Financial charges from the delayed U.S. Air Force aerial refueling tanker continue to ripple across industry, with refueling system provider Cobham on Feb. 16 warning it will take £150 million ($187 million) in charges after tough talks with tanker prime .
“The schedule remains challenging and is being executed against the ongoing backdrop of an onerous commercial arrangement,” a Cobham statement said. “Through the commercial negotiations associated with the changes, it became clear that the costs to complete the development schedule would fall largely to Cobham’s account.”
Cobham Chairman Mike Wareing added that the charge to 2016 results should be all-encompassing. “While the charge to finish the development phase is hugely disappointing, it is essential and does bound all historic liabilities, as well as appropriately funding the remaining work,” he said.
Cobham provides the RP-910E-75 Wing Aerial Refueling Pod (WARP) and FR-600-84MDR Centerline Drogue System (CDS) for the KC-46. The WARP is based on Cobham’s “fifth-generation” 900E electric architecture, while the CDS marries Cobham’s “proven” hydraulic architecture with “the latest digital controls to provide a reliable and cost-effective centerline system,” a company brochure says.
Unfortunately for Cobham, the tanker charges come as part of a larger setback to 2016 results, which will be unveiled March 2. On Jan. 11 the company warned investors of headwinds, starting with the tanker, and as part of the Feb. 16 update Cobham disclosed an additional £20 million cut to its expected trading profit for last year, and £811 million of other charges.
As part of those “adjustments,” Cobham explained charges of £574 million related to individual business lines, including acquired assets like those related to the 2014 purchase of Aeroflex Holding, a Plainview, N.Y.-based provider of high-performance, radiation-hardened microelectronic components and test and measurement equipment. Aeroflex was a high-profile part of a plan to diversify Cobham (Aerospace DAILY, May 22, 2014, p. 5).
According to Cobham, the £574 million in charges include:
· £196 million against the Wireless business unit within the Communications and Connectivity Sector, which includes part of the Aeroflex acquisition in 2014 and Axell Wireless acquired in 2013;
· £186 million against the Integrated Electronic Solutions business unit, part of the Advanced Electronic Solutions Sector, which includes the Lansdale business acquired in 2009, part of the M/A-COM business also acquired in 2009, the Trivec business acquired in 2011 and part of Aeroflex; and
· £192 million against the Semiconductor Solutions business unit, also within the Advanced Electronic, and also entailing heritage Aeroflex.
Cobham CEO David Lockwood said “2016 was an incredibly turbulent and disappointing year for Cobham. Execution failure in many businesses led us to miss expectations badly and provides a poor entry point into 2017.”
He promised strong operational performance and financial control from now on. But financial analysts sounded pessimistic, with Vertical Research Partners calling Cobham a “slow-moving train wreck” that nonetheless leaves investors with few palatable options except to maybe look for a corporate breakup.
“In an ideal world, we think Cobham’s new management team should accept that the diversification strategy has been an unmitigated disaster,” Vertical said. “Following this acceptance, we think that they should look at carving the company into what could be called ‘good bank’ and ‘bad bank,’ as we have seen in financial services restructuring.”
Cobham’s core aerospace and defense franchises are good, Vertical said, and would be an attractive acquisition target, particularly for larger defense companies.
Said Vertical, “This would mean the end of Cobham as we know it, but it would at least put an end to the pain for shareholders.”