U.S. prosecutors' letter spurred orders in self-driving car lawsuit

SAN FRANCISCO (Reuters) – The judge overseeing a lawsuit between Uber Technologies Inc [UBER.UL] and Alphabet Inc’s (GOOGL.O) Waymo self-driving car unit issued a series of orders this week, prompted by information shared with him by the U.S. Department of Justice.

FILE PHOTO: The Uber logo is seen on a screen in Singapore August 4, 2017. REUTERS/Thomas White/File Picture

U.S. District Judge William Alsup in San Francisco disclosed on Wednesday that he had received a letter from Justice Department attorneys about the case, which is set for trial in December. The judge did not reveal the letter’s contents.

However, Alsup issued two subsequent orders, including one on Saturday, that discussed some details. He ordered Uber to make three witnesses, including a former Uber security analyst and a company attorney, available to testify on Tuesday at a final pretrial hearing. Trial is scheduled to begin on Dec. 4.

It is unusual for the Justice Department to share information with a judge days before a civil case is set to begin.

Earlier this year Alsup, who is hearing the civil action brought by Waymo, asked federal prosecutors to investigate whether criminal theft of trade secrets had occurred. That probe is being handled by the intellectual property unit of the Northern California U.S. Attorney’s office, sources familiar with the situation said. No charges have been filed.

Representatives for Waymo, Uber and the Justice Department declined to comment. The former Uber security analyst could not be reached for comment.

FILE PHOTO: The Waymo logo is displayed during the North American International Auto Show in Detroit, Michigan, U.S., January 8, 2017. REUTERS/Brendan McDermid/File Picture

Waymo sued Uber in February, claiming that former Waymo executive Anthony Levandowski downloaded more than 14,000 confidential files before leaving to set up a self-driving truck company, called Otto, which Uber acquired soon after.

Uber denied using any of Waymo’s trade secrets. Levandowski has declined to answer questions about the allegations, citing constitutional protections against self-incrimination.

Since the case began, Uber said its personnel have spent thousands of hours scouring its servers and other communications devices but have not found Waymo trade secrets.

In an order on Friday, Alsup referred to a former Uber security analyst in connection with the letter from the U.S. Attorney’s office and to certain “devices” the former employee said were maintained by Uber.

Alsup asked Uber to disclose whether it had searched those devices for relevant evidence in the case.

Reuters is part of a media coalition seeking to maintain public access to the trial.

Reporting by Dan Levine; Editing by Sue Horton and Marguerita Choy

Our Standards:The Thomson Reuters Trust Principles.

Black Friday, Thanksgiving online sales climb to record high

CHICAGO (Reuters) – Black Friday and Thanksgiving online sales in the United States surged to record highs as shoppers bagged deep discounts and bought more on their mobile devices, heralding a promising start to the key holiday season, according to retail analytics firms.

Customers push their shopping carts after making a purchase at Target in Chicago, Illinois. REUTERS/Kamil Krzaczynski

U.S. retailers raked in a record $7.9 billion in online sales on Black Friday and Thanksgiving, up 17.9 percent from a year ago, according to Adobe Analytics, which measures transactions at the largest 100 U.S. web retailers, on Saturday.

Adobe said Cyber Monday is expected to drive $6.6 billion in internet sales, which would make it the largest U.S. online shopping day in history.

In the run-up to the holiday weekend, traditional retailers invested heavily in improving their websites and bulking up delivery options, preempting a decline in visits to brick-and-mortar stores. Several chains tightened store inventories as well, to ward off any post-holiday liquidation that would weigh on profits.

TVs, laptops, toys and gaming consoles – particularly the PlayStation 4 – were among the most heavily discounted and the biggest sellers, according to retail analysts and consultants.

Commerce marketing firm Criteo said 40 percent of Black Friday online purchases were made on mobile phones, up from 29 percent last year.

No brick-and-mortar sales data for Thanksgiving or Black Friday was immediately available, but Reuters reporters and industry analysts noted anecdotal signs of muted activity – fewer cars in mall parking lots, shoppers leaving stores without purchases in hand.

People shop for items in Macy’s Herald Square in Manhattan, New York. REUTERS/Andrew Kelly

Stores offered heavy discounts, creative gimmicks and free gifts to draw bargain hunters out of their homes, but some shoppers said they were just browsing the merchandise, reserving their cash for internet purchases. There was little evidence of the delirious shopper frenzy customary of Black Fridays from past years.

However, retail research firm ShopperTrak said store traffic fell less than 1 percent on Black Friday, bucking industry predictions of a sharper decline.

A cashier handles money in Macy’s Herald Square in Manhattan, New York. REUTERS/Andrew Kelly

“There has been a significant amount of debate surrounding the shifting importance of brick-and-mortar retail,” Brian Field, ShopperTrak’s senior director of advisory services, said.

“The fact that shopper visits remained intact on Black Friday illustrates that physical retail is still highly relevant and when done right, it is profitable.”

The National Retail Federation (NRF), which had predicted strong holiday sales helped by rising consumer confidence, said on Friday that fair weather across much of the nation had also helped draw shoppers into stores.

The NRF, whose overall industry sales data is closely watched each year, is scheduled to release Thanksgiving, Black Friday and Cyber Monday sales numbers on Tuesday.

U.S. consumer confidence has been strengthening over this past year, due to a labor market that is churning out jobs, rising home prices and stock markets that are hovering at record highs.

Reporting by Richa NaiduEditing by Marguerita Choy

Our Standards:The Thomson Reuters Trust Principles.

GE Investor Update Review

This is a follow-up to my October 24 article about General Electric (GE). My basic decision stated in that article was that I like the initial comments and actions by new CEO John Flannery, and I’m not inclined to close the GE position. However, I would view GE as CAFD (cash available for deployment) if an unusual opportunity came along and I didn’t want to use existing cash for the purchase.

I decided to take no action until the November 13 GE Investor Update. I’ll provide more details about my portfolio action at the end of the article.

Key takeaways

GE’s November 13 Investor Update packed an abundance of information in the 2-hour, 50-minute presentation (including the question-and-answer segment). Here are my key takeaways, with elaboration to follow later in the article:

  • Flannery is in charge. He has charted a new direction for the company, has built his own leadership team, and is re-shaping the Board.
  • Miller is making a significant contribution. New chief financial officer, Jamie Miller, will be a key part of GE’s turnaround story.
  • Joyce leads “GE at its best.” Vice Chairman David Joyce since 2008 has been the CEO of GE Aviation, the company’s most profitable division.
  • Stokes is the one to watch. Russell Stokes, the CEO of GE Power, has the tough job of turning around GE’s largest and most challenged division.
  • “Complexity hurts us.” Flannery is designing a simpler and more focused GE, putting priority on units with cash flows that grow the bottom line.
  • Collaborative, competitive rigor. Flannery expects pushback and thrives in fluid situations where options are open-ended and vigorously debated.
  • Growing cash flow, operating earnings, and dividends. 2018 will be the base from which growth will be measured. Flannery expects growth.

