RIBBON COMMUNICATIONS INC. The following discussion of the financial condition and results of operations ofRibbon Communications Inc. should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theU.S. Securities and Exchange Commission onMarch 11, 2022 .
Overview
We are a leading global provider of communications technology to service providers and enterprises. We provide a broad range of software and high-performance hardware products, solutions and services that enable the secure delivery of data and voice communications for residential consumers and for small, medium and large enterprises and industry verticals such as finance, education, government, utilities and transportation. Our mission is to create a recognized global technology leader providing cloud-centric solutions that enable the secure exchange of information, with unparalleled scale, performance and elasticity. Headquartered inPlano, Texas , we have a global presence with research and development and/or sales and support locations in over thirty-five countries around the world.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has had a negative effect on the global economy, disrupting the various manufacturing, commodity and financial markets and increasing volatility, and has impeded global supply chains. Continued uncertain global economic conditions as a result of the continuing COVID-19 pandemic, particularly in areas experiencing higher case numbers as a result of new variants, may cause our customers to restrict spending or delay purchases for an indeterminate period of time and consequently cause our revenues to decline. In addition, our ability to deliver our solutions as agreed upon with our customers depends in part on the ability of our global contract manufacturers, vendors, licensors and other business partners to deliver products or perform services we have procured from them. The degree to which the continuing COVID-19 pandemic impacts our future business, financial position and results of operations will depend on developments beyond our control, including the effectiveness of vaccines over the long-term or with respect to new variants, the frequency and duration of future waves of infection, the extent of actions to contain or treat the virus, how quickly and to what extent normal economic and operating conditions can result after new future waves, and the severity and duration of the global economic downturn that has resulted from the pandemic.
Presentation
Unless otherwise noted, all financial amounts, excluding tabular information, in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") are rounded to the nearest million dollar amount, and all
percentages, excluding tabular information, are rounded to the nearest
percentage point.
Reclassification of Amortization of Acquired Intangible Assets
In 2021, we reclassified amounts recorded for amortization of certain acquired intangible assets in prior presentations from Total operating expenses under the caption "Amortization of acquired intangible assets" to Total cost of revenue under the caption "Amortization of acquired technology" in the consolidated statements of operations. Our management believes this presentation aids in the comparability of our financial statements to industry peers. These reclassifications did not impact our operating income (loss), net income (loss) or earnings (loss) per share for any historical periods. These reclassifications also did not impact our condensed consolidated balance sheets or statements of cash flows. This reclassification resulted in$9.7 million and$19.8 million of expense recorded to Amortization of acquired technology within Total cost of revenue in the three and six months endedJune 30, 2021 , respectively, and decreases to Amortization of acquired intangible assets within Total operating expenses of$9.7 million and$19.8 million . The increases to Total cost of revenue decreased our gross profit as a percentage of revenue ("gross margin") by approximately five percentage points in both the three and six months endedJune 30, 2021 , respectively. Operating Segments
Our Chief Operating Decision Maker assesses our performance based on the performance of two separate organizations within Ribbon: the Cloud and Edge operating segment ("Cloud and Edge") and the IP Optical Networks operating segment ("IP Optical Networks"). For additional details regarding our operating segments, see Note 12 - Operating Segment Information to
37
--------------------------------------------------------------------------------our condensed consolidated financial statements.
Financial Overview
Financial Results
We reported a loss from operations of$7.2 million for the three months endedJune 30, 2022 and income from operations of$13.0 million for the three months endedJune 30, 2021 . We reported a loss from operations of$46.3 million for the six months endedJune 30, 2022 and income from operations of$0.3 million for the six months endedJune 30, 2021 . The loss from operations in 2022 is primarily related to the impact from higher supply chain costs and the incremental investment in R&D within our IP Optical Networks segment. Our revenue was$205.8 million and$211.2 million in the three months endedJune 30, 2022 and 2021, respectively. Our gross profit and gross margin were$104.6 million and 50.8%, respectively, in the three months endedJune 30, 2022 , and$118.7 million and 56.2%, respectively, in the three months endedJune 30, 2021 . Our revenue was$379.0 million and$404.0 million in the six months endedJune 30, 2022 and 2021, respectively. Our gross profit and gross margin were$182.6 million and 48.2%, respectively, in the six months endedJune 30, 2022 , and$219.2 million and 54.3%, respectively, in the six months endedJune 30, 2021 . The lower revenue in the first half of 2022 compared to 2021 is primarily related to lower SBC sales and lower service revenue from Service Provider VoIP Network Transformation projects completing in the first quarter. Revenue from our Cloud and Edge segment was$137.1 million and$141.4 million in the three months endedJune 30, 2022 and 2021, respectively. Gross profit and gross margin for this segment were$88.3 million and 64.4%, respectively, in the three months endedJune 30, 2022 , and$88.8 million and 62.8%, respectively, in the three months endedJune 30, 2021 . Revenue from our Cloud and Edge segment was$246.9 million and$266.8 million in the six months endedJune 30, 2022 and 2021, respectively. Gross profit and gross margin for this segment were$151.0 million and 61.2%, respectively, in the six months endedJune 30, 2022 , and$166.4 million and 62.3%, respectively, in the six months endedJune 30, 2021 . Revenue from our IP Optical Networks segment was$68.7 million and$69.8 million in the three months endedJune 30, 2022 and 2021, respectively. Gross profit and gross margin for this segment were$16.3 million and 23.7%, respectively, in the three months endedJune 30, 2022 , and$29.9 million and 42.8%, respectively, in the three months endedJune 30, 2021 . Revenue from our IP Optical Networks segment was$132.1 million and$137.1 million in the six months endedJune 30, 2022 and 2021, respectively. Gross profit and gross margin for this segment were$31.6 million and 23.9%, respectively, in the six months endedJune 30, 2022 , and$52.9 million and 38.5%, respectively, in the six months endedJune 30, 2021 . Gross margin in 2022 is lower than 2021 due to higher component and logistics costs, as well as increased investment in customer service to support our expanded global footprint. Our operating expenses were$111.8 million and$105.8 million in the three months endedJune 30, 2022 and 2021, respectively, and$228.9 million and$218.9 million in the six months endedJune 30, 2022 and 2021, respectively. The increased operating expenses are primarily related to higher R&D investment in our IP Optical Networks segment to support the expansion of the portfolio. Operating expenses for the three months endedJune 30, 2022 included$7.5 million of amortization of acquired intangible assets,$1.5 million of acquisition-, disposal- and integration-related expense, and$2.9 million of restructuring and related expense. Operating expenses for the three months endedJune 30, 2021 included$7.5 million of amortization of acquired intangible assets,$1.1 million of acquisition-, disposal- and integration-related expense, and$2.8 million of restructuring and related expense. Operating expenses for the six months endedJune 30, 2022 included$14.8 million of amortization of acquired intangible assets,$3.4 million of acquisition-, disposal- and integration-related expense, and$7.7 million of restructuring and related expense. Operating expenses for the six months endedJune 30, 2021 included$13.2 million of amortization of acquired intangible assets,$2.2 million of acquisition-, disposal- and integration-related expense, and$8.8 million of restructuring and related expense. We recorded stock-based compensation expense of$4.4 million and$4.8 million in the three months endedJune 30, 2022 and 2021, respectively, and$8.7 million and$9.9 million in the six months endedJune 30, 2022 and 2021, respectively These amounts are included as components of both Cost of revenue and Operating expenses in our condensed consolidated statements of operations. See "Results of Operations" in this MD&A for a discussion of the changes in our revenue and expenses for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 .
Restructuring and Cost Reduction Initiatives
38
--------------------------------------------------------------------------------
2022 Restructuring Plan. In February 2022 , our Board of Directors approved a
strategic restructuring program (the "2022 Restructuring Plan") to streamline
the Company's operations in order to support the Company's investment in
critical growth areas. The 2022 Restructuring Plan is expected to include, among
other things, charges related to a consolidation of facilities and a workforce
reduction. Any positions eliminated in countries outside the United States are
subject to local law and consultation requirements.
We recorded restructuring and related expense of $2.9 million and $7.1 million
in the three and six months ended June 30, 2022 , respectively, in connection
with the 2022 Restructuring Plan. The amount for the three months ended June 30,
2022 was comprised of $1.1 million for variable and other facilities-related
costs, $1.0 million for accelerated amortization of lease assets no longer being
used with no ability or intent to sublease, and $0.8 million for severance and
related costs for approximately 10 employees. The amount for the six months
ended June 30, 2022 was comprised of $5.0 million for severance and related
costs for approximately 60 employees, $1.1 million for variable and other
facilities-related costs and $1.0 million for accelerated amortization of lease
assets no longer being used with no ability or intent to sublease. We anticipate
that we will record future expense for severance and facility consolidations
aggregating approximately $13 million in connection with the 2022 Restructuring
Plan.
Accelerated Rent Amortization. Accelerated rent amortization is recognized from
the date that we commence the plan to fully or partially vacate a facility, for
which there is no intent or ability to enter into a sublease, through the final
vacate date. We recorded $1.0 million and $3.4 million for accelerated rent
amortization in the six months ended June 30, 2022 and 2021, respectively. We
continue to evaluate our properties included in our restructuring plans for
accelerated amortization and/or right-of-use asset impairment. We may incur
additional future expense if we are unable to sublease other locations included
in these initiatives.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment: revenue recognition, the valuation of inventory, the valuation of our investment in American Virtual Cloud Technologies Inc. (the "AVCT Investment "), warranty accruals, loss contingencies and reserves, stock-based compensation, business combinations, goodwill and intangible assets, accounting for leases, and accounting for income taxes. If actual results differ significantly from management's estimates and projections, there could be a material effect on our condensed consolidated financial statements. There were no significant changes to our critical accounting policies fromJanuary 1, 2022 throughJune 30, 2022 . For a further discussion of our other critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Results of Operations
Three and six months ended
Revenue. Revenue for the three and six months ended
Decrease
Three months ended from prior year
June 30, June 30,
2022 2021 $ %
Product $ 112,667 $ 113,129 $ (462) (0.4) %
Service 93,129 98,081 (4,952) (5.0) %
Total revenue $ 205,796 $ 211,210 $ (5,414) (2.6) %
39--------------------------------------------------------------------------------
Decrease
Six months ended from prior year
June 30, June 30,
2022 2021 $ %
Product $ 194,657 $ 211,018 $ (16,361) (7.8) %
Service 184,337 192,964 (8,627) (4.5) %
Total revenue $ 378,994 $ 403,982 $ (24,988) (6.2) %
Segment revenue for the three and six months ended June 30, 2022 and 2021 was as
follows (in thousands):
Three months ended June 30, 2022 Three months ended June 30, 2021
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 64,125 $ 48,542 $ 112,667 $ 64,361 $ 48,768 $ 113,129
Service 72,955 20,174 93,129 77,060 21,021 98,081
Total revenue $ 137,080 $ 68,716 $ 205,796 $ 141,421 $ 69,789 $ 211,210
Six months ended June 30, 2022 Six months ended June 30, 2021
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 101,760 $ 92,897 $ 194,657 $ 114,513 $ 96,505 $ 211,018
Service 145,126 39,211 184,337 152,330 40,634 192,964
Total revenue $ 246,886 $ 132,108 $ 378,994 $ 266,843 $ 137,139 $ 403,982
Our product revenue in the three months ended June 30, 2022 was essentially flat
for both of our segments compared to the three months ended June 30, 2021 , with
slightly higher sales in the Asia Pacific region. The decrease in our product
revenue in the six months ended June 30, 2022 compared to the six months ended
June 30, 2021 was primarily the result of lower sales of our Cloud and Edge SBC
products, coupled with slightly lower sales of IP Optical Networks products,
partially offset by higher sales of our Cloud and Edge network transformation
products. Service revenue in our Cloud and Edge segment was lower in the first
half of 2022 compared with 2021 due to a smaller number of Network
Transformation projects completing during the period.
