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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-01 · 1213 added, 1298 removed, 1455 unchanged (63% of the section changed)

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The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes included in Part II, Item 8 of this report.

of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, which is available free of charge on the SEC's website at http://www.sec.gov and on our website at www.adtran.com .

We have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part I, Item 1A, Risk Factors, included in Amendment No.

1 to our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on August 14, 2023 (the “2022 Form 10-K/A”), as well as Part I, Item 1, Business, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2023., which is available free of charge on the SEC's website at http://www.sec.gov and on our website at www.adtran.com.

This discussion is designed to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our consolidated financial statements.

See “Cautionary Note Regarding Forward-Looking Statements”

on page 2 of this report for a description of important factors that could cause actual results to differ from expected results.

See “Cautionary Note Regarding Forward-Looking Statements” on page 2 of this report for a description of important factors that could cause actual results to differ from expected results.

See also Part I, Item 1A, Risk Factors, of this Form 10-K.

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to "ADTRAN", the “Company,”

“we,”

“us”

and “our”

refer to ADTRAN Holdings, Inc.

Unless the context otherwise indicates or requires, references in this Annual Report on Form 10-K 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 ADVA prior to the Merger.

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.

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;

distributed enterprises, including Fortune 500 companies with sophisticated business continuity applications;

and federal, state and local government agencies.

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

We support our customers through our direct global sales organization and our distribution networks.

Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having optimal selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors in order to gain market share.

Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having optimal selling prices and increased functionality as compared to both the prior generation of a product and the products of competitors in order to gain market share.

To service our customers and grow revenue, we are continually conducting research and developing new products addressing customer needs and testing those products for the specific requirements of the particular customers.

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

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

ADTRAN Holdings, Inc.

solely owns ADTRAN, Inc.

and is the majority shareholder of ADVA Optical Networking SE ("ADVA").

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.

The Company solely owns ADTRAN, Inc.

and is the majority shareholder of Adtran Networks (formerly ADVA Optical Networking SE).

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

ADVA is a global provider of network solutions for data, storage, voice and video services.

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

In addition to the Company's reportable segments, revenue is also reported for the following three categories –

Subscriber Solutions, Access & Aggregation Solutions, and Optical Networking Solutions.

Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories:

Adtran Networks is a global provider of network solutions for data, storage, voice and video services.

We believe that the combined technology portfolio can best address current and future customer needs for high-speed connectivity from the network core to the end consumer, especially upon the convergence of solutions at the network edge.

The chief operating decision maker regularly reviews the Company’s financial performance based on two reportable segments:

(1) Network Solutions and (2) Services & Support.

In addition to operating under two reportable segments, the Company also reports revenue across three categories – Subscriber Solutions, Access & Aggregation Solutions and Optical Networking Solutions.

Prior to the Business Combination with Adtran Networks on July 15, 2022, ADTRAN, Inc.

reported revenue across the following three categories:

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

Following the Business Combination with ADVA, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions & Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions and the revenue from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.

Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.

Our Subscriber Solutions portfolio is used by service providers to terminate their access services infrastructure at the customer premises while providing an immersive and interactive experience for residential, business and wholesale subscribers.

Following the Business Combination with Adtran Networks, we have recast these revenues such that ADTRAN, Inc's former Access & Aggregation revenue is combined with a portion of the applicable Adtran Networks solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions & Experience revenue is combined with a portion of the applicable Adtran Networks solutions to create Subscriber Solutions and the revenue from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.

Optical Networking Solutions was added as a new revenue category to represent a meaningful portion of Adtran Networks portfolio.

Our Subscriber Solutions portfolio is used by Service Providers to terminate their access services infrastructure at customers' premises while providing an immersive and interactive experience for residential, business and wholesale subscribers.

This revenue category includes hardware- and software-based products and services.

These solutions include fiber termination solutions for residential, business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network edge virtualization solutions for business subscribers and cloud software solutions covering a mix of subscriber types.

Our Access & Aggregation Solutions are solutions that are used by communications service providers to connect residential subscribers, business subscribers and mobile radio networks to the service providers’

metro network, primarily through fiber-based connectivity.

These solutions include our Mosaic One SaaS applications, fiber termination solutions for residential, business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network edge virtualization solutions for business subscribers and cloud software solutions covering a mix of subscriber types.

Our Access & Aggregation Solutions are solutions that are used by communications Service Providers to connect residential subscribers, business subscribers and mobile radio networks to the Service Providers’ metro network, primarily through fiber-based connectivity.

This revenue category includes hardware- and software-based products and services.

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Our solutions within this category include open optical terminals, open line systems, optical subsystems and modules, network infrastructure assurance systems and automation platforms that are used to build high-scale, secure and assured optical networks.

ADVA Domination and Profit and Loss Transfer Agreement

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

Adtran Networks Domination and Profit and Loss Transfer Agreement

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

Under the DPLTA, subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, (i) the Company is

entitled to issue binding instructions to the management board of ADVA, (ii) ADVA will transfer its annual profit to the Company, subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net loss incurred by ADVA.

The obligation of ADVA to transfer its annual profit to the Company applies for the first time to the profit, if any, generated in the ADVA fiscal year 2023.

The obligation of the Company to absorb ADVA’s annual net loss applies for the first time to the loss, if any, generated in the ADVA fiscal year 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that ADVA shareholders (other than us) be offered, at their election, (i) to put their ADVA shares to the Company in exchange for a compensation in cash of EUR 17.21 per share (the “Exit Compensation”), or (ii) to remain ADVA shareholders and receive a recurring compensation in cash of EUR 0.59 (EUR 0.52 net under the current tax regime) per share for each full fiscal year of ADVA (the “Annual Recurring Compensation”).

The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’

meeting of ADVA for the respective preceding fiscal year (but in any event within eight months following expiration of the fiscal year) and is first granted for the 2023 fiscal year, payable for the first time after the ordinary general shareholders’

meeting of ADVA in 2024.

The adequacy of both forms of compensation have been challenged by minority shareholders of ADVA via court-led appraisal proceedings under German law, and it is possible that the courts in such appraisal proceedings may adjudicate a higher Exit Compensation or Annual Recurring Compensation (in each case, including interest thereon) than agreed upon in the DPLTA.

The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation had been scheduled to expire on March 16, 2023.

entitled to issue binding instructions to the management board of Adtran Networks, (ii) Adtran Networks will transfer its annual profit to the Company, subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net loss incurred by Adtran Networks.

The obligation of the Company to absorb Adtran Networks’ annual net loss applied for the first time to the loss generated in 2023.

Additionally, and subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that Adtran Networks shareholders (other than us) be offered, at their election, (i) to put their Adtran Networks shares to the Company in exchange for compensation in cash of €17.21 per share plus guaranteed interest (the "Exit Compensation"), or (ii) to remain Adtran Networks shareholders and receive a recurring compensation in cash of €0.59 (€0.52 net under the current tax regime) per share for each full fiscal year of Adtran Networks (the “Annual Recurring Compensation”).

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

The guaranteed interest rate is 5.0% plus a variable component that was 3.12% as of December 31, 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 it will be payable for the first time after the ordinary general shareholders’ meeting of Adtran Networks in 2024 for the fiscal year ended December 31, 2023.

The adequacy of both forms of compensation has been challenged by minority shareholders of Adtran Networks via court-led appraisal proceedings under German law, and it is possible that the courts in such appraisal proceedings may adjudicate a higher Exit Compensation or Annual Recurring Compensation (in each case, including interest thereon) than agreed upon in the DPLTA.

The opportunity for outside Adtran Networks shareholders to tender Adtran Networks shares in exchange for Exit Compensation had been scheduled to expire on March 16, 2023.

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

We currently hold 33,961,170 no-par value bearer shares of ADVA, representing 65.30% of ADVA’s outstanding shares as of February 14, 2023.

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

During the year ended December 31, 2022, we recognized $14.2 million of transaction costs relating to the Business Combination.

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

For the year ended December 31, 2023, 67 thousand shares, respectively, of Adtran Networks stock were tendered to the Company and Exit Compensation payments of approximately €1.2 million or approximately $1.3 million based on an exchange rate as of December 31, 2023, were paid to Adtran Networks' shareholders.

In addition to our cash and cash equivalents and the credit facility, we may fund a portion or all of the Exit Compensation through the sale of securities or additional alternative funding sources, if available.

There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms or at all.

If we cannot raise additional funds as needed, it could have a material adverse impact on our financial results and financial condition.

We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.32% of Adtran Networks outstanding shares as of December 31, 2023.

As of December 31, 2023, the Company has incurred $26.2 million of transaction costs related to the Business Combination.

During the year ended December 31, 2023, 2022 and 2021, $0.1 million, $14.2 million and $11.9 million of transaction costs were incurred, respectively.

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

Multi -Year Integration Program

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

The program has identified several potential cost synergies, including:

realizing operational scale;

combined sales channels;

streamlining corporate and general and administrative functions;

combined sourcing and production costs.

We have and will continue to invest significant dollars to restructure the workforce, optimize legacy systems, streamline legal entities and consolidate real estate holdings.

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

See Note 23 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report for additional information.

The program was designed to address several potential cost synergies, including realizing operational scale, combining sales channels, streamlining corporate and general and administrative functions, and combined sourcing and production costs.

During the years ended December 31, 2023 and 2022, we recognized $21.5 million and $1.6 million of restructuring costs relating to the Business Combination under the multi-year integration program and synergy realization, 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.

The Company does not anticipate additional material expenses to be incurred in connection with this integration program.

Business Efficiency Program

On November 6, 2023, due to the uncertainty around the current macroeconomic environment and its impact on customer spending levels, the Company’s management decided to implement a business efficiency program (the “Business Efficiency Program”) targeting the reduction of ongoing operating expenses and focusing on capital efficiency inclusive of certain salary reductions, an early retirement program, a site consolidation plan to include lease impairments and the partial sale of owned real estate (including the potential sale of portions of our headquarters), inventory write downs from product discontinuances, and the suspension of the quarterly dividend.

The Business Efficiency Program expands upon other recently implemented restructuring efforts and synergy costs following the Business Combination.

For instance, on August 17, 2023, the Company’s management determined to discontinue its copper-based Digital Subscriber Line broadband access technology products and its fixed wireless access products in its Network Solutions segment.

Furthermore, on September 29, 2023, the Company’s management decided to exit the "IoT" gateway market (indoor and outdoor), a subset of the broader IoT market (together with the other product discontinuations, the “Discontinuations”).

Additionally, on October 25, 2023, all employees were informed of certain personnel measures, which included the reduction of salary for select management, a reduction of approximately 5% of the workforce, an early retirement program and a hiring freeze.

During the year ended December 31, 2023, we recognized $25.1 million of costs relating to the Business Efficiency Program.

We expect costs in the first quarter 2024 and thereafter relating to the Business Efficiency Program to range between $22.2 million and $35.2 million.

Management expects these planned costs to include severance costs ranging from $12.2 million to $18.9 million in connection with an early retirement program and reductions in workforce, inventory write down of product discontinuances ranging from $7.6 million to $10.3 million, and site consolidation transaction expenses (primarily brokers fees) ranging from $2.4 million to $6.0 million.

Future cash payments include:

severance costs and outplacement fees that are anticipated to be in the range of $12.2 million to $18.9 million, payments relating to the site consolidation transaction expenses that are anticipated to be in the range of $2.4 million to $6.0 million, and potential cash payments in the range of $3.6 million to $6.3 million for anticipated product discontinuances.

We may also incur other charges or cash expenditures not currently contemplated due to events that may occur as a result of, or associated with, the Business Efficiency Program, including potential impairment charges related to the discontinuance of additional product lines, regulatory requirements related to personnel measures, and site closures.

However, we are not able to estimate the amount or range of amounts of such potential incremental charges as of the date of this filing.

If required, we will amend this disclosure at such time as management is able in good faith to estimate the amount, or range of amounts, of these charges.

The Business Efficiency Program is expected to be substantially completed by the end of 2024, with expected cash payments continuing into 2025.

See Note 23 of Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for additional information.

Financial Performance and Trends

We ended 2022 with a year-over-year revenue increase of 82.2% as compared to the year ended December 31, 2021, driven by increased volume of sales activity due to the Business Combination with ADVA and to service provider customers.

During 2022, we had one 10% revenue customer which was a domestic service provider customer and our five largest customers comprised 38.3% of our revenue.

Our year-over-year domestic revenue increased by 38.1%, driven by increased sales volume due to the Business Combination with ADVA and an increased sales volume of residential gateways and optical network terminals in our Network Solutions segment.

Internationally, our revenue increased by 169.7% compared to the prior year period, primarily driven by increased volume of sales activity due to the Business Combination with ADVA and increased shipments to a Tier-1 network operator in Europe.

We experienced strong demand for our solutions during 2022 and achieved significant year-over-year bookings growth.

Bookings are defined as orders received for a product or service during a fiscal period that will be delivered or performed sometime in the future and is a forward looking metric that we utilize to help us understand future revenue growth for the Company.

Bookings are generally subject to modification and or cancellation per the terms of the order.

Our increase in demand comes from service providers planning to deploy our fiber access platforms, in-home service delivery platforms and SaaS applications.

We expect this growth to accelerate.

During 2021 and 2022, we secured several Tier-1 next-generation fiber customers, and previously announced Tier-1 fiber customers significantly increased their bookings for our fiber access platforms.

Although we expect our revenue growth and profitability in the near-term to continue to be negatively impacted by supply chain issues, our outlook continues to strengthen given the increased demand for our products and our expectation of an improving supply chain over the longer term.

A substantial portion of our shipments of inventory in any fiscal period relate to orders received and shipped within that fiscal period for customers under agreements containing non-binding purchase commitments.

Further, a significant percentage of orders require delivery within a few days.

However, with the current global supply chain and transportation constraints, and limited availability of semiconductor chips and other components of our products, we have experienced and may continue to experience extended lead times, increased logistics intervals and costs, and lower volume of products deliveries, which have had and may continue to have a material adverse effect on our operating results and could have a material adverse effect on our customer relations and our financial condition.

The extent of the impact of the novel coronavirus (“COVID-19”) pandemic on our business remains uncertain and difficult to predict because of the dynamic and evolving nature of the situation.

Despite the widespread availability of COVID-19 vaccines and related treatments, the global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect the effects of public health restrictions in various ways.

The economic recovery following the impact of the COVID-19 pandemic is only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with uncertainty regarding its ultimate length and trajectory.

The COVID-19 pandemic and related countermeasures have previously impacted our operations.

During 2022, notwithstanding improvement in many markets in which we operate due to a return to more normalized business operations, certain markets continued to be adversely impacted by COVID-19 or as a result of policies relating to COVID-19.

Additionally, due to the pandemic and a global semiconductor chip shortage, we experienced disruption and delays in our supply chain and significant price increases with certain of our manufacturing partners, and those disruptions, delays and price increases may continue.

For example, in the second half of 2021 and throughout 2022, our results of operations were negatively impacted by increased expenses resulting from supply chain disruptions.

With the current global supply chain and transportation constraints, including delays in supply chain deliveries and the related global semi-conductor chip shortage may continue to have a material adverse effect on our operating results and could have a material adverse effect on customer relations and our financial condition.

We believe these supply chain challenges and their adverse impact on our industry will continue to ease during 2023.

However, there can be no assurance that the ongoing disruptions due to COVID-19, the related global semiconductor chip shortage or other supply chain constraints or price increases will be resolved in the near term, which could continue to adversely affect our business, financial condition, and results of operations.

We will continue to evaluate the nature and extent of the impact of COVID-19 on our business.

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

A substantial portion of our shipments in any fiscal period relates to orders received and shipped within that fiscal period for customers under agreements containing non-binding purchase commitments.

We ended 2023 with a year-over-year revenue increase of 12.0%, driven by an increase in volume of sales activity during the first half of 2023 due to the Business Combination with Adtran Networks partially offset by decreased volume of sales activity in our domestic ADTRAN, Inc.

operations due to customers' focus on reducing inventory levels and customers readjusting their capital expenditure budgets due to the uncertain macroeconomic environment related to continued elevated interest rates and ongoing inflationary pressures.

During 2023, we had one customer with revenues greater than 10.0% which was an international Service Provider customer and our five largest customers comprised 37.0% of our revenue.

Our year-over-year domestic revenue decreased by 10.9%, driven 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, partially offset by an increase in volume of sales activity in the first half of 2023 as a result of the Business Combination with Adtran Networks.

Internationally, our year-over-year revenue increased by 35.4%, primarily driven by an increase in volume of sales activity in the first half of 2023 as a result of the Business Combination with Adtran Networks partially offset 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.

Revenues in 2023 were impacted by normalization subsequent to the supply chain disruptions we saw during the pandemic.

This normalization has led to a reduction in lead times as customer concerns over inventory stocking levels affected the Subscriber Solutions category due to over-supply situation of CPE products which the Company expects to continue into the first half of 2024.

In the second half of 2023, our Access & Aggregation and Optical Networking revenue categories experienced a general slowdown in revenue as a result of reduced spending by our medium and large Service Provider customers as they continue to reduce inventory levels and monitor uncertain macroeconomic conditions related to continued elevated interest rates and ongoing inflationary pressures.

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.

In Europe, we continue to see increased activity from high-risk vendor replacement and broadband subsidy programs.

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 and integration with Adtran Networks.

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

These factors may result in limited order flow visibility.

We believe these supply chain challenges and their adverse impact on our industry will continue at least through fiscal 2023 and expect that the extended lead times and elevated supply chain costs experienced by our industry will persist for the reasonably foreseeable future.

It is unclear when the supply environment will become less volatile and what impacts the supply environment will have on the industry in future periods.

Operating expenses are relatively fixed in the short term;

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

Our operating results may also fluctuate as a result of a number of other factors, including a decline in general economic and market conditions, specifically the decline that initially resulted from the COVID-19 pandemic and that may recur and foreign currency exchange rate movements, inflation, regional conflicts, increased competition, customer order patterns, changes in product and services mix, timing differences between price decreases and product cost reductions, product warranty returns, expediting costs, tariffs and announcements of new products by us or our competitors.

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

For example, although, expedite fees and lead times for semiconductor chips and other key components began to ease during 2023 following shortages in the industry, 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 Business Efficiency Program, which includes a significant cost efficiency program targeting a reduction of ongoing operating expenses and a capital efficiency program inclusive of certain salary reductions, an early retirement program, a site consolidation plan to include lease impairments and the partial sale of owned real estate (including the potential sale of portions of our headquarters), inventory write downs from product discontinuances, 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.

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.

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

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

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

Also, not maintaining sufficient inventory levels to assure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements, which may negatively impact our operating results.

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 additional adverse effect on our business and operating results beyond the effects of the most recent inventory write-downs.

Also, not maintaining sufficient inventory levels to ensure prompt delivery of our products may cause us to incur expediting costs to meet customer delivery requirements, which may negatively impact our operating results.

We are exposed to changes in foreign currencies relative to the U.S.

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dollars for financial reporting purposes.

This impact of foreign-exchange rate changes is calculated based on the difference between the current period’s currency exchange rates and that of the comparable prior period.

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

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

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 assets (long-lived assets, intangibles and goodwill) held within our reporting units and to evaluate such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

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

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

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

It was determined that the decreases in projected future

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

Upon the conclusion of its quantitative impairment assessment, the Company recognized a $37.9 million non-cash goodwill impairment charge for the Services & Support reporting unit.

The Company did not recognize any impairment charges for the Network Solutions reporting unit during the third quarter of 2023.

During the fourth quarter of 2023, the Company qualitatively assessed the carrying value of each reporting unit for events or circumstance changes that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

During the fourth quarter of 2023, the Company completed its annual impairment test of the carrying value of reporting unit assets.

Based on our assessment of certain qualitative factors such as macro-economic conditions, industry and market considerations, cost factors and overall financial performance, management concluded that the fair value of the reporting unit was more likely than not greater than its carrying amount as of December 31, 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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Results of Operations

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

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

Amounts may not foot due to rounding.

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Network Solutions

Network Solutions - Inventory Write Down

Services & Support

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Research and development expenses

Asset impairments

Asset impairment

Goodwill impairments

Operating Loss

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Interest expense

Net investment (loss) gain

Other income (expense), net

Net investment gain (loss)

Other income, net

Loss Before Income Taxes

Income tax benefit (expense)

Net (Loss) Income

Net Loss attributable to non-controlling interest

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

Net Income (loss) attributable to non-controlling interest

Net Loss attributable to ADTRAN Holdings, Inc.

The following discussion and financial information are presented to aid in an understanding of our current consolidated financial position, changes in financial position, results of operations and cash flows and should be read in conjunction with the audited consolidated financial statements and notes thereto included herein.

