinuation of product lines in the Network solutions segment and, as a result, wrote-down related inventories of $ 21.0 million and is included in cost of revenue in the Condensed Consolidated Statements of Loss.

There was no write-down of inventory during the three and nine months ended September 30, 2022.

As of June 30, 2023 and December 31, 2022, inventory reserves were $ 79.6 million and $ 57.0 million, respectively.

PROPERTY, PLANT AND EQUIPMENT

1 unchanged sentence

(In thousands)

September 30, 2023

June 30, 2023

December 31, 2022

7 unchanged sentences

Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value.

In connection with the planned integration of information technology following the Business Combination, we determined that certain projects no longer fit our needs.

As a result, the Company recognized impairment charges of $ 17.0 million during the three and nine months ended September 30, 2022 related to capitalized implementation costs for a cloud computing arrangement.

The impairment charges were determined based on actual costs incurred.

During the three and nine months ended September 30, 2023, no impairment charges were recognized.

Depreciation expense was $ 7.4 million and $ 7.1 million for the three months ended September 30, 2023 and 2022 , respectively, and $ 22.6 million and $ 12.6 million for the nine months ended September 30, 2023 and 2022 , respectively, which is recorded in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Loss.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2023 are as follows:

During the three and six months ended June 30, 2023 and 2022, no impairment charges were recognized.

Depreciation expense was $ 6.2 million and $ 2.7 million for the three months ended June 30, 2023 and 2022 , respectively, and $ 13.8 million and $ 5.5 million for the six months ended June 30, 2023 and 2022, respectively, which is recorded in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of (Loss) Income.

The changes in the carrying amount of goodwill for the six months ended June 30, 2023 are as follows:

(In thousands)

2 unchanged sentences

As of December 31, 2022

Goodwill impairment

Foreign currency translation adjustments

As of September 30, 2023

As of June 30, 2023

Related to the Business Combination with Adtran Networks the Company recognized $ 350.5 million of goodwill upon the closing of the Business Combination on July 15, 2022.

Goodwill represents the excess purchase price over the fair value of net assets acquired.

The Company performed an impairment assessment as of September 30, 2023, prior to our October 1, 2023 annual measurement date.

The Company’s policy is to assess the realizability of its goodwill, and to evaluate such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (or group of assets) may not be recoverable.

During the third quarter of 2023, qualitative factors such as a decrease in the Company's market capitalization and long-term projections, triggered a quantitative impairment assessment for our reporting units.

The Company determined the fair value of each reporting unit using a combination of an income approach and a market based peer group analysis.

It was determined that the decreases in projected future cash flows, discount rates, overall macroeconomic conditions, as well as the decrease in our market capitalization applied in the valuation, were required to align with market-based assumptions and company-specific risk, which resulted in lower fair values of the Services & Support reporting unit.

The Company determined upon its quantitative impairment assessment to recognize a $ 37.9 million non-cash goodwill impairment charge for the Services & Support reporting unit.

The Company does not expect the impairment charge for the Services & Support Unit to result in any future cash expenditures.

The Company did not recognize any impairment charges for the Network Solutions reporting unit as of September 30, 2023.

Subsequent to September 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 is further indication of a sustained decline in fair value requiring an event driven assessment of the recoverability of its goodwill within the fourth quarter of 2023.

We qualitatively assess the carrying value of goodwill each reporting period for events or circumstance changes that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

Based on its assessment of certain qualitative factors such as macro-economic conditions, industry and market considerations, costs factors and overall financial performance, management concluded that no such events or circumstance changes were identified that would suggest that the fair value of the goodwill was more likely than not greater than it's carrying amount as of June 30, 2023.

No impairment of goodwill was recorded during the three and six months ended June 30, 2023 and 2022.

INTANGIBLE ASSETS

Intangible assets consisted of the following:

As of September 30, 2023

As of June 30, 2023

As of December 31, 2022

13 unchanged sentences

The Company assessed impairment triggers related to intangible assets during each financial period in 2023 and 2022.

During the third quarter of 2023, the Company's market capitalization and long-term projections decreased which triggered a reassessment of our estimated future undiscounted cash flows.

The Company determined that our estimated future undiscounted cash flows exceeded the carrying amount of intangible assets as of September 30, 2023.

No quantitative impairment test of long-lived assets was performed as of September 30, 2022.

No impairment losses of intangible assets were recorded during the three and nine months ended September 30, 2023 and 2022.

Amortization expense was $ 16.5 million and $ 20.4 million in the three months ended September 30, 2023 and 2022 , respectively, and $ 68.8 million and $ 22.2 million in the nine months ended September 30, 2023 and 2022, respectively and was included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Loss.