Revenue from indirect sales through our channel partner program was 25% and 24%
of our product revenue in the three months ended June 30, 2022 and 2021,
respectively, and 27% and 22% of our product revenue in the six months ended
June 30, 2022 and 2021, respectively.
Revenue from sales to enterprise customers was 20% and 22% of our product
revenue in the three months ended June 30, 2022 and 2021, respectively. These
sales were made through both our direct sales team and indirect sales channel
partners. Revenue from sales to enterprise customers was 23% and 22% of our
product revenue in the six months ended June 30, 2022 and 2021, respectively.
Cloud and Edge sales to Enterprise customers in the first half of 2022 were
consistent with the same period of 2021. IP Optical sales to Enterprise
customers declined modestly over the same period.
The timing of the completion of customer projects and revenue recognition criteria satisfaction may cause our product revenue to fluctuate from one period to the next.
Service revenue is primarily comprised of hardware and software maintenance and support ("maintenance revenue") and network design, installation and other professional services ("professional services revenue").
Service revenue for the three and six months ended
Decrease
Three months ended from prior year
June 30, June 30,
2022 2021 $ %
Maintenance $ 69,458 $ 72,437 $ (2,979) (4.1) %
Professional services 23,671 25,644 (1,973) (7.7) %
$ 93,129 $ 98,081 $ (4,952) (5.0) %
40
--------------------------------------------------------------------------------
Decrease
Six months ended from prior year
June 30, June 30,
2022 2021 $ %
Maintenance $ 138,063 $ 141,142 $ (3,079) (2.2) %
Professional services 46,274 51,822 (5,548) (10.7) %
$ 184,337 $ 192,964 $ (8,627) (4.5) %
Segment service revenue for the three and six months ended
Three months ended June 30, 2022 Three months ended June 30, 2021
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Maintenance $ 55,179 $ 14,279
17,776 5,895 23,671 19,074 6,570 25,644
Total service revenue $ 72,955 $ 20,174 $ 93,129 $ 77,060 $ 21,021 $ 98,081
Six months ended June 30, 2022 Six months ended June 30, 2021
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Maintenance $ 110,209 $ 27,854 $ 138,063 $ 112,659 $ 28,483 $ 141,142
Professional services 34,917 11,357 46,274 39,671 12,151 51,822
Total service revenue $ 145,126 $ 39,211 $ 184,337 $ 152,330 $ 40,634 $ 192,964
The decrease in maintenance revenue in the three and six months ended June 30,
2022 compared to the three and six months ended June 30, 2021 was attributable
to lower revenue in our Cloud and Edge segment, reflecting timing variability in
renewal timing.
The decrease in professional services revenue in the three months ended June 30,
2022 compared to the three months ended June 30, 2021 was primarily attributable
to $1 million of lower revenue from each of our segments. The decrease in
professional services revenue in the six months ended June 30, 2022 compared to
the six months ended June 30, 2021 was primarily attributable to approximately
$5 million of lower revenue from our Cloud and Edge segment, due to a fewer
number of VoIP Network Transformation projects completing in the first quarter
of 2022.
The following customer contributed 10% or more of our revenue in the three month
periods ended
Three months ended Six months ended
June 30, June 30, June 30, June 30,
Customer 2022 2021 2022 2021
Verizon Communications Inc. 20% 17% 17% 16%
Revenue from customers domiciled outside the United States was approximately 52%
of revenue in both the three months ended June 30, 2022 and 2021 and 54% and 55%
of revenue in the six months ended June 30, 2022 and 2021, respectively. Due to
the timing of project completions, we expect that the domestic and international
components as a percentage of revenue may fluctuate from quarter to quarter and
year to year.
Our deferred product revenue was $11 million and $10 million at June 30, 2022
and December 31, 2021 , respectively. Our deferred service revenue was $115
million and $120 million at June 30, 2022 and December 31, 2021 , respectively.
Our deferred revenue balance may fluctuate because of the timing of revenue
recognition, customer payments, maintenance contract renewals, contractual
billing rights and maintenance revenue deferrals included in multiple element
arrangements.