The emphasis of the discussion is a comparison of the years ended December 31, 2023 and December 31, 2022.

For a discussion of a comparison of the years ended December 31, 2021 and December 31, 2020, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.

For a discussion of a comparison of the years ended December 31, 2022 and December 31, 2021, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2022, filed with the SEC on August 14, 2023.

Comparison of Years Ended December 31, 2023 and December 31, 2022

Our revenue increased 12.0% from $1,025.5 million for the year ended December 31, 2022 to $1,149.1 million for the year ended December 31, 2023.

The increase in revenue for the year ended December 31, 2022 is primarily attributable to a $365.9 million increase in volume of sales activity due to the Business Combination with ADVA and a $96.6 million increase in volume of sales activity related to our ADTRAN, Inc.

The increase in revenue by category for the year ended December 31, 2022 was primarily attributable to a $261.1 million increase in Optical Networking Solutions products due to the Business Combination with ADVA and a $184.2 million increase in Subscriber Solutions products.

Although our revenue increased, supply of semiconductor chips and other components of our products has become constrained resulting in extended lead times and increased costs.

Transportation constraints, including shortages for both air and surface freight, as well as labor shortages in the transportation industry, have also affected the timing and the cost of obtaining raw materials and production supplies.

Although our revenue growth and profitability in the near-term may be impacted by these global supply chain issues, our longer term outlook continues to strengthen given our progress with new customer opportunities and the increased customer demand.

Network Solutions segment revenue increased 83.8% from $498.8 million in 2021 to $916.8 million in 2022, due primarily to the increase of $320.3 million in volume of sales activity due to the Business Combination with ADVA and the increase in revenue for Subscriber Solutions products of $107.0 million, partially offset by a decrease in Access & Aggregation Solutions products of $9.3 million revenue in our ADTRAN, Inc.

Services & Support revenue increased by 69.5% from $64.2 million in 2021 to $108.7 million in 2022.

The increase in revenue for 2022 was primarily attributable to the increase of $45.6 million in volume of sales activity from the Business Combination with ADVA partially offset by a $3.1 million decrease in revenue for Access & Aggregation Solutions products in our ADTRAN, Inc.

Domestic revenue increased by 38.1% from $374.6 million in 2021 to $517.4 million in 2022, driven by increased volume of network termination and fiber CPE in our Network Solutions segment.

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

International revenue, which is defined as revenue generated from the Network Solutions and Services & Support segments provided to a customer outside of the U.S., increased by 169.7% from $188.4 million for the year ended December 31, 2021 to $508.1 million for the year ended December 31, 2022.

The increase in revenue for the year ended December 31, 2023 is primarily attributable to a $379.0 million increase in volume of sales activity during the first half of 2023 due to the Business Combination with Adtran Networks partially offset by a $255.4 million decrease in volume of sales activity due to customers’ focus on reducing inventory levels in our domestic ADTRAN, Inc.

operations and customers readjusting their capital expenditure budgets due to the uncertain macroeconomic environment.

The increase in revenue by category for the year ended December 31, 2023 was primarily attributable to a $231.9 million increase in Optical Networking Solutions category due to the Business Combination with Adtran Networks partially offset by a $92.7 million decrease in Subscriber Solutions products and a $15.6 million decrease in Access & Aggregation Solutions.

Ongoing customer concerns over inventory stocking levels have affected our revenue in the Subscriber Solutions category.

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

Network Solutions segment revenue increased 6.3% from $916.8 million in 2022 to $974.3 million in 2023, primarily due to an increase of $326.8 million in volume of sales activity during the first half of 2023 due to the Business Combination with Adtran Networks partially offset by a decrease of $159.7 million in Subscriber Solutions products, a decrease of $43.3 million in Access & Aggregation Solutions and a decrease of $66.3 million in Optical Networking Solutions product.

More specifically, for the year ended December 31,

2023, the decrease in revenue for 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 revenue increased 60.7% from $108.7 million in 2022 to $174.7 million in 2023.

The increase in revenue for 2023 was primarily attributable to the increase of $52.2 million in volume of sales activity during the first half of 2023 from the Business Combination with Adtran Networks, a $7.4 million increase in revenue for Optical Networking Solutions products, a $4.8 million increase in revenue for Access & Aggregation Solutions revenue and a $1.6 million increase in revenue for Subscriber Solutions services.

More specifically, the increase in revenue for the year ended December 31, 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 10.9% from $517.4 million in 2022 to $461.0 million in 2023, driven 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, partially offset by an increase in volume of sales activity during the first half of 2023 from the Business Combination with Adtran Networks.

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 35.4% from $508.1 million for the year ended December 31, 2022 to $688.1 million for the year ended December 31, 2023.

International revenue, as a percentage of total revenue, increased from 49.5% for the year ended December 31, 2022 to 59.8% for the year ended December 31, 2023.

The increase in international revenue for 2022 was primarily attributable to the increase in volume of $263.8 million in sales activity from the Business Combination with ADVA and increased shipments to a Tier-1 network operator and multiple alternative network operators in Europe.

While international revenue has increased to approximately 49.5% of total revenues for the year ended December 31, 2022, the mix of our Network Solutions and Services & Support segments as a percentage of total international revenue remains relatively linear.

For the year ended December 31, 2022 as compared to the year ended December 31, 2021, changes in foreign currencies relative to the U.S dollar decreased our net sales by approximately $41.5 million.

The increase in international revenue for 2023 was primarily attributable to an increase in volume of sales activity during the first half of 2023 as a result of the Business Combination with Adtran Networks 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.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, changes in foreign currencies relative to the U.S dollar increased our net revenue by approximately $9.0 million.

Our ADTRAN, Inc.

international revenue is largely focused on broadband infrastructure and is consequently affected by the decisions of our customers as to timing for installation of new technologies, expansion of their networks and/or network upgrades.

Our international customers must make these decisions in the regulatory and political environment in which they operate –

both nationally and in some instances, regionally –

whether of a multi-country region or a more local region within a country.

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

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

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

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

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 their cost to maintain these networks.

Cost of Revenue

As a percentage of revenue, cost of revenue increased from 68.1% for the year ended December 31, 2022 to 71.0% for the year ended December 31, 2023.

The increase was primarily attributable to acquisition related expenses, adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with ADVA, as well as supply chain constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

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

The increase was primarily attributable to $89.6 million 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 $24.3 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 year ended December 31, 2023, changes in foreign currencies relative to the U.S.

dollar decreased our cost of revenue by approximately $9.6 million.

Network Solutions cost of revenue, as a percentage of that segment’s revenue, increased from 61.7% of revenue in 2021 to 70.6% of revenue in 2022.

The increase in cost of revenue as a percentage of revenue was primarily attributable to acquisition related expenses, amortizations and adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with ADVA, as well as supply chain constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

Services & Support cost of revenue, as a percentage of that segment’s revenue, decreased from 57.3% of revenue in 2021 to 47.1% of revenue in 2022.

The decrease in cost of revenue as a percentage of revenue was primarily attributable to customer mix and changes in Services & Support mix as a result of the Business Combination with ADVA.

dollar increased our cost of revenue by approximately $1.5 million.

Network Solutions cost of revenue, as a percentage of that segment’s revenue, increased from 70.6% of revenue in 2022 to 76.7% of revenue in 2023.

The increase in cost of revenue as a percentage of revenue was primarily attributable to acquisition related expenses, amortizations and adjustments consisting of intangible amortization of backlog, developed technology and fair value adjustments to inventory costs that flow through to cost of revenue as a result of the Business Combination with 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 47.1% of revenue in 2022 to 39.6% of revenue in 2023.

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

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

Compared to our other services, such as maintenance, support and cloud-based management services, our network planning and implementation services typically utilize a higher percentage of internal and subcontracted engineers, professionals and contractors to perform the work for customers.

for customers.

The additional costs incurred to perform these infrastructure and labor-intensive services inherently result in lower average gross margins as compared to maintenance and support services.

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As a percentage of revenue, gross profit decreased from 31.9% for the year ended December 31, 2022 to 29.0% for the year ended December 31, 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 ADVA, as well as supply chain constraint related expenses and to a lesser extent changes in customer and product mix and a regional revenue shift in our ADTRAN, Inc.

operations partially offset by an increase in volume of sales activity due to the Business Combination with ADVA and an increase in volume of sales activity related to our ADTRAN, Inc.

The decrease was primarily attributable to $89.6 million 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 29.4% for the year ended December 31, 2022 to 23.3% for the year ended December 31, 2023.

operations partially offset by an increase in volume of sales activity due to the Business Combination with ADVA and an increase in volume of sales activity related to our ADTRAN, Inc.

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 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 52.9% for the year ended December 31, 2022 to 60.4% for the year ended December 31, 2023.

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

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

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.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenue decreased from 22.1% for the year ended December 31, 2021 to 20.4% for the year ended December 31, 2022.

Selling, general and administrative expenses as a percentage of revenue will generally fluctuate whenever there is a significant fluctuation in revenue for the periods being compared as these costs are relatively fixed in the short term.

Selling, general and administrative expenses as a percentage of revenue increased from 20.4% for the year ended December 31, 2022, to 22.5% for the year ended December 31, 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 year ended December 31, 2023 we saw a more significant increase due to higher expenses related to the Business Combination with Adtran Networks and other items described below.

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

Selling, general and administrative expenses increased by 23.6% from $208.9 million for the year ended December 31, 2022, to $258.1 million for the year ended December 31, 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 increase in selling, general and administrative expenses was primarily attributable to increased expenses related to the Business Combination with ADVA such as employee-related costs due to an increase in the number of employees, amortization of intangible assets, depreciation of property, plant and equipment and transactions costs.

For the year ended December 31, 2022 as compared to the year ended December 31, 2021, changes in foreign currencies relative to the U.S dollar decreased our selling, general and administrative expenses by approximately $4.4 million.

The increase in selling, general and administrative 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, 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 year ended December 31, 2023, as compared to the year ended December 31, 2022, changes in foreign currencies relative to the U.S dollar increased our selling, general and administrative expenses by approximately $1.3 million.

Research and Development Expenses

Research and development expenses as a percentage of revenue decreased from 19.3% for the year ended December 31, 2021 to 16.9% for the year ended December 31, 2022.

Research and development expenses as a percentage of revenue will fluctuate whenever there are incremental product development activities or significant fluctuations in revenue for the periods being compared as these costs are relatively fixed in the short term.

Research and development expenses increased by 59.9% from $108.7 million for the year ended December 31, 2021 to $173.8 million for the year ended December 31, 2022.

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

Research and development expenses as a percentage of revenue increased from 16.9% for the year ended December 31, 2022, to 22.5% for the year ended December 31, 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 in expenses related to the Business Combination with Adtran Networks and other items described below.

Our restructuring, business efficiency 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 by $84.5 million or 48.7% from $173.8 million for the year ended December 31, 2022, to $258.3 million for the year ended December 31, 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 of $70.5 million, depreciation of property, plant and equipment of $6.3 million and

restructuring expenses of $6.2 million.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, changes in foreign currencies relative to the U.S.

dollar decreased our research and development expenses by approximately $5.2 million.

ADVA has arrangements with governmental entities for the purposes of obtaining funding for research and development activities.

dollar increased our research and development expenses by approximately $0.1 million.

Adtran Networks has arrangements with governmental entities for the purposes of obtaining funding for research and development activities.

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

For the year ended December 31, 2022, the Company recognized $1.1 million as a reduction of research and development expense.

For the years ended December 31, 2023 and 2022, the Company recognized $5.2 million and $1.1 million, respectively, as a reduction of research and development expense.

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

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As a result, the Company recognized impairment charges of $17.4 million during the year ended December 31, 2022, primarily attributable to capitalized implementation costs for a cloud computing arrangement.

There were no asset impairments recognized during the year ended December 31, 2021.

There were no asset impairments recognized during the years ended December 31, 2023 and 2021.

See Note 10 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Goodwill Impairment

The Company recognized impairment charges of $37.9 million during the year ended December 31, 2023, primarily attributable to lower fair values of the Services & Support reporting unit driven by decreases in projected future cash flows, discount rates, overall macroeconomic conditions, as well as the decrease in our market capitalization.

There were no goodwill impairments recognized during the years ended December 31, 2022 and 2021.

See Note 9 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Interest and Dividend Income

Interest and dividend income decreased by 25.4% from $2.8 million for the year ended December 31, 2021 to $2.1 million for the year ended December 31, 2022.

The decrease in interest and dividend income was primarily attributable to a decrease in the investment balance for the twelve months ended December 31, 2022.

Interest and dividend income increased by 10.2% from $2.1 million for the year ended December 31, 2022 to $2.3 million for the year ended December 31, 2023.

Interest and dividend income was up due to increased income in the first half of 2023 as a result of the Business Combination with Adtran Networks and increased dividend income from the deferred compensation plan during the year ended December 31, 2023.

Our investments decreased from $33.0 million as of December 31, 2022 to $27.7 million as of December 31, 2023 and was primarily attributable to the sale of certain equity and fixed income investments for working capital and other purposes.

Interest Expense

Interest expense increased from less than $0.1 million for the year ended December 31, 2021 to $3.4 million for the year ended December 31, 2022.

The increase in interest expense was primarily related to an increase in assumed debt associated with the Business Combination with ADVA and the new Wells Fargo Credit Agreement.

See Note 13 and Note 14 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report and “Financing Activities”

in “Liquidity and Capital Resources”

Net Investment (Loss) Gain

We recognized a net investment gain of $1.8 million and a loss of $11.3 million for the years ended December 31, 2021 and 2022, respectively.

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

Interest expense increased from $3.4 million for the year ended December 31, 2022 to $16.3 million for the year ended December 31, 2023.

The increase in interest expense was primarily related to increased borrowings under 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 Consolidated Financial Statements, included in Part II, Item 8 of this report and “Financing Activities” in “Liquidity and Capital Resources” below.

Net Investment Gain (Loss)

We recognized a net investment loss of $11.3 million and a gain of $2.8 million for the years ended December 31, 2022 and 2023, respectively.

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

We expect that any future market volatility could result in continued fluctuations in our investment portfolio.

See “Investing Activities”

in “Liquidity and Capital Resources”

of this report and Note 1 and Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Other Income (Expense), net

Other income (expense), net, increased from income of $3.8 million for the year ended December 31, 2021 to income of $14.5 million for the year ended December 31, 2022.

For the years ended December 31, 2022 and 2021, other income (expense), net, is comprised primarily of unrealized gains on foreign exchange contracts, gains and losses on foreign currency transactions and income from excess material sales.

See “Investing Activities” in “Liquidity and Capital Resources” of this report and Note 1 and Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Other Income, net

Other income, net, decreased from income of $14.5 million for the year ended December 31, 2022 to income of $1.3 million for the year ended December 31, 2023.

For the years ended December 31, 2023 and 2022, other income, net, is comprised primarily of gains and losses on foreign currency transactions and income from excess material sales.

See Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of the report for additional information on foreign exchange contracts.

Income Tax Benefit (Expense)

Our effective tax rate changed from an expense of 37.0%, for the year ended December 31, 2021 to a benefit of 87.5% for the year ended December 31, 2022.

The change in the effective tax rate for the year ended December 31, 2022, was driven primarily by the release of the majority of our valuation allowance against our domestic deferred tax assets during the fourth quarter of 2022, that was partially offset by increased international tax expense primarily as a result of our closing of the Business Combination with ADVA during the third quarter of 2022.

Income Tax (Expense) Benefit

Our effective tax rate changed from a benefit of 87.5%, for the year ended December 31, 2022 to an expense of 12.2% for the year ended December 31, 2023.

The change in the effective tax rate for the year ended December 31, 2023, was driven primarily by the establishment of our valuation allowance against our domestic deferred tax assets during the fourth quarter of 2023, along with an increase in the global intangible low-taxed income ("GILTI") inclusion amount derived from the income of our controlled foreign companies.

See Note 14 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

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

Net Loss Attributable to ADTRAN Holdings, Inc.

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

decreased from $8.6 million for the year ended December 31, 2021 to a net loss of $2.0 million for the year ended December 31, 2022.

increased from $2.0 million for the year ended December 31, 2022 to a net loss of $267.7 million for the year ended December 31, 2023.

As a percentage of revenue, net loss was 0.2% for the year ended December 31, 2022 and net loss was 23.3% for the year ended December 31, 2023.

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

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

We had a net operating cash outflow in 2023.

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

As of December 31, 2022, the Company has incurred a total of $26.1 million of transaction costs related to the Business Combination.

We will also be obligated to compensate any annual net loss of ADVA under the DPLTA.

Additionally, pursuant to the terms of the DPLTA, each

ADVA shareholder (other than the Company) has received an offer to elect either (1) to remain an ADVA shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation.

Assuming all of the minority holders of currently outstanding ADVA shares were to elect the second option, we would be obligated to make aggregate Exit Compensation payments of approximately EUR 310.6 million or approximately $333.2 million, based on an exchange rate as of December 31, 2022.

In addition, we have increasingly relied upon our credit arrangements to manage our working capital needs.

As of December 31, 2023, our cash on hand was $87.2 million of which $73.0 million was held by our foreign subsidiaries.

The Company had access to $202.7 million on its Credit Facility for future borrowings;

however, as of December 31, 2023, the Company was limited to additional borrowings of $38.8 million based on debt covenant compliance metrics.

Generally, we intend to permanently reinvest funds held outside the U.S., except to the extent that any of these funds can be repatriated without withholding tax.

As of December 31, 2022, our cash on hand was $108.6 million and our 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.

Pursuant to the terms of the DPLTA, each Adtran Networks shareholder (other than the Company) has received an offer to elect either (1) to remain an Adtran Networks shareholder and receive from us an Annual Recurring Compensation payment, or (2) to receive Exit Compensation plus guaranteed interest.

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

The guaranteed interest rate is 5.0% plus a variable component (according to the German Civil Code) that was 3.12% as of December 31, 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 €310.3 million or approximately $342.5 million, based on an exchange rate as of December 31, 2023 and reflecting interest accrued through December 31, 2023 during the pendency of the appraisal proceedings discussed below.

Shareholders electing the first option of Annual Recurring Compensation may later elect the second option.

The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation expires on March 16, 2023 (subject to appraisal proceedings).

Our obligation to pay Annual Recurring Compensation under the DPLTA would lead to a continuing payment obligation, which would amount to approximately EUR 10.6 million or $11.4 million (based on the current exchange rate), per year assuming none of the minority ADVA shareholders were to elect Exit Compensation.

The opportunity for outside Adtran Networks shareholders to tender Adtran Networks shares in exchange for Exit Compensation had been scheduled to expire on March 16, 2023.

We are also obligated to absorb any annual net loss of Adtran Networks under the DPLTA.

Additionally, our obligation to pay Annual Recurring Compensation under the DPLTA is a continuing payment obligation, which will amount to approximately €10.6 million or $11.7 million (based on the current exchange rate) per year assuming none of the minority Adtran Networks shareholders were to elect Exit Compensation.

The foregoing amounts do not reflect any potential increase in payment obligations that we may have depending on the outcome of ongoing appraisal proceedings in Germany.

We believe that our cash and cash equivalents, investments, cash generated from operations and access to funds under the new Wells Fargo credit facility (described below) will be adequate to meet our operating and capital needs and our obligations under the Business Combination and the DPLTA for at least the next 12 months.

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

As of December 31, 2021, cash on hand was $56.6 million and short-term investments were $0.4 million, which resulted in available short-term liquidity of $57.0 million, of which $47.7 million was held by our foreign subsidiaries.

Generally, we intend to permanently reinvest funds held outside the U.S., except to the extent that any of these funds can be repatriated without withholding tax.

The decrease in short-term liquidity from December 31, 2021 to December 31, 2022 was primarily attributable to the sale of certain equity and fixed income investments for working capital and other purposes.

In addition to our cash and cash equivalents and the credit facility, we may fund a portion or all of the Exit Compensation through the sale of securities.

There can be no assurances that we would be successful in effecting these actions on commercially reasonable terms or at all.

During the year ended December 31, 2023, we accrued $11.5 million in Annual Recurring Compensation, which was reflected as an increase to retained deficit and shown as an other current liability in our Consolidated Balance Sheets.

With respect to the year ended December 31, 2023, we will be obligated to pay $11.5 million in Annual Recurring Compensation on the third banking day following the 2024 ordinary general shareholders’ meeting of Adtran Networks (but in any event within eight months following December 31, 2023).

On July 18, 2022, ADTRAN, Inc., as the borrower, and ADTRAN Holdings, Inc.

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”), which has since been amended three times.

