Monday, October 20, 2014

Valeant Part XIII: channeling Jeff Skilling - or trying to reconstruct Valeant's balance sheet

There was a very famous conference call once where Highfields Capital analyst Richard Grubman asked for a balance sheet with Enron's earnings statement. Jeff Skilling's response is a key part of the Enron legend.
Grubman: You’re the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings. 
Skilling: You…you…you. Well, uh…thank you very much. We appreciate it. Asshole.
The "asshole" quip disappeared from the conference call transcript but everyone remembered it.

Well today Valeant produced a earnings result with only cursory balance sheet data and no balance sheet. Linked here is the SEC release.  And here is all they say about balance sheet.

Valeant Pharmaceuticals International, Inc.
Table 5
Consolidated Balance Sheet and Other Data
(In millions)
5.1 Cash


  As ofAs of
  September 30,December 31,
  20142013
Cash and cash equivalents
  $808.8  $600.3  
Marketable securities
  —    —    
  




Total cash and marketable securities
  $808.8  $600.3  
  




Debt
  
Series A-1 Tranche A Term Loan Facility
  $182.3  $259.0  
Series A-2 Tranche A Term Loan Facility
  166.3  228.1  
Series A-3 Tranche A Term Loan Facility
  1,813.9  1,935.7  
Series D-2 Tranche B Term Loan Facility
  1,088.6  1,256.7  
Series C-2 Tranche B Term Loan Facility
  837.5  966.8  
Series E-1 Tranche B Term Loan Facility
  2,544.8  3,090.5  
Senior Notes
  9,629.5  9,618.9  
Other
  12.0  12.0  
  




  16,274.9  17,367.7  
Less: current portion
  (191.7(204.8
  




Total long-term debt
  $16,083.2  $17,162.9

Okay - net debt was $15,466.1 million (being $16,274.9 minus 808.8).

Lets go back a quarter ago. Here is the balance sheet from the 10Q:


VALEANT PHARMACEUTICALS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(All dollar amounts expressed in millions of U.S. dollars)
(Unaudited)
As of
June 30,
 2014
As of
December 31,
 2013
Assets
Current assets:
Cash and cash equivalents
$
531.2

$
600.3

Trade receivables, net
1,770.7

1,676.4

Inventories, net
942.5

883.0

Prepaid expenses and other current assets
452.6

343.4

Assets held for sale
1,156.9

15.9

Deferred tax assets, net
309.8

366.9

Total current assets
5,163.7

3,885.9

Property, plant and equipment, net
1,319.6

1,234.2

Intangible assets, net
11,751.4

12,848.2

Goodwill
9,436.3

9,752.1

Deferred tax assets, net
18.3

54.9

Other long-term assets, net
206.3

195.5

Total assets
$
27,895.6

$
27,970.8

Liabilities
Current liabilities:
Accounts payable
$
327.7

$
327.0

Accrued and other current liabilities
1,774.9

1,800.2

Acquisition-related contingent consideration
88.9

114.5

Current portion of long-term debt
266.7

204.8

Liability held for sale
27.1


Deferred tax liabilities, net
11.0

66.0

Total current liabilities
2,496.3

2,512.5

Acquisition-related contingent consideration
238.1

241.3

Long-term debt
17,058.8

17,162.9

Pension and other benefit liabilities
165.5

172.0

Liabilities for uncertain tax positions
115.8

169.1

Deferred tax liabilities, net
2,238.8

2,319.2

Other long-term liabilities
215.0

160.5

Total liabilities
22,528.3

22,737.5

Commitments and contingencies (note 17)




Equity
Common shares, no par value, unlimited shares authorized, 333,777,181 and
  333,036,637 issued and outstanding at June 30, 2014 and December 31, 2013, respectively
8,325.9

8,301.2

Additional paid-in capital
212.2

228.8

Accumulated deficit
(3,175.3
)
(3,278.5
)
Accumulated other comprehensive loss
(104.7
)
(132.8
)
Total Valeant Pharmaceuticals International, Inc. shareholders’ equity
5,258.1

5,118.7

Noncontrolling interest
109.2

114.6

Total equity
5,367.3

5,233.3

Total liabilities and equity
$
27,895.6

$
27,970.8



Cash and equivalents was $531 million. Long term debt was $17058 million. Current debt was $266.7 million.

Net debt was thus $16793 million.

Net debt thus dropped $1327 million in the quarter. That looks pretty good.

Except that they sold the Aesthetics business during the quarter.

Slide 165 of this presentation (reproduced below) indicates net proceeds of $1240 million.

Net of this they generated only $88 million of cash in the quarter.

Which given they had $2 billion of sales and everyone thinks their cash margin is about 50 percent does not seem to compute.




We could of course work it out with a balance sheet and cash flow statement. It is probably all sweet and innocent.

So at the risk of being called an "asshole" please Mr Pearson will you give me a balance sheet and a cash flow statement with your earnings?





John

7 comments:

Anonymous said...

John,

They also closed on the acquisition of Precision Dermatology during the quarter (which was a $475mm outlay). GAAP Cash Flow From Operations was $619mm. We don't yet know what capex was, but if we average the last 2 quarters we get to an $86mm run-rate. FCF therefore $530mm on a GAAP basis. Less the $475mm paid for Precision, is $55mm. Which is close enough to your estimate of cash flow ($110mm) given we don't know the exact capex run-rate yet, that it should not draw significant red flag.

Anonymous said...

John,

Valeant historically does not include cash flow and balance sheet statements in their press release, but they historically release their 10-Q on same-day or very shortly after they report earnings so it is not a significant issue and I don't think it means they're hiding anything. This quarter (and also last, but to a lesser extent) they moved forward their earnings report date due to the dynamics surrounding the Allergan acquisition attempt.

Anonymous said...

John, You know Valeant closed their $500m acquisition of PreCision Dermatology on July 7?

Between that and a little CAPEX, I think free cash flow and net debt are right where you'd expect them to be based on the results.

Anonymous said...

they closed PreCision acquisition this quarter as well, which had been announced earlier in the year at a price of $475mm, so that should bridge a large portion of the gap. it's fair, however, to ask for more b/s and cf/s information. not sure it's fair to compare VRX to Enron or Pearson to Jeff Skilling. but time will tell.

Anonymous said...

It's Precision Dermatology...that's a CFFI outflow. That acquisition closed this most recent quarter. They also did some other M&A...Chroma, etc. In total M&A consumed about $720m, which is about the size of the issue you cite in change in net debt.

Anonymous said...

They just reported 620m in cash from ops..

Anonymous said...

Balance sheet and cash flow statement posted in their 10-Q filing: http://valeant.q4cdn.com/bc746fef-a59d-4195-afd5-44d4f1970d80.pdf?noexit=true

You should take this down

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