Scandal & Cover-Up Plagued Toshiba Re-Implodes

After surging 206% since February!

Toshiba, which has been embroiled in all kinds of intricate and massive financial and accounting scandals, that investors deluded themselves into thinking were now behind it, is once again melting down.

Shares plunged 20% to ¥233 in early trading on Thursday in Tokyo, hitting the stock exchange’s downward limit of 20%, before bouncing off a little, after having plunged 20% on Wednesday, stopped only by the downward limit, and after having plunged 12% the day before. Shares are down 48% from their 52-week high of ¥475 two weeks ago.

This daily chart shows the wild ride since August:

The most recent fiasco became public late Tuesday, when Toshiba announced that cost overruns at CB&I Stone & Webster – a nuclear company it had bought from Chicago Bridge & Iron last year – could trigger “several billion dollars” in charges. It would likely take till February to get the exact magnitude of the write-down, it said.

But this is just the latest morsel of an ongoing smorgasbord of nuclear, financial, and accounting fiascoes. Toshiba was going to profit profusely from a nuclear-power renaissance back in 2006 when it paid $5.4 billion after a bidding war to acquire Westinghouse Electric, regarded as the nuclear industry’s heavyweight with next-generation reactor projects in the US and China. This has turned massively sour ever since. More on that in a moment.

Standard & Poor’s downgraded Toshiba another notch deeper into junk, to B- with a “negative” outlook. S&P expects shareholder equity to “drastically shrink” due to the write-down, which would further weaken the conglomerate.

But it still can borrow money on the cheap in NIRP Japan: According to Thomson Reuters data, the yield on its bonds due 2020 rose 17 basis points to a still minuscule 1.76%, for a junk-rated company that has been embroiled in financial and accounting scandals, and a huge and still not fully disclosed problem in its nuclear operations. The Bank of Japan has clearly killed off any remaining market discipline.

In 2015, the Nikkei uncovered the latest scandal related to Toshiba’s nuclear operations, which caused Toshiba’s shares to re-crater, after they’d barely recovered from its prior accounting scandal. So the current disclosure and crash is just a continuation of this saga. From the Nikkei at the time:

Westinghouse, the U.S. nuclear power company acquired by Toshiba in 2006, booked write-downs totaling over $1.3 billion in fiscal 2012 and 2013. The write-downs were first discovered by Nikkei Business in Toshiba internal e-mails and documents, and Toshiba did not disclose them until questioned by Nikkei Business reporters. In response to the newly revealed accounting issues, the Tokyo Stock Exchange is launching a probe.

Toshiba has been consistently upbeat regarding its nuclear power business until now. But it has become clear that there is a gap between the company’s public statements and its actual state of affairs.

An official at the Tokyo Stock Exchange suspects “a systematic cover-up,” pointing out that “a huge write-down at the Westinghouse unit completely contradicts what they have said up until now.”

Toshiba is already ensnared in a separate accounting scandal, and the TSE on Sept. 15 put the company “on alert,” stating it had serious problems with its internal controls.

Toshiba first disclosed accounting irregularities in April, and since then has conducted investigations by two committees, an internal one and an independent one composed of lawyers and other outside experts. The company admitted it had inflated profits by 224.8 billion yen over seven years, and revised past figures accordingly. The scandal caused the resignations of the company’s past three CEOs, who were president, vice chairman, and adviser, respectively, at the time of their resignations.

Toshiba hoped to convince investors that it had put its problems behind. But a TSE official says that given its continued cover-up of write-downs at an important subsidiary, “it hasn’t fulfilled its accountability obligations as a publicly traded company.”

And the Nikkei homes in on the nuclear business, all of it still in 2015:

Toshiba’s nuclear business has struggled in the wake of the 2011 disaster at the Fukushima Daiichi nuclear power plant. When Toshiba invested 540 billion yen in Westinghouse in 2006 (later increased to 660 billion yen), then-CEO Atsutoshi Nishida and then-vice president Norio Sasaki said the company planned to secure contracts to build over 30 new reactors and increase revenue from its nuclear division to one trillion yen by 2015. But the 2011 disaster made those goals all but impossible. As of 2015, Toshiba has won only 10 contracts for new nuclear plants.

Nonetheless, at the end of September Toshiba still had on its books 515.6 billion yen in assets and goodwill related to its nuclear business, including Westinghouse. But it has not disclosed Westinghouse’s revenue, profits, or current assets.

