Fabergé egg in the rubble (Full Version)Posted: September 14, 2013
As it is the case for all postings in this blog, my standard disclaimers apply for this posting. However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice. Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
Why I am buying a lot of UNTK — right now
This posting discusses UNTK, the equity of Unitek Global Services, and, in particular, explains why I have recently been increasing my investment in Unitek Global Services based on certain information that I gleaned from the company’s recent 10K restatement filing for its 2011 fiscal year and for the interim periods ended March 31st, 2012, June 30th, 2012 and September 29th, 2012.
By way of background, I have gone through several rounds of investments in Unitek Global Services over the last year, and I have laid out my rationale for each of these rounds in a number of postings, and, so, I will not detail my pre-10K rationale for investing in Unitek Global Services, but, rather, refer the reader to my postings, perhaps starting with this one. Alternatively, if you are somewhat lazy (you shouldn’t be, but odds are that you are,) you can read a recent summary by another blogger, Red, blogging on the red corner blog (here.)
Overall, my earlier investments in Unitek Global Services have been predicated on the market’s consistent and repeated overreactions to negative (but, ultimately, insignificant) news coming out of Unitek Global Services, primarily originating with a relatively minor revenue recognition and accounting fraud that the company uncovered in its Pinnacle division, and my assumption has been that these overreactions would allow for several opportunities for twofers around UNTK.
So far I have been entirely correct in my assessment of the market’s overreactions and the associated opportunities, and I have been able to profit from the predictability of the market. However, up until the date of the recently released 10K filing, my assumption has been that any gains would be relatively slow, and not explosive, with the practical limit being twofers.
With the 10K filing my assumption has changed, and I now see an opportunity for far higher gains in a very short time and with very little warning.
This opportunity is the subject of this posting. Before you proceed to reading about the opportunity, however, I want to repeat the disclaimer that I laid out in the above and emphasize that the operative word is opportunity, implying chance, guess, and risk. So, before you read on, you need to recognize that: (1) whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever, and (2) that based on the 10K filing and my past experience I have formed an opinion about UNTK and Unitek Global Services, which has caused me to invest, but this decision is based on guesses and assumptions, which may be 100% wrong and, in fact, every dollar that I have invested and will invest in Unitek Global Services is at risk, including the risk of a complete loss.
It is estimated that at Stunde Null, the time of the capitulation of the Nazi government on May 8th, 1945, Berlin contained 75 million tons of rubble or 39 cubic yards of rubble for every inhabitant in the city.
The survival of the population of Berlin, estimated to be 2.8 million people, during the immediate post-war period, battling diseases and hunger, and, later on, battling an exceptionally cold winter, is a testament to German tenacity and Russian practicality.
The Russian military occupied all of Berlin at the time of surrender and would not hand the American, British and French sectors to the American and British Forces before July of 1945. To manage the acute logistical and humanitarian crisis that it had on its hands, the Russian occupying force instituted a rationing system linked to a rubble-clearing compensation scheme, which solved the problems of logistics and humanitarian help with one stroke, but also created an extensive underground economy based on Hamstern, the act of recovering goods from the rubble and traveling into the countryside in order to exchange these possessions for food. Mostly, the goods from the rubble would be small items, such as watches, rugs, and pillows, but, once in a while, the rubble work would turn up extremely valuable objects.
I was reminded of Hamstern when I recently read the newly published 10K restatement filing from Unitek Global Services.
On the surface, the 10K filing was loaded with rubble related to the restatement necessitated by the recently uncovered fraud, clearly indicative of the fact that the company, in the midst of securities litigation, is being extremely cautious about how it presents information. However, if you were able to move a few layer of brick, you would uncover several pleasant surprises, including nice top-line growth, nice operational performance, a nicely controlled litigation picture, and — surprisingly — a restatement that was much smaller that I, for one, had expected.
So, here, for the record, is an excerpt from the company’s earnings release discussing the 10K filing:
Revenues increased 24.5% to $437.6 million for the year ended December 31, 2012, from $351.5 million in 2011. This increase in revenues was primarily from organic revenue growth in the Company’s wireless business, growth in the cable portion of the Fulfillment segment from market share gains and the acquisitions completed in 2012, as well as the asset acquisition of Skylink Ltd. in September 2012.
Revenues from the Company’s Fulfillment segment increased 6.5% in 2012, to $305.3 million, from $286.7 million in 2011. Revenues from the Company’s Engineering and Construction segment totaled $132.3 million in 2012, an increase of 104.4% from $64.7 million in 2011.
