King Not Loving Its Shareholders

There are certain actions that, when engaged in by the management of any company, can reveal its feelings about shareholders. When management shows a distaste for shareholders via excessive compensation agreements or other such dealings, it can be hard to get excited about the company no matter how well its operations are run.

King Pharmaceuticals (NYSE:KG), no stranger to accounting problems and other shareholder-unfriendly activities, announced its quarterly results Thursday. Conveniently nestled in the middle of its 10-Q was the notice that it was taking a $3.6 million charge to correct for numerous "immaterial understatements of compensation expense," which conveniently ended up giving executives and others stock options on "favorable" dates. Sure, this is not a huge charge for a company expected to bring in nearly $2 billion in revenues this year, but these are the kinds of things that show investors where management's priorities are.

As for its operations, revenue at King declined year over year because of changes in reserves for returned products and increases in wholesale inventory. With the SEC continuing its investigation into King's practices in regards to how it accounts for product returns, it will be interesting to see if this affects the company's future revenue numbers, which all of a sudden stopped growing this quarter, as can be seen below.

Because of the reduction in sales and rising expenses, earnings declined 16% to $106 million, or $0.44 per share. Gross margins and operating margins were 78% and 25%, respectively, both down from the third quarter last year.

The other news this quarter for King was its purchase of the pain-relief drug Avinza from Ligand Pharmaceuticals (NASDAQ:LGND) for $265 million plus royalties on sales. The drug is nearing the end of its high-sales-growth phase, growing 34% year over year in the first six months of 2006, and we'll get to see how its sales performed in its most recent quarter tomorrow.

King has nearly $920 million sitting on its balance sheet, excluding the upcoming purchase of Avinza. Even with $400 million in debt, King's operating cash flows of $127 million for the quarter mean that there will be plenty of money to use for future product acquisitions. Considering that this is King's preferred form of growing sales, I wouldn't be surprised to see more acquisitions this quarter.

My issues with King are that it appears to be a company with stagnating operations, trying to grow sales via licensing or acquiring new drugs, with (at best) a shaky handling of its accounting practices. On that basis, I think I'll pass.

Whether you're delighted by dividends or tickled pink by tax tips, the Fool has a newsletter for you. You can try any of them free for 30 days.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .