Is Cadence's Restatement Likely the Result of Fraud?

Meaningful Disclosure.

Is Cadence's Restatement Likely the Result of Fraud? Posted by Reed Kathrein 11/04/08 1:38 AM On October 15, 2008, Cadence (NASDAQ: CDNS) of San Jose, California, was supposed to announce its third quarter results for 2008. Instead it announced the resignation, "by mutual agreement" of its CEO, Mike Fister and four other executives: Kevin Bushby, executive vice president, worldwide sales operations; James S. Miller Jr., executive vice president of products and technologies; William Porter, executive vice president and chief administrative officer; and R.L. Smith McKeithen, executive vice president, corporate affairs. Porter had also served as CFO between 1999 and April 2008. Then on October 23, 2008, Cadence announced that it has improperly recognized $24 million in revenue in the first quarter, which should have been recognized over the duration of the contracts beginning in the second quarter. While a restatement of $24 million is only about 10 percent of the revenue, the impact on the income/loss would have been tremendous, as the first quarter was already a loss of $27 million. Hence, if the executives were scrambling to close the gap on the loss, a little revenue recognition shenanigans might have helped:

PERIOD ENDING			28-Jun-08	29-Mar-08	29-Dec-07	29-Sep-07
Total Revene			329,478	287,189	457,943	400,924
Cost of Revenue			59,670	51,734	56,150	52,404
Gross Profit			269,808	235,455	401,793	348,520
	Operating Expenses
	Research Development		120,087	125,356	297,611	125,391
	Selling General and Admin		124,870	130,742	(13,942)	137,910
	Non Recurring		(355)	600	(102)	(4,388)
	Others		5,820	5,760	5,760	4,739
	Total Operating Expenses		250,422	262,458	289,327	263,652
Operating Income or Loss			19,386	(27,003)	112,466	84,868

Even then, however, the stock took a hit over the next two quarters. Results:

But often a good indicator of fraud is insider selling. However, insider sales have been very small over the last year, though James Miller, one of the executives who resigned, sold about $120,000 in September and an executive who did not resign, sold about $631,000 in February. Much more was sold in the last two quarters of 2007, before the revenue recognition problems, but it is always possible that the executives foresaw the upcoming income declines and sold before they needed to play revenue games.

Of course another incentive could be the need to raise cash for acquisitions such as the failed attempt to acquire Mentor Graphics announced in May 2008.

We will keep monitoring this story, and if you have any information, let us know. See our post on Meaningfuldisclosure.com.

Comments

[curious]

Blame it on the economic polices crafted and fostered by the lame duck Cabinet and the staggering calamity of the stock market.

[curious]

Blame it on the economic polices crafted and fostered by the lame duck Cabinet and the staggering calamity of the stock market.