Toshiba has continued to state that Westinghouse is doing brisk business. At Toshiba’s April-September earnings briefing on Nov. 7, CFO Masayoshi Hirata said, “The services and fuel businesses are holding steady, and since the Fukushima Daiichi nuclear disaster, we have seen growth in the plant safety business.” But he did not offer any figures, such as recent earnings, to back those claims.

Internal documents reveal the gap between Toshiba’s claims and the actual state of affairs at Westinghouse. As the nuclear unit fell into a prolonged slump, Toshiba’s management tried a number of methods to prevent it from affecting the parent’s bottom line. An internal document clearly states that if Toshiba had had to write down its goodwill related to Westinghouse, there might have been “insufficient funds for cash dividends.” Executives appear to have been concerned about this and other possibilities.

All this transpired over a year ago. And it has simply re-exploded.

So the Wall Street Journal reported just now that Toshiba’s Westinghouse wager “threatens to sink the venerable Japanese conglomerate”:

It isn’t clear if Toshiba’s financial difficulties will have an impact on the eight reactors it is trying to complete in the U.S. and China, but its disclosure suggests the situation is worse than previously understood.

“It’s an unexpected development at a time when concerns had been receding,” said Yoshinori Ogawa, strategist at Okasan Securities, cited by the Journal.

But apparently, the Journal, Yoshinori, and hedge funds in the US and around the world had quickly forgotten the scandals, cover-ups, and write-offs as exposed in 2015 and as described by the Nikkei above. Instead, they bid up the shares from the scandal-inspired crash-low in February 2016 of ¥155 to its 52-week high two weeks ago of ¥475. That’s a 206% jump in 10 months!

The surge was fired up by hope that the nuclear fiasco was over, and that the accounting, financial, and cover-up issues had been brushed successfully under the rug. And it was fueled by hype about Toshiba’s semiconductor business and, as the Journal put it, “expectations for solid net profit in the current fiscal year ending March 2017.”

Now they’re surprised that the hype hasn’t panned out and that they’ve instead been hit, as Yoshinori Ogawa put it, by this “unexpected development?”

And suddenly they have a new worry – that this financial sinkhole on the balance sheet could in fact threaten crucial investments in its crucial semiconductor business. But memories are short, and shares, even as I’m finishing this, are already getting bid up again, and now they’re down just 16% for the day and 45% from two weeks ago.

Threatened Trade War meets the Great Stagnation. Read…  World Trade Falls to 2014 Level, just in Time for a “Trade War”

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  38 comments for “Scandal & Cover-Up Plagued Toshiba Re-Implodes

  1. NotSoSure says:

    Can’t “tobashi” this one away. It’s definitely apt for a company called Toshiba. LOL.

  2. Ishkabibble says:

    Speaking of nuclear power,

    That’s a great renewable energy project and the more of them, the better, because a number of them can replace the need for unclear power plants and nuclear waste repositories. Let’s have some fun with some numbers to see how useful and affordable they could be.

    According to the article linked above, the 5-mW solar project’s construction cost was about $10 million.

    Now consider that the cost of a single “generic” F-35 is around $178 million.

    Completely ignoring the tremendous cost-savings advantage of a mass-scale, “Liberty Ship”-type solar-power manufacturing system, $178 million per fighter divided by $10 million per 5-mw solar project = 17.8 solar systems, and 17.8 times 5 mW = 89 mW of electric power for the cost of a SINGLE F-35.

    The US Air Force plans to acquire 1,763 F-35s; the Marines 353 and the Navy 369, for a total of 2,485 units.

    Therefore, 2,485 units times 89 mW of solar-electric power-generation per unit = 221,165 mW of solar electric power generating capacity.

    A typical PWR powered station such as Seabrook Station in NH puts out about 1,100 mW net.

    Therefore, 221,165 mW divided by 1,100 mW per PWR unit equals about 201 single-PWR units and, of course, highly-trained, specialized, very expensive operating personnel will have to operate them 23/7.

    The total peak electric demand in the US is around 673,000 mW.

    Very unfortunately for US taxpayers, the total cost of flying a single F-35 is $42,000 PER HOUR.

    Therefore, to operate the fleet of 2,485 planes for one single hour in the air is 2,485 times $42,000 = $104 million. Chickenfeed, right?

    We already know that the 5-mW project costs $10 million, so $104 million divided by $10 million = about ten 5-mW systems, or 50 mW of electric generating capacity FOR EACH HOUR that the fleet of F-35s flies. If all of the planes operate for a total of only 1,000 hours each, which isn’t much, there’s another 50,000 mW of generating capacity. If they operate for 10,000 hours, the number of dollars to keep them going would buy 500,000 mW of generating capacity.