John Flannery’s stock purchases

CEO John L. Flannery maintains that GE is a good holding for someone with at least a 3-5 year time horizon. Translation: “This won’t be a quick turnaround.”

On November 15, Flannery purchased 60,000 GE shares at $18.27, or $1.096 million.

In August, shortly after becoming CEO, Flannery bought 104,000 shares at $25.56 per share, or $2.7 million worth of GE shares, bringing his total at that time to 615,000 shares, worth (at that time) $15.6 million. He also owns 101,000 restricted stock units and options to purchase 2.6 million shares at a $11.95-38.75 price range (SA Aug. 10).

So, since becoming CEO, Flannery has purchased 164,000 GE shares at an average cost of $23.15 for an investment of $3,796,000. GE shares closed at $18.21 on November 17, so the 164,000 shares recently purchased are now worth $2,986,440. Flannery has a paper loss of $809,560, or 21.3% on those two purchases.

This brings his total stake (not counting restricted stock units and options) to 675,000 shares, worth $12,291,750 as of November 17.

Quotations below are from the November 13 Investor Update held in Atlanta, Georgia. You can access a replay of the webcast at the GE website, and you can also access an edited version of the transcript from the GE website.

Basic direction

I like the basic direction charted by Flannery. At the beginning of the Investor Update, Flannery affirmed GE’s long history of innovation in “light, flight and health,” which are “the absolute underpinnings of the modern world.” Flannery is a 30-year veteran of GE and he affirms the company’s long history and the culture that he believes made GE a great “iconic” company:

“…the 125-year history of the company… . is just an incessant stream of technology breakthroughs going back to the first light bulb, the first X-ray, the first jet engine, the first CT, the LEAP, the H turbine.”

“…I’ve been in the company for 30 years … I love the company and I’ve always loved the culture. … It’s always been a culture of meritocracy… compliance and integrity.”

(Logo graphic from underconsideration.com)

While affirming GE’s heritage, Flannery is forthright about GE’s problems and the need for new direction:

“So it’s a heavy lift. But I think for our teams, what we’re motivated by, this is the opportunity, really, of a lifetime to reinvent an iconic company.”

Flannery concluded his prepared remarks at the Investor Update with this statement to his GE colleagues:

“…to the GE team, my colleagues at GE team. This is our time. This is our time to reinvent the company. This is our time to show our passion and our fury, and our resolve and our grit. This is an incredible opportunity for all of us. It’s game on. And I just want to say I couldn’t be more secure or more confident in fighting this fight with all of you.”

The following excerpt provides an excellent summary of the pivot that Flannery is leading. It expresses the cultural shift he is driving:

“There are things, though, that I think we can sharpen in the culture, with things that are going to change the performance of the businesses, the performance of the team, and that’s really what I’m focused on when I’m talking culture. … Accountability, outcomes matter. Effort’s good, outcomes matter. Transparency, more candor, more debate, more pushback. Rigor, intense analytics, use data, probe, verify, revisit. And then lastly, consistency, making sure that we have compensation schemes, goals and metrics that drive us to perform on a consistent basis over an extended period of time for investors. So I have spent a ton of time on the culture with our officers, with the rest of the company. And I don’t think there’s any confusion inside the company about what I expect here in terms of behaviors and motivations.”

“So that’s it… strong franchises; 2018, a reset year; capital allocation, critical; portfolio simplification, critical. We know what we need to do, and it’s show-me time. We have to perform and execute, and that’s what we owe all of you.”

An insider’s outsider

Former CEO was widely disparaged, and some GE shareholders hoped for a clear break with the Immelt years. As CEO of GE Healthcare, John Flannery was viewed by some as an “accomplice” who bears some responsibility for GE’s recent past.

Although Flannery has been at GE for three decades, he is not a “me, too” person. He thinks for himself and he has moved thoughtfully yet quickly to implement strategic change. I consider him an “insider’s outsider.” He has demonstrated the ability to view familiar territory objectively and analytically. He knows how to “orbit the giant hairball” without becoming entangled in it. He is an insider who is leading from the outside.

GE announced Flannery’s appointment as CEO on June 12, 2017, effective August 1. The four presenters at the November 13 Investor Update represent the heart of Flannery’s new team. Like Flannery, the team combines years of experience at GE with fresh perspectives:

“I’m just a believer that there’s a lot of power and benefit in melding fresh eyes with people that have institutional memory. And this is something that worked extremely well for me in Healthcare, and we’re going to do the same thing again here with the company.”

Flannery, GE’s new CEO, previously was CEO of GE Healthcare. Jamie Miller, the new CFO, previously was CEO of GE Transportation. Russell Stokes, the new CEO of GE’s most challenged division, GE Power, was previously CEO of GE Energy and he is tasked with merging GE Energy with GE Power. The announcement of Stokes’ appointment came two days after the announcement that Flannery would be the new GE CEO. David Joyce, the CEO of GE’s most successful division, GE Aviation, has been in that role since 2008 and he serves as GE’s Vice Chairman. The common thread is that each of these key leaders has had experience running a GE division.

Other key team members

Senior Vice President and Chief Financial Officer Jamie S. Miller was prominent in the Investor Update presentations. She fielded questions along with CEO Flannery. She is new to the CFO position, moving a few weeks ago from her role as President and CEO of GE Transportation.

Miller joined GE in 2008 as VP, Controller and Chief Accounting Officer. She served in that role for two and a half years before leading GE Transportation. She announced two changes in the way GE will report:

“…on earnings per share, we’ll be moving … to an adjusted earnings per share measure. … it starts with continuing operations EPS. … back out gains and restructuring, and … back out non-operating pension expense.”

“…On cash reporting, we’re moving from CFOA (cash from operating activities) to industrial free cash flow … just like our peers… CFOA, less deal taxes, less gross P&E additions and capitalized software.”

Miller said management has identified some $3 billion in cost reductions over the next two years. Corporate headcount will be down 25% as the company moves into 2018. She reiterated management’s view that 2018 will be “a reset and stabilization year for the company. And we see adjusted EPS of $1 to $1.07, with industrial free cash flow at $6 billion to $7 billion.”