Adjusted EBITDA increased 22.6% to $39.6 million for the year ended December 31, 2012, compared to $32.3 million for 2011. The year-over-year increase in adjusted EBITDA was primarily related to higher revenue and margins in the Company’s Engineering and Construction segment, partially offset by increased selling, general and administrative expenses related to a full year impact of the Pinnacle acquisition, which occurred in April 2011.
The Company also recorded a non-cash impairment charge of $14.9 million in the fourth quarter of 2012 related to the goodwill of its wireless reporting unit (including Pinnacle) in connection with its annual impairment testing.
Loss from continuing operations was ($39.5) million, or $(2.18) per diluted share in 2012, compared with $(7.3) million, or $(0.46) per diluted share in 2011.
Net loss for 2012 was $(77.7) million, or $(4.28) per diluted share, compared with $(9.1) million, or $(0.57) per diluted share in 2011. The increase in net loss and loss from continuing operations in 2012 was primarily related to the $14.9 million goodwill impairment charge, the impairment charges from discontinued operations of $35.2 million related to the Company’s wireline assets which were sold in 2012, an expense related to contingent consideration of $10.1 million compared to income of $8.5 million in 2011, and restructuring charges totaling $8.0 million.
These are, of course, big numbers, so it is probably prudent to explain that very large portions of the numbers are made up of charges related to the sale of one of the company’s divisions in 2012.
This transaction, which was linked to the near-simultaneous acquisition of another, more profitable business unit, is expected to be a good thing, materially adding to the bottom line on the overall business going forward. Also,it is worth noting that a large charge was related to company performing its regular, annual impairment test in the fourth quarter of 2012. As the 10K filing says:
During the third quarter of 2012, we committed to a plan to sell the net assets of our wireline telecommunications business unit (the “Wireline Group”) which resulted in the performance of interim tests of impairment. As a result of those tests, we impaired property and equipment by $2.2 million and goodwill by $33.0 million.
We performed our most recent annual goodwill impairment test as of September 30, 2012, the first day of our fourth fiscal quarter. When we performed our annual goodwill impairment test, we determined that the fair value of the wireless reporting unit exceeded the carrying value. Accordingly, we performed the second step in the analysis and determined that the carrying amount of our goodwill exceeded its implied fair value, and we recognized an impairment loss in an amount equal to that excess. In the fourth quarter of 2012, the carrying value of goodwill for the wireless reporting unit exceeded its implied fair value and we recorded a non-cash, pre-tax impairment charge of $14.9 million.
So business as usual and — critically — losses related mainly to what I call funny money.
Funny money are non-cash income or expenses, an oddity born out of a somewhat broken accounting system that allows for non-tangible items, such as goodwill and customer relationships, to be considered assets and liabilities with peculiar effects on net earnings when they, at some point in the company’s life-cycle, are corrected — as they inevitably must be — through adjustments to earnings.
Don’t get me wrong. Funny money do matter. However, they do not matter for the fundamentals of the business, which, frankly, is dominated by cash collection, the benefits of tangible assets, and the inherent risks in tangible liabilities. Rather, they matter for the way that the make the — generally ill-informed and uneducated — market participants react when they are adjusted.
Here, for instance, $33 million in goodwill may have moved, but $33 million dollars in cash were not lost by the company, which, of course, is clear to anyone who cares to read the company’s cash flow statement.
Unfortunately, however, as no-one cares to read anything except headlines, the market equates a $33 million goodwill adjustment to a $33 million loss of cash, causing an unsubstantiated depression of the per share price for the company’s equity.
We will talk more about funny money and their effect on the earnings later. For now, on the point of the 10K filing, it is simply worth noting that the net loss for fiscal year 2012 may have been in excess of $75 million, but these were mostly funny money of little or no interest to value or fundamentals investors who routinely eliminate non-tangible assets and liabilities from their value calculations.
When all this is said, the important thing about the 10K filing, is not, in fact, the magnitude of the net loss for the year, but, rather, the diminutive size of the restatement, as detailed in the 10K filing:
The aggregate impact of the Pinnacle revenue and related adjustments for the year ended December 31, 2011 decreased revenues and cost of revenues by $7.2 million and $1.4 million, respectively … These revenue and related adjustments also (decreased) increased accounts receivable, net, inventories, accounts payable and other liabilities at December 31, 2011 by $(7.2) million, $0.5 million, $(1.2) million, and $0.2 million, respectively…
It is worth noting that the adjustment’s decrease of revenues by $7.2 million is completely out of balance with the market’s reaction to the company’s announcement of the discovery of relatively minor accounting fraud in one of its many division, which wiped out between $50 and $65 million in market capitalization.