As a result, no quantitative impairment test of long-lived assets was performed as of June 30, 2023 and 2022 , and no impairment losses of intangible assets were recorded during the three and six months ended June 30, 2023 and 2022.

Amortization expense was $ 26.5 million and $ 0.9 million in the three months ended June 30, 2023 and 2022 , respectively, and $ 52.3 million and $ 1.8 million in the six months ended June 30, 2023 and 2022, respectively and was included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of (Loss) Income.

Estimated future amortization expense of intangible assets is as follows:

(In thousands)

September 30, 2023

June 30, 2023

The Company has certain forward rate agreements to hedge foreign currency exposure of expected future cash flows in foreign currency.

1 unchanged sentence

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each reporting period.

All changes in the fair value of derivative instruments are recognized as other income (expense) in the Consolidated Statements of Loss and are classified as Level II under the fair value hierarchy.

All changes in the fair value of derivative instruments are recognized as other income (expense) in the Consolidated Statements of (Loss) Income and are classified as Level II under the fair value hierarchy.

The derivative instruments are not subject to master netting agreements and are not offset in the Consolidated Balance Sheets.

2 unchanged sentences

We have not experienced credit losses from our counterparties.

As of September 30, 2023, the Company had 49 fo rward rate contracts outstanding.

As of June 30, 2023, the Company had 51 fo rward rate contracts outstanding.

Foreign Currency Hedging Arrangements

3 unchanged sentences

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 conv ert a portion of its Euro denominated payment obligations under the DPLTA into U.S.

Under the Initial Forward, the Company agreed to exchange an aggregate notional amount of € 160.0 million for U.S.

dollars 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, which commenced in the fourth quarter of 2022.

During the nine months ended September 30, 2023, the Company se ttled three € 20.0 million forward contract tranches a nd the remaining amount will be divided into five quarterly tranches of € 20.0 million.

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;

3 unchanged sentences

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 supplemen t such agreement) entered into between the Company and the Hedge Counterparty, the Company will exchange an aggregate notional amount of € 160.0 million for U.S.

dollars at a daily fixed forward rate of $ 1.085 per € 1.00 in average.

During the nine months ended September 30, 2023, the Company se ttled three € 20.0 million forward contract tranches, a nd the remaining amount will be divided into five quarterly tranches of € 20.0 million.

These forward contracts were executed on March 21, 2023 (to sell EUR/buy USD) and were entered into for the purpose of unwinding the Initial Forward (to buy EUR/sell USD).

The drawdown dates of the Initial Forward are set to the same date as the maturity of the new offsetting Forward.

The fair values of the Company's derivative instruments recorded in the Condensed Consolidated Balance Sheet as of September 30, 2023 and December 31, 2022 were as follows:

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 a nd the remaining will be divided into six quarterly tranches of $ 20.0 million.

These 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.

The fair values of the Company's derivative instruments recorded in the Condensed Consolidated Balance Sheet as of June 30, 2023 and December 31, 2022 were as follows:

(In thousands)

Balance Sheet Location

September 30, 2023

June 30, 2023

December 31, 2022

5 unchanged sentences

Total derivatives

The change in the fair values of the Company's derivative instruments recorded in the Condensed Consolidated Statements of Loss during the three and nine months ended September 30, 2023 and 2022 were as follows:

The change in the fair values of the Company's derivative instruments recorded in the Condensed Consolidated Statements of (Loss) Income during the three and six months ended June 30, 2023 and 2022 were as follows:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

6 unchanged sentences

(In thousands)

September 30, 2023

June 30, 2023

December 31, 2022

5 unchanged sentences

(In thousands)

September 30, 2023

June 30, 2023

December 31, 2022

1 unchanged sentence

Total non-current revolving credit agreement

As of September 30, 2023 , the weighted average interest rate on our revolving credit agreements was 7.11 %.

As of June 30, 2023, the weighted average interest rate on our revolving credit agreements was 6.4 %.

Wells Fargo Credit Agreement

1 unchanged sentence

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 initially allowed for borrowings of up to $ 100.0 million in aggregate principal amount, but the permitted borrowings increased to up to $ 400.0 million in aggregate principal amount upon the DPLTA becoming effective on January 16, 2023.

On August 9, 2023, (the "First Amendment Effective Date") the Company, its wholly-owned direct subsidiary, ADTRAN, Inc., the lenders party thereto and the Administrative Agent entered into a First Amendment to the Credit Agreement (the “First Amendment” and together with the Credit Agreement, the "Credit Facility").

The First Amendment, provides for, among other things, a new $ 50.0 million delayed draw term loan (“DDTL”), which is available for borrowing in the event of the purchase by the Company of at least sixty percent ( 60.0 %) of the outstanding shares of Adtran Networks that were not owned by the Company as of the First Amendment Effective Date (such event, a “Springing Covenant Event”).

Proceeds of the DDTL may only be used to repurchase minority shares of Adtran Networks.

The DDTL remains available for borrowing from the occurrence of a Springing Covenant Event through the period that is three consecutive fiscal quarters thereafter.

The First Amendment further added additional financial flexibility by amending the $ 30.0 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.

As of September 30, 2023 , ADTRAN, Inc.’s borrowings under the revolving line of credit were $ 200.0 million.

As of September 30, 2023, there were no borrowings under the DDTL.

The Credit Facility matures in July 2027;

however, the Company has an option to request extensions subject to customary conditions.

The Credit Agreement replaced the Cadence Revolving Credit Agreement and the prior Wells Fargo Revolving Credit Agreement.

In connection with the entry into the Credit Agreement, all outstanding borrowings under such credit agreements have been repaid and the agreements terminated.

As of 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 total facility.

As of September 30, 2023 , we had a total of $ 2.2 million in letters of credit under ADTRAN, Inc.

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.

An y future credit extensions under the Credit Agreement are subject to customary conditions precedent.

The proceeds of any loans are expected to be used for general corporate purposes and to pay a portion of the Exchange Offer consideration.

Revolving Line of Credit Interest Rate

borrowings under the revolving line of credit (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 1.0 %, (b) the prime commercial lending rate of the Administrative Agent, as established from time to time at its principal 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”).

2 unchanged sentences

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 ranging from 0.20 % to 0.25 % per annum on the average daily unused portion of the revolving credit commitment 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.

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.

DDTL Interest Rate

borrowings under the DDTL 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 1.0 %, (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 sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus the applicable rate, ranging from 1.9 % to 2.9 %, provided that such sum is subject to a 0.0 % floor (such loans utilizing this interest rate, “SOFR Loans”) or (B) the sum of the daily Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor plus 1.0 %, plus (ii) the applicable rate, ranging from 0.9 % to 1.9 %.

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 2.0 % 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 DDTL loan, the Company is required to pay a commitment fee to the lenders under the Credit Agreement in respect of unutilized DDTL commitments at a rate of 0.25 % per annum on the daily unused portion of the aggregate DDTL commitment until the earliest of (i) the delayed draw funding date, (ii) the delayed draw funding deadline and (iii) the termination in full of the DDTL commitments.

Covenants Under the Credit Agreement

The First Amendment permits the Company to prepay any or all of the outstanding loans or to reduce the commitments under the First Amendment without incurring premiums or penalties (except breakage costs with respect to SOFR Loans and EURIBOR Loans).

The First Amendment 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.

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).

The First Amendment further included the following revised financial covenants;

(i) the addition of an automatic step up in the consolidated total net leverage ratio to 5.00 :1.00 from 3.25 :1.00 upon the occurrence of a Springing Covenant Event and continuing for the fiscal quarter in which the Springing Covenant Event occurs and the next three consecutive fiscal quarters thereafter (such period, a “Springing Covenant Period”) and (ii) the addition of a consolidated senior secured net leverage ratio covenant to be tested quarterly during a Springing Covenant Period and sized at 4.00 :1.00 during the first quarter ending after a Springing Covenant Event, 3.75 :1.00 during the second quarter ending after a Springing Covenant Event and 3.50 :1.00 during the third and fourth quarters ending after a Springing Covenant Event.

Further, if the Company or any of its subsidiaries incurs unsecured indebtedness under the uncapped general indebtedness basket or permitted convertible indebtedness basket of the Credit Agreement in excess of $ 50.0 million in connection with a transaction that is a Springing Covenant Event or during a Springing Covenant Period, then the maximum consolidated senior secured net leverage ratio shall be, or shall automatically step down to, 3.50 :1.00 at the time of such incurrence.

The First Amendment also requires that the consolidated interest coverage ratio (as defined in the First Amendment) of the Company and its subsidiaries tested on the last day of each fiscal quarter not fall below 3.00 to 1.00.

As of September 30, 2023, the Company was in compliance with all material covenants.

Furthermore, the Credit Agreement requires that the consolidated total net leverage ratio (as defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter not exceed 3.25 to 1.0 through September 30, 2024 and 2.75 to 1.00 from December 31, 2024 and thereafter, subject to certain exceptions.

