JDS Uniphase's Accounting Woes

According to the old investing saw, the future cash flows of a business are what really matter. Yet many of the financial data points that investors have to work with are historical. In reality, it's the guidance that historical information lends to estimates of future cash flows that makes for successful investing.

Company management often provides a good example. A management team that has overspent and underdelivered in the past, for example, is likely to do so again. JDS Uniphase (Nasdaq: JDSU  ) is a case in point, and shareholders should not be terribly surprised. The company disclosed on Friday (after the market closed, of course) that it had found material deficiencies in its system of internal controls over its financial reporting. Unfortunately, internal-control deficiencies aren't that uncommon at a lot of public companies, but JDSU's broad level of deficiencies in revenues, cash flow, inventory, currency translations, stock-based compensation, investments, and goodwill impairment expenses is unusual.

The reason JDSU's accounting problems shouldn't be a huge surprise to investors lies in its multiple and costly acquisitions over the past five years. Most of those acquisitions didn't work out, and they've led to restructuring charges of $975 million and goodwill impairment expenses of more than $54 billion. That's a large amount of losses to push through the income statement, and it may not even end up being a full accounting. A string of recurring "one-time" charges in each of the past five years should also be troubling to investors.

The internal-controls disclosure comes on the heels of the company's recent decision to change its "common usage" name from JDS Uniphase to JDSU and to pursue a reverse stock split in the 1-for-8 to 1-for-10 range. In theory, the reverse stock split should help the company's float, because institutional money managers barred from buying shares at less than $5 would now be permitted to purchase JDSU shares, which presumably would trade in the high teens after the split (at least initially).

The question I have is why anybody would want to purchase shares of JDSU. A new marketing name and a higher share price don't make up for the fact that the company has no earnings, a history of poor capital allocation, and now potential accounting problems lurking in the wings.

Some tech companies have developed a reputation for being shareholder-unfriendly, primarily because of the lengths a number of them have gone to in order to hide from investors the true cost of issuing stock options to employees. Still, there are far better tech and networking investment opportunities than JDSU, and I have a hard time imagining a scenario in which an investor in Intel (Nasdaq: INTC  ) or Cisco Systems (Nasdaq: CSCO  ) comes out behind an investor in JDSU over the next few years.

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NathanParmeleehas no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.


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