Pursuant to the terms of the Credit Agreement, as amended, the Company, ADTRAN, Inc., and the subsidiary guarantors (together, the “Credit Parties”) are subject to a liquidity covenant, which provides that, during the fourth quarter of 2023 through and including the third quarter of 2024 (the "Covenant Relief Period") or a Springing Covenant Period, (i.e., the period beginning upon the purchase by the Company of at least 60% of the outstanding shares of Adtran Networks not owned by the Company as of August 9, 2023 and the three consecutive quarterly test periods after such date), as of the last day of any fiscal quarter, the cash and cash equivalents of the Credit Parties must be at least $50.0 million and the cash and cash equivalents of the Company and its subsidiaries must be at least $75.0 million, limiting our ability to pay the obligations under the DPLTA.

See below, as well as Note 12 and Note 23 of Notes to Consolidated Financial Statements included in Part II, Item, 8 for additional information regarding the terms of each amendment to the Wells Fargo Credit Agreement.

As of December 31, 2023, and as of the date of issuance of these financial statements, the Company does not have sufficient liquidity to meet the substantial majority of its payment obligations under the DPLTA pertaining to Exit Compensation.

For the year ended December 31, 2023, 67 thousand shares of Adtran Networks stock were tendered to the Company and Exit Compensation payments of approximately €1.2 million or approximately $1.3 million based on an exchange rate of December 31, 2023, were paid to Adtran Networks shareholders.

We believe the probability that more than a small minority 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 24-32 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 shares.

The Company experienced revenue declines in 2023.

To the extent that the Company is further impacted by the uncertain macroeconomic environment related to continued elevated interest rates and ongoing inflationary pressures, the Company has established plans to preserve cash liquidity and maintain compliance with the Company’s covenants.

The Company has suspended dividend payments and is continuing to implement a Business Efficiency Program, which includes, but is not limited to, planned reductions in operating expenses and a site consolidation plan.

In connection with the site consolidation plan, the Company is also exploring a potential sale of portions of our headquarters in Huntsville.

There can be no assurance that the Company will be successful in effecting this action on commercially reasonable terms or at all.

We may need to further reduce capital expenditures and/or take other steps to preserve working capital in order to ensure that we can meet our needs and obligations and maintain compliance with our debt covenants.

In summary, the Company believes that its cash and cash equivalents, investments, working capital management initiatives and availability to access cash under the Wells Fargo Credit Facility (described below), including (i) the additional funding provided for under the First Amendment to the Wells Fargo Credit Facility that was signed on August 9, 2023, (ii) the additional covenant headroom during the Covenant Relief Period provided for under the Second Amendment to Wells Fargo Credit Facility, and (iii) the exclusion of the Factoring Agreement as debt for purposes of the Credit Facility’s financial covenants as provided for under the Third Amendment to Wells Fargo Credit Facility (each as described below), will be adequate to meet our business operating requirements, our capital expenditures and our expected obligations under the DPLTA, including anticipated levels of Exit Compensation and continue to comply with our debt covenants under the Second Amendment for at least the next twelve months, from the issuance of these financial statements.

See below, as well as Note 12 and Note 23 of Notes to Consolidated Financial Statements included in Part II, Item 8 for additional information regarding the terms of the Wells Fargo Credit Agreement and its amendments.

Wells Fargo Credit Facility

On July 18, 2022, ADTRAN, Inc., as the borrower, and ADTRAN Holdings, Inc.

entered into the Credit Agreement with a syndicate of banks, including Administrative Agent, and the other lenders named therein (the “Credit Agreement”).

As of the date of this filing, the Credit Agreement allows for revolving credit borrowings of up to $400.0 million in aggregate principal amount, as well as the $50.0 million delayed draw term loan facility described below.

On August 9, 2023, (the "First Amendment Effective Date") the Company, its wholly-owned direct subsidiary, ADTRAN, Inc.

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, provided for, among other things, a new $50.0 million delayed draw term loan (“DDTL”), which (subject to certain conditions) 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 SE that were not owned by the Company and its subsidiaries as of the First Amendment Effective Date (such event, a “Springing Covenant Event”).

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

The DDTL remains available for borrowing from the occurrence of a Springing Covenant Event through August 9, 2024.

The First Amendment further added additional financial flexibility by permitting, subject to certain requirements, the incurrence of convertible indebtedness by the Company in an aggregate principal amount of up to $172.5 million.

Any such convertible indebtedness must, among other things, be incurred in pro forma compliance with the financial covenants in the Credit Agreement, be unsecured, and otherwise rank junior to borrowings under the Credit Agreement, and have a stated maturity date of at least 91 days after the latest scheduled maturity date of loans and commitments under the Credit Agreement.

Net cash proceeds from any incurrence of convertible indebtedness must be used to repurchase minority shares of Adtran Networks or repay revolver borrowings under the Credit Agreement.

On January 16, 2024, the Company entered into a Second Amendment to the Credit Agreement and First Amendment to the Collateral Agreement.

The Second Amendment, among other things, provided the Company and its subsidiaries with additional covenant headroom for the fourth quarter of 2023 through the third quarter of 2024 (the "Covenant Relief Period") and added certain other financial covenants which are described below.

On March 12, 2024, the Company entered into a Third Amendment to the Credit Agreement.

The Third Amendment, among other things, amends the definition of “Consolidated Funded Indebtedness” (which is used in the calculation of the Consolidated Total Net Leverage Ratio and the Consolidated Senior Secured Net Leverage Ratio) to exclude obligations of the Company and its subsidiaries under certain factoring arrangements when calculated for the fiscal quarters ending March 31, 2024 and June 30, 2024.

The Company is also currently in negotiations with the Administrative Agent regarding a potential further amendment to the Credit Agreement to address the addition of certain foreign subsidiary guarantors.

As of December 31, 2023, ADTRAN, Inc.’s borrowings under the revolving line of credit were $195.0 million.

As of December 31, 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 $50.0 million in letters of credit against our $400.0 million total facility.

As of December 31, 2023, we had a total of $2.3 million in letters of credit under ADTRAN, Inc.

outstanding against our eligible borrowings, leaving a net amount of $202.7 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.

As of December 31, 2023, the Company was in compliance with all material covenants.

Revolving Line of Credit Interest Rate

dollar borrowings under the revolving line of credit (other than swingline loans, which bear interest at the Base Rate (as defined below plus the applicable margin) bear interest, at the Company’s option, at a rate per annum equal to either (A) the Base Rate plus an applicable margin ranging from 0.65% to 1.65% per annum based on the Company’s Consolidated Total Net Leverage Ratio (or, during the Covenant Relief Period, an applicable margin of 2.15% per annum), or (B) Adjusted Term SOFR (as defined below) plus an applicable margin ranging from 1.65% to 2.65% per annum based on the Company’s Consolidated Total Net Leverage Ratio (or, during the Covenant Relief Period, an applicable margin of 3.15% per annum).

“Base Rate” means 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.

The Base Rate is subject to a floor of 1.00% per annum.

“Adjusted Term SOFR” means Term SOFR for the applicable interest period plus 0.10% per annum.

Adjusted Term SOFR is subject to a floor of 0.00% per annum.

All Euro borrowings under the revolving line of credit bear interest at a rate per annum equal to EURIBOR (as defined in the Credit Agreement and subject to a 0.00% per annum floor) plus an applicable margin ranging from 1.75% to 2.75% per annum based on the Company’s Consolidated Total Net Leverage Ratio (or, during the Covenant Relief Period, an applicable margin of 3.25% per annum).

In addition, (x) if on or prior to December 31, 2024 we have not reduced the aggregate revolving credit commitment to $340.0 million or less, the applicable margin for all loans shall be increased by 1.00% per annum, and (y) if on or prior to June 30, 2025 we have not reduced the aggregate revolving credit commitment to $300.0 million or less, the applicable margin for all loans shall be increased by 1.00% per annum.

In addition to paying interest on outstanding principal under the Credit Agreement, the Company is required to pay a quarterly commitment fee to the lenders under the Credit Agreement in respect of unutilized revolving loan commitments on the average daily unused portion of the revolving credit commitment of each lender, which commitment fee ranges from 0.20% to 0.25% per annum based on the Company’s Consolidated Total Net Leverage Ratio (or, during the Covenant Relief Period, is equal to 0.25% per annum).

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 Adjusted Term SOFR Loans or EURIBOR Loans, and other customary fronting, issuance and administration fees with respect to letters of credit.

The increases in the commitment fee and margin rates during the Covenant Relief Period (referenced above) continue until the first date when each of the following conditions have been met (the period during which such increases are in place is hereinafter referred to as the (“Applicable Margin Interest Period”):

(a) the Covenant Relief Period has ended, (b) since the Second Amendment effective date, the Company has repaid the revolving credit outstanding borrowings by a principal amount of at least $75.0 million, (c) the Company has reduced the aggregate revolving credit commitment to an amount no greater than $300.0 million and (d) the Company is in compliance with all financial covenants based on the financial statements for the most recently completed reference period.

Default interest is 2.0% per annum in excess of the rate otherwise applicable.

DDTL Interest Rate

dollar borrowings under the DDTL bear interest, at the Company’s option, at a rate per annum equal to either (A) the Base Rate plus an applicable margin ranging from 0.90% to 1.90% per annum based on the Company’s Consolidated Total Net Leverage Ratio (or, during the Covenant Relief Period, an applicable margin of 2.40% per annum), or (B) Adjusted Term SOFR plus an applicable margin ranging from 1.90% to 2.90% per annum based on the Company’s Consolidated Total Net Leverage Ratio (or, during the Covenant Relief Period, an applicable margin of 3.40% per annum).

In addition to paying interest on outstanding principal under the DDTL loan, the Company is required to pay a quarterly 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.

Default interest is 2.0% per annum in excess of the rate otherwise applicable.

Covenants Under the Credit Agreement

The financial covenants under the Credit Agreement, as amended, include the following (capitalized terms used in this subsection and not otherwise defined herein have the meanings assigned to them in the Credit Agreement or its amendments, as applicable)::

• As of the last day of any fiscal quarter, commencing with the fiscal quarter ended December 31, 2023, the Consolidated Total Net Leverage Ratio may not exceed 5.00x.

• As of the last day of any fiscal quarter, commencing with the fiscal quarter ended December 31, 2023, the Consolidated Senior Secured Net Leverage Ratio may not exceed:

• In the event of the purchase by the Company of at least sixty percent (60%) of the outstanding shares of Adtran Networks SE not owned by the Company as of August 9, 2023 that have been tendered (such event, a “Springing Covenant Event” and the fiscal quarter in which the Springing Covenant Event Occurs and the three consecutive quarterly test periods thereafter, the “Springing Covenant Period”), the following covenant levels:

• First fiscal quarter ending after a Springing Covenant Event:

• Second fiscal quarter ending after a Springing Covenant Event:

• Third and fourth fiscal quarters ending after a Springing Covenant Event:

• If the Company or any of its subsidiaries incurs certain unsecured indebtedness in excess of $50,000,000 in connection with a transaction that is a Springing Covenant Event or during a Springing Covenant Period, the Consolidated Senor Secured Net Leverage Ratio covenant will step down to 3.50x at the time of such incurrence.

• If a Springing Covenant Period is not in effect, the following covenant levels:

• From December 31, 2023 through and including March 31, 2024:

• From April 1, 2024 through and including June 30, 2024:

• From July 1, 2024 and thereafter:

• As of the last day of any fiscal quarter, commencing with the fiscal quarter ended December 31, 2023, the Consolidated Fixed Charge Coverage Ratio may not exceed 1.25x.

• During the Covenant Relief Period or a Springing Covenant Period, as of the last day of any fiscal quarter (i) cash and cash equivalents of the Credit Parties must be at least $50.0 million and (ii) cash and cash equivalents of the Company and its subsidiaries must be at least $75.0 million.

The Credit Agreement is guaranteed by certain domestic subsidiaries of the Company, and the Company is also required to add certain additional domestic and international subsidiaries as guarantors under the Credit Agreement (such existing and new guarantors, collectively, the “Guarantors”).

In addition to the guarantees provided by the Guarantors, the Guarantors have granted (or will grant) security interests in favor of the Administrative Agent over substantially all tangible and intangible assets, and the Borrower will grant mortgages in favor of the Administrative Agent over certain owned real estate assets.

The Company is currently in negotiations with the Administrative Agent regarding a potential further amendment to the Credit Agreement to address the addition of certain foreign subsidiary guarantors.

The Credit Agreement provides for revolving borrowings of up to $400.0 million in aggregate principal amount, as well as an additional $50.0 million delayed draw term loan tranche that would be available upon a Springing Covenant Event.

It also continues to permit the Company to prepay any or all of the outstanding loans or to reduce the commitments under the Credit Agreement subject to certain limitations and minimum payment thresholds.

During the Covenant Relief Period, the Company is not permitted to make certain dividend payments to the Company's Stockholders or certain other Restricted Payments.

However, the Company is permitted to make the Recurring Compensation Payment to each Adtran Networks shareholder (other than the Company), pursuant to the terms of the DPLTA.

See Note 20 for additional information.

Furthermore, the Credit Agreement, as amended, contain 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, make restricted payments, engage in mergers or consolidations, engage in transactions with affiliates, modify its organizational documents, and enter into certain restrictive agreements.

The negative covenants are subject to various exceptions and carveouts;

however, certain of the exceptions and carveouts are not permitted to be used during the Covenant Relief Period.

It also contains customary events of default, such as misrepresentation and a default in the performance or observance of any covenant (subject to customary cure periods and materiality thresholds).

Upon the occurrence and during the continuance of an event of default, the Administrative Agent is entitled to take various actions, including the acceleration of all amounts due under the Credit Agreement.

Operating Activities

Net cash used in operating activities of $44.2 million during the year ended December 31, 2022 decreased by $47.2 million compared to $3.0 million of net cash provided during the year ended December 31, 2021.

This decrease was primarily due to net cash outflows from working capital, specifically, an inventory build related to component availability, an increase in accounts receivables and transaction costs related to the Business Combination partially offset by an increase in the average number of days payable to our trade suppliers.

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

Net accounts receivable increased 76.0% from $158.7 million as of December 31, 2021 to $279.4 million as of December 31, 2022.

There was an allowance for credit losses of less than $0.1 million as of December 31, 2022 and no allowance for credit losses as of December 31, 2021.

The increase in net accounts receivable was due primarily to the increase in sales volume related to the Business Combination with ADVA and an increase in sales volume in our ADTRAN, Inc.

Quarterly accounts receivable DSO decreased from 95 days as of December 31, 2021 to 72 days as of December 31, 2022.

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

Other receivables increased 192.4% from $11.2 million as of December 31, 2021 to $32.8 million as of December 31, 2022.

The increase in other receivables was primarily attributable to an increase in prepaid taxes associated with Business Combination with ADVA and contract assets partially offset by a decrease in our receivables for sales of raw materials and reclaimed duty drawbacks.

Net cash used in operating activities of $45.6 million during the year ended December 31, 2023 increased by $1.4 million compared to $44.2 million of net cash used in during the year ended December 31, 2022.

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

Net accounts receivable decreased 22.5% from $279.4 million as of December 31, 2022 to $216.4 million as of December 31, 2023.

There was an allowance for credit losses of $0.4 million and less than $0.1 as of December 31, 2023 and December 31, 2022, respectively.

The decrease in net accounts receivable was due primarily to sales volume and timing of sales.

Quarterly accounts receivable DSO increased from 72 days as of December 31, 2022 to 88 days as of December 31, 2023.

The increase in DSO was primarily driven by customer and geographical mix of commercial terms and the international expansion associated with the Business Combination with Adtran Networks and timing of sales within the quarter.

Other receivables decreased 46.8% from $32.8 million as of December 31, 2022 to $17.5 million as of December 31, 2023.

The decrease in other receivables was primarily attributable to a decrease in sales of raw materials to our contract manufacturers.

Annual inventory turnover decreased from 2.46 turns as of December 31, 2022 to 2.07 turns as of December 31, 2023.

Inventory increased 205.6% from $139.9 million as of December 31, 2021 to $427.5 million as of December 31, 2022.

The increase in inventory was due to Business Combination with ADVA and strategic inventory buffer purchases given extended component lead times and availability constraints as well as new product ramp ups to ensure supply continuity.

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

Accounts payable increased 131.9% from $102.5 million as of December 31, 2021 to $237.7 million as of December 31, 2022.

The increase in accounts payable was primarily due to the increase in volume of operating costs associated with the Business Combination with ADVA, additional purchases of raw material inventory and extended payment terms.

Accounts payable will fluctuate due to variations in the timing of the receipt of inventory, supplies and services and our subsequent payments for these purchases.

Inventory decreased 15.3% from $427.5 million as of December 31, 2022 to $362.3 million as of December 31, 2023.

The decrease in inventory was primarily due to a $24.3 million write down of inventory due to discontinuation of certain product lines within our Network Solutions segment and a reduction in component purchases due to improved lead times and utilization of buffer stock.

We expect inventory levels to fluctuate as we attempt to maintain sufficient inventory for customer demand and improve working capital.

Accounts payable decreased 31.5% from $237.7 million as of December 31, 2022 to $162.9 million as of December 31, 2023.

The decrease in accounts payable was primarily due to a decrease in the average number of days payable to our trade suppliers and reduced purchases with inventory depletion.

Accounts payable fluctuate due to variations in the timing of the receipt of inventory, supplies and services and our subsequent payments for these purchases.

Investing Activities

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

The increase in capital expenditures 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 $5.3 million from $33.0 million as of December 31, 2022 to $27.7 million as of December 31, 2023.

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

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

See Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

As of December 31, 2022, our corporate bonds, municipal bonds, asset-backed bonds, mortgage/agency bonds, U.S.

government bonds and other government bonds were classified as available-for-sale and had a combined duration of 1.74 years with an average Standard & Poor’s credit rating of AA-.

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

Our long-term investments decreased 15.1% from $32.7 million as of December 31, 2022 to $27.7 million as of December 31, 2023.

This decrease was due to the sale of our fixed income investments.

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 December 31, 2023 and 2022, respectively.

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During 2023 and 2022, we paid shareholder dividends totaling $21.2 million and $22.9 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.

Beginning in the third quarter of 2022, the amount of dividends paid to shareholders increased from approximately $4.4 million per quarter to approximately $7.1 million per quarter which was due to the increased number of shareholders of the Company's stock as a result of the Business Combination with Adtran Networks.

On November 6, 2023, the Board of Directors suspended the Company’s quarterly cash dividend in order 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.

In addition, the Wells Fargo Credit Agreement currently does not allow for the payment of dividends to shareholders.

For addition information, see Note 20 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report and Liquidity & Capital Resources above .

The following table shows dividends per common share paid to our shareholders in each quarter of 2023 and 2022:

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Fourth Quarter

On February 20, 2023, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.09 per common share to be paid to the Company’s stockholders of record at the close of business on March 7, 2023.

The dividends will be paid on March 21, 2023 in the aggregate amount of approximately $7.0 million.

Stock Repurchase Program

There were no stock repurchases during the years ended December 31, 2022 and 2021, and there currently is no authorized stock repurchase plan.

The Company did not repurchase any stock during the years ended December 31, 2023 and 2022, and there currently is no authorized stock repurchase plan.

Stock Option Exercises

To accommodate employee stock option exercises, the Company issued 0.5 million and 0.4 million shares of common stock and treasury stock which resulted in proceeds of $6.9 million and $6.4 million during the years ended December 31, 2022 and 2021, respectively.

Additionally, to accommodate ADVA Optical Networking SE stock option exercises, ADVA Optical Networking SE issued 0.1 million of ADVA Optical Networking SE common stock which resulted in proceeds of $0.8 million, during the period July 15, 2022 to December 31, 2022.

ADVA Optical Networking SE stock options outstanding as of December 31, 2022 totaled 81 thousand (representing less than 0.2% of ADVA's outstanding shares), of which 27 thousand were exercisable.

To accommodate employee stock option exercises, the Company issued 23 thousand and 0.5 million shares of common stock and treasury stock which resulted in proceeds of $0.5 million and $6.9 million during the years ended December 31, 2023 and 2022, respectively.

Additionally, to accommodate Adtran Networks stock option exercises, Adtran Networks issued 0.1 million of Adtran Networks common stock which resulted in proceeds of $0.8 million, during the period July 15, 2022 to December 31, 2022.

Adtran Networks issued 0.1 million of Adtran Networks common stock which resulted in proceeds of $0.4 million, during the year ended December 31, 2023.

Adtran Networks stock options outstanding as of December 31, 2023 totaled 18 thousand (representing less than 0.1% of Adtran Networks' outstanding shares), of which none were exercisable.

Employee Pension Plan

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Actual results that differ from the assumptions and changes in assumptions could affect future expenses and obligations.

In connection with the Business Combination, we acquired $29.6 million of additional obligations and $22.3 million of assets related to postemployment benefit plans for certain groups of employees at our new operations outside of the U.S.

