Valeant Pharmaceuticals Utilisation Iii: Assessing The One-Off Charges From The Medicis Merger
In Part II of this series I explained how to await at Valeant Pharmaceutics GAAP in addition to non-GAAP accounts. In detail I showed how the GAAP accounts present large in addition to increasing losses which the companionship asks yous to await through. Instead they prefer yous await at earnings disregarding large in addition to increasing "merger in addition to restructuring charges", "asset writedowns" in addition to "legal settlements".
This is a reasonable affair to exercise if yous mean value these charges are (a) reasonable in addition to (b) non-repeating.
If the "one-off charges" are non actually "one-off" in addition to so the "non-GAAP" earnings (presented internet of these charges) are a fraud on the gullible.
This is the central point of the series. It would go dead-easy to imitation "earnings after one-offs" past times putting ordinary expenses inwards the restructuring budget. I could brand margins virtually every bit large every bit I liked past times telling yous to ignore costs. Take an extreme example: if I called marketing expenses one-off (and lay them inwards a bucket which I ignored) my margin would await much higher. Telling yous to ignore those expenses of course of written report is a form of con - a Wizard of Oz play tricks where yous tell people to "ignore those expenses past times behind the curtain".
The "non-GAAP" earnings presented past times Valeant soundless are non audited. GAAP accounting does non ignore the one-off expenses. The inquiry is whether yous - every bit an inventor - should ignore them similar management encourages yous to do.
The go of this shipping service is to assess whether one-off charges every bit booked past times Valeant are reasonable.
To assess reasonableness I looked at a few mergers where the acquired companionship had world accounts prior to the merger. It is against those accounts in addition to that trouble organisation said merger charges arise.
I get-go amongst the Medicis Pharmaceuticals merger.
Here, from Medicis's in conclusion filed This article from the Phoenix Business Blog that 319 people were fired the solar daytime the merger closed in addition to that they were paid 2 months pay inwards lieu of notice. Two months pay fourth dimension 319 people gets nowhere near the $275 1000000 provision inwards the inwards a higher identify quote. We demand to await elsewhere.
More by in addition to large nosotros should compare the total charges disclosed or anticipated ($275 million) to the pre-acquisition residue canvass of Medicis. If for instance the pre-acquisition residue canvass contained only $20 1000000 inwards constitute it would go unreasonable to write off $100 million. The excess write-off would exercise a cookie appall which could go used to imitation non-GAAP earnings. Indeed that is the key allegation nosotros are addressing.
Here is the in conclusion quarterly residue canvass for Medicis every bit an independent company:
The beginning is CapitalIQ but it checks against their in conclusion 10-Q.
This is a reasonable affair to exercise if yous mean value these charges are (a) reasonable in addition to (b) non-repeating.
If the "one-off charges" are non actually "one-off" in addition to so the "non-GAAP" earnings (presented internet of these charges) are a fraud on the gullible.
This is the central point of the series. It would go dead-easy to imitation "earnings after one-offs" past times putting ordinary expenses inwards the restructuring budget. I could brand margins virtually every bit large every bit I liked past times telling yous to ignore costs. Take an extreme example: if I called marketing expenses one-off (and lay them inwards a bucket which I ignored) my margin would await much higher. Telling yous to ignore those expenses of course of written report is a form of con - a Wizard of Oz play tricks where yous tell people to "ignore those expenses past times behind the curtain".
The "non-GAAP" earnings presented past times Valeant soundless are non audited. GAAP accounting does non ignore the one-off expenses. The inquiry is whether yous - every bit an inventor - should ignore them similar management encourages yous to do.
The go of this shipping service is to assess whether one-off charges every bit booked past times Valeant are reasonable.
To assess reasonableness I looked at a few mergers where the acquired companionship had world accounts prior to the merger. It is against those accounts in addition to that trouble organisation said merger charges arise.
I get-go amongst the Medicis Pharmaceuticals merger.
Here, from Medicis's in conclusion filed This article from the Phoenix Business Blog that 319 people were fired the solar daytime the merger closed in addition to that they were paid 2 months pay inwards lieu of notice. Two months pay fourth dimension 319 people gets nowhere near the $275 1000000 provision inwards the inwards a higher identify quote. We demand to await elsewhere.
More by in addition to large nosotros should compare the total charges disclosed or anticipated ($275 million) to the pre-acquisition residue canvass of Medicis. If for instance the pre-acquisition residue canvass contained only $20 1000000 inwards constitute it would go unreasonable to write off $100 million. The excess write-off would exercise a cookie appall which could go used to imitation non-GAAP earnings. Indeed that is the key allegation nosotros are addressing.
Here is the in conclusion quarterly residue canvass for Medicis every bit an independent company:
Balance Sheet every bit of: | Q3 Sep-30-2012 |
Currency | USD |
ASSETS | |
Cash And Equivalents | 130.1 |
Short Term Investments | 629.8 |
Total Cash & ST Investments | 759.9 |
Accounts Receivable | 145.8 |
Total Receivables | 145.8 |
Inventory | 34.9 |
Deferred Tax Assets, Curr. | 73.5 |
Other Current Assets | 54.5 |
Total Current Assets | 1,068.6 |
Gross Property, Plant & Equipment | - |
Accumulated Depreciation | - |
Net Property, Plant & Equipment | 32.5 |
Long-term Investments | 12.8 |
Goodwill | 202.7 |
Other Intangibles | 452.6 |
Deferred Tax Assets, LT | 59.0 |
Deferred Charges, LT | 11.9 |
Other Long-Term Assets | 23.7 |
Total Assets | 1,863.8 |
LIABILITIES | |
Accounts Payable | 77.4 |
Accrued Exp. | 224.8 |
Curr. Port. of LT Debt | 0.2 |
Curr. Income Taxes Payable | - |
Unearned Revenue, Current | 11.4 |
Other Current Liabilities | 77.2 |
Total Current Liabilities | 391.0 |
Long-Term Debt | 594.7 |
Other Non-Current Liabilities | 50.2 |
Total Liabilities | 1,035.9 |
Common Stock | 1.1 |
Additional Paid In Capital | 851.3 |
Retained Earnings | 571.1 |
Treasury Stock | (578.7) |
Comprehensive Inc. in addition to Other | (17.0) |
Total Common Equity | 827.8 |
Total Equity | 827.8 |
The beginning is CapitalIQ but it checks against their in conclusion 10-Q.