    Most unfortunately for US taxpayers, “their” federal government, in its very finite, politically-corrupted wisdom, has decided that the publicly-owned F-35 weapon system is a much better bang for the buck for US taxpayers than a publicly-owned 221,165+ mWs of solar-power systems which would provide tens, if not hundreds, of millions of taxpayers with free electricity (that would compete directly with the privately-owned power generators, and, therefore, “we” can’t allow that particular miracle to happen).

    The F-35 is just ONE weapon system among many. The waste of taxpayer’s money and industrial capacity and human resources is astronomical. It is the gravest sin a nation can commit and the US has been committing each and every year since the end of WWII, only now its getting much worse.

    Because the US economy cannot withstand a shutting down of the military-security-industrial complex (MSIC), what MUST happen, and that right soon, is that the MSIC must start making stuff for a peacetime economy that will benefit all Americans — stuff like solar power systems, bullet trains, improved highways and bridges, etc. etc.– rather than weapon systems that will be obsolete in a few years and benefit no one but war corporations’ bottom lines.

    (If you want to see where the F-35 might very well end up “resting” after its inevitable obsolescence, Google “Davis-Monthan Air Force Base Boneyard”.)

    • nhz says:

      Of course government has decided otherwise, and not just in the US … massive use of solar arrays and other sustainable energy sources would eliminate the need for endless oil wars and all the hyper-expensive gear needed to wage them .. we can’t have that in our modern society, just imagine how much damage this would do to the stocks values of Lockheed, Boeing, Goldman Sachs etc. ;-(

      My country is finally starting to build huge wind energy parks on the North Sea, and every few months there are positive cost surprises. The parks that will be constructed from next year will already be much cheaper than nuclear and some newer (clean) coal-powered plants, and the cost is expected to decline even further due to technological progress and economies of scale. The current parks are still subsidized, but the subsidy is already far below that for nuclear and coal power …

      In 5-10 years probably nothing can compete as long as there is wind (which still is a major issue of course, especially if you draw most of your electrical power from wind energy at sea). I would prefer the government to support small-scale sustainable energy as much as possible; this would also make the country far less vulnerable to cyberwar, real war and big disasters. They are aiming to have all homes self-sustainable for energy by 2050, but nothing happens to accomplish that. Government only wants centralized power and monopolies, and all the nice bribes and jobs for failed politicians that go with it :-(

    • Ishkabibble
      Dec 29, 2016 at 2:00 am

      Please post this(your) little essay on EVERY BLOG EVERYWHERE.


    • Beard681 says:

      The capacity factor for fixed solar in AZ is around 28%. Tilting arrays around 35%. For Maine, I would guessyou could get 20%. So your costs from the get go are off by a factor of 5. Also while the sun is free there are still transmission, and ancillary services plus capital costs for storage or backup power.

      Nuclear is a government sponsored boondoggle (a poor 80% cap factor) but solar is little better.

  3. Jas says:

    Japan’s CEO’s have a long history with market manipulation. An example of this is “Window Guidance” in real estate. It appears that it’s now ingrained in their culture as the norm. Anyone care to guess where most of Japan’s economic gurus were educated?

    • Dave says:

      US, Harvard, Goldman Sachs School of Financial Engineering?

    • Wind Hawk says:

      These corporate guys might get the best education… but as soon as they join Corporate Japan, tribalism takes over and all the professional training/education goes out the window. Olympus is in similar deep doo doo… they covered up superbugs being introduced via their products among other misdeeds… Japan needs to change the corporate law and strengthen shareholder rights. Until then, more cover ups & corporate scandals.

  4. night-train says:

    In a comment on another article, Walter Map suggested someone might need a new bullshit detector. I may be in the same boat. But, my detector may still be working. The problem may be that I can’t find anywhere BS free enough to get a realistic background reading.

    Spin, spin, spin – merrily we go along. At least after visiting Wolf’s site, I feel as though I have some grip on reality.

  5. nhz says:

    Another example of how ‘profitable’ nuclear power is; I don’t doubt that in this case too the Japanese savers and taxpayers will get to pay most of the bill and the managers of these nuclear companies and their friendly politicians keep their outrageous compensation.

    My country has just two operating nuclear reactors, a real one and a small ‘research/medical’ unit and both are financial black holes, instead of the financial nirwana that was promised when they were approved. But still some politicians and other scammers are proposing building new nuclear reactors: who cares if an activity is profitable, if it’s extremely expensive that makes it highly attractive for these con artists!