The Credit Agreement also requires that the consolidated interest coverage ratio (as defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter not fall below 3.00 to 1.00.

As of June 30, 2023, the Company was in compliance with all material covenants.

Finally, pursuant to a Collateral Agreement, dated as of July 18, 2022, among the Company, ADTRAN, Inc.

and the Administrative Agent, ADTRAN, Inc.’s obligations under the First Amendment 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 First Amendment pursuant to a Guaranty Agreement, dated as of July 18, 2022, by 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.

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.

2 unchanged sentences

The line of credit has a perpetual term that can be terminated by the Company or Nord/LB at any time.

As of September 30, 2023 , Adtran Networks borrowed $ 10.6 million under this facility.

As of June 30, 2023, Adtran Networks borrowed $ 10.9 million under this facility.

Prior Nord/LB Revolving Line of Credit

On August 8, 2022, Adtran Networks entered into a $ 16.1 million revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB) that bears interest of Euro Short Term Rate plus 1.4 % and matured in August 2023 .

On January 31, 2023, the Company repaid the outstanding borrowings under the Nord/LB revolving line of credit.

15 unchanged sentences

(In thousands)

September 30, 2023

June 30, 2023

December 31, 2022

23 unchanged sentences

The plan is financed directly by the Company on a pay as you go basis.

The Company's net pension liability for all defined benefit pension plans totaled $ 10.7 million and $ 10.6 million as of September 30, 2023 and December 31, 2022, respectively.

The Company's net pension liability for all defined benefit pension plans totaled $ 10.9 million and $ 10.6 million as of June 30, 2023 and December 31, 2022, respectively.

The following table summarizes the components of net periodic pension cost related to the Company's defined benefit pension plans:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

3 unchanged sentences

Net periodic pension cost

The components of net periodic pension cost, other than the service cost component, are included in other income, net in the Condensed Consolidated Statements of Loss.

Service cost is included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of Loss.

The Company made contributions to the defined benefit pension plans totaling $ 2.8 million and $ 1.2 million during the nine months ended September 30, 2023 and 2022, respectively.

The components of net periodic pension cost, other than the service cost component, are included in other income, net in the Condensed Consolidated Statements of (Loss) Income.

Service cost is included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statements of (Loss) Income.

The Company made contributions to the defined benefit pension plans totaling $ 1.8 million and $ 0.6 million during the six months ending June 30, 2023 and 2022, respectively.

Contributions to the defined benefit pension plans for the remainder of 2023 will be limited to benefit payments to retirees which are paid out of the operating cash flows of the Company and are expected to be approximately $ 1.8 million.

Accumulated Other Comprehensive (Loss) Income

The following tables present the changes in accumulated other comprehensive (loss) income, net of tax, by component:

Three Months Ended September 30, 2023

Accumulated Other Comprehensive Income (Loss)

The following tables present the changes in accumulated other comprehensive income (loss), net of tax, by component:

Three Months Ended June 30, 2023

(As Restated)

2 unchanged sentences

ASU 2018-02 Adoption

Balance as of June 30, 2023

Other comprehensive income (loss) before

Balance as of March 31, 2023

Other comprehensive income before

reclassifications

Amounts reclassified from accumulated other

comprehensive loss

Net current period other comprehensive income (loss)

Balance as of September 30, 2023

Three Months Ended September 30, 2022

comprehensive (loss) income

Net current period other comprehensive (loss) income

Balance as of June 30, 2023

Three Months Ended June 30, 2022

(In thousands)

1 unchanged sentence

ASU 2018-02 Adoption

Balance as of June 30, 2022

Balance as of March 31, 2022

Other comprehensive loss before

1 unchanged sentence

Amounts reclassified from accumulated other

comprehensive loss

comprehensive income (loss)

Net current period other comprehensive loss

Comprehensive loss attributable to non-controlling interest, net of tax

Balance as of September 30, 2022

Nine Months Ended September 30, 2023

Balance as of June 30, 2022

Six Months Ended June 30, 2023

(As Restated)

(In thousands)

(Losses) Gains

Gains (Losses)

ASU 2018-02 Adoption

Balance as of December 31, 2022

Other comprehensive income (loss) before

Other comprehensive income before

reclassifications

Amounts reclassified from accumulated other

comprehensive loss

Net current period other comprehensive income (loss)

comprehensive (loss) income

Net current period other comprehensive income

Comprehensive income attributable to non-controlling interest, net of tax

Balance as of September 30, 2023

Nine Months Ended September 30, 2022

Balance as of June 30, 2023

Six Months Ended June 30, 2022

(In thousands)