Plans vary depending on the legal, economic, and tax environments of the respective country.

For defined benefit plans, accruals for pensions and similar commitments have been included in the results for this year.

The new defined benefit plans are for employees in Switzerland, Italy, Israel and India:

Details regarding the pension plans are set forth below.

• In Germany, there is one defined benefit pension plan and one defined contribution plan.

Both plans provide benefits in the event of retirement, death or disability.

The plan's benefits are based on age, years of service and salary.

The defined benefit plan is financed by contributions paid by the Company and the defined contribution plan is financed by contributions paid by the participants.

• In Switzerland, there are two defined benefit pension plans.

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Our investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants and consider a broad range of economic conditions.

The objectives of our investment policy are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’

actuarial assumptions and achieve asset returns that are competitive with like institutions employing similar investment strategies.

The objectives of our investment policy are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions and achieve asset returns that are competitive with like institutions employing similar investment strategies.

The investment policy is periodically reviewed by us and a designated third-party fiduciary for investment matters.

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The projected benefit obligation for our defined benefit pension plans was $67.9 million and $59.3 million as of December 31, 2023 and 2022, respectively.

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

The components of net periodic pension cost and amounts recognized in other comprehensive (loss) income for the years ended December 31, 2022 and 2021 were ($5.8) million and ($5.0) million, respectively.

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

The components of net periodic pension cost and amounts recognized in other comprehensive income (loss) for the years ended December 31, 2023 and 2022 were $5.1 million and ($5.8) million, respectively.

Actuarial gains and losses are recorded in accumulated other comprehensive (loss) income.

To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the projected benefit obligation, the excess is amortized as a component of net periodic pension cost over the remaining service period of active participants.

We estimate that less than $0.1 million will be amortized from accumulated other comprehensive (loss) income into net periodic pension cost in 2023 for the net actuarial loss.

We estimate that less than $0.1 million will be amortized from accumulated other comprehensive income into net periodic pension cost in 2024 for the net actuarial loss.

The net actuarial loss recognized in accumulated other comprehensive loss as of December 31, 2023 and 2022 was $2.5 million and $1.1 million, respectively.

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Off-Balance Sheet Arrangements

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

We have exposure to credit losses from off-balance sheet exposures used 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 December 31, 2023.

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

See Note 20 of the Notes to Condensed Consolidated Financial Statements, included in Part II, Item 8 of this report for additional information.

Cash Requirements

The following table summarizes the Company’s material short- and long-term cash requirements from known obligations pursuant to certain contracts and commitments as of December 31, 2022, as well as an estimate of the timing in which such obligations and payments are expected to be satisfied (but excluding payments that may be made pursuant to the DPLTA and currency hedging arrangements, which are discussed below).

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 December 31, 2023, as well as an estimate of the timing in which such obligations and payments are expected to be satisfied (but excluding payments that may be made pursuant to the DPLTA and currency hedging arrangements, which are discussed below).

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

(In thousands)

Wells Fargo credit agreement (1)

Nord/LB revolving line of credit (2)

Syndicated credit agreement working capital line of credit (3)

DZ Bank revolving line of credit (4)

Syndicated credit agreement note payable (5)

Secured borrowings related to accounts receivable (2)

Purchase obligations (3)

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(1) See description below.

(2) See description below.

(3) See description below.

(4) See description below.

(5) See description below.

(2) Secured borrowings related to our accounts receivable factoring agreement that are expected to be repaid within 12 months..

(3) We have purchase obligations related to open purchase orders to our contract manufacturers, ODMs, component suppliers, service partners and other vendors.

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and in certain international locations.

Our operating leases had remaining lease terms ranging from one month to 119 months as of December 31, 2022.

New Wells Fargo Credit Agreement

Our operating leases had remaining lease terms ranging from two months to 116 months as of December 31, 2023.

Stock Repurchase Program

There were no stock repurchases during the years ended December 31, 2023 and 2022, and there currently is no authorized stock repurchase plan.

Wells Fargo Credit Agreement

On July 18, 2022, ADTRAN Holdings, Inc.

and ADTRAN, Inc., as the borrower, entered into a credit agreement with a syndicate of banks, including Wells Fargo Bank, National Association, as administrative agent (“Administrative Agent”), and the other lenders named therein (the “Credit Agreement”).

The Credit Agreement allows for borrowings of up to $100 million in aggregate principal amount, subject to being increased to up to $400 million in aggregate principal amount upon the Company or Borrower’s execution of a DPLTA with ADVA or a parent of ADVA, among other conditions (the “Senior Credit Facilities Increase”).

The DPLTA as executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register ( Handelsregister ) of the local court ( Amtsgericht ) at the registered seat of ADVA (Jena).

See Note 24 of the Notes to Consolidated Financial Statements for further information.

As of December 31, 2022, ADTRAN, Inc.’s borrowings under the revolving line of credit were $60.0 million in tranches that mature during the first quarter of 2023 and can either be repaid or borrowed again for a one month, three month or six month period.

In addition, we may issue up to $25 million in letters of credit against the first $100 million in our total facility.

As of December 31, 2022, we had a total of $21.3 million in letters of credit with ADTRAN, Inc.

outstanding against our eligible borrowings, leaving a net amount of $18.7 million available for future borrowings.

Upon the DPLTA becoming effective on January 16, 2023, the available total borrowings under the Wells Fargo Credit Agreement increased from $100 million to $400 million.

On January 31, 2023, the Company increased its borrowings under the Credit Agreement from $60.0 million to $187.5 million.

In February 2023, the borrowings under the Credit Agreement were paid down by $7.5 million, leaving $180.0 million of borrowings as of February 28, 2023.

After considering our outstanding letters of credit, this leaves the Company approximately $198.7 million available for future borrowings as of February 28, 2023.

The Company used approximately $51.4 million of the proceeds from the borrowings under the Credit Agreement to retire the outstanding borrowings under ADVA's syndicated credit agreement note payable, syndicated credit agreement working capital line of credit and the Nord/LB revolving line of credit.

ADVA's $9.1 million of borrowings under its revolving line of credit with DZ Bank remain outstanding.

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

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

borrowings under the Credit Agreement (other than swingline loans, which will bear interest at the Base Rate (as defined below)) will bear interest, at the Company’s option, at a rate per annum equal to (A)(i) the highest of (a) the federal funds rate (i.e., for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the business day next succeeding such day) plus ½

of 1%, (b) the prime commercial lending rate of the Administrative Agent, as established from time to time at its principal U.S.

office (which such rate is an index or base rate and will not necessarily be its lowest or best rate charged to its customers or other banks), and (c) the daily Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor plus 1%, plus (ii) the applicable rate, ranging from 0.5% to 1.25% (the “Base Rate”), or (B) the sum of the Adjusted Term SOFR (as defined in the Credit Agreement) plus the applicable rate, ranging from 1.4% to 2.15%, provided that such sum is subject to a 0.0% floor (such loans utilizing this interest rate, “SOFR Loans”).

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

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

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

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

The Company is also required to pay a participation fee to the Administrative Agent for the account of each lender with respect to the Company’s participations in letters of credit at the then applicable rate for SOFR Loans.

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

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

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

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

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

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

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.

and ADTRAN, Inc., as the borrower, entered into the Credit Agreement with the Administrative Agent and the other lenders named therein.

The Credit Agreement was subsequently amended on August 9, 2023, January 16, 2024 and March 12, 2024.

The Credit Agreement provides for a revolving line of credit and a DDTL.

As of December 31, 2023, ADTRAN, Inc.’s borrowings under the revolving line of credit were $195.0 million.

As of December 31, 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.

See Note 12 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report and “Liquidity and Capital Resources” in Part II, Item 7 of this report for additional information.

Nord/LB Revolving Line of Credit

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

During the term of the loan, ADVA is obligated to maintain an adjusted net debt to cover ratio that is equal to or less than 2.75.

As of December 31, 2022, ADVA’s borrowings under the revolving line of credit were $16.1 million.

On January 31, 2023, the Company increased its borrowings under the Wells Fargo Credit Agreement.

A portion of the proceeds from the borrowings were used to retire the outstanding borrowings under the Nord/LB revolving line of credit.

On March 29, 2023, Adtran Networks entered into a $16.1million unsecured revolving line of credit with Norddeutsche Landesbark - Girozentrale (Nord/LB) that bore interest of Euro Short Term Rate plus 1.94%.

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

As of December 31, 2023, Adtran Networks repaid the outstanding borrowings and terminated the Nord/LB Revolving Line of Credit.

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 bore interest of Euro Short Term Rate plus 1.4% and matured in August 2023.

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

Syndicated Credit Agreement Working Capital Line of Credit

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

The interest rate for the working capital line of credit is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35% as of December 31, 2022.

The working capital line of credit matures in September 2023.

As of December 31, 2022, borrowings under the working capital line of credit totaled $10.7 million.

On January 31, 2023, the Company increased its borrowings under the Wells Fargo Credit Agreement.

A portion of the proceeds from the borrowings were used to retire the outstanding borrowings under the syndicated credit agreement working capital line of credit.

DZ Bank Money Market Facility

As of December 31, 2022, ADVA’s borrowings under its revolving line of credit with DZ Bank totaled $9.1 million, with no amounts available for future borrowings.

The interest rate is currently a fixed rate of 2.85%, which resets monthly based on renewal of the loan.

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 and terminated the syndicated credit agreement working capital line of credit.

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 and terminated the DZ Bank revolving line of credit.

Syndicated Credit Agreement Note Payable

In September 2018, ADVA entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch German Business to borrow $63.7 million.

As of December 31, 2022, the amount outstanding under the note payable is $24.6 million.

The interest rate for the note payable is adjusted periodically based on a defined leverage ratio and is currently EURIBOR plus 1.35% as of December 31, 2022.

The note payable matures in September 2023.

On January 31, 2023, the Company increased its borrowings under the Wells Fargo Credit Agreement.

A portion of the proceeds from the borrowings were used to retire the outstanding borrowings under the syndicated credit agreement note payable.

In September 2018, Adtran Networks entered into a syndicated credit agreement with Bayerische Landesbank and Deutsche Bank AG Branch German Business to borrow $63.7 million.

On January 31, 2023, the Company repaid the outstanding borrowings and terminated the syndicated credit agreement note payable.

Currency Hedging Arrangements

On November 3, 2022, the Company entered into a euro/U.S.

dollar cross-currency swap arrangement (the “Swap”) with Wells Fargo Bank, N.A.

(the “Hedge Counterparty”).

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

Under the Swap, the Company will exchange an aggregate notional amount of $160.0 million U.S.

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

The aggregate amount of $160.0 million will be divided into eight quarterly tranches of $20.0 million.

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

(the “Hedge Counterparty”).

The Initial Forward, which is governed by the provisions of an ISDA Master Agreement (including schedules thereto and transaction confirmations that supplement such agreement) entered into between the Company and the Hedge Counterparty, enable the Company to convert a portion of its euro denominated payment obligations under the proposed 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 $1.0141 to $1.0305.

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 twelve months ended December 31, 2023, the Company settled four €20.0 million forward contract tranches and the remaining amount will be divided into four quarterly tranches of €20.0 million.

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

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

The Swap may be accelerated or terminated early for a number of reasons, including but not limited to (i) non-payment by the Company or the Hedge Counterparty, (ii) breach of representation or warranty or covenant by either party or (iii) insolvency or bankruptcy of either party.

ADVA Domination and Profit and Loss Transfer Agreement

On December 1, 2022, we, as the controlling company, entered into the DPLTA with ADVA, as the controlled company (the “DPLTA”).

The DPLTA, which was executed on December 1, 2022, became effective on January 16, 2023, as a result of its registration with the commercial register ( Handelsregister ) of the local court ( Amtsgericht ) at the registered seat of ADVA (Jena).

Under the DPLTA, subject to certain limitations pursuant to applicable law, (i) we are entitled to issue binding instructions to the management board of ADVA, (ii) ADVA will transfer all of its annual profits to us, subject to, among other things, the creation or dissolution of certain reserves, and (iii) we will generally absorb all annual losses incurred by ADVA.

The obligation of ADVA to transfer its annual profit to us, as well as our obligation to absorb ADVA’s annual net loss, applies for the first time to the profits or losses generated in the ADVA fiscal year 2023.

The Annual Recurring Compensation is due on the third banking day following the ordinary general shareholders’

meeting of ADVA in 2024.

Our aggregate potential payment obligations under the DPLTA are discussed above under " Liquidity ".

The opportunity for outside ADVA shareholders to tender ADVA shares in exchange for Exit Compensation had been scheduled to expire on March 16, 2023.

The Initial Forward may be accelerated or terminated early for a number of reasons, including but not limited to (i) non-payment by the Company or the Hedge Counterparty, (ii) breach of representation or warranty or covenant by either party or (iii) insolvency or bankruptcy of either party.

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

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

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

dollars for euros at a daily fixed forward rate ranging from $1.0882 to $1.0955 per €1.00.

During the twelve months ended December 31, 2023, the Company settled four $20.0 million forward contract tranches and the remaining amount will be divided into four 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.

Receivables Purchase Arrangements

The Company is party to a Receivables Purchase and Servicing Agreement with True Value S.A.R.L.

(the “Factoring Agreement”), which accelerates receivable collection and helps to better manage cash flow.

Total accounts receivables factored as of December 31, 2023 and December 31, 2022, totaled $17.5 million and $14.9 million, respectively, of which $2.8 million and $1.2 million was retained pursuant to the Factoring Agreement in the reserve account, respectively.

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

The cost of receivables purchase agreement is included in interest expense in the Consolidated Statements of Loss and totaled $0.9 million and $0.3 million for the years ended December 31, 2023 and December 31, 2022, respectively.

Domination and Profit and Loss Transfer Agreement

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

Under the DPLTA, subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, (i) the Company is entitled to issue binding instructions to the management board of Adtran Networks, (ii) Adtran Networks will transfer its annual profit to the Company, subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net loss incurred by Adtran Networks.

The obligation of the Company to absorb Adtran Networks’ annual net loss applied for the first time to the loss generated in 2023.

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 December 31, 2023.

Shareholders electing the first option of Annual Recurring Compensation may later elect the second option.

The opportunity for outside Adtran Networks shareholders to tender Adtran Networks shares in exchange for Exit Compensation

had been scheduled to expire on March 16, 2023.

We currently hold 33,961,170 no-par value bearer shares of ADVA, representing 65.30% of ADVA’s outstanding shares as of February 14, 2023.

We are also obligated to absorb any annual net loss of Adtran Networks under the DPLTA.

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 year ended December 31, 2023, we accrued $11.5 million in Annual Recurring Compensation, which was reflected as an increase to retained deficit.

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

For the year ended December 31, 2023, 67 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately €1.2 million or approximately $1.3 million based on an exchange rate as of December 31, 2023, were paid to Adtran Networks shareholders.

We currently hold 33,957,538 no-par value bearer shares of Adtran Networks, representing 65.32% of Adtran Networks outstanding shares as of February 2, 2024.

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

During the year ended December 31, 2022, we recognized $14.2 million of transaction costs relating to the Business Combination.

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

Business Combination Transaction Costs

As of December 31, 2023, the Company has incurred $26.2 million of transaction costs related to the Business Combination.

During the years ended December 31, 2023, 2022 and 2021, $0.1 million, $14.2 million and $11.9 million of transaction costs were incurred, respectively.

Business Efficiency Program

The Business Efficiency Program expands upon other recently implemented restructuring efforts and synergy costs following the Business Combination.

During the year ended December 31, 2023, we recognized $25.1 million of costs relating to the Business Efficiency Program.

We expect costs in the first quarter 2024 and thereafter relating to the Business Efficiency Program to range between $22.2 million and $35.2 million.

Management expects these planned costs to include severance costs ranging from $12.2 million to $18.9 million in connection with an early retirement program and reductions in workforce, inventory write downs from product discontinuances ranging from $7.6 million to $10.3 million, and site consolidation transaction expenses (primarily brokers fees) ranging from $2.4 million to $6.0 million.

Future cash payments include:

However, we are not able to estimate the amount or range of amounts of such potential incremental charges as of the date of this filing.

If required, we will amend this disclosure at such time as management is able in good faith to estimate the amount, or range of amounts, of these charges.

Business Combination Integration Costs

During the year ended December 31, 2023, we recognized $4.9 million of integration costs related to the Business Combination that are included in selling, general and administrative expenses in the Condensed Consolidated Statement of Loss.

We expect to incur additional

integration costs and expenses associated with the implementation of the DPLTA throughout 2024 and such costs are expected to be material.

These costs are separate and apart from the costs associated with the integration program discussed below.

Multi-Year Integration Program

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

During the years ended December 31, 2023 and 2022, we recognized $21.5 million and $1.6 million of restructuring costs relating to the Business Combination under the multi-year integration program, 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.

The Company does not anticipate additional material expenses to be incurred in connection with this integration program.

See Note 23 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report for additional information.

Other Cash Requirements

During the year ended December 31, 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.

Performance Bonds

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The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices.

Stand-alone selling prices are determined based on the prices at which the separate products and services are sold and are allocated based on each item’s relative value to the total value of the products and services in the arrangement.

For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin”

For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach.

Payment terms are generally 30 days in the U.S.

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The contract asset is transferred to accounts receivable when the completed performance obligation is invoiced to the customer.

Accounts Receivable Factoring

The Company has entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-recourse basis.

These transactions are accounted for in accordance with Accounting Standards Codification ("ASC") Topic 860, Transfers and Servicing, and result in a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers.

Trade accounts receivables balances sold are removed from the Consolidated Balance Sheets and cash received is reflected as cash provided by (used in) operating activities in the Consolidated Statements of Cash Flow.

Factoring related interest expense is recorded to interest expense on the Consolidated Statements of (Loss) Income.

On each sale date, the financial institution retains from the sale price a default reserve, up to a required balance, which is held by the financial institution in a reserve account and pledged to the Company.

The financial institution is entitled to withdraw from the reserve account the sale price of a defaulted receivable.

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

New Accounts Receivable Factoring Agreement

On December 19, 2023, the Company entered into a new factoring agreement with a third-party financial institution to replace the Company’s prior accounts receivable purchase agreement and to sell, on a revolving basis, undivided interests in the Company’s accounts receivable.

The new factoring agreement qualifies for treatment as a secured borrowing with a pledge of collateral under Accounting Standards Codification ("ASC") Topic 810, Consolidations, as the Company is considered the primary beneficiary in a variable interest entity created to hold the factored receivables and the Company retains a residual claim on reserves related to the factored receivables .

The receivables factored continue to be carried in accounts receivable, less allowance for credit losses on the Consolidated Balance Sheets, secured borrowings are carried on the Company’s Consolidated Balance Sheets as a current liability, in accounts payable, proceeds and repayments of secured borrowings are reflected as cash flows provided by (used in) financing activities in the Consolidated Statements of Cash Flows and program fees are recorded in interest expense in the Company’s Consolidated Statements of Loss.

The short-term liability classification of the secured borrowings is based on the estimated timing of the collection of the accounts receivable which are expected to be received within 12 months.

See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for additional information.

Previous Accounts Receivable Factoring Agreement

The Company had previously entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-recourse basis.

These transactions were accounted for in accordance with ASC Topic 860 and resulted in a reduction in accounts receivable because the agreement transferred effective control over and risk related to the receivables to the buyers.

Trade accounts receivables balances sold were removed from the Consolidated Balance Sheets and cash received was reflected as cash flows (used in) provided by operating activities in the Consolidated Statements of Cash Flow.

Factoring related interest expense was recorded to interest expense on the Consolidated Statements of Loss.

On each sale date, the financial institution retained from the sale price a default reserve, up to a required balance, which was held by the financial institution in a reserve account and pledged to the Company.

The financial institution was entitled to withdraw from the reserve account the sale price of a defaulted receivable.

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

We carry our inventory at the lower of cost and net realizable value, with cost being determined using the first-in, first-out method.

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As of December 31, 2023, total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $15.5 million.

Pursuant to the Business Combination, which closed on July 15, 2022, ADVA stock option holders were entitled to have their ADVA stock options assumed by ADTRAN Holdings (applying the exchange ratio in the Business Combination Agreement), thereafter representing options to acquire stock of ADTRAN Holdings.

Pursuant to the Business Combination, which closed on July 15, 2022, Adtran Networks stock option holders were entitled to have their Adtran Networks stock options assumed by ADTRAN Holdings (applying the exchange ratio in the Business Combination Agreement), thereafter representing options to acquire stock of ADTRAN Holdings.

The maximum number of shares of ADTRAN Holdings stock potentially issuable upon such assumption was 2.3 million shares.