Miller said:

“I think the one thing that I’m most excited about benefiting free cash flow is the fact that our incentive comp programs are going to be mostly aligned with free cash flow as a primary metric.”

GE Aviation’s revenue was $6.816 billion, or 22.7% of the $30.046 billion Industrial Segment revenue in 2017 Q3. GE Aviation’s profit for Q3 was $1.680 billion, or 46.3% of GE Industrial Segment’s profit of $3.630 billion for Q3. Flannery said this division is “GE at its best.” David L. Joyce, Vice Chairman of GE and President and CEO of GE Aviation, made this statement:

“Our projections for op profit growth this year, about 5% to 6% on revenue of 2% to 4%, with a free cash flow conversion which will be a little north of 90%. In 2018, you should expect us to be at about 7% to 10% growth on op profit on the same growth in organic revenue. As John said, our goal is to hold op profit rate as we move forward with this big LEAP ramp as well as the Passport ramp, which is new engine in the business and general aviation space. We have to continue to focus on structural reduction in cost to do that. Our SG&A will be below 6% of sales in 2018.”

GE Power’s revenue was $8.679 billion, or 28.9% of the Industrial Segment revenue in 2017 Q3. GE Power’s profit for Q3 was $0.611 billion, or 16.8% of GE Industrial Segment’s profit for Q3. Russell T. Stokes, Senior VP and since June 2017 President and CEO of GE Power, described some of the challenges facing GE Power:

“… We are going to right-size the business for the realities of the market… Structural cost… could be better. …investments … focused on the right things. … a more holistic view of our service franchise. … Better performance on outages for our customers, better cost execution out in the field. We can broadly execute better. Improving on working capital, higher say/do ratio, … delivering on an objective and very transparent environment… Cash as important as returns, system transparency, so everybody sees what goes on.”

Transparency, tone and temperament

I like the new management’s transparency. There’s been a consistency of content and style in Flannery’s public interviews, the 2017 Q3 earnings call and the Investor Update. I’m convinced his message is the same to the public and to individuals inside and outside the company.

It’s not uncommon for a CEO to be guarded in his or her public assessment of a company’s situation. However, Flannery has demonstrated a refreshing openness about GE’s weaknesses as well as strengths. He is comfortable being the leader of a public company, and he is clearly willing to be evaluated by the marketplace and by his colleagues:

“I expect rigorous debate. I expect rigorous tracking of how things are going. I expect a lot of pushback.”

Flannery was asked in the Q&A session:

“…as CEO, what would you like to see your biggest impact and the biggest change be…?”

He responded:

“I want the team to move forward. I want the team to have confidence. I want the team to be focused… execute with rigor, maximize the value of everything else. And those things will take care of themselves and write their own legacy. I really do not need to be motivated by that.”

I like the new management’s tone. Some CEOs might be tempted to gloss over problems or (on the other extreme) throw the previous CEO under the bus. Flannery has struck a different tone. He has expressed respect for his former boss/CEO, Jeff Immelt. The only mention of Immelt in the Investor Update expresses both an appreciation for Immelt’s focus on digital and Flannery’s new direction:

“Digital continues to be very key to the company. Jeff was very early in his seeing this trend, and I’d say we’ve only had growing validation of what we’re seeing and able to achieve with customers. … We’re still deeply committed to it, but we want a much more focused strategy.”

This respectful tone is extended to Flannery’s colleagues on his leadership team. As one who ran GE’s Healthcare division, he understands the importance of the CEOs and teams of the various segments:

“… businesses run their operations. My job, our job at the center of the company, really is to allocate the financial resources, the financial capital of the company and the human resources, the human capital of the company to the highest and best use.”

Flannery seems to be establishing a tone of collegiality and teamwork while blending GE veterans with fresh blood and setting high expectations:

“…About 40% of the team is new since June. I love the team. … I especially love the team dynamic. This is a team that’s comfortable with debate back and forth. It’s a team that’s competitive as hell, a team that’s fun. And I feel very confident working with this team…”

The tone set by Flannery has the sound of a cash register. He has established a clear focus on cash growth as the measure of success. The management team appears to be united around the effort to grow GE’s cash flow:

“To me, purpose of the business at the end of the day is to generate cash for investment and return to investors.”

“…we’re going to focus on improving the cash flow of the company. … the … free cash flow in 2018 (will be) double what it is in 2017.”

“So growth in cash to me (is) the ultimate litmus test. … the cash is what people consume. The cash is what lets you invest. The cash is what lets you do all the capital allocation things you want to do. … if we’re growing and generating a lot of cash, people are going to like what they see.”

Flannery’s shift in the metrics he and the team will pursue is another illustration of “turning the page” from the Immelt era, and it’s a cultural shift:

“…there was a premium in that universe on top line growth, on operating profit. Nothing wrong, obviously, with either one of those metrics, but we really needed to close the loop more with a focus on cash, cash flow, free cash flow. So … you can see just a growing delta between what our operating earnings were, our operating profit earnings were and our cash earnings. So as we go forward, we’re going to focus on much simpler metrics … a handful, things like revenue and operating profit, free cash flow. Free cash flow is a much more penetrating metric. It incorporates, obviously, capital spending, software spending, et cetera. So cash is going to be a huge focus, and simplification of metrics is going to be a huge focus as we go forward.”

Flannery’s comments about GE’s dividend made it clear that dividend growth is a function of growing cash flow:

“…we are intensely focused…on the cash generation of the company, discipline in the company, taking cost out of the company, restoring the oxygen of cash and earnings to the company. And that’s openly what we’ll be able to use to grow and expand the dividend…”

“…we’re comfortable with the dividend relative to the cash flow of the company… The cash flow of the company will grow … in 2018. Businesses that we focus on will continue to grow cash flow…”

Flannery is taking a new approach to compensation for 190 company officers, focused less on cash and more on equity compensation:

“Much more equity is the biggest point. Today, for its senior executives… equity would be probably about 20% of their compensation. It’s going to be 50%… My compensation, 100% equity compensation, PSUs, equity granted over 3-year time period, simple set of metrics. …an environment … much more aligned and rewarding of our team for and with shareholders.”

The Investor Update slide presentation included an explanation of the new compensation structure for management:

I like the new management team’s temperament. It starts with CEO Flannery. A strong leader is unflappable and does not become defensive when criticized. Here’s a question posed to Flannery during the Investor Update:

“…What … duration … should (we) give you? And what metrics we should be looking at to decide whether this current construct is a success versus something … like a larger breakup?”

