UTStarcom Holdings Corp. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP.
Business context and financial performance
UTStarcom supplies broadband telecommunications equipment, network solutions and related services, principally to carriers in Asia. Its products include packet transport and aggregation, network synchronization, Wi-Fi, broadband access and SDN platforms. India became its largest market in 2018.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $115.9 million | $98.3 million |
| Gross profit / margin | $32.3 million / 27.8% | $33.1 million / 33.7% |
| Operating income | $4.4 million | $6.5 million |
| Net income attributable to UTStarcom | $4.8 million | $7.0 million |
| Basic / diluted earnings per share | $0.14 / $0.13 | $0.20 / $0.19 |
| Cash provided by (used in) operating activities | $(26.1) million | $3.8 million |
| Cash and cash equivalents | $57.0 million | $79.7 million |
| Working capital | $90.4 million | $78.5 million |
| Total debt | None reported | None reported |
At year-end, restricted cash was $16.7 million, bringing cash plus restricted cash to $73.7 million. Current assets were $160.2 million and current liabilities $69.8 million. Cash includes funds held in multiple countries; transfers from China and India may be restricted.
Material changes and comparability
- Reported sales rose 18.0%, mainly reflecting higher equipment revenue. Equipment sales grew to $97.7 million; services declined to $18.3 million.
- Reported gross margin fell to 27.8% from 33.7%, which management attributed mainly to the shift in sales mix from higher-margin Japan to lower-margin India. Operating income and net income also declined.
- Revenue recognition changed in 2018 with adoption of ASC 606 using the modified retrospective method. For 2018, the filing estimates revenue of $60.4 million and net income of $0.6 million without ASC 606, compared with reported revenue of $115.9 million and net income of $4.8 million. Thus, reported growth and earnings are not directly comparable with prior-year results. ASC 606 recognized equipment revenue generally upon delivery rather than awaiting final customer acceptance.
- Accounts receivable increased to $60.7 million from $16.9 million; the filing attributes the increase principally to India. One customer accounted for 93% of year-end receivables. Finished goods inventory rose to $21.7 million from $10.9 million, including $14.4 million at customer sites.
- Operating cash flow swung from a $3.8 million inflow to a $26.1 million outflow, driven chiefly by a $44.8 million use of cash from accounts receivable, partly offset by higher accounts payable.
Outlook, risks and unusual items
- Management stated it expects liquidity to be sufficient for anticipated operations for at least 12 months after issuance of the financial statements, while noting this depends on operating performance, collections and expense control. It may further reduce costs if projected sales do not materialize. No quantified revenue or earnings guidance is provided.
- Management cited expected continued demand in India for broadband, MSAN and Wi-Fi products, and anticipated increasing shipments of 5G-ready synchronization products and initial SPN products. These are expectations, not firm financial guidance.
- Customer and geographic concentration is acute: BSNL represented 58% of 2018 sales and SoftBank 28%. India generated 60% of sales; Japan generated 31%. Delays, cancellations, payment issues or loss of either major customer could materially affect results and cash flow.
- Cash fell by $27.0 million on a cash, restricted-cash and equivalents basis. Liquidity risks include slow collections, customer concentration, restricted cross-border cash movement and the possibility of more stringent supplier payment terms.
- Management identified a material weakness in financial-reporting controls: insufficient personnel with appropriate U.S. GAAP expertise for complex accounting. Disclosure controls and internal control over financial reporting were ineffective at December 31, 2018. Management plans to add expertise, provide training, conduct peer reviews and use external consultants.
- In February 2019, Taiwan authorities opened an investigation into whether UTStarcom Taiwan is a PRC investor. The filing says PRC persons or entities hold approximately 42.13% directly or indirectly; a finding could prohibit the subsidiary from operating in Taiwan. Taiwan represented 6% of 2018 sales.
- Other notable items: a $2.6 million foreign-currency loss; a $2.5 million release of tax provisions due to statute-of-limitations expirations; $0.4 million of investment impairment; and $2.5 million spent repurchasing shares. The company acquired full ownership of uSTAR in December 2018.
- Commitments included $31.7 million of purchase commitments, $16.7 million of outstanding letters of credit and $3.4 million of operating lease payments. Gross unrecognized tax benefits were $17.5 million. The company reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of reported 2018 revenue and profit reflects ASC 606 timing effects, and how should the filing’s legacy-GAAP comparison be interpreted?
- Whether the large India receivables are collected on schedule, and how customer credit exposure and the associated allowance develop.
- Whether operating cash flow returns to positive levels, given the cash decline and working-capital demands.
- Whether the Taiwan investigation results in operating restrictions or other costs.
- Progress in remediating the material weakness and restoring effective disclosure and financial-reporting controls.
- Renewal, delivery and payment trends for BSNL and SoftBank, and the margin impact of the company’s changing geographic and product mix.