Friday, July 4, 2008

Cash and Asset Position

After the PCD sale and subsequent 17% drop in the stock this week, investors are understandably not happy. Because the operations are not going to be profitable anytime soon, it is now prudent to look (again) at the (1) company cash/assets and (2) growth prospects of the core businesses and timing of profitability. I will discuss the first part in this post and the second part in another post.

At the end of 2007, the company had $503m in cash and short term investments. It also had $323m in short term debt for a net cash position of $180m. During the Q4 2007 call, Barton updated the cash at $220m and the debt at $40m (net cash of $180m with half of the cash in China and half in the US). The full year forecast prior to the divestitures of the PCD and MSBU was for neutral cash flows. The almost $100m net cash gain after Q1 2008 will be reversed in Q2. So, I will use the net $180m cash as basis for my year end cash/asset balance. Here are my estimates.

$230m (sale of PCD including $216m upfront and $14m in escrow to be received soon)
-$30m The PCD had operating profits of $86m. Lets assume this is all cash flow to the company. For the 2nd half of the year, I am assuming they will lose $30m more in cash flow. This assumes 12% gross margins for the internal handset and 6% for the distribution part of the PCD (also using 6.9% overall GMs, $280m in internal PCD and the rest about $1.545b for distribution part).
+0m (With the same argument, the sale of money losing MSBU should benefit cash flows - unless revenue recognition in the 2nd half is much stronger, but I will assign zero for now)
+6m (With $230m in cash, the company should make 5% in half a year or atleast save in short term interest payments/borrowings)

So, at the end of the year, the company should have about $386m in net cash. Now, lets look at other potential cash/assets.

$10-15m? (Sale of MSBU. This division had sales of about $30m and potentially more from a source that contacted me. I didn't want to add any cash from this sale to the above figure just to be conservative).
$40-50m? (The other non-core asset is CSBU, which includes the 3com Commworks division it bought for $100m a few years ago. This division will be profitable this year, have revenues in the 40m (double from last year), and gross margins above 50%.
$15m (Long term investments)
$6m (2% remaining interest in PCD assuming $300m valuation)
$6m (Bank notes)
$30m (Restricted cash)
$10m (Remaining receivables from PCD sale in escrow due in 12 months)
$50m (Due 2.5 years from now if cummulative earnings from 2008-2010 are met, looking good so far)

Thats about $175m more in assets that could potentialy be realized.

Plant, property, and equipment are valued at about $210m (with the Hangzhou property/building alone assessed at $180m last year).

There are obviously other factors such as receivables, payables, inventory, intangibles, etc but the above adds to about $771m (or $200m more than the current market cap). Shareholder equity based on the last 10Q prior to the two divestitures was $661m (or about $90m higher than the current market cap).

The cash/asset part as detailed above is relatively straightforward. We have been doing these analyses for a while now. The more important analysis is the cash flow/profitability of the core businesses in 2009 and going forward. For a while now, the stock has been discounting the underlying assets due to losses and other issues. The stock has increased due to the elimination of certain issues and the divestiture of some assets but operational profitability is still far off. Barton was correct that it provides the company with more transparency and they can really focus on the core businesses. The outlook will change from the bookings they receive from quarter to quarter but I'll take a closer look at the situation in the next post.

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