Remember this next time someone tells you that the market is always right.
So, in summary: Significant funny money loss, very limited restatement, and colossal over-reaction by the market.
However, it is not what is on or immediately below the surface that concerns us…. Rather it is what you can find if you dig into the rubble.
Digging further down in the rubble, here is the extremely valuable item that I found, which immediately prompted me to buy more UNTK:
As of December 31, 2012, we have net operating loss carryforwards of approximately $86.6 million for federal income tax purposes, prior to consideration of valuation allowances, which begin to expire in 2014. Based on our history of operating losses and our forecasts for future periods, we have determined that it is more likely than not that the federal and state net operating loss carryforwards and other temporary differences will not be realized. Accordingly, we established valuation allowances against the related deferred tax assets of $79.7 million as of December 31, 2012. If we ultimately are able to utilize these deferred tax assets to offset taxable income in future periods, we could recognize a significant income tax benefit that could improve our results of operations by a material amount.
Here is the financial summary from the 10K.
Get it? If not, think funny money, but, this time, think of it as a potentially positive effect on the per share price.
Actually, I am being unfair, since I have the advantage of having seen this particular play once before and, therefore, know what to look for.
A stroll down Memory Lane — Joe’s Jeans
From 2007 through 2009 Joe’ Jeans, a U.S. based fashion company, had seen its equity, JOEZ, decline materially, bottoming out at $0.25, or so, per share in early 2009.
I will not get into the details of why the per share price tanked or why JOEZ has been a bad investment for almost a decade, as this is not germane to this posting.
What is germane, however, is that the Joe’s Jeans towards the end of 2009 pulled the proverbial rabbit out of an accounting hat, utilizing an obscure tax rule that allowed for the release of its valuation allowance. As the company wrote in its 10K filing for the 2009 fiscal year:
A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Periodically, management reassesses the need for a valuation allowance. Realization of deferred income tax assets is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Based on Joe’s assessment of these items during the fourth quarter of fiscal 2009, Joe’s determined that it was more likely than not that the deferred tax assets would be fully utilized. Accordingly, the valuation allowance of $20,291,000 as of November 30, 2008 was released and recorded as a credit to income tax benefit during fiscal 2009.
On the income statement, more than 75% of these $20.3 million went towards net income, causing the company to register net income of 24.5 million in its fiscal year 2009, compared to $4.9 million in fiscal year 2008 and $2.5 million in fiscal year 2007.
Expecting this one-off events to be repeatable (it is not) and expecting following quarters to show net income in the tens of millions or dollars (they did not,) the market, which appears to be unable to read filings, went crazy, lifting the per share price to almost $3 before the quarters were reported in 2010, causing a per share price collapse in April of 2010.
How the management of Joe’s Jeans justified the release of the valuation allowance is almost as unclear as what tangible benefits they achieved (we can speculate, but it is going to be really hard to make such speculations actually stick, so there is not much point in doing so.)
Here, it may be worth referring to Intermediate Accounting, Mr. Donald E. Kieso’s excellent textbook:
The decision as to whether a valuation allowance is needed should be based on the weight of all available evidence. The real question is whether or not there will be sufficient taxable income in future years for the anticipated tax benefit to be realized. The benefit of future deductible amounts can be realized only if future income is at least equal to the deferred deductions. After all, a deduction reduces taxes only if it reduces taxable income.
All evidence—both positive and negative—should be considered. For instance, operating losses in recent years or anticipated circumstances that would adversely affect future operations would constitute negative evidence. On the other hand, a strong history of profitable operations or sizable, existing contracts would constitute positive evidence of sufficient taxable income to be able to realize the deferred tax asset.
Managerial actions that could be taken to reduce or eliminate a valuation allowance when deferred tax assets are not otherwise expected to be realized must be considered. These tax-planning strategies include any prudent and feasible actions management might take to realize a tax benefit while it is available.
This having been said, it should be clear that the decision as to whether or not a valuation allowance is used, as well as how large the allowance should be, rests squarely on managerial judgment. Because that decision directly impacts the amount of income tax expense and therefore reported income, it has obvious implications for earnings quality assessment from an analyst’s perspective.
Let me translate that: Caveat emptor — A company can pretty much do what it want here, so there is some serious potential for earnings management.
