What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-03-15 compared with 2024-03-15 · 233 added, 299 removed, 228 unchanged (70% of the section changed)

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See also Part 1, Item 1A, Risk Factors, of the 2022 Form 10‑K/A and Part II, Item 1A, Risk Factors of this Amendment No.

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q/A to "ADTRAN", the “Company,” “we,” “us” and “our” refer to ADTRAN Holdings, Inc.

Unless the context otherwise indicates or requires, references in this Amendment No.

1 on Form 10-Q/A to "ADTRAN", the “Company,” “we,” “us” and “our” refer to ADTRAN Holdings, Inc.

and its consolidated subsidiaries for periods subsequent to the Merger and to ADTRAN, Inc.

and its consolidated subsidiaries for periods prior to the Merger.

The prior period results do not include the results of Adtran Networks prior to the Business Combination which occurred on July 15, 2022.

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.

The prior period results do not include the results of Adtran Networks prior to the Business Combination.

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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We offer a broad portfolio of flexible software and hardware network solutions and services that enable Service Providers to meet today’s service demands while enabling them to transition to the fully converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future.

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

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

On May 24, 2023, at the annual general meeting of the shareholders of ADVA Optical Networking SE, a subsidiary of the Company ("ADVA"), the shareholders of ADVA approved the proposed change of its name to Adtran Networks SE ("Adtran Networks"), which was registered in the commercial register of the local court of Jena, Germany on June 8, 2023.

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “Adtran Networks” refer to Adtran Networks SE (formerly ADVA Optical Networking SE).

ADTRAN Holdings, Inc.

solely owns ADTRAN, Inc.

and is the majority shareholder of Adtran Networks (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 guaranteed interest component under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid.

The guaranteed interest rate is 5.0% plus a variable component 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.

The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’ meeting of Adtran Networks for the respective preceding fiscal year (but in any event within eight months following expiration of the fiscal year) and is first granted for the 2023 fiscal year, payable for the first time after the ordinary general shareholders’ meeting of Adtran Networks in 2024.

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However, due to the appraisal proceedings that have been initiated in accordance with applicable German law, this time period for tendering shares has been extended pursuant to the German Stock Corporation Act ( Aktiengesetz ) and will end two months after the date on which a final decision in such appraisal proceedings has been published in the Federal Gazette ( Bundesanzeiger ).

For the three and nine months ended September 30, 2023, less than one 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.

We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.36% of Adtran Networks outstanding shares as of September 30, 2023.

For the three and six months ended June 30, 2023, a total of approximately 46 thousand shares and 63 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately €0.8 million and €1.1 million, respectively, or approximately $0.9 million and $1.2 million, respectively, based on an exchange rate as of June 30, 2023, were paid to Adtran Networks' shareholders.

We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.36% of Adtran Networks outstanding shares as of June 30, 2023.

The foregoing description of the DPLTA does not purport to be complete and is qualified in its entirety by reference to the DPLTA, a non-binding English translation of which is incorporated by reference to Exhibit 10.5 of the 2022 Form 10-K/A.

As of 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.

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

During the three and six months ended June 30, 2023, $0.1 million of transaction costs were incurred.

During the three and six months ended June 30, 2022, $1.2 million and $2.7 million of transaction costs were incurred, respectively.

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

MULTI-YEAR INTEGRATION PROGRAM

During the fourth quarter of 2022, the Company initiated a two-year integration program designed to optimize the assets, business processes, and information technology systems of the Company.

During the fourth quarter of 2022, the Company initiated a multi-year integration program designed to optimize the assets, business processes, and information technology systems of the Company.

The program has identified several potential cost synergies, including:

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By executing these integration activities, we expect to deliver greater innovation for customers, career enrichment opportunities for employees, and enhanced value for shareholders.

During the three and nine months ended September 30, 2023, we recognized $1.7 million and $3.1 million of integration costs related to the Business Combination, respectively, that are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Loss.

We expect to incur additional integration costs and costs associated with the implementation of the DPLTA during the remainder of 2023 and into 2024 and such costs are expected to be material.

During the three and nine months ended September 30, 2023, we recognized $24.9 million and $33.2 million of restructuring costs relating to the Business Combination that are included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statement of Loss, respectively.

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

included in selling, general and administrative expenses in the Condensed Consolidated Statement of (Loss) Income.

We expect to incur additional integration costs and costs associated with the implementation of the DPLTA during the remainder of 2023 and such costs are expected to be material.

During the three and six months ended June 30, 2023, we recognized $5.9 million and $8.3 million of restructuring costs relating to the Business Combination that are included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statement of (Loss) Income, respectively.

See Note 21 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Amendment No.

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FINANCIAL PERFORMANCE AND TRENDS

We ended the third quarter of 2023 with a year-over-year revenue decrease of 20.1% as compared to the three months ended September 30, 2022, driven by decreased volume of sales activity due to customers' focus on reducing inventory levels and due to the unfavorable impact on revenue generated outside of the U.S.

as a result of the strengthened U.S.

During the third quarter of 2023, we had one customer with revenues greater than 10.0% which was an international Service Provider customer and our five largest customers comprised 36.5% of our revenue.

Our year-over-year domestic revenue decreased by 34.3%, driven by decreased volume of sales activity due to customer focus on reducing inventory levels.

Internationally, our year-over-year revenue decreased by 6.0%, primarily driven by the unfavorable impact on revenue as a result of the strengthened U.S.

dollar and decreased shipments to two Large network operators and one alternative network operator in Europe.

Growing customer concerns over inventory stocking levels affected our third quarter Subscriber Solutions category.

We believe that this over-supply of CPE products will continue into the fourth quarter of 2023 and the first half of 2024.

Revenue for our Optical Networking products was unfavorably impacted by strengthened U.S.

dollar in the third quarter.

Revenue for our Access products grew sequentially.

We expect to see some improvement to the over-supply of CPE products in the coming quarters.

We ended the second quarter of 2023 with a year-over-year revenue increase of 90.3% as compared to the three months ended June 30, 2022, driven by increased volume of sales activity due to the Business Combination with Adtran Networks and to Service Provider customers.

During the second quarter of 2023, we had one 10% revenue customer, which was an international Service Provider customer and our five largest customers comprised 39.1% of our revenue.

Our year-over-year domestic revenue increased by 25.1%, driven by increased sales volume due to the Business Combination with Adtran Networks and partially offset by decreases due to the macro-economic environment and customers optimizing their inventory, which impacted our Subscriber Solutions product line.

Internationally, our year-over-year revenue increased by 194.3%, primarily driven by increased volume of sales activity due to the Business Combination with Adtran Networks and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe.

Growing customer concerns over inventory stocking levels affected our second quarter Subscriber Solutions category.

We believe that this over-supply of CPE products will continue into the third quarter of 2023.

Revenue for our Access and Optical Networking products grew sequentially.

Supply constraints, however, limited our flexibility to clear past-due backlog across all product categories.

We believe that the inventory impact is transitory, and we expect to see some improvement to both the over-supply of CPE products and the backlog of products across all categories in the coming quarters.

Despite these challenges, we have maintained our emphasis on product development to enable us to respond to rapidly changing technology and evolving industry standards.

For example, we expect public funding through projects such as IPCEI ME/CT to further our research and development for new communication technologies.

Additionally, public funding through the Broadband Equity, Access and Deployment Program is expected to commence in late 2024 through 2026, which provides a positive outlook for the future.

Our operating results have fluctuated and may continue to fluctuate on a quarterly basis due to several factors, including customer order activity, supply chain constraints, component availability, and the Company's consolidation, purchase accounting, and integration with Adtran Networks.

For example, public funding through projects such as IPCEI ME/CT will further our research and development for new communication technologies.

Additionally, public funding through BEAD is expected to commence in late 2024 to early 2025, which provides a positive outlook for the future.

Our operating results have fluctuated and may continue to fluctuate on a quarterly basis due to several factors, including customer order activity, supply chain constraints, component availability, the Company's consolidation, purchase accounting, and integration with Adtran Networks.

Further, a significant percentage of orders require delivery within a few-days requiring us to maintain higher inventory levels.

