Toshiba said it may have to book several billion dollars in charges related to a U.S. nuclear power acquisition, a shock warning that sent its stock tumbling 12 percent Tuesday and rekindled concerns about its accounting acumen.
The Japanese group said cost overruns at U.S. power projects handled by a nuclear construction business newly acquired from Chicago Bridge & Iron would be much greater than initially expected, potentially requiring a huge write-down.
Such a hit would be another slap in the face for a sprawling conglomerate hoping to recover from a $1.3 billion accounting scandal as well as a write-down of more than $2 billion for its nuclear business in the last financial year. “This will come as an additional shock to Toshiba’s institutional investors that may further undermine confidence in company management as well as significantly weakening its international nuclear credentials,” said Tom O’Sullivan, founder of energy consultancy Mathyos Japan.
O’Sullivan noted the acquisition in December 2015 coincided with the finalizing of a record fine by Japanese regulators for accounting irregularities at Toshiba, indicating that corporate governance controls were extremely weak.
Toshiba chief executive Satoshi Tsunakawa, who took the helm in June after his predecessor embarked on a series of restructuring steps to clean up Toshiba’s books, said the conglomerate would look at some kind of strategy to boost capital.
“We would have needed to boost our capital base anyway because our shareholders’ equity ratio is low,” he told a news conference.
As of the end of September, Toshiba had shareholders’ equity of 363 billion yen, or just 7.5 percent of assets, which could fall close to zero if the company is forced to log significant losses.
Asked if Toshiba’s liabilities would exceed its assets, Chief Financial Officer Masayoshi Hirata said the company had not yet completed its estimation of the charge.
It would finalize that by mid-February, he said, adding that the conglomerate would explain the situation to its main banks and seek their support. Toshiba’s main lenders are Sumitomo Mitsui Financial Group and Mizuho Financial Group.
Toshiba has positioned its nuclear and semiconductors businesses as key pillars of growth while seeking to scale down less profitable consumer electronics units such as personal computers and TVs.
But Toshiba could revise the positioning of its nuclear business if need be, said Tsunakawa, who has been credited with having shaped a medical equipment unit into a major earnings driver. The unit was sold to Canon this year.
Tsunakawa added that asset sales or a potential listing of its cash-cow flash memory chips division were options that could be considered.
The deal between CB&I and Toshiba’s Westinghouse division has been fraught with disagreement since at least July.
Clashing over who should shoulder potential liabilities related to cost overruns and over calculations for working capital for the unit, CB&I sued Toshiba’s Westinghouse division after Westinghouse said it was owed more than $2 billion.
Shares in Toshiba, which remains on the Tokyo bourse’s watch list because of concerns about the firm’s internal controls, finished 12 percent lower Tuesday, giving it a market value of about $14.2 billion. The charges were flagged earlier in the day.
Before Tuesday, Toshiba had forecast a full-year net profit of about 145 billion yen this financial year, a turnaround from a loss of 460 billion yen, thanks to strong demand for flash memory chips from Chinese smartphone makers.
Masahiko Ishino, an analyst at Tokai Tokyo Research Center, said the focus may soon shift to whether Toshiba will divest some of its businesses if the latest loss wipes out its shareholders’ equity.
“There will be a lot of companies that want to buy Toshiba’s businesses,” Ishino said. “It is possible that its NAND flash memory business would attract various buyout offers as there are few players in the market.”