Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2023

Summary of Significant Accounting Policies

GENERAL

ADTRAN Holdings, Inc. (“ADTRAN” or the “Company”) is a leading global provider of networking and communications platforms, software, systems and services focused on the broadband access market, serving a diverse domestic and international customer base in multiple countries that includes Tier-1, -2 and -3 Service Providers, alternative Service Providers, such as utilities, municipalities and fiber overbuilders, cable/MSOs, SMBs and distributed enterprises. Our innovative solutions and services enable voice, data, video and internet-communications across a variety of network infrastructures and are currently in use by millions worldwide. We support our customers through our direct global sales organization and our distribution networks. Our success depends upon our ability to increase unit volume and market share through the introduction of new products and succeeding generations of products having optimal selling prices and increased functionality as compared to both the prior generation of a product and to the products of competitors in order to gain market share. To service our customers and grow revenue, we are continually conducting research and developing new products addressing customer needs and testing those products for the specific requirements of the particular customers. We offer a broad portfolio of flexible software and hardware network solutions and services that enable Service Providers to meet today’s service demands, while enabling them to transition to the fully converged, scalable, highly-automated, cloud-controlled voice, data, internet and video network of the future. In addition to our global headquarters in Huntsville, Alabama, and our European headquarters in Munich, Germany, we have sales and research and development facilities in strategic global locations.

In 2022, following the business combination (the “Business Combination”) with ADVA Optical Networking SE (“ADVA”), which included the Merger, we became the sole owner of and successor to ADTRAN, Inc. and the majority shareholder of ADVA. ADTRAN, Inc. is a leading global provider of open, disaggregated networking and communications solutions that enable voice, data, video, and internet communications across any network infrastructure. Its award-winning end-to-end fiber broadband solutions portfolio spans from OLTs to in-home services and intelligent SaaS solutions. ADVA is a global provider of open networking solutions with over 25 years of experience in optical networking, carrier Ethernet access and network synchronization. ADVA has led the industry for over two decades with open and secure networking solutions that carefully balance space, power and cost. Together, we serve customers in a broad range of industries in over 100 countries.

Effectiveness of the Domination and Profit and Loss Transfer Agreement

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

Under the DPLTA, subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, (i) the Company is entitled to issue binding instructions to the management board of ADVA, (ii) ADVA will transfer its annual profit to the Company, subject to, among other things, the creation or dissolution of certain reserves, and (iii) the Company will generally absorb the annual net loss incurred by ADVA. The obligation of ADVA to transfer its annual profit to the Company applies for the first time to the profit generated subsequent to January 16, 2023.

Subject to certain limitations pursuant to applicable law and the specific terms of the DPLTA, the DPLTA provides that ADVA preferred shareholders 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 preferred 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 Annual Recurring Compensation payment is similar to a cumulative dividend, which does not require Board of Director approval as it is guaranteed under the DPLTA, and is accrued as a dividend liability when it is earned.

The adequacy of both forms of compensation have been challenged by the preferred 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 the ADVA preferred shareholders to tender ADVA preferred 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).

Board Approval Purchase of ADVA Common Stock

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of ADTRAN Holdings, Inc. and its subsidiaries have been prepared pursuant to the rules and regulations of the SEC applicable to interim financial information presented in Quarterly Reports on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements are not included herein. The December 31, 2022 Condensed Consolidated Balance Sheet is derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

In the opinion of management, all adjustments necessary to fairly state these interim statements have been recorded and are of a normal and recurring nature. The results of operations for an interim period are not necessarily indicative of the results for the full year. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in ADTRAN Holdings, Inc. Annual Report on Form 10-K/A for the year ended December 31, 2022, filed with the SEC on August 14, 2023.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Significant estimates include allowance for credit losses on accounts receivable and contract assets, excess and obsolete inventory reserves, warranty reserves, customer rebates, determination and accrual of the deferred revenue related to performance obligations under contracts with customers, estimated costs to complete obligations associated with deferred and accrued revenues and network installations, estimated income tax provision and income tax contingencies, fair value of stock-based compensation, assessment of goodwill and other intangibles for impairment, estimated lives of intangible assets, estimates of intangible assets upon measurement, estimated pension liability and fair value of investments. Actual amounts could differ significantly from these estimates.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of supply chain constraints, inflationary pressures, the energy crisis, currency fluctuations and political tensions as of March 31, 2023 and through the date of this report. The accounting matters assessed included, but were not limited to, the allowance for credit losses, stock-based compensation, carrying value of goodwill, intangibles and other long-lived assets, financial assets, valuation allowances for tax assets, revenue recognition and costs of revenue. Future conditions related to supply chain constraints, inflationary pressures, the energy crisis, rising 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, management 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 during 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 in connection with the filing of this Amendment No. 2, the December 31, 2022 balance sheet items have been corrected to reflect the impact of this immaterial error. The Company will revise its consolidated financial statements as of and for the year ended December 31, 2022 when it files its Form 10-K for the period ended December 31, 2023.