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

A total of 2.1 million shares of ADTRAN Holdings stock are subject to assumed ADVA options.

A total of 2.1 million shares of ADTRAN Holdings stock were subject to assumed Adtran Networks options.

The determination of the fair value of stock options assumed by ADTRAN Holdings was estimated using the Monte Carlo method and is affected by its stock price, as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.

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

The carrying value of goodwill is tested for impairment in the fourth quarter of each year or more frequently if events or circumstances indicate it may be impaired.

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

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

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

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

In connection with the Business Combination with ADVA the Company recognized $350.5 million of goodwill upon the closing of the exchange offer on July 15, 2022.

Therefore, we decided to proceed directly to the quantitative test of goodwill and forego the qualitative assessment.

We estimate the fair value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.

A discounted cash flow analysis requires us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants.

We also estimate the fair value of our reporting units based on a peer group analysis, whereby companies in the telecommunications industry or with a comparable product and market structure are used to calculate a fair enterprise value using revenue, EBITDA and debt multiples of trading value.

The Company’s annual impairment assessment is done at the reporting unit level, which we determined are generally the same as our operating segments, which are identified in Note 18 to the Consolidated Financial Statements.

We review goodwill for impairment annually during the fourth quarter and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount.

Such events and circumstances may include among others:

a significant adverse change in legal factors or in the general business climate;

significant decline in our stock price and market capitalization;

unanticipated competition;

the testing for recoverability of a significant asset group within the reporting unit;

and an adverse action or assessment by a regulator.

Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

Due to the Company's decreased market capitalization and long-term projections, a reassessment of our estimated future undiscounted cash flows within our two identified reporting units was triggered.

Therefore an interim impairment test over goodwill was performed as of September 30, 2023.

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

Management’s determination of the fair value of our reporting units, based on future cash flows for the reporting units, requires significant judgment and the use of estimates and assumptions related to cash flow projections, discount rate, peer group determination and market multiple selection.

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.

As a result of the interim assessment, the Company recorded a goodwill impairment charge of $37.9 million as its estimated fair value was less than its book value on that date.

The Company’s annual impairment test date was October 1, 2023.

The Company concluded that there was no goodwill impairment as of that date as there was no change in enterprise value from the September 30, 2023 testing date.

Between the annual impairment date of October 1, 2023 and year-end December 31, 2023, there were no additional triggering events.

As a result of the Business Combination during 2022, the Company recognized $350.5 million of goodwill.

During the fourth quarter of 2022, we decided to proceed directly to the quantitative test of goodwill and forego the qualitative assessment.

We estimated the fair value of our reporting units based on an income approach, whereby we calculated the fair value of a reporting unit based on the present value of estimated future cash flows.

Our discounted cash flow analysis required us to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates, which are based on our budgets, business plans, economic projections, anticipated future cash flows and market participants.

We also estimated the fair value of our reporting units based on a peer group analysis, whereby companies in the telecommunications industry or with a comparable product and market structure are used to calculate a fair enterprise value using revenue, EBITDA and debt multiples of trading value.

Based on our analysis, management concluded that there was no impairment of goodwill as of December 31, 2022.

No goodwill impairment charges were recognized during the years ended December 31, 2021 and 2020.

No goodwill impairment charge was recorded in 2021 as a result of the Company’s internal assessment.

The balance of our goodwill was $353.4 million and $381.7 million as of December 31, 2023 and 2022, respectively.

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Amortization is recorded over the estimated useful lives of the respective assets.

As part of the purchase price allocation related to the Business Combination with ADVA, the Company recognized $403.8 million of intangible assets on July 15, 2022.

Intangible assets are reviewed for impairment whenever events and circumstances indicate impairment may have occurred.

The Company assessed impairment triggers related to intangible assets during the fourth quarter of 2022, 2021 and 2020.

As a result, no quantitative impairment test of long-lived assets was performed as of December 31, 2022, 2021 and 2020, and no impairment losses of intangible assets were recorded during the years ended December 31, 2022, 2021 and 2020.

As part of the purchase price allocation related to the Business Combination with Adtran Networks, the Company recognized $403.8 million of intangible assets on July 15, 2022.

The balance of our intangible assets was $328.0 million and $401.2 million as of December 31, 2023 and 2022, respectively.

Impairment of Long-Lived Assets and Intangibles

Long-lived assets and intangibles used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets within a reporting unit may not be recoverable and the undiscounted cash flows estimated to be generated by the assets are less than the reporting units carrying value.

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

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

As a result the Company recognized impairment charges of $17.4 million during the year ended December 31, 2022 primarily related to capitalized implementation costs for a cloud computing arrangement.

The impairment charges were determined based on actual costs incurred.

There were no impairment losses for long-lived assets during the years ended December 31, 2023 and 2021, or for intangible assets recognized during the years ended December 31, 2023, 2022 or 2021.

We estimate our income tax provision or benefit in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities.

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Our products generally include warranties of 90 days to five years for product defects.

We accrue for warranty returns at the time of product shipment based on our historical return rate and an estimate of the cost to repair or replace the defective products.

We accrue a provision for warranty returns at the time of product shipment based on our historical return rate and an estimate of the cost to repair or replace the defective products.

We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers.

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If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the purchase price, a bargain purchase gain is recorded.

The Company’s estimates of fair value are based on historical experience, industry knowledge, certain information obtained from the management of the acquired company and, in some cases, valuations performed by independent third-party firms.

The results of operations of acquired companies are included in the accompanying Consolidated Statements of (Loss) Income since their dates of acquisition.

The results of operations of acquired companies are included in the accompanying Consolidated Statements of Loss since their dates of acquisition.

Costs incurred to complete the Business Combination, such as legal, accounting or other professional fees, are charged to selling, general and administrative expenses as incurred.

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A hypothetical 50 basis point decline in interest rates as of December 31, 2023, assuming all other variables remain constant, would reduce annualized interest income on our cash and investments by less than $0.1 million.

In addition, we held $9.1 million of fixed-rate bonds whose fair values may be directly affected by a change in interest rates.

A hypothetical 50 basis point increase in interest rates as of December 31, 2022, assuming all other variables remain constant, would reduce the fair value of our fixed-rate bonds by approximately $0.1 million.

As of December 31, 2022, the carrying amounts of our revolving credit agreements and notes payable totaled $95.9 million and $24.6 million, respectively, where a change in interest rates would impact our interest expense.

As of December 31, 2023, the carrying amounts of our revolving credit agreements totaled $195.0 million where a change in interest rates would impact our interest expense.

A hypothetical 50 basis point increase in interest rates as of December 31, 2023, assuming all other variables remain constant, would increase our interest expense by $1.0 million.

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Foreign Currency Exchange Rate Risk

We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, expenses, and assets and liabilities held in non-functional currencies related to our foreign subsidiaries.

We are exposed to changes in foreign currency exchange rates to the extent that such changes affect our revenue and gross margin on revenue derived from some international customers, operating expenses, and assets and liabilities held in non-functional currencies related to our foreign subsidiaries.

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

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dollars and some of our operating expenses are paid in certain local currencies (approximately 43.2% of total operating expense for the year ended December 31, 2023, respectively).

Therefore, our revenue, gross margins, operating expenses and operating income (loss) are all subject to foreign currency fluctuations.

As a result, changes in currency exchange rates could cause variations in our operating income (loss).

Therefore, our revenue, gross margins, operating expenses and operating loss are all subject to foreign currency fluctuations.

As a result, changes in currency exchange rates could cause variations in our operating loss.

A hypothetical 10% movement in foreign exchange rates would result in a before-tax positive or negative impact of approximately $15.0 million for the year ended December 31, 2023.

Actual future gains and losses associated with our foreign currency exposures and positions may differ materially from the sensitivity analyses performed as of December 31, 2023 due to the inherent limitations associated with predicting the foreign currency exchange rates, and our actual exposures and positions.

We have certain customers and suppliers who are invoiced or pay in a non-functional currency.

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See Note 11 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

In addition, on November 3, 2022, the Company entered into the Swap with the Hedge Counterparty, which enables the Company to convert a portion of its Euro denominated payment obligations under the DPLTA into U.S.

Under the Swap, the Company will exchange an aggregate notional amount of $160.0 million U.S.

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

The aggregate amount of $160.0 million will be divided into eight quarterly tranches of $20.0 million.

On November 3, 2022, the Company entered into a euro/U.S.

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

(the “Hedge Counterparty”).

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 $1.0141 to $1.0305.

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.

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.

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

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

dollars for euros at a daily fixed forward rate ranging from $1.0882 to $1.0955 per €1.00.

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.

For further information about the fair value of our investments as of December 31, 2023, see Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.

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As of December 31, 2023 and 2022

Consolidated Statements of (Loss) Income,

Consolidated Statements of Loss,

Years Ended December 31, 2023, 2022 and 2021

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We have audited the accompanying consolidated balance sheets of ADTRAN Holdings, Inc.

and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of (loss) income, of comprehensive (loss) income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of loss, of comprehensive (loss) income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to the Company not (i) designing and maintaining effective controls in response to the risks of material misstatement;

(ii) designing and maintaining effective controls over financial statement preparation, presentation and disclosure commensurate with its financial reporting requirements;

and (iii) designing and maintaining effective controls to address the initial application of complex accounting standards and accounting of non-routine, unusual or complex events and transactions.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded ADVA Optical Networking SE from its assessment of internal control over financial reporting as of December 31, 2022, because it was acquired by the Company in a purchase business combination during 2022.We have also excluded ADVA Optical Networking SE from our audit of internal control over financial reporting.

ADVA Optical Networking SE is a subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 41.42% and 35.68%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

accordance with authorizations of management and directors of the company;

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisition of ADVA Optical Networking SE –

Valuation of Developed Technology, Customer Relationships, and Backlog Intangible Assets

As described in Note 2 to the consolidated financial statements, the Company completed the acquisition of ADVA Optical Networking SE for total purchase consideration of $578.3 million on July 15, 2022.

Assets acquired and liabilities assumed were recognized at their respective fair values as of July 15, 2022, which resulted in the recognition of $403.8 million of identifiable intangible assets.

The fair value of the identifiable intangible assets acquired as of the acquisition date primarily consisted of developed technology of $291.9 million, customer relationships of $32.7 million, and backlog of $52.2 million.

In determining the fair value, management utilized various methods of the income approach depending on the asset.

The estimation of fair value required significant judgment by management related to net cash flows reflecting the risk inherent in each cash flow stream, competitive trends, market comparables and other factors.

Inputs were generally determined by taking into account historical data, current and anticipated market conditions, and growth rates.

Developed technology and customer relationships were valued using the multi-period excess earnings method.

Backlog was valued using the distributor method.

Significant assumptions used in the discounted cash flow analysis for (i) developed technology were the revenue growth rates, long-term revenue growth rate, discount rate, earnings before interest, taxes, depreciation, and amortization (EBITDA) margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation;

(ii) customer relationships were earnings before interest and taxes (EBIT) margins, contributory asset charges, and customer attrition rate;

and (iii) backlog were EBIT margins, adjusted EBIT margins, and contributory asset charges.

The principal considerations for our determination that performing procedures relating to the valuation of the developed technology, customer relationships, and backlog intangible assets acquired in the acquisition of ADVA Optical Networking SE is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the identifiable intangible assets acquired;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the revenue growth rates, long-term revenue growth rate, discount rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation used in the valuation of the developed technology;

EBIT margins, contributory asset charges, and customer attrition rate used in the valuation of the customer relationships;

and EBIT margins, adjusted EBIT margins, and contributory asset charges used in the valuation of the backlog;

Interim Goodwill Impairment Assessments – Network Solutions and Services & Support Reporting Units

As described in Notes 1 and 9 to the consolidated financial statements, the Company’s goodwill balance was $353.4 million as of December 31, 2023, and the goodwill associated with the Network Solutions and Services & Support reporting units was $297.0 million and $56.4 million, respectively.

Goodwill is tested by management for impairment at the reporting unit level annually as of October 1, or if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount.

During the third quarter of 2023, the Company’s market capitalization and long-term projections decreased and triggered a reassessment of the estimated future undiscounted cash flows within the Company’s two identified reporting units as of September 30, 2023.

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

Management’s determination of the fair value of the Company’s reporting units, based on future cash flows for the reporting units, requires significant judgment and the use of estimates and assumptions related to cash flow projections, discount rate, peer group determination and market multiple selection.

As disclosed by management, as a result of the interim assessment, the Company recognized a non-cash goodwill impairment charge of $37.9 million for the Services & Support reporting unit.

The principal considerations for our determination that performing procedures relating to the interim goodwill impairment assessments of the Network Solutions and Services & Support reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the Network Solutions and Services & Support reporting units;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to cash flow projections, discount rate, peer group determination and market multiples selection;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over the valuation of the identifiable intangible assets acquired.

These procedures also included, among others (i) reading the purchase agreement;

(ii) testing management’s process for developing the fair value estimates of the developed technology, customer relationships, and backlog intangible assets;

(iii) evaluating the appropriateness of the multi-period excess earnings and distributor methods;

(iv) testing the completeness and accuracy of underlying data used by management in the valuation methods;

and (v) evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, long-term revenue growth rate, discount rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation used in the valuation of the developed technology;

EBIT margins, contributory asset charges, and customer attrition rate used in the valuation of the customer relationships;

and EBIT margins, adjusted EBIT margins, and contributory asset charges used in the valuation of the backlog.

Evaluating the reasonableness of management’s significant assumptions related to the revenue growth rates, long-term revenue growth rate, EBITDA margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation related to the developed technology;

the EBIT margins, contributory asset charges, and customer attrition rate related to the customer relationships;

and EBIT margins, adjusted EBIT margins, and contributory asset charges related to backlog involved considering (i) the past performance of the acquired business;

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Network Solutions and Services & Support reporting units.

These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Network Solutions and Services & Support reporting units;

(ii) evaluating the appropriateness of the income approach and the market based peer group analyses used by management;

(iii) testing the completeness and accuracy of underlying data used by management in the income approach and market based peer group analyses;

and (iv) evaluating the reasonableness of the significant assumptions used by management related to cash flow projections, discount rate, peer group determination and market multiples selection.

Evaluating management’s assumption related to cash flow projections involved evaluating whether the assumption used by management was reasonable considering (i) the current and past performance of the Network Solutions and Services & Support reporting units;

(ii) the consistency with external market and industry data;

and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the valuation methods used and (ii) the reasonableness of the discount rate significant assumption.

and (iii) whether the assumption was consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the income approach and market based peer group analyses and (ii) the reasonableness of the assumptions related to the discount rate, peer group determination and market multiples selection.

/s/ PricewaterhouseCoopers LLP

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March 15, 2024

We have served as the Company’s auditor since 1986.

Financial Statements

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Consolidated Balance Sheets

(In th ousands, except per share amount)

(In th ousands, except share and per share amount)

December 31, 2023 and 2022

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Cash and cash equivalents

Restricted cash

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

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Other receivables

Income tax receivable

Inventory, net

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Accounts payable

Revolving credit agreements outstanding

Revolving credit agreement outstanding

Notes payable

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Accrued wages and benefits

Income tax payable, net

Income tax payable

Total Current Liabilities

Non-current revolving credit agreement outstanding

Deferred tax liabilities

Non-current unearned revenue

Pension liability

Non-current pension liability

Deferred compensation liability

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Commitments and contingencies (see Note 20)

Redeemable Non-Controlling Interest

Common stock, par value $ 0.01 per share;

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Additional paid-in capital

Accumulated other comprehensive income (loss)

Retained earnings

Accumulated other comprehensive income

Retained (deficit) earnings

Less treasury stock at cost:

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ADTRAN Holdings, Inc.

Consolidated Statements of (Loss) Income

Consolidated Statements of Loss

(In thousands, except per share amounts)

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Network Solutions

Network Solutions - Inventory Write Down

Services & Support

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Asset impairment

Goodwill impairment

Operating Loss

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Interest expense

Net investment (loss) gain

Other income (expense), net

Net investment gain (loss)

Other income, net

Loss Before Income Taxes

Income tax benefit (expense)

Net (Loss) Income

Net Loss attributable to non-controlling interest

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

Weighted average shares outstanding –

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

Income tax (expense) benefit

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

Net Loss attributable to ADTRAN Holdings, Inc.

Weighted average shares outstanding – basic

Weighted average shares outstanding – diluted

Loss per common share attributable to ADTRAN Holdings, Inc.

(1) For the year ended December 31, 2023, we have recognized $ 11.5 million, representing the recurring cash compensation earned by non-controlling interest shareholders post-DPLTA partially offset by a $ 3.2 million net loss attributable to non-controlling interests pre-DPLTA for the year ended December 31, 2023.

See accompanying notes to consolidated financial statements.

ADTRAN Holdings, Inc.

Consolidated Statements of Compr ehensive Income (Loss)

Consolidated Statements of Compr ehensive (Loss) Income

(In thousands)

Years ended December 31, 2023, 2022 and 2021

Net (Loss) Income

Other Comprehensive Income (Loss), net of tax

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

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

Defined benefit plan adjustments

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Other Comprehensive Income (Loss), net of tax

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

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

Comprehensive (Loss) Income, net of tax

Comprehensive Income attributable to non-controlling interest

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

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Changes in Equity

(In thousands, except per share amounts)

(In thousands, except per share and share amounts)

Years ended December 31, 2023, 2022 and 2021

Earnings (Deficit)

Accumulated Other Comprehensive Income (Loss)

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Balance as of December 31, 2020

Other comprehensive income, net of tax

Dividend payments ($ 0.09 per share)

Dividends accrued on unvested restricted

Deferred compensation adjustments,

PSUs, RSUs and restricted stock vested

Stock-based compensation expense

Balance as of December 31, 2020

Other comprehensive loss, net of tax

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Balance as of December 31, 2021

Acquisition of ADVA

Acquisition of Adtran Networks

Retirement of treasury stock

Other comprehensive loss, net of tax

Other comprehensive income, net of tax

Dividend payments ($ 0.09 per share)

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ADTRAN stock-based compensation expense

Reclassification of ADVA stock options

ADVA stock options exercised

ADVA stock-based compensation expense

Reclassification of Adtran Networks stock options

Adtran Networks stock options exercised

Adtran Networks stock-based compensation expense

Balance as of December 31, 2022

Reclassification and remeasurement from equity to mezzanine equity for non-controlling interests in Adtran Networks

Other comprehensive income, net of tax

Dividend payments ($ 0.09 per share)

Dividends accrued on unvested restricted stock units

Deferred compensation adjustments, net of tax

ADTRAN RSUs and restricted stock vested

ADTRAN stock options exercised

ADTRAN stock-based compensation expense

Redemption of redeemable non-controlling interest

Foreign currency remeasurement of redeemable non-controlling interest

Annual recurring compensation earned

Adtran Networks stock options exercised

Adtran Networks stock-based compensation expense

Balance as of December 31, 2023

See accompanying notes to consolidated financial statements.

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Cash flows from operating activities:

Net (Loss) Income

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

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

Depreciation and amortization

Asset impairments

Asset impairment

Goodwill impairment

Amortization of debt issuance cost

Amortization of net discount on available-for-sale investments

Loss (gain) on investments

(Accretion) amortization on available-for-sale investments, net

(Gain) loss on investments

Net loss on disposal of property, plant and equipment

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Deferred income taxes

Inventory write down

Inventory reserves

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Other receivables

Income taxes receivable

Prepaid expenses, other current assets and other assets

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Insurance proceeds received

Acquisition of note receivable

Acquisition of business, net of cash acquired

Net cash provided by investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities:

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Dividend payments

Proceeds from receivables purchase agreement

Proceeds from draw on revolving credit agreements

Repayment of revolving credit agreements

Redemption of redeemable non-controlling interest

Payment of debt issuance cost

Repayment of bonds payable

Repayment of notes payable

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Effect of exchange rate changes

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Purchases of property, plant and equipment included in accounts payable

ADVA common shares exchanged in acquisition

ADVA options assumed in acquisition

Non-controlling interest related to ADVA

Adtran Networks common shares exchanged in acquisition

Adtran Networks options assumed in acquisition

Non-controlling interest related to Adtran Networks

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

Note 1 –

Nature of Business

Note 1 – Nature of Business

ADTRAN Holdings, Inc.

(“ADTRAN”

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

(“ADTRAN” or the “Company”) is a leading global provider of networking and communications platforms, software, systems and services focused on the broadband access market, serving a diverse domestic and international customer base in multiple countries that includes large, medium and small Service Providers;

alternative Service Providers, such as utilities, municipalities and fiber overbuilders;

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 2022, following the business combination (the “Business Combination”) with ADVA Optical Networking SE (“ADVA”), which included the Merger, we became the sole owner of and successor to ADTRAN, Inc.

and the majority shareholder of ADVA.

is a leading global provider of open, disaggregated networking and communications solutions that enable voice, data, video, and internet communications across any network infrastructure.