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For example, during the recent pandemic and a global semiconductor chip shortage, we experienced disruption and delays in our supply chain and significant price increases with certain of our manufacturing partners.

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

We have taken decisive steps to transform our business into a leaner, more efficient and more profitable company, including through the implementation of a comprehensive business efficiency program, which includes a significant cost efficiency program targeting a reduction of ongoing operating expenses, a capital efficiency program that includes a site consolidation plan that management expects to generate proceeds through the partial sale of owned real estate (including the potential sale of our headquarters), and the suspension of the quarterly dividend.

Nevertheless, our operating expenses are relatively fixed in the short term;

therefore, a shortfall in quarterly revenues has and may again in the future significantly impact our financial results in a given quarter.

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

Our operating expenses are relatively fixed in the short term;

therefore, a shortfall in quarterly revenues could significantly impact our financial results in a given quarter.

The coronavirus ("COVID-19") pandemic and related countermeasures previously impacted our operations.

Notwithstanding improvement in many markets in which we operate due to a return to more normalized business operations, certain markets may in the future be adversely impacted by pandemic or endemic diseases including COVID-19 or as a result of policies relating to such diseases.

Our operating results have significantly fluctuated and may do so in the future as a result of a number of other factors, including a decline in general economic and market conditions, foreign currency exchange rate movements, inflation, regional conflicts, increased competition, customer order patterns, changes in product and services mix, timing differences between price decreases and product cost

reductions, product warranty returns, expediting costs, tariffs and announcements of new products by us or our competitors.

In recent years, inflationary pressures on input costs, such as raw materials and labor, and distribution costs had a negative impact on our operating results.

However, inflationary pressures on our supply chain have eased somewhat, which has led to reductions in cost premiums on raw material costs and freight.

Notwithstanding improvement in many markets in which we operate due to a return to more normalized business operations, certain markets continue to be adversely impacted by COVID-19 or as a result of policies relating to COVID-19.

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, foreign currency exchange rate movements, inflation, regional conflicts, increased competition, customer order patterns, changes in product and services mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs, tariffs and announcements of new products by us or our competitors.

Specifically, we expect inflationary pressures on input costs, such as raw materials and labor, and distribution costs to increase.

We continue to support our customer demand for our products by working with our suppliers, contract manufacturers, distributors, and customers to address and to limit the disruption to our operations and order fulfillment.

Our attempts to offset these cost pressures, such as through increases in the selling prices of some of our products and services, may not be successful and could negatively affect our operating results.

Additionally, maintaining sufficient inventory levels to assure prompt delivery of our products increases the amount of inventory that may become obsolete and increases the risk that the obsolescence of this inventory may have an adverse effect on our business and operating results.

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Our primary exposures to foreign currency exchange rate movements are with the Euro and the British pound sterling.

As a result of our global operations, our revenue, gross margins, operating expense and operating loss in some international markets have been and may continue to be affected by foreign currency fluctuations.

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 changes in the Company's long-term projections, triggered a quantitative impairment assessment for our reporting units.

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

It was determined that decreases in projected future cash flows, discount rates, overall macroeconomic conditions, as well as decreases 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.

As a result of our global operations, our revenue, gross margins, operating expense and operating income (loss) in some international markets have been and may continue to be affected by foreign currency fluctuations.

Subsequent to June 30, 2023, the Company has experienced volatility in its stock price which reduced the market value of the Company’s common stock as of this filing.

The Company will continue to monitor its stock price, operating results and other macroeconomic factors to determine if there has been any indication of a sustained decline in fair value requiring an event driven assessment of the recoverability of its goodwill within the third quarter of 2023.

Our historical financial performance is not necessarily a meaningful indicator of future results, and in general, management expects that our financial results may vary from period to period.

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1 for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

The following table presents selected financial information derived from our Condensed Consolidated Statements of Loss expressed as a percentage of revenue for the periods indicated.

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

The following table presents selected financial information derived from our Condensed Consolidated Statements of (Loss) Income expressed as a percentage of revenue for the periods indicated.

Amounts may not foot due to rounding.

Three Months Ended

Nine Months Ended

September 30,

Six Months Ended

(As Restated)

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Network Solutions

Network Solutions - Inventory Write Down

Services & Support

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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

Net Loss attributable to ADTRAN Holdings, Inc.

Our revenue decreased 20.1% from $340.7 million for the three months ended September 30, 2022 to $272.3 million for the three months ended September 30, 2023 and increased 38.4% from $667.3 million for the nine months ended September 30, 2022 to $923.6 million for the nine months ended September 30, 2023.

The decrease in revenue for the three months ended September 30, 2023 is primarily driven by a $63.0 million decrease in volume of sales activity related to our ADTRAN, Inc.

operations due to customers’ focus on reducing inventory levels and $5.4 million decrease due to the unfavorable impact on revenue generated outside of the U.S.

as a result of the strengthened U.S.

The increase in revenue for the nine months ended September 30, 2023 is primarily attributable to a $379.0 million increase in volume of sales activity due to the Business Combination with Adtran Networks during the first half of 2023 partially offset by a $117.3 million decrease in volume of sales activity due to customers’ focus on reducing inventory levels in our domestic ADTRAN, Inc.

The decrease in revenue by category for the three months ended September 30, 2023 was primarily attributable to a $72.2 million decrease in Subscriber Solutions products, and a $2.6 million decrease in Optical Networking Solutions products partially offset by a $6.5 million increase in Access & Aggregation revenue.

The increase in revenue by category for the nine months ended September 30, 2023 was primarily attributable to a $288.1 million increase in Optical Networking Solutions products and a $15.9 million increase in Access and Aggregation revenue partially offset by a $47.7 million decrease in Subscriber Solutions products.

Growing customer concerns over inventory stocking levels have affected our revenue in the first three quarters in our Subscriber Solutions category.

We believe that this over-supply of CPE products will continue into the fourth quarter of 2023 and into the first half of 2024.

(Loss) Income Before Income Taxes

Income tax benefit (expense)

Net (Loss) Income

Net Income attributable to non-controlling interest

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

Our revenue increased 90.3% from $172.0 million for the three months ended June 30, 2022 to $327.4 million for the three months ended June 30, 2023 and increased 99.4% from $326.6 million for the six months ended June 30, 2022 to $651.3 million for the six months ended June 30, 2023.

The increase in revenue for the three months ended June 30, 2023 is primarily attributable to a $186.7 million increase in volume of sales activity due to the Business Combination with Adtran Networks and partially offset by a $31.4 million decrease in volume of sales activity related to our ADTRAN, Inc.

The increase in revenue for the six months ended June 30, 2023 is primarily attributable to a $379.0 million increase in volume of sales activity due to the Business Combination with Adtran Networks partially offset by a $54.3 million decrease in volume of sales activity related to our ADTRAN, Inc.

The increase in revenue by category for the three months ended June 30, 2023 was primarily attributable to a $143.0 million increase in Optical Networking Solutions products due to the Business Combination with Adtran Networks, a $10.4 million increase in Access & Aggregation revenue and a $1.9 million increase in Subscriber Solutions products.

The increase in revenue by category for the six months ended June 30, 2023 was primarily attributable to a $290.8 million increase in Optical Networking Solutions products due to the Business Combination with Adtran Networks, a $24.5 million increase in Subscriber Solutions products, and a $9.5 million increase in Access & Aggregation Solutions revenue.

Growing customer concerns over inventory stocking levels affected our first and second quarter Subscriber Solutions category.

We believe that this over-supply of CPE products will continue into the third quarter of 2023.

Revenue for our Access and Optical Networking products grew sequentially.

Supply constraints, however, limited our flexibility to clear past-due backlog across all product categories.

We do not see any material changes to our near-term opportunities and our long-term growth catalysts as carriers around the world upgrade their networks to fiber.

Network Solutions segment revenue decreased 25.0% from $304.9 million for the three months ended September 30, 2022 to $228.6 million for the three months ended September 30, 2023 and increased 32.5% from $599.3 million for the nine months ended September 30, 2022 to $794.0 million for the nine months ended September 30, 2023.

