Sipex Continues to Mystify, Disappoint

Resuming a distrubing trend, the small-cap chipmaker restates second- and third-quarter results.
By K.C. Swanson ,

Updated from Feb. 18

The head of

Sipex

(SIPX)

admitted late Wednesday that he was "embarrassed" by accounting screwups that have forced the Milpitas, Calif.-based chipmaker to restate earnings for 2003's second and third quarters. This marks the second time the company has restated third-quarter results.

In a highly unusual admission, CEO Walid Maghribi also confirmed suspicions that the company has continued to be dogged by inventory management problems, notwithstanding its promise to clean up its act.

Sipex shares were recently down 78 cents, or 8.5%, to $7.45 Thursday morning.

TheStreet.com

has previously reported on the

troubling links between Sipex and its owner, a private investment outfit that also controls Sipex's leading customer. Outsiders said the setup was rife with potential for manipulation of inventory. Sipex's former accounting firm, KPMG, underscored those concerns last year when it found "material weaknesses" during its fiscal-year 2002 audit.

Sipex pledged to clean up its sloppy balance sheet, bringing on a new chief financial officer and another auditing firm, Deloitte & Touche, after KPMG walked away. But apparently the company didn't go nearly far enough.

Besides announcing it would restate results for two previous quarters, Sipex also delivered its fourth-quarter earnings results a full month after most of its peers -- and it was a highly confusing report, to boot.

"This quarter's news release was a challenge to write and I'm sure it was a challenge to understand," Maghribi admitted on a postclose conference call, after the company's chief financial officer reeled off a complicated hash of financial details and charges.

One hedge fund analyst, speaking off the record, called the report impossible to analyze.

For example, Sipex reports sales both according to generally accepted accounting principles and non-GAAP. A company representative was not immediately available to explain what non-GAAP sales actually represent.

Judged either way, Sipex's sales performance dramatically trailed that of its chipmaker peers, which have been delivering fat, double-digit sales growth. On a GAAP basis, Sipex fourth-quarter revenue fell 75% from last year's levels to $4.2 million. Meanwhile, non-GAAP revenue rose 3% from year-ago levels to $17.1 million.

The company's fourth-quarter GAAP loss amounted to 60 cents, compared to a 28-cent loss in the same period a year ago.

In a press release announcing its results, Sipex did not include the profit and loss statement that is a standard element of U.S. corporate earnings reports.

As for the earnings restatement, Maghribi told analysts on a conference call that the company's preparations for its year-end audit had "opened our eyes to some holes in the organization that we intend to remedy shortly."

Specifically, he said Sipex had "erroneously understated the cost of sales" in the second and third quarters of 2003, in part due to mistakes by now-departed accounting staff and to clerical errors related to the cost of inventory held at the company's subcontractors.

Sipex retroactively increased its net loss per share for the third quarter of 2003 by a full nickel, bringing its EPS loss to 17 cents. It increased its second-quarter loss by two cents a share to 19 cents. This marks the second earnings revision for the third quarter: On Oct. 30, the company initially reported a loss of 7 cents a share, but later revised that loss in November to 12 cents a share.

In what passes for progress at the troubled company, Maghribi noted that Sipex will not be cited for material weakness in accounting for its 2003 audit. "This is by itself a major accomplishment when compared to the end of 2002," he said, though most investors would describe that as a dubious kind of success.

Maghribi told analysts that the company has now "plugged the holes" that have led to its accounting troubles, referring to inventory management. Perhaps equally important, Sipex said it has also jettisoned some of its accounting staff and brought in new blood.

That's likely to help. But after editing its financial numbers not once but twice, Sipex has plenty of proving to do before investors buy its promises.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Sipex to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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