The following table reflects the impact of the revision to the specific line items presented in the Company's previously reported Condensed Consolidated Balance Sheets and the Condensed Consolidated Statement of Changes in Equity as of December 31, 2022:


	December 31, 2022
(In thousands)	As Reported		Adjustment			As Revised

Accumulated Other Comprehensive Income	$	46,713	$	(20,587	)	$	26,126
Non-Controlling Interest	$	309,072	$	20,587		$	329,659
Total Equity	$	1,303,613	$	—		$	1,303,613

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

Restatement of Previously Issued Financial Statements

During the fourth quarter of 2023, the Company determined that it overstated loss attributable to the non-controlling interest, understated loss attributable to the Company, understated loss per common share attributable to ADTRAN Holdings, Inc. – basic and diluted, understated comprehensive loss attributable to non-controlling interest and overstated comprehensive loss attributable to ADTRAN Holdings, Inc., net of tax for the three months ended March 31, 2023. The misstatements occurred following the effectiveness of the DPLTA between the Company and the Company’s majority-owned subsidiary, Adtran Networks upon the registration of the DPLTA with the commercial register on January 16, 2023. Pursuant to the DPLTA, the minority shareholders of Adtran Networks are guaranteed recurring cash compensation commencing with respect to the 2023 fiscal year. The Company incorrectly presented the guaranteed cash compensation attributable to the non-controlling interest as a loss rather than income attributable to the non-controlling interest during the three months ended March 31, 2023. This error resulted in an overstatement of net loss attributable to the non-controlling interest, an understatement of net loss attributable to the Company and loss per common share attributable to ADTRAN Holdings, Inc. - basic and diluted, an understated comprehensive loss attributable to non-controlling interest and an overstated comprehensive loss attributable to ADTRAN Holdings, Inc., net of tax. Additionally, this error resulted in an understatement of additional paid-in capital and an overstatement of accumulated other comprehensive income. The Company restated the Condensed Consolidated Statements of Loss presented in this report by increasing net loss attributable to the Company by $5.6 million for the quarter ended March 31, 2023.

The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported Condensed Consolidated Statements of Loss and the previously reported Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2023:


	For the Three Months Ended March 31, 2023
(In thousands)	As Reported			Adjustment			As Restated
Net Loss attributable to non-controlling interest	$	(5,989	)	$	5,619		$	(370	)
Net Loss attributable to ADTRAN Holdings, Inc.	$	(34,464	)	$	(5,619	)	$	(40,083	)
Loss per common share attributable to ADTRAN Holdings, Inc. – basic	$	(0.44	)	$	(0.07	)	$	(0.51	)
Loss per common share attributable to ADTRAN Holdings, Inc. – diluted	$	(0.44	)	$	(0.07	)	$	(0.51	)
Comprehensive Loss attributable to non-controlling interest	$	244		$	(232	)	$	12
Comprehensive Loss attributable to ADTRAN Holdings, Inc., net of tax	$	(31,915	)	$	232		$	(31,683	)

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


	March 31, 2023
(In thousands)	As Reported		Adjustment			As Restated

Additional Paid-in Capital	$	762,035	$	20,725		$	782,760
Accumulated Other Comprehensive Income	$	55,251	$	(20,725	)	$	34,526
Total Equity	$	820,162	$	—		$	820,162

During the second quarter of 2023, the Company determined that it overstated total current liabilities and understated non-current liabilities as of March 31, 2023 and December 31, 2022, due to a revolving credit agreement being classified as a current liability instead of a non-current liability. The total amount of liabilities remains unchanged. The Company restated the March 31, 2023 Condensed Consolidated Balance Sheet presented in this report by decreasing current revolving credit agreements outstanding by $180.0 million and increasing non-current revolving credit agreement outstanding by $180.0 million.

The following table reflects the impact of the restatement to the specific line items presented in the Company’s previously reported condensed consolidated financial statements as of March 31, 2023:


(In thousands)	As Reported		Adjustment			As Restated
Revolving credit agreements outstanding	$	190,843	$	(180,000	)	$	10,843
Total current liabilities	$	522,204	$	(180,000	)	$	342,204
Non-current revolving credit agreement outstanding	$	—	$	180,000		$	180,000

The accompanying applicable Notes have been updated to reflect the effects of the restatements as of March 31, 2023.

Redeemable Non-Controlling Interest

As of March 31, 2023 and December 31, 2022, the ADVA stockholders’ equity ownership percentage in ADVA was approximately 34.6% and 34.7%, respectively.

As a result of the effectiveness of the DPLTA on January 16, 2023, the ADVA shares, representing the equity interest in ADVA 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 ADVA 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 redeemable noncontrolling interest. 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 redeemable non-controlling interest outside of stockholders’ equity in the condensed consolidated balance sheets.

See Note 16 for additional information on RNCI.

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which would require an acquirer to recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements in accordance with Topic 606, Revenue Recognition. The Company early adopted ASU 2021-08 on July 1, 2022 and the standard was applied retrospectively beginning with January 1, 2022.

Recent Accounting Pronouncements Not Yet Adopted

There are currently no accounting pronouncements not yet adopted that are expected to have a material effect on the Condensed Consolidated Financial Statements.