(Losses) Gains

Gains (Losses)

ASU 2018-02 Adoption

5 unchanged sentences

Net current period other comprehensive loss

Comprehensive loss attributable to non-controlling interest, net of tax

Balance as of September 30, 2022

Balance as of June 30, 2022

The following tables present the details of reclassifications out of accumulated other comprehensive loss:

Three Months Ended September 30, 2023

Three Months Ended June 30, 2023

(In thousands)

Comprehensive

(Loss) Income

Affected Line Item in the

Statement Where Net

Loss Is Presented

(Loss) Income Is Presented

Unrealized gain (loss) on available-for-sale securities:

Net realized loss on sales of securities

Net investment (loss) gain

Net realized gain on sales of securities

Net investment gain (loss)

Defined benefit plan adjustments – actuarial loss

1 unchanged sentence

Total reclassifications for the period, net of tax

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of Loss.

Three Months Ended September 30, 2022

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of (Loss) Income.

Three Months Ended June 30, 2022

(In thousands)

Comprehensive

(Loss) Income

Affected Line Item in the

Statement Where Net

Loss Is Presented

(Loss) Income Is Presented

Unrealized gain (loss) on available-for-sale securities:

Net realized loss on sales of securities

Net investment (loss) gain

Defined benefit plan adjustments – actuarial loss

Net investment gain (loss)

Defined benefit plan adjustments – actuarial gain

Total reclassifications for the period, before tax

Total reclassifications for the period, net of tax

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of Loss.

Nine Months Ended September 30, 2023

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of (Loss) Income.

Six Months Ended June 30, 2023

(In thousands)

Comprehensive

(Loss) Income

Affected Line Item in the

Statement Where Net

Loss Is Presented

Statement Where Net (Loss)

Income Is Presented

Unrealized gain (loss) on available-for-sale securities:

Net realized loss on sales of securities

Net investment (loss) gain

Net realized gain on sales of securities

Net investment gain (loss)

Defined benefit plan adjustments – actuarial loss

1 unchanged sentence

Total reclassifications for the period, net of tax

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of Loss.

Nine Months Ended September 30, 2022

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of (Loss) Income.

Six Months Ended June 30, 2022

(In thousands)

1 unchanged sentence

Affected Line Item in the

Statement Where Net

Loss Is Presented

Statement Where Net (Loss)

Income Is Presented

Unrealized gain (loss) on available-for-sale securities:

Net realized gain on sales of securities

Net investment (loss) gain

Defined benefit plan adjustments – actuarial loss

Net realized loss on sales of securities

Net investment gain (loss)

Defined benefit plan adjustments – actuarial gain

Total reclassifications for the period, before tax

Total reclassifications for the period, net of tax

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of Loss.

The following table presents the tax effects related to the change in each component of other comprehensive (loss) income:

(1) A part of the computation of net periodic pension cost, which is included in other income, net in the Condensed Consolidated Statements of (Loss) Income.

The following table presents the tax effects related to the change in each component of other comprehensive income (loss):

Three Months Ended

September 30, 2023

September 30, 2022

June 30, 2023

June 30, 2022

(In thousands)

3 unchanged sentences

Reclassification adjustment for amounts related to

defined benefit plan adjustments included in net loss

defined benefit plan adjustments included in net gain (loss)

Foreign currency translation adjustments

Total Other Comprehensive Loss

Nine Months Ended

September 30, 2023

September 30, 2022

Total Other Comprehensive Income (Loss)

Six Months Ended

June 30, 2023

June 30, 2022

(In thousands)

1 unchanged sentence

Reclassification adjustment for amounts related to

available-for-sale investments included in net (loss) gain

available-for-sale investments included in net

Reclassification adjustment for amounts related to

defined benefit plan adjustments included in net loss

defined benefit plan adjustments included in net

Foreign currency translation adjustments

Total Other Comprehensive Loss

Total Other Comprehensive Gain (Loss)

REDEEMABLE NON-CONTROLLING INTEREST

The following table summarizes the redeemable non-controlling interest activity for the nine months ended September 30, 2023:

Nine Months Ended

The following table summarizes the redeemable non-controlling interest activity for the six months ended June 30, 2023:

Six Months Ended

(In thousands)

September 30, 2023

June 30, 2023

Balance at beginning of period

5 unchanged sentences

Adtran Networks stock option exercises

Balance as of September 30, 2023

Balance as of June 30, 2023

Annual recurring compensation payable on untendered outstanding shares under the DPLTA must be recognized as it is accrued.