Its award-winning end-to-end fiber broadband solutions portfolio spans from OLTs to in-home services and intelligent SaaS solutions.

ADVA is a global provider of open networking solutions with over 25 years of experience in optical networking, carrier Ethernet access and network synchronization.

ADVA has led the industry for over two decades with open and secure networking solutions that carefully balance space, power and cost.

Together, we serve customers in a broad range of industries in over 100 countries.

The Company solely owns ADTRAN, Inc.

and is the majority shareholder of Adtran Networks (formerly ADVA Optical Networking SE).

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

Adtran Networks is a global provider of network solutions for data, storage, voice and video services.

We believe that the combined technology portfolio can best address current and future customer needs for high-speed connectivity from the network core to the end consumer and in particular upon the convergence of solutions at the network edge.

Liquidity, Domination and Profit and Loss Transfer Agreement and Credit Facility

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

The obligation of the Company to absorb Adtran Networks’ annual net loss applied for the first time to the loss generated in 2023.

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 December 31, 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 € 310.3 million or approximately $ 342.5 million, based on an exchange rate as of December 31, 2023 and reflecting interest accrued through December 31, 2023 during the pendency of the appraisal proceedings discussed below.

Shareholders electing the first option of Annual Recurring Compensation may later elect the second option.

The opportunity for outside Adtran Networks shareholders to tender Adtran Networks shares in exchange for Exit Compensation had been scheduled to expire on March 16, 2023 .

We are also obligated to absorb any annual net loss of Adtran Networks under the DPLTA.

Additionally, our obligation to pay Annual Recurring Compensation under the DPLTA is a continuing payment obligation, which will amount to approximately € 10.6 million or $ 11.7 million (based on the current exchange rate) per year assuming none of the minority Adtran Networks shareholders were to elect Exit Compensation.

The foregoing amounts do not reflect any potential increase in payment obligations that we may have depending on the outcome of ongoing appraisal proceedings in Germany.

During the year ended December 31, 2023, we accrued $ 11.5 million in Annual Recurring Compensation, which was reflected as an increase to retained deficit.

With respect to the year ended December 31,

2023, we will be obligated to pay $ 11.5 million in Annual Recurring Compensation on the third banking day following the 2024 ordinary general shareholders’ meeting of Adtran Networks (but in any event within eight months following December 31, 2023).

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

For the year ended December 31, 2023, 67 thousand shares, respectively, of Adtran Networks stock was tendered to the Company and Exit Compensation payments of approximately € 1.2 million or approximately $ 1.3 million based on an exchange rate as of December 31, 2023, were paid to Adtran Networks shareholders.

On July 18, 2022, ADTRAN, Inc., as the borrower, and ADTRAN Holdings, Inc.

Pursuant to the terms of the Credit Agreement, as amended, the Company, ADTRAN, Inc., and the subsidiary guarantors (together, the “Credit Parties”) are subject to a liquidity covenant, which provides that, during the fourth quarter of 2023 through and including the third quarter of 2024 (the “Covenant Relief Period”) or a Springing Covenant Period (i.e., the period beginning upon the purchase by the Company of at least 60% of the outstanding shares of Adtran Networks not owned by the Company as of August 9, 2023 and the three consecutive quarterly test periods after such date ), as of the last day of any fiscal quarter, the cash and cash equivalents of the Credit Parties must be at least $ 50.0 million and the cash and cash equivalents of the Company and its subsidiaries must be at least $ 75.0 million, limiting our ability to pay the obligations under the DPLTA.

The Company had access to $ 202.7 million on its Credit Facility for future borrowings;

however, as of December 31, 2023, the Company was limited to additional borrowings of $ 38.8 million based on debt covenant compliance metrics.

See Note 12, Revolving Credit Agreements, and Note 24, Subsequent Events, for additional information regarding the terms of the Wells Fargo Credit Agreement and its amendments.

As of December 31, 2023, and as of the date of issuance of these financial statements, the Company does not have sufficient liquidity to meet payment obligations under the DPLTA pertaining to Exit Compensation.

For the year ended December 31, 2023, 67 thousand shares of Adtran Networks stock were tendered to the Company and Exit Compensation payments of approximately € 1.2 million or approximately $ 1.3 million based on an exchange rate of December 31, 2023, were paid to Adtran Networks shareholders.

The Company experienced revenue declines in 2023.

The Company has suspended dividend payments and is continuing to implement a business efficiency program, which includes, but is not limited to, our ongoing integration program, planned reductions in operating expenses and a site consolidation plan.

In connection with the site consolidation plan, the Company is also exploring a potential sale of portions of our headquarters in Huntsville.

There can be no assurance that the Company will be successful in effecting this action on commercially reasonable terms or at all.

In summary, the Company believes that its cash and cash equivalents, investments, working capital management initiatives and availability to access cash under the Wells Fargo credit facility, including (i) the additional funding provided for under the First Amendment to the Wells Fargo Credit Facility that was signed on August 9, 2023, (ii) the additional covenant headroom during the Covenant Relief Period provided for under the Second Amendment to Wells Fargo Credit Facility, and (iii) the exclusion of the Factoring Agreement as debt for purposes of the Credit Facility’s financial covenants as provided for under the Third Amendment to Wells Fargo Credit Facility will be adequate to meet our business operating requirements, our capital expenditures and our expected obligations under the DPLTA, including anticipated levels of Exit Compensation and continue to comply with our debt covenants under the Credit Facility for at least the next twelve months, from the issuance of these financial statements.

See Note 12, Revolving Credit Agreements, for additional information regarding the terms of the First Amendment of the Wells Fargo Credit agreement and Note 24, Subsequent Events, for additional information regarding the terms of the Second and Third Amendments of the Wells Fargo Credit Agreement.

Principles of Consolidation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S.

(“U.S.

GAAP”) and include the financial position, results of operations, comprehensive (loss) income, changes in equity and cash flows of ADTRAN and its wholly-owned subsidiaries.

All intercompany accounts and transactions have been eliminated in consolidation.

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period.

Significant estimates include allowance for credit losses on accounts receivable and contract assets, excess and obsolete inventory reserves, warranty reserves, customer rebates, determination and accrual of the deferred revenue related to performance obligations under contracts with customers, estimated costs to complete obligations associated with deferred and accrued revenues and network installations, estimated income tax provision and income tax contingencies, fair value of stock-based compensation, assessment of goodwill and other intangibles for impairment, estimated lives of intangible assets, estimates of intangible assets upon measurement, estimated pension liability and fair value of investments.

Significant estimates include allowance for credit losses on accounts receivable and contract assets, excess and obsolete inventory reserves, warranty reserves, customer rebates, estimated income tax provision and income tax contingencies, fair value of stock-based compensation, assessment of goodwill and other intangibles for impairment, estimated lives of intangible assets, estimates of intangible assets upon measurement, estimated pension liability and fair value of investments and estimated contingent liabilities.

Actual amounts could differ significantly from these estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the SARS-CoV-2 coronavirus/COVID-19 global pandemic (or variants of the SARS-CoV-2 coronavirus), supply chain constraints, inflationary pressures, the energy crisis, currency fluctuations and political tensions as of December 31, 2022 and through the date of this report.

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

Future conditions related to the magnitude and duration of the COVID-19 pandemic, as well as other factors, including supply chain constraints and inflationary pressures could result in further impacts to the Company's consolidated financial statements in future reporting periods.

Correction of Immaterial Misstatements

During the first quarter of 2020, it was determined that certain investments held in the Company’s stock for a deferred compensation plan accounted for as a Rabbi trust were incorrectly classified as long-term investments with the fair value of such investments incorrectly marked to market at each period end rather than classified as treasury stock held at historical cost.

This plan has been in existence since 2011.

The Company corrected this misstatement as an out-of-period adjustment in the three months ended March 31, 2020 and the twelve months ended December 31, 2020, by remeasuring the investment assets to their historical cost basis through the

recording of a net investment gain of $ 1.5 million in the Consolidated Statement of (Loss) Income and then correcting the classification by decreasing the long-term investment balance at its remeasured cost basis of $ 2.8 million to treasury stock in the Consolidated 2020 Balance Sheet.

Management has determined that this misstatement was not material to any of its previously issued financial statements and that correction of the misstatement was not material to the 2020 annual financial results on either a quantitative or qualitative basis.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts inflationary pressures, the energy crisis, currency fluctuations and political tensions as of December 31, 2023, and through the date of this report.

Future conditions related to ongoing inflationary pressures, the energy crisis, continued elevated interest rates, instability in the financial services industry, currency fluctuations and political tensions could result in further impacts to the Company's consolidated financial statements in future reporting periods.

Revision of Previously Issued Financial Statements

During the fourth quarter of 2023, the Company identified an immaterial error relating to the understatement of non-controlling interest and the overstatement of accumulated other comprehensive income in the Consolidated Balance Sheet as of December 31, 2022.

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

The Company incorrectly presented the allocation of foreign currency translation loss attributable to the non-controlling interest as well as loss attributable to non-controlling interest in calculating the comprehensive income attributable to ADTRAN Holdings, Inc., net of tax for the year ended December 31, 2022.

Management evaluated the impact of this error on the Company’s full year 2022 consolidated financial statements and determined that the consolidated financial statements were not materially misstated.

However, in order to correctly state non-controlling interest and accumulated other comprehensive income (loss) attributable to non-controlling interest and ADTRAN Holdings, Inc.

in connection with the filing of this Form 10-K, the December 31, 2022 the balance sheet items and comprehensive loss for the year ended December 31, 2022 have been corrected to reflect the impact of this immaterial error.

Accumulated Other Comprehensive Income (Loss) and Non-Controlling Interest were also adjusted within the Consolidated Statement of Changes in Equity to correct these errors.

The following table reflects the impact of the revision to the specific line items presented in the Company’s previously reported Consolidated Balance Sheet and Consolidated Statement of Changes in Equity as of December 31, 2022:

December 31, 2022

(In thousands)

Accumulated Other Comprehensive Income (Loss)

Non-Controlling Interest

The following table reflects the impact of the revision to the specific line items presented in the Company’s previously reported Consolidated Statements of Comprehensive Loss for the year ended December 31, 2022:

Year Ended December 31, 2022

(In thousands)

Comprehensive (Loss) Income attributable to non-controlling interest

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

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

Summary of Significant Accounting Policies

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We have not recorded any losses relating to variable rate demand notes.

Long-term investments is comprised of deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S.

Long-term investments is comprised of our deferred compensation plan assets, corporate bonds, municipal fixed-rate bonds, asset-backed bonds, mortgage/agency-backed bonds, U.S.

and foreign government bonds, marketable equity securities and other equity investments.

Marketable equity securities are reported at fair value as determined by the most recently traded price of the securities at the balance sheet date, although the securities may not be readily marketable due to the size of the available market.

Any changes in fair value are recognized in net investment (loss) gain.

Realized gains and losses on sales of debt securities are computed under the specific identification method and are included in other income (expense).

Any changes in fair value are recognized in net investment gain (loss).

Realized gains and losses on sales of debt securities are computed under the specific identification method and are included in other income, net.

See Note 5 for additional information.

For financing receivables, the Company does not measure the allowance for credit losses for accrued interest receivables, as the uncollectable accrued interest receivable is written off by reversing any previously recorded interest income in a timely manner (as soon as these amounts are determined to be uncollectable).

Accounts Receivable

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Credit limits and payment terms established for new customers are re-evaluated periodically based on customer collection experience and other financial factors.

As of December 31, 2023 , a single customer comprised more than 10% of our total accounts receivable balance, which accounted for 11.9 % of our total accounts receivable.

As of December 31, 2022 , single customers comprising more than 10% of our total accounts receivable balance included three customers, which accounted for 33.1 % of our total accounts receivable.

As of December 31, 2022, these three customers individually accounted for 11.4 %, 11.1 % and 10.6 %, respectively, of our total accounts receivable.

As of December 31, 2021, single customers comprising more than 10% of our total accounts rece ivable balance included three customers, which accounted for 59.9 % of our total accounts receivable.

As of December 31, 2021, these three customers individually accounted fo r 35.8 %, 12.1 % and 12.0 %, respectively, of our total accounts receivable.

We regularly review the need for an allowance for credit losses related to our outstanding accounts receivable balances using the historical loss-rate method as well as assessing asset-specific risks.

The assessment of asset-specific risks included the evaluation of

relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to pay, such as the customer’s current financial condition or credit rating by geographic location, as provided by a third party and/or by customer, if needed, and overall macro-economic conditions in which the customer operates.

We regularly review the need for an allowance for cre dit losses related to our outstanding accounts receivable balances using the historical loss-rate method, as well as assessing asset-specific risks.

The assessment of asset-specific risks included the evaluation of relevant available information, from internal and external sources, relating to current conditions that may affect a customer’s ability to pay, such as the customer’s current financial condition or credit rating by geographic location, as provided by a third party and/or by customer, if needed, and overall macro-economic conditions in which the customer operates.

Based on this assessment, an allowance for credit losses would be recorded if the Company determined that, based on our historical write-offs, which have been immaterial, and such asset specific risks, there was risk in collectability of the full amount of any accounts receivable.

Accounts Receivable Factoring

The Company has entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-recourse basis.

Factoring related interest expense is recorded to interest expense on the Consolidated Statements of Loss.

On each sale date, the financial institution retains from the sale price a default reserve, up to a required balance, which are held by the financial institution in a reserve account and pledged to the Company.

The financial institution is entitled to withdraw from the reserve account the sale price of a defaulted receivable.

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

New Accounts Receivable Factoring Agreement

On December 19, 2023, the Company entered into a new factoring agreement with a third-party financial institution to replace the Company’s prior accounts receivable purchase agreement, to sell on a revolving basis, undivided interests in the Company’s accounts receivable.

Within the Consolidated Balance Sheets, the receivables factored continue to be carried in accounts receivable, less allowance for credit losses, and the secured borrowings are carried as a current liability within accounts payable.

The proceeds and repayments of secured borrowings are reflected as cash flows provided by (used in) financing activities within the Consolidated Statements of Cash Flows, and program fees are recorded as interest expense in the Consolidated Statements of Loss.

The short-term liability classification of the

secured borrowings is based on the estimated timing of the collection of the accounts receivable which are expected to be received within 12 months.

See Note 3 for additional information.

Previous Accounts Receivable Factoring Agreement

The Company had previously entered into a factoring agreement to sell certain receivables to an unrelated third-party financial institution on a non-recourse basis.

Factoring related interest expense was recorded to interest expense on the Consolidated Statements of Loss.

The financial institution was entitled to withdraw from the reserve account the sale price of a defaulted receivable.

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

Inventory is carried at the lower of cost and estimated net realizable value, with cost being determined using the first-in, first-out method.

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Impairment of Long-Lived Assets and Intangibles

Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no t be recoverable and the undiscounted cash flows estimated to be generated by the asset are less than the asset’s carrying value.

The Company’s annual impairment assessment is done at the reporting unit level whenever events or changes in circumstances indicate that the carrying amount of assets within a reporting unit may not be recoverable and the undiscounted cash flows estimated to be generated by the assets are less than the reporting units carrying value.

actors and overall financial performance, management concluded that the fair value of the reporting unit was more likely than not greater than its carrying amount as of December 31, 2023.

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

As a result the Company recognized impairment charges of $ 17.4 million during the year ended December 31, 2022 related to capitalized implementation costs for a cloud computing arrangement.

As a result the Company recognized impairment charges of $ 17.4 million during the year ended December 31, 2022 primarily related to capitalized implementation costs for a cloud computing arrangement.

The impairment charges were determined based on actual costs incurred.

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

The carrying value of goodwill is tested for impairment in the fourth quarter of each year or more frequently if events or circumstances indicate it may be impaired.

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

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

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

Therefore, we decided to proceed directly to the quantitative test of goodwill and forego the qualitative assessment.

We estimate the fair value of our reporting units based on an income approach, whereby we calculate the fair value of a reporting unit based on the present value of estimated future cash flows.

Such events and circumstances may include among others:

a significant adverse change in legal factors or in the general business climate;

significant decline in our stock price and market capitalization;

unanticipated competition;

the testing for recoverability of a significant asset group within the reporting unit;

and an adverse action or assessment by a regulator.

Any adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

Due to the Company's decreased market capitalization and long-term projections, a reassessment of our estimated future undiscounted cash flows within our two identified reporting units was triggered.

Therefore an interim impairment test over goodwill was performed as of September 30, 2023.

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

As a result of the interim assessment, the Company recorded a goodwill impairment charge of $ 37.9 million as its estimated fair value was less than its book value on that date.

The Company’s annual impairment test date is October 1, 2023.

The Company concluded that there was no goodwill impairment as of that date as there was no change in enterprise value from the September 30, 2023 testing date.

Between the annual impairment date of October 1, 2023 and year-end December 31, 2023, there were no additional triggering events.

As a result of the Business Combination during 2022, the Company recognized $ 350.5 million of goodwill.

During the fourth quarter of 2022, we decided to proceed directly to the quantitative test of goodwill and forego the qualitative assessment.

We estimated the fair value of our reporting units based on an income approach, whereby we calculated the fair value of a reporting unit based on the present value of estimated future cash flows.

Based on our analysis, management concluded that there was no impairment of goodwill as of December 31, 2022.

No impairment charges on goodwill were recognized during the years ended December 31, 2021 and 2020.

No goodwill impairment charge was recorded in 2021 as a result of the Company’s internal assessment.

Other Non-Current Assets

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

As a result the Company recognized impairment charges of $ 16.9 million during the year ended December 31, 2022 related to capitalized implementation costs for a cloud computing arrangement.

As a result the Company recognized impairment charges of $ 16.9 million during the year ended December 31, 2022 primarily related to capitalized implementation costs for a cloud computing arrangement.

The impairment charges were determined based on actual costs incurred.

During the year ended December 31, 2023 and 2021, no impairment charges were recognized.

We depreciate capitalized implementation costs on a straight-line basis over ten years .

Amortization expense was $ 3.9 million and $ 1.0 million for the years ended December 31, 2022 and 2021 , respectively, which is recorded almost entirely in selling, general and administrative expenses in the Consolidated Statements of (Loss) Income.

No amortization expense was recognized for the year ended December 31, 2020 .

We depreciate capitalized implementation costs over various lives .

Amortization expense was $ 5.9 million, $ 3.9 million and $ 1.0 million for the years ended December 31, 2023, 2022 and 2021, respectively, which is recorded almost entirely in selling, general and administrative expenses in the Consolidated Statements of Loss.

Liability for Warranty

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These other contracts are specifically reviewed to determine whether we have the right to substantially all of the economic benefit from the use of any specified assets or the right to direct the use of any specified assets, either of which would indicate the existence of a lease.

Some of our leases include options to renew, with renewal terms of up to five years .

Some of our leases include options to renew.

For those leases that are reasonably assured to be renewed, we have included the option to extend as part of our right of use asset and lease liability.

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Stock-Based Compensation

We have two stock incentive plans from which stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and restricted stock are available for grant to employees and directors.

Costs related to these awards are recognized over their vesting periods.

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Research and development costs totaled $ 258.3 million, $ 173.8 million and $ 108.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

ADVA has arrangements with governmental entities for the purposes of obtaining funding for research and development activities.

Adtran Networks has arrangements with governmental entities for the purposes of obtaining funding for research and development activities.

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

For the year ended December 31, 2022, the Company recognized $ 1.1 million as a reduction of research and development expense.

For the years ended December 31, 2023 and 2022, the Company recognized $ 5.2 million and $ 1.1 million, respectively as a reduction of research and development expense.

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes.

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Transactions with customers that are denominated in foreign currencies are recorded using the appropriate exchange rates from throughout the year.

Assets and liabilities denominated in foreign currencies are remeasured at the balance sheet dates using the closing rates of exchange between those foreign currencies and the functional currency with any transaction gains or losses reported in other income (expense).

Our primary exposures to foreign currency exchange rate movements are with our German subsidiary, whose functional currency is the Euro and our Australian subsidiary, whose functional currency is the Australian dollar.

Adjustments resulting from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive (loss) income.

Our primary exposures to foreign currency exchange rate movements are with our German and United Kingdom subsidiaries, whose functional currencies are the Euro and the British pound sterling.

Adjustments resulting from translating financial statements of international subsidiaries are recorded as a component of accumulated other comprehensive income.

Revenue is measured based on the consideration expected to be received in exchange for transferring goods or providing services to a customer and as performance obligations under the terms of the contract are satisfied.

