UTStarcom Holdings Corp. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter earnings filing. Figures are in U.S. dollars unless noted.
Business context
UTStarcom supplies broadband telecommunications network equipment, software and services, including packet transport, network synchronization, broadband access and carrier Wi-Fi solutions. Its business is concentrated in Asia, especially India and Japan, and sales depend heavily on two customers: BSNL in India and SoftBank in Japan.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $65.6 million | $115.9 million |
| Gross profit / gross margin | $24.2 million / 37% | $32.3 million / 28% |
| Operating income (loss) | $(6.1) million | $4.4 million |
| Net income (loss) | $(3.9) million | $4.8 million |
| Operating cash flow | $(24.1) million | $(26.1) million |
| Cash and cash equivalents at year-end | $35.0 million | $57.0 million |
- Revenue fell 43.4%. Equipment sales declined to $43.7 million from $97.7 million, mainly because significant Indian projects completed in the prior year. Services revenue increased to $21.9 million from $18.3 million.
- Gross margin improved as sales mix shifted toward higher-margin Japan business. Equipment gross margin was 32% versus 26%; services gross margin was 46% versus 37%.
- Operating expenses rose to $30.3 million from $27.9 million, including $14.5 million of R&D spending, up from $12.7 million, primarily reflecting investment in 5G products.
- Year-end total assets were $151.3 million, current assets $137.1 million, current liabilities $49.0 million and working capital $88.0 million. Total debt was reported as zero at year-end; the company drew and repaid $4.6 million of short-term borrowings during 2019. Lease liabilities totaled $3.0 million.
- Restricted cash was $13.6 million, primarily collateral for performance and warranty bonds and letters of credit, and is not freely available. Cash, cash equivalents and restricted cash together totaled $48.6 million.
- Net accounts receivable was $77.8 million, versus $60.7 million; gross receivables were $84.3 million and the allowance was $6.5 million. Inventory fell to $6.1 million from $26.4 million.
Material changes and unusual items
- India revenue declined to $37.2 million from $70.1 million; Japan revenue declined to $21.8 million from $35.5 million. India and Japan accounted for 57% and 33% of FY2019 sales, respectively.
- BSNL represented 48% of sales and SoftBank 21%. Gross receivables owed by BSNL were approximately $53.9 million at year-end. The company recorded a $6.1 million allowance for doubtful accounts for its main Indian customer and said collections were delayed; it reported receiving partial payments at year-end 2019 and monthly through April 2020.
- Other income included a $3.2 million reversal of an aged Indian accounts-payable balance and a $1.2 million reversal of a FIN 45 reserve after the statute of limitations expired. These gains were partly offset by a $3.9 million foreign-exchange loss.
- UTStarcom transferred its Taiwan business to an unaffiliated local company in August 2019 after a Taiwan regulatory investigation concerning ownership eligibility. Taiwan contributed $3.5 million, or 5%, of 2019 sales; the subsidiary’s dissolution was approved in March 2020.
- The company discontinued its smart-retail goBox product line in 2020 after reassessing its prospects. Aceland repurchased the company’s investment in March 2020, producing a reported $0.3 million gain.
Outlook, risks and contingencies
- Management said it expected available liquidity to fund anticipated operations and obligations for at least 12 months after issuance of the financial statements, while acknowledging that this depends on operating performance, customer collections and expense control. It planned to continue reducing costs and improving receivables turnover. No numerical revenue or earnings guidance was provided.
- COVID-19 disrupted operations after year-end: offices and facilities were temporarily closed, productivity and shipments were affected, and the company warned of possible lower 2020 revenue, slower collections and additional receivables allowances. The impact could not be reasonably estimated in the filing.
- Customer concentration, especially BSNL’s overdue balance, is a major cash-flow and credit risk. Management said timing of collection of the remaining BSNL receivables was uncertain.
- Management identified a material weakness in internal control over financial reporting: insufficient personnel with appropriate U.S. GAAP expertise to account for complex matters. Disclosure controls and internal controls were deemed ineffective at December 31, 2019. Planned remediation included hiring and training staff, finance-team reviews and external consulting. The auditor did not express an opinion on control effectiveness.
- Other key exposures include foreign-exchange movements (the company did not hedge its currency exposures), restrictions on moving funds out of China and India, trade tariffs, supplier and technology risks, competition, and the possibility that restructuring or new products may not deliver expected results.
- Commitments included $13.6 million of outstanding letters of credit and $48.3 million of purchase commitments. Gross unrecognized tax benefits were $15.5 million. The company reported no material legal proceedings and no off-balance-sheet arrangements.
Most important facts for investors to verify
- BSNL’s current financial condition, subsequent cash receipts, the aging and recoverability of its approximately $53.9 million gross receivable, and the adequacy of the $6.5 million total receivables allowance.
- Available, unrestricted liquidity by country, expected operating cash burn, and whether management’s 12-month liquidity assessment remains supportable.
- Whether sales and gross margins can recover after the sharp decline in equipment revenue, including evidence of new orders and customer diversification.
- Progress in remediating the material weakness and whether controls over complex U.S. GAAP accounting are operating effectively.
- The continuing effects of COVID-19, the Taiwan business exit, foreign-exchange exposure and any changes in customer or supplier payment terms.