UTStarcom Holdings Corp. — FY 2011 Form 20-F
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide a clear standalone Q4 financial result. Financial statements are prepared under U.S. GAAP. UTStarcom Holdings became the Cayman Islands parent through a June 2011 reorganization; the business continued under substantially the same structure.
Business context and financial results
UTStarcom sells IP-based telecommunications and network equipment and related services, principally for telecom and cable operators. Its focus includes broadband, IPTV, iDTV and Internet TV. China, Japan and India are key markets; 2011 revenue was concentrated in China (49%) and Japan (30%).
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $320.6 million | $291.5 million |
| Gross profit / margin | $114.3 million / 35.7% | $70.2 million / 24.1% |
| Operating income (loss) | $21.2 million | ($73.7 million) |
| Net income (loss) attributable to UTStarcom Holdings | $13.4 million; $0.09 per share | ($65.1 million); ($0.48) per share |
| Cash used in operating activities | $41.7 million | $92.2 million |
| Cash and cash equivalents at year-end | $301.6 million | $351.5 million |
| Working capital | $280.0 million | $213.7 million |
| Total assets / shareholders’ equity | $600.9 million / $264.6 million | $784.3 million / $240.9 million |
| Outstanding bank debt | None | None |
Current assets were $503.8 million and current liabilities $223.8 million at year-end. Cash, cash equivalents and bank notes totaled $304.0 million; a further $18.6 million of restricted cash was reported. About $131.8 million of cash was held by China subsidiaries and is subject to local transfer and currency controls. The $4.6 million recourse factoring facility was undrawn at year-end. The prior $29.4 million of credit facilities expired in 2011.
Material changes versus FY 2010
- Sales rose 10%, primarily from increased PTN sales in Japan and RollingStream infrastructure sales in India and Thailand. Japan’s share of sales increased to 30% from 17%; China’s share declined to 49% from 57%.
- Gross margin improved to 35.7% from 24.1%, with higher-margin PTN sales and lower operating costs contributing. Equipment gross margin was 37%, compared with 23%.
- SG&A fell to $63.9 million from $95.2 million and R&D to $30.1 million from $38.0 million, reflecting restructuring and cost controls. Headcount declined by 340, to approximately 1,560.
- Despite the return to annual profitability, operating cash flow remained negative. Cash declined by $49.9 million during the year; operating cash use improved from $92.2 million in FY 2010.
- Equipment-based services revenue declined to $34.5 million from $40.4 million, mainly as PAS maintenance activity wound down. Operational support services were nascent, with $0.5 million revenue and a $2.0 million gross loss.
Outlook, risks and unusual items
- Management outlook: Management said it expected sufficient liquidity for working capital and capital expenditure needs for more than 12 months and aimed to maintain profitability through expense control and improved collections. This outlook was conditional; the filing gives no quantified revenue or earnings guidance and says results and cash collections are uncertain.
- PAS phase-out: China’s PAS service phase-out was completed by the end of 2011. The company recognized $95.3 million of PAS-related deferred revenue in 2011, contributing approximately $33.1 million of gross profit; management did not expect this profit contribution to recur in 2012 and beyond. A further $13.2 million PAS deferred-revenue balance remained, of which about $11.6 million was expected to be recognized in 2012 subject to release of obligations.
- Other earnings items: FY 2011 operating expenses included a $4.5 million net gain on divestitures. Gross profit also benefited from a $1.9 million customer inventory-cost indemnification and a $2.2 million release of PHS deferred revenue without associated cost. Other expense included an $8.9 million foreign-exchange loss, primarily related to Indian-rupee intercompany receivables.
- Customer concentration: Softbank affiliates accounted for 29% of FY 2011 sales ($94.2 million) and approximately 42% of year-end net accounts receivable. Softbank contracts include a three-year service period and product-failure penalty provisions extending over seven years.
- Liquidity and collections: Operating cash use, a $1.1 billion accumulated deficit, aged receivables and reliance on cash held in China remain important risks. Gross receivables were $50.3 million with a $30.1 million allowance; the company wrote off $4.7 million of aged iPAS receivables in 2011.
- Business and regulatory risks: The filing highlights intense competition and pricing pressure, uncertain contract timing and customer acceptance, dependence on outsourced manufacturing and sole-source components, China currency-transfer restrictions, foreign-exchange exposure, and uncertainty over Indian security and supply-chain requirements. Revenue was not recognized on certain India contracts; related deferred revenue and deferred costs were $5.3 million and $4.1 million.
- Contingencies and governance: The company is defending an Ireland claim relating to its EMEA operations transfer; settlement discussions were ongoing. A prior DOJ/SEC investigation was resolved with $3.0 million in combined payments and continuing reporting obligations. Management and the auditor reported effective internal controls at December 31, 2011, following remediation of prior-year material weaknesses. The filing also notes the China-based auditor was not subject to PCAOB inspection.
- iTV transaction: Management intended to exercise a repurchase option by April 16, 2012, which could reduce ownership below 50%, deconsolidate iTV and result in an accounting gain or loss. The filing says the accounting impact was still being assessed.
- Subsequent event: On March 26, 2012, the company obtained a $31.8 million non-recourse factoring line for receivables from China telecom operators, effective April 1, 2012. This was not available at the 2011 year-end.
- The company repurchased $6.3 million of shares in 2011 under a program authorizing up to $20 million through August 2012. No cash dividends were paid, and management did not expect dividends in the foreseeable future.
Most important facts for investors to verify
- Whether improved margins and reported profitability persist after the nonrecurring PAS revenue and other favorable items are excluded.
- Whether operating cash flow turns positive and customer collections improve, particularly from Softbank and China customers.
- How much of the reported $301.6 million cash balance is accessible outside China, and whether the 2012 factoring facility was drawn and on what terms.
- The outcome and financial effects of the iTV repurchase, potential deconsolidation and related impairment assessment.
- Recognition and release of remaining PAS deferred revenue, and the timing of revenue under Indian security and supply-chain requirements.
- Developments in the EMEA Ireland dispute, tax exposures, foreign-exchange losses and Softbank contract penalty obligations.