Toshiba Warns Westinghouse Nuclear Losses Jeopardize Its FutureBy and
Toshiba’s been unable to get auditors to sign off on results
Four auditors add independent review to emphasize risks
The troubles at Japan’s Toshiba Corp. grew deeper as the 142-year-old conglomerate warned it may not be able to continue as a going concern because of losses from its Westinghouse Electric nuclear business. Shares fell as much as 3.6 percent in Tokyo.
The disclosure came Tuesday as the Tokyo-based company took the unusual step of reporting third quarter earnings without approval from its auditors. Toshiba said losses last year had left it with negative shareholders equity of 225.6 billion yen ($2.1 billion) at the end of December, jeopardizing its listing on the Tokyo Stock Exchange. Toshiba has been at odds with PricewaterhouseCoopers Aarata over accounting at Westinghouse, which has been hit with billions of dollars in losses from cost overruns on nuclear projects.
Toshiba put Westinghouse into bankruptcy in the U.S. last month and is selling off assets in an effort to repair its balance sheet. Still, four accountants from the auditing firm submitted an independent review with Toshiba’s results that emphasized risks to its future. They cited uncertainty stemming from losses in the Westinghouse unit responsible for atomic projects and breach of covenants on 284 billion yen in loans.
“Toshiba has done everything in its power to gain the understanding of the auditors,” Chief Executive Officer Satoshi Tsunakawa said at a briefing with about 200 reporters in Tokyo. “Without clear prospects for auditor approval, we could no longer inconvenience and worry our investors and other stakeholders and decided on this very unusual way of releasing results.”
The TSE kept Toshiba on its list of securities on alert in a December announcement, after originally being included for overstating profits from 2008 through 2014. The company last month submitted a report detailing plans to improve internal controls. If deemed insufficient, the company will face delisting.
“The disclaimer of opinion by the auditor is an additional item that we must evaluate and consider,” said Miwa Aonuma, a spokeswoman for Japan Exchange Group, which runs the Tokyo Stock Exchange.
Even if Toshiba clears these hurdles, there is a longer-term threat to stakeholders. The negative shareholder equity, stemming from the nuclear business writedown, has implications for its listing on the TSE. If the company can’t reverse the situation in the fiscal year just ended, it could face demotion to the second section of the exchange. That would in turn force an automatic selloff by some index funds. If the situation persists for two straight years, it will be delisted.
“The situation at Toshiba continues to make a mockery of TSE listing rules, as authorities have done their best to allow it as much time as possible for its auditors to approve its” third-quarter results, Amir Anvarzadeh, head of Japanese equity sales at BGC Partners Ltd. in Singapore, wrote in a note prior to the announcement. “We think TSE will continue to remain supportive.”
Toshiba has responded by putting its prized memory chip unit up for sale and is narrowing down a list of bidders. Taiwan’s Hon Hai Precision Industry Co., South Korea’s SK Hynix Inc. and chipmaker Broadcom Ltd. have all submitted preliminary bids for the Toshiba business valued at 2 trillion yen or more, people familiar with the matter have said. Hon Hai has indicated it may pay as much as 3 trillion yen, in part to force Japanese management into negotiations, said one of the people, asking not to be identified because the matter is private.
It’s a dramatic humbling for a company that dates back to 1875. Toshiba and its affiliates played a central role in developing Japan’s economy, making its first X-ray tubes, electric washing machines and vacuum cleaners.
After World War II, Toshiba diversified into electronics and computers, growing to more than 600 business. It’s now looking to sell many assets to raise cash for its missteps in the Westinghouse nuclear business.
Toshiba’s banks, including Sumitomo Mitsui Banking Corp., Mizuho Bank Ltd. and Sumitomo Mitsui Trust Bank Ltd. have been supportive. Toshiba has sought additional financial support from them, offering stock holdings and real estate as collateral to lenders.
“Toshiba could move back into solvency depending on how it proceeds with the Toshiba Memory sale,” Credit Suisse Group AG’s Tokyo-based analysts Hideyuki Maekawa and Yoshiyasu Takemura wrote in a report. “We think the only major risk remaining is a possible delisting.”
— With assistance by Takahiko Hyuga, and Gearoid Reidy