For the three and nine months ended September 30, 2023 , we have recognized $ 2.9 million and $ 8.6 million, respectively, representing the portion of the annual recurring cash compensation to the non-controlling shareholders accrued during such periods, which will be paid after the ordinary general shareholders' meeting of Adtran Networks beginning in 2024.

For the three and six months ended June 30, 2023, we have recognized $ 2.9 million and $ 5.7 million, respectively, representing the portion of the annual recurring cash compensation to the non-controlling shareholders accrued during such periods, which will be paid after the ordinary general shareholders' meeting of Adtran Networks beginning in 2024.

See Note 1 and Note 20 for additional information on RNCI and the annual dividend .

LOSS PER SHARE

The calculation of basic and diluted loss per share is as follows:

(LOSS) EARNINGS PER SHARE

The calculation of basic and diluted (loss) earnings per share is as follows:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands, except per share amounts)

1 unchanged sentence

(As Restated)

Net loss attributable to ADTRAN Holdings, Inc.

Net (loss) income attributable to ADTRAN Holdings, Inc.

Weighted average number of shares – basic

3 unchanged sentences

Weighted average number of shares – diluted

Loss per share attributable to ADTRAN Holdings, Inc.

For the three months ended September 30, 2023 and 2022 , 0.5 million and 4 thousand shares, respectively, and for the nine months ended September 30, 2023 and 2022 , 0.4 million and 4 thousand shares, respectively, of unvested PSUs, RSUs and restricted stock were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

For the three months ended September 30, 2023 and 2022 , 2.6 million and 0.1 million stock options, respectively, and for the nine months ended September 30, 2023 and 2022 , 1.4 million and 0.2 million stock options, respectively, were outstanding but were not included in the computation of diluted earnings per share.

(Loss) earnings per share attributable to ADTRAN Holdings, Inc.

For the three months ended June 30, 2023 and 2022, 0.8 million and 33 thousand shares, respectively, and for the six months ended June 30, 2023 and 2022, 0.3 million and 8 thousand shares, respectively, of unvested PSUs, RSUs and restricted stock were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

For the three months ended June 30, 2023 and 2022, 2.2 million and 0.2 million stock options, respectively, and for the six months ended June 30, 2023 and 2022, 1.0 million and 0.1 million stock options, respectively, were outstanding but were not included in the computation of diluted earnings per share.

These stock options were excluded because their exercise prices were greater than the average market price of the common shares during the applicable period, making them anti-dilutive under the treasury stock method.

11 unchanged sentences

The performance of these segments is evaluated based on revenue, gross profit and gross margin;

therefore, selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net investment (loss) gain, other income, net and income tax benefit are reported on a Company-wide basis only.

therefore, selling, general and administrative expenses, research and development expenses, interest and dividend income, interest expense, net investment gain (loss), other income (loss), net and income tax benefit (expense) are reported on a Company-wide basis only.

There is no inter-segment revenue.

2 unchanged sentences

Three Months Ended

September 30, 2023

September 30, 2022

June 30, 2023

June 30, 2022

(In thousands)

1 unchanged sentence

Services & Support

Nine Months Ended

September 30, 2023

September 30, 2022

Six Months Ended

June 30, 2023

June 30, 2022

(In thousands)

1 unchanged sentence

Services & Support

For the three months ended September 30, 2023 and 2022 , $ 1.5 million and $ 1.1 million, respectively, of depreciation expense was included in gross profit for our Network Solutions segment.

For the nine months ended September 30, 2023 and 2022 , $ 4.5 million and $ 1.6 million, respectively, of depreciation expense was included in gross profit for our Network Solutions segment.

For the three months ended September 30, 2023 and 2022 , $ 2.4 thousand of depreciation expense was included in gross profit for our Services & Support segment.

For the nine months ended September 30, 2023 and 2022 , $ 7.3 thousand and $ 8.0 thousand, respectively, of depreciation expense was included in gross profit for our Services & Support segment.

For the three months ended June 30, 2023 and 2022, $ 1.5 million and $ 0.2 million, respectively, of depreciation expense was included in gross profit for our Network Solutions segment.

For the six months ended June 30, 2023 and 2022, $ 2.9 million and $ 0.5 million, respectively, of depreciation expense was included in gross profit for our Network Solutions segment.

For the three months ended June 30, 2023 and 2022, $ 2 thousand and $ 3 thousand, respectively, of depreciation expense was included in gross profit for our Services & Support segment.

For the six months ended June 30, 2023 and 2022, $ 5 thousand and $ 6 thousand, respectively, of depreciation expense was included in gross profit for our Services & Support segment.

