UTStarcom Holdings Corp. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP; amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
UTStarcom provides broadband telecommunications equipment and related services, including packet transport, optical transport, fixed-line broadband access and Wi-Fi solutions. It is shifting toward broadband products and services and away from discontinued or divested non-core businesses. Revenue is concentrated in Asia, particularly Japan, and sales are primarily equipment.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $164.4 million | $186.7 million |
| Gross profit / margin | $40.2 million / 24.4% | $68.2 million / 36.5% |
| Operating loss | $13.2 million | $29.5 million |
| Net loss attributable to UTStarcom | $22.7 million; $0.58 per share | $34.4 million; $0.71 per share |
| Cash used in operating activities | $1.9 million | $25.6 million |
| Cash and cash equivalents at year-end | $107.8 million | $179.6 million |
| Working capital | $107.9 million | $196.4 million |
| Total assets | $367.0 million | $488.1 million |
| Debt | No bank loans; no short- or long-term debt reported | No bank loans reported |
Current liabilities were $164.6 million against current assets of $272.5 million. Cash declined $71.8 million during 2013, reflecting, among other items, $30.7 million used for share repurchases, $28.9 million used in investing activities and a $10.3 million adverse exchange-rate effect. The company reported an accumulated deficit of $1.176 billion.
Material changes versus the prior comparable period
- Sales fell 11.9%. Equipment revenue declined by $19.6 million, primarily due to the IPTV divestiture and lower PTN/MSAN sales affected by yen depreciation; higher Wi-Fi and value-added resale sales partly offset the decline.
- Gross margin fell to 24.4% from 36.5%. Equipment gross profit dropped, and equipment-based services recorded a $1.0 million gross loss versus $3.5 million gross profit in 2012.
- Operating loss improved by $16.3 million as SG&A and R&D expenses fell, but lower gross profit and investment-related losses remained significant.
- Net loss narrowed by $11.7 million. Results included a $9.4 million investment impairment, $9.6 million equity-method loss from iTV Media, and $11.5 million of other income, including a $7.1 million currency-translation gain and $3.9 million foreign-exchange gain.
- Cash used in operations improved to $1.9 million from $25.6 million; year-end cash nevertheless decreased by $71.8 million.
- Japan represented 57% of sales, while China represented 4%. Sales to Softbank affiliates were $90.3 million, or approximately 55% of sales, compared with 49% in 2012.
Outlook, commentary, risks and unusual items
- Management said it expected liquidity to cover working capital and capital expenditure needs for more than 12 months and believed it had sufficient liquidity for anticipated 2014 operations. It also noted this assessment depended on customer collections, expense control and planned operating performance. No specific revenue or earnings guidance was provided.
- Management planned to continue streamlining operations, improving collections and aligning the cost base with sales. R&D spending declined to $14.5 million from $28.1 million in 2012. In the fourth quarter, the company consolidated R&D, manufacturing and back-office functions in Hangzhou.
- Customer concentration is a major risk: Softbank accounted for about 55% of 2013 sales and 82% of year-end net accounts receivable. Softbank sold its entire stake in the company in January 2014; UTStarcom repurchased 3.9 million shares for $9.9 million, while Shah Capital purchased 1.0 million shares.
- UTStarcom invested further in iTV Media, holding $35.1 million of convertible bonds before impairment and a $5.3 million equity-method investment at year-end. The bonds were written down by $9.1 million due to uncertainty about iTV’s ability to obtain funding. The company warned it could recognize additional iTV losses if the investee’s equity value is exhausted.
- Deferred costs were substantial: $95.3 million current and long-term combined at year-end, including $29.3 million paired with liabilities for IPTV contracts not legally assigned to the buyer. Revenue recognition depends on customer acceptance, which can be prolonged.
- The company had no outstanding debt, but reported $45.4 million of gross unrecognized tax benefits. It also had $14.7 million in letters of credit and $22.7 million in purchase commitments. Potential penalties under Indian security and supply-chain agreements could not be estimated; no penalties had been incurred.
- Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2013 due to a material weakness: insufficient personnel with appropriate U.S. GAAP expertise to account for non-routine transactions. The weakness was also reported for 2012; remediation efforts continued.
- Other risks include foreign-exchange exposure (the company did not hedge currency transactions), PRC restrictions on moving funds, competition and pricing pressure, contract acceptance and collection delays, and regulatory and geopolitical risks in China, Japan and India. The filing describes prior DOJ and SEC investigations as resolved; routine litigation was not expected by management to have a material effect.
Important facts for investors to verify
- Whether revenue, margins and cash generation can stabilize after divestitures and the sharp decline in gross margin.
- Softbank-related sales and receivables, ongoing customer relationship terms, and the effect of Softbank’s January 2014 exit as a shareholder.
- Recoverability, maturity extensions and further funding needs associated with iTV Media and the $20 million IPTV-business convertible bond.
- Composition and collectability of deferred costs, including the $29.3 million associated with unassigned IPTV contracts, and customer acceptance timing.
- Progress in remediating the material weakness in financial reporting controls and availability of qualified accounting staff.
- Access to cash held in China, restricted cash, customer collections, and the company’s ability to meet its liquidity expectations without additional financing.
- Potential outcomes of tax examinations and the unrecognized tax benefits, as well as any exposure under Indian security agreements and customer guarantees.