Of course, eventually one has to pay the piper. And, so, moving forward after 2009, Joe’s Jeans became liable for taxes and that liability had to be satisfied with real hard cash.
Effectively, therefore, the trade-off for a significant on-going loss of cash after 2009 was a short-term bump in the per share price. Granted, it was a significant bump, but, still, it was a bump. From a value investor’s perspective it made very little sense.
Value investors may lament this irrational behavior, but value investors are, of course, not what drives the market, so I guess that, since, for a short time, investors, traders, and the market were happy, and, so, and since the short term satisfaction of the interests of those groups apparently is the main objective of publicly traded corporations today, then, certainly, the management team of Joe’s Jeans did the right thing.
Regardless of the rationality — or lack thereof — the fact remains that the sudden appearance of the rabbit caused an explosive growth in the per share price of JOEZ.
So what does it mean
[Neo sees a black cat walk by them, and then a
similar black cat walk by them just like the first one]
Neo: Whoa. Déjà vu.
[Everyone freezes right in their tracks]
Trinity: What did you just say?
Neo: Nothing. Just had a little déjà vu.
Trinity: What did you see?
Cypher: What happened?
Neo: A black cat went past us, and then another that looked just like it.
Trinity: How much like it? Was it the same cat?
Neo: It might have been. I’m not sure.
Morpheus: Switch! Apoc!
Neo: What is it?
Trinity: A déjà vu is usually a glitch in the Matrix.
It happens when they change something.
— The Matrix
It would appear that Unitek Global Services could wave its hand over the accounting hat and produce a rabbit similar to that which was conjured up by Joe’s Jeans, but just bigger…. much bigger.
In fact, the rabbit could be huge, weighing in at 21,775 tons if payable in pennies (one million dollars in pennies weigh approximately 275.6 tons (don’t ask.))
Here is the thing, though: With the tax asset beginning to expire in 2014 and faced with a substantial debt burden Unitek Global Services would, I suspect, be correct in locking in the benefits of this perfectly legal accounting maneuver now. The reason for this is quite simple: Any deferred tax assets not used up within the statutory period, are lost in a slow (and, for Unitek Global Services’ purposes, useless) drip-drip manner.
Moreover, and this is a bit more technical, §382 of the Internal Revenue Code may severely impact upon the value of deferred tax assets in the event of future sale of the company or in the event that the company undertakes a future equity issue. In fact, the asset class may be destroyed through such events.
And then there is, of course, the pragmatic view that the key to getting out of the debt burden is the issuance of new shares in a cash for paper swap — a deal which is only attractive if the per share price can be restored to its former glory or, better yet, to a price level higher than anything seen in the last couple of yet — and, so, a release (and a resulting market stampede) may come in handy.
Yes, we are — again! — talking about funny money. But this time the funny money are actually to our benefit, and although the calculus may seem sinister, counting on the market participants not understanding the mechanics that may lead to a significant leap in net income, the maneuver is legitimate, legal, and justified. Moreover, in my book, the maneuver has an element of poetic justice to it in that it is an exact mirror of the funny money and market (idiocy!) dynamics that destroyed the company’s market capitalization in the first place.
Clearly, res ipsa loquitur, the groundwork for a release of the valuation allowance has now been laid by Unitek Global Services and, equally clearly, reasonable justification can be made at almost any time in the future for exercising a release of the valuation allowance. As my mother like to say, the duck is in the oven and the kitchen timer is set.
Think of it as a shotgun being loaded and put on the living room table. Sooner or later someone is going to reach for it and carnage will ensue.
And if the management team needed an incentive, consider that the market’s perception of the impact of such release may be enormous. At, for instance, 20 million shares, a release of the full valuation allowance amounts to $3.95 per share… for an equity that is currently trading at $1.40, or so. That is an enormous value discrepancy.
In fact, the only question to my mind is one of timing. Now or next quarter or the quarter after that or next year? I don’t know, but, for sure, if the management team of Unitek Global Services triggers the release of the valuation allowance in full, it may move the per share price extremely quickly. And, so, if one thinks that this is a probable outcome, then one needs to buy now, before the shotgun goes off.
And, so, I am buying.
It is important to note that my decision to buy is based on my assumption that the company — sooner or later — will release the the valuation allowance, either partially or in full. However, there can be absolutely no assurance that this is the case, and even if it is the case, there is no way to know with certainty when a release will occur.
As such, my decision is speculative in nature and is suitable only for myself, reflecting my personal investment philosophy, which emphasizes reward on the basis of risk and which operates with a near indefinite time-horizon.