We expect that our total revenue will increase for 2022 compared to 2021 as a result of both increased customer spend and continued cross-selling opportunities.
Cost of Revenue/Gross Margin. Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased materials and services, royalties, inventory valuation adjustments, warranty costs, manufacturing and services personnel and related costs, and amortization of acquired technology. Our cost of revenue, gross profit and gross margins for the three and six months endedJune 30, 2022 and 2021 were as follows (in thousands, except percentages): 41 --------------------------------------------------------------------------------
Increase (decrease)
Three months ended from prior year
June 30, June 30,
2022 2021 $ %
Cost of revenue:
Product $ 58,151 $ 46,641 11,510 24.7 %
Service 35,207 36,142 (935) (2.6) %
Amortization of acquired technology 7,888 9,700 (1,812) (18.7) %
Total cost of revenue $ 101,246 $ 92,483 8,763 9.5 %
Gross profit $ 104,550 $ 118,727 $ (14,177) (11.9) %
Gross margin 50.8 % 56.2 %
Increase (decrease)
Six months ended from prior year
June 30, June 30,
2022 2021 $ %
Cost of revenue:
Product $ 109,360 $ 91,086 $ 18,274 20.1 %
Service 70,874 73,922 (3,048) (4.1) %
Amortization of acquired technology 16,155 19,761 (3,606) (18.2) %
Total cost of revenue $ 196,389 $ 184,769 $ 11,620 6.3 %
Gross profit $ 182,605 $ 219,213 $ (36,608) (16.7) %
Gross margin 48.2 % 54.3 %
Our segment cost of revenue, gross profit and gross margins for the three and
six months ended June 30, 2022 and 2021 were as follows (in thousands, except
percentages):
Three months ended June 30, 2022 Three months ended June 30, 2021
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 19,037 $ 39,114 $ 58,151 $ 19,112 $ 27,529 $ 46,641
Service 25,033 10,174 35,207 26,846 9,296 36,142
Amortization of acquired
technology 4,760 3,128 7,888 6,627 3,073 9,700
Total cost of revenue $ 48,830 $ 52,416 $ 101,246 $ 52,585 $ 39,898 $ 92,483
Gross profit $ 88,250 $ 16,300 $ 104,550 $ 88,836 $ 29,891 $ 118,727
Gross margin 64.4 % 23.7 % 50.8 % 62.8 % 42.8 % 56.2 %
Six months ended June 30, 2022 Six months ended June 30, 2021
IP Optical IP Optical
Cloud and Edge Networks Total Cloud and Edge Networks Total
Product $ 36,036 $ 73,324 $ 109,360 $ 32,533 $ 58,553 $ 91,086
Service 49,932 20,942 70,874 54,685 19,237 73,922
Amortization of acquired
technology 9,936 6,219 16,155 13,266 6,495 19,761
Total cost of revenue $ 95,904 $ 100,485 $ 196,389 $ 100,484 $ 84,285 $ 184,769
Gross profit $ 150,982 $ 31,623 $ 182,605 $ 166,359 $ 52,854 $ 219,213
Gross margin 61.2 % 23.9 % 48.2 % 62.3 % 38.5 % 54.3 %
42
--------------------------------------------------------------------------------
Our gross margin decreased in the three and six months ended June 30, 2022
compared to the three and six months ended June 30, 2021 primarily due to lower
margins in our IP Optical Networks segment. The decrease was primarily
attributable to product and customer mix, higher component costs, and higher
freight and logistics expenses, which decreased our gross margin by five
percentage points and six percentage points, respectively. We anticipate
improved gross margin in the second half of 2022 as elevated supply chain costs
improve, and higher sales and better customer mix benefit from fixed operational
costs further improving margins.
We believe that our consolidated gross margin may decrease in 2022 compared to
2021 as a result of higher expected sales from IP Optical Networks, which has
lower margins due to the higher hardware content in its products, and higher
production costs resulting from ongoing worldwide supply chain issues.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and related personnel expenses and prototype costs for the
design, development, testing, and enhancement of our products. Research and
development expenses for the three and six months ended June 30, 2022 and 2021
were as follows (in thousands, except percentages):
Increase
from prior year
June 30, June 30,
2022 2021 $ %
Three months ended $ 51,103 $ 46,797 $ 4,306 9.2 %
Six months ended $ 103,793 $ 94,207 $ 9,586 10.2 %
The increase in our research and development expenses in the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 was primarily
attributable to approximately $6 million of higher expenses in our IP Optical
Networks segment partially offset by approximately $2 million of lower expenses
in our Cloud and Edge segment.
The increase in our research and development expenses in the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 was primarily
attributable to approximately $14 million of higher expenses in our IP Optical
Networks segment partially offset by approximately $4 million of lower expenses
in our Cloud and Edge segment.
The increased investment in IP Optical Networks R&D is focused on significantly
expanding our portfolio of IP Routing solutions, adding additional features to
our Optical Transport portfolio, and investment in a next generation SDN
management and orchestration platform.
Some aspects of our research and development efforts require significant
short-term expenditures, the timing of which may cause significant variability
in our expenses. We believe that rapid technological innovation is critical to
our long-term success, and we are tailoring our investments to meet the
requirements of our customers and market. We believe that our research and
development expense will increase modestly in 2022 compared to 2021, primarily
due to our incremental investment in critical growth areas, partially offset by
cost savings from the 2022 Restructuring Plan.