The decrease in Network Solutions revenue for the three months ended September 30, 2023 was due to the decrease of $72.4 million in volume of sales activity in Subscriber Solutions products primarily in our ADTRAN, Inc.

operations and a decrease of $8.4 million in Optical Networking products partially offset by an increase of $4.5 million in volume of sales activity in Access & Aggregation revenue.

The increase in revenue for the nine months

ended September 30, 2023 was due to an increase of $326.9 million in volume of sales activity due to the Business Combination with Adtran Networks during the first half of 2023 partially offset by a decrease of $114.8 million in Subscriber Solutions products, a decrease of $8.9 million in Access & Aggregation Solutions and a decrease of $8.4 million in Optical Networking products.

More specifically, the decrease in revenue for the three and nine months ended September 30, 2023 of our Subscriber Solutions products was primarily due to lower volume of sales of our residential solutions products as a result of customers focus on reducing inventory levels.

Services & Support segment revenue increased 22.4% from $35.8 million for the three months ended September 30, 2022 to $43.8 million for the three months ended September 30, 2023 and increased 90.8% from $68.0 million for the nine months ended September 30, 2022 to $129.6 million for the nine months ended September 30, 2023.

The increase in revenue for the three months ended September 30, 2023 was primarily attributable a $5.8 million increase in revenue for Optical Networking products a $2.0 million increase in revenue for Access & Aggregation revenue and a $0.2 million increase in revenue for Subscriber Solutions services.

The increase in revenue for the nine months ended September 30, 2023 was primarily attributable to the increase of $52.2 million in volume of sales activity from the Business Combination with Adtran Networks a $5.8 million increase in revenue for Optical Networking products a $2.0 million increase in revenue for Access & Aggregation revenue and a $1.8 million increase in revenue for Subscriber Solutions services.

More specifically, the increase in revenue for the three and nine months ended September 30, 2023 of our ADTRAN, Inc.

Network Solutions segment revenue increased 81.4% from $156.0 million for the three months ended June 30, 2022 to $283.0 million for the three months ended June 30, 2023 and increased 92.1% from $294.4 million for the six months ended June 30, 2022 to $565.4 million for the six months ended June 30, 2023.

The increase in Network Solutions revenue for the three months ended June 30, 2023 was due to the increase of $159.9 million in volume of sales activity due to the Business Combination with Adtran Networks, partially offset by a decrease of $31.3 million in Subscriber Solutions products and a decrease of $1.5 million in Access & Aggregation revenue in our ADTRAN, Inc.

The increase in revenue for the six months ended June 30, 2023 was due to an increase of $326.9 million in volume of sales activity due to the Business Combination with Adtran Networks, partially offset by a decrease of $42.4 million

in Subscriber Solutions products and a decrease of $13.4 million in Access & Aggregation Solutions in our ADTRAN, Inc.

More specifically, the decrease in revenue for the three and six months ended June 30, 2023 of our ADTRAN, Inc.

operations was primarily due to lower volume of sales of our residential solutions products.

Services & Support segment revenue increased 176.6% from $16.0 million for the three months ended June 30, 2022 to $44.4 million for the three months ended June 30, 2023 and increased 166.8% from $32.2 million for the six months ended June 30, 2022 to $85.9 million for the six months ended June 30, 2023.

The increase in revenue for the three months ended June 30, 2023 was primarily attributable to the increase of $26.9 million in volume of sales activity from the Business Combination with Adtran Networks a $0.8 million increase in revenue for Subscriber Solutions services in our ADTRAN, Inc.

operations and a $0.7 million increase in revenue for Access & Aggregation Solutions services in our ADTRAN, Inc.

The increase in revenue for the six months ended June 30, 2023 was primarily attributable to the increase of $52.2 million in volume of sales activity from the Business Combination with Adtran Networks and a $1.5 million increase in revenue for Subscriber Solutions services in our ADTRAN, Inc.

More specifically, the increase in revenue for the three and six months ended June 30, 2023 of our ADTRAN, Inc.

operations was primarily due to higher volume of sales of our software services and business solutions services.

Domestic revenue decreased by 34.3% from $169.7 million for the three months ended September 30, 2022 to $111.5 million for the three months ended September 30, 2023 and increased by 0.2% from $374.5 million for the nine months ended September 30, 2022 to $375.3 million for the nine months ended September 30, 2023.

The decrease in domestic revenue for the three months ended September 30, 2023 was primarily due to lower volume of sales of our residential solutions products as a result of customers focus on reducing inventory levels in our Subscriber Solutions segment.

The increase in domestic revenue for the nine months ended September 30, 2023 was primarily due to an increase in volume of sales activity from the Business Combination with Adtran Networks in the first half of 2023 partially offset by lower volume of sales of our residential solutions products as a result of customers focus on reducing inventory levels in our Subscriber Solutions segment.

International revenue, which is defined as revenue generated from the Network Solutions and Services & Support segments provided to a customer outside of the U.S., decreased by 6.0% from $171.0 million for the three months ended September 30, 2022 to $160.8 million for the three months ended September 30, 2023 and increased by 87.3% from $292.8 million for the nine months ended September 30, 2022 to $548.4 million for the nine months ended September 30, 2023.

International revenue, as a percentage of total revenue, increased from 50.2% for the three months ended September 30, 2022 to 59.1% for the three months ended September 30, 2023 and increased from 43.9% for the nine months ended September 30, 2022 to 59.4% for the nine months ended September 30, 2023.

The decrease in international revenue for the three months ended September 30, 2023 was primarily due to the unfavorable impact on revenue generated outside of the U.S.

as a result of the strengthened U.S.

The change for the nine months ended September 30, 2023 was primarily attributable to an increase in volume of sales activity from the Business Combination with Adtran Networks in the first half of 2023 and increased shipments partially offset by the unfavorable impact on revenue generated outside of the U.S.

as a result of the strengthened U.S.

While international revenue has increased to approximately 59.1% and 59.4% of total revenues for the three and nine months ended September 30, 2023, the mix of our Network Solutions and Services & Support segments as a percentage of total international revenue remains relatively linear.

For the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, changes in foreign currencies relative to the U.S.

dollar increased our net revenue by approximately $11.1 million and increased our net revenue by approximately $3.6 million, respectively.

Domestic revenue increased by 25.1% from $105.6 million for the three months ended June 30, 2022 to $132.3 million for the three months ended June 30, 2023 and increased by 28.8% from $204.8 million for the six months ended June 30, 2022 to $263.8 million for the six months ended June 30, 2023, driven by increased volume of network termination and fiber CPE in our Network Solutions segment.

In addition, such growth was a result of increased revenue to Tier-2 and Tier-3 customers with diversified businesses among our fiber access and CPE, Service Provider CPE and services.

International revenue, which is defined as revenue generated from the Network Solutions and Services & Support segments provided to a customer outside of the U.S., increased by 194.3% from $66.3 million for the three months ended June 30, 2022 to $195.1 million for the three months ended June 30, 2023 and increased by 218.3% from $121.8 million for the six months ended June 30, 2022 to $387.5 million for the six months ended June 30, 2023.

International revenue, as a percentage of total revenue, increased from 38.5% for the three months ended June 30, 2022 to 59.6% for the three months ended June 30, 2023 and increased from 37.3% for the six months ended June 30, 2022 to 59.5% for the six months ended June 30, 2023.

The change for the three months ended June 30, 2023 was primarily attributable to a $126.4 million increase in volume of sales activity from the Business Combination with Adtran Networks and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe.

The change for the six months ended June 30, 2023 was primarily attributable to a $256.8 million increase in volume of sales activity from the Business Combination with Adtran Networks and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe.

While international revenue has increased to approximately 59.6% and 59.5% of total revenues for the three and six months ended June 30, 2023, the mix of our Network Solutions and Services & Support segments as a percentage of total international revenue remains relatively linear.

For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S.

dollar increased our net revenue by approximately $2.6 million and decreased our net revenue by approximately $7.5 million, respectively.

Our ADTRAN, Inc.

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Our international customers must make these decisions in the regulatory and political environment in which they operate – both nationally and, in some instances, regionally – whether of a multi-country region or a more local region within a country.

Consequently, while we expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market opportunities for us, the factors described above have resulted in and may continue to result in pressure on revenue and operating income.