I also — once again — remind the reader of this blog’s disclaimers and that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.
OK, so I get a lot of questions about this. I mean, how can it be? How can you take a tax benefit and then magically turn it into net income because you decide that it is the right thing to do?
Two words: Accounting Self-regulation. As they say in the large CPA firms, it is a beautiful thing.
It really is your lobby dollars at work, of course.
Sounds to good to be true? For the skeptical among us, I will first refer to a somewhat pedestrian overview by Emil Lee, published on Motley Fool (here.)
Yes, I know. Motley Fool ain’t exactly the ultimate source and the article by Mr. Lee is rather brief. So, let me refer you to Accounting for Deferred Tax Assets (9/29/00), a little gem by the Center for Financial Research and Analysis, Inc. (here,) an outfit focused on forensic accounting.
Read it. It is all good stuff. Here are some extracts:
When should a firm establish a tax valuation allowance?
The decision whether to establish a valuation allowance is highly subjective. SFAS No. 109 requires evaluation and adjustment of the tax valuation allowance at the end of each accounting period. Negative evidence of future profitability might include: (a) recent history of net losses; (b) NOL carryforwards expiring unused; (c) losses expected in future years; and (d) only a few years remaining in the carryforward period. Positive evidence could include, among other things: (a) appreciated asset values or (b) a sales backlog or existing contracts that are likely to be profitable. It is very difficult for an outsider to assess whether a change in the tax valuation allowance balance is appropriate or to identify the need for such an account.
What happens when a firm decides to reverse its tax valuation allowance account?
Reversal of the Deferred Tax Asset Valuation Allowance can provide a large one-time increase in reported net income. The entry to reverse an existing tax valuation allowance debits the tax valuation allowance and credits income tax expense. The credit to income tax expense provides a boost to net income equal to the amount of the reversal. This can make a significant one-time difference in reported profits.
There it is, the magic bullet: Significant one-time difference in reported profits.
Now, the one-time difference is, of course, assuming that all the credit is taken at once. As I once heard a spokesperson for a CPA firm say, the preferred approach is to smooth the benefit out over several periods, so as not to disrupt the financial statement too much.
Regardless of how many periods this accounting exercise is performed over, it is, of course, a funny money exercise (or funny money exercises, in the event that we are exposed to smoothing) and have little or no impact on cash-flow. Moreover, anyone who actually reads the filings will understand that this just an accounting exercise and does not reflect an improvement in the operations of the company.
But, most investors and traders (and, yes, analysts) do not read. And, so, we may see a dramatic move in the per share price.
As Accounting for Deferred Tax Assets puts it:
The Business Press may incorrectly report the effect of reversing the tax valuation allowance.
The business press sometimes understates the impact of reversing the tax valuation allowance. For example, Verity, Inc. eliminated its entire $18.9 million beginning-of-the-year tax valuation allowance on May 31, 2000, even though the firm generated additional deferred tax assets from NOL carryforwards and unused research and development tax credits. The firm reported the following in the press release announcing its fourth quarter and fiscal year earnings:
“Net income for the quarter was $14.2 million or $0.39 per diluted share. The financial results for the fourth fiscal quarter and fiscal year ended May 31, 2000 include an income tax benefit of $2.6 million as a result of the reversal of the income tax valuation allowance as required by accounting rules. ……… Net income for fiscal 2000 was $33.0 million or $0.95 per diluted share. Excluding the income tax benefit, net income for the fiscal year ended May 31, 2000 would have been $30.4 million, or $0.87 per diluted share.”
This statement implies that the elimination of the tax valuation asset added only $2.6 million to its net income. In reality, the elimination of the tax valuation account provided an $18.9 million “turn-around” in income tax expense and net income for the quarter and the year resulting in a $2.6 million “Net Tax Benefit” for the fourth quarter and a $2.2 million “Net Tax Benefit” for the year. Verity would have reported a “Net Tax Expense” of about $16.7 million if it had continued to provide a full valuation allowance for its beginning-of-the-year deferred tax assets and its fiscal 2000 net income would have been only about $14.1 million. The Press Release downplayed the importance of the entry and emphasized, instead, the “Net Tax Benefit” figure.