Flannery’s response made it clear that he isn’t playing to an audience. He is focused on the performance of the business and on strategic outcomes:

“Listen, that’s for the market to decide. I think we’ve laid out very clearly where we’re going… where we compete, where we have competitive advantage, where we generate cash. I recognize fully it’s show-me time. … And until we produce the results, not going to matter. … we’re focused on what we can control, where we’re allocating the capital, how we’re running the company, how we’re driving the teams. You guys will decide what you like and don’t like.”

Flannery’s style seems to follow Good to Great author Jim Collins’ description of “Level 5” leadership:

“The essential ingredient for taking a company to greatness is having a ‘Level 5’ leader, an executive in whom extreme personal humility blends paradoxically with intense professional will.”

One of the slides from the November 13 Investor Update slide presentation summarizes Flannery’s approach to driving GE’s cultural change:

Holding GE

I plan to continue to hold shares of GE. I’m more impressed with CEO John Flannery after the Investor Update. He has articulated a clear set of values and priorities. He seems to thrive on fluidity and the challenge of a changing landscape.

He announced a plan to raise $20 billion in divestitures. Some people might have expected that he would produce a list of assets to be sold, with an approximate price tag on each. But Flannery is approaching this $20 billion target in a pragmatic and (I believe) appropriate way. The company is continuing to manage and grow each of the segments to maximize profitability as it explores options for how to maximize shareholder value.

As for Baker Hughes (NYSE:BHGE), Flannery said:

“We own 62.5% of this company. We want to maximize the value of that for the shareholders of our company… how we deliver synergies… how we share technology. And part of that might be, is there a different form or structure for the ownership of that asset.”

As for the troubled GE Power unit:

“…our Power business is a challenged business right now. We’ve got a lot of work to do. … It’s a heavy lift to turn around, but it’s a fundamental asset, strong franchise in an essential infrastructure business. We can improve that a lot in the next 1 to 2 years.”

When asked directly why he’s putting GE Transportation on the block:

“… you’ve been in the business 100 years … You make big machines, lots of sensors, lots of digital content, customer service agreements. So it just seems like it fits. So why put it on the block?”

Flannery replied:

“…we’ve talked about is focus and … we’ve talked … which businesses are exposed to cycles. … we foresee a protracted slowdown in the North American market … around coal shipments and other things. So it is an excellent asset. We have a very strong franchise. We have incredible customer relations. But we think it’s going to be an extended slow period in North America, and the international business can pick up some of that, point one. Point two is … we’re exploring the options that we have with these assets. So that may be a sale, it may be a spin … And then the last thing I would say is focus means focus. … Transportation is a great asset (but it’s only) 3%, 4%, 5% of the company. And so we’re concentrating deliberately on the areas where we think we can make the most impact for the owners, and then we’ll maximize the value of the other assets.”

This is a good example of how Flannery charts a course (i.e., “we intend to sell GE Transportation”), but the “when” and “how” of that decision will depend on how well the division executes and how macro market forces unfold.

Conclusion

I have a brokerage account and an IRA. I’ve had some holdings in both accounts. For simplicity, I’m eliminating duplications. I was holding 80% of my GE shares in the IRA and 20% in the brokerage account. I decided to sell the GE shares in the brokerage account (where I’ll realize a tax loss by selling at $18.27). I applied the proceeds toward the purchase of some shares of Magellan Midstream Partners (MMP) at $65.00. It makes more sense to hold MMP in the brokerage account.

The sale of 20% of my GE shares reduced the allocation from 1.96% of the portfolio to 1.61%. I feel better with this somewhat lower allocation for GE. I agree with John Flannery that this is “show me” time. If I continue to view GE’s new management favorably and if the turnaround materializes, I would be willing to add more GE shares. One factor I’m watching is whether Standard & Poor’s maintains its AA- credit rating on GE. S&P has placed GE on negative watch for a possible downgrade.

I expect GE shares to trade in a range of roughly $15.00 to $20.00 over the next 12-14 months. The stock’s price dropped to $5.87 on March 4, 2009, in the depth of the Great Recession’s bear market. The 2010 price range was $13.75 to $19.69. I could see the price of GE stock approximating the 2010 range in 2018. During 2010, GE paid $.46 per share in dividends, which approximates the current $.48. I think GE will hold at the $15 level, although a severe market downturn could knock GE shares down to the 2010 lows.

We’ll have a clearer picture after the 2018 results are reported about 14 months from now.

My target price to consider adding more GE shares is $16.67, which would equal a dividend yield of 2.88%. I might lower the target if S&P lowers GE’s credit rating.

My goal is to write at least one article a week, usually about a company in my retirement portfolio. I’ve been writing recently about REITs in the portfolio. That will continue for the next few weeks, but I wanted to provide this update about GE. I always learn from our Seeking Alpha conversations. I welcome your opinion because your responses enrich our discussion. What’s your take on GE’s new management and the company’s prospects?

You can access a list of previous articles here.

To be notified of future articles on a real-time basis, just click “Follow” at the top of this article, then choose “Follow this author” and “Real-time alerts.”

It’s not my intent to advocate the purchase or sale of any security. I offer articles to provide ideas for stocks to study and to share a journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

Disclosure: I am/we are long GE, JNJ, PG, MMM, WMT, MSFT, MRK, PFE, XOM, AAPL, CSCO, TD, SPG, ADP, RY, BCE, O, VTR, DUK, KMB, PPL, SKT, PEP, NNN, WPC, GPC, EPD, MMP, BEP, BIP, TGT, SO, IBM, TXN, VFC, QCOM, KO, HRL, UL, PEGI, MRCC, HASI, APLE, BIF, VTI, VEA, VWO, VYM, VOE, VNQ, VPU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Uber’s Cover-Up of Its Massive Data Breach May Lead to E.U. Investigations

(BRUSSELS) – European Union privacy regulators will discuss ride-hailing app Uber‘s massive data breach cover-up next week and could create a task-force to coordinate investigations.

Uber faces regulatory scrutiny after CEO Dara Khosrowshahi said the company covered up a data breach last year that exposed personal data from around 57 million accounts.

The chair of the group of European data protection authorities – known as the Article 29 Working Party – said on Thursday the data breach would be discussed at its meeting on Nov. 28 and 29.

While EU data protection authorities cannot impose joint sanctions, they can set up task-forces to coordinate national investigations.

When a new EU data protection law comes into force next May, regulators will have the power to impose much higher fines – up to 4 percent of global turnover – and coordinate more closely.

Uber paid hackers $100,000 to keep secret the massive breach.

The stolen information included names, email addresses and mobile phone numbers of Uber users around the world, and the names and license numbers of 600,000 U.S. drivers, Khosrowshahi said. Uber declined to say what other countries may be affected.