Sales and Marketing Expenses. Sales and marketing expenses primarily consist of
salaries and related personnel costs, commissions, travel and entertainment
expenses, promotions, customer trial and evaluations inventory, and other
marketing and sales support expenses. Sales and marketing expenses for the three
and six months ended June 30, 2022 and 2021 were as follows (in thousands,
except percentages):
Increase
from prior year
June 30, June 30,
2022 2021 $ %
Three months ended $ 35,843 $ 34,881 $
962 2.8 %
Six months ended $ 73,462 $ 72,099 $ 1,363 1.9 %
The slight increase in sales and marketing expenses in the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 was primarily
attributable to approximately $2 million of higher expenses in our IP Optical
Networks segment, partially offset by approximately $1 million of lower expense
in our Cloud and Edge segment, primarily for travel related costs. Our Sales and
Marketing team is responsible for selling the entire portfolio of products and
services, and expenses are allocated to each operating segment pro-rata based on
revenue contribution.
43
--------------------------------------------------------------------------------
The increase in sales and marketing expenses in the six months ended June 30,
2022 compared to the six months ended June 30, 2021 was primarily attributable
to approximately $3 million of higher expenses in our IP Optical Networks
segment, primarily offset by approximately $2 million of lower expenses in our
Cloud and Edge segment, primarily for travel related costs.
We believe that our full year 2022 sales and marketing expenses will be consistent with 2021 levels.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative personnel, and audit, legal and other professional fees. General and administrative expenses for the three and six months endedJune 30, 2022 and 2021 were as follows (in thousands, except percentages): Increase (decrease) from prior year June 30, June 30, 2022 2021 $ % Three months ended$ 12,901 $ 12,734 $ 167 1.3 % Six months ended$ 25,763 $ 28,287 $ (2,524) (8.9) %
Our general and administrative expenses were relatively flat in the three months
ended
The decrease in general and administrative expenses in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily attributable to lower employee-related expenses in the current year period of approximately$1 million in each of our Cloud and Edge and IP Optical Networks segments. Although our general and administrative expenses decreased 9% in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , we believe that our general and administrative expenses will decrease only slightly for the full year 2022 compared to our 2021 levels. Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets included in Operating expenses ("Opex Amortization") for the three and six months endedJune 30, 2022 and 2021 was as follows (in thousands, except percentages): Increase from prior year June 30, June 30, 2022 2021 $ % Three months ended$ 7,513 $ 7,481 $
32 0.4 %
Six months ended $ 14,788 $ 13,243 $ 1,545 11.7 %
The increase in Opex Amortization in both the three and six months ended June
30, 2022 compared to the three and six months ended June 30, 2021 was primarily
due to higher expense related to customer lists recorded in connection with the
ECI Acquisition. Opex Amortization is not recorded on a straight-line basis;
rather, it is recorded in relation to expected future cash flows. Accordingly,
such expense may vary from one period to the next.
Acquisition-, Disposal- and Integration-Related. Acquisition-, disposal- and
integration-related expenses include those expenses related to acquisitions that
we would otherwise not have incurred. Acquisition- and disposal-related expenses
include professional and services fees, such as legal, audit, consulting, paying
agent and other fees. Integration-related expenses represent incremental costs
related to combining our systems and processes with those of acquired
businesses, such as third-party consulting and other third-party services.
Our acquisition-, disposal- and integration-related expenses were $1.5 million
and $1.1 million in the three months ended June 30, 2022 and 2021, respectively,
and $3.4 million and $2.2 million in the six months ended June 30, 2022 and
2021, respectively. The amounts for the three and six months ended June 30, 2022
primarily related to integration-related expenses. The amounts for the three and
six months ended June 30, 2021 were primarily incurred for integration-related
expenses and professional and services fees in connection with the sale of our
Kandy Communications business to American Cloud Technologies, Inc. ("AVCT") on
December 1, 2020 (the "Kandy Sale").
Restructuring and Related. We have been committed to streamlining our operations and reducing operating costs by
44
--------------------------------------------------------------------------------
closing and consolidating certain facilities and reducing our worldwide
workforce. Please see the additional discussion of our restructuring initiatives
in the "Restructuring and Cost Reduction Initiatives" section of the Overview of
this MD&A.
We recorded restructuring and related expense of $2.9 million and $2.8 million
in the three months ended June 30, 2022 and 2021, respectively, and $7.7 million
and $8.8 million in the six months ended June 30, 2022 and 2021, respectively.
Although we have eliminated positions as part of our restructuring initiatives,
we continue to hire in certain areas that we believe are important to our future
growth.
Interest Expense, Net. Interest income and interest expense for the three and
six months ended June 30, 2022 and 2021 were as follows (in thousands, except
percentages):
Increase (decrease)
Three months ended from prior year
June 30, June 30,
2022 2021 $ %
Interest income $ 59 $ 1,259 $ (1,200) (95.3) %
Interest expense (4,661) (4,307) 354 8.2 %
Interest expense, net $ (4,602) $ (3,048) $ 1,554 51.0 %
Decrease
Six months ended from prior year
June 30, June 30,
2022 2021 $ %
Interest income $ 98 $ 2,744 $ (2,646) (96.4) %
Interest expense (8,701) (11,611) (2,910) (25.1) %
Interest expense, net $ (8,603) $ (8,867) $ (264) (3.0) %
We recorded nominal interest income in the three and six months ended June 30,
2022 . We received debentures (the "Debentures") and warrants in connection with
the Kandy Sale. The Debentures bore interest at 10% per annum. We recorded $1.2
million and $2.7 million of interest income in the three and six months ended
June 30, 2021 , which was added to the principal amount of the Debentures, and
which is included in Interest expense, net, in our condensed consolidated
statement of operations for those periods. The Debentures were converted to
shares of AVCT common stock on September 8, 2021 .
