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Maxar Technologies Ltd. – the former Macdonald, Dettwiler & Associates Ltd. – tumbled 13 per cent Tuesday as a U.S.-based short-seller published a report arguing the company is hiding the evidence of a declining business by using aggressive profit-boosting accounting.

Spruce Point Capital Management LLC – which has previously targeted Intertain Group Ltd. and Just Energy Group Inc. – also notes the biography of company chief executive Howard Lance omits his board service at a company that restated its financials and misstates his role at past employer NCR Corp.

The short-seller – which stands to profit by knocking down Maxar’s shares – argues the stock is more realistically worth US$20 in the intermediate term, a 50-per-cent downside from Monday’s close of US$44.41 on the New York Stock Exchange; the stock closed at US$38.44 on Tuesday. Spruce Point claims Maxar’s business trends are poor enough to make its “long-term” share-price target zero.

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In a seven-sentence statement late on Tuesday, Maxar said the Spruce Point report “contains a number of inaccurate claims and misleading statements,” but it did not identify them. It said it “believes [the report] is a direct attempt by a short-seller to profit, at the expense of Maxar shareholders, by manipulating Maxar’s stock price.”

“Maxar continues to execute against its strategy, and recently reaffirmed its full-year 2018 guidance for revenue and cash flow from operations, while increasing its full-year adjusted [earnings per share] outlook,” the company continued. “Maxar continues to be fully committed to transparency in all of its investor presentations and financial reports.”

Spruce Point argues MacDonald Dettwiler erred when it borrowed to buy Space Systems Loral in 2012 at a time of robust satellite demand, then added Colorado-based DigitalGlobe in 2017 “as a last-ditch effort to save a sinking ship.” The company changed its name to Maxar after the deal and moved its headquarters from Richmond, B.C., to the United States, but many of its shareholders and the analysts who follow it remain Canadian.

Much of Spruce Point’s analysis is based on skepticism about Maxar’s business and how the company’s 2018 guidance is already below the numbers presented in documents related to the DigitalGlobe merger. While Maxar boosters say there’s a growing need for satellite imagery, Spruce Point believes customers will find cheaper, alternative solutions from companies such as Airbus SE and Planet Labs Inc., whose products’ image resolutions, while not as good as DigitalGlobe’s, are satisfactory for most private-sector satellite-photography needs.

That’s a problem for a company that expects a double-digit decline in its satellite-selling Space Systems business while also trying to reduce its debt burden. Spruce Point says Maxar’s accounting choices are making things look better than they really are, however.

The short-sellers say a footnote in the company’s financial statements shows that it is capitalizing more research and development costs than its peers. By capitalizing costs, a company moves them out of the income statement and creates an asset that is written off over time. But because the costs fall into a line item called depreciation and amortization, they're left out of the metric EBITDA, which is earnings “before” those costs (and interest and taxes).

The short-selling firm says that adjusting these numbers to make Maxar match peers would cut US$50-million from its 2018 EBITDA.

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In doing the DigitalGlobe merger accounting, Spruce Point says, Maxar reduced the balance-sheet value of DigitalGlobe’s satellite assets by $1.2-billion, and simultaneously created more than $1.3-billion in intangible assets, which also don’t require expensing in the income statement each quarter. Reversing this change, Spruce Point argues, subtracts US$86.9-million from 2018 net income.

The Spruce Point short case also makes human arguments. It notes the resignation of the company’s chief financial officer, William McCombe, less than 10 days before the March investor day.

CEO Howard Lance, the short-sellers note, was previously chief executive at Harris Corp., a New York Stock Exchange-traded company, and director of its spinoff Harris Stratex Networks Inc. when Harris Stratex had to delay its 10-K annual report and then restate its financials in 2008. (Harris Stratex is now known as Aviat Networks Inc.). He served as the chairman of the board at Change Healthcare Holdings Inc. in 2017 when it restated its financials; that role is not listed in the Maxar proxy under the heading for Mr. Lance’s “other public board memberships – present and past five years.” (Change Healthcare has since been acquired by McKesson Corp.)

Mr. Lance’s biography also lists him as having “served as President and Chief Operating Officer of NCR Corp. from 2001 to 2003.” Spruce Point says Mr. Lance has “embellished” his role, as NCR appointed Mark Hurd chief operating officer in September, 2002.

A Globe and Mail review of NCR’s proxy statements shows the current Maxar proxy is incorrect. Mr. Lance and Mr. Hurd held the president’s title simultaneously in 2001, with each serving as chief operating officer of one of the company’s divisions. When NCR named Mr. Hurd sole president and COO of the corporation in September, 2002, Mr. Lance left the company.

Editor’s note: Editor's note: This version clarifies that Maxar CEO Howard Lance was CEO of Harris Corp. and a director of its spinoff Harris Stratex Networks when it (not Harris Corp.) had to restate its financials in 2008.
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