Consequently, while we expect the global trend towards deployment of more robust broadband speeds and access to continue creating additional market opportunities for us, the factors described above may result in pressure on revenue and operating income.

Our Adtran Networks international revenue is largely focused on the manufacture and selling of networking solutions that are based on three core areas of expertise:

fiber-optic transmission technology (cloud interconnect), cloud access technology for rapid creation of innovative services around the network edge and solutions for precise timing and synchronization of networks.

In addition, Adtran

Networks international operations offers a comprehensive portfolio of network design, implementation and maintenance services to assist operators in the deployment of market-leading networks while reducing costs to maintain these networks.

In addition, Adtran Networks international operations offers a comprehensive portfolio of network design, implementation and maintenance services to assist operators in the deployment of market-leading networks while reducing costs to maintain these networks.

COST OF REVENUE

As a percentage of revenue, cost of revenue increased from 69.8% for the three months ended September 30, 2022 to 72.7% for the three months ended September 30, 2023 and increased from 67.1% for the nine months ended September 30, 2022 to 72.4% for the nine months ended September 30, 2023.

The increase for the three and nine months ended September 30, 2023 was primarily attributable to $13.5 million and $79.6 million, respectively, of adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks, acquisition related expenses, a $21.0 million write down of inventory due to a restructuring discontinuation of certain product lines within our Network Solutions segment, and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

operations partially offset by supply chain cost improvements.

As the inventory that was acquired in the Business Combination with Adtran Networks is sold, our cost of revenue as a percentage of revenue will return to more normalized levels.

For the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, changes in foreign currencies relative to the U.S.

dollar increased our cost of revenue by approximately $1.8 million and increased our cost of revenue by approximately $0.1 million, respectively.

As a percentage of revenue, cost of revenue increased from 63.7% for the three months ended June 30, 2022 to 71.7% for the three months ended June 30, 2023 and increased from 64.2% for the six months ended June 30, 2022 to 72.3% for the six months ended June 30, 2023.

The increase for the three and six months ended June 30, 2022 was primarily attributable to $33.4 million and $66.0 million, respectively, of adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks, acquisition related expenses, and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

operations, partially offset by lower freight and expedite fees.

As the current inventory that was acquired in the Business Combination with Adtran Networks is sold, we expect that our cost of revenue as a percentage of revenue will return to more normalized levels.

For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S.

dollar increased our cost of revenue by approximately $0.3 million and decreased our cost of revenue by approximately $1.7 million, respectively.

See additional information related to amortization lives and expense in Notes 2 and 10 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment No.

Network Solutions cost of revenue including the inventory write down, as a percentage of that segment’s revenue, increased from 73.0% for the three months ended September 30, 2022 to 79.3% for the three months ended September 30, 2023 and increased from 68.9% for the nine months ended September 30, 2022 to 77.8% for the nine months ended September 30, 2023.

The increase in cost of revenue as a percentage of revenue for the three and nine months ended September 30, 2023 was primarily attributable to acquisition related expenses, amortizations and adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks, a write down of inventory due to a restructuring discontinuation of certain product lines and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

operations partially offset by supply chain cost improvements.

Services & Support cost of revenue, as a percentage of that segment’s revenue, decreased from 42.1% for the three months ended September 30, 2022 to 38.4% for the three months ended September 30, 2023 and decreased from 50.4% for the nine months ended September 30, 2022 to 39.8% for the nine months ended September 30, 2023.

The decrease in cost of revenue as a percentage of revenue for the three and nine months ended September 30, 2023 was primarily attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with Adtran Networks.

Network Solutions cost of revenue, as a percentage of that segment’s revenue, increased from 64.1% for the three months ended June 30, 2022 to 76.7% for the three months ended June 30, 2023 and increased from 64.7% for the six months ended June 30, 2022 to 77.1% for the six months ended June 30, 2023.

The increase in cost of revenue as a percentage of revenue for the three and six months ended June 30, 2023 was primarily attributable to acquisition related expenses, amortizations and adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

operations, partially offset by lower freight and expedite fees.

Services & Support cost of revenue, as a percentage of that segment’s revenue, decreased from 59.9% for the three months ended June 30, 2022 to 40.3% for the three months ended June 30, 2023 and decreased from 59.5% for the six months ended June 30, 2022 to 40.6% for the six months ended June 30, 2023.

The decrease in cost of revenue as a percentage of revenue for the three and six months ended June 30, 2023 was primarily attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with Adtran Networks.

Services & Support revenue is comprised of network planning and implementation, maintenance, support and cloud-based management services, with network planning and implementation being the largest and fastest growing component in the long-term.

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Within the Services & Support segment, we do expect variability in gross margins from quarter-to-quarter based on the mix of the services recognized.

As a percentage of revenue, gross profit decreased from 30.2% for the three months ended September 30, 2022 to 27.3% for the three months ended September 30, 2023 and decreased from 32.9% for the nine months ended September 30, 2022 to 27.6% for the nine months ended September 30, 2023.

The decrease for the three months ended September 30, 2023 was primarily attributable to $13.5 million and $79.6 million, respectively, of adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks, acquisition related expenses, a decrease in volume of sales activity due to customers focus on reducing inventory levels in our domestic ADTRAN, Inc.

operations a decrease due to the unfavorable impact on revenue generated outside of the U.S.

as a result of the strengthened U.S.

dollar and a write down of inventory due to a restructuring discontinuation of certain product lines.

As a percentage of that segment's revenue, Network Solutions gross profit decreased from 27.0% for the three months ended September 30, 2022 to 20.7% for the three months ended September 30, 2023 and decreased from 31.1% for the nine months ended September 30, 2022 to 22.2% for the nine months ended September 30, 2023.

As a percentage of revenue, gross profit decreased from 36.3% for the three months ended June 30, 2022 to 28.3% for the three months ended June 30, 2023 and decreased from 35.8% for the six months ended June 30, 2022 to 27.7% for the six months ended June 30, 2023.

The decrease for the three and six months ended June 30, 2023 was primarily attributable to $33.4 million and $66.0 million, respectively, of adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks, acquisition related expenses and a decrease in volume of sales activity related to our ADTRAN, Inc.

As a percentage of that segment's revenue, Network Solutions gross profit decreased from 35.9% for the three months ended June 30, 2022 to 23.3% for the three months ended June 30, 2023 and decreased from 35.3% for the six months ended June 30, 2022 to 22.9% for the six months ended June 30, 2023.

The decrease was primarily attributable to increases in cost of revenue related to acquisition related expenses, adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with Adtran Networks and a decrease in volume of sales activity related to our ADTRAN, Inc.

operations, a decrease in volume of sales activity due to customers focus on reducing inventory levels in our domestic ADTRAN, Inc.

operations a decrease due to the unfavorable impact on revenue generated outside of the U.S.

as a result of the strengthened U.S.

dollar and a write down of inventory due to a restructuring discontinuation of certain product lines partially offset by an increase in volume of sales activity in the first half of 2023 due to the Business Combination with Adtran Networks.

As a percentage of that segment's revenue, Services & Support gross profit increased from 57.9% for the three months ended September 30, 2022 to 61.6% for the three months ended September 30, 2023 and increased from 49.6% for the nine months ended September 30, 2022 to 60.2% for the nine months ended September 30, 2023.

The increase was primarily attributable to an increase in volume of sales activity in the first half of 2023 due to the Business Combination with Adtran Networks and a decrease in cost of revenue as a percentage of revenue attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with Adtran Networks.

operations partially offset by an increase in volume of sales activity due to the Business Combination with Adtran Networks.

As a percentage of that segment's revenue, Services & Support gross profit increased from 40.1% for the three months ended June 30, 2022 to 59.7% for the three months ended June 30, 2023 and increased from 40.5% for the six months ended June 30, 2022 to 59.4% for the six months ended June 30, 2023.

The increase was primarily attributable to an increase in volume of sales activity due to the Business Combination with Adtran Networks, an increase in volume of sales activity related to our ADTRAN, Inc.

operations and a decrease in cost of revenue attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with Adtran Networks.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

As a percentage of revenue, selling, general and administrative expenses increased from 22.0% for the three months ended September 30, 2022 to 23.1% for the three months ended September 30, 2023 and increased from 19.6% for the nine months ended September 30, 2022 to 21.3% for the nine months ended September 30, 2023.