Interest expense in the three and six months ended June 30, 2022 primarily
represented interest and debt issuance costs in connection with the 2020 Credit
Facility (as defined below). Interest expense in the three and six months ended
June 30, 2021 was primarily comprised of interest and debt issuance costs in
connection with the 2020 Credit Facility, including the write-off of $2.5
million of capitalized debt issuance costs in connection with the Third
Amendment (as defined below).
Other (Expense) Income, Net. We recorded other expense, net, aggregating $10.2
million and other income, net of $17.2 million in the three months ended June
30, 2022 and 2021, respectively, and other expense, net, aggregating $39.0
million and $8.3 million in the six months ended June 30, 2022 and 2021,
respectively. The primary component in all periods was gains and losses from the
change in the fair value of the AVCT Investment , which were a loss of $12.4
million and a gain of $12.1 million in the three months ended June 30, 2022 and
2021, respectively, and losses of $39.4 million and $11.8 million in the six
months ended June 30, 2022 and 2021, respectively.
Income Taxes. We recorded income tax provisions of $6.2 million and $4.7 million
in the six months ended June 30, 2022 and 2021, respectively. These amounts
reflect our estimates of the effective rates expected to be applicable for the
respective full fiscal years, adjusted for any discrete events, which are
recorded in the period that they occur. These estimates are reevaluated each
quarter based on our estimated tax rate for the full fiscal year. The estimated
effective tax rate includes the impact of valuation allowances in various
jurisdictions.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the "TCJA") eliminates the
option to deduct research and development expenditures currently and requires
taxpayers to amortize them over a minimum of five years pursuant to IRC Section
174. Although Congress is considering legislation that would defer the
amortization requirement to later years, we have no assurance that the provision
will be repealed or otherwise modified. If this provision of the TCJA is not
repealed or otherwise modified, it will materially reduce our operating cash
flows in 2022.
45
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Liquidity and Capital Resources
Our condensed consolidated statements of cash flows are summarized as follows
(in thousands):
Six months ended
June 30, June 30,
2022 2021 Change
Net loss $ (100,155)
76,911 64,343 12,568
Changes in operating assets and liabilities (1,143) (34,867) 33,724
Net cash (used in) provided by operating activities
$ 8,030 $ (32,417) Net cash used in investing activities$ (6,515) $ (7,626) $ 1,111 Net cash used in by financing activities$ (38,362) $ (20,858) $ (17,504) Our cash and restricted cash aggregated$38 million atJune 30, 2022 and$106 million atDecember 31, 2021 . These amounts included cash and restricted cash aggregating$36 million atJune 30, 2022 and$60 million atDecember 31, 2021 held by our non-U.S. subsidiaries. If we elected to repatriate all excess funds held by our non-U.S. subsidiaries as ofJune 30, 2022 , we do not believe that the amounts of potential withholding taxes that would arise from the repatriation would have a material effect on our liquidity. We currently maintain the Senior Secured Credit Facilities Credit Agreement (as amended, the "2020 Credit Facility"), by and among us, as a guarantor,Ribbon Communications Operating Company, Inc. , as the borrower ("Borrower"),Citizens Bank, N.A. ("Citizens"), as administrative agent, a lender, issuing lender, swingline lender, joint lead arranger and bookrunner,Santander Bank, N.A ., as a lender, joint lead arranger and bookrunner, and the other lenders party thereto (each, together withCitizens Bank, N.A. andSantander Bank, N.A ., referred to individually as a "Lender", and collectively, the "Lenders"). For additional details regarding the terms of the 2020 Credit Facility, see Note 9 to our condensed consolidated financial statements. OnMarch 3, 2021 (the "Third Amendment Effective Date"), we entered into a Third Amendment to Credit Agreement (the "Third Amendment"), which further amended the 2020 Credit Facility. The Third Amendment provided for an incremental term loan facility to us in the original principal amount of$74.6 million , the proceeds of which were used on the Third Amendment Effective Date to consummate an open market purchase of all outstanding amounts under the Term B Loan. Upon the consummation of the open market purchase, the Term B Loans were assigned to the Borrower and immediately canceled, such that the outstanding amount under the Term A Loan and incremental term loan facility were combined and held by the Lenders (the "2020 Term Loan"). OnMarch 10, 2022 , we entered into a Fourth Amendment to the 2020 Credit Facility (the "Fourth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) to 4.25:1.00 for the first quarter of 2022 and 4.50:1.00 for the second quarter of 2022, with reductions in subsequent quarters through the third quarter of 2023, when the ratio will be fixed at 3.00:1.00. In connection with the Fourth Amendment, we made a$15.0 million prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fourth Amendment, we were required to make quarterly principal payments on the 2020 Term Loan aggregating approximately$20 million per year for the next two years and$30 million in the following year, with the final payment approximating$285 million due on the maturity date. OnJune 30, 2022 , the we entered into a Fifth Amendment to the 2020 Credit Facility (the "Fifth Amendment") to increase the Maximum Consolidated Net Leverage Ratio (as defined in the 2020 Credit Facility) to 5.25:1.00 for the second quarter of 2022, 5.00:1.00 for the third quarter of 2022, and 4.75:1.00 for the fourth quarter of 2022. Also, the Fifth Amendment reduced the minimum Consolidated Fixed Charge Coverage Ratio (as defined in the 2020 Credit Facility) to 1.10:1.00 for the second, third and fourth quarters of 2022 and increased the maximum rate at which loans bear interest if our Consolidated Net Leverage Ratio for any