Force Protection's Cougar Facing Extinction

Last Updated Nov 12, 2008 1:21 PM EST

Force Protection's 'Cougar' SeriesForce Protection, a manufacturer of ballistic- and blast-protected wheeled vehicles for U.S. military, reported a profit of $19.9 million for the third quarter of 2008 ended September 30, compared to a net loss of $(799,000) in the prior-year quarter. Chief Executive Officer Michael Moody credited the earnings' turnaround, in part, to growth in spare parts and services revenues. Nonetheless, as the company lost out in its bid to build the Pentagon's next-generation, mine-resistant Humvee, it is difficult to see any positives in future.Force Protection's Cougar series remains its top 'Mine Resistant Ambush Protected' (MRAP) vehicle, representing 95 percent, or $882 million, of total MRAP vehicles it sold to the U.S. military for the nine-months ended September 2008. A key challenge to future growth will be lessening its dependence on the Department of Defense for virtually all of its business, especially when President-elect Obama campaigned on withdrawing substantially all troops from Iraq in 2010. As the company admitted to shareholders in the third-quarter 10-Q regulatory filing:
  • The main uncertainty about our future operations is whether we will continue to receive additional orders or contracts for our vehicles. We estimate that current orders for our Cougar vehicles will allow us to continue production through the first part of 2009 and for our Buffalo vehicles to extend production until 2012. It is impossible to predict with certainty whether future orders or contracts will be placed by new or existing customers for our existing products. If we do not receive future orders or contracts for production beyond such dates, it is unlikely that our vehicle business will continue and our business will be materially affected. If we do not receive future orders or contracts for spare parts and/or sustainment services, our business may be materially affected.

    We derive substantially all of our revenue from contracts and subcontracts with the U.S. government and its agencies, primarily the Department of Defense ("DoD"). We expect that U.S. government contracts, particularly with the DoD, will continue to be our primary source of revenue for the foreseeable future. The continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the DoD. Changes in U.S. government spending could directly affect our operating performance and lead to an unexpected loss of revenue. The loss or significant reduction in government funding of a large program in which we participate could also result in a material decrease to our future sales, earnings and cash flows.

MRAP vehicles were never intended to replace the lighter Humvees in the front-line, battlefield roles that they currently play in Iraq. The Pentagon aims to replace many of the US military's 120,000 or so Hummers (as its main tactical vehicle in combat zones) with seven to 10-ton vehicle that are lighter than MRAPs and easier to transport aboard ship, while offering substantially improved protection over existing up-armored Hummers. This search has lead to Joint Light Tactical Vehicles (JLTVs). At the end of October, the military awarded JLTV contracts to General Dynamics, Lockheed Martin, and Navistar.
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.