Question..Do you have any accounting opinion to offer regarding Olddog's prior post and Ronnies reply? TIA.
Posted by: olddog967
In reply to: None Date:2/18/2006 11:47:52 AM
Post #of 146549
IMO we will have a good 4th quarter report; however, I believe the earnings will be due to an accounting transaction, rather than an increase in revenues or decrease in expenses.
In Dec, the company forecast 4th quarter revenues between $39 - 42 mil. Since most revenues are based on licensee reports for the previous quarter, the forecast should be accurate. In regard to expenses it was originally stated in Nov that while litigation expenses could be as high as the 3rd quarter, other expenses should be slightly lower. Third quarter expenses totaled $38.4 mil, including a $0.8 mil charge related to the closure of the Melbourne facility. Since then, the company reported that there would be a 4th quarter charge of $3.4 mil related to the LTCP, and a $0.2 mil charge related to the accelerated vesting of options. Based on these figures It would appear that depending on actual revenues the 4th qtr would be around break even or slightly plus/minus.
What will significantly affect 4th qtr earnings, will be the reported reversal of the remaining valuation allowance for deferred taxes. During the 3rd qtr 2004 IDCC reversed $26.9 mil of the valuation account. This resulted in a $17.1 credit to income, with the remaining $9.8 million credited directly to additional paid-in-capital. As of 31 Dec 2004 the Company still had a valuation allowance of approximately $75.2 million. They stated that a majority of the reserve would be reversed for the 4th quarter report. Based on this guidance there would be a minimum reversal of $38.4 mil ($75.2 x51%). Assuming that the credit to income would be in the same proportion as that recorded in the 3rd qtr of 2004 (approx 64% of the total reversal), the income credit would be approx $25 mil or $0.46 per share.
Although they could probably reverse the entire reserve, I have no idea what the actual reversal amount will be. In addtion, I do not know how the reversal will be split between credits to income and paid-in-capital; but if prior accounting is any guide, we should be in for a nice surprise.
This is just my WAG. Accounting for deferred taxes is a very complex area, maybe Dd or RonM who are much more familiar with this issue can comment.
Posted by: rmarchma
In reply to: olddog967 who wrote msg# 145688 Date: 2/21/2006 1:06:07 PM
Post #
Olddog re good fourth quarter
I agree with your assessments in the referenced post. You said "the earnings will be due to an accounting transaction, rather than an increase in revenues or decrease in expenses." In a sense that is true for the fourth quarter on a stand-alone basis. However in actuality, the earnings from the income tax reversal in the fourth quarter is really attributable to the LG revenues that will begin being recorded in the first quarter of 2006.
It's somewhat regrettable that the past LG revenues that will be allocated to years prior to 2006 will not be recorded in the fourth quarter of 2005, so that the cause and effect relationship can be clearly seen in the fourth quarter income statement. It would have "appeared" somewhat better if the increase in net income in the fourth quarter 2005 could be clearly tied to an accompanying increase in recorded revenues, and not to an accounting transaction. IDCC can mitigate this rather unusual "appearing" 4th quarter net income with good disclosures and explanations regarding the LG revenues in the press release and CC.
IDCC needs to clearly identify that the income tax reversal in the fourth quarter of 2005 is being triggered by LG revenues. That because of consistency with past accounting methods, IDCC could not begin to record the LG revenues until the first quarter of 2006, even though part of the 2006 recorded LG revenues will clearly be attributed to 2005 and earlier. They need to give specific guidance for the LG royalty as to the one-time revenue amount that will be associated with prior years before 2006, but recorded in the first quarter of 2006. They also need to provide clear guidance as to the ongoing recurring quarterly amounts associated with the LG contract.
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