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The consideration, including any discounts, is allocated between separate products and services based on their stand-alone selling prices.

For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin”

For items that are not sold separately, we estimate stand-alone selling prices primarily using the “expected cost plus a margin” approach.

Payment terms are generally 30 days in the U.S.

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Revenue from software license sales is recognized at delivery and transfer of control to the customer.

Revenue is recorded net of estimated discounts and rebates using historical trends.

Revenue is recognized net of estimated discounts and rebates using historical trends.

Customers are typically invoiced when control is transferred and revenue is recognized.

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Current deferred costs are included in prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets and totaled $ 2.1 million and $ 1.5 million as of December 31, 2023 and 2022, respectively.

Non-current deferred costs are included in other non-current assets on the accompanying Consolidated Balance Sheets and less than $ 0.1 million as of December 31, 2022 and $ 0.1 million as of December 31, 2021 .

(Loss) Earnings per Share

(Loss) earnings per common share and (loss) earnings per common share assuming dilution are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year.

Non-current deferred costs included in other non-current assets on the accompanying Consolidated Balance Sheets were less than $ 0.1 million a s of December 31, 2023 and December 31, 2022 .

Loss per Share

Loss per common share and loss per common share assuming dilution are based on the weighted average number of common shares and, when dilutive, common equivalent shares outstanding during the year.

See Note 22 for additional information.

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If the estimated fair values of net tangible and intangible assets acquired and liabilities assumed exceed the purchase price, a bargain purchase gain is recorded.

The results of operations of acquired companies are included in the accompanying Consolidated Statements of (Loss) Income since their dates of acquisition.

The results of operations of acquired companies are included in the accompanying Consolidated Statements of Loss since their dates of acquisition.

Costs incurred to complete the Business Combination, such as legal, accounting or other professional fees are charged to selling, general and administrative expenses as incurred.

Non-Controlling Interest

Non-controlling interest represents the equity interest in ADVA held by holders other than the Company.

On July 15, 2022, upon the close of the Business Combination, the ADVA stockholders’

equity ownership percentage in ADVA was approximately 36 %.

The Company has consolidated the financial position and results of operations of ADVA and reflected the proportionate interest held by the ADVA stockholders as non-controlling interest in the accompanying condensed consolidated balance sheet.

As of December 31, 2022, the ADVA stockholders’

equity ownership percentage in ADVA was approximately 34.7 %.

Redeemable Non-Controlling Interest

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

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

Therefore, the permanent equity noncontrolling interest balance was reclassified to redeemable non-controlling interest (RNCI) on January 16, 2023 and was remeasured to fair value based on the trading market price of the Adtran Networks shares.

Subsequently, the carrying value of the RNCI is adjusted to its maximum redemption value at each reporting date when the maximum redemption value is greater than the initial carrying amount of the RNCI.

However, the RNCI will be remeasured using the current exchange rate at each reporting date as long as the RNCI is currently redeemable.

For the period of time that the DPLTA is in effect, the RNCI will continue to be presented as RNCI outside of stockholders’ equity in the Condensed Consolidated Balance Sheets.

See Note 17, Redeemable Non-Controlling Interest, for additional information on RNCI .

Recent Accounting Pronouncements Not Yet Adopted

There are currently no recently issued accounting pronouncements not yet adopted which would have a material effect on the Condensed Consolidated Financial Statements.

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2023-09, "Income Taxes (Topic 740):

Improvements to Income Tax Disclosures", which is intended to enhance the transparency, decision usefulness and effectiveness of income tax disclosures.

The amendments in this ASU require a public entity to disclose a tabular tax rate reconciliation, using both percentages and currency, with specific categories.

A public entity is also required to provide a qualitative description of the states and local jurisdictions that make up the majority of the effect of the state and local income tax category and the net amount of income taxes paid, disaggregated by federal, state and foreign taxes and also disaggregated by individual jurisdictions.

The amendments also remove certain disclosures that are no longer considered cost beneficial.

The amendments are effective prospectively for annual periods beginning after December 15, 2024, and early adoption and retrospective application are permitted.

The Company is currently evaluating the effect that adoption of ASU 2023-09 will have on our disclosures.

In November 2023, the FASB issued ASU 2023-7, "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures", which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, allowing financial statement users to better understand the components of a segment's profit or loss to assess potential future cash flows for each reportable segment and the entity as a whole.

The amendments expand a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), clarifying when an entity may report one or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and requiring other new disclosures.

The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and early adoption is permitted.

The Company expect to adopt the new disclosures as required for the year ended December 31, 2024.

The Company is currently evaluating the impact on the related disclosures.

Recent Securities and Exchange Commission (SEC) Final Rules Not Yet Adopted

In March 2024, the SEC adopted final rules under SEC Release No.

33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors , which requires registrants to provide certain climate-related information in their registration statements and annual reports.

The rules require information about a registrant's climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition.

The required information about climate-related risks will also include disclosure of a registrant's greenhouse gas emissions.

In addition, the rules will require registrants to present certain climate-related financial metrics in their audited financial statements.

These requirements are effective for the Company in various fiscal years, starting with its fiscal year beginning January 1, 2025.

Disclosures will be required prospectively, with information for prior periods required only to the extent it was previously disclosed in an SEC filing.

The Company is currently evaluating the impact of these final rules on its consolidated financial statements and disclosures.

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which would require an acquirer to recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements in accordance with Topic 606, Revenue Recognition.

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers", which would require an acquirer to recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements in accordance with Topic 606, Revenue Recognition.

The Company early adopted ASU 2021-08 on July 1, 2022 and the standard was applied retrospectively beginning with January 1, 2022.

Note 2 –

Business Combination Agreement

ADVA Optical Networking SE

On August 30, 2021 , ADTRAN and ADVA, entered into a Business Combination Agreement, pursuant to which both companies agreed to combine their respective businesses and each become subsidiaries of a new holding company, ADTRAN Holdings, Inc.

known as Acorn HoldCo, Inc.) which was formed as a wholly-owned subsidiary of ADTRAN in order to consummate the transactions under the Business Combination Agreement.

Under the terms of the Business Combination Agreement, on July 8, 2022, Acorn MergeCo, Inc, a Delaware corporation and wholly-owned direct subsidiary of the Company, merged with and into ADTRAN Holdings, Inc.

leaving ADTRAN Holdings, Inc.

Note 2 – Business Combination Agreement

There were no business combinations during the years ended December 31, 2023 and 2021.

Adtran Networks (formerly ADVA Optical Networking SE)

On August 30, 2021 , ADTRAN, Inc.

and Adtran Networks (then known as ADVA Optical Networking SE) entered into a Business Combination Agreement, pursuant to which both companies agreed to combine their respective businesses and each become subsidiaries of a new holding company, ADTRAN Holdings, Inc.

(formerly known as Acorn HoldCo, Inc.), which was formed as a wholly-owned subsidiary of ADTRAN, Inc.

in order to consummate the transactions under the Business Combination Agreement.

surviving the Business Combination as a wholly-owned direct subsidiary of the Company.

Additionally, pursuant to the Business Combination Agreement, on July 15, 2022, the Compa ny made a public offer to exchange each issued and outstanding no-par value bearer share of ADVA for 0.8244 shares of Company Common Stock, par value $ 0.01 per share of the Company.

The Exchange Offer was settled on Exchange Offer Settlement Date, on which date the Company acquired 33,957,538 bearer shares of ADVA, or 65.43 % of ADVA’s outstanding bearer shares as of the Exchange Offer Settlement Date, in exchange for the issuance of an aggregate of 27,994,595 shares of Company Common Stock.

Additionally, pursuant to the Business Combination Agreement, ADVA stock option holders were entitled to have their ADVA stock options assumed by ADTRAN Holdings, Inc.

(applying the exchange ratio in the Business Combination Agreement), thereafter representing options to acquire stock of ADTRAN, Inc.

The fair value of the ADVA stock options assumed by ADTRAN, Inc.

Additionally, pursuant to the Business Combination Agreement, on July 15, 2022, the Compa ny made a public offer to exchange each issued and outstanding no-par value bearer share of Adtran Networks for 0.8244 shares of Company Common Stock, par value $ 0.01 per share of the Company.

The Exchange Offer was settled on July 15, 2022 (the "Exchange Offer Settlement Date"), on which date the Company acquired 33,957,538 bearer shares of Adtran Networks, or 65.43 % of Adtran Networks’ outstanding bearer shares as of the Exchange Offer Settlement Date, in exchange for the issuance of an aggregate of 27,994,595 shares of Company Common Stock.

Additionally, pursuant to the Business Combination Agreement, Adtran Networks stock option holders were entitled to have their Adtran Networks stock options assumed by ADTRAN Holdings, Inc.

(applying the exchange ratio in the Business Combination Agreement), thereafter representing options to acquire stock of ADTRAN, Holdings, Inc.

The fair value of the Adtran Networks stock options assumed by ADTRAN Holdings, Inc.

was $ 12.8 million, estimated using the Monte Carlo method.

and ADVA became subsidiaries of ADTRAN Holdings, Inc.

and Adtran Networks became subsidiaries of ADTRAN Holdings, Inc.

as a result of the Business Combination.

ADTRAN was determined to be the accounting acquirer of ADVA based on ADTRAN shareholders’

majority equity stake in the combined company, the composition of the board of directors and senior management of the combined company, among other factors.

The Business Combination of ADVA has been accounted for using the acquisition method of accounting as per the provisions of Accounting Standards Codification 805, “Business Combinations”

(“ASC 805”).

The Business Combination Agreement used a fixed exchange ratio of Company Common Stock for ADVA shares of common stock, which resulted in a 36 % equity stake for ADVA stockholders and 64 % equity stake for ADTRAN stockholders in the post-closing combined company (calculated on a fully diluted basis and utilizing the tender of 65.43 % of ADVA’s current issued and outstanding share capital).

Therefore, ADTRAN shareholders continue to hold a majority interest in the combined company after the Business Combination was completed.

Additionally, the Board of Directors is comprised of six members from ADTRAN and three members from ADVA;

the current ADTRAN chief executive officer acts as the chairman of the Board of Directors and the former ADVA chief executive officer as the vice chairman of the Board of Directors.

Additionally, the current ADTRAN chief executive officer and ADTRAN chief financial officer hold these positions within the combined company.

Based upon these and other considerations as outlined in ASC 805, ADTRAN represents the accounting acquirer.

The following table summarizes the purchase price for the ADVA business combination:

was determined to be the accounting acquirer of Adtran Networks based on ADTRAN, Inc.

shareholders’ majority equity stake in the combined company, the composition of the board of directors and senior management of the combined company, among other factors.

The Business Combination with Adtran Networks has been accounted for using the acquisition method of accounting as per the provisions of Accounting Standards Codification 805, “Business Combinations” (“ASC 805”).

The Business Combination Agreement used a fixed exchange ratio of Company Common Stock for Adtran Networks shares of common stock, which resulted in a 36.0 % equity stake for Adtran Networks stockholders and a 64.0 % equity stake for ADTRAN, Inc.

stockholders in the post-closing combined company (calculated on a fully diluted basis and utilizing the tender of 65.43 % of Adtran Networks’ current issued and outstanding share capital) as of July 15, 2022.

Therefore, ADTRAN, Inc.

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

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

and three members from Adtran Networks;

the ADTRAN, Inc.

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

Additionally, the ADTRAN, Inc.

chief executive officer and ADTRAN, Inc.

chief financial officer held these positions within the combined company immediately following the completion of the Business Combination.

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

represented the accounting acquirer.

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

(In thousands, except shares, share price and exchange ratio)

Purchase Price

ADVA shares exchanged

Adtran Networks shares exchanged

Exchange ratio

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share price on July 15, 2022

Purchase price paid for ADVA shares

Purchase price paid for Adtran Networks shares

Equity compensation (1)

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Backlog was valued using the distributor method.

Significant assumptions used in the discounted cash flow analysis for (i) developed technology were the revenue growth rates, long-term revenue growth rate, discount rate, and earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins, obsolescence factors, income tax rate, tax depreciation, and economic depreciation;

(ii) customer relationships were earnings before interest and taxes (“EBIT”) margins, contributory asset charges, and customer attrition rate;

and (iii) backlog were EBIT margins, adjusted EBIT margins, and contributory asset charges.

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

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

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

(In thousands)

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Total net assets acquired

The allocation of the purchase price and fair value assessment of goodwill, deferred tax assets, and deferred tax liabilities continues to be preliminary.

The acquisition accounting is subject to revision once the Company receives final information.

It is possible that the final assessment of fair value may differ materially from the preliminary assessment.

If the final assessment differs from this preliminary assessment, the measurement period adjustments will be recorded in the period in which they are determined as if they had been completed at the acquisition date.

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

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

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

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

The unpaid principal balance under these receivables as of the date of the Business Combination was $ 118.5 million and $ 1.5 million, respectively.

The difference between the fair value and the unpaid principal balance represents an allowance for credit losses that was factored into the fair value calculation as of the date of the Business Combination.

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

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

Based on preliminary estimates, the ADVA acquisition resulted in the recognition of goodwill of $ 350.5 million, which the Company believes is attributable to the value driven by the Company’s expected growth of the business, synergies, and expanded market and product opportunities.

Goodwill created as a result of the ADVA acquisition is not deductible for tax purposes.

After the Business Combination, the chief operating decision maker assessed and will continue to assess the Company’s performance and allocate resources to its two segments (1) Network Solutions and (2) Services & Support.

Based on preliminary estimates, the goodwill resulting from the Business Combination of $ 272.8 million was allocated to the Network Solutions segment, and $ 77.7 million was allocated to the Services & Support segment.

See Note 18 of the Notes to Consolidated Financial Statements, included in this report for more information about the Company’s segments.

The Business Combination resulted in the recognition of goodwill of $ 350.5 million, which the Company believes is attributable to the value driven by the Company’s expected growth of the business, synergies, and expanded market and product opportunities.

Goodwill created as a result of the Business Combination is not deductible for tax purposes.

The goodwill resulting from the Business Combination of $ 272.8 million was allocated to the Network Solutions segment, and $ 77.7 million was allocated to the Services & Support segment.

See Note 18 of the Notes to Consolidated Financial Statements, included in this report for more information about the Company’s segments.

As of the acquisition date, the fair value of the non-controlling interest was approximately $ 316.4 million and determined using a market approach.

As a portion of ADVA shares will remain trading after the Business Combination, the non-controlling interest was calculated using 17,941,496 ADVA shares held by non-controlling interest multiplied by the ADVA closing share price of €

17.58 ($ 17.64 using the July 15, 2022 EUR to USD conversion rate of $ 1.00318 ) on July 15, 2022.

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

The net revenue and net loss from the ADVA business since July 15, 2022, were $ 365.9 million and $ 12.9 million, respectively, which are included in the Company’s Consolidated Statement of Loss.

The net loss attributable to non-controlling interest from the ADVA business for the year ended December 31, 2022 was $ 6.9 million.

As of December 31, 2022, the Company has incurred $ 26.1 million of transaction costs related to the Business Combination, of which $ 14.2 million and $ 11.9 million were incurred during the years ended December 31, 2022 and 2021, respectively.

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

As a portion of Adtran Networks' shares remains trading after the Business Combination, the non-controlling interest was calculated using 17,941,496 Adtran Networks shares held by non-controlling interest multiplied by the Adtran Networks closing share price of € 17.58 ($ 17.64 using the July 15, 2022 EUR to USD conversion rate of $ 1.00318 ) on July 15, 2022.

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

The net revenue from the Adtran Networks business for the Adtran Networks business for the period from July 15, 2022 through December 31, 2022, was $ 365.9 million and the net loss from the Adtran Networks business for the period from July 15, 2022 through December 31, 2022, was $ 12.9 million which are included in the Company’s Consolidated Statement of Loss.

The net revenue from the Adtran Networks business for the year ended December 31, 2023, wa s $ 666.3 milli on and the net loss from the Adtran Networks business for the year ended December 31, 2023, w as $ 93.6 million which are included in the Company’s Consolidated Statement of Loss.

The net (income) loss attributable to non-controlling interest from the Adtran Networks business for the years ended December 31, 2023 and 2022 was $ 8.4 million and ($ 6.9 ) million, respectively.

For the year ended December 31, 2023, we recognized $ 11.5 million, representing the portion of the annual recurring cash compensation to the non-controlling shareholders accrued during such periods, which will be paid after the ordinary general shareholders' meeting of Adtran Networks beginning in 2024.

See Note 1 and Note 17 for additional information on RNCI and the annual dividend .

As of December 31, 2023, the Company has incurred $ 26.2 million of transaction costs related to the Business Combination, of which $ 0.1 million, $ 14.2 million and $ 11.9 million were incurred during the years ended December 31, 2023, 2022 and 2021, respectively.

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

Supplemental Pro Forma Information (Unaudited)

The unaudited pro forma financial information in the table below summarizes the combined results of operations for ADTRAN and ADVA as though the Business Combination had occurred on January 1, 2021.

The unaudited pro forma financial information in the table below summarizes the combined results of operations for ADTRAN, Inc.

and Adtran Networks as though the Business Combination had occurred on January 1, 2021.

The pro forma amounts have been adjusted for differences in basis of accounting which are determined before taking into effect the impacts of purchase accounting and Business Combination accounting impacts.

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The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition.

The unaudited pro forma information also does not include any integration costs that the Company may incur related to the acquisition as part of combining the operations of the companies.

The unaudited pro forma information also does not include any integration costs that the Company has incurred and may continue to incur related to the Business Combination as part of combining the operations of the companies.

For the Years Ended

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Net loss attributable to ADTRAN Holdings, Inc.

Note 3 –

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:

(In thousands)

December 31, 2022

December 31, 2021

Cash and cash equivalents

Restricted cash

Cash, cash equivalents and restricted cash

Note 3 - Revenue

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Revenue by Category

In addition to the Company's reportable segments, revenue is also reported for the following three categories –

Subscriber Solutions, Access & Aggregation Solutions and Optical Networking Solutions.

Prior to the Business Combination with ADVA on July 15, 2022, ADTRAN reported revenue across the following three categories:

Prior to the Business Combination with Adtran Networks on July 15, 2022, ADTRAN, Inc.

reported revenue across the following three categories:

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

Following the Business Combination with ADVA, we have recast these revenues such that ADTRAN’s former Access & Aggregation revenue is combined with a portion of the applicable ADVA solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions & Experience revenue is combined with a portion of the applicable ADVA solutions to create Subscriber Solutions, and the revenue from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.

Optical Networking Solutions is a new revenue category added to represent a meaningful portion of ADVA’s portfolio.

Following the Business Combination with Adtran Networks, we have recast these revenues such that ADTRAN, Inc.'s former Access & Aggregation revenue is combined with a portion of the applicable Adtran Networks solutions to create Access & Aggregation Solutions, ADTRAN’s former Subscriber Solutions & Experience revenue is combined with a portion of the applicable Adtran Networks solutions to create Subscriber Solutions, and the revenue from Traditional & Other products is now included in the applicable Access & Aggregation Solutions or Subscriber Solutions category.

Optical Networking Solutions was added as a new revenue category to represent a meaningful portion of Adtran Networks' portfolio.

Our Subscriber Solutions portfolio is used by Service Providers to terminate their access services infrastructure at the customer premises while providing an immersive and interactive experience for residential, business and wholesale subscribers.

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These solutions include fiber termination solutions for residential, business and wholesale subscribers, Wi-Fi access solutions for residential and business subscribers, Ethernet switching and network edge virtualization solutions for business subscribers, and cloud software solutions covering a mix of subscriber types.

metro network, primarily through fiber-based connectivity.

This revenue category includes hardware- and software-based products and services.

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(1) Included in other receivables on the Consolidated Balance Sheets.

The Company is party to a receivables purchase agreement with a third party financial institution (the “Factor”).

As of December 31, 2022, accounts receivable totaling $ 14.9 million were sold, of which $ 1.2 million was retained by the Factor in the reserve account.

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

As of December 31, 2022, the Company has an allowance for doubtful accounts related to factored accounts receivable totalin g less than $ 0.1 million.

The cost of receivables purchase agreement is included in interest expense in the Consolidated Statements of Loss and totaled $ 0.3 million for the year ended December 31, 2022.

Of the outstanding unearned revenue balances as of December 31, 2021, $ 14.0 m illion was recognized as revenue during the year ended December 31, 2022, respective ly.

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

Total accounts receivables factored as of the end of December 31, 2022, totaled $ 14.9 million of which $ 1.2 million was retained pursuant to the Factoring Agreement in the reserve account.

As of December 31, 2023 no accounts receivable were factored under the agreement or held in the reserve account.