    Of course there are many more financial black holes in the financial and technological sector that only will become visible when the free money party stops, and when managers finally have to do lengthy jail time (plus return all of their profits with an extra fine on top) for serious accounting fraud.

    • Wolfbay says:

      FASB doesn’t stand for financial accounting standards board anymore. It’s now Fantasy Accounting Standards Board.

  6. Paid Minion says:

    Selling tooling to the Soviets to make extra quiet submarine propellers, accounting fraud? No big deal. We’re a Multi National Corporation, after all.

    All the rights of citizens, with zero accountability. Nothing new to see here.

    Get your priorities straight………we haven’t heard anything about the Kardashians for five or six hours.

  7. d says:

    Americans Auctioned off what they claimed was nuclear Grape Fruit.

    Toshiba should have known they were in fact nuclear Lemon’s.

    Otherwise America would not have allowed such a strategic Defense related industry, to pass into Japanese hands.

    When the Japanese make mistakes like this in Business, they are generally BIG.

    I would say there is much more hiding under the Tatami at Toshiba HQ.

  8. walter map says:

    Yet another leading candidate for the corporate death penalty. It’s a crowded field.

    Staggering. Simply staggering.

    • Edward E says:

      In a couple of years you may be posting rants by painting them on the walls of caves. The legendary wind bag Fouke Monster from Bizzaro Creek is promising deals for Israel and strategic planning from Henry.

  9. Realist says:

    The nuclear industry seems to be quite radioactive stuff nowadays, France’s Areva did screw up their big project in Olkiluoto, Finland, way behind shedule for years and way over budget and the French are now fighting in court against having to cough up the money due to their screwup … In addition Areva is under investigation in France for supplying substandard components for years and falsifying documentation of said components. Russia’s Rosatom haven’t yet been able to produce the required documentation and plans for the projected reactor in Pyhajoki, Finland and add Thosiba’s woes to this, the nuclear industry is in quite a sorry state. Will be interesting to see wether the Chinese after all will be building the next gen of reactors in Britain or not, especially as the existing British reactors are quite old, apparently several near end-of-life …and the Brits are the proud owners and operators of the Sellafield plant …

  10. robt says:

    Goodwill on any balance sheet is BS. It generally signifies payment in excess of identifiable assets in an acquisition. If any company is actually sold for anything over asset value it should be considered extraordinary gain; if it’s never sold then nothing can ever be realized.

    • economicminor says:

      robt, Goodwill is typically the value of the future income stream from that business. A business isn’t just the buildings and equipment but also the income derived. So Goodwill is for the future income. It can be quite large in a very profitable business.

      • nhz says:

        I guess that future income for this type of business can be huge if you assume that government will force everyone to go nuclear. Something went wrong along the way in Japan, but the nuclear supporters still claim that nuclear reactors are ‘extremely cheap’ and/or ‘the only real option’…

        Or maybe Toshiba knows more than we and is planning for a Japanese nuclear weapons arsenal?

        • Chicken says:

          I’ve long had a suspicion nuclear may hold the key to a hydrogen economy. Haven’t been able to identify any supporting information though.

        • d says:

          Nuclear and solar in combination maybe.

          Hydrogen is viable as a transportable fuel.

          However you need a continuous constant energy source, to efficiently produce it.

          This is all old hat to Honda.

          They have been for some considerable time, and are still, running all the energy needs of an Island on hydrogen.

          They used that Island as an experimental site, as it has huge rainfall. Mountains, Lakes, DAMMABLE Rivers, and can produce more Hydro electricity (Constant energy supply) that it can ever possibly consume.

          All the cars on the Island are hydrogen powered.

          As a Portable energy source, it work’s. Efficiently, it is simply a matter of sorting it. To make it large scale cost efficient.

          The petrol powered car is a Staggering Dinosaur It’s just a matter of which alternative source puts it down. When.

        • nhz says:

          why would nuclear be relevant for a hydrogen economy? The best way to make hydrogen IMHO is solar, just like nature does it … on a small scale and totally friendly for the environment.

          The research group I worked with was working towards that over 30 years ago; unfortunately the research – based on photosynthetic algae – was killed, like most research into alternative/sustainable energy that threatens the status quo. Just imagine that everyone starts producing their own energy for home and car using bio-solar arrays on the roof or in the garden, the horror … ;-(

        • Chicken says:

          Judging by the financial performance of the companies involved, this method doesn’t appear to be chosen? You’re right, to produce hydrogen it can be accomplished in several ways but we’ll need vast amounts. Currently the primary mechanism is via refining natural gas.

