A major provider of airline in-flight entertainment has encountered heavy turbulence after the resignation of two top executives and the announcement that earnings would be delayed because the company’s financial staff is overwhelmed.
The stock of Global Eagle Entertainment Inc., the in-flight entertainment company for Southwest Airlines and several foreign carriers, has fallen sharply since the Marina del Rey company said last month that its chief executive, David Davis, resigned along with the company’s chief financial officer, Tom Severson.
The company also said it would miss the Securities and Exchange Commission’s March 16 deadline to file its fourth-quarter and full-year financial results, in part because of “material weaknesses in our internal control over financial reporting.”
The company, founded by Harry Sloan, former chairman and chief executive of Metro-Goldwyn-Mayer, and Jeff Sagansky, former president of CBS Entertainment, provides wireless service and in-flight entertainment for commercial airlines, ships and remote locations. Global Eagle employs 1,500 people.
Global Eagle shares, which closed at a recent high of $6.44 on Feb. 15, fell to $4.24 on Feb. 22, the day after the announcements, for a 34% decline. The stock managed to regain about 50 cents in the midst of several analyst downgrades and shareholder lawsuits, but slipped again to close at $4.11 a share on Friday.
Global Eagle said Davis resigned as CEO and a director to “pursue other endeavors,” but would remain as a temporary consultant. It didn’t offer an explanation for Severson’s departure.
The resignations came about three months after the company filed an SEC report saying that its staff was overwhelmed by the acquisition of several new firms, including the July purchase of Emerging Markets Communications, a communications provider for ships.
As a result, the company said it “failed to execute certain control and monitoring activities timely, and at a sufficient level of precision to address the risk of material misstatement to our financial statements.”
Global Eagle has said it won’t meet its earnings filing deadline because it needed to address the internal reporting problems, the effect of Severson’s departure and the company’s increased size and complexity.
The acquisition of Emerging Markets was a $550-million deal that Global Eagle said could boost revenue by up to $40 million by 2018.
But the company announced last month that its 2016 revenues would be at or near the low end of its prior guidance range of $530 million to $538 million.
Several equity analysts have downgraded Global Eagle in the last few weeks, including Minneapolis-based Piper Jaffray, which cut its recommendation on the stock from “overweight” to “neutral.”
Stan Meyers, a senior research analyst for Piper Jaffray, said the problems at Global Eagle may have begun when the company acquired a German-based airline entertainment company, Advanced Inflight Alliance in 2013.
“The problems stem from not having a real strong, sufficient finance team to deal with all of the acquisitions, particularly international,” he said.
Several lawsuits have been filed against Global Eagle on behalf of shareholders, claiming that the financial reporting problems represent violations of security laws that caused shareholders significant losses or damages.
Global Eagle representatives declined to comment on the lawsuits, but industry experts say such claims are commonly filed after a publicly owned company reports a major change that sinks a company’s stock price.
Board member Jeff Leddy, a former technology company executive, was appointed as the new chief executive and will act as chief financial officer until a replacement for Severson is hired.
The company said in a securities filing that it is paying Davis $1.1 million in severance plus $50,000 a month for three months to act as a consultant to Global Eagle. The company also said in a filing that Severson’s severance package is equal to his base salary, which started at $350,000, for 12 months after he resigned, plus stock options.
As he took on his new job, Leddy said that Global Eagle had identified “significant market opportunities” in foreign markets, including China.
“While change can cause uncertainty, I am confident in the future success of [Global Eagle Entertainment] and our ability to deliver on behalf of our shareholders and for our customers,” Leddy said.
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