For more on the Uber data breach, see Fortune’s video:

“We cannot but voice our strong concern for the breach suffered by Uber, which was reported belatedly by the U.S. company. We initiated our inquiries and are gathering all the information that can help us assess the scope of the data breach and take the appropriate steps to protect any Italian citizens involved,” said Antonello Soro, President of the Italian Data Protection Authority on Wednesday.

The British data protection authority also said the concealment of the breach raised “huge concerns” about Uber‘s data policies and ethics.

Long known for its combative stance with local taxi regulators, Uber has faced a stream of top-level executive departures over issues from sexual harassment to data privacy to driver working conditions, which led its board to remove Travis Kalanick as CEO in June.

Exclusive: China's SenseTime plans IPO, aims to open R&D center in U.S.

HONG KONG (Reuters) – Chinese artificial intelligence start-up SenseTime Group is planning an initial public offering (IPO) and aims to open a research and development (R&D) center in the United States as early as next year, its founder told Reuters in an interview.

The Hong Kong and Beijing-based deep learning company founded by Tang Xiaoou, a professor at the Chinese University of Hong Kong, is a leader among Chinese AI start-ups that are enjoying fast growth thanks to demand from the government and private sector for their facial recognition technology.[nL4N1N72PS]

Reporting by Sijia Jiang; Editing by Anne Marie Roantree and Stephen Coates

Our Standards:The Thomson Reuters Trust Principles.

Uber's messy data breach collides with launch of SoftBank deal

TORONTO/SAN FRANCISCO (Reuters) – A newspaper advertisement for an Uber Technologies Inc stock sale was juxtaposed on Wednesday with a report that the ride-service provider had covered up a data hack – something of a metaphor for Uber, a company with boundless investor interest, but whose penchant for rule-breaking has led to a series of scandals.

FILE PHOTO: A photo illustration shows the Uber app on a mobile telephone, as it is held up for a posed photograph, in London, Britain November 10, 2017. REUTERS/Simon Dawson/File Photo

The stock sale advertised in the New York Times will enable Uber [UBER.UL] investors to sell their shares to Japanese investor SoftBank, a critical deal for the company whose problems included building software to spy on competitors and to evade regulators and being investigated in Asia for paying bribes.

Uber on Tuesday said that it had paid hackers $100,000 to destroy data on more than 57 million customers and drivers that was stolen from the company – and decided under the previous CEO Travis Kalanick not to report the matter to victims or authorities. Uber was first hacked in October 2016 and discovered the data breach the following month.

Chief Executive Dara Khosrowshahi, who took the helm in August with the mission of turning around the company and overhauling its culture, acknowledged in a blog that Uber had erred in its handling of the breach. (ubr.to/2AmxlQt)

The timing of the disclosure could hardly have been worse.

The company is trying to complete a deal with SoftBank Group Corp (9984.T) in which the Japanese firm would invest as much as $10 billion for at least 14 percent of the company, mostly by buying out existing shareholders. SoftBank is advertising to find shareholders who want to sell.

Uber last month announced a preliminary deal for the SoftBank investment.

One question is whether SoftBank will now try to alter the price of the deal. One source familiar with the matter said SoftBank is planning to stick to its agreement to invest in Uber but may seek better terms. SoftBank has not yet made a final decision on whether to renegotiate, the source said.

Another question is the future of Kalanick, the co-founder who led Uber to becoming a global powerhouse but did so with aggressive and controversial tactics. He was forced out by investors in June who feared his leadership style would damage the company, although he stayed on the board and remains a significant shareholder.

A bitter battle among investors over how to resolve Uber’s problems led to a lawsuit by early investor Benchmark, which sought to oust Kalanick from any role. But a settlement was reached earlier this month to pave the way for the SoftBank deal, with Kalanick retaining his board seat and other rights.

Kalanick was made aware of the hack last November and was aware of the $100,000 payment, according to a person close to the matter. Kalanick has declined to comment. Uber did not respond to questions from Reuters on Wednesday.

MULTIPLE INVESTIGATIONS, LAWSUITS

The scope of the repercussions Uber will face for the October 2016 data breach began to take shape Wednesday with governments around the world opening investigations.

Authorities in Britain, Australia and the Philippines said they would investigate Uber’s response to the data breach. London’s transport regulator, which has been in discussions with Uber after stripping it of its license to operate, said it was pressing Uber for details.

Canada’s privacy watchdog said that it had asked Uber for details on the breach, though it had not launched a formal investigation.

Attorneys general offices in at least six U.S. states along with the Federal Trade Commission (FTC) have announced they are looking into the matter. Some states are likely to go after Uber for breaking laws on data breach notification within a reasonable period of time.

At least two class action lawsuits have been filed against the company in the United States for failing to disclose the data breaches and causing potential harm to consumers.

Uber said that it has been in touch with the FTC and several states to discuss a hack and pledged to cooperate.

Legal experts said the company is likely to face limited financial fallout from data-breach lawsuits. Uber might succeed in squelching them outright because its agreements with both customers and drivers call for mandatory arbitration of disputes.

Uber fired its chief security officer, Joe Sullivan, and a deputy, Craig Clark, over their role in handling the hack.

The board of directors had commissioned an investigation into Sullivan and his team, which is how the breach was discovered. The board committee concluded that neither Kalanick nor Salle Yoo, who was general counsel at the time, had been consulted in the company’s response to the breach, according to a second person familiar with the matter.

It is unclear what the board of directors knew, if anything. Multiple board members did not respond to requests for comment.

“The scope of this breach is something the Uber board should have been briefed about and consulted on at the very least,” said Cynthia Clark, an associate professor of management at Bentley University. “It’s a monitoring issue and one of strategy and reputation.”

Clark said that these sorts of risks could affect Uber’s IPO, which the board has agreed will take place in 2019.

The company has begun overhauling its security practices with help from Matt Olsen, former general counsel of the U.S. National Security Agency and director of the National Counterterrorism Center, CEO Khosrwoshahi said.

Uber in August settled with the FTC after the regulator found the company failed to protect the personal information of passengers and drivers, an agreement that requires 20 years of regular auditing of Uber’s data.

After this week’s disclosures, Uber can expect “more audits and more people inside of the company” from regulators, said cyber security attorney Steven Rubin.

Reporting by Jim Finkle in Toronto and Heather Somerville in San Francisco; Additional reporting by Diane Bartz in Washington, Greg Roumeliotis in New York and Alastair Sharp in Toronto.; Editing by Jonathan Weber and Grant McCool

Our Standards:The Thomson Reuters Trust Principles.