The cost of receivables purchase agreement is included in interest expense in the Consolidated Statements of Loss and totaled $ 0.9 million and $ 0.3 million for the years ended December 31, 2023 and December 31, 2022, respectively.

On December 19, 2023, the agreement with the Factor was terminated and the Company, entered into a receivables purchase agreement with a third-party financial institution (the “New Factor”) to replace the Company’s prior accounts receivable purchase agreement and to sell, on a revolving basis, undivided interests in the Company’s accounts receivable.

The New Factor provides for up to $ 40.0 million in borrowing capacity, subject to eligible receivables and reserve requirements, secured by the receivables.

The New Factor qualifies for treatment as a secured borrowing with a pledge of collateral under Accounting Standards Codification ("ASC") Topic 810, Consolidations .

Total secured borrowings under the agreement were $ 14.3 million as of December 31, 2023, leaving $ 25.4 million available for future borrowings.

Accounts receivable pledged as collateral related to the secured borrowings were $ 16.9 million as of December 31, 2023.

For the year ended December 31, 2023, the Company incurred program fee expenses of $ 13 thousand.

As of December 31, 2023, the program fee rate was 6.9 % percent for receivables denominated in the U.S.

dollar and 5.5 % for receivables denominated in the Euro.

Of the outstanding unearned revenue balances as of December 31, 2022, $ 36.2 million was recognized as revenue during the year ended December 31, 2023 .

Note 5 –

Stock-Based Compensation

The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the years ended December 31, 2022, 2021 and 2020:

Of the outstanding unearned revenue balances as of December 31, 2021, $ 14.0 million was recognized as revenue during the year ended December 31, 2022.

Note 4 – Stock-Based Compensation

The following table summarizes stock-based compensation expense related to stock options, PSUs, RSUs and restricted stock for the years ended December 31, 2023, 2022 an

(In thousands)

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2020 Stock Incentive Plans

At the annual meeting of stockholders held on May 13, 2020, the Company’s stockholders approved, upon recommendation of the Board of Directors, the adoption of the ADTRAN, Inc.

2020 Employee Stock Incentive Plan (the “2020 Employee Plan”) as well as the

2020 Directors Stock Plan (the “2020 Directors Plan”), which were assumed by the Company upon consummation of the Merger.

No additional awards will be granted under the Company’s previous stock incentive plans, the ADTRAN, Inc.

2015 Employee Stock Incentive Plan (the “2015 Employee Plan”) or the 2010 Directors Stock Plan (the “2010 Directors Plan”) subsequent to the stockholders’

approval of these new stock plans.

At the annual meeting of stockholders held on May 13, 2020, the Company’s stockholders approved, upon recommendation of the Board of Directors, the adoption of the ADTRAN, Inc.

2020 Employee Stock Incentive Plan (the “2020 Employee Plan”), as well as the ADTRAN, Inc.

2020 Directors Stock Plan (the “2020 Directors Plan”), which were assumed by the Company upon consummation of the Merger.

No additional awards will be granted under the Company’s previous stock incentive plans, the ADTRAN, Inc.

2015 Employee Stock Incentive Plan (the “2015 Employee Plan”) or the 2010 Directors Stock Plan (the “2010 Directors Plan”) subsequent to the stockholders’ approval of these new stock plans.

Outstanding awards granted under the 2015 Employee Plan and the 2010 Directors Plan will remain subject to the terms of such plans, and shares underlying awards granted under such plans that are cancelled or forfeited will be available for issuance under the 2020 Employee Plan or the 2020 Directors Plan, as applicable.

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Forfeitures, cancellations and expirations of awards granted under the 2010 Directors Stock Plan increase the shares authorized for issuance under the 2020 Directors Plan by one share of common stock for each share underlying the award.

As of December 31, 2023 , 1.1 million shares were available for issuance under shareholder-approved equity plans in connection with the grant and exercise of stock options, PSU’s, RSU’s or restricted stock.

Previous Stock Incentive Plans

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In January 2006, the Board of Directors adopted the ADTRAN, Inc.

2006 Employee Stock Incentive Plan (the “2006 Plan”), which authorized 13.0 million shares of common stock for issuance to officers and certain employees through incentive stock options and non-qualified stock options, stock appreciation rights, RSUs and restricted stock.

Options granted under the 2006 Plan typically become exercisable beginning after one year of continued employment, normally pursuant to a four-year vesting schedule beginning on the first anniversary of the grant date and had a ten-year contractual term.

The 2006 Plan was replaced in May 2015 by the 2015 Employee Plan.

Expiration dates of options outstanding as of December 31, 2022 under the 2006 Plan range from 2022 to 2024 .

In May 2010, the Company’s stockholders approved the 2010 Directors Plan, under which 0.5 million shares of common stock have been reserved for issuance.

This plan replaced the 2005 Directors Stock Option Plan.

Under the 2010 Directors Plan, the Company may issue stock options, restricted stock and RSUs to our non-employee directors.

Stock awards issued under the 2010 Directors Plan become vested in full on the first anniversary of the grant date.

Options issued under the 2010 Directors Plan had a ten-year contractual term.

All remaining options under the 2010 Directors Plan expired in 2019 .

Options outstanding as of December 31, 2023 under the 2006 Plan expire in 2024.

PSUs, RSUs and restricted stock - ADTRAN Holdings, Inc.

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Expected dividend yield

For market-based PSUs, the number of shares of common stock earned by a recipient is subject to a market condition based on ADTRAN’s relative total shareholder return against all companies in the NASDAQ Telecommunications Index at the end of a three-year performance period.

Depending on the relative total shareholder return over the performance period, the recipient may earn from 0 % to 150 % of the shares underlying the PSUs, with the shares earned distributed upon the vesting.

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The dividend credits vest and are earned in the same manner as the PSUs and are paid in cash upon the issuance of common stock for the PSUs.

During the year ended December 31, 2023, the Company granted 0.9 million performance-based PSUs to its executive officers and certain employees.

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

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

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

During each of the years ended December 2022 and 2021, the Company granted 0.3 million performance-based PSUs to its executive officers and certain employees.

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

These awards vest over one-year , two-year and three-year periods, respectively, subject to the grantee’s continued employment, with the ability to earn shares in a range of 0 % to 142.8 % of the awarded number of PSUs based on the achievement of defined performance targets.

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

These awards vested over one-year and two-year periods, respectively, subject to the grantee’s continued employment, with the ability to earn shares in a range of 0 % to 142.8 % of the awarded number of PSUs based on the achievement of defined performance targets.

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

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These awards were fully vested as of December 31, 2022.

Pursuant to the Business Combination, 0.3 million shares of market-based PSU awards converted to time-based RSU's awards which were treated as an award modification during the third quarter of 2022.

Pursuant to the Business Combination, 0.3 million shares of market-based PSU awards converted to time-based RSU awards which were treated as an award modification during the third quarter of 2022.

Given that the fair value of these awards after the modification was less than the fair value of the awards immediately before the modification, no incremental compensation expense was recognized.

The Company continued to recognize compensation expense based on the award's original grant date fair value.

As of December 31, 2022, there was $ 1.4 million of unrecognized compensation expense related to these awards which will be recognized over the weighted average remaining service period of 1.57 years.

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

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If circumstances change, and additional data becomes available over time, we may change our assumptions and methodologies, which may materially impact our fair value determination.

As of December 31, 2022 , total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $ 15.8 million, which is expected to be recognized over an average remaining recognition period of 2.25 years and will be adjusted for actual forfeitures as they occur.

As of December 31, 2022 , 3.3 million shares were available for issuance under shareholder-approved equity plans in connection with the grant and exercise of stock options, PSU’s, RSU’s or restricted stock.

As of December 31, 2023 , total unrecognized compensation expense related to the non-vested portion of market-based PSUs, RSUs and restricted stock was approximately $ 15.5 million, which is expected to be recognized over an average remaining recognition period of 2.1 years.

There was $ 10.5 million of unrecognized compensation expense related to unvested 2023 performance-based PSUs, which will be recognized over the remaining requisite service period of 2.0 years if achievement of the performance obligation becomes probable.

Unrecognized compensation expense will be adjusted for actual forfeitures as they occur.

Stock Options - ADTRAN Holdings, Inc.

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Exercise Price

Weighted Avg.

Weighted Average

Contractual Life

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Stock options outstanding, December 31, 2022

ADVA stock options replaced by ADTRAN Holdings stock options (1)

Stock options granted

Stock options exercised

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Stock options exercisable, December 31, 2023

(1) Each ADVA stock option surrendered was exchanged for 0.8244 ADTRAN Holdings stock options.

As of December 31, 2023, there was $ 8.1 million of unrecognized compensation expense related to stock options which will be recognized over the remaining weighted-average period of 1.8 years.

The maximum number of shares of ADTRAN Holdings stock potentially issuable upon such assumption was 2.3 million shares.

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

A total of 2.1 million shares of ADTRAN Holdings stock are subject to assumed ADVA options.

A total of 2.1 million shares of ADTRAN Holdings stock are subject to assumed Adtran Networks options.

As part of our Business Efficiency Program, on October 25, 2023, all employees were informed of certain personnel measures, which included the reduction of salary for select employees.

The Company provided the employees subject to the salary reductions with 1.3 million of stock option awards for retention purp oses.

Our Chief Executive Officer voluntarily reduced his salary by 50 % and did not receive any awards under the Business Efficiency Program.

The determination of the fair value of stock options assumed or granted by ADTRAN Holdings was estimated using the Monte Carlo method and is affected by its stock price, as well as assumptions regarding a number of complex and subjective variables that may have a significant impact on the fair value estimate.

The stock option pricing model requires the use of several assumptions that impact the fair value estimate.

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

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADTRAN’s closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2022.

The amount of aggregate intrinsic value was $ 16.3 million as of December 31, 2022 and will change based on the fair market value of ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during the year ended December 31, 2022 was $ 4.0 million.

The amount of aggregate intrinsic value was $ 3.1 million as of December 31, 2023 and will change based on the fair market value of ADTRAN’s stock.

The total pre-tax intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was $ 0.1 million, $ 4.0 million and $ 1.5 million, respectively.

The fair value of options fully vesting during the years ended December 31, 2023 and 2022 was $ 1.1 million and $ 0.2 million, respectively.

No options vested during the year ended December 31, 2021.

The following table further describes our stock options outstanding as of December 31, 2023:

1 unchanged sentence

Options Exercisable

Exercise Prices

Exercise Prices (Per Share)

Outstanding at

1 unchanged sentence

(In thousands)

Weighted Avg.

Weighted Average

Contractual Life

Exercise Price

Exercisable at

1 unchanged sentence

(In thousands)

$ 6.06 –

$ 8.68 –

$ 13.75 –

$ 17.16 –

$ 21.37 –

The Black-Scholes option pricing model (the “Black-Scholes Model”) is used to determine the estimated fair value of stock option awards on the date of grant.

$ 5.23 – $ 5.23

$ 5.24 – $ 8.58

$ 8.59 – $ 12.17

$ 12.18 – $ 15.33

$ 15.34 – $ 19.08

The Black-Scholes option pricing model (the “Black-Scholes Model”) is used to determine the estimated fair value of stock option awards on the date of grant.

The Black-Scholes Model requires the input of certain assumptions that involve judgment.

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These variables include, but are not limited to, the volatility of our stock price and employee exercise behaviors.

The weighted-average estimated fair value of stock options granted to employees during the year ended December 31,2022 was $ 5.81 per share with the following weighted-average assumptions:

The weighted-average estimated fair value of stock options granted to employees during the years ended December 31, 2023 and 2022 was $ 2.99 and $ 5.81 per share, respectively, with the following weighted-average assumptions:

Expected volatility

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Expected life (in years)

There were no stock options granted in during the years ended December 31, 2021 and 2020.

Stock Options - ADVA Optical Networking SE

The following table summarizes ADVA Optical Networking SE stock options outstanding as of July 15, 2022 (the Business Combination closing date) and December 31, 2022 and the changes that occurred between July 15, 2022 and December 31, 2022:

There were no stock options granted during the year ended December 31, 2021.

Stock Options - Adtran Networks

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

(In thousands)

Exercise Price

Weighted Avg.

Weighted Average

Contractual Life

1 unchanged sentence

(In thousands)

Stock options outstanding, July 15, 2022

Stock options outstanding, December 31, 2022

Stock options exercised

ADVA stock options replaced by ADTRAN Holdings stock options (1)

Stock options forfeited

Stock options expired

Stock options outstanding, December 31, 2023

Stock options exercisable, December 31, 2023

(1) Each ADVA stock option surrendered was exchanged for 0.8244 ADTRAN Holdings stock options.

As of December 31, 2022, there was $ 0.1 million of unrecognized compensation expense related to stock options which will be recognized over the remaining weighted-average period of 1.17 years.

As of December 31, 2023, there was $ 24 thousand of unrecognized compensation expense related to stock options which will be recognized over the remaining weighted-average period of 1.4 years.

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

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between ADVA's closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2022.

The amount of aggregate intrinsic value was $ 1.2 million as of December 31, 2022 and will change based on the fair market value of ADVA's stock.

The aggregate intrinsic value of stock options represents the total pre-tax intrinsic value (the difference between Adtran Networks' closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2023.

The amount of aggregate intrinsic value was $ 0.2 million as of December 31, 2023 and will change based on the fair market value of Adtran Networks' stock.

The total pre-tax intrinsic value of options exercised during the year ended December 31, 2023 was $ 0.7 million.

The total pre-tax intrinsic value of options exercised during the period July 15, 2022 through December 31, 2022 was $ 1.6 million.

The following table further describes ADVA's stock options outstanding as of December 31, 2022:

The following table further describes Adtran Networks' stock options outstanding as of December 31, 2023:

Options Outstanding

Options Exercisable

Exercise Prices

Exercise Prices (Per Share)

Outstanding at

1 unchanged sentence

(In thousands)

Weighted Avg.

Weighted Average

Contractual Life

Exercise Price

Exercisable at

1 unchanged sentence

(In thousands)

4.98 - €

7.06 - €

8.71 - €

Note 6 –

€ 10.00 - € 10.00

Note 5 – Investments

Debt Securities and Other Investments

As of December 31, 2022, the following debt securities and other investments were included in short-term investments and long-term investments on the Consolidated Balance Sheet and recorded at fair value:

Gross Unrealized

(In thousands)

Corporate bonds

Municipal fixed-rate bonds

Asset-backed bonds

Mortgage/Agency-backed bonds

government bonds

Foreign government bonds

Available-for-sale debt securities held at fair value

The Company did no t have any debt securities and other investments as of December 31, 2023.

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Available-for-sale debt securities held at fair value

As of December 31, 2022, our debt securities had the following contractual maturities:

(In thousands)

Agency-backed

Less than one year

One to two years

Two to three years

Three to five years

Five to ten years

More than ten years

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

Realized gains and losses on sales of securities are computed under the specific identification method.

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Total (loss) gain recognized, net

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

The Company did no t purchase any available-for-sale debt with credit deterioration during the years ended December 31, 2023, 2022 and 2021.

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Foreign government bonds

The following table presents the breakdown of debt securities and other investments with unrealized losses as of December 31, 2021:

Continuous Unrealized

Loss Position for Less

than 12 Months

Continuous Unrealized

Loss Position for 12

Months or Greater

(In thousands)

Corporate bonds

Municipal fixed-rate bonds

Asset-backed bonds

Mortgage/Agency-backed bonds

government bonds

Foreign government bonds

The increase in unrealized losses during 2022 resulted from changes in market positions associated with our fixed income portfolio.

Marketable Equity Securities

3 unchanged sentences

(In thousands)

Realized losses on equity securities sold

Unrealized (losses) gains on equity securities held

Total (loss) gain recognized, net

As of December 31, 2022 and 2021, gross unrealized losses related to individual investments in a continuous loss position for twelve months or longer were not material.

Realized gains (losses) on equity securities sold

Unrealized gains (losses) on equity securities held

Total gain (loss) recognized, net

As of December 31, 2022, gross unrealized losses related to individual investments in a continuous loss position for twelve months or longer were not material.

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

Level 1 –

Observable outputs;

• Level 1 – Observable outputs;

values based on unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2 –

Significant inputs that are observable;

• Level 2 – Significant inputs that are observable;

values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly;

Level 3 –

Significant unobservable inputs;

• Level 3 – Significant unobservable inputs;

values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement;

inputs could include information supplied by investees.

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

Fair Value Measurements as of December 31, 2023 Using

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Money market funds

Available-for-sale debt securities

Corporate bonds

Municipal fixed-rate bonds

Asset-backed bonds

Mortgage/Agency-backed bonds

government bonds

Foreign government bonds

Marketable equity securities

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The fair value of Level 3 securities is calculated based on unobservable inputs.

Quantitative information with respect to unobservable inputs consisted of third-party valuations performed in accordance with ASC 820 –

Fair Value Measurement.

Quantitative information with respect to unobservable inputs consisted of third-party valuations performed in accordance with ASC 820 – Fair Value Measurement.

Inputs used in preparing the third-party valuation included the following assumptions, among others:

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These securities are priced at the expected market price.

Note 7 –

Note 6 – Inventory

As of December 31, 2023 and 2022, inventory, net was comprised of the following:

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As of December 31, 2023 and 2022, our inventory reserve was $ 83.1 million and $ 57.0 million, respectively.

Note 8 –

Property, Plant and Equipment

In connection with the Company’s restructuring efforts, for the year ended December 31, 2023, management determined that there would be a discontinuation of product lines in the Network solutions segment and, as a result, wrote-down related inventories of $ 24.3 million, which is included in cost of revenue in the Condensed Consolidated Statements of Loss.

Note 7 – Property, Plant and Equipment

As of December 31, 2023 and 2022, property, plant and equipment, net was comprised of the following:

7 unchanged sentences

Total Property, Plant and Equipment, net

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

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

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

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

As a result, the Company recognized impairment charges of $ 0.5 million during the year ended December 31, 2022 related to software and web site development.

The impairment charges were determined based on actual costs incurred.

During the year ended December 31, 2021, no impairment charges were recognized.

During the year ended December 31, 2020, the Company recognized impairment charges of $ 0.1 million.

Depreciation expense was $ 20.9 million, $ 12.0 million and $ 12.2 million for the years ended December 31, 2022, 2021 and 2020 , respectively, which is recorded in cost of revenue, selling, general and administrative expenses and research and development expenses in the Consolidated Statements of (Loss) Income.

Note 9 –

During the years ended December 31, 2023 and 2021, no impairment charges were recognized.

Depreciation expense was $ 30.2 million, $ 20.9 million and $ 12.0 million for the years ended December 31, 2023, 2022 and 2021 , respectively, which is recorded in cost of revenue, selling, general and administrative expenses and research and development expenses in the Consolidated Statements of Loss.

Note 8 – Leases

We have operating leases for office space, automobiles and various other equipment in the U.S.

and in certain international locations.

As of December 31, 2022 , our operating leases had remaining lease terms of one month to 119 months , some of which included options to extend the leases for up to five years , and some of which included options to terminate the leases within three months .

As of December 31, 2023 , our operating leases had remaining lease terms of two months to 116 months , some of which included options to extend the leases for up to one year , and some of which included options to terminate the leases within three months .

Supplemental balance sheet information related to operating leases is as follows:

6 unchanged sentences

Accrued expenses and other liabilities

Non-current operating lease liability

Other non-current liabilities

Non-current lease obligations

Total lease liability

Lease expense related to short-term leases was less than $ 0.1 million for the twelve months ended December 31, 2022, 2021 and 2020, and is included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Consolidated Statements of (Loss) Income.

Lease expense related to short-term leases was less than $ 0.1 million for the twelve months ended December 31, 2023, 2022 and 2021, and is included in cost of revenue, selling, general and administrative expenses and research and development expenses in the Consolidated Statements of Loss.

Lease expense related to variable lease payments that do not depend on an index or rate, such as real estate taxes and insurance reimbursements, was $ 0.7 million, $ 0.6 million and $ 0.5 million for the twelve months ended December 31, 2023, 2022 and 2021, respectively.

The components of lease expense included in the Consolidated Statements of (Loss) Income were as follows:

The components of lease expense included in the Consolidated Statements of Loss were as follows:

For the Year Ended December 31,

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Operating leases with USD functional currency

Operating leases with Euro functional currency

Operating leases with EUR functional currency

Weighted average discount rate

Operating leases with USD functional currency

Operating leases with Euro functional currency

Note 10 –

Operating leases with EUR functional currency

Note 9 – Goodwill

The changes in the carrying amount of goodwill for the year ended December 31, 2023 are as follows:

3 unchanged sentences

As of December 31, 2022

Goodwill from Business Combination with ADVA

Goodwill impairment

Correction of a purchase allocation adjustment

Foreign currency translation adjustments

As of December 31, 2023