While selling, general and administrative expenses as a percentage of revenue will generally fluctuate whenever there is a significant fluctuation in revenue for the periods being compared, in the three and nine months ended September 30, 2023 we saw a more significant increase due to higher expenses related to the Business Combination with Adtran Networks and other items described below.

As a percentage of revenue, selling, general and administrative expenses increased from 16.2% for the three months ended June 30, 2022 to 20.3% for the three months ended June 30, 2023 and increased from 17.1% for the six months ended June 30, 2023 to 20.6% for the six months ended June 30, 2023.

While selling, general and administrative expenses as a percentage of revenue will generally fluctuate whenever there is a significant fluctuation in revenue for the periods being compared, in the three and six months ended June 30, 2023 we saw a more significant increase due to increased expenses related to the Business Combination with Adtran Networks and other items described below.

Our restructuring and integration programs are in the process of consolidating, streamlining and integrating the workforce, systems and processes of ADTRAN and Adtran Networks, which we expect will lower selling, general and administrative expense as a percentage of revenue over time.

Selling, general and administrative expenses decreased 16.0% from $74.9 million for the three months ended September 30, 2022 to $62.9 million for the three months ended September 30, 2023 and increased 50.7% from $130.6 million for the nine months ended September 30, 2022 to $196.9 million for the nine months ended September 30, 2023.

Selling, general and administrative expenses include personnel costs for management, accounting, information technology, human resources, sales and marketing, as well as independent auditor, tax and other professional fees, contract services and legal and litigation related costs.

The decrease in selling, general and administrative expenses for the three months ended September 30, 2023 was primarily attributable to decreased expenses for employee-related costs, depreciation of property, plant and equipment, and stock-based compensation expense partially offset by increased costs related to our restructuring program and amortization of intangible assets.

The increase in selling, general and administrative expenses for the nine months ended September 30, 2023 was primarily attributable to increased expenses in the first half of 2023 related to the Business Combination with Adtran Networks such as employee-related costs due to an increase in the number of employees, costs related to our restructuring program, amortization of intangible assets, depreciation of property, plant and equipment, restructuring expenses and transactions costs partially offset by decreased stock-based compensation expense.

For the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, changes in foreign currencies relative to the U.S dollar increased our selling, general and administrative expenses by approximately $1.5 million and increased our selling, general and administrative expenses by approximately $0.2 million, respectively.

Selling, general and administrative expenses increased 138.9% from $27.9 million for the three months ended June 30, 2022 to $66.6 million for the three months ended June 30, 2023 and increased 140.3% from $55.8 million for the six months ended June 30, 2022 to $134.0 million for the six months ended June 30, 2023.

Although selling, general and administrative expenses include personnel costs for management, accounting, information technology, human resources, sales and marketing, as well as independent auditor, tax and other professional fees, contract services and legal and litigation related costs.

The increase in selling, general and administrative expenses for the three and six months ended June 30, 2023 was primarily attributable to increased expenses related to the Business Combination with Adtran Networks such as employee-related costs due to an increase in the number of employees, costs related to our restructuring program, amortization of intangible assets, depreciation of property, plant and equipment, restructuring expenses, stock-based compensation expense and transactions costs.

For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S dollar increased our selling, general and administrative expenses by approximately $0.2 million and decreased our selling, general and administrative expenses by approximately $1.2 million, respectively.

RESEARCH AND DEVELOPMENT EXPENSES

As a percentage of revenue, research and development expenses increased from 17.4% for the three months ended September 30, 2022 to 23.0% for the three months ended September 30, 2023 and increased from 16.8% for the nine months ended September 30, 2022 to 22.0% for the nine months ended September 30, 2023.

As a percentage of revenue, research and development expenses increased from 15.4% for the three months ended June 30, 2022 to 21.6% for the three months ended June 30, 2023 and increased from 16.2% for the six months ended June 30, 2022 to 21.6% for the six months ended June 30, 2023.

Although, research and development expenses as a percentage of revenue will fluctuate whenever there are incremental product development activities or significant fluctuations in revenue for the periods being compared, in the first half of 2023 we saw a more significant increase due to increased expenses related to the Business Combination with Adtran Networks and other items described below.

Our restructuring and integration programs are in the process of consolidating, streamlining and integrating the workforce, systems and processes of ADTRAN and Adtran Networks, which we expect will lower research and development expense as a percentage of revenue over time.

Research and development expenses increased 6.0% from $59.2 million for the three months ended September 30, 2022 to $62.8 million for the three months ended September 30, 2023 and increased 81.4% from $112.2 million for the nine months ended September 30, 2022 to $203.5 million for the nine months ended September 30, 2023.

The increase in research and development expenses was primarily attributable to increased expenses in the first half of 2023 related to the Business Combination with Adtran Networks such as employee-related costs due to an increase in the number of employees, restructuring expenses and depreciation of property, plant and equipment.

For the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022, changes in foreign currencies relative to the U.S.

Research and development expenses increased 166.4% from $26.5 million for the three months ended June 30, 2022 to $70.6 million for the three months ended June 30, 2023 and increased 165.6% from $53.0 million for the six months ended June 30, 2022 to $140.7 million for the six months ended June 30, 2023.

The increase in research and development expenses was primarily attributable to increased expenses related to the Business Combination with Adtran Networks such as employee-related costs due to an increase in the number of employees and expenses related to our multi-year integration program, restructuring expenses, amortization of intangible assets, depreciation of property, plant and equipment and stock-based compensation expense.

For the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022, changes in foreign currencies relative to the U.S.

dollar increased our research and development expenses by approximately $0.1 million and decreased our research and development expenses by approximately $2.1 million, respectively.

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The Company classifies government grants received under these arrangements as a reduction to research and development expense incurred.

For the three and nine months ended September 30, 2023, the Company recognized $0.8 million and $2.3 million as a reduction of research and development expense, respectively.

For the three and six months ended June 30, 2023, the Company recognized $0.9 million and $1.5 million as a reduction of research and development expense, respectively.

We expect to continue to incur research and development expenses in connection with our new and existing products.

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We may incur significant research and development expenses prior to the receipt of revenue from a major new product group.

GOODWILL IMPAIRMENT

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 of its reporting units 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.

Furthermore, no impairment of goodwill was recorded for either reporting unit as of September 30, 2022.

ASSET IMPAIRMENT

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.

There were no asset impairments recognized during the three and nine months ended September 30, 2023.

See Note 8 of Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment No.

1 for additional information.

INTEREST AND DIVIDEND INCOME

Interest and dividend income increased from $0.3 million for the three months ended September 30, 2022 to $0.5 million for the three months ended September 30, 2023 and increased from $0.8 million for the nine months ended September 30, 2022 to $1.2 million for the nine months ended September 30, 2023.

Interest and dividend income was up due to increased income related to the Business Combination with Adtran Networks in the first half of 2023 and increased dividend income from the deferred compensation plan.

Interest and dividend income increased from $0.2 million for the three months ended June 30, 2022 to $0.4 million for the three months ended June 30, 2023 and increased from $0.4 million for the six months ended June 30, 2022 to $0.7 million for the six months ended June 30, 2023.

Interest and dividend income was up due to increased income related to the Business Combination with Adtran Networks for the three and six months ended June 30, 2023.

INTEREST EXPENSE

Interest expense increased from $1.3 million for the three months ended September 30, 2022 to $4.5 million for the three months ended September 30, 2023 and increased from $1.4 million for the nine months ended September 30, 2022 to $11.9 million for the nine months ended September 30, 2023.

The increase in interest expense during the three and nine months ended September 30, 2023 was primarily related to an increase in the Wells Fargo Credit Agreement and the assumed debt associated with the Business Combination with Adtran Networks.

Interest expense increased from $0.1 million for the three months ended June 30, 2022 to $4.1 million for the three months ended June 30, 2023 and increased from $0.1 million for the six months ended June 30, 2022 to $7.4 million for the six months ended June 30, 2023.