Homeland Security Urges Businesses to Act on Intel’s Cyber Bug Alert

The U.S. government on Tuesday urged businesses to act on an Intel (intc) alert about security flaws in widely used computer chips as industry researchers scrambled to understand the impact of the newly disclosed vulnerability.

Homeland Security gave the guidance a day after Intel said it had identified security vulnerabilities in remote-management software known as “Management Engine” that shipped with eight types of processors used in business computers sold by Dell Technologies (dell), Lenovo Group (lnvgy), HP, Hewlett Packard Enterprise (hpe) and other manufacturers.

Security experts said that it was not clear how difficult it would be to exploit the vulnerabilities to launch attacks, though they found the disclosure troubling because the affected chips were widely used.

“These vulnerabilities affect essentially every business computer and server with an Intel processor released in the last two years,” said Jay Little, a security engineer with cyber consulting firm Trail of Bits.

For a remote attack to succeed, a vulnerable machine would need to be configured to allow remote access, and a hacker would need to know the administrator’s user name and password, Little said. Attackers could break in without those credentials if they have physical access to the computer, he said.

Intel said that it knew of no cases where hackers had exploited the vulnerability in a cyber attack.

Homeland Security advised computer users to review the warning from Intel, which includes a software tool that checks whether a computer has a vulnerable chip. It also urged them to contact computer makers to obtain software updates and advice on strategies for mitigating the threat.

Intel spokeswoman Agnes Kwan said the company had provided software patches to fix the issue to all major computer manufacturers, though it was up to them to distribute patches to computers users.

Dell’s support website offered patches for servers, but not laptop or desktop computers, as of midday Tuesday. Lenovo offered fixes for some servers, laptops and tablets and said more updates would be available Friday. An HP representative said the company would soon post fixes on its support site.

Security experts noted that it could take time to fix vulnerable systems because installing patches on computer chips is a difficult process.

“Patching software is hard. Patching hardware is even harder,” said Ben Johnson, co-founder of cyber startup Obsidian Security.

HPE CEO Meg Whitman Reveals Why She’s Stepping Down

Meg Whitman’s tenure as CEO of Hewlett Packard Enterprise is coming to an end.

Whitman said Tuesday that she would step down from the business technology giant after a six-year stint, and described the reasons for her upcoming departure in a call with analysts.

In Whitman’s view, HPE is in much better shape than it was when she first arrived in 2011, prior to the company’s split from personal computer and printer sibling HP Inc. in 2015. At that time, Hewlett-Packard “was an enormous conglomerate,” she said, that confused customers because it sold too many disparate products—from servers to software to printers.

Additionally, she explained that the company’s size and management structure was an obstacle to staying current with technology trends. HPE’s core data center hardware business has shrunk over the years amid the rise of cloud computing, in which companies can purchase computing resources in a pay-as-you-go model.

“This company was a slower company than I would have liked to seen six years ago,” Whitman said.

Whitman’s tenure at HPE was marked by a series of corporate restructurings she believed was necessary to return the company to fighting weight. Even after its massive split from HP Inc., HPE continued to shed off pieces of its business it deemed non-essential.

This included, as Whitman detailed in the call, several complex deals like HPE spinning off its software business to United Kingdom IT company Micro Focus, and spinning off and merging its IT services business with IT company Computer Sciences, thus creating a new company called DXC Technology. During Whitman’s tenure, HPE also unloaded its Indian IT outsourcing unit Mphasis to the Blackstone Group.

Now that HPE can put those financial overhauls behind it, Whitman believes that the company needs a leader with technology chops, which is something she lacked. Antonio Neri, a longtime HPE executive who currently serves as president, will become CEO on Feb. 1.

“The next CEO needs to be a deeper technologist,” Whitman said. “That is exactly what Antonio is.”

Bernstein analyst Toni Sacconaghi said on the call that he was surprised by Whitman’s upcoming departure, given Whitman’s earlier comments this summer that she had no plans to leave. At the time, Whitman was also reportedly discussing becoming CEO of the embattled online ride-hailing company Uber.

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Sacconaghi also cited Whitman’s comments at the time in about there still being a lot of work to do at HPE, and noted that the company’s core server business, which had a 5% drop in year-over-year sales in the latest quarter to $3.28 billion, indicates that “there still is a lot of work” to be done.

Whitman said “there hasn’t been a change in sentiment” about her earlier statements in the summer. She then reiterated that HPE is much smaller and more nimble than it used to be, and that Neri, with his tech skills, “is ready to go take the reins and go the distance.”

“He has worked at almost every business in this company,” Whitman said. “I just think it’s the right thing.”

Whitman didn’t say what she plans to do after, but insisted that one thing is certain: she will not join a competitor. That means, Cisco (csco), IBM (ibm), Amazon (amzn), Microsoft (msft), or any of the enterprise technology titans competing in the IT market.

“There is no chance I’m going to a competitor, no chance,” Whitman said. “I love my company and I would never go to a competitor.”

Still, despite Whitman saying that HPE is better run today, investors were spooked about her exit.

HPE shares fell 6% in after-hours trading Tuesday to $13.27.

Amazon's Hidden Platform Labor Startups

For the past couple of years, Amazon has trialed last-mile delivery with individuals, in a program called Amazon Flex, and with small-courier companies using “white vans.” Both of these initiatives are designed to rival UPS and FedEx.

As Amazon prepares for the holiday season, these programs are ramping up to take on more of the load. But that’s not all. Amazon recently launched Amazon Relay, an app aimed at making it easier for truck drivers to make pickups from Amazon warehouses, and is soon to launch a trucking cargo app. All of these services are being trialed internally at Amazon and slowly being turned into platform businesses, specifically services marketplaces.

Amazon Flex: What Uber Rush Aspires To

Amazon Flex lets individuals with cars pick-up packages from an Amazon warehouse and deliver them to customers’ doorsteps. Amazon advertises that drivers can earn $18-25 per hour. The B2C delivery model has been tried before by platforms like Postmates, Deliv and UberRush. However, UberRush has been reported to be struggling after launching a couple years ago.

UberRush also focused on small businesses as its primary customer. These businesses, like restaurants, would use UberRush to deliver products to their customers. Postmates is different. The customer places the order through Postmates and pays Postmates the delivery fee.

Amazon Flex can subsidize the cost of the B2C delivery model to small businesses with its own package volume. As Amazon Flex gains a more public presence, it’s rumored that Amazon will let other small businesses use the program for their own needs. However, the cost structure is completely different if a driver is already on a scheduled route to deliver Amazon’s packages and is adding incremental volume from small businesses.

