Detecting Static in Himax's Prospects

Another red flag comes from the fact that Himax's cash flow from operations in 2005 benefited from an extension of payment terms with certain vendors, a move the company said was made to better align the terms of its supplier and customer agreements.

This led to a spike in the company's accounts payable to $105.8 million in 2005, from $38.6 million in 2004. An increase in payables is a source of cash on the cash-flow statement, as the company has received goods and services from its vendors for which it has not yet paid. Himax reported cash from operations of $12.464 million in 2005, which would have likely been negative had the company not received the extension from some of its suppliers.

Himax also reported that it has had internal control issues in the past, something it will have to get a quick handle on if it wants to succeed as a public company in this post-Sarbanes-Oxley world. According to the company's filing, at the end of 2004 its accountants noted a lack of personnel with significant experience using generally accepted accounting principles (GAAP) in the U.S., a skill that is necessary to identify and resolve certain complex matters in a timely manner.

Then, at the end of 2005, Himax's accountants noted that the company's use of a manual accounting system marked a control deficiency. The company is working to improve its accounting, but there is a risk of negative headlines in the near term that could weigh on the stock.

When you overlay weak near-term industry trends -- based on Genesis' earnings warning -- with Himax's dependence on one customer, CMO, for more than half of its revenue and its use of a portion of IPO proceeds to pay back a loan created to fund a one-time dividend, we believe this is one IPO that will struggle to gain favor with investors. As such, we will look for better opportunities from future IPO deals.