quarter is greater than 4.50:1.00. Specifically, pursuant to the Fifth Amendment, loans incurred under the Senior 46 -------------------------------------------------------------------------------- Secured Credit Facilities bear interest, at our option, at either LIBOR plus a margin ranging from 1.50% to 4.50% per year, or the base rate (the highest of the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.50%, or the prime rate announced from time to time inThe Wall Street Journal ) plus a margin ranging from 0.50% to 3.50% per year (such margins being referred to as the "Applicable Margin"). In addition, the Fifth Amendment allows us to incur junior secured or unsecured debt in an amount no less than$50 million , subject to certain conditions, including the requirement that 50% of the aggregate amount of such incurred debt (net of certain costs, fees and other amounts) must be applied to prepay the Senior Secured Credit Facilities, and compliance with certain leverage ratio-based covenant exceptions. In connection with the Fifth Amendment, we made a$10.0 million voluntary prepayment that was applied to the final payment due on the maturity date. Subsequent to the Fifth Amendment, we are required to make quarterly principal payments on the 2020 Term Loan aggregating approximately$5.0 million per quarter throughMarch 31, 2024 and$10.0 million in each of the three quarters thereafter, with the final payment approximating$275 million due on the maturity date inMarch 2025 . AtJune 30, 2022 , we had an outstanding balance under the 2020 Term Loan of$340.5 million at an average interest rate of 4.4% and$4.3 million million of letters of credit outstanding with an interest rate of 3.5%. We were in compliance with all covenants of the 2020 Credit Facility at bothJune 30, 2022 andDecember 31, 2021 . We are exposed to financial market risk related to foreign currency fluctuations and changes in interest rates. These exposures are actively monitored by management. To manage the volatility related to the exposure to changes in interest rates, we have entered into a derivative financial instrument. Management's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates. Our policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. We do not hold or issue derivative financial instruments for trading or speculative purposes. As a result of exposure to interest rate movements, duringMarch 2020 , we entered into an interest rate swap arrangement, which effectively converted our$400 million term loan with its variable interest rate based upon one-month LIBOR to an aggregate fixed rate of 0.904%, plus a leverage-based margin as defined in the 2020 Credit Facility. The notional amount of this swap as ofJune 30, 2022 was$400 million , and the swap matures onMarch 3, 2025 , the same date the 2020 Credit Facility matures. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we are using an interest rate swap as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income in the condensed consolidated balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. During the three and six months endedJune 30, 2022 and 2021, such a derivative was used to hedge the variable cash flows associated with the 2020 Credit Facility. Any ineffective portion of the change in fair value of the derivative would be recognized directly in earnings. However, during the three and six months endedJune 30, 2022 and 2021, we recorded no hedge ineffectiveness. Amounts reported in accumulated other comprehensive income related to our derivative will be reclassified to interest expense as interest is accrued on our variable-rate debt. Based upon projected forward rates, we estimate as ofJune 30, 2022 that$8.0 million may be reclassified as a decrease to interest expense over the next 12 months. We use letters of credit, performance and bid bonds in the course of our business. AtJune 30, 2022 , we had letters of credit, bank guarantees, and performance and bid bonds outstanding (collectively, "Guarantees") aggregating$25.4 million million, comprised of the$4.3 million of letters of credit under the 2020 Credit Facility described above (the "Letters of Credit") and$21.1 million of bank guarantees and performance and bid bonds (collectively, the "Other Guarantees") under various uncommitted facilities. AtDecember 31, 2021 , we had$30.1 million of Guarantees, comprised of$4.3 million of Letters of Credit and$25.8 million of Other Guarantees. At bothJune 30, 2022 andDecember 31, 2021 , the Company had cash collateral of$2.0 million supporting the Guarantees, which is reported as Restricted cash in our condensed consolidated balance sheets.
Cash Flows from Operating Activities
Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by
47
--------------------------------------------------------------------------------purchases and shipments of inventory. Our primary uses of cash for operating activities have been for personnel costs and investment in our research and development and in our sales and marketing, and general and administrative departments.
Cash used in operating activities in the six months endedJune 30, 2022 was$24.4 million , primarily resulting from our net loss, higher inventory, and lower accrued expenses and deferred revenue. These amounts were partially offset by certain non-cash expenses, such as the decrease in the fair value of theAVCT Investment , amortization of intangible assets, depreciation and amortization of property and equipment, as well as lower accounts receivable. Our operating activities provided$8.0 million of cash in the six months endedJune 30, 2021 primarily the result of lower accounts receivable and other operating assets, and slightly higher deferred revenue, coupled with our non-cash operating activities. These amounts were partially offset by our net loss, lower accrued expenses and other long-term liabilities, lower accounts payable and higher inventory. Our lower accounts receivable reflected typical mid-year seasonality. The decrease in accrued expenses and other long-term liabilities was primarily due to the cash payments related to our employee cash bonus program, facilities, professional fees, and royalties.