Revenue by Category

16 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

10 unchanged sentences

Should the Company's actual experience relative to these factors be worse than its estimates, the Company will be required to record additional warranty expense.

The liability for warranty obligations totaled $ 6.6 million and $ 7.2 million as of September 30, 2023 and December 31, 2022 , respectively, and is included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.

The warranty expense and write-off activity for the three and nine months ended September 30, 2023 and 2022 are summarized as follows:

The liability for warranty obligations totaled $ 6.8 million and $ 7.2 million as of June 30, 2023 and December 31, 2022 , respectively, and is included in accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.

The warranty expense and write-off activity for the three and six months ended June 30, 2023 and 2022 are summarized as follows:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

Balance at beginning of period

Adtran Networks acquisition

Amounts charged to cost and expenses

8 unchanged sentences

Adtran Networks Legal Matter

On May 8, 2023, Adtran Networks SE and its subsidiary, ADVA Optical Networking North America, Inc.

(together, “Adtran Networks”), filed a lawsuit in the U.S District Court for the Eastern District of Texas (“EDTX”) against Huawei Technologies Co.

On May 8, 2023, ADVA and its subsidiary, ADVA Optical Networking North America, Inc.

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 Adtran Networks, on Fair, Reasonable and Non-Discriminatory (“FRAND”) terms and conditions.

The case also sought to obtain a ruling by the EDTX that Adtran Networks has complied with its own commitments and requested that the Court establish FRAND terms and conditions for obtaining a FRAND license on any SEPs to the extent they are practiced by Adtran Networks.

The lawsuit further sought to enjoin Huawei from enforcing certain Huawei patents that Adtran Networks considers invalid and/or not practiced, and Adtran Networks alleged that Huawei had infringed upon an Adtran Networks patent.

On July 20, 2023, Adtran Networks SE was served with a complaint filed by Huawei against Adtran Networks SE in the District Court München I, Germany, alleging that certain of its products infringe upon one of Huawei’s patents.

On August 22, 2023, Adtran Networks entered into a settlement agreement with Huawei pursuant to which the parties agreed to, among other things, dismiss the lawsuits described above.

The case also seeks to obtain a ruling by the court that Adtran Networks 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 Adtran Networks.

The lawsuit also seeks to enjoin Huawei from enforcing five Huawei patents that Adtran Networks considers invalid and/or not practiced, and that Huawei has infringed an Adtran Networks patent.

Adtran Networks 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.

The Company intends to continue to vigorously defend its interests;

however, these matters are subject to many uncertainties, and an adverse outcome in any one of these matters could potentially have a materially adverse impact on the Company's financial position, results of operations and cash flows.

Given the current status of these matters, the Company is unable to predict the outcome of or estimate the possible loss or range of loss, if any, associated with such legal matters.

DPLTA Exit and Recurring Compensation Costs

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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 5.0 % plus a variable component (according to the German Civil Code) that was 3.12 % as of September 30, 2023.

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.

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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 nine months ended September 30, 2023 , less than 1 thousand shares and 64 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately € 8 thousand and € 1.1 million, respectively, or appro ximately $ 9 thousand and $ 1.2 million, respectively, based on an exchange rate as of September 30, 2023, were paid to Adtran Networks shareholders.

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 appro ximately $ 0.9 million and $ 1.2 million, respectively, based on an exchange rate as of June 30, 2023, were paid to Adtran Networks shareholders.

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 September 30, 2023 and December 31, 2022, we had commitments related to these bonds totaling $ 11.8 million and $ 22.0 million, respectively, which expire at various dates through April 2031 .

C ertain 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 $ 22.0 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.

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Certain of our inventory purchase commitments with contract manufacturers and suppliers relate to arrangements to secure supply and pricing for certain product components for multi-year periods.

As of September 30, 2023, purchase commitments totaled $ 308.4 million.

As of June 30, 2023, purchase commitments totaled $ 377.4 million.

RESTRUCTURING

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This plan was completed in 2021 and all amounts were paid in 2022.

During the three and nine months ended September 30, 2023, we recognized a certain write down of inventory of $ 21.0 million due to a restructuring discontinuation of certain product lines within our Network Solutions segment.

There was no write down of inventory during the three and nine months ended September 30, 2022.

See Note 7, Inventory, for additional information regarding the write down of inventory.