Amazon’s Trucking Apps

Amazon Relay is primarily for internal use and will likely not be opened up as a stand-alone platform. It helps trucker drivers coordinate their drop offs at Amazon warehouses. The app makes this tedious process more organized and efficient. However, the app also will prove to be a great learning experience for Amazon in advance of the rumored release of Amazon’s cargo delivery app for truckers.

Uber Freight launched in May of 2017 and began a national roll-out just a few months after launch. The service provides a seamless booking process for truck drivers to accept freight delivery jobs similar to the Uber process for passenger drivers. Uber Freight also provides driver benefits like payment within a few days of completing a job when the industry norm can be payment after a month or more. For this reason and others, Uber Freight seems to be making good progress.

Amazon’s competing app should be coming out soon and will probably follow a similar process of leveraging the existing demand from Amazon’s routes as we have seen with Amazon Flex.

Act as a Consumer

One of the hardest elements of building a successful platform is the chicken and egg problem. Existing businesses have an advantage in launch a platform because they can act as the producer or consumer at launch to seed the marketplace with liquidity. In Amazon’s case, it is acting as a consumer for both individual delivery drivers as well as truckers.

As Amazon builds a fluid network of producers (drivers), it can scale its network by opening the service up to other customers. If not opened up, this would still be considered a linear business; however, platforms like Amazon are masters at building new platform businesses on top of its core modern monopoly: the product marketplace.

Just like Google built platform moats around its modern monopoly in search. Google built Android, YouTube, Gmail and others which leverage Search’s advertising network and protect the business that drivers over 95% of Google’s profits.

As Amazon expands further into logistics, it seems to be heading down a similar path.

Record Earnings And A 10% Yield On Qualified Dividends – Buy This Niche MLP On The Dip (No K-1)

When does an LP not act like an LP? When it issues a 1099 at tax time, so you can avoid the complications of a K-1. KNOT Offshore Partners LP (KNOP) is one of a few LPs that has elected to be treated as a C-Corp, and issues 1099s to unit-holders at tax time. Thus, we are spared what some investors refer to as the “dreaded K-1.”

Profile:

KNOT Offshore Partners LP owns and operates shuttle tankers under long-term charters in the North Sea and Brazil. The company provides crude oil loading, transportation, and storage services under time charters and bareboat charters. KNOT Offshore Partners GP LLC serves as the general partner of the company, and Knutsen NYK Offshore Tankers AS is their sponsor. The company was founded in 2013 and is headquartered in Aberdeen, UK.

To say that shuttle tankers are a niche industry would be putting it mildly – shuttle tankers comprise only around 1% of the world’s conventional tanker fleet, and are a vital key solution for oil companies looking to monetize their product. Since many ports don’t have the infrastructure to accommodate large tankers, producers charter shuttle tankers to get their oil into port. These are specialized vessels that take 2.5-3 years to build, so there isn’t a lot of speculative new-building going on in this industry.

Fleet:

Like many of the high-yield stocks and LPs we cover in our articles, KNOP works on long-term, fee-based contracts, with strong counter-parties such as Statoil (NYSE:STO), Exxon Mobil (NYSE:XOM), and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B).

This serves to provide stable cash flow for KNOP’s distributions. The company now has an average of 4.4 years left on their fleet’s contracts, with an additional average of 4.5 years extension at the charters’ option.

Since their 2013 IPO, KNOP’s fleet has grown 230% to 14 vessels with a low average vessel age of about 4.5 years, compared to the rest of the industry average, which is much older – around 12 years.

(Source: KNOP site)

Distributions:

Our High Dividend Stocks By Sector Tables track KNOP’s price and current distribution yield (in the Services section).

KNOP pays their distributions in the usual Feb-May-Aug-Nov. cycle for LPs, but there’s a big difference at tax time: unlike most LPs, it’s elected to be treated as a C-Corporation for tax purposes, so investors receive the standard 1099 form and not a K-1 form. (Tell your accountant he owes you a beer.)

Management has held the quarterly distribution steady, at $.52, since October 2015 – it’s ~39% above their targeted minimum distribution of $.375. Since their 2013 IPO, KNOP has paid common unit distributions of $8.74.

When asked about future distribution hikes on the Q3 earnings call, management replied, “The MLP has an elevated yield compared to most MLPs, and we therefore are focused on first rebuilding coverage and then deleveraging when not making accretive investments. There is little benefit to the MLP in the short term (in) paying much more than the current yield.”

KNOP achieved record distribution coverage in the past two quarters, at 1.46x in Q3 ’17 and 1.43X in Q2 ’17:

Options:

KNOP has options, which we feature in our premium service, and didn’t list here. But you can see details for over 25 other income-producing trades in both our Covered Calls Table and also in our Cash Secured Puts Table.

Earnings:

After a sub-par Q1 ’17, KNOP has bounced back strongly in Q2 and Q3 ’17. Q3 ’17 saw 34% growth in Revenue, 29% EBITDA growth and 18% DCF growth.

KNOP hit record amounts for revenue, EBITDA, DCF, and net income in Q3 ’17, due to their new vessels contributing to earnings.

In the last 12 months, the MLP has acquired the Raquel Knutsen in 2016 Q4, Tordis in Q1 2017, Vigdis in Q2 2017 and Lena Knutsen in Q3. “The fleet achieved strong performance with 99.7% utilization for scheduled operations and 99.3% utilization, taking into account the scheduled drydocking and repair of Carmen Knutsen. We completed the acquisition of Lena Knutsen, which is a five-year charter to Shell.” (Source: Q3 ’17 earnings call)

Even with the unit count growing by 9%, distribution coverage has grown from an already strong 1.24x factor to 1.28x, over the past four quarters:

This table compares the low end of KNOP’s 2017 guidance, pro-rated for three quarters, to their actual figures for Q1-3 ’17. So far, they’ve exceeded their net income and EBITDA guidance, and narrowly missed their DCF, distributions and coverage ratio guidance:

Risks:

Dilution/Coverage: Since LPs pay out the lion’s share of their cash flow, they must periodically go to the debt and equity markets to raise more capital for further expansion. (See the Financials and Debt and Liquidity sections at the bottom of the article for more information about current debt levels.)

On 11/6/17, management announced a secondary public offering of 3,000,000 common units, representing limited partner interests in the Partnership. This 10% dilution caused their price to fall well over 12%, to around $20.00.

But therein lies the opportunity – with KNOP’s ample distribution coverage, that $.52 quarterly distribution isn’t going away. Even with a 10% higher unit base, they should still achieve good coverage.