Cash Flows from Investing Activities
Our investing activities used
Our investing activities used$7.6 million of cash in the six months endedJune 30, 2021 , comprised of$10.6 million to purchase property and equipment, partially offset by$2.9 million of proceeds from the sale of our QualiTech business, which operated compliance testing laboratories inIsrael for reliability and standardization testing for the high-tech industry, including testing medical equipment, military equipment and vehicles.
Cash Flows from Financing Activities
Our financing activities used$38.4 million of cash in the six months endedJune 30, 2022 , primarily due to$35.0 million of principal payments on the 2020 Credit Facility, including the voluntary$15.0 million incremental principal payment in connection with the Fourth Amendment, voluntary$10.0 million incremental principal payment in connection with the Fifth Amendment and$1.9 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting. Payments of debt issuance costs and principal payments of finance leases totaled approximately$1.4 million . Our financing activities used$20.9 million of cash in the six months endedJune 30, 2021 . We received$74.6 million of proceeds from the incremental loan obtained in connection with the Third Amendment, which amount was used to consummate an open market purchase of all outstanding amounts under the Term B Loan. We used$12.1 million for the payment of tax withholding obligations related to the net share settlement of restricted stock awards upon vesting, and$82.1 million of principal payments of term debt, including the$74.6 million payoff of the Term B Loan in connection with the Third Amendment,$0.8 million of payments of debt issuance costs and$0.5 million for principal payments of finance leases. Under the 2020 Credit Facility, we are required to maintain compliance with certain financial covenants. As ofJune 30, 2022 , we were in compliance with our financial covenants. Due to the impact of market conditions on our forecast, including supply chain disruptions, higher costs, and other geopolitical instabilities and disputes, we project that we may not maintain compliance with our financial covenants under the 2020 Credit Facility, as amended, for the quarter endedSeptember 30, 2022 . Failure to remain in compliance would be an event of default that would permit the Lenders to accelerate the maturity of the 2020 Credit Facility. As of the date of the issuance of our condensed consolidated financial statements, we currently do not have sufficient cash on hand or available liquidity to repay the outstanding balance of$340.5 million as ofJune 30, 2022 in the event the debt was accelerated. Management plans to avoid any potential event of default include raising additional cash that would allow us to pay down debt in order to remain in compliance with our financial covenants. In addition, we have the ability to sell our derivative financial instrument, which had an aggregate fair market value of$21 million as ofJune 30 2022 . Lastly, we would evaluate the timing of our capital spending and extension of our payment terms with vendors as needed. 48 -------------------------------------------------------------------------------- We believe our plans are probable of being successfully implemented, which along with our available cash on hand and liquidity from the factoring of receivables will result in adequate cash to allow us to pay down debt to meet our financial covenant requirements. Based on our current expectations, we believe our current cash and available borrowings under the 2020 Credit Facility, along with management's plans as outlined above, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least twelve months. The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations atJune 30, 2022 , primarily comprised of our debt principal and interest obligations as described above, and our operating lease and purchase obligations. Our operating lease obligations totaled$77.7 million atJune 30, 2022 , with payments aggregating$9.7 million in the remainder of 2022,$17.8 million in 2023,$10.8 million in 2024 and$39.4 million thereafter. Estimated payments for purchase obligations for the full year 2022 aggregate approximately$139 million . We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing, to complete acquisition-related integration activities and for other general corporate activities. We further believe that our financial resources, along with managing discretionary expenses, will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations. Looking ahead, we have developed contingency plans to reduce costs further if the situation deteriorates. The challenges posed by the COVID-19 pandemic on our business continue to evolve rapidly. Consequently, we continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 pandemic. However, it is difficult to predict future liquidity requirements with certainty, and our cash and available borrowings under the 2020 Credit Facility may not be sufficient to meet our future needs, which would require us to refinance our debt and/or obtain additional financing. We may not be able to refinance our debt or obtain additional financing on favorable terms or at all.
Recent Accounting Pronouncements
InMarch 2022 , the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"), which eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments - Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for the CompanyJanuary 1, 2023 , with early adoption permitted. The Company believes that the adoption of ASU 2022-02 will not have a material impact on its consolidated financial statements upon adoption. InOctober 2021 , the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"), which amends ASC 805, Business Combinations (Topic 805), to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606) ("ASC 606"). Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. While primarily related to contract assets and contract liabilities that were accounted for by the acquiree in accordance with ASC 606, ASU 2021-08 also applies to contract assets and contract liabilities from other contracts to which the provisions of ASC 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2021-08 is effective for usJanuary 1, 2023 , with early adoption permitted. We believe that the adoption of ASU 2021-08 could have a material impact on our consolidated financial statements for periods including and subsequent to significant business acquisitions. InJanuary 2021 the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"), which refines the scope of ASC 848, Reference Rate Reform, and clarifies some of its guidance as part of the FASB's monitoring of global reference rate reform activities. ASU 2021-01 permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets (the "discounting transition"). ASU 2021-01 is effective for us prospectively in any period throughDecember 31, 2022 that a modification is made to the terms of the derivatives affected by the discounting transition. The adoption of ASU 2021-01 did not have a material impact on our consolidated financial statements. 49
--------------------------------------------------------------------------------
© Edgar Online, source