        • nhz says:

          yes, producing hydrogen or other fuels with bio technology isn’t attractive right now, most of all because the technology isn’t mature and TPTB have done everything they can to prevent small scale energy production (= without a monopoly and rip-off profits for the multinationals). If nature can do it (the sun sets every day and sometimes disappears for longer …) why wouldn’t we be able to do it?

          If we had spent just 1% of the money that went into nuclear fission and fusion over the last 70 years on bio solar, the technology would be widespread by now.

          Of course society would need to adapt, if we plan to grow energy use indefinitely then at some point solar and wind become irrelevant. But IMHO it is much better to shrink energy use, there would be many benefits. And we don’t need fuels for all energy needs, just for certain types of use like some cars and large planes. Liquid hydrogen requires large scale installations and is relatively risky, in most cases there will be better alternatives for storing solar power like fuel cells.

      • robt says:

        Yeah, Sears has 269 million in goodwill on their 2015 balance sheet.
        Yellow Pages had 3 billion the moment before it imploded.
        etc etc
        Goodwill is the excess valuation over tangible assets. It is a plug in the balance sheet.
        Profit can vanish, and very quickly.
        You may notice that takeovers occur more and most often at market highs, paid for with inflated shares. Thus the inflated book values.

        • economicminor says:

          I totally agree. And profits can vanish really quick when the take over destroys the profitable business model of the entity being taken over. I have seen this a lot in small businesses. Especially restaurants where the buyers paid to much and then cut either portions or quality to make up the difference. But it can easily happen in large corporations. There is an efficiency of size to a certain point and then if not managed perfectly, it can be an anchor. So far Amazon and Ebay seem to be exceptions to the rule of to big to manage.

        • d says:

          “So far Amazon and Ebay seem to be exceptions to the rule of to big to manage.”

          Both are still effectively young and both are no longer experiencing major growth, just as google is now enter the “costs do matter” phase after its major growth.

          Look at the Micro$oft cycle.

          That entity find something “New” or continues on it downward slide.

          All those HB1 replacement employees, are not a good sign. That’s maintaining profits, by CUTTING Costs..

  11. Frederick says:

    Meanwhile Gold is catching a nice bid up almost twenty dollars on a weaker dollar and stock market doldrums Just wait till the real fun starts

  12. DV says:

    The problems with “new designs” in nuclear industry that they have been untested and the cost of construction and equipment cannot be estimated reliably (Areva’s Finish fiasco can testify to that). Furthermore, no new reactors were built in the Western countries for many years and the expertise have been lost. So the huge cost overuns on construction. And no respite there. But with Westinghouse, there is one more major risk. What they are trying to do, is to tap Russian-design VVR reactors market. They already had a couple of major incidents with their fuel in Hungary and Ukarine. If there is another one (and this is quite likely), Westinghouse may be finished.

    • Realist says:

      Regarding lost expertise, Sweden is an excellent example. Their ASEA was on the cutting edge in nuclera technology until the Swedes did forbid ANY research or planning regarding nuclear power, thus their knowledge did stagnate and dissapear, even blueprints for existing power plants are reportedly been partially lost over the years. It is reported that the Swedes even have had to make new components using the running equipment as models because of long lost blueprints ! What makes things even funnier is that the previous government in Sweden ordered the owners of Sweden’s plants to increase the output from their old reactors that haven’t been username upgraded nor.modernized since the fateful “thinking ban” in the 80s. Feels safe …

      • nhz says:

        All nuclear reactors in Netherlands and Belgium are way past their planned lifetime, with very little upgrades and most of the effort spent on falsified safety reports. Just ignore all the cracks in the reactor vessels, the frequent leaks, the risks of shipping new and spent fuel by road or train right through big cities and the unsolved problem of nuclear waste disposal or dismantling of nuclear power stations, and let future generations clean up the mess …

        Probably the rest of Europe isn’t much better. The technocrats should have done some real thinking before starting this mess. But it’s difficult to have a person understand something when his income depends on not understanding it …

  13. ANON says:

    While in 2008 the subprime was about to blow up everything else to smithereens, these days everything else seems to be blowing up on its own, at the same time.
    In 2008, one could have (arguably) hoped for some dust to settle at some time in the future. Now, chances are there will not be any dust left to settle.
    2017 is shaping up to be a hell of a year, either way.

  14. Dave says:

    Don’t worry, the Japanese ‘Ship of Fools’ government will continue buying Toshiba stocks with printed and Pension Fund money. It does appear that they are entering their terminal stage of idiocy, though.

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