Taro Pharmaceutical Industries Ltd published an audited version of its financial statements for calendar 2006 including restated financials for 2004 and 2005. Sun Pharmaceutical Industries Ltd, which is involved in a long-drawn effort to complete its acquisition of Taro, and key institutional investor Templeton Asset Management Ltd were demanding the company end the delay in publishing these statements. The audited version shows an even higher loss than what Taro had indicated in May, when it announced its internal estimates of restated financials. Moreover, there is a sharp drop in its shareholders’ equity or net worth.
The restatements are for the years 2003 to 2005 while the financials for 2006 have been audited. The audited financial statements for 2006 show an improvement in Taro’s operating performance, compared with its proforma numbers. Taro had earlier reported sales of $184 million (Rs833.5 crore) and a net loss of $141 million for 2006. After the audit, sales have been restated upwards by 78% to $252 million compared with its proforma numbers and its net loss is lower at $83 million.
For 2004 and 2005, however, its restated financials show an increase in its loss of around $6 million for each year. But its net worth has taken a severe beating because of balance sheet-related adjustments. Before the restatement, Taro’s net worth was $253.8 million as of January 2004. After prior period adjustments, it dropped to $157 million. After adjustments done to its 2004 and 2005 reported financials, the figure further declined to $128 million. And, after adjusting for the $83 million loss of 2006, the actual figure as of December 2006 is $49 million. That is sharply lower than the estimated figure of $186 million.
Thus, while its operating performance in 2006 shows an improvement, its balance sheet position looks worse off. The main areas of adjustments have been in revenue recognition and errors in inventory valuation. The restatement affects Taro’s debt to equity ratio for 2006. Its long-term debt to equity ratio was 0.5 time and total debt to equity was 1.2 times. After the restatement, these change to 1.8 times and 4.8 times, respectively.
While that should cause some concern, its performance has improved in the past few years, assuming the audit of its 2007 to 2009 financials do not result in any negative surprises. In 2007, 2008 and 2009, its estimated net income was $29 million, $50 million and $33 million (for the nine months ended September), respectively. In addition, it has been repaying debt as per schedule while its cash surplus has been growing. As of December, its total debt was $164 million compared with $218 million in December 2007.
The reduction in net worth takes some shine off its balance sheet but shareholders seem happy with its current performance, and its stock has risen by around 30% in 2010 so far to around $13. That is substantially higher than Sun’s initial acquisition price of $6 or its open offer price of $7.75. That will give it no satisfaction, however, as it awaits the Supreme Court of Israel’s decision in a case whose outcome will play a deciding factor in its ability to close the acquisition quickly.
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