Financial Shenanigans on UTStarcom

I’m currently reading Financial Shenanigans by Howards Schilit, and it’s about accounting gimmicks and fraud in financial statements. The book is filled with examples of both, and you see a lot of well known companies discussed. You have the usual suspects such as Enron and Worldcom, but also well known tech companies such as Intel, Microsoft and Cisco don’t escape the spotlight. Certainly recommended reading for the serious investor. To my surprise it even has a few sections on UTStarcom, a pretty obscure name in my book:

From chapter thirteen, about boosting operating cash flow:

Be Wary of Dramatic Improvements in CFFO. Telecom equipment manufacturer UTStarcom reported markedly improved CFFO in early 2008. After a dismal 2007, in which it logged four consecutive quarters of negative CFFO (for a total cash burn of $218 million), UTStarcom suddenly reported positive cash flow of $97 million in March 2008. Investors could have readily noticed that the cash flow turnaround resulted from a number of particularly aggressive working capital actions. A quick peek at the Balance Sheet revealed a $65 million drop in accounts receivable and a $66 million increase in accounts payable. The 10-Q gave more insight and mentioned one of those “management decisions” we warned you about in CF Shenanigan No. 1 with the infamous Computer Associates. (See the accompanying disclosure from UTStarcom’s March 2008 10-Q.)

UTStarcom proceeded to report negative operating cash flow throughout the rest of 2008. Despite the $97 million in positive CFFO during the first quarter, the company ended the year in a hole, having burned through $55 million in operating cash flow.

The company is mentioned again in chapter fifteen, about distorting balance sheet metrics:

Watch for Increases in Receivables Other Than Accounts Receivable. UTStarcom pulled a similar switcheroo in 2004 by taking more payment in the form of “bank notes” and “commercial notes.” Since these notes receivable were not categorized as accounts receivable on the Balance Sheet (in fact, the bank notes were considered cash), UTStarcom was able to present a more palatable DSO to investors, despite a severe deterioration in its business. Diligent investors could easily have spotted this improper account classification by reading UTStarcom’s footnotes. As shown in the accompanying box, the company disclosed clearly that it had accepted a substantial amount of bank and commercial notes in place of accounts receivable.

UTStarcom is still using this practice, but the impact of this accounting maneuver is at the moment (probably) insignificant. In 2004 the company had $100 million of bank notes receivable (that were classified as cash), while at the end of 2011 (date latest 20-F) UTSI had $2.4 million in bank notes. We don’t know what the current status is because quarterly results are released without footnotes. UTSI’s working capital management is probably still quite aggressive given the small amount of receivables on the balance sheet, and we also learn in the latest 20-F that the company does have an accounts-receivable factoring line of $31.8M that can be used to sell receivables from China telecommunication operators.



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