Oh, just in case you think that this little accounting pirouette is unusual, here is an excerpt from the opening of Accounting for Deferred Tax Assets, which, as you may recall, was published in 2000:
In a September 2000 report on Concord Camera Corp. (“LENS”), CFRA cited the reversal of the Deferred Tax Asset Valuation Allowance account as a major source of the Company’s increased earnings. Specifically, LENS eliminated its tax valuation allowance account in the June 2000 quarter, adding $6 million to net income and thereby increasing fiscal 2000 earnings per share by $0.25 – to $0.81 from $0.56. The firm was subsequently cited as the 20th fastest-growing company on Fortune Magazine’s list of “America’s 100 Fastest Growing Companies”. CFRA notes that other firms such as Gen Rad, IOMEGA, Verity, MTI, Great Atlantic and Pacific Tea Co., Laboratory Corp. of America have also reversed all or part of their tax valuation accounts in recent months.
Piling on more disclaimers
It is probably time for more disclosures at this point… I don’t know if the company intends to release the valuation allowance, but I assume so (as a shareholder, I certainly would encourage such release.) Likewise, I don’t know if the company intends to release the valuation allowance in chunks (I would not) or in one go. Furthermore, I don’t know whether there are special considerations that makes it impossible to release parts of or all of the valuation allowance and what impact such release would have on the finance covenants. Finally, I don’t know what the optimum timing is for such release, except, of course, that it involves working the release to happen some time before the expiry of the associated tax benefits (personally, I would release them this year and go for a near-immediate secondary offering on the back-end of any per share price appreciation, but that is just me.)
So, I believe, I think, I don’t know… You get the drift. We are in uncertainty country here. And with uncertainty comes risk. Moreover, given the nature of debt management and corporate governance, there are risks that are outside the scope of valuation allowances and associated allowances, including risk of complete loss.
What I do know, however, is this. The release of a substantial (double digit million dollars valuation allowance) is possible, can have an enormous impact on the earnings statement for the fiscal quarter and fiscal year, and could probably be justified.
I also know that I feel like Unitek Global Services just fired a shot across the bow. In fact, it feels like when Richard III in Act I confides his up and coming plans to the audience:
“I’ll marry Warwick’s youngest daughter.
What, though I kill’d her husband and her father?”
— Richard III
Finally, it is worth emphasizing that the probable reason why I am able to spot the opportunity is my prior run-in with releases of valuation allowances at Joe’s Jeans. When I learned about the maneuver by the Joe’s Jeans I knew with absolute certainty that I would one day encounter a similar maneuver and I, therefore, set out to learn as much as I could about it.
And, as always, the problem with learning a lot about something and actively scanning for occurrence of it, is, of course, that one runs the risk of suffering from an unshakable case of confirmation bias.
All this, of course, is not a problem for me and my investment thesis (read more about this thesis here,) which fully accepts total risk and aims to gain competitive advantage by embracing an infinite time-horizon, but certainly violates almost all convention for investment and trading management.
So, caveat emptor
An added bonus — or two
I would be remiss if I did not point out two additional nuggets in the 10K filing.
The first nugget is implied, in that my guiding assumption is that any publicly traded company, when given the opportunity to take a significant charge or make a significant adjustment, will throw in everything and the kitchen sink, possibly taking the opportunity to clear some of the skeletons out of the closet.
Therefore, I assume that Unitek Global Services’ books are now as good as they can get — short of pulling the valuation allowance, of course.
That is very valuable to the company’s investors.
The second nugget is explicit, and, so, I will simply quote the 10K filing:
During the quarter ended June 30, 2012, the entire contingent consideration liability to the sellers was settled by virtue of the transfer of the aggregate cash and equity consideration described above, which represented the maximum contingent consideration payable under the Asset Purchase Agreement. While the Company made the aforementioned earn-out payments with a fair value for accounting purposes of $27.8 million, based on the [r]estatement of the Company’s results of operations and the related EBITDA calculations, no earn-out was due or payable under the Asset Purchase Agreement. The difference between the restated contingent consideration liability of $23.3 million recorded as of March 31, 2012 and the fair value of the consideration transferred during the quarter ended June 30, 2012 of $25.3 million was recognized as additional expense related to contingent consideration in the consolidated statement of comprehensive income or loss. Despite the determination that no amount was actually payable based on the six month or one year results of Pinnacle, subsequent to the settlement of this liability in the quarter ended June 30, 2012, the Company no longer measured or recorded a contingent consideration liability related to the projected EBITDA for the twelve month period ending March 31, 2013, the third earn-out period.
The Company intends to seek repayment of the contingent consideration paid, and any amount recovered will be reflected in the consolidated statement of comprehensive income or loss at such time as the amount is determined and the gain has been realized.
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