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Toshiba results get auditor nod, may avert delisting for now

10 August 2017

Toshiba Corp has likely averted immediate delisting after its auditor signed off on its financial results albeit with criticism of its governance, although it does not guarantee any future prospects and the progress of the proposed sale of its chip unit remains uncertain.

While Toshiba managed to secure auditor approval before the Thursday deadline for the audited earnings figures, the company is yet to see any progress in talks to sell its chips unit for much-needed cash.

PriceWaterhouseCoopers Aarata LLC (PwC) gave a "qualified opinion" on Toshiba's results for the year ended March as well as for April-June, according to a filing. That means the auditor broadly vouched for Toshiba's book-keeping.

However, PwC also issued a rare "adverse opinion" on the firm's internal controls, saying losses at its now bankrupt US nuclear arm Westinghouse were not booked in a timely manner.

The auditors' approval came after a seven-month investigation into whether Toshiba had known in advance the subsequent losses that emerged related to Westinghouse's acquisition of CB&I Stone & Webster, a nuclear construction and services business.

Toshiba Corp president Satoshi Tsunakawa said he stood behind the decision, although he acknowledged more due diligence might have been needed and the company intended to beef up its risk management.

The investigation included widespread interviews and checking into emails, according to Toshiba.

Toshiba reported a 965.7 billion ($8.8 billion) loss for the fiscal year through March, worse than the 460 billion loss racked up the previous fiscal year, and similar to what it had reported before.

Toshiba had earlier released unaudited preliminary earnings results, to stave off delisting, though the company was later moved to the Tokyo Stock Exchange's second section from its first section.

''Our earnings have now been normalised,'' Toshiba president Satoshi Tsunakawa told reporters.

He reiterated the company was working hard to revive itself and regain value for shareholders. He said no additional losses were expected related to its US nuclear business, after the bankruptcy filing and other settlements it has reached there.

He said Toshiba was still in talks with various partners on the memory chip sales, while declining to comment in detail on why the agreement was being delayed. He acknowledged major obstacles remained, but stressed he was determined to go through with a sale.

Toshiba is still mired in legal wrangling with joint venture partner Western Digital of the US, which is opposing Toshiba's attempt to sell its computer memory chip business to gain the cash it needs to survive, and has taken legal action.

The company has struggled to win back shareholder trust since 2015 when it said it had inflated profits over several years, and analysts have said it was unclear whether it could stay listed in the long term regardless of the auditor's endorsement.

A delisting would have reduced the ability of the 140-year-old firm to raise money for its cash-hungry memory chip business, risking its competitiveness.

PwC said some Westinghouse-related losses booked in the business year through March 2017 should have been recorded in the previous year. Toshiba said it disagreed.

If the losses were booked as per PwC's opinion, Toshibawould have recorded negative net worth - liabilities exceeding assets - for two consecutive years. That would normally trigger a delisting from the Tokyo Stock Exchange.

The bourse is currently reviewing Toshiba's governance to decide whether the firm can stay listed. Analysts have said delisting is unlikely as long as PwC signed off on the results.

Analysts, however, say Toshiba's long-term prospects are bleak, with the firm trying to raise cash by selling its flash memory business - its only division showing significant growth after the sale of its medical devices unit last year.

The chips unit accounted for 94 per cent of Toshiba's total April-June operating profit of 96.7 billion. The result represented a leap from the 16.3 billion of a year earlier, allowing Toshiba to raise its full-year earnings outlook.

Toshiba hopes auctioning its chip unit will help it pay debt and cover the impact of $6.3 billion in liabilities linked to Westinghouse, but talks on the sale have stalled.

Toshiba's joint venture partner Western Digital Corp, which has said any sale would require its consent, has opposed the auction and has taken Toshiba to court in addition to lodging its own offer for the chip business.

That has detracted Toshiba's preferred bidder group, a consortium including Japanese government-backed funds, private equity firm Bain Capital LP and South Korean chip maker SK Hynix Inc.

Even if a sale takes off, regulatory approval is likely to take several months. Also, Toshiba minus the chip unit could lead to further losses and legal tangle for the company.

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