The increase in interest expense during the three and six months ended June 30, 2023 was primarily related to an increase in the Wells Fargo Credit Agreement and the assumed debt associated with the Business Combination with Adtran Networks.

See Note 12 and Note 13 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Amendment No 1.

NET INVESTMENT (LOSS) GAIN

We recognized a net investment loss of $2.7 million and $1.4 million for the three months ended September 30, 2022 and 2023, respectively and recognized a net investment loss of $10.8 million compared to a gain of $1.1 million for the nine months ended September 30, 2022 and 2023, respectively.

We recognized a net investment loss of $4.6 million and a gain of $1.3 million for the three months ended June 30, 2022 and 2023, respectively and recognized a net investment loss of $8.1 million and a gain of $2.5 million for the six months ended June 30, 2022 and 2023, respectively.

The fluctuations in our net investments were primarily attributable to changes in the fair value of our securities recognized during the period.

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OTHER INCOME, NET

Other expense, net, which primarily consisted of gains and losses on foreign currency transactions and income from excess material sales, was flat with income of $2.5 million for the three months ended September 30, 2022 and 2023 and increased from $2.9 million for the nine months ended September 30, 2022 compared to $4.7 million for the nine months ended September 30, 2023.

INCOME TAX BENEFIT

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.

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

INCOME TAX BENEFIT (EXPENSE)

The Company's effective tax rate changed from an expense of 50.1% of pre-tax income for the three months ended June 30, 2022, to a benefit of 18.8% of pre-tax income for the three months ended June 30, 2023 and changed from a benefit of 34.3% of pre-tax income for the six months ended June 30, 2022, to a benefit of 20.4% of pre-tax income for the six months ended June 30, 2023.

In 2022, we benefited from a change in our annual estimated tax rate as a result of the requirement to begin capitalizing research and development expenses for U.S.

tax purposes beginning in 2022 as previously passed as part of the Tax Cuts and Jobs Act in December 2017, and the associated impact of those changes on our previously established valuation allowance.

The change in the effective tax rate for the three and 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.

NET LOSS ATTRIBUTABLE TO ADTRAN HOLDINGS, INC.

(AS RESTATED)

As a result of the above factors, net loss attributable to ADTRAN Holdings, Inc.

increased from net loss of $41.9 million for the three months ended September 30, 2022 to a net loss of $78.6 million for the three months ended September 30, 2023 and increased from net loss of $40.9 million for the nine months ended September 30, 2022 to a net loss of $157.7 million for the nine months ended September 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.

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

As a result of the above factors, net (loss) income attributable to ADTRAN Holdings, Inc.

decreased from net income of $2.1 million for the three months ended June 30, 2022 to a net loss of $39.1 million for the three months ended June 30, 2023 and decreased from net income of $1.0 million for the six months ended June 30, 2022 to a net loss of $79.2 million for the six months ended June 30, 2023.

Upon the DPLTA becoming effective on January 16, 2023, the Company began absorbing all Adtran Networks losses rather than just the loss related to the Company's ownership percentage in Adtran Networks.

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We have historically financed our ongoing business with existing cash, investments and cash flow from operations.

In the current environment we have begun to and expect to continue to utilize our credit arrangements to manage our working capital needs.

In the current supply environment we also expect to utilize our credit arrangements to manage our working capital needs.

We have used, and expect to continue to use, existing cash, investments, credit arrangements and cash generated from operations for working capital, business acquisitions, shareholder dividends and other general corporate purposes, including product development activities to enhance our existing products and develop new products, expand our sales and marketing activities and fund capital expenditures.

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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.

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, 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.

As of June 30, 2023, the Company does not have sufficient liquidity to meet payment obligations under the DPLTA pertaining to Exit Compensation assuming a substantial majority of Adtran Networks shareholders elect such option in the current period.

We believe the probability that a substantial majority of Adtran Networks shareholders elect to receive Exit Compensation in the next twelve months is remote based on the diverse base of shareholders that must make this election on an individual shareholder basis, the current ongoing appraisal proceedings involving a dispute on the value of the Exit Compensation which is expected to take 24-36 months to resolve, the current guaranteed Annual Recurring Compensation payment plus the interest earned on such shares during the ongoing appraisal proceedings, and the current trading value of Adtran Networks SE shares.

Therefore, we believe that our cash and cash equivalents, investments, working capital management initiatives and access to funds under the Wells Fargo credit facility, including 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.

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

Wells Fargo Credit Agreement

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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”).

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

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

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

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

In addition, we may issue up to $25.0 million in letters of credit against our $400.0 million total facility.

As of June 30, 2023, we had a total of $2.2 million in letters of credit outstanding against our eligible borrowings, leaving a net amount of $197.8 million available for future borrowings.

Any future credit extensions under the Credit Agreement are subject to customary conditions precedent, including a net leverage ratio financial covenant and a material adverse effect condition.

In consideration of the factors described above in respect of expected timing of payment of the Exit Compensation and our assessment of compliance with these covenants we believe that we will have access to sufficient funding to meet any obligations that come due under the terms of the DPLTA in the next 12 months from the date of issuance of these condensed consolidated financial statements.

Wells Fargo Credit Agreement Amendment

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

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 EUIBOR 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.

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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.

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.

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.

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.

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 1.0%, plus (ii) the applicable rate, ranging from 0.65% to 1.65% (the “Base Rate”), or (B) the sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus the applicable rate, ranging from 1.65% to 2.65%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate, “SOFR Loans”).

borrowings under the Credit Agreement (other than swingline loans) bear interest at a rate per annum equal to the sum of the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the applicable rate, ranging from 1.75% to 2.75%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate, “EURIBOR Loans”).

The applicable rate is based on the consolidated net leverage ratio of the Company and its subsidiaries as determined pursuant to the terms of the Credit Agreement.

Default interest is 2.0% 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 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.

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 a 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.

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.

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 Company in favor of the Administrative Agent.

As of September 30, 2023, our cash on hand was $116.1 million of which $94.4 million was held by our foreign subsidiaries.

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

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

As of December 31, 2022, cash on hand was $108.6 million and short-term investments were $0.3 million, which resulted in available short-term liquidity of $108.9 million, of which $86.3 million was held by our foreign subsidiaries.

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Operating Activities

Net cash used in operating activities of $29.3 million during the nine months ended September 30, 2023 improved by $13.4 million compared to net cash used in operating activities of $42.7 million during the nine months ended September 30, 2022.

The decrease in net cash used was primarily due to the net loss for the period, for the reasons discussed above, as adjusted primarily for increased depreciation and increased deferred taxes, increased impairments and write downs and decreased net cash outflows from working capital.

Net cash used in operating activities of $36.2 million during the six months ended June 30, 2023 increased by $30.2 million compared to net cash used in operating activities of $5.9 million during the six months ended June 30, 2022.

This increase in net cash used was primarily due to the net loss for the period, for the reasons discussed above, as adjusted primarily for depreciation and deferred taxes, and net cash outflows from working capital, specifically, a decrease in the average number of days payable to our trade suppliers.

Additional details related to our working capital and its drivers are discussed below.

Net accounts receivable decreased 17.9% from $279.4 million as of December 31, 2022 to $229.3 million as of September 30, 2023.

There was an allowance for credit losses of less than $15 thousand as of September 30, 2023 and an allowance for credit losses of less than $0.1 million as of December 31, 2022.

The decrease in net accounts receivable was due primarily to sales volume and timing within the quarter, customer and geographical mix.

Quarterly accounts receivable DSO increased from 72 days as of December 31, 2022 to 77

days as of September 30, 2023.

The increase in DSO was due to customer and geographical mix associated with the Business Combination with Adtran Networks and timing of sales within the quarter.

Other receivables decreased 25.9% from $32.8 million as of December 31, 2022 to $24.3 million as of September 30, 2023.

Net accounts receivable decreased 14.3% from $279.4 million as of December 31, 2022 to $239.6 million as of June 30, 2023.

There was an allowance for credit losses of less than $0.1 million as of June 30, 2023 and an allowance for credit losses of less than $0.1 million as of December 31, 2022.

The decrease in net accounts receivable was due primarily to customer and geographical mix.

Quarterly accounts receivable DSO decreased from 72 days as of December 31, 2022 to 67 days as of June 30, 2023.