3M more units at $.52/unit = $1.56M in additional payouts/quarter. In Q3, they paid out $17.39M in total distributions, so this would rise to ~$18.95M. If DCF is flat, coverage would still be ~1.26x, with plenty of leeway.

Management did warn on the earnings release that in Q4 ’17, “the Partnership’s earnings for the fourth quarter of 2017 will be affected by the planned drydocking and repair of the Carmen Knutsen, which is expected to be offhire for 73-75 days until mid-December 2017. Offsetting this offhire will be the Lena Knutsen, which is expected to operate for the entire fourth quarter. There is no further expected offhire for the fleet during the fourth quarter of 2017″ (Source: Q3 ’17 earnings release).

So we could see DCF fall, with the Carmen Knutsen being out for ~2.5 months, unless the new vessel, the Lena Knutsen is able to pick up the entire slack. Either way, we see KNOP maintaining good distribution coverage for the long term, which is why we bought more units on the dip.

Contract Expirations – Management has been working on renewing/extending contracts for some of their vessels which had contracts expiring in late 2017 (Windsor Knutsen) and in 2018 (Hilda and Torill Knutsen). So far, it’s gotten the Windsor extended to October 2018.

The company addressed this on the Q2 earnings call:

The Windsor Knutsen has been on a two-year contract from 13th of October 2015 with Brazil Shipping, a subsidiary of Royal Dutch Shell with a further six years of extension options. In July ’17, the first option is listed taken charter codes reaching October 2018.”

The company still has plenty of time to re-contract the Hilda Knutsen and Torill Knutsen, whose contracts expire at the end of Q3 ’18 and Q4 ’18, respectively. Also in their favor is the fact that these are highly specialized vessels, which would take 2.5 to 3 years to replace.

Privately held Preferred Units: Management sold a total of 4.1M preferred units in two private placements in February and May.

These 8% (~$2/unit annually) preferred distributions will take seniority over common units in any liquidation scenario, in addition to lessening the amount of DCF available to pay common unit distributions, by around $1-2M/quarter.

However, as we detailed above, KNOP’s distribution coverage hit records in Q2 and Q3 ’17, even after accounting for the preferred payouts.

Positive Developments:

Management elaborated about current trends and developments concerning their sub-industry and their sponsor Knutsen NYK on the Q3 earnings call.

As our production moves further offshore, these tankers operate in a space which will see substantial growth in the coming years. Some of the largest discovered oil reserves in the southern hemisphere are in pre-salt layer, 130 kilometers off the coast of Brazil. And Petrobras, for the month of September, oil and natural gas output on those proportions of 1.68 million barrels of oil equivalent average daily production, a 6.6% increase from the previous months and higher than last year’s average.”

Petrobras Transpetro have requested tenders for shore tankers and whilst have not been specific about numbers, we believe their requirement will be for at least 4 vessels initially. Although our MLP is young, our sponsor is a very experienced operator, having been involved in the design and construction of these type of vessels for over 30 years.”

Concerning future dropdowns, they said, “We will see when we get this Torill financing out of the way and perhaps, we’ll see how the equity market looks. I think probably early next year, first quarter next year, we might send that ship dropping to the MLP. But that’s subject to the factors on equity we can raise and what kind of financings we do. So it can be longer than that. But after that, we’d probably take a bit of a breather.”

Analysts’ Price Targets:

At $20.25, KNOP is over 16% below the average price target of $23.57, and 23.5% below the high price target of $25.00.

Estimates are mixed – with average EPS estimates rising over the past seven days for Q1 ’18, 2017, and 2018, but a mix of upward and downward EPS revisions for those same periods, and two downward revisions for next quarter:

(Source: YahooFinance)

Performance:

KNOP was outperforming the market and the Guggenheim Shipping ETF (NYSEARCA:SEA) over the past year, until the November pullback. At $20.25, the stock is only 2% above its 52-week low.

Valuations:

Although KNOP isn’t an LNG tanker company, we’ve added them this LNG shipping company valuations table to compare the company to other tanker companies we cover in our articles, such GasLog Partners LP (GLOP), Golar LNG Partners LP (GMLP), and Dynagas LNG Partners LP (DLNG). The table also includes Teekay Offshore Partners L.P. (NYSE:TOO), the closest comparative company we could find, and Hoegh LNG Partners LP (HMLP).

KNOP is in the lowest tier of this small group, for price/DCF, price/book, and price/sales. Their 10.27% distribution yield is above average also:

Financials:

Like most LPs, KNOP’s debt levels wax and wane over time as the company takes on debt to finance new vessels, and those vessels begin to contribute to earnings. The company ended Q3 ’17 at a net debt/EBITDA level of 6.11x, up substantially from Q3 ’16, but also much lower than their peak of 7.15x. Their ROE ratio has improved over the past two quarters, while their ROA is lower than it was in Q3-4 ’16, due to a higher asset base and higher depreciation and amortization charges:

KNOP is in a lower margin business than these LNG carriers, but their financial metrics are certainly much better than Teekay’s, the other shuttle company in the group:

Debt and Liquidity:

In the year-to-date, to finance the growth of acquisitions, we have raised both $145 million of new equity and $100 million of long-term debt, and $25 million of credit facilities, all on attractive terms.”

At the end of Q3, we had a very solid liquidity position with cash and cash equivalents of $38.1 million and undrawn credit facility of $12 million. And the credit facilities are available until mid-2019.”

The Partnership announced that its subsidiary, KNOT Shuttle Tankers 15 AS, which owns the vessel Torill Knutsen, has entered into a term sheet for a new $100 million senior secured term loan facility with The Bank of Tokyo-Mitsubishi UFJ, which will act as agent. The New Torill Facility is expected to be repayable in 24 consecutive quarterly installments with a balloon payment of $60.0 million due at maturity. The New Torill Facility is expected to bear interest at a rate per annum equal to LIBOR plus a margin of 2.1%. The facility is expected to mature in 2023 and be guaranteed by the Partnership. The new Torill Facility would refinance a $74.4 million loan facility associated with the Torill Knutsen that bears interest at a rate of LIBOR plus 2.5% and is due to be paid in full in November 2018. Closing of the New Torill Facility is anticipated to occur by the end of 2017.” (Source: KNOP Q3 ’17 release)

With the new Torill Facility, KNOP’s first maturity is in 2019:

(Source: KNOP Q3 ’17 release)

Summary:

We rate KNOP a long-term buy, based on their very attractive yield, their distribution coverage, and their secure position, via long-term contracts within their niche industry.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Articles posted on SA aren’t meant to be all-inclusive white papers by any means. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long KNOP, GLOP, GMLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.