As Tellabs, Inc.’s new CFO and acting CEO establish their relationships with the telecommunications equipment maker’s shareholders, they should provide more details about how the company makes money from its multifaceted sales.
Tellabs sells not only products, but also services that support customers through the planning, building and operating involved in running a network. Determining the proper way to say when it earned money on a deal requires the company to make judgments based on the circumstances of each arrangement. For example, Tellabs sometimes needs to take into account the likelihood that an item will be delivered as agreed upon. In other situations the company must estimate its prices. When it sells a new product, it only sometimes defers its revenue until it receives “formal customer acceptance,” according to its annual regulatory filing for the year ended Dec. 30, 2011.
For numerous quarters, Tellabs’ financial statements have reflected that the company has high proportions of revenue owed it by customers who have to pay within the year. For example, the average of its total receivables amounted to $358.2 million as of the quarter ended January 2010, or nearly 24% of the trailing twelve month average of its total sales versus the industry average of nearly 18%.
On December 5, 2011, Tellabs noted a problem. In the second quarter of 2011, the company had recognized $15.3 million of revenue related to a project with a customer outside North America. The customer accepted the related products and ownership of them, but they had been shipped to a temporary, third-party storage location, arranged by Tellabs’ local office to accommodate delivery. “While $2.6 million of the products were delivered from the third-party warehouse to the customer by the end of the second quarter, the balance of the products were not delivered from the third-party warehouse to the customer” until the third quarter July 20, 2011, the company said in its filing. Tellabs decided on November 28, 2011 that it needed to restate its results.
The company warned at the time that the deficiency that caused the mistake could do the same again later if not remediated. Management promised to take steps such as providing additional training to staff and strengthening its procedures for making the appropriate inquiries about the products for which it records revenue. Meanwhile, the Audit and Ethics Committee on Tellabs’ board retained an independent counsel to conduct an investigation related to the restatement. According to a March 21, 2011 regulatory filing, the people on this committee had served the company for some time: then 61-year old Frank Ianna, CEO of Attila Technologies LLC, had been a Tellabs director since 2004; 82-year-old William F. Souders, the retired chairman and CEO of Emery Air Freight Corporation, since 1990; 69-year-old Jan H. Suwinski, professor of business and operations at Cornell University, since 1997; 47-year-old Linda Wells Kahangi, executive director of Alpha Phi International Fraternity and former EarthLink executive, since 2006; and 65-year-old committee chairman Michael E. Lavin, the retired midwest area
managing partner of KPMG, since 2003. While experience has its merits, as board members become familiar with management they also lose their ability to be impartial.
On December 14, 2011, Tellabs said its CFO Timothy J. Wiggins would leave effective December 30, and that he had resigned to take on the same role at the educational services provider DeVry Inc. “There were no disagreements between him and Tellabs on any matter that resulted in his resignation,” the company said in a regulatory filing. After then- vice president of finance and chief accounting officer Thomas P. Minichiello stepped in to replace Wiggins for the interim, Tellabs finally appointed Andrew B. Szafran its CFO effective April 16, 2012. Before that Szafran had served as CFO at APAC Customer Services since 2008.
On June 27, as Tellabs’ CEO Robert W. Pullen battled cancer, the company appointed Daniel P. Kelly acting president and CEO in his place. Kelly had served the company since at least July 2004 and had responsibility for Tellabs’ products, including research and development, product line management and product-specific marketing. As a long-time insider, Kelly is likely to have been close to the errors that led to Tellabs’ misstatement before Wiggins left, and it remains to be seen whether his familiarity will help him fix such problems or make it harder for him to institute change.
As of the three month period ended July 1, 2011, Tellabs said on July 27 that its unaudited, restated accounts receivable amounted to $342.2 million net of allowances of $1.4 and $1.3 million. As of March 2012, the average of Tellabs’ total receivables amounted to $342.9 million, or more than 28% of the trailing twelve month average of its total sales versus the industry average of 17%.
Tellabs included an explanatory note in its regulatory filing on July 27 that amended the amendment filed in December 2011. The statement mentions an agent’ s inadvertent use of the wrong interactive internet data file when uploading quarterly information. As the explanatory note must be read in conjunction with other filings, it is unclear and does not add to the company’s credibility.
In part due to Tellabs’ accounting of the money its customers owe it within the year, Tellabs’ financial statements reflected an AGR score of 24 as of June, indicating higher accounting and governance risk than 76% of companies.
On a brighter note, an unnamed attendee at Tellabs’ conference call on July 27 said the company has recently welcomed shareholder input. “I hope that this is the beginning of the new very shareholder-friendly Tellabs with openness and increased transparency and everything else,” the attendee said, according to the transcript of the call. The attendee also said shareholders need increased transparency from the management. “Obviously, a lot of bad news is factored into your stock and so let’s just get it all out on the table. . . you were kind of beating around the bush of what is the Tellabs of the future?”
CEO Kelly said his team has tried since January to be very clear with shareholders about where they think they’re going with the company from a product and market perspective. “As far as detailed granularity down to a product level, at some point in time, as we mentioned, there’s so many moving pieces within the quarter that, I think it would add a lot of probably noise more to our business than not by going down to each and every product line, frankly. And I think we’ve grouped the products,” he said.
In the meantime Tellabs’ stock price has dropped by more than 18% in the year to date and traded at $3.31 per share intraday on Tuesday. As long as investors continue to scratch their heads, the stock price seems unlikely to recover.
Region: North America
Industry: Communications Equipment
Market Cap: 1,133.4mm (Unknown Cap)
ESG Rating: B
AGR: Aggressive (24)