A reconciliation of the beginning and ending restructuring liabilities, which is included in accrued wages and benefits in the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, is as follows:

A reconciliation of the beginning and ending restructuring liability, which is included in accrued wages and benefits in the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022, is as follows:

Three Months Ended

Nine Months Ended

Six Months Ended

(In thousands)

September 30, 2023

June 30, 2023

Balance at beginning of period

Amounts charged to cost and expense

Balance as of September 30, 2023

Balance as of June 30, 2023

For the Year Ended

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Balance as of December 31, 2022

Restructuring expenses included in the Condensed Consolidated Statements of Loss are for the three and nine months ended September 30, 2023 and 2022:

Restructuring expenses included in the Condensed Consolidated Statements of (Loss) Income are for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

Network Solutions - Cost of revenue

Network Solutions - Inventory write down

Services & Support - Cost of revenue

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Total restructuring expenses

The following table represents the components of restructuring expenses by geographic area for the three and nine months ended September 30, 2023 and 2022:

The following table represents the components of restructuring expense by geographic area for the three and six months ended June 30, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(In thousands)

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SUBSEQUENT EVENTS

Dividend Suspension

On November 6, 2023, the Board of Directors suspended the Company’s quarterly cash dividend which will be redirected to reduce debt and interest expense and support the Company's capital efficiency program.

The payment of any future dividends will be at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, capital requirements, and any other factors deemed relevant by the Board of Directors.

Business Efficiency Program

On November 6, 2023, due to the uncertainty around the current macroeconomic environment and its impact on customer spending levels, the Company’s management determined to implement a comprehensive business efficiency program, which includes (i) a cost efficiency program targeting the reduction of ongoing operating expenses, and (ii) a capital efficiency program, which includes a site consolidation plan exploring the partial sale of owned real estate and the suspension of the quarterly dividend.

See Part II, Item 5 (a) of this report for additional information regarding the business efficiency program.

Dividend Approval

On August 6, 2023 , the Company announced that its Board of Directors declared a quarterly cash dividend of $ 0.09 per common share to be paid to the Company’s stockholders of record as of the close of business on August 21, 2023 .

The payment date will be September 5, 2023 in the aggregate amount of approximately $ 7.1 million.

Wells Fargo Credit Agreement Amendment

The First Amendment, among other things, provides for:

• a new $ 50 million delayed draw term loan A tranche (“DDTL”), which is available for borrowing in the event of the purchase by the Company of at least sixty percent ( 60 %) of the outstanding shares of Adtran Networks that are not currently owned by the Company (such event, a “Springing Covenant Event”).

Proceeds of the DDTL may only be used to repurchase minority shares of Adtran Networks.

The DDTL remains available for borrowing from the occurrence of a Springing Covenant Event through the period that is three consecutive fiscal quarters thereafter;

• a revised applicable margin, which varies based on consolidated total net leverage ratio and ranges from, (a) in the case of revolving loans, (i) 1.65 %, with respect to term SOFR loans, to 2.65 %, (ii) 1.75 %, with respect to EURIBOR loans, to 2.75 % and (iii) 0.65 %, with respect to base rate loans (including swingline loans) to 1.65 %, and (b) in the case of term loans, ranging from (i) 1.90 %, with respect to term SOFR loans, to 2.90 % and (ii) 0.90 %, with respect to Base Rate Loans, to 1.90 % (each as defined in the First Amendment to the Credit Agreement);

• a revised commitment fee, which varies based on consolidated total net leverage ratio and ranges from 0.20 % to 0.25 % per annum on the average daily unused portion of the revolving credit commitment of the revolving credit lenders (other than the defaulting lenders, if any) (each as defined in the credit agreement);

• revised financial covenants, including (i) the addition of an automatic step up in the consolidated total net leverage ratio to 5.00 :1.00 from 3.25 :1.00 upon the occurrence of a Springing Covenant Event and continuing for the fiscal quarter in which the Springing Covenant Event occurs and the next three consecutive fiscal quarters thereafter (such period, a “Springing Covenant Period”) and (ii) the addition of a consolidated senior secured net leverage ratio covenant to be tested quarterly during a Springing Covenant Period and sized at 4.00 :1.00 during the first quarter ending after a Springing Covenant Event, 3.75 :1.00 during the second quarter ending after a Springing Covenant Event and 3.50 :1.00 during the third and fourth quarters ending after a Springing Covenant Event.

Further, if the Company or any of its subsidiaries incurs unsecured indebtedness under the uncapped general indebtedness basket or permitted convertible indebtedness basket of the Credit Agreement in excess of $ 50 million in connection with a transaction that is a Springing Covenant Event or during a Springing Covenant Period, then the maximum consolidated senior secured net leverage ratio shall be, or shall automatically step down to, 3.50 :1.00 at the time of such incurrence.

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.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q/A

Item 1. Financial Statements