The decrease in DSO was

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

Other receivables decreased 1.3% from $32.8 million as of December 31, 2022 to $32.4 million as of June 30, 2023.

The decrease in other receivables was primarily attributable to a decrease for sales of raw materials.

Quarterly inventory turnover was 2.5 turns as of December 31, 2022 and 2.0 turns as of September 30, 2023.

Inventory decreased 12.5% from $427.5 million as of December 31, 2022 to $374.0 million as of September 30, 2023.

The decrease in inventory was primarily due to a $21.0 million write down of inventory due to a restructuring discontinuation of certain product lines within our Network Solutions segment, a reduction in component purchases due to improved lead times and utilization of buffer stock.

Quarterly inventory turnover was 2.5 turns as of December 31, 2022 and 2.3 turns as of June 30, 2023.

Inventory decreased 2.5% from $427.5 million as of December 31, 2022 to $416.8 million as of June 30, 2023.

The decrease in inventory was due to a reduction in component purchases due to improved lead times as well as utilization of buffer stock.

We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory in response to supply chain uncertainties.

Accounts payable decreased 37.4% from $237.7 million as of December 31, 2022 to $148.9 million as of September 30, 2023.

Accounts payable decreased 27.8% from $237.7 million as of December 31, 2022 to $171.7 million as of June 30, 2023.

The decrease in accounts payable was primarily due to a decrease in the average number of days payable to our trade suppliers.

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Investing Activities

Capital expenditures totaled approximately $33.7 million and $10.1 million for the nine months ended September 30, 2023 and 2022, respectively.

Capital expenditures totaled approximately $20.1 million and $3.3 million for the six months ended June 30, 2023 and 2022, respectively.

These expenditures were primarily used to purchase manufacturing and test equipment, software, computer hardware and building improvements.

The increase in capital expenditures for the nine months ended September 30, 2023 is primarily attributable to an increase in expenditures due to the Business Combination with Adtran Networks and for expenditures related to the construction of a terafactory building in Europe.

Our combined short-term and long-term investments decreased $7.8 million from $33.0 million as of December 31, 2022 to $25.2 million as of September 30, 2023.

This decrease reflects the impact of the net unrealized and realized gains and losses on our investments and the sale of our fixed income investments.

Our combined short-term and long-term investments increased $1.3 million from $33.0 million as of December 31, 2022 to $34.3 million as of June 30, 2023.

This increase reflects the impact of the net unrealized and realized gains and losses on our investments.

We typically invest all available cash not required for immediate use in operations, primarily in securities that we believe bear minimal risk of loss.

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1 for additional information.

Our long-term investments decreased 22.9% from $32.7 million as of December 31, 2022 to $25.2 million as of September 30, 2023.

Our investments include various marketable equity securities classified as long-term investments with a fair market value of $0.7 million and $0.8 million as of September 30, 2023 and December 31, 2022, respectively.

Our investments include various available-for-sale debt securities classified as long-term investments with a fair market value of $9.3 million as of December 31, 2022.

The Company did not hold any available-for-sale debt securities as of September 30, 2023.

Long-term investments as of September 30, 2023 and December 31, 2022 also included $24.4 million and $22.9 million, respectively, related to our deferred compensation plans.

As of June 30, 2023, our corporate bonds, municipal bonds, asset-backed bonds, mortgage/agency bonds, U.S.

government bonds and other government bonds were classified as available-for-sale and had a combined duration of 15 years with an average Standard & Poor’s credit rating of AA.

Because our investment portfolio has a high-quality rating and contractual maturities of short duration, we are able to obtain prices for these bonds derived from observable market inputs, or for similar securities traded in an active market, on a daily basis.

Our long-term investments decreased 4.4% from $32.7 million as of December 31, 2022 to $31.2 million as of June 30, 2023.

Our investments include various marketable equity securities classified as long-term investments with a fair market value of $0.9 million and $0.8 million as of June 30, 2023 and December 31, 2022, respectively.

Our investments include various available-for-sale debt securities classified as long-term investments with a fair market value of $8.1 million and $9.3 million as of June 30, 2023 and December 31, 2022.

Long-term investments as of June 30, 2023 and December 31, 2022 also included $25.4 million and $22.9 million, respectively, related to our deferred compensation plans.

Financing Activities

During the nine month periods ended September 30, 2023 and 2022, we paid dividends totaling $21.2 million and $15.9 million, respectively.

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.

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

The continued payment of dividends is at the discretion of the Company’s Board of Directors and is subject to general business conditions and ongoing financial results of the Company.

Stock Repurchase Program

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

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

Stock Option Exercises

To accommodate employee stock option exercises, the Company issued 8 thousand and 0.4 million shares of common stock and treasury stock which resulted in proceeds of $0.1 million and $4.8 million during the nine months ended September 30, 2023 and 2022, respectively.

Additionally, to accommodate Adtran Networks SE stock option exercises, Adtran Networks issued 13 thousand shares of Adtran Networks common stock which resulted in proceeds of $0.1 million, for the nine months ended September 30, 2023.

Adtran Networks SE stock options outstanding as of September 30, 2023 totaled 58 thousand (representing less than 0.2% of Adtran Networks outstanding shares), of which 12 thousand were exercisable.

To accommodate employee stock option exercises, the Company issued 6 thousand and 37 thousand shares of common stock and treasury stock which resulted in proceeds of $58 thousand and $0.6 million during the six months ended June 30, 2023 and 2022, respectively.

Adtran Networks SE stock options outstanding as of June 30, 2023 totaled 68 thousand (representing less than 0.2% of Adtran Networks outstanding shares), of which 13 thousand were exercisable.

Off-Balance Sheet Arrangements

We have exposure to credit losses from off-balance sheet exposures, to provide various guarantees of performance such as bid bonds, performance bonds and customs bonds, where we believe the risk of loss is immaterial to our financial statements as of September 30, 2023.

Otherwise, we do not have off-balance sheet financing arrangements and have not engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of or requirements for capital resources.

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Cash Requirements

The following table summarizes the Company’s material short- and long-term cash requirements from known obligations pursuant to certain contracts and commitments as of September 30, 2023, as well as an estimate of the timing in which such obligations and payments are expected to be satisfied (but excluding payments that may be made pursuant to the DPLTA and currency hedging arrangements, which are discussed below).

The following table summarizes the Company’s material short- and long-term cash requirements from known obligations pursuant to certain contracts and commitments as of June 30, 2023, as well as an estimate of the timing in which such obligations and payments are expected to be satisfied (but excluding payments that may be made pursuant to the DPLTA and currency hedging arrangements, which are discussed below).

Other than operating lease obligations, the cash requirements table excludes interest payments.

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and in certain international

Our operating leases had remaining lease terms ranging from two months to 117 months as of September 30, 2023.

Our operating leases had remaining lease terms ranging from once month to 113 months as of June 30, 2023.

Wells Fargo Credit Agreement

On July 18, 2022, ADTRAN Holdings, Inc.

and ADTRAN, Inc., as the borrower, entered into a credit agreement with a syndicate of banks, including the Administrative Agent and the other lenders named therein.

See “Liquidity and Capital Resources” above for additional information regarding the Wells Fargo credit agreement.

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

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

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

In addition, we may issue up to $25.0 million in letters of credit against our $400.0 million dollar total facility.

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

outstanding against our eligible borrowings, leaving a net amount of $197.8 million available for future borrowings.

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

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

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”).

borrowings under the Credit Agreement (other than swingline loans) bear interest at a rate per annum equal to the sum of the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the applicable rate, ranging from 1.5% to 2.25%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate, “EURIBOR Loans”).

The applicable rate is based on the consolidated net leverage ratio of the Company and its subsidiaries as determined pursuant to the terms of the Credit Agreement.

Default interest is 2.00% per annum in excess of the rate otherwise applicable in the case of any overdue principal or any other overdue amount.

In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a commitment fee to the lenders under the Credit Agreement in respect of unutilized revolving loan commitments and an additional commitment ticking fee at a rate of 0.25% on the commitment amounts of each lender until the earliest of (i) the date of the Senior Credit Facilities Increase, (ii) the Company’s voluntary termination of the credit facility commitment, and (iii) December 31, 2023.