Not all of these assets are land of written report to write-down or residue canvass adjustment on acquisition. For instance the cash in addition to short-dated securities are virtually sure able to go converted to cash close par in addition to so money-good. No write-down there. It mightiness go truthful that the accounts receivable are non alone solid, but yous would mean value they are mostly money-good, after all the customers earlier the merger were roughly the same people every bit the customers after the merger. And it doesn't brand feel to write downwardly the revenue enhancement assets - after all Valeant is claiming that these are rattling profitable businesses after the merger - so onetime revenue enhancement losses are likely coin good.
Writing downwardly intangibles is a launder in addition to has no lawsuit on Valeant's accounts. Valeant has to piece of work out what each of the tangible assets is worth at acquisition, in addition to using this novel residue canvass in addition to the toll they acquired they deduce the goodwill to add together to their ain residue sheet. They could write-off some of the belongings constitute in addition to equipment. I guess at the same grade they could render some liabilities, eg they could have got a provision for sacking staff. However the primary liabilities (long term debt in addition to the like) are non land of written report to much write-up either. [Looking at a residue canvass unremarkably the debt is a corporation number!]
So lets exercise a (im)plausibility banking company check - lets imagine a write-off so large it is implausible (at to the lowest degree if the trouble organisation was worth buying for $2.6 billion. Here goes:
Suppose - in addition to this is rattling nasty,
*. that one-half of the receiveables are bad
*. in addition to one-half of the inventory has to go written off,
*. in addition to the entire internet property, constitute in addition to equipment needs to go written off.
*. And farther suppose they have got to sack every i of the 646 total fourth dimension employees in addition to render $200 one thousand per employee (and suppose nosotros render this notwithstanding that the Phoenix Business Blog suggested that most those employees were paid only 2 months salary). That mightiness laissez passer us the largest plausible provision.
So the response is $252 million which fifty-fifty amongst these extreme assumptions is non every bit much at the $275 1000000 stated inwards the Valeant shape 10-K.
The $275 1000000 lay out looks similar a porky to me. It sure every bit hell looks similar the only agency that yous tin instruct to that lay out is to dump ordinary expenses into the one-off bucket. And if yous exercise that the "non-GAAP cash EPS" that the bulls inwards the companionship tout is rubbish.
The alternative hypothesis is that Medicis actually was awful - in addition to the receivables were bad, in addition to the inventory did have got to go written off, in addition to the belongings in addition to constitute was useless because they moved all the manufacturing. And they were so efficient they got to sack 750 of their 646 staff.
Stranger things have got happened inwards my investing travels. Maybe it is all reasonable after all.
John
Post script. Even Valeant managed to cut down the merger-charges. The 2013 shape 10-K re-estimates the provision for this merger at $250 million and gives farther break-up every bit per this paragraph:
We estimated that nosotros volition incur total costs of less than $250 1000000 inwards connectedness amongst these cost-rationalization in addition to integration initiatives, which were substantially completed past times the halt of 2013. However, sure costs may soundless go incurred inwards 2014. Since the acquisition date, total costs of $181.3 1000000 (including (i) $109.2 1000000 of restructuring expenses, (ii) $32.2 1000000 of acquisition-related costs, which excludes $24.2 1000000 of acquisition-related costs recognized inwards the 4th quarter of 2012 related to royalties to go paid to Galderma S.A. on sales of Sculptra®, in addition to (iii) $39.9 1000000 of integration expenses) have got been incurred through December 31, 2013. The estimated costs primarily include: employee termination costs payable to unopen to 750 employees of the Company in addition to Medicis who have got been terminated every bit a final result of the Medicis Acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did non align amongst our inquiry in addition to evolution model; costs to consolidate or unopen facilities in addition to relocate employees; in addition to contract termination in addition to lease cancellation costs. These estimates exercise non include a accuse of $77.3 1000000 recognized in addition to paid inwards the 4th quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, in addition to portion appreciation rights for Medicis employees that was triggered past times the alter inwards control.I wonder where inwards the P&L the departure betwixt 250 1000000 in addition to $275 1000000 appears. Whatever, both numbers seem rattling large to me.
So far the buy-case for Valeant looks weak.
However this is a unmarried acquisition, Medicis, in addition to the primary products of that company Valeant are selling to Nestle. I would similar to exercise this to a greater extent than by in addition to large but every bit a afterwards shipping service shows that becomes increasingly to a greater extent than hard after the Medicis merger because the one-off charges are non sufficiently broken out past times acquisition.
John
PPS. Someone on twitter is maxim that - similar the jobs - many of the restructuring expenses to exercise amongst the Medicis merger could have got taken identify inwards the pre-Medicis Valeant. I volition endeavour to address this inwards hereafter posts.
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