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

The Credit Agreement contains customary affirmative and negative covenants, including incurrence covenants and certain other limitations on the ability of the Company and the Company’s subsidiaries to incur additional debt, guarantee other obligations, grant liens on assets, make investments, dispose of assets, pay dividends or other payments on capital stock, make restricted payments, engage in mergers or consolidations, engage in transactions with affiliates, modify its organizational documents, and enter into certain restrictive agreements.

It also contains customary events of default (subject to customary cure periods and materiality thresholds).

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

The Credit Agreement also requires that the Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of the Company and its subsidiaries tested on the last day of each fiscal quarter not fall below 3.00 to 1.00.

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

and the Administrative Agent, ADTRAN, Inc.’s obligations under the Credit Agreement are secured by substantially all of the assets of ADTRAN, Inc.

and the Company.

In addition, the Company has guaranteed ADTRAN, Inc.’s obligations under the Credit Agreement pursuant to a Guaranty Agreement, dated as of July 18, 2022, by ADTRAN, Inc.

and the Company in favor of the Administrative Agent.

New Nord/LB Revolving Line of Credit

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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.

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.

No amounts are available for future borrowings.

Syndicated Credit Agreement Working Capital Line of Credit

In September 2018, Adtran Networks entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch German Business to borrow up to $10.7 million as part of a working capital line of credit.

On January 31, 2023, the Company

repaid the outstanding borrowings under the syndicated credit agreement working capital line of credit.

No amounts are available for future borrowings.

DZ Bank Revolving Line of Credit

In the fourth quarter of 2022, Adtran Networks entered into a revolving line of credit with DZ Bank to borrow up to $9.1 million.

Interest on the line of credit reset monthly based on renewal of the loan and was 2.8% at the time the loan was repaid.

On March 12, 2023, the Company repaid the outstanding borrowings under the DZ Bank revolving line of credit.

No amounts are available for future borrowings.

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

Currency Hedging Arrangements

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The Initial Forward, which is governed by the provisions of an ISDA Master Agreement (including schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge Counterparty, enables the Company to convert a portion of its Euro denominated payment obligations under the DPLTA into U.S.

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 settled three €20.0 million forward contract tranches and the remaining amount will be divided into five quarterly tranches of €20.0 million.

The Company, at its sole discretion, may exchange all or part of each tranche on any given day within the applicable quarter;

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

dollars for Euros at a daily fixed forward rate ranging from $0.98286 to $1.03290.

The aggregate amount of $160.0 million is divided into eight quarterly tranches of $20.0 million, commencing in the fourth quarter of 2022.

The Company, at its sole discretion, may exchange all

or part of each tranche on any given day within the applicable quarter;

provided, however, that it must exchange the full tranche by the end of such quarter.

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On March 21, 2023, the Company entered into a Euro/U.S.

dollar forward contract arrangement (the “Forward”) with the Hedge Counterparty.

Under the Forward, which is governed by the provisions of an ISDA Master Agreement (including schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge Counterparty, the Company will exchange an aggregate notional amount of €160.0 million 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 settled three €20.0 million forward contract tranches, and 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.

dollar forward contract arrangement (the “Forward”) with Wells Fargo Bank, N.A.

(the “Hedge Counterparty”).

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

During the six months ended June 30, 2023, the Company settled two $20.0 million forward contract tranches and the remaining will be divided into six quarterly tranches of $20.0 million.

These new forward contracts transacted on March 21, 2023 (to sell EUR/buy USD) were entered into for the purpose of unwinding the previously transacted forward contracts (to buy EUR/sell USD), transacted in November 2022.

The drawdown dates of the original ratchet forwards are set to the same date as the maturity of the new offsetting forward contracts.

Adtran Networks Domination and Profit and Loss Transfer Agreement

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The guaranteed interest component under the Exit Compensation is calculated from the effective date of the DPLTA to the date the shares are tendered, less any Annual Recurring Compensation paid.

The guaranteed interest rate is 5.0% plus a variable component 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.

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We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.36% of Adtran Networks outstanding shares as of September 30, 2023.

We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.36% of Adtran Networks outstanding shares as of June 30, 2023.

The foregoing description of the DPLTA does not purport to be complete and is qualified in its entirety by reference to the DPLTA, a non-binding English translation of which incorporated by reference to Exhibit 10.5 of the 2022 Form 10-K/A.

As of 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.

We expect to incur additional integration costs and costs associated with the implementation of the DPLTA during the remainder of 2023 and 2024 and such costs are expected to be material.

During the three and nine months ended September 30, 2023, we recognized $24.9 million and $33.2 million of restructuring costs relating to the Business Combination, respectively, that are included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statement of Loss.

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

During the three and six months ended June 30, 2023, $0.1 million of transaction costs were incurred.

During the three and six months ended June 30, 2022, $1.2 million and $2.7 million of transaction costs were incurred, respectively.

During the three and six months ended June 30, 2023, we recognized $0.6 million and $1.4 million of integration costs related to the Business Combination, respectively, that are included in selling, general and administrative expenses in the Condensed Consolidated Statement of (Loss) Income.

We expect to incur additional integration costs and costs associated with the implementation of the DPLTA during the remainder of 2023 and such costs are expected to be material.

During the three and six months ended June 30, 2023, we recognized $5.9 million and $8.3 million of restructuring costs relating to the Business Combination, respectively, that are included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Condensed Consolidated Statement of (Loss) Income.

See Note 21 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Amendment No.

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Other Cash Requirements

During the nine months ended September 30, 2023, other than the Exit Compensation payments, Annual Recurring Compensation under the DPLTA, restructuring costs and increased debt service costs, there have been no other material changes in cash requirements from those discussed in the 2022 Form 10-K/A and our cash requirements table shown in Liquidity and Capital Resources above.

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

Performance Bonds

Certain contracts, customers and jurisdictions in which we do business require us to provide various guarantees of performance such as bid bonds, performance bonds and customs bonds.

As of 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.

As of June 30, 2023 and December 31, 2022, we had commitments related to these bonds totaling $12.2 million and $21.1 million, respectively, which expire at various dates through April 2031.

In general, we would only be liable for the amount of these guarantees in the event of default under each contract, the probability of which we believe is remote.

Critical Accounting Policies and Estimates

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 quantitative goodwill impairment test is performed at the level of the reporting unit.

The identification of our reporting units begins at the operating segment level and considers whether components one level below the operating segment levels should be identified as reporting units for the purpose of testing goodwill for impairment.

For goodwill impairment testing purposes, we determined the Company's reporting units are generally the same as its operating segments, which are identified in Note 18 to the Condensed Consolidated Financial Statements.

Our general policy is to qualitatively assess the carrying value of goodwill each reporting period for events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

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.

The Company determined upon its quantitative impairment assessment to recognized 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.

There was no impairment for the Network Solutions reporting unit during the three and nine months ended September 30, 2023.

The balance of our goodwill was $339.1 million and $381.7 million as of September 30, 2023 and December 31, 2022, respectively.

Accounting Policies

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used or if changes in the accounting estimate that are reasonably likely to occur could materially impact the results of financial operations.

Several accounting policies, as described in Note 1 of Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Amendment No.

1, require material subjective or complex judgment and have a significant impact on our financial condition and results of operations, as applicable.

Several accounting policies, as described in Note 1 of Notes to the Consolidated Financial Statements included in Part I, Item 1 of this report, require material subjective or complex judgment and have a significant impact on our financial condition and results of operations, as applicable.

We believe the critical accounting policies affect our more significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.

During the nine months ended September 30, 2023, other than the change in accounting policy regarding non-controlling interests as outlined in Note 1 and Note 16 to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Amendment No.

1, there were no significant changes to our critical accounting policies and estimates as described in the financial statements contained in the 2022 Form 10-K/A.

During the six months ended June 30, 2023, other than the change in accounting policy regarding non-controlling interests as outlined in Note 1 and Note 16 to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, there were no significant changes to our critical accounting policies and estimates as described in the financial statements contained in the 2022 Form 10-K/A.

